-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UMfkfLIxfa13jkGidYAp6YoWAgQAUVxq0/ABeAcK4hIDKMmfI9cK87+xpPFQwBWp RVbZ7c5hKDkVJR9BnIaLbg== 0000857737-03-000041.txt : 20030613 0000857737-03-000041.hdr.sgml : 20030613 20030613172519 ACCESSION NUMBER: 0000857737-03-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20030613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 112481903 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10593 FILM NUMBER: 03744301 BUSINESS ADDRESS: STREET 1: 400 COLUMBUS AVE. CITY: VALHALLA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147698600 MAIL ADDRESS: STREET 1: 400 COLUMBUS AVE. CITY: VALHALLA STATE: NY ZIP: 10595 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 cand_10q043003.txt QUARTERLY REPORT FOR CANDIES INC United States Securities and Exchange Commission Washington, D.C. 20549 ------------------------------------ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended April 30, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 For the Transition Period From ________ to ________. Commission file number 0-10593 CANDIE'S, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2481903 - --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Columbus Avenue Valhalla, NY 10595 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (914) 769-8600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes__ No. X Common Stock, $.001 Par Value -- 25,027,138 shares as of May 30, 2003 INDEX FORM 10-Q CANDIE'S, INC. and SUBSIDIARIES
Page No. Part I. Financial Information Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheets - April 30, 2003 and January 31, 2003.................... 3 Condensed Consolidated Income Statements - Three Months Ended April 30, 2003 and 2002.................................................................. 4 Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended April 30, 2003........................................................................... 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended April 30, 2003 and 2002.................................................................. 6 Notes to Condensed Consolidated Financial Statements........................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................... 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................... 16 Item 4. Controls and Procedures ....................................................................... 16 Part II. Other Information.............................................................................. Item 1. Legal Proceedings ............................................................................. 17 Item 2. Changes in Securities and Use of Proceeds ..................................................... 17 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 .............................................................. 17 Signatures ........................................................................................... 18 Certifications ........................................................................................ 19
2 Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited)
Candie's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets April 30, January 31, 2003 2003 ---------- ---------- (Unaudited) Assets (000's omitted, except par value) Current Assets Cash............................................................... $ 1,466 $ 1,899 Accounts receivable, net........................................... 6,048 8,456 Due from factors, net.............................................. 19,871 17,966 Due from affiliate................................................. 172 230 Inventories........................................................ 20,348 19,016 Deferred income taxes.............................................. 3,109 3,109 Prepaid advertising and other...................................... 1,719 1,140 ------- ------- Total Current Assets................................................... 52,733 51,816 Property and equipment, at cost: Furniture, fixtures and equipment.................................. 9,403 9,157 Less: Accumulated depreciation and amortization.................... 6,895 6,514 ------- ------- 2,508 2,643 Other assets: Restricted cash.................................................... 2,900 2,900 Goodwill........................................................... 25,241 25,241 Intangibles, net.................................................... 17,457 17,818 Deferred financing costs, net...................................... 2,317 2,326 Deferred income taxes.............................................. 513 513 Other.............................................................. 203 180 ------- ------- 48,631 48,978 ------- ------- Total Assets........................................................... $103,872 $103,437 ======= ======= Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks.................................... $ 24,869 $ 21,577 Accounts payable and accrued expenses.............................. 12,932 15,493 Due to affiliates.................................................. 5,673 6,203 Current portion of long-term debt............................... 2,580 2,648 ------- ------- Total Current Liabilities.............................................. 46,054 45,921 ------- ------- Long-term liabilities.................................................. 28,051 28,505 Stockholders' Equity Preferred stock, $.01 par value - shares authorized 5,000; none issued and outstanding................................... - - Common stock, $.001 par value - shares authorized 75,000; shares issued 25,027 at April 30, 2003 and 24,992 issued at January 31, 2003........................................... 25 25 Additional paid-in capital......................................... 69,842 69,812 Retained earnings (deficit)........................................ (39,433) (40,159) Treasury stock - at cost - 198 shares at April 30 and January 31, 2003............................................... (667) (667) ------- ------- Total Stockholders' Equity............................................. 29,767 29,011 ------- ------- Total Liabilities and Stockholders' Equity............................. $103,872 $103,437 ======= =======
