U.S. Securities and Exchange Commission
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended October 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From ________ to ________
Commission file number 0-10593
CANDIE'S, INC.
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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)
400 Columbus Avenue
Valhalla, NY 10595
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(Address of principal executive offices) (Zip Code)
(914) 769-8600
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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 -- 24,961,469 shares as of November 26, 2002
- -
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
Page No.
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Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - October 31, 2002 and January 31, 2002...................... 2
Condensed Consolidated Statements of Operations - Three and Nine Months
Ended October 31, 2002 and 2001.................................................................... 3
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended
October 31, 2002................................................................................... 4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31,
2002 and 2001...................................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 15
Item 4. Controls and Procedures....................................................................... 15
Part II. Other Information
Item 1. Legal Proceedings.............................................................................. 16
Item 2. Changes in Securities and Use of Proceeds ..................................................... 16
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............................................................... 16
Signatures ........................................................................................... 18
Certifications of Principal Executive Officer and Principal Financial Officer........................... 19
Exhibit index........................................................................................... 21
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Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, January 31,
2002 2002
---------- ----------
(Unaudited)
Assets (000's omitted, except par value)
Current Assets
Cash............................................................... $ 1,391 $ 636
Accounts receivable, net........................................... 6,516 4,674
Due from factors, net.............................................. 20,660 5,791
Due from affiliate................................................. 322 565
Inventories........................................................ 18,713 8,368
Deferred income taxes.............................................. 1,881 1,881
Prepaid advertising and other...................................... 1,403 718
Other current assets............................................... 182 97
---------- ----------
Total Current Assets................................................... 51,068 22,730
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 11,357 9,618
Less: Accumulated depreciation and amortization.................... 5,755 4,470
---------- ----------
5,602 5,148
Other assets:
Restricted cash.................................................... 2,900 -
Goodwill, net...................................................... 23,687 1,868
Intangibles, net.................................................... 19,411 18,158
Deferred financing costs........................................... 2,391 741
Deferred income taxes.............................................. 1,741 1,741
Other.............................................................. 266 284
---------- ----------
50,396 22,792
---------- ----------
Total Assets........................................................... $107,066 $ 50,670
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks.................................... $ 21,039 $ 12,366
Accounts payable and accrued expenses.............................. 17,468 12,672
Current portion of long-term debt............................... 2,435 1,225
Losses in excess of joint venture investment....................... - 250
---------- ----------
Total Current Liabilities.............................................. 40,942 26,513
---------- ----------
Other liabilities...................................................... 816 638
Long-term debt......................................................... 28,815 -
Stockholders' Equity
Preferred and common stock to be issued............................ - 2,000
Preferred stock, $.01 par value - shares authorized 5,000;
none issued and outstanding................................... - -
Common stock, $.001 par value - shares authorized 75,000;
shares issued 24,987 at October 31, 2002 and 20,400 issued
at January 31, 2002........................................... 24 20
Additional paid-in capital......................................... 69,762 58,188
Retained earnings (deficit)........................................ (32,626) (36,214)
Treasury stock - at cost - 198 shares at October 31, 2002 and
113 shares at January 31, 2002................................ (667) (475)
---------- ----------
Total Stockholders' Equity............................................. 36,493 23,519
---------- ----------
Total Liabilities and Stockholders' Equity............................. $107,066 $ 50,670
========== ==========
See notes to condensed consolidated financial statements.
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Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
2002 2001 2002 2001
------------ ----------- ------------ -----------
(000's omitted, except per share data)
Net sales............................................. $ 41,792 $ 25,325 $ 114,200 $ 78,547
Licensing income...................................... 1,434 1,411 4,206 3,929
------------ ----------- ------------ -----------
Net revenues.......................................... 43,226 26,736 118,406 82,476
Cost of goods sold.................................... 31,839 18,277 84,331 56,577
------------ ----------- ------------ -----------
Gross profit.......................................... 11,387 8,459 34,075 25,899
Operating expenses:
Selling, general and administrative expenses.......... 10,703 7,714 28,326 22,923
Special charges....................................... 207 120 300 363
------------ ----------- ------------ -----------
10,910 7,834 28,626 23,286
------------ ----------- ------------ -----------
Operating income...................................... 477 625 5,449 2,613
Other expenses:
Interest expenses..................................... 1,265 328 2,250 949
Equity income in joint venture........................ - - (250) -
------------ ----------- ------------ -----------
1,265 328 2,000 949
------------ ----------- ------------ -----------
Income (loss) before income taxes..................... (788) 297 3,449 1,664
Income tax benefit.................................... - - (139) -
------------ ----------- ------------ -----------
Net income (loss)..................................... $ (788) $ 297 $ 3,588 $ 1,664
============ =========== ============ ===========
Earnings (loss) per common share:
Basic............................................ $ (0.03) $ 0.02 $ 0.15 $ 0.09
============ =========== ============ ===========
Diluted.......................................... $ (0.03) $ 0.01 $ 0.14 $ 0.07
============ =========== ============ ===========
Weighted average number of common shares outstanding:
Basic............................................ 24,845 19,407 23,249 19,237
============ =========== ============ ===========
Diluted.......................................... 24,845 22,681 25,591 22,497
============ =========== ============ ===========
See notes to condensed consolidated financial statements.
