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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 March 31, 2005
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.
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(Exact name of registrant as specified in its charter)
Delaware 11-2481903
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 West 40th Street
New York, NY 10018
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(Address of principal executive offices) (Zip Code)
(212) 730-0030
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(Registrant's telephone number, including area code)
Not Applicable
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes__ No. X
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.001 Par Value - 28,468,357 shares as of April 28, 2005
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
Page No.
-----------
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2005 and December 31, 2004................... 3
Condensed Consolidated Income Statements - Three Months Ended
March 31, 2005 and April 30, 2004........................................................ 4
Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended
March 31, 2005........................................................................... 5
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2005 and April 30, 2004........................................................ 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
Exhibits .............................................................................................. 18
Signatures ........................................................................................... 19
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
2005 2004
---------- ----------
(Unaudited)
Assets (000's omitted, except par value)
Current Assets
Cash............................................................... $ 773 $ 798
Accounts receivable, net........................................... 2,789 2,239
Due from factors, net.............................................. 202 3,865
Due from affiliate................................................. 414 227
Inventories........................................................ 50 279
Deferred income taxes.............................................. 1,549 1,549
Prepaid advertising and other...................................... 669 670
------- -------
Total Current Assets................................................... 6,446 9,627
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 1,587 1,638
Less: Accumulated depreciation and amortization.................... 1,331 1,292
------- -------
256 346
Other assets:
Restricted cash.................................................... 2,900 2,900
Goodwill........................................................... 25,241 25,241
Intangibles, net.................................................... 16,321 16,591
Deferred financing costs, net...................................... 2,028 2,149
Deferred income taxes.............................................. 2,073 2,073
Other.............................................................. 1,187 1,233
------- -------
49,750 50,187
------- -------
Total Assets........................................................... $56,452 $60,160
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses.............................. $ 3,253 $ 4,284
Accounts payable, subject to litigation............................ 4,886 4,886
Due to related parties............................................. 465 2,465
Current portion of deferred revenue................................ 682 1,413
Current portion of long-term debt.................................. 2,496 2,563
------- -------
Total Current Liabilities.............................................. 11,782 15,611
------- -------
Deferred revenue....................................................... 275 366
Long-term debt......................................................... 19,028 19,925
Commitments and contingencies.......................................... - -
Stockholders' Equity
Common stock, $.001 par value - shares authorized 75,000; shares issued
28,417 at March 31, 2005 and 28,293 issued
at December 31, 2004.......................................... 29 29
Additional paid-in capital......................................... 76,476 76,154
Accumulated deficit................................................ (50,471) (51,258)
Treasury stock - 198 shares at cost................................. (667) (667)
------- -------
Total Stockholders' Equity............................................. 25,367 24,258
------- -------
Total Liabilities and Stockholders' Equity............................. $56,452 $60,160
======= =======
See notes to condensed consolidated financial statements.
3
Candie's, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
Three Months Ended
March 31, April 30,
2005 2004
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(000's omitted, except per share data)
Net sales $ - $ 17,289
Licensing and commission revenue 4,300 1,936
------------------ ------------------
Net revenue 4,300 19,225
Cost of goods sold (net of recovery pursuant to
an agreement of $988 in 2004 - See Note F) - 14,283
------------------ ------------------
Gross profit 4,300 4,942
Selling, general and administrative expenses (net of
recovery pursuant to an agreement of $296 in
2005 - See Note F) 2,679 4,114
Special charges 379 99
------------------ ------------------
Operating income 1,242 729
Other expenses:
Interest expense - net 445 696
------------------ ------------------
Income before income tax provision 797 33
Income tax provision 10 -
------------------ ------------------
Net income $ 787 $ 33
================== ==================
Earnings per share:
Basic $ 0.03 $ 0.00
================== ==================
Diluted $ 0.03 $ 0.00
================== ==================
Weighted average number of common shares outstanding:
Basic 28,429 26,022
================== ==================
Diluted 29,982 26,903
================== ==================
See notes to condensed consolidated financial statements.