See notes to condensed consolidated financial statements. 3 Candie's, Inc. and Subsidiaries
Condensed Consolidated Income Statements (Unaudited) Three Months Ended ----------------------------- April 30, April 30, 2003 2002 -------------- -------------- (000's omitted, except per share data) Net sales............................................ $ 40,863 $ 24,190 Licensing income...................................... 1,178 1,427 -------------- -------------- Net revenue........................................... 42,041 25,617 Cost of goods sold.................................... 30,147 16,924 -------------- -------------- Gross profit.......................................... 11,894 8,693 Selling, general and administrative expenses.......... 9,861 7,725 Special charges....................................... 434 15 -------------- -------------- Operating income...................................... 1,599 953 Other expenses: Interest expense - net........................ 873 277 Equity income in joint venture................ - (250) -------------- -------------- 873 27 -------------- -------------- Income before income tax benefit...................... 726 926 Income tax benefit.................................... - (139) -------------- -------------- Net income............................................ $ 726 $ 1,065 ============== ============== Earnings per share: Basic................... $ 0.03 $ 0.05 ============== ============== Diluted................. $ 0.03 $ 0.05 ============== ============== Weighted average number of common shares outstanding: Basic................... 25,015 20,642 ============== ============== Diluted................. 25,054 23,104 ============== ==============
See notes to condensed consolidated financial statements. 4 Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Three Months Ended April 30, 2003 (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, 2003 24,992 $ 25 $ -- $ 69,812 $ (40,159) $ (667) $ 29,011 Options granted to non-employees.......... 35 -- -- 30 -- -- 30 Net income................................ -- -- -- -- 726 -- 726 - ---------------------------------------------------------------------------------------------------------------------------- Balance at April 30, 2003 25,027 $ 25 $ -- $ 69,842 $ (39,433) $ (667) $ 29,767 ============================================================================================================================
See notes to condensed consolidated financial statements. 5 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended ------------------------------- April 30, April 30, 2003 2002 ------------------------------- (000's omitted) OPERATING ACTIVITIES: Net cash used in operating activities...................................... $ (2,868) $ (5,324) ------------------------------- INVESTING ACTIVITIES: Purchases of property and equipment................................ (246) (239) ------------------------------- Net cash used in investing activities...................................... (246) (239) ------------------------------- FINANCING ACTIVITIES: Payment of long-term debt.......................................... (522) - Deferred financing costs........................................... (89) - Proceeds from exercise of stock options............................ - 98 Revolving notes payable - bank..................................... 3,292 5,208 Purchase of treasury stock......................................... - (192) ------------------------------- Net cash provided by financing activities.................................. 2,681 5,114 ------------------------------- DECREASE IN CASH........................................................... (433) (449) Cash at beginning of period................................................ 1,899 636 ------------------------------- Cash at end of period...................................................... $ 1,466 $ 187 =============================== Supplemental disclosure of cash flow information: Cash paid for interest................................................ $ 731 $ 278 =============================== Non-cash acquisition of Unzipped (stock and debt)..................... $ - $ 19,250 ===============================
See notes to condensed consolidated financial statements. 6 Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) April 30, 2003 NOTE A BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended April 30, 2003 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 $663,000 for the three months ended April 30, 2002 has 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, 2003. NOTE B STOCK OPTIONS Pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options has been measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, the Company only recognizes compensation expense for stock-based awards to employees for options granted at below-market prices, with the expense recognized over the vesting period of the options. The stock-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards, as well as the resulting pro forma net income and earnings per share using the fair value approach, are presented in the following table. These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.