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Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended October 31, 2002
(000's omitted)
Preferred
& Common Additional Retained
Common Stock Stock to be Paid-In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
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Balance at February 1, 2002 20,400 $ 20 $ 2,000 $ 58,188 $(36,214) $ (475) $ 23,519
Issuance of common stock to retirement plan 35 -- -- 54 -- -- 54
Exercise of stock options 844 1 -- 1,112 -- -- 1,113
Shares granted to board members 34 -- -- 90 -- -- 90
Options granted to non-employees -- -- -- 71 -- -- 71
Purchase of treasury shares -- -- -- -- -- (192) (192)
Acquisition of Unzipped Apparel, LLC 3,000 3 -- 8,247 -- -- 8,250
Issuance of common stock to shareholders in
connection with previous litigation 674 -- (2,000) 2,000 -- -- --
Net income -- -- -- -- 3,588 -- 3,588
----------------------------------------------------------------------------------
Balance at October 31, 2002 24,987 $ 24 $ -- $ 69,762 $ (32,626) $ (667) $ 36,493
==================================================================================
See notes to condensed consolidated financial statements.
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Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
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October 31, October 31,
2002 2001
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(000's omitted)
OPERATING ACTIVITIES:
Net cash provided (used) in operating activities........................... $ (12,956) $ (348)
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INVESTING ACTIVITIES:
Purchases of property and equipment................................... (1,418) (967)
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Net cash used in investing activities...................................... (1,418) (967)
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FINANCING ACTIVITIES:
Restricted cash....................................................... (2,900) -
Proceeds from exercise of stock options and warrants.................. 1,113 594
Purchase of treasury stock............................................ (192) (296)
Capital lease payments................................................ (1,053) (663)
Debt payable.......................................................... 18,161 2,186
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Net cash provided by financing activities.................................. 15,129 1,821
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INCREASE IN CASH........................................................... 755 506
Cash at beginning of period................................................ 636 366
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Cash at end of period...................................................... $ 1,391 $ 872
===========================
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 2,250 $ 950
===========================
Value of common shares and subordinated note issued
to acquire Unzipped Apparel, LLC.................................. $ 19,250 $ -
===========================
See notes to condensed consolidated financial statements.
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Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 31, 2002
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 and nine-month periods
ended October 31, 2002 are not necessarily indicative of the results that may be
expected for a full fiscal year.
Certain reclassifications have been made to conform prior year data with the
current presentation. Warehousing and distribution costs of $405,000 for the
three months ended October 31, 2001, and $1.7 million for the nine months ended
October 31, 2001, have been included in SG&A expenses in the consolidated
statements of income. The Company had previously included such expenses in cost
of goods sold.
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, 2002.
NOTE B REVENUE RECOGNITION
Wholesale revenues are recognized upon the shipment of products to the customers
FOB shipping point. Allowances for chargebacks, returns and other charges are
recorded at the sales date based on customer specific projections as well as
historical rates of such allowances. Retail revenues are recognized at the
"point of sale," which occur when merchandise is sold "over the counter" in
retail stores.
NOTE C FINANCING AGREEMENTS
On January 23, 2002, the Company entered into a three-year $20 million credit
facility ("the Credit Facility") with CIT Commercial Services ("CIT") replacing
its arrangement with Rosenthal & Rosenthal, Inc ("Rosenthal"). Borrowings under
the Credit Facility are formula based and originally included a $5 million over
advance provision with interest at 1.00% above the prime rate. In June 2002, the
Company agreed to amend the Credit Facility to increase the over advance
provision to $7 million and include certain retail inventory in the availability
formula. Borrowings under the amended Credit Facility bear interest at 1.5%
above the prime rate. Borrowings under the amended Credit Facility were $5.9
million at October 31, 2002 at an average interest rate of 5.88%.
In August 2002 IP Holdings LLC, an indirect wholly owned subsidiary of the
Company, issued in a private placement $20 million of asset-backed notes in a
private placement secured by intellectual property assets (tradenames,
trademarks and license payments thereon). The notes have a 7-year term with a
fixed interest rate of 7.93% with quarterly principal and interest payments of
approximately $859,000. The notes are subject to a liquidity reserve account of
$2.9 million, funded by a deposit of a portion of the proceeds of the notes. The
net proceeds of $16.2 million were used to reduce amounts due by the Company
under its existing revolving credit facilities. Concurrently with this payment,
the Credit Facility was further amended to eliminate the over advance provision
along with certain changes in the availability formula. Costs incurred to obtain
this financing totaled approximately $2.4 million which amount has been deferred
and is being 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.
At October 31, 2002, consolidated borrowings totaled $41.3 million at an average
interest rate of 6.52%
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NOTE D EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing
net income (loss) 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 the conversion
of preferred stock to be issued and the exercise of stock options and warrants.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
2002 2001 2002 2001
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(000's omitted)
Basic .......................................................... 24,845 19,407 23,249 19,237
Effect of assumed conversions of employee stock options......... - 1,850 1,840 1,443
Effect of assumed conversions of preferred stock to be issued... - 1,424 502 1,817
------------------------------ -----------------------------
Diluted ........................................................ 24,845 22,681 25,591 22,497
============================== =============================
NOTE E COMMITMENTS AND CONTINGENCIES
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, certain accounting issues concerning the
restatement of certain of the Company's financial statements in prior years.