4
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Three Months Ended March 31, 2005
(000's omitted)
Additional
Common Stock Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
--------------------------------------------------------------------------
Balance at January 1, 2005 28,293 $ 29 $ 76,154 $ (51,258) $ (667) $ 24,258
Issuance of common stock to directors .... 12 -- 60 -- -- 60
Exercise of stock options................. 112 -- 262 -- -- 262
Net income................................ -- -- -- 787 -- 787
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Balance at March 31, 2005 28,417 $ 29 $ 76,476 $ (50,471) $ (667) $ 25,367
==========================================================================
See notes to condensed consolidated financial statements.
5
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
--------------------------
March 31, April 30,
2005 2004
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(000's omitted)
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities........................ $ 2,496 $ (594)
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INVESTING ACTIVITIES:
Purchases of property and equipment................................... - (4)
Purchases of trademarks............................................... (71) -
----------- ----------
Net cash used in investing activities...................................... (71) (4)
----------- ----------
FINANCING ACTIVITIES:
Proceeds from long - term debt..................................... - 3,600
Repayment of long - term debt...................................... (712) (567)
Repayment of loans from related party.............................. (2,000) -
Prepaid interest expense - long term............................... - (500)
Deferred financing costs........................................... - (179)
Proceeds from exercise of stock options............................ 262 332
Revolving notes payable - bank..................................... - (2,477)
----------- ----------
Net cash (used in) provided by financing activities........................ (2,450) 209
----------- ----------
DECREASE IN CASH........................................................... (25) (389)
Cash at beginning of period................................................ 798 2,794
----------- ----------
Cash at end of period...................................................... $ 773 $ 2,405
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 466 $ 1,198
=========== ==========
See notes to condensed consolidated financial statements.
6
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2005
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
primarily of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2005 ("Current Quarter") are not necessarily indicative of the results
that may be expected for a full fiscal year.
In December, 2004, the Board of Directors of the Company approved a change in
the Company's fiscal year end from January 31 to December 31, effective for the
period ending December 31, 2004. As a result, the end of the Current Quarter and
the three months ended April 30, 2004 ("Prior Year Quarter") do not coincide.
The financial statements included herein are for the three months ended March
31, 2005, and they are compared with the three months in the prior year ended on
April 30, 2004. The Company has not recast the Prior Year Quarter to coincide
with the Current Quarter as Management believes that such recasting is not cost
justified and does not materially affect the relative comparability of the data
presented herein.
Beginning January 2005, the Company changed its business practices with respect
to Bright Star Footwear, Inc ("Bright Star"), a subsidiary of the Company, which
resulted in a change in revenue recognition. Bright Star is now acting as an
agent, therefore, only net commission revenue is recognized, commencing in the
Current Quarter. As a result there was $322,000 in commission revenue and no
sales recorded in the Current Quarter for Bright Star, as compared to $6.0
million in sales and $477,000 in gross profit in the Prior Year Quarter.
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 December 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
----------------------------------------
March 31, April 30,
2005 2004
------------------- -----------------
Net income - as reported $ 787 $ 33
Deduct: Stock-based employee compensation
determined under the fair value based
method, net of related tax effects (1,706) (470)
------------------- -----------------
Pro forma net loss $(919) $(437)
=================== =================
Basic and diluted earnings (loss) per share:
As reported $0.03 $0.00
=================== =================
Pro forma $(0.03) $(0.02)
=================== =================
7
NOTE C FINANCING AGREEMENTS
In August 2002, IP Holdings, LLC ("IPH"), a subsidiary owned by 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 March 31, 2005, the unamortized portion of such costs were $1.8
million.
During the Prior Year 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 + 4.45%, with quarterly principal
and interest payments and $500,000 of interest prepaid at closing. The net
proceeds of $2.9 million were used for general working capital purposes. Costs
incurred to obtain this financing totaling approximately $179,000 were deferred
and amortized over the life of the debt.