(000's omitted except per share data) Three Months Ended April 30, ----------------------------------- 2003 2002 ----------------------------------- Net income - as reported $726 $1,065 Add: Stock-based employee compensation included in reported net income - - Deduct: Stock-based employee compensation determined under the fair value based method (482) (148) ----------------------------------- Pro forma net income $244 $917 =================================== Basic and diluted earnings per share: As reported $0.03 $0.05 =================================== Pro forma $0.01 $0.04 ===================================
7 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 for its footwear business. Borrowings under the amended Credit Facility bear interest at 1.5% above the prime rate. 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 (reflected as restricted cash in the accompanying balance sheet), funded by a deposit of a portion of the proceeds of the notes. The net proceeds of $16.2 million were used to reduce amounts due by the Company under its existing revolving credit facilities. Concurrently with this payment, the Credit Facility was further amended to eliminate the over advance provision along with certain changes in the availability formula. Costs incurred to obtain this financing totaled approximately $2.4 million which amount has been deferred and is being amortized over the life of the debt. See Note F of the Notes to the Condensed Consolidated Financial Statements regarding the financing agreement of Unzipped Apparel, LLC. At April 30, 2003, total borrowings under revolving credit facilities, including Unzipped, were $24.9 million at a weighted average interest rate of 4.73%. NOTE D EARNINGS PER SHARE Basic earnings per share includes no dilution and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, warrants and convertible preferred stock. The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
April 30, ------------------------- 2003 2002 ------------------------- (000's omitted) Basic................................................................... 25,015 20,642 Effect of assumed conversions of employee stock options................. 39 1,630 Effect of assumed conversions of preferred stock........................ - 832 ------------------------- Denominator for diluted earnings per share.............................. 25,054 23,104 =========================
NOTE E COMMITMENTS AND CONTINGENCIES In April 2003 the Company settled the SEC's previously disclosed investigation of the Company of matters that have been under investigation by the SEC since July 1999 and that were also the subject of a previously disclosed internal investigation completed by a Special Committee of the Board of Directors of the Company. In connection with the settlement, the Company, without admitting or denying the SEC's allegations, consented to the entry by the SEC of an administrative order in which the Company was ordered to cease and desist from committing or causing any violations and any future violations of certain books and records, internal controls, periodic reporting and the anti-fraud provisions of the Securities Exchange Act of 1934 and the anti-fraud provisions of the Securities Act of 1933. 8 In November 2001, the Company settled a litigation filed in December 2000 in the United States District Court for Southern District of New York, by Michael Caruso, as trustee of the Claudio Trust and Gene Montasano (collectively, "Caruso"). The settlement agreement between the Company and Caruso provides for the Company to pay to Caruso equal quarterly payments of $62,500, up to a maximum amount of $1 million, over a period of four years. However, the Company's obligation to make these quarterly payments will terminate in the event that the last daily sale price per share of the Company's common stock is at least $4.98 during any ten days in any thirty day period within such four year period with any remaining balance to be recognized as income. 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 filed a motion to dismiss certain counts of the Complaint based upon Redwood's failure to state a claim, in response to which Redwood has filed an Amended Complaint. The Company also moved to dismiss certain parts of the Amended Complaint. The magistrate assigned to the matter granted, in part, the Company's motion to dismiss, and this ruling is currently pending before the District Court. The Company intends to vigorously defend the lawsuit, and file counterclaims against Redwood after the District Court rules on the pending motion to dismiss. In addition, the Company has recently moved for summary judgment with respect to another of the claims asserted by Redwood in the Amended Complaint. In connection with the closing of certain retail locations during the fiscal year ended January 31, 2003, certain litigation has been brought by the landlords pursuant to the Company's obligations on the respective leases. The Company has recorded approximately $300,000 in the fourth quarter of Fiscal 2003 for the above lease obligations representing its estimate of the amount it will pay to settle the future obligations of these leases. From time