U.S. Securities and Exchange Commission
Washington, D.C. 20549
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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 July 31, 2002
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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
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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 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 -- 24,945,544 shares as of August 29, 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 - July 31, 2002 and January 31, 2002......................... 2
Condensed Consolidated Statements of Income - Three and Six Months
Ended July 31, 2002 and 2001....................................................................... 3
Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended
July 31, 2002...................................................................................... 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended July 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 (not applicable).................... 14
Item 4. Internal Controls and Procedures (not applicable).............................................. 14
Part II. Other Information
Item 1. Legal Proceedings.............................................................................. 15
Item 2. Changes in Securities and Use of Proceeds ..................................................... 15
Item 3. Defaults upon Senior Securities (Not Applicable)...............................................
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 15
Item 5. Other Information (Not Applicable).............................................................
Item 6. Exhibits and Reports on Form 8-K............................................................... 16
Signatures ........................................................................................... 17
Certifications of Principal Executive Officer and Principal Financial Officer........................... 18
Exhibit index........................................................................................... 20
Page 1
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, January 31,
2002 2002
---------- ----------
(Unaudited)
Assets (000's omitted, except par value)
Current Assets
Cash............................................................... $ 258 $ 636
Accounts receivable, net........................................... 9,149 4,674
Due from factors, net.............................................. 26,356 5,791
Due from affiliate................................................. 444 565
Inventories........................................................ 18,821 8,368
Refundable income taxes............................................ 168 -
Deferred income taxes.............................................. 1,881 1,881
Prepaid advertising and other...................................... 1,835 718
Other current assets............................................... 125 97
------- -------
Total Current Assets................................................... 59,037 22,730
Property and equipment, at cost:
Furniture, fixtures and equipment.................................. 10,777 9,618
Less: Accumulated depreciation and amortization.................... 5,326 4,470
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5,451 5,148
Other assets:
Goodwill, net...................................................... 23,641 1,868
Intangibles, net.................................................... 19,767 18,158
Deferred financing costs........................................... 777 741
Deferred income taxes.............................................. 1,741 1,741
Other.............................................................. 259 284
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46,185 22,792
------- -------
Total Assets........................................................... $110,673 $ 50,670
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable - banks.................................... $ 17,268 $ 12,366
Accounts payable and accrued expenses.............................. 27,487 12,672
Current portion of long-term debt............................... 4,265 1,225
Losses in excess of joint venture investment....................... - 250
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Total Current Liabilities.............................................. 49,020 26,513
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Long-term liabilities.................................................. 465 638
Long-term debt......................................................... 12,763 -
Dividend payable....................................................... 200 -
Redeemable preferred stock............................................. 11,000 -
Stockholders' Equity
Preferred and common stock to be issued........................... 2,000 2,000
Preferred stock, $.01 par value - shares authorized 5,000;
none issued and outstanding................................... - -
Common stock, $.001 par value - shares authorized 30,000;
shares issued 24,295 at July 31, 2002 and 20,400 issued
at January 31, 2002........................................... 24 20
Additional paid-in capital......................................... 67,706 58,188
Retained earnings (deficit)........................................ (31,838) (36,214)
Treasury stock - at cost - 198 shares at July 31, 2002 and
113 shares at January 31, 2002................................ (667) (475)
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Total Stockholders' Equity............................................. 37,225 23,519
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Total Liabilities and Stockholders' Equity............................. $110,673 $ 50,670
======= =======
See notes to condensed consolidated financial statements.