See Note F 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 March 31, 2005, 6.3 million 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:
March 31, April 30,
2005 2004
-------------------------
(000's omitted)
Basic................................................................... 28,429 26,022
Effect of assumed conversions of employee stock options................. 1,553 881
-------------------------
Denominator for diluted earnings per share.............................. 29,982 26,903
=========================
NOTE E COMMITMENTS AND CONTINGENCIES
On August 5, 2004, the Company, along with Unzipped, its subsidiary Michael
Caruso & Co., Inc.("Caruso") and IPH (collectively, "Plaintiffs") commenced a
lawsuit in the Superior Court of California, Los Angeles County, against
Unzipped's former manager, former supplier and former distributor, Sweet
Sportswear LLC ("Sweet"), Azteca Production International, Inc. ("Azteca") and
Apparel Distribution Services, LLC ("ADS"), and a principal of these entities
and former Company Board member, Hubert Guez (collectively, "Defendants").
Plaintiffs amended their Complaint on November 22, 2004. In their Amended
Complaint, Plaintiffs allege that Defendants' fraudulently induced Plaintiffs to
purchase Sweet's 50% interest in Unzipped for an inflated price, Sweet and
Azteca committed material breaches of the management, supply and distribution
agreements and Guez materially breached his fiduciary obligations to the Company
while a member of the Company's Board of Directors, and seeks damages in excess
of $50 million. Additionally, Plaintiffs allege that Defendants have imported,
distributed and sold goods bearing the Company's BONGO trademarks in violation
of federal and California law. Defendants filed a motion to dismiss certain of
the claims asserted in the Amended Complaint, and on February 7, 2005, the Court
denied Defendants' motion in its entirety. Defendants filed an Answer to
Plaintiffs' Amended Complaint and a Cross-Complaint against Plaintiffs and the
Company's Chief Executive Officer, Neil Cole ("Mr. Cole") seeking compensatory,
punitive and exemplary damages and litigation costs, as well as the
establishment of a constructive trust for the benefit of the Defendants
(referred to as "Cross-Complainants"). The Cross-Complainants allege that some
or all of the Plaintiffs breached the management, supply and distribution
agreements, IPH and Mr. Cole interfered with Sweet's performance under the
management agreement, and the Company, Caruso and Mr. Cole interfered with
Cross-Complainants' relationships with Unzipped and caused Unzipped to breach
its agreements with Azteca and ADS. Cross-Complainants allege that some or all
of the Company, Caruso and Mr. Cole fraudulently induced Sweet to sell its 50%
interest in Unzipped for a deflated price and enter into an associated 8% Senior
Subordinated Note (the " Sweet Note").
8
The Company had previously entered into a management agreement with Sweet (the
"Management Agreement") wherein Sweet guarantees that the net income of
Unzipped, as defined, shall be no less than $1.7 million for each year during
the term ("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").Additionally, Cross-Complainants allege
that the Company has breached its obligations to Sweet arising under the Sweet
Note by, among other things, understating Unzipped's earnings for the fiscal
year ended January 31, 2004 and the first three quarters of the fiscal year
ended January 31, 2005 for the purpose of causing Unzipped to fall short of the
Guarantee for these periods, and improperly offsetting the Shortfall Payment
against the Sweet Note. See Note F. Cross-Complainants allege that the
understatements in Unzipped's earnings and offsets against the Sweet Note were
incorporated into the Company's public filings for the periods identified above,
causing the Company to overstate materially its earnings and understate its
liabilities for such period with the effect of improperly inflating the public
trading price of the Company's common stock. Plaintiffs and Mr. Cole deny
Cross-Complainants' allegations and intend to vigorously defend against the
Cross-Complaint.
In January 2002, Redwood Shoe Corporation ("Redwood"), one of the Company's
former buying agents of footwear 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. At March 31, 2005 and
April 30, 2004, 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, and was reflected in "Accounts payable, subject to litigation".
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 provided 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 terminated on or about
November 15, 2004 based upon a provision of the settlement agreement that stated
that in the event that the last daily sale price per share of the Company's
common stock reached at least $4.98 during any ten days within a thirty day
period, the Company's obligation to make the quarterly payments would terminate.
The remaining balance of $238,000 was recognized as a reduction of special
charges in November 2004.
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.