In January 2002, Redwood Shoe Corp ("Redwood"), one of the Company's former
buying agents and a supplier of footwear to the Company, filed a Complaint in
the United States District Court for the Southern District of New York, alleging
that the Company breached various contractual obligations to Redwood and seeking
to recover damages in excess of $20 million and its litigation costs. The
Company moved to dismiss the Amended Complaint based upon Redwood's failure to
state a claim, and on November 13, 2002, the Magistrate issued an Opinion and
Recommended Order dismissing Redwood's complaint to the extent Redwood sought to
recover damages for breach of an oral contract for alleged guaranteed
commissions. The parties are now awaiting a determination from the District
Court whether the Recommended Order will be accepted. Thereafter, the Company
will file an answer to the remaining counts of the Amended Complaint, as well as
counterclaims against Redwood.
On June 10, 2002 the Company was sued by Bank One Leasing Corp. in the Franklin
County Court of Common Pleas (Ohio) to recover on an accelerated basis certain
capitalized lease payments which otherwise would have been due in various
installments through April. On October 7, 2002, the parties reached a settlement
agreement, and the case was dismissed with prejudice. The Company paid Bank One
Leasing Corp $1.1 million, of which $346,000 was in excess of the recorded
amount of the debt. The $346,000 was recorded as interest expense.
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 above, 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 INVESTMENT IN JOINT VENTURE
Equity Investment:
On October 7, 1998, the Company formed Unzipped Apparel, LLC ("Unzipped") with
joint venture partner Sweet Sportswear LLC ("Sweet"), the purpose of which was
to market and distribute apparel under the BONGO label. The Company and Sweet
each had a 50% interest in Unzipped. The Company was entitled to receive an
advertising royalty from Unzipped equal to 3% of Unzipped's net sales. For the
nine months ended October 31, 2002 and 2001, respectively, included in royalty
income from Unzipped was $414,000 and $983,000.
Acquisition:
On April 23, 2002, the Company, through a subsidiary, acquired Sweet's 50%
interest in Unzipped for $19.3 million payable in the form of 3 million shares
of the Company's common stock valued at a price of $2.75 per share, totaling
-7-
$8.3 million, and an additional $11 million obligation to be evidenced by an 8%
senior subordinated note with interest due quarterly and principal due in 2012.
The original purchase agreement indicated that $11 million would be issued as
redeemable preferred stock and at July 31, 2002, the $11 million was classified
as redeemable preferred stock and $200,000 of dividends were recorded in the
quarter. During the third quarter, the agreement was revised and the $11 million
was retroactively changed to debt. Thus, the obligation was reclassified to debt
at October 31, 2002 and the dividend charge from the second quarter was
reclassified to interest expense. The debt is subordinated to the Company's
Credit Facility (See Note C of the Notes to the Condensed Consolidated Financial
Statements) and is collaterized by the shares of stock of a subsidiary which
owns the royalty rights to the Company's trademarks. The acquisition was
recorded as of April 30, 2002. Accordingly the operations of Unzipped have been
included beginning May 1, 2002.
The following table shows the value of assets and liabilities recorded for the
purchase of Unzipped, adjusted to reflect changes in fair value of assets and
liabilities and purchase accounting liabilities:
(000's omitted)
Accounts receivable, net $ 593
Due from factors and accounts receivable, net 7,509
Inventories 5,485
Prepaid advertising and other 61
Property and equipment 156
Other assets 11
----------
Total assets acquired 13,815
Revolving notes payable - banks 10,512
Accounts payable and accrued expenses 8,167
----------
Total liabilities assumed 18,679
----------
Net assets acquired $ (4,864)
==========
The excess purchase price over net assets acquired of $21.8 million has been
recorded as goodwill and $2.4 million as other intangible assets. The Company is
in the process of obtaining a third party valuation of certain intangible
assets; thus the allocation of the purchases price is subject to change.
The following unaudited pro-forma information presents a summary of the
Company's consolidated results of operations as if the Unzipped acquisition and
its related financing had occurred on February 1, 2001. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisition occurred on February 1, 2001, or which may result in the future.
Three months ended Nine months ended
October 31, October 31,
2002 2001 2002 2001
--------------------------------------------------------------------
(000's omitted, except per share)
Total net revenues $43,226 $38,426 $131,099 $114,494
Operating income $477 $1,451 $5,515 $5,141
Net income (loss) ($788) $684 $2,933 $3,191
Basic earnings (loss) per common share ($0.03) $0.03 $0.13 $0.14
Diluted earnings (loss) per common share ($0.03) $0.03 $0.11 $0.13
Revolving Credit Agreement:
Unzipped has a credit facility with Congress Financial Corporation ("Congress").
Under the facility as amended, Unzipped may borrow up to $15 million under
revolving loans until September 30, 2002. The facility was further amended to
extend its expiration on a month-to-month basis through January 31, 2003.