Page 2
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ------------------- ------------------ -------------------
2002 2001 2002 2001
(000's omitted, except per share data)
Net sales...................................... $ 48,218 $ 30,570 $ 72,408 $ 53,222
Licensing income............................... 1,345 1,316 2,772 2,518
------------------ ------------------- ------------------ -------------------
Net revenues................................... 49,563 31,886 75,180 55,740
Cost of goods sold............................. 35,568 22,755 52,492 38,300
------------------ ------------------- ------------------ -------------------
Gross profit................................... 13,995 9,131 22,688 17,440
Operating expenses:
Selling, general and administrative expenses... 9,898 7,683 17,623 15,209
Special charges................................ 78 178 93 243
------------------ ------------------- ------------------ -------------------
9,976 7,861 17,716 15,452
------------------ ------------------- ------------------ -------------------
Operating income............................... 4,019 1,270 4,972 1,988
Other expenses:
Interest expense............................... 508 296 785 621
Equity income in joint venture................. - - (250) -
------------------ ------------------- ------------------ -------------------
508 296 535 621
------------------ ------------------- ------------------ -------------------
Income before income taxes..................... 3,511 974 4,437 1,367
Income tax benefit............................. - - (139) -
------------------ ------------------- ------------------ -------------------
Net income..................................... 3,511 974 4,576 1,367
Dividends on preferred stock................... 200 - 200 -
------------------ ------------------- ------------------ -------------------
Income available to common stockholders........ $ 3,311 $ 974 $ 4,376 $ 1,367
================== =================== ================== ===================
Earnings per common share:
Basic..................................... $ 0.14 $ 0.05 $ 0.20 $ 0.07
================== =================== ================== ===================
Diluted................................... $ 0.12 $ 0.04 $ 0.17 $ 0.06
================== =================== ================== ===================
Weighted average number of common shares outstanding:
Basic..................................... 24,176 19,169 22,438 19,153
================== =================== ================== ===================
Diluted................................... 27,835 22,327 25,499 22,405
================== =================== ================== ===================
See notes to condensed consolidated financial statements.
Page 3
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Six Months Ended July 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
----------------------------------------------------------------------------------
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................. 842 1 -- 1,119 -- -- 1,120
Shares granted to board members........... 18 -- -- 40 -- -- 40
Options granted to non-employees.......... -- -- -- 58 -- -- 58
Purchase of treasury shares............... -- -- -- -- -- (192) (192)
Acquisition of Unzipped Apparel, LLC...... 3,000 3 -- 8,247 -- -- 8,250
Dividends on preferred stock ............. -- -- -- -- (200) -- (200)
Net income................................ -- -- -- -- 4,576 -- 4,576
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Balance at July 31, 2002 24,295 $ 24 $ 2,000 $ 67,706 $(31,838) $ (667) $ 37,225
==================================================================================
See notes to condensed consolidated financial statements.
Page 4
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
---------------------------
July 31, July 31,
2002 2001
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(000's omitted)
OPERATING ACTIVITIES:
Net cash provided (used) in operating activities........................... $ (10,472) $ (3,992)
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INVESTING ACTIVITIES:
Purchases of property and equipment................................... (948) (663)
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Net cash used in investing activities...................................... (948) (663)
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FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants.................. 1,120 355
Purchase of treasury stock............................................ (192) (201)
Capital lease reduction............................................... (474) (438)
Debt payable.......................................................... 10,588 5,409
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Net cash provided by financing activities.................................. 11,042 5,125
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INCREASE IN CASH........................................................... (378) 470
Cash at beginning of period................................................ 636 366
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Cash at end of period...................................................... $ 258 $ 836
===========================
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................... $ 1,097 $ 622
===========================
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 508 $ 296
===========================
Value of common and preferred shares issued
to acquire Unzipped Apparel, LLC.................................. $ 19,250 $ -
===========================
See notes to condensed consolidated financial statements.
Page 5
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
July 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 six-month periods ended
July 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 $664,000 for the
three months ended July 31, 2001, and $1.3 million for the six months ended July
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 sales," 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 include 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. In August 2002, $16.2 million from the net proceeds from a private
placement of asset backed notes 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 I of the Notes to the Condensed Consolidated
Financial Statements.
See Note F of the Notes to the Condensed Consolidated Financial Statements
regarding the financing agreement of Unzipped Apparel, LLC.
At July 31, 2002, borrowings totaled $34.3 million at an average interest rate
of 5.38%
NOTE D EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing
earnings attributable to common stockholders 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.