NOTE F UNZIPPED APPAREL, LLC
Equity Investment:
On October 7, 1998, the Company formed Unzipped with a joint venture partner
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 three million shares of the Company's common stock and $11
million in debt evidenced by the Sweet Note. In connection with the acquisition
of Unzipped, the Company filed a registration statement with the SEC for the
three million shares of the Company's common stock issued to Sweet. The
registration statement was declared effective by the SEC on July 29, 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 were limited by advance rates against
eligible accounts receivable and inventory balances, as defined. Under the
facility, Unzipped could also arrange for letters of credit in an amount up to
$5 million. The borrowings bore interest at a rate of 2.25% per annum in excess
of the 30 day Commercial Paper rate or 3%, whichever is greater.
9
Borrowings under the facility were secured by substantially all of the assets of
Unzipped. In addition, Unzipped had agreed to subordinate its accounts payable
to Azteca, ADS and Sweet to GECCS. Unzipped was required to meet a minimum
tangible net worth covenant, as defined. At October 31, 2004, the loan had been
repaid in full and the borrowing arrangement with GECCS was terminated.
Related Party Transactions:
Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to the
Management Agreement, pursuant to which Sweet was obligated to manage the
operations of Unzipped in return for, commencing in fiscal year ended January
31, 2004 ("Fiscal 2004"), a management fee based upon certain specified
percentages of net income that Unzipped would achieve during the three-year
term. In addition, Sweet guaranteed that the net income, as defined, of Unzipped
commencing in Fiscal 2004 would be no less than $1.7 million for each year
during the term (the "Guarantee"). In the event that the Guarantee is not met,
under the Management Agreement, Sweet is obligated to pay to the Company the
difference between the actual net income of Unzipped, as defined, and the
Guarantee. The Shortfall Payment can be offset against the Sweet Note in the
original amount of $11 million at the option of either Sweet or the Company.
For the month of January 2005 (the last month of Unzipped's fiscal year),
Unzipped had a net loss (as defined, for the purpose of determining if the
Guarantee had been met) of $296,000, as compared to net loss (as defined, for
the purpose of determining if the Guarantee had been met) in the Prior Year
Quarter of $563,000. Consequently for the Current Quarter there was a Shortfall
Payment of $438,000, as compared to a Shortfall Payment of $988,000 in the Prior
Year Quarter. These payments have been recorded in the consolidated income
statements as a reduction of Unzipped's cost of sales (since the majority of
Unzipped's operations are with entities under common ownership with Sweet,
including all of the purchases of inventory) and on the balance sheet as a
reduction of the Sweet Note based upon the right to offset in the Management
Agreement. At March 31, 2005, as a net result of the offset of the Shortfall
Payments, the balance of the Note was reduced to $2.8 million and is reflected
in "Long-term debt". The Company believes that it is entitled to the full
Guarantee of $1.7 million for the fiscal year of Unzipped ended January 31,
2005. For the purpose of computing the Shortfall Payment for financial statement
presentation, however, the Company has pro-rated the Guarantee to exclude the
portion relating to the period subsequent to August 5, 2004 ($827,000, including
$142,000 for the month of January 2005). As a result, the net Shortfall Payment
reflected as a reduction of cost of sales in the Current Quarter of $296,000,
and the Sweet Note balance of $2.8 million includes the above noted $827,000,
pending the outcome of its litigation with Sweet and its affiliates. See Note E.
After adjusting for the Shortfall Payments, Unzipped reported a net loss of
$37,500 for the Current Quarter, on sales of $448,000, and net income of
$312,500 in the Prior Year Quarter. Due to the immaterial nature of the related
amounts, the net loss of $37,500 from Unzipped has been included in the selling,
general and administrative expense in the Company's Condensed Consolidated
Income Statements for the Current Quarter.
For each of the quarters ended July 31, October 31, and December 31, 2004 and
the Current Quarter, the Company did not make an interest payment on the Note to
partially offset the Shortfall Payments due from Sweet. Such interest payment is
to be resumed after the Shortfall Payment is satisfied.