Borrowings 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. The borrowings bear interest at the lender's prime rate
or at a rate of 2.25% per annum in excess of the Eurodollar rate.
Borrowings under the facility are secured by substantially all of the assets of
Unzipped and are guaranteed by a principal of Sweet who is also a director of
the Company and his family trust, with such guarantee being limited to $500,000.
The Company has agreed to cause these guarantees to be released on or before
February 1, 2003.
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At October 31, 2002, Unzipped's borrowings totaled $15.1 million under the
revolving credit agreement.
The facility requires Unzipped to be in compliance with certain financial and
nonfinancial covenants. At January 31, 2002, Unzipped was required to have a
minimum members' equity balance of $750,000. Unzipped obtained an amendment to
the facility dated March 15, 2002, under which the minimum members' equity
balance was waived for the period from November 1, 2001 through February 28,
2002. In consideration for the amendment, Azteca Production International,
Inc.("Azteca"), a company that shares common ownership with Sweet, agreed to
increase the amount of a subordinated loan that Azteca previously made to
Unzipped from $3.5 million to $5 million.
In connection with its acquisition of the remaining interest in Unzipped, the
Company agreed that on or before February 1, 2003, it will pay any amount
remaining due under the subordinated loan made to Unzipped by Azteca.
Related Party Transactions:
Unzipped has a supply agreement with Azteca for the development, manufacturing,
and supply of certain products bearing the Bongo trademark for the exclusive use
by Unzipped. As consideration for the development of the products, Unzipped pays
Azteca pursuant to a separate pricing schedule. For the three and nine months
ended October 31, 2002, Unzipped purchased $17.6 and $31.7 million of products
from Azteca. The supply agreement was consummated upon Unzipped's formation and
originally extended through January 31, 2003, and was amended and restated on
substantially the same terms 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
three and nine months ended October 31, 2002, Unzipped incurred $106,962 and
$213,924 of such allocated expenses.
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 based
upon certain specified percentages of net income that Unzipped achieves during
the three-year term.
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 three
and nine months ended October 31, 2002, Unzipped incurred $827,261 and $1.8
million for such services. The agreement also provides for reimbursement for
certain operating costs incurred by ADS and charges for special handling fees at
hourly rates approved by management. These rates can be adjusted annually by the
parties to reflect changes in economic factors. The distribution agreement was
consummated upon Unzipped's formation and was amended and restated on
substantially the same terms effective April 23, 2002 through January 31, 2005.
Unzipped occupies office space in a building rented by ADS and Commerce Clothing
Company, LLC (Commerce), a related party to Azteca.
Amounts due to related parties at October 31, 2002 and included in accounts
payable and accrued expenses, consist of the following:
Azteca $ (110,136)
ADS 4,030,000
Commerce (86,000)
------------
$ 3,833,864
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 recent acquisition
of Unzipped, the Company has redefined the reportable operating segments. The
Company's operations are now comprised of two reportable segments: footwear and
-9-
apparel. Segment revenues are generated from the sale of footwear, apparel and
accessories through wholesale channels and the Company's retail locations. The
Company defines segment income as operating income before interest expense and
income taxes. Summarized below are the Company's segment revenues, income (loss)
and total assets by reportable segments for the fiscal quarter and nine months
ended October 31, 2002.
(000's omitted) Footwear Apparel Elimination Consolidated
---------------------------------------------------------------------
For the fiscal quarter ended October 31, 2002
Total revenues $ 24,551 $ 18,767 $ (92) $ 43,226
Segment income (loss) (1,188) 1,665 - 477
Net interest expense 1,265
------------
Loss before income tax provision $ (788)
============
For the fiscal nine months ended October 31, 2002
Total revenues $ 79,924 $ 38,595 $ (113) $ 118,406
Segment income 1,883 3,566 - 5,449
Net interest expense 2,250
------------
Income before income tax provision $ 3,449
============
Total assets as of October 31, 2002 $ 84,905 $ 45,832 $(23,671) $ 107,066
=====================================================================
NOTE H RECENT ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which changes the
accounting for goodwill from an amortization method to an impairment-only
approach. The amortization of goodwill totaled $36,000 and $107,000,
respectively, in the quarter and nine months ended October 31, 2001. Under SFAS
No. 142, beginning on February 1, 2002, amortization of goodwill ceased.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting
and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a
business. SFAS No. 144 is effective for the fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted SFAS
No. 144 as of February 1, 2002, and the adoption of the Statement did not have a
significant impact on the Company's financial position and results of
operations.
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor
consideration to any purchasers of the vendor's products at any point along the
distribution chain, regardless of whether the purchaser receiving the
consideration is a direct customer of the vendor. The adoption, effective
February 1, 2002, required the Company to reclassify cooperative advertising
expenses from a deduction against revenues to a selling, general and
administrative ("SG&A") expense. As a result, restated net sales, gross profit
and SG&A expenses for the fiscal nine months ended October 31, 2002 increased by
$477,000. The calculation of this reclassification for the prior year was deemed
impractical but was expected to be immaterial.
-10-
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, 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, 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.