Page 6
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
Three Months Ended July 31, Six Months Ended July 31,
---------------------------- --------------------------
2002 2001 2002 2001
---------------------------- --------------------------
(000's omitted)
Basic .......................................................... 24,176 19,169 22,438 19,153
Effect of assumed conversions of employee stock options......... 2,985 1,595 2,308 1,239
Effect of assumed conversions of preferred stock to be issued... 674 1,563 753 2,013
---------------------------- --------------------------
Diluted ........................................................ 27,835 22,327 25,499 22,405
============================ ==========================
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, one of the Company's former buying agents and a
supplier of footwear to the Company, filed a Complaint in the United States
District Court for the Southern District of New York, alleging that the Company
breached various contractual obligations to Redwood and seeking to recover
damages in excess of $20 million and its litigation costs. The Company has filed
a motion to dismiss the Complaint based upon Redwood's failure to state a claim,
in response to which Redwood has filed an amended complaint, which the Company
has moved to dismiss. In the event that some or all of the amended Complaint
survives the motion to dismiss, the Company intends to vigorously defend this
lawsuit and to file counterclaims.
The Company is a defendant in an action brought 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 2003 and is classified as current liabilities
on the Company's July 2002 balance sheet. The Company does not believe that this
action will have a material adverse effect on its business, operations or
financial condition.
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. Pursuant to the terms of the joint venture,
the Company licensed the BONGO trademark to Unzipped for use in the design,
manufacture and sale of certain designated apparel products. At January 31, 2002
and 2001, the Company believed that Unzipped was in breach of certain provisions
of the agreements among the parties, and notified Unzipped that the Company did
not intend to contribute any additional capital or otherwise support the joint
venture. Accordingly, as of January 31, 2001, the Company recorded $750,000 as
its maximum liability to Unzipped, consisting primarily of a guarantee of bank
debt, and suspended booking its share of Unzipped losses beyond its liability.
During the fourth quarter of fiscal 2002, the Company reduced its liability by
$500,000 with the termination of the guarantee of the bank debt. During the
quarter ended April 30, 2002, the Company reduced the remaining $250,000 in
connection with the acquisition of Unzipped (see below).
The Company was entitled to receive an advertising royalty from Unzipped equal
to 3% of Unzipped's net sales prior to the acquisition. Included in royalty
income is $414,000 and $626,000 of such royalties for the six months ended July
31, 2002 and 2001, respectively.
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 at a price of $2.75 per share, totaling $8.3
Page 7
million, and an additional $11 million obligation to be evidenced by an 8%
senior preferred stock which the Company will be required to redeem in 2012. The
Company may issue subordinated debt in lieu of the redeemable preferred stock,
subject to the approval of Sweet. 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 Six months ended
July 31, July 31,
2002 2001 2002 2001
----------------------------------------------------------------------
(000's omitted, except per share)
Total net revenues $49,563 $43,263 $87,873 $76,068
Operating income $4,019 $2,775 $5,038 $3,690
Net income $3,511 $2,455 $3,921 $2,507
Basic earnings per common share $0.15 $0.11 $0.17 $0.11
Diluted earnings per common share $0.13 $0.10 $0.15 $0.10
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. 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 the former Chairman/Manager of Unzipped 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 the guarantee of the
Chairman/Manager and his family trust to be released on or before February 1,
2003.
At July 31, 2002, borrowings totaled $15.0 million and approximately $29,000 of
additional funds were available to be borrowed under the revolving credit
agreement.
Page 8
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 months ended July
31, 2002, Unzipped purchased $16.3 million of products from Azteca. The supply
agreement was consummated upon Unzipped's formation and originally extended
through January 31, 2003. In connection with the acquisition, the Company agreed
to renew its supply agreement with Azteca for a three year period, the details
of which are not yet finalized.
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 months ended July 31, 2002, Unzipped incurred $118,242 of such allocated
expenses.
In connection with the acquisition, the Company agreed to enter into a
three-year management agreement with Sweet or its designee that provides for
Sweet or its designee to manage the operations of Unzipped in return for a
management fee which is based upon certain specified percentages of net income
that Unzipped achieves during the three-year term, the details of which are not
yet finalized.