Prior to August 5, 2004, there was a distribution agreement between Unzipped and
ADS pursuant to which Unzipped paid ADS a per unit fee for warehousing and
distribution functions and per unit fee for processing and invoicing orders. The
agreement also provided for reimbursement for certain operating costs incurred
by ADS and charges for special handling fees at hourly rates approved by
management. Prior to August 5, 2004, there was also a supply agreement in effect
between Unzipped and Azteca pursuant to which Unzipped paid Azteca cost plus 6%
for goods, and was entitled to up to 30 days in which to pay Azteca. Prior to
August 5, 2004, Azteca allocated expenses to Unzipped for Unzipped's use of a
portion of Azteca's office space, design and production team and support
personnel. Unzipped also occupied office space in a building rented by ADS and
Commerce Clothing Company, LLC, a related party to Azteca.
On August 5, 2004, Unzipped terminated the Management Agreement with Sweet, the
supply agreement with Azteca and the distribution agreement with ADS and
commenced a lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note E.
At March 31, 2005, the Company included in "Accounts payable, subject to
litigation" amounts due to Azteca and ADS of $847,000 and $2.3 million
respectively. See Note E. At April 30, 2004, included in the "Due to related
party" were amounts due to Azteca and ADS $1.2 million and $727,000
respectively.
In a separate transaction concerning Unzipped with Bongo Apparel, Inc. ("BAI"),
a related party, the amount to due to BAI at March 31, 2005 was $465,000. BAI is
the licensee under the Jeans Wear License and managed the operations of Unzipped
following the termination of Sweet as the manager on August 5, 2004.
10
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. The Company's operations are
comprised of two reportable segments: footwear/licensing 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 three
months ended March 31, 2005 and April 30, 2004.
(000's omitted) Footwear/licensing Apparel Consolidated
For three months ended March 31, 2005
Total revenues $ 4,300 $ - $ 4,300
Segment income (loss) 1,280 (38) 1,242
Net interest expense 445
Income before provision for income taxes $ 797
Capital additions $ - $ - $ -
Depreciation and amortization expenses $ 491 $ 38 $ 529
Total assets as of March 31, 2005 $ 47,416 $ 9,036 $ 56,452
For three months ended April 30, 2004
Total revenues $ 7,865 $ 11,360 $ 19,225
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
NOTE H BADGLEY MISCHKA LICENSING LLC
On October 29, 2004 (the "Closing Date"), the Company acquired the principal
assets (the "Purchased Assets") of B.E.M. Enterprise, Ltd. ("BEM"), the holding
company for the Badgley Mischka designer business from parent company Escada
U.S.A. The purchased assets include the BADGLEY MISCHKA(R) trademark, two
existing licenses and the rights to operate the existing Badgley Mischka retail
store located on Rodeo Drive in Beverly Hills, California. The purchase price
for the transaction was $950,000, (excluding $372,000 of fees and expenses
related to the acquisition) which was paid by the Company's issuance of 214,981
shares of the Company's common stock. The purchase price of the Purchased Assets
was subject to an upward adjustment in the event that the closing sale price of
the Company's common stock on the date which is 180 days after the Closing Date
is less than the closing sale price on the Closing Date. No such adjustment to
the purchase price was necessary as the closing sales price at April 27, 2005
was $4.95, greater than the closing price of $4.44 on the Closing Date. The
Company filed a registration statement with the SEC for the resale of the
214,981 shares of the Company's common stock issued to BEM. The registration
statement was declared effective by the SEC on December 1, 2004.
Included in cash on the Company's condensed consolidated financial statements is
a term deposit in the principal amount of $100,000 which has been pledged as
collateral to the landlord of the Badgley Mischka retail store until December
31, 2005 in connection with the leased premises. Unrestricted access to this
fund will revert to the Company on January 1, 2006.
The Company was advised in acquisition of the Purchased Assets by UCC Funding
Corporation ("UCC"), of which Robert D'Loren, a director of the Company, is
President. In connection with the services provided in the acquisition, Mr.
D'Loren, the sole shareholder of UCC, received 50,000 stock options. In
addition, UCC will receive a fee of 5% of the gross revenues that the Company
derives from the BADGLEY MISCHKA trademark and all derivative trademarks, which
right was assigned to Content Holding, which is owned by Mr. D'Loren. In
addition, should the Company sell all or substantially all of the acquired
assets, UCC will receive a cash payment calculated under a formula based on the
sales price
NOTE I - SPECIAL CHARGES
During the quarter ended March 31, 2005, the Company recorded $379,000 of
special charges in connection with its litigation against Defendants related to
Unzipped. See Note E. In the Prior Year Quarter, the Company's special charges
of $99,000 consisting primarily of legal and professional fees related to
transferring Unzipped's wholesale business into a licensing business in the
Prior Year Quarter.