Seasonal And Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of holidays, weather, the timing of
footwear shipments, market acceptance of the Company's products, the mix,
pricing and presentation of the products offered and sold, the hiring and
training of additional personnel, the timing of inventory write downs,
fluctuations in the cost of materials, the timing of licensing payments and
reporting, and other factors beyond the Company's control, such as general
economic conditions and the action of competitors. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the results that
may be achieved for a full fiscal year or any future quarter.
In addition, the timing of the receipt of future revenues could be impacted by
the recent trend among retailers in the Company's industry to order goods closer
to a particular selling season than they have historically done so. The Company
continues to seek to expand and diversify its product lines to help reduce the
dependence on any particular product line and lessen the impact of the seasonal
nature of its business. However, the success of the Company will still remain
largely dependent on its ability to predict accurately upcoming fashion trends
among its customer base, build and maintain brand awareness and to fulfill the
product requirements of its retail channel within the shortened timeframe
required. Unanticipated changes in consumer fashion preferences, slowdowns in
the United States economy, changes in the prices of supplies, consolidation of
retail chains, among other factors noted herein, could adversely affect the
Company's future operating results.
Results of Operations
General
As of May 1, 2002, the operating results of Unzipped, the Company's Bongo
jeanswear business, have been consolidated.
For the three months ended October 31, 2002
Revenues. Net revenues increased by $16.5 million to $43.2 million from $26.7
million in the comparable period of the prior year. The net revenue increase
resulted primarily from the sales of $18.7 million by Unzipped, partially offset
by a decrease of $2.1 million to $24.6 million from $26.7 million in footwear in
the comparable period of the prior year. The net revenue decrease in footwear
resulted primarily from decreases in sales in wholesale footwear of $474,000 and
the Company's private label men's division of $2.3 million. These decreases were
partially offset by $527,000 of retail store sales increases. The private label
men's division sales decrease resulted primarily from significantly reduced
sales to K-Mart, which is retrenching as a result of its bankruptcy filing and
associated store closings. Retail store sales increased to $2.7 million, as
compared to $2.2 million in the third quarter of the prior year. The retail
sales increase resulted from the sales of $1.2 million in nine new stores, which
was partially offset by decreases of $197,000 in comparable store sales and
$430,000 from one store that has been sold to a licensee and one under
performing store that has been closed. Comparable licensing income increased
$380,000, as the prior year period licensing income included $357,000 of
royalties from Unzipped, which royalty payment ceased with the Company's
acquisition of the remaining interest in Unzipped on April 23, 2002.
-11-
Gross Profit. Gross profit increased by $2.9 million to $11.4 million as
compared to $8.5 million in the prior year quarter. The gross profit increase of
$3.7 million is attributable to Unzipped, partially offset by a decrease of
$882,000 to $7.6 million from $8.5 million in footwear in the comparable period
of the prior year. Gross profit margin decreased, as a percentage of net
revenues, by 5.3% to 26.3% as compared to 31.6% in the third quarter of the
prior year. The decrease in gross profit margin percentage is primarily
attributable to Unzipped, which had gross margins of 20.3% for apparel sales in
the current year quarter. Gross profit margin in footwear slightly decreased, as
a percentage of net revenues, by 0.7% to 30.9% as compared to 31.6% in the
comparable prior year quarter. The gross profit decrease in footwear is
attributable $826,000 to wholesale footwear, of which $701,000 resulted from
lower margins and $125,000 from lower sales, and $205,000 to the Company's
private label men's division, partially offset by gross profit increases of
$126,000 in retail stores and $23,000 in licensing income.
Operating Expenses and Special Charges. Operating expenses and special charges
increased by $3.1 million to $10.9 million from $7.8 million in the prior year
quarter. $2.1 million of this increase resulted from the operations of Unzipped.
Operating expenses in footwear increased by $700,000 to $8.4 million from $7.7
million in the prior year quarter. The operating expense increase in footwear
resulted primarily from $720,000 of incremental costs associated with the
opening of new retail stores and $242,000 of selling, general and administrative
expenses increases in wholesale footwear, partially offset by $50,000 of
operating expense decrease in the comparable stores and $212,000 of operating
expense savings in the two discontinued retail stores. Included in special
charges for the three months ended October 31, 2002 were $145,000 of employee
severance payments.
Net Interest Expense. Net interest expense increased by $937,000 to $1.3 million
from $328,000 in the prior year quarter. Included in the interest expenses were
$197,000 from the operations of Unzipped, and $200,000 from the 8% senior
subordinated note issued in the Unzipped acquisition. See Note F of the Notes to
the Condensed Consolidated Financial Statements. Interest expense in the current
fiscal quarter associated with the asset backed notes issued by a subsidiary of
the Company was $352,000, see Note C of the Notes to the Condensed Consolidated
Financial Statements. $346,000 of interest expenses was an adjustment of
interest payment associated with a $3.5 million master lease and loan agreement
with Bank One Leasing Corp. in connection with a litigation settlement, see Note
E of the Notes to the Condensed Consolidated Financial Statements. Net interest
expense in footwear decreased by $127,000 to $170,000 from $297,000, excluding
$31,000 interest expense paid under the above master lease agreement in the
prior year quarter. The net interest expense decrease in footwear resulted from
lower average interest rates and lower average outstanding borrowing as compared
with the comparable prior year period.