to time, the Company is also made a party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not have a material effect on the Company's financial position or future liquidity. Except as noted herein, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. NOTE F UNZIPPED APPAREL, LLC Equity Investment: On October 7, 1998, the Company formed Unzipped Apparel, LLC ("Unzipped") with a 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. Included in licensing income is $414,000 such royalties for the period ended April 30, 2002. Acquisition: On April 23, 2002, the Company acquired Sweet's 50% interest in Unzipped for $19.3 million payable in the form of 3 million shares of the Company's common stock valued at a price of $2.75 per share, totaling $8.3 million, and an additional $11 million obligation evidenced by an 8% senior subordinated note with interest due quarterly and principal due in 2012. The debt is subordinated to the Company's Credit Facility (See Note C) 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. 9 In connection with the acquisition, the Company agreed to file and have declared effective a registration statement with the SEC for the 3 million shares of the Company's common stock issued to Sweet. In the event that the registration statement is not declared effective on or before April 23, 2003, the Company is required to pay $82,500 to Sweet as a penalty. Subsequently, the Company is required to pay $82,500 per calendar quarter for each calendar quarter thereafter in which the registration statement has not been effective for more than 30 days of such calendar quarter. The Company recorded $82,500 expense for such penalty in the quarter ended April 30, 2003. The Company has filed the registration statement, but as of June 13, 2003, the registration statement had not yet been declared effective. 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, 2002. 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, 2002, or which may result in the future. Three months ended April 30, 2002 ------------------------------------ (000's omitted, except per share) Total net revenues $38,310 Operating income $1,099 Net income $490 Basic earnings per common share $0.02 Diluted earnings per common share $0.02 Revolving Credit Agreement: Unzipped had a credit facility with Congress Financial Corporation ("Congress"). Under the facility as amended, Unzipped was entitled to borrow up to $15 million under revolving loans until September 30, 2002. The facility was further amended to extend its expiration on a month-to-month basis through January 31, 2003. Borrowings under the facility were limited by advance rates against eligible accounts receivable and inventory balances, as defined. The borrowings under the facility bore interest at the lender's prime rate or at a rate of 2.25% per annum in excess of the Eurodollar rate. On February 25, 2003 Unzipped entered into a two-year $25 million credit facility ("the Unzipped Credit Facility") with GE Capital Commercial Services, Inc. ("GECCS") replacing its credit facility with Congress. Borrowings are limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the facility, Unzipped may also arrange for letters of credit in an amount up to $5 million. The borrowings bear interest at a rate of 2.25% per annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater. At April 30, 2003, Unzipped's borrowings totaled $16.9 million under the revolving credit agreement with GECCS. Borrowings under the new facility are secured by substantially all of the assets of Unzipped. In addition, Unzipped has agreed to subordinate $3.9 million of its accounts payable to Azteca Productions to GECCS. Unzipped is also required to meet certain financial covenants including tangible net worth minimums and a fixed charge coverage ratio, as defined. Related Party Transactions: Unzipped has a supply agreement with Azteca Productions, Inc ("Azteca") for the development, manufacturing, and supply of certain products bearing the Bongo trademark. As consideration for the development of the products, Unzipped pays Azteca pursuant to a separate pricing schedule. For the quarter ended April 30, 2003, Unzipped purchased $16.1 million of products from Azteca. The supply agreement was consummated upon Unzipped's formation and originally extended through January 31, 2003, and was amended and restated effective April 23, 2002 through January 31, 2005. Azteca also allocates expenses to Unzipped for Unzipped's use of a portion of Azteca's office space, design and production team and support personnel. For the quarter ended April 30, 2003, Unzipped incurred $46,500 of such allocated expenses. In connection with the acquisition, the Company has a management agreement with Sweet for a term ending January 31, 2005, which provides for Sweet to manage the operations of Unzipped in return for a management fee based upon certain specified percentages of net income that Unzipped achieves during the three-year term. The fee commenced in Fiscal 2004. In the April 30, 2003 period, Unzipped expensed $105,000 for the management fee. In addition, Sweet guarantees that the net income, as defined, of Unzipped shall be no less than $1.7 million for each year during the term commencing in Fiscal 2004. 