11
NOTE J RECENT ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) by requiring these items to be
recognized as current-period charges. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted. The adoption of SFAS No. 151 will have no impact on our
results of operations or our future financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Monetary Assets,"
which addresses the measurement of exchanges of nonmonetary assets and
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005, with
earlier application permitted. The adoption of SFAS No. 153 will have no impact
on our results of operations or our future financial position or results of
operations.
In December 2004, the FASB issued FAS No. 123(R), "Share-Based Payment," an
amendment of FASB Statements 123 and 95. FAS No, 123(R) replaced FAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." This statement requires companies to
recognize the fair value of stock options and other stock-based compensation to
employees beginning with fiscal periods beginning after June 15, 2005. During
the first quarter of 2005, the Securities and Exchange Commission approved a new
rule for public companies which delays the adoption of this standard for an
additional six months. This means that the Company will be required to implement
FAS No, 123(R) no later than the quarter beginning January 1, 2006. The Company
currently measures stock-based compensation in accordance with APB Opinion No.
25, as discussed above. The impact on the company's financial condition or
results of operations will depend on the number and terms of stock options
outstanding on the date of change, as well as future options that may be
granted.
12
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 licensees' 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 in this report 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. In December, 2004, the Board of Directors of the Company
approved a change in the Company's fiscal year end from January 31 to December
31, effective for the period ending December 31, 2004. As a result, the end of
the Current Quarter and the end of the Prior Year Quarter do not coincide. The
financial statements included herein are for the three months ended March 31,
2005, and they are compared with the three months in the prior year ended on
April 30, 2004. The Company has not recast the Prior Year Quarter to coincide
with the Current Quarter as Management believes that such recasting is not cost
justified and does not materially affect the relative comparability of the data
presented herein.
Beginning January 2005, the Company changed its business practices with respect
to Bright Star Footwear, Inc ("Bright Star"), a subsidiary of the Company, which
resulted in a change in revenue recognition. Bright Star is now acting as an
agent, therefore, only net commission revenue is recognized.
In addition, on or about June 9, 2004, the Company, through its subsidiary IPH,
effective August 1, 2004, licensed the operations of the BONGO jeans wear
business previously operated through Unzipped.
As a result of the Company's transition to a licensing business, and to a lesser
extent, its change in fiscal year end and the change in its Bright Star revenue
reporting, the Company's operating results are not comparable to prior years.
Further, since it is anticipated that there will be no revenue, other than
licensing and commission revenue, going forward, the results for the remaining
quarters for the year ending December 31, 2005 are also expected to be
non-comparable to the corresponding prior year's quarters.
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.
13
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 $787,000 for the Current Quarter compared to
$33,000 for the Prior Year Quarter. In the Current Quarter, there were $379,000
of special charges and $445,000 of net interest expense as compared to $99,000
of special charges and $696,000 of net interest expense for Prior Year Quarter.
The Company's operating income was $1.2 million in the Current Quarter, compared
to $729,000 in the Prior Year Quarter.
Results of Operations
For the three months ended March 31, 2005
Revenues. During the Current Quarter, consolidated net revenues decreased by
$14.9 million to $4.3 million from $19.2 million in the Prior Year Quarter.
As a result of the Company changing to licensing arrangements in its jeans wear
operations in August 2004, there were no reportable jeans wear sales in the
Current Quarter as compared to $11.4 million in the Prior Year Quarter and there
will be no jeans wear sales for the remainder of the fiscal year ending December
31, 2005 and thereafter. Further, due to a change in revenue recognition
resulting from its change of business practice beginning January 2005, Bright
Star recorded only the net commission earned on such transactions in the Current
Quarter and will continue to do so in the future. As a result there was $322,000
in commission revenue and no sales recorded in the Current Quarter for Bright
Star, as compared to $6.0 million in sales and $477,000 in gross profit in the
Prior Year Quarter.