Net loss. As a result of the foregoing, the Company recorded a net loss of
$788,000 in the quarter ended October 31, 2002, compared to net income of
$297,000 in the comparable prior year quarter.
For the nine months ended October 31, 2002
Revenues. Net revenues increased by $35.9 million to $118.4 million from $82.5
million in the comparable period of the prior year. The net revenue increase
resulted primarily from $38.6 million sales in Unzipped partially offset by the
net revenue decrease of $2.6 million in footwear to $79.9 million from $82.5
million in the comparable period of the prior year. The net revenue decrease in
footwear resulted primarily from sales decreases of $1.2 million in the
wholesale footwear and $3.0 million in the Company's private label men's
division, partially offset by retail store increases of $1.3 million and a
$278,000 increase in licensing income. The private label men's division sales
decrease resulted primarily from significantly reduced sales to K-Mart, which is
retrenching as a result of its bankruptcy filing and associated store closings.
Retail store sales increased to $7.3 million, as compared to $5.9 million in the
comparable nine months of the prior year. The retail sales increase resulted
from $2.8 million of sales in nine new stores, partially offset by a decrease of
$245,000 in comparable retail stores and $1.2 million from one store sold to a
licensee and one under performing store that was closed. Licensing income
increased to $4.2 million as compared to $3.9 million in the comparable prior
year nine month period. Comparable licensing income increased $980,000, as the
prior year second and third quarter licensing income included $346,000 and
$357,000 of royalties from Unzipped, respectively, which royalty payment ceased
with the acquisition of the remaining interest in Unzipped on April 23, 2002.
Gross Profit. Gross profit increased by $8.2 million to $34.1 million as
compared to $25.9 million in the prior year nine- month period. The gross profit
increase of $7.7 million is attributable to Unzipped and $360,000 to footwear.
-12-
Gross profit margin decreased, as a percentage of net revenues, by 2.6% to 28.8%
as compared to 31.4% for the nine months ended October 31, 2001. The decrease in
gross profit margin percentage is primarily attributable to Unzipped, which had
gross margins of 20.3% for apparel sales in the current year period, partially
offset by improved margins in footwear. Gross profit in footwear increased by
$360,000 to $26.3 million as compared to $25.9 million in the nine months of the
prior year. Gross profit margin in footwear increased, as a percentage of net
revenues, by 1.6% to 33.0% as compared to 31.4% for the nine months ended
October 31, 2001. The increase in gross profit in footwear is primarily
attributable $24,000 to improved margins in the wholesale footwear, $363,000 to
retail stores, and $278,000 to licensing income, partially offset by gross
profit decrease of $305,000 in the Company's private label men's division.
Operating Expenses and Special Charges. Operating expenses and special charges
increased by $5.3 million to $28.6 million from $23.3 million in the comparable
nine month period of the prior year. $4.2 million of the increase resulted from
the operations of Unzipped. Operating expenses in footwear increased by $1.2
million to $24.1 million from $22.9 million in the comparable nine month period
of the prior year. Operating expense increase in footwear resulted primarily
from $1.8 million of the incremental costs associated with the opening of new
retail stores and $60,000 of operating expense increase in the comparable
stores, partially offset by $151,000 of cost reduction in the wholesale footwear
and $569,000 of operating expense savings in the two discontinued retail stores.
Included in special charges for the nine months ended October 31, 2002 were
$145,000 of employee severance payments.
Net Interest Expense. Net interest expense increased by $1.3 million to $2.3
million from $949,000 in the prior year comparable nine month period. Included
in the interest expenses were $470,000 from the operations of Unzipped, and
$400,000 from the 8% senior subordinated note issued in the Unzipped
acquisition. See Note F of the Notes to the Condensed Consolidated Financial
Statements. Interest expense in the nine months ended October 31, 2002
associated with the asset backed notes issued by a subsidiary of the Company was
$352,000, see Note C of the Notes to the Condensed Consolidated Financial
Statements. $346,000 of interest expenses was an adjustment of interest payment
associated with a $3.5 million master lease and loan agreement with Bank One
Leasing Corp. in connection with a litigation settlement, see Note E of the
Notes to the Condensed Consolidated Financial Statements. Net interest expense
in footwear decreased by $161,000 to $682,000 from $843,000, excluding $106,000
interest expense paid to Bank One Leasing Corp. in the prior year nine month
period. The net interest expense decrease in footwear resulted from lower
average interest rates and lower average outstanding borrowing as compared with
the comparable prior year period.
Equity Income in Joint Venture. During the quarter ended April 30, 2002, the
Company eliminated the remaining $250,000 liability in connection with the
acquisition of Unzipped. See Note E of Notes to Condensed Consolidated Financial
Statements.
Income Tax Benefit. In the quarter ended April 30, 2002, the Company recorded
$139,000 of income tax benefit resulting from the utilization of net operating
losses to recover previously recorded minimum statutory taxes. No tax expense
was recorded for the current and prior year quarter, due to a reduction in the
valuation reserve, which offset the income tax provision.