10 Unzipped has a distribution agreement with Apparel Distribution Services (ADS), an entity that shares common ownership with Sweet for a term ending January 31, 2005. The agreement provides for a per unit fee for warehousing and distribution functions and per unit fee for processing and invoicing orders. For the quarter ended April 30, 2003, Unzipped incurred $896,000 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. During the quarter ended April 30, 2003, Azteca transferred $3.9 million of Unzipped obligations to the Guez Living Trust, an entity controlled by Hubert Guez, a principal of Sweet and a member of the Company's Board of Directors. Amounts due to related parties at April 30, 2003 and included in accounts payable and accrued expenses, consist of the following (Note - all amounts are non-interest bearing): (`000 omitted) Azteca $ 317 Guez Living Trust 3,900 Sweet 916 ADS 540 --------- $5,673 In connection with its acquisition of Unzipped, the Company had agreed that on or before February 1, 2003, it would pay Azteca for all receivables due from Unzipped for purchases of product that were more than 30 days past due as of that date and any amount remaining under a $5 million subordinated loan between Unzipped and Azteca. Management of the Company believes that it has fulfilled all of its acquisition related obligations as described above. At January 31, 2003, the total amount due to Azteca and related parties from Unzipped was $6.2 million, all of which, in the opinion of Company management, constitutes accounts payable less than 30 days past due. Management of the Company also believes that the subordinated note has been paid in full. However, because of a dispute with Azteca and Sweet as to the terms for merchandise supplied by Azteca to Unzipped under the Supply Agreement and resulting application of payments from Unzipped to invoices and the subordinated note, Azteca believes that the total of $5.9 million is comprised of $697,000 of accounts payable less than 30 days past due, $171,000 of interest and $5 million due on the subordinated note. In that event, the Company would be obligated under the Unzipped acquisition agreement to repay Azteca the $5 million that it believes is due on the subordinated note. The interest accrual of $171,000 due to Azteca on the subordinated note is also in dispute. This amount has been included in interest expense for the year ended January 31, 2003. No interest was accrued on any amounts due to Azteca, ADS or the Guez Living Trust for the quarter ended April 30, 2003. 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 ended April 30, 2003. (000's omitted) Footwear Apparel Consolidated ------------------------------------ For the fiscal quarter ended April 30, 2003 Total revenues $ 24,792 $ 17,249 $ 42,041 Segment income 750 849 1,599 Net interest expense 873 Income before provision for income taxes $ 726 Capital additions $ 238 $ 8 $ 246 Depreciation and amortization expenses $ 368 $ 13 $ 381 Total assets as of April 30, 2003 $ 54,794 $ 49,078 $103,872 11 NOTE H RECENT ACCOUNTING STANDARDS In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which changes the accounting for costs such as lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity initiated after December 31, 2002. The standard requires companies to recognize the fair value of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of this standard will impact the Company's restructuring plans in connection with store closings. NOTE I SUBSEQUENT EVENTS On May 1, 2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide license to design, manufacture, sell, distribute and market footwear under the BONGO brand. The CEO and Chairman of Kenneth Cole Productions, Inc. is the brother of the Company's CEO. The license agreement expires on December 31, 2007, subject to renewal options for three additional terms of three years each contingent on Kenneth Cole Productions, Inc. meeting certain performance and minimum net sales standards. In addition, on May 12, 2003, the Company granted Steven Madden, Ltd. the exclusive worldwide license to design, manufacture, sell, distribute and market footwear under the CANDIE'S brand. The agreement expires on December 31, 2009, subject to renewal options for four additional terms of three years each contingent on Steven Madden, Ltd. meeting certain performance and minimum net sales standards. In connection with the footwear licenses and due to the challenging retail environment, the Company expects to close the 11 concepts stores, which are performing below expectations. The estimate of the lease settlements will be recorded in the period(s) the stores are closed. In connection with these license agreements and store closings, the Company's operations will change significantly in the second half of Fiscal 2004. Sales of the BONGO and CANDIE'S brands, which comprise the majority of footwear sales, and retail sales from the concept stores, will cease. The Company's operations will consist of licensing, distributing and marketing jeans wear, and arranging for the manufacture of footwear products for mass market and discount retailers. 