Unzipped has a distribution agreement with Apparel Distribution Services (ADS),
an entity that shares common ownership with Sweet. The agreement provides for a
$0.35 per unit fee for warehousing and distribution functions and $0.15 per unit
fee for processing and invoicing orders. For the three months ended July 31,
2002, Unzipped incurred $993,707 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 extends
through December 31, 2002. In connection with the acquisition, the Company
agreed to cause Unzipped to renew its distribution agreement with ADS for a
three-year period, the details of which are not yet finalized.
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 July 31, 2002 and included in accounts payable
and accrued expenses, consist of the following:
Azteca $ 4,362,000
ADS 3,305,000
Commerce 8,000
-------------------
$ 7,675,000
===================
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
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 six-month
period ended July 31, 2002.
Page 9
(000's omitted) Footwear Apparel Elimination Consolidated
For the fiscal quarter ended July 31, 2002
Total revenues $ 29,756 $ 19,828 $ (21) $ 49,563
Segment income 2,118 1,901 - 4,019
Net interest expense 235 273 - 508
Income before provision for income taxes $ 1,883 $ 1,628 $ - $ 3,511
For the fiscal quarter ended July 31, 20021
Total revenues $ 55,373 $ 19,828 $ (21) $ 75,180
Segment income 3,071 1,901 - 4,972
Net interest expense 512 273 - 785
Income before provision for income taxes $ 2,809 $ 1,628 $ - $ 4,437
Total assets as of July 31, 2002 $ 64,520 $ 44,925 $ (1,122) $ 110,673
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 in the quarter ended April
30, 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 first fiscal six months ended July 31, 2002 increased by
$243,000. This reclassification on the prior year was impractical to do so, but
was expected to be immaterial.
NOTE I SUBSEQUENT EVENTS
In August 2002 the Company issued $20 million of asset-backed notes in a private
placement. The notes were issued by IP Holdings LLC, an indirect wholly owned
subsidiary of the Company, and were 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 which will provide
additional availability for the Company to fund its expansion, see Note C of the
Notes to the Condensed Consolidated Financial Statements.
In August 2002, the Company converted $2 million of preferred stock into 674,300
shares of the Company's Common Stock at a price of $2.97 per share.
Page 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
For the three months ended July 31, 2002
Revenues. Net revenues increased by $17.7 million to $49.6 million from $31.9
million in the comparable period of the prior year. The net revenue increase
resulted primarily from the sales of $19.8 million by Unzipped, partially offset
by a decrease of $2.1 million to $29.8 million from $31.9 million in Candie's in
the comparable period of the prior year. The net revenue decrease in Candie's
resulted primarily from decreases in sales in Candie's wholesale footwear of
$1.3 million and the Company's private label men's division of $1.2 million,
partially offset by $310,000 sales increases in the retail stores and $30,000
increase in licensing income. Retail store sales increased to $2.5 million, as
compared to $2.2 million in the second quarter of the prior year. The retail
sales increase resulted from the sales of $927,000 in six new stores, partially
offset by sales decreases of $151,000 in comparable retail stores and $466,000
in two discontinued stores. Comparable licensing income increased $375,000, as
the prior year period included $346,000 of royalties from Unzipped, which
payments ceased with the acquisition on April 23, 2002.
Gross Profit. Gross profit increased by $4.9 million to $14.0 million as
compared to $9.1 million in the prior year quarter. The gross profit increase is
attributable $4.0 million to Unzipped and $859,000 to Candie's. Gross profit in
Candie's increased to $10.0 million from $9.1 million in the prior year quarter.
Gross profit margin decreased, as a percentage of net revenues, by 0.4% to 28.2%
as compared to 28.6% in the second quarter of the prior year. The decrease in
gross profit margin percentage is primarily attributable to Unzipped apparel
sales in current year quarter at 20.2%, partially offset by improved margins in
Page 11
Candie's. Gross profit margin in Candie's increased, as a percentage of net
revenues, by 5.0% to 33.6% as compared to 28.6% in the comparable prior year
quarter. The gross profit increase in Candie's is attributable $907,000 to
Candie's wholesale footwear, $67,000 to retail stores and $30,000 to licensing
income, partially offset by gross profit decrease of $145,000 in the Company's
private label men's division.