Net Income. As a result of the foregoing, the Company recorded net income of
$3.6 million for the nine month ended October 31, 2002, compared to $1.7 million
in the comparable nine months of the prior year.
Liquidity and Capital Resources
Working Capital.
At October 31, 2002, the current ratio was 1.25 to 1, as compared to 1.08:1 a
year ago.
The Company continues to rely upon trade credit, revenues generated from
operations, especially private label and licensing activity, as well as
borrowings under its Credit Agreement to finance its operations. Net cash used
in operating activities for the nine months ended October 31, 2002 totaled $13
million, compared to cash used of $348,000 for the nine months ended October 31,
2001. The increase in cash used in operating activities resulted primarily from
an increase in factoring and trade receivables related to the acquisition of
Unzipped. In anticipation of continued margin pressure resulting from a
difficult retail environment, the Company implemented, in November 2002, a
reduction in personnel which the Company anticipates will result in a $540,000
reduction in general and administrative expenses for the fourth quarter of the
fiscal year ending January 31, 2003.
-13-
Capital Expenditures.
Capital expenditures for the nine months ended October 31, 2002 were $1.4
million, compared to $967,000 for the comparable period in the prior year. The
Company anticipates additional capital expenditures of approximately $100,000 in
the fiscal year ending January 31, 2003. The Company believes that it will be
able to fund these anticipated expenditures primarily with cash from borrowings
under its Credit Facility. The Company is not planning on opening any additional
retail Candie's concept stores within the next 12 months. The Company currently
has a license and supply agreement with Casual Male Retail Group ("CMRG)",
pursuant to which CMRG is obligated to open Candie's outlet stores. CMRG has
advised the Company, however, that it does not intend to open any additional
outlet stores and is seeking to terminate the agreement. There are currently 12
Candie's outlet stores that were opened and are currently being operated by
CMRG. Under the agreement the Company has the right to take over these stores
from CMRG. If the Company exercises its right and takes over the operation of
the existing outlet stores it will require the Company to make additional
capital expenditures. The Company does not anticipate any material adverse
impact on its business, operations or financial condition if the CMRG agreement
is terminated.
Current Revolving Credit Facility.
On January 23, 2002, the Company entered into a three-year $20 million Credit
Facility with CIT replacing its arrangement with Rosenthal. Borrowings under the
Credit Facility are formula based and include a $5 million over advance
provision with interest at 1.00% above the prime rate. Subsequent to April 30,
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. Borrowing under the amended Credit Facility bear interest
at 1.5% above the prime rate. In August 2002, $16.2 million from the net
proceeds from a private placement of asset backed notes by a subsidiary of the
Company were used to reduce amounts due under this Credit Facility. Concurrently
with this payment the Credit Facility was further amended to eliminate the over
advance provision along with certain changes in the availability formula. See
Note C of the Notes to the Condensed Consolidated Financial Statements.
Unzipped has a credit facility with Congress Financial Corporation which expired
on September 30, 2002, and was amended to extend its expiration on a
month-to-month basis through January 31, 2003. Under the facility as amended,
Unzipped may borrow up to $15 million under revolving loans. 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. The borrowings bear interest at the lender's prime rate or at a rate
of 2.25% per annum in excess of the Eurodollar rate. The Company is presently
negotiating with prospective lenders in an effort to obtain a new credit
facility for Unzipped prior to the expiration of Unzipped's existing credit
facility.
In August 2002 IP Holdings LLC, an indirect wholly owned subsidiary of the
Company, issued in a private placement $20 million of asset-backed notes secured
by intellectual property assets (tradenames, trademarks and license payment
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. See Note C of the Notes to the Condensed Consolidated
Financial Statements.
Other
On April 23, 2002, the Company, through a subsidiary, acquired Sweet's 50%
interest in Unzipped for $19.3 million payable in the form of 3 million shares
of the Company's common stock at a price of $2.75 per share, totaling $8.3
million, and an additional $11 million obligation to be evidenced by an 8%
senior subordinated note with interest due quarterly and principal due in 2012.
The original purchase agreement indicated that $11 million would be issued as
redeemable preferred stock and at July 31, 2002, the $11 million was classified
as redeemable preferred stock and $200,000 of dividends were recorded in the
quarter. During the third quarter, the agreement was revised and the $11 million
was retroactively changed to debt. Thus, the obligation was reclassified to debt
at October 31, 2002 and the dividend charge from the second quarter was
reclassified to interest expense. The debt is subordinated to the Company's
Credit Facility (See Note C of the Notes to the Condensed Consolidated Financial
Statements) and is collaterized by the shares of stock of IP Holdings, LLC,
which owns the royalty rights to the Company's trademarks.
In connection with its acquisition of Unzipped (See Note F of the Notes to
Condensed Consolidated Financial Statements), the Company has agreed that on or
before February 1, 2003, it will pay Azteca for all receivables due from
Unzipped for purchases of product that are more than 30 days past due and any
amount remaining under the subordinated loan between Unzipped and Azteca. On
October 31, 2002 these obligations totaled $3.8 million. In addition, borrowings
under Unzipped existing credit facility are guaranteed by a principal of Sweet,
who is also a director of the Company and his family trust, with such guarantee
being limited to $500,000. The Company has agreed to cause these guarantees to
be released on or before February 1, 2003.