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this Form 10-Q are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the Company, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, but are not limited to, uncertainty regarding continued market acceptance of current products and the ability to successfully develop and market new products, particularly in light of rapidly changing fashion trends, the impact of supply and manufacturing constraints or difficulties relating to the Company's 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 product 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. See "Recent Developments" below. 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. See "Recent Developments" below. Recent Developments On May 1, 2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide license to design, manufacture, sell, distribute and market footwear under the BONGO brand. The license agreement expires on December 31, 2007, subject to renewal options for three additional terms of three years each contingent on Kenneth Cole Productions, Inc. meeting certain performance and minimum net sales standards. In addition, on May 12, 2003, the Company granted Steven Madden, Ltd. the exclusive worldwide license to design, manufacture, sell, distribute and market footwear under the CANDIE'S brand. The license agreement expires on December 31, 2009, subject to renewal options for four additional terms of three years each contingent on Steven Madden, Ltd. meeting certain performance and minimum net sales standards. The foregoing licensing agreements between the Company and each of Kenneth Cole Productions, Inc and Steven Madden, Ltd. are collectively referred to in this report as the "Footwear Licenses". As a result of the Company's grant of the Footwear Licenses, there will be a material impact on the Company's net revenues, operating expenses, profits and liquidity, including interest expense. Commencing in the fiscal quarter ending July 31, 2003 the change in the footwear business will result in substantial reductions in net sales, net revenues and operating expenses and increases in licensing income when compared to the comparable prior year's periods. 13 Prior to granting the Footwear Licenses, with respect to its footwear business pursuant to which it imported and sold footwear to customers, the Company purchased all of its footwear inventory from various suppliers, and took title to that inventory prior to selling it to its customers. The Company's cash requirements and borrowings under its Credit Facility therefore fluctuated from time to time, due to, among other factors, seasonal requirements including the timing of receipt of merchandise. As a result of the licensing of its footwear operations, the Company will no longer need to borrow from its Credit Facility to finance purchases of footwear and therefore its interest expense is expected to significantly decrease. The Company's revenues will also decrease substantially, as it will no longer recognize revenues from the sale of its footwear. The Company is expecting a substantial increase in its licensing income resulting from certain guaranteed payments under the Company's Footwear Licenses. In addition, the Company is expecting to eliminate a substantial portion of its operating expenses, resulting primarily from the elimination of operations relating to the former design, development, importing, distribution and sale of footwear. The Company is also planning on closing its offices in Valhalla, New York, and a floor of its offices in New York City and consolidating to approximately 5,000 square feet in New York City. The Company will remain obligated on the Valhalla lease through May 2005, subject to its ability to sublet the space. Due to the anticipated decreases in operating expenses and increases in licensing income, the Company is projecting that its change from a manufacturer/distributor of footwear to a licensor of footwear manufacturing and distribution rights will result in an increase in net profits after giving effect to certain charges relating to the transition from manufacturing and distributing footwear products to licensing such rights and the expected closing of certain retail stores. Results of Operations For the three months ended April 30,2003 Revenues. Net revenues increased by $16.4 million to $42.0 million from $25.6 million in the comparable period of the prior year. The net revenue increase resulted primarily from the sales of $17.2 million by the Unzipped jeans wear business, partially offset by a decrease of $825,000 to $24.8 million from $25.6 million in the Candie's footwear business 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 $2.4 million and licensing income of $249,000, partially offset by $472,000 sales increases in the retail stores and $909,000 increase in the Company's private label men's division. Retail store sales increased to $2.6 million, as compared to $2.1 million in the first quarter of the prior year. The retail sales increase resulted from the sales of $1.1 million in twelve new stores, partially offset by sales decreases of $475,000 in comparable retail stores and $224,000 in two discontinued