Operating Expenses. Operating expenses increased by $2.1 million to $10.0
million from $7.9 million in the prior year quarter. $2.1 million of this
increase resulted from the operations of Unzipped. Operating expenses in
Candie's were $7.9 million, about the same as in the prior year quarter. The
operating expense increase resulted from $575,000 of incremental costs
associated with the opening of new retail stores and $82,000 of operating
expense increase in the comparable stores were offset by $482,000 of cost
reduction in Candie's wholesale footwear and $175,000 of operating expense
savings in the two discontinued retail stores.
Net Interest Expense. Net interest expense increased by $212,000 to $508,000
from $296,000 in the prior year quarter. $273,000 of this increase resulted from
the operations of Unzipped. Net interest expense in Candie's decreased by
$61,000 to $235,000 from $296,000 in the prior year quarter. Net interest
expense decrease in Candie's resulted from lower average interest rates and
lower average outstanding borrowing as compared with the comparable prior year
period.
Income Taxes. The income tax provision for the quarter was offset by a reduction
in the valuation reserve. As a result, no tax provision was recorded for the
period ended July 31, 2002 and the comparable quarter in prior year.
Net Income. The Company recorded net income of $3.5 million, compared to
$974,000 in the prior year quarter.
Dividend Payable. The Company recorded a dividend payable of $200,000 in the
current year quarter associated with the acquisition of Unzipped, see Note E of
the Notes to the Condensed Consolidated Financial Statements.
Net Income Available to Common Stockholders. The Company recorded net income
available to common stockholders of $3.3 million, compared to $974,000 in the
prior year quarter.
For the six months ended July 31, 2001
Revenues. Net revenues increased by $19.4 million to $75.2 million from $55.7
million in the comparable period of the prior year. The net revenue increase
resulted primarily from $19.8 million sales in Unzipped. Net revenues in
Candie's decreased by $367,000 to $55.4 million from $55.7 million in the
comparable period of the prior year. The net revenue decrease in Candie's
resulted primarily from sales decreases of $705,000 in Candie's wholesale
footwear and $725,000 in the Company's private label men's division, partially
offset by sales increases of $809,000 in the retail stores and $254,000 in
licensing income. Retail store sales increased to $4.6 million, as compared to
$3.8 million in the second quarter of the prior year. The retail sales increase
resulted from $1.6 million of sales in six new stores, partially offset by
$48,000 sales decreases in comparable retail stores and $800,000 in two
discontinued stores. Licensing income increased to $2.8 million as compared to
$2.5 million in the comparable prior year six month period. Comparable licensing
income increased $600,000, as the prior year quarter included $346,000 of
royalties from Unzipped.
Gross Profit. Gross profit increased by $5.3 million to $22.7 million as
compared to $17.4 million in the first six months of the prior year. The gross
profit increase is attributable $4.0 million to Unzipped and $1.3 million to
Candie's. Gross profit margin decreased, as a percentage of net revenues, by
1.1% to 30.2% as compared to 31.3% for the six months ended July 31, 2001. The
decrease in gross profit margin percentage is primarily attributable to Unzipped
apparel sales in the current year quarter at 20.2%, partially offset by improved
margins in Candie's. Gross profit in Candie's increased by $1.3 million to $18.7
million as compared to $17.4 million in the first six months of the prior year.
Gross profit margin in Candie's increased, as a percentage of net revenues, by
2.4% to 33.7% as compared to 31.3% for the six months ended July 31, 2001. The
increase in gross profit in Candie's is primarily attributable $850,000 to
improved margins in Candie's wholesale footwear, $238,000 to retail stores, and
$254,000 to licensing income, partially offset by gross profit decrease of
$100,000 in the Company's private label men's division.