Licensing and commission revenue increased $2.4 million, or 122.1% to $4.3
million in the Current Quarter from $1.9 million in the Prior Year Quarter. The
increase was due primarily to revenue generated by new licenses as the Company
transitioned from an operating business to a licensing business and $322,000
commission revenue from Bright Star as mentioned above.
Gross Profit. Consolidated gross profit decreased by $642,000 to $4.3 million in
the Current Quarter from $4.9 million in the Prior Year Quarter. There was no
reportable gross profit from Unzipped's wholesale jeans wear sales in the
Current Quarter as compared to $2.5 million in the Prior Year Quarter.
Unzipped's gross profit in the Prior Year Quarter included $988,000 adjustment
from the Shortfall Payment. See Note F to Notes to Condensed Consolidated
Financial Statements. As previously discussed above, Bright Star's gross profit
decreased from $477,000 in the Prior Year Quarter to $332,000 in the Current
Quarter.
Operating Expenses. During the Current Quarter, consolidated selling, general
and administrative expenses decreased by $1.4 million to $2.7 million from $4.1
million in the Prior Year Quarter. Included in the consolidated selling, general
and administrative expenses were $37,500 of Unzipped's net loss, as compared to
$2.1 million in the Prior Year Quarter as the Company completed its transition
of the jeans wear business to a licensing business. See Matters Pertaining to
Unzipped and Note F of Notes to Condensed Consolidated Financial Statements.
Offsetting the decline in selling, general and administrative expenses in the
Current Quarter was $476,000 of expenses related to the activities of the
Company's Badgely Mischka subsidiary which was acquired in October 2004
In the Current Quarter, the Company's special charges included $379,000 of legal
fees incurred by the Company relating to litigation involving Unzipped compared
to $99,000 of legal professional fees related to transferring Unzipped's
wholesale business into a licensing business in the Prior Year Quarter. See Note
F of Notes to Condensed Consolidated Financial Statements.
Interest Expense - Net. Interest expense decreased by $251,000 in the Current
Quarter to $445,000 (net of interest income of $15,000), compared to $696,000 in
the Prior Year Quarter. Included in interest expense in the Current Quarter was
$38,000 from the Sweet Note as compared to $203,000 in the Prior Year Quarter.
The decrease is due to a lower average outstanding borrowing as the Sweet Note
is reduced as a result of the application of Shortfall Payments. See Note F of
Notes to the Consolidated Condensed Financial Statements. Interest expense in
the Current Quarter associated with the asset backed notes issued by IPH was
$422,000 as compared to $370,000 in the Prior Year Quarter. This increase is due
primarily to a higher average outstanding borrowing as the Company borrowed an
additional $3.6 million in April, 2004. Also included in interest expense in the
Prior Year Quarter was $123,000 from Unzipped's activities, with no comparable
amount in the Current Quarter.
14
Income Tax Expense. A provision for $10,000 for minimum franchise taxes was
recorded in the Current Quarter. There was no tax expense on income reported for
the Current Quarter and Prior Year Quarter, due to a reduction in the deferred
tax valuation reserve, which offsets the income tax provision.
Net Income. The Company recorded net income of $787,000, compared to $33,000 in
the Prior Year Quarter.
Liquidity and Capital Resources
Working Capital.
At March 31, 2005, the current ratio of assets to liabilities was 0.55 to 1 as
compared to 0.87 to 1 at April 30, 2004. Included in current liabilities at
March 31, 2005 are $4.9 million of accounts payables that are subject to
litigation.
The Company continues to rely upon cash generated from operations, especially
licensing and men's private label activity to finance its operations. Net cash
provided from operating activities totaled $2.5 million in the Current Quarter,
as compared to $594,000 of net cash used in the Prior Year Quarter. The Company
believes that such cash from operations will be sufficient to satisfy its
anticipated working capital requirements for the foreseeable future.
Capital Expenditures.
There were no capital expenditures in the Current Quarter as compared to $4,000
for the Prior Year Quarter.