stores. Comparable licensing income increased $165,000, as the prior year period included $414,000 of royalties the Company received from Unzipped, which payments ceased with the Company's acquisition of the remaining equity interest in Unzipped on April 23, 2002. Gross Profit. Gross profit increased by $3.2 million to $11.9 million as compared to $8.7 million in the prior year quarter. The gross profit increase is primarily attributable to Unzipped, which recorded gross profit of $3.3 million in the current year quarter. Gross profit in the Candie's footwear business decreased to $8.6 million from $8.7 million in the prior year quarter. Gross profit margin decreased, as a percentage of net revenues, by 5.6% to 28.3% as compared to 33.9% in the first quarter of the prior year. The decrease in gross profit margin percentage is primarily attributable to Unzipped apparel sales in current year quarter at 19.2%, partially offset by slightly improved margins in the Candie's footwear business. Gross profit margin in the Candie's footwear business increased, as a percentage of net revenues, by 0.7% to 34.6% as compared to 33.9% in the comparable prior year quarter. The gross profit increase in the Candie's footwear business is primarily attributable to Candie's wholesale footwear. Operating Expenses. Operating expenses increased by $2.1 million to $9.9 million from $7.7 million in the prior year quarter. $2.5 million of this increase resulted from the operations of Unzipped. Operating expenses in Candie's were $7.4 million, a decrease of $332,000 compared to $7.7 million in the prior year quarter. The operating expense decrease resulted from $888,000 of cost reduction in Candie's wholesale footwear, $152,000 of operating expense savings in the two discontinued retail stores, and $144,000 of operating expense decrease in the comparable stores, partially offset by $852,000 of incremental costs associated with new retail stores. Included in the special charges for the three months ended April 30, 2002 were $352,000 legal fees related to the settlement of the Company's SEC investigation, see Note E of Notes to Condensed Consolidated Financial Statements, and $82,500 penalty paid to Azteca for late stock registration in connection with the Unzipped acquisition, see Note F of Notes to Condensed Consolidated Financial Statements. Interest Expense. Net interest expense increased by $596,000 to $873,000 from $277,000 in the prior year quarter. Of the increased amount, $211,000 of this increase resulted from the operations of Unzipped, and $220,000 from the 8% senior subordinated note issued in the Unzipped Acquisition (see Note F of the Notes to the Condensed Consolidated Financial Statements) and $379,000 associated with the assets backed notes issued by a subsidiary of the Company (see Note C of the Notes to the Condensed Consolidated Financial Statements). Offsetting this was a decrease of $214,000 net interest expense in Candie's to $63,000 from $277,000 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. 14 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 F of Notes to Condensed Consolidated Financial Statements. Income Tax Benefit. 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. In the quarter ended April 30, 2002, the Company recorded $139,000 of income tax benefit resulting from the utilization of net operating losses due to changes in the tax laws. Net Income. The Company recorded net income of $726,000 compared to $1.1 million in the comparable quarter of prior year. Liquidity and Capital Resources Working Capital. At April 30, 2003, the current ratio of assets to liabilities was 1.15 to 1 as compared to .90 to 1 at April 30, 2002. 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 $2.9 million, compared to cash used of $5.3 million in the prior year quarter. The decrease in cash used in operating activities resulted primarily from in-house accounts receivable. Capital Expenditures. Capital expenditures for the period ended April 30, 2003 were $246,000, compared to $239,000 for the three months ended April 30, 2002. The Company does not anticipate any material amount of additional capital expenditures for in Fiscal 2004. Current Revolving Credit Facilities. On January 23, 2002, the Company entered into a three-year $20 million credit facility ("the Credit Facility") with CIT Commercial Services ("CIT") replacing its arrangement with Rosenthal & Rosenthal, Inc ("Rosenthal"). Borrowings under the Credit Facility are formula based and originally included a $5 million over advance provision with interest at 1.00% above the prime rate. In June 2002, the Company agreed to amend the Credit Facility to increase the over advance provision to $7 million and include certain retail inventory in the availability formula for its footwear business. Borrowings under the amended Credit Facility bear interest at 1.5% above the prime rate. At April 30, 2003, borrowings under the Credit Facility totaled $8.0 million and availability under the formula was $407,000. On February 25, 2003 Unzipped entered into a two-year $25 million credit facility ("the Unzipped Credit Facility") with GE Capital Commercial Services, Inc. ("GECCS") replacing