-14-
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 October 31, 2002
that are sensitive to changes in interest rates.
The Company's Credit Facility had an average interest
rate of 5.88% for the three month period ended
October 31, 2002 $5.9 million
The Unzipped Credit Facility had an average interest rate of
6.75% for the three month period ended October 31, 2002 $15.1 million
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on the evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90
days of the filing date of this Quarterly Report on Form 10-Q, the Company's
chief executive officer and chief financial officer have concluded that the
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that the Company file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms and are operating
in an effective manner.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
-15-
PART II. Other Information
Item 1. Legal Proceedings
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, certain accounting issues concerning the
restatement of certain of the Company's financial statements in prior years.
In January 2002, Redwood, one of the Company's former buying agents and a
supplier of footwear to the Company, filed a Complaint in the United States
District Court for the Southern District of New York, alleging that the Company
breached various contractual obligations to Redwood and seeking to recover
damages in excess of $20 million and its litigation costs. The Company moved to
dismiss the Amended Complaint based upon Redwood's failure to state a claim, and
on November 13, 2002, the Magistrate issued an Opinion and Recommended Order
dismissing Redwood's complaint to the extent Redwood sought to recover damages
for breach of an oral contract for alleged guaranteed commissions. The parties
are now awaiting a determination from the District Court whether the Recommended
Order will be accepted. Thereafter, the Company will file an answer to the
remaining counts of the Amended Complaint, as well as counterclaims against
Redwood.
On June 10, 2002 the Company was sued by Bank One Leasing Corp. in the Franklin
County Court of Common Pleas (Ohio) to recover on an accelerated basis certain
capitalized lease payments which otherwise would have been due in various
installments through April 2002. On October 7, 2002, the parties reached a
settlement agreement, and the case was dismissed with prejudice.
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 above, the Company knows of no
material legal proceedings, pending or threatened, or judgments entered, against
any director or officer of the Company in his capacity as such.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended October 31, 2002, the Company issued a total of 674,309
shares of its common stock to the plaintiff class and its counsel which
constituted the final payment made by the Company in connection with the
settlement of the stockholder class action captioned Willow Creek Capital
Partners, L.P. v Candie's, Inc. which had been commenced in the U.S. District
Court for the Southern District of New York. This share issuance is in addition
to the Company's prior issuance of 1,908,682 shares of its common stock made to
the plaintiff class and its counsel in connection with the settlement. The
issuance of the shares was made pursuant to a court approved settlement of the
class action after appropriate fairness hearings. The shares were issued
pursuant to the exemption from registration under Section 3(a)(10) of the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 3.1 - Amendment to Certificate of Incorporation dated June 24,
2002.
Exhibit 10.1 - Equity Acquisition Agreement between Michael Caruso &
Co., Inc., Candie's, Inc. and Sweet Sportswear, LLC dated as of April
23, 2002.
Exhibit 10.2 - 8% Senior Subordinated Note due 2012 of Candie's Inc.
payable to Sweet Sportswear, LLC.
Exhibit 10.3 - Collateral Pledge Agreement dated October 18, 2002
between Candie's, Inc., Michael Caruso & Co., Inc. and Sweet
Sportswear LLC.
Exhibit 99.1 - Certification of CEO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99.2 - Certification of CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
-16-
b. Reports on Form 8-K - During the quarter ended October 31, 2002 the
Company filed a Current Report on Form 8-K under Item 5 of that form
to report that on August 20, 2002 a subsidiary of the Company issued
$20 million of asset backed securities in a private placement.
-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 December 13, 2002 /s/ Neil Cole
--------------------------- --------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date December 13, 2002 /s/ Richard Danderline
--------------------------- --------------------------------
Richard Danderline
Executive Vice President of Finance
And Operations
-18-
Candie's, Inc.
Certification of Principal Executive Officer
I, Neil Cole, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Candie's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 13, 2002
/s/ Neil Cole
---------------------------
Neil Cole
Chief Executive Officer
(Principal Executive Officer)
-19-
Candie's, Inc.
Certification of Principal Financial Officer
I, Richard Danderline, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Candie's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 13, 2002
/s/ Richard Danderline
--------------------------------------------------
Richard Danderline
Executive Vice President of Finance and Operations
(Principal Financial Officer)
-20-
Candie's Inc and Subsidiaries
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- --------------- ---------------
3.1 Amendment to Certificate of Incorporation dated June 24, 2002.
10.1 Equity Acquisition Agreement between Michael Caruso & Co., Inc.,
Candie's, Inc. and Sweet Sportswear, LLC dated as of April 23, 2002.
10.2 8% Senior Subordinated Note due 2012 of Candie's Inc. payable to Sweet
Sportswear, LLC.
10.3 Collateral Pledge Agreement dated October 18, 2002 between Candie's,
Inc., Michael Caruso & Co., Inc. and Sweet Sportswear LLC.
99.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-21-