Matters Pertaining to Unzipped.
On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped
from Sweet for three million shares of the Company's common stock and the Sweet
Note. Pursuant to the Management Agreement, Sweet is obligated to pay any
Shortfall under the Guarantee. The Shortfall Payment can be offset against the
Sweet Note.
For the month of January 2005 (the last month of Unzipped's fiscal year),
Unzipped had a net loss (as defined, for the purpose of determining if the
Guarantee had been met) of $296,000, as compared to net loss (as defined, for
the purpose of determining if the Guarantee had been met) in the Prior Year
Quarter of $563,000. Consequently for the Current Quarter there was a Shortfall
Payment of $438,000, as compared to a Shortfall Payment of $988,000 in the Prior
Year Quarter. These payments have been recorded in the consolidated income
statements as a reduction of Unzipped's cost of sales (since the majority of
Unzipped's operations are with entities under common ownership with Sweet,
including all of the purchases of inventory) and on the balance sheet as a
reduction of the Sweet Note based upon the right to offset in the Management
Agreement. At March 31, 2005, as a net result of the offset of the Shortfall
Payments, the balance of the Note was reduced to $2.8 million and is reflected
in "Long-term debt". The Company believes that it is entitled to the full
Guarantee of $1.7 million for the fiscal year of Unzipped ended January 31,
2005. For the purpose of computing the Shortfall Payment for financial statement
presentation, however, the Company has pro-rated the Guarantee to exclude the
portion relating to the period subsequent to August 5, 2004 ($827,000, including
$142,000 for the month of January 2005). As a result, the net Shortfall Payment
reflected as a reduction of cost of sales in the Current Quarter of $296,000,
and the Sweet Note balance of $2.8 million includes the above noted $827,000,
pending the outcome of its litigation with Sweet and its affiliates. See Note E
of Note to Condensed Consolidated Financial Statements. After adjusting for the
Shortfall Payments, Unzipped reported a net loss of $37,500 for the Current
Quarter, on sales of $448,000, and net income of $312,500 in the Prior Year
Quarter. Due to the immaterial nature of the related amounts, the net loss of
$37,500 from Unzipped has been included in the selling, general and
administrative expense in the Company's Condensed Consolidated Income Statements
for the Current Quarter.
For each of the quarters ended July 31, October 31, and December 31, 2004 and
the Current Quarter, the Company did not make an interest payment on the Note to
partially offset the Shortfall Payments due from Sweet. Such interest payment
will be resumed in the event that the Shortfall Payment is satisfied.
Current Revolving Credit Facilities.
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"). Borrowings under the Unzipped Credit Facility were 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.
The Unzipped Credit Facility was terminated on October 31, 2004.
15
Bond Financing
In August 2002, IPH issued in a private placement $20 million of asset-backed
notes secured by intellectual property assets (trade names, 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 March 31, 2005, the unamortized portion
of such costs was $2.0 million and there was $18.2 million outstanding under the
notes.
During the Prior Year 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 + 4.45%, with quarterly principal
and interest payments and $500,000 of interest prepaid at closing. The net
proceeds of $2.9 million were be used for general working capital purposes.
Costs incurred to obtain this financing totaling approximately $178,500 were
deferred and are being amortized over the life of the debt.
Other
The Company's cash requirements fluctuate from time to time due to, among other
factors, seasonal variations in the timing of licensee shipments and the related
royalty payments. The Company believes that it will be able to satisfy its
ongoing cash requirements for the foreseeable future, primarily with cash flow
from operations. 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.
16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a result of the Company's 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 March 31, 2005 that is sensitive to changes
in interest rates.
The IPH's additional assets-backed notes had an average interest
rate of 6.7% for the three month period ended March 31, 2005 $3.3 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 March 31, 2005 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 March 31, 2005.
17
PART II. Other Information
Item 1. Legal Proceedings
See Note E of Notes to Condensed Consolidated Financial Statements.
Item 6. 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.
18
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 May 13, 2005 /s/ Neil Cole
------------------------------ ----------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date May 13, 2005 /s/ Warren Clamen
------------------------------ ----------------------------------
Warren Clamen
Chief Financial Officer
19