Operating Expenses. Operating expenses increased by $2.2 million to $17.7
million from $15.5 million in the first six months of the prior year. $2.1
million of the increase resulted from the operations of Unzipped. Operating
expenses in Candie's increased by $160,000 to $15.6 million from $15.5 million
in the first six months of the prior year. Operating expense increase in
Candie's resulted primarily from $1.1 million of the incremental costs
associated with the opening of new retail stores and $121,000 of operating
expense increase in the comparable stores, substantially offset by $704,000 of
cost reduction in Candie's wholesale footwear and $357,000 of operating expense
savings in the two discontinued retail stores.
Page 12
Net Interest Expense. Net interest expense increased by $164,000 to $785,000
from $621,000 in the first six months of the prior year. $273,000 of this
increase resulted from the operation of Unzipped. Net interest expense in
Candie's decreased by $109,000 to $512,000 from $621,000 in the first six months
of the prior year. Net interest expense decrease in Candie's 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 reduced 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. The Company recorded net income of $4.6 million, compared to $1.4
million in the first six months of the prior year.
Dividend Payable. The Company recorded a dividend payable of $200,000 in the
current year quarter associated with the acquisition of Unzipped, see Note E of
the Notes to the Condensed Consolidated Financial Statements.
Net Income Available to Common Stockholders. The Company recorded net income
available to common stockholders of $4.4 million, compared to $1.4 million in
the comparable prior year period.
Liquidity and Capital Resources
Working Capital.
At July 31, 2002, the current ratio was 1.20 to 1, as compared to 1.04:1 for the
prior fiscal year
The Company continues to rely upon trade credit, revenues generated from
operations, especially private label and licensing activity, as well as
borrowings from under its revolving loan to finance its operations. Net cash
used in operating activities totaled $10.5 million, compared to cash used of
$4.0 million for the six months ended July 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.
Capital Expenditures.
Capital expenditures for the six months ended July 31, 2002 were $948,000,
compared to $663,000 for the comparable period in the prior year. The Company
has forecasted additional capital expenditures of approximately $1.4 million 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.
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 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 I of the Notes
to the Condensed Consolidated Financial Statements.
Page 13
Unzipped has a credit facility with Congress Financial Corporation which expires
on September 30, 2002. 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.
In August 2002 the Company issued $20 million of asset-backed notes in a private
placement. The notes were issued by IP Holdings LLC, an indirect wholly owned
subsidiary of the Company, and were 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 which will provide
additional availability for the Company to fund its expansion, see Note C of the
Notes to the Condensed Consolidated Financial Statements.
Other Borrowing Arrangements
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $1.9 million with the remaining balance
considered to be an unsecured loan. The term of the agreement is four years at
an effective annual interest rate of 10.48%. The outstanding loan balance as of
July 31, 2002 was $743,000. The quarterly payment on the loan is $260,000,
including interest.
Other
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. As of
July 31, 2002, these amounts aggregated $4.3 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Internal Controls and Procedures
Not applicable.
Page 14
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 has filed
a motion to dismiss the Complaint based upon Redwood's failure to state a claim,
in response to which Redwood has filed an amended complaint, which the Company
has moved to dismiss. In the event that some or all of the amended Complaint
survives the motion to dismiss, the Company intends to vigorously defend this
lawsuit and to file counterclaims.
The Company is a defendant in an action brought 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 2003 and is classified as current liabilities
on the Company's July 2002 balance sheet. The Company does not believe that this
action will have a material adverse effect on its business, operations or
financial condition.
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 three months ended July 31, 2002, the Company granted certain of its
employees and directors, pursuant to a stock option plan, 10-year non-qualified
stock options to purchase a total of 319,000 shares of its common stock at
prices ranging from $4.00 to $4.47 per share (an average of $4.17 per share).
The options were granted in private transactions pursuant to the exemption from
registration under Sections 2(a) (3) and 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
On June 24, 2002 the Company held an Annual Meeting of Stockholders at which the
holders of the Company's common stock voted on: (i) the election of directors,
(ii) an amendment to the Company's Certificate of Incorporation to increase the
authorized common stock from 30,000,000 to 75,000,000 shares, (iii) a proposal
to approve the adoption of the Company's 2002 Stock Option Plan under which up
to 2,000,000 shares of Common Stock may be issued, and (iv) the appointment of
BDO Seidman, LLP as the Company's independent auditors for the fiscal year
ending January 31, 2003.
Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Peter Siris, Ann Iverson and
Hubert Guez were elected to serve as members of the Company's Board of Directors
for the ensuing year and until the election and qualification of their
successors.
The votes cast by stockholders with respect to the election of Directors were as
follows:
Votes Cast Votes
Director "For" "Withheld"
-------- -------------- ----------
Neil Cole 20,838,752 998,401
Barry Emanuel 21,781,900 55,253
Steven Mendelow 21,784,167 52,986
Peter Siris 21,787,567 49,586
Ann Iverson 21,787,367 49,786
Hubert Guez 21,787,917 49,236
Page 15
The amendment to the Certificate of Incorporation to increase the Company's
authorized common stock was approved by the stockholders. The votes cast by
stockholders with respect to the amendment to the Certificate of Incorporation
were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
21,491,168 297,990 47,995
The Company's 2002 Stock Option Plan was approved by the stockholders. The votes
cast by stockholders with respect to the 2002 Stock Option Plan were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining" Not Voted
---------------- -------------------- ------------------ -----------
6,347,975 1,524,936 62,500 13,901,742
The ratification of the appointment of BDO Seidman, LLP as the Company's
independent auditors for the fiscal year ending January 31, 2003 was approved by
the stockholders. The votes cast by stockholders with respect to the
ratification of the appointment of BDO Seidman, LLP as the Company's independent
auditors for the fiscal year ending January 31, 2003 were as follows:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
21,729,072 23,741 84,340
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.1 - Candie's Inc. 2002 Stock Option (incorporated herein
by reference to Exhibit B to the Company's Proxy Statement dated May
28, 2002 contained in the Company's Schedule 14A filed with the SEC
on May 29, 2002).
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
b. Reports on Form 8-K - During the quarter ended July 31, 2002, a Form 8-K
and an amendment of such Form 8-K were filed under items 2 and 7 of Form 8-K to
report the Company's acquisition on April 23, 2002 of the remaining 50% interest
of Unzipped and to file the required financial statements of Unzipped.
Page 16
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 September 16, 2002 /s/ Neil Cole
--------------------------- --------------------------------
Neil Cole
Chairman of the Board, President
And Chief Executive Officer
(on Behalf of the Registrant)
Date September 16, 2002 /s/ Richard Danderline
--------------------------- --------------------------------
Richard Danderline
Executive Vice President of Finance
And Operations
Page 17
Candie's, Inc.
Certification of Principal Executive Officer
I, Neil Cole, Chief Executive Officer of Candie's, Inc., 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.
Date: September 16, 2002
/s/ Neil Cole
----------------------------------
Neil Cole
Chief Executive Officer
(Principal Executive Officer)
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the
Certification as set forth in this Quarterly Report on Form 10-Q have been
omitted, consistent with the Transition Provisions of SEC Exchange Act Release
No. 34-46427, because this Quarterly Report on Form 10-Q covers a period ending
before the Effective Date of Exchange Rules 13a-14 and 15d-14.
Page 18
Candie's, Inc.
Certification of Principal Financial Officer
I, Richard Danderline, Chief Financial Officer of Candie's, Inc., 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.
Date: September 16, 2002
/s/ Richard Danderline
----------------------------------
Richard Danderline
Chief Financial Officer
(Principal Financial Officer)
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the
Certification as set forth in this Quarterly Report on Form 10-Q have been
omitted, consistent with the Transition Provisions of SEC Exchange Act Release
No. 34-46427, because this Quarterly Report on Form 10-Q covers a period ending
before the Effective Date of Exchange Act Rules 13a-14 and 15d-14.
Page 19
Candie's Inc and Subsidiaries
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- --------------- ---------------
(10)(a) Candie's Inc. 2002 Stock Option (incorporated herein by
reference to Exhibit B to the Company's Proxy Statement
dated May 28, 2002 contained in the Company's Schedule 14A
filed with the SEC on May 29, 2002).
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
Page 20