its credit facility with Congress Borrowings are limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the facility, Unzipped may also arrange for letters of credit in an amount up to $5 million. The borrowings bear interest at a rate of 2.25% per annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater. At April 30, 2003, borrowings under the Unzipped Credit Facility totaled $16.9 million and availability under the formula was $648,000. Bond Financing In August 2002 IP Holdings LLC, an indirect wholly owned subsidiary of the Company, issued in a private placement $20 million of asset-backed notes in a private placement secured by intellectual property assets (tradenames, trademarks and license payments thereon). The notes have a 7-year term with a fixed interest rate of 7.93% with quarterly principal and interest payments of approximately $859. The notes are subject to a liquidity reserve account of $2.9 million (reflected as restricted cash in the accompanying balance sheet), funded by a deposit of a portion of the proceeds of the notes. The net proceeds of $16.2 million were used to reduce amounts due by the Company under its existing revolving credit facilities. Concurrently with this payment, the Credit Facility was further amended to eliminate the over advance provision along with certain changes in the availability formula. Costs incurred to obtain this financing totaled approximately $2.4 million which amount has been deferred and is being amortized over the life of the debt. 15 Other In connection with its acquisition of Unzipped (See Note E 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. Management of the Company believes that it has fulfilled all of its acquisition related obligations as described above. At January 31, 2003, the total amount due to Azteca and related parties from Unzipped was $6.2 million, all of which, in the opinion of Company management, constitutes accounts payable less than 30 days past due. Management of the Company also believes that the subordinated note has been paid in full. However, because of a dispute with Azteca and Sweet as to the terms for merchandise supplied by Azteca to Unzipped under the Supply Agreement and resulting application of payments from Unzipped to invoices and the subordinated note, Azteca believes that the total of $5.9 million is comprised of $697,000 of accounts payable less than 30 days past due, $171,000 of interest and $5 million due on the subordinated note. In that event, the Company would be obligated under the Unzipped acquisition agreement to repay Azteca the $5 million that it believes is due on the subordinated note. The interest accrual of $171,000 due to Azteca on the subordinated note is also in dispute. This amount has been included in interest expense for the year ended January 31, 2003. The Company believes that its existing credit facilities, along with revenues generated from operations, are sufficient to finance its operations, including the transition of the footwear business to licensing as described in "Recent Development". The Company anticipates that its cash requirements and borrowings under its Credit Facility will be substantially reduced as it exits the footwear operating business. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a result of the Company's and Unzipped variable rate credit facilities, the Company is exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of April 30, 2003 that are sensitive to changes in interest rates. The Company's Credit Facility had an average interest rate of 5.75% for the three month period ended April 30, 2003.... $ 8.0 million The Unzipped Credit Facility had an average interest rate of 4.25% for the three month period ended April 30, 2003 $16.9 million Item 4. Controls and Procedures Within the 90 days prior to the filing date of this Quarterly Report on Form 10-Q, an evaluation was carried out (the "Controls Evaluation"), under the supervision and with the participation of Company's management, including its Chief Executive Officer ("CEO") and its Chief Financial Officer ("CFO"), of the effectiveness of the Company's "disclosure controls and procedures" (as defined in Section 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of 1934 ("Disclosure Controls")). Based upon that evaluation, the CEO and CFO have concluded that the Disclosure Controls are effective to ensure that the information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as required by the rules and forms of the Securities Exchange Commission. The CEO and CFO note that, since the date of the Controls Evaluation to the date of this Quarterly Report on Form 10-Q, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 16 PART II. Other Information Item 1. Legal Proceedings See Note E of Notes to Condensed Consolidated Financial Statements. Item 2. Changes in Securities and Use of Proceeds. During the three months ended April 30, 2003, 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 115,000 shares of its common stock at prices ranging from $0.73 to $0.86 per share (an average of $0.75 per share). The options were granted in private transactions pursuant to the exemption from registration under Sections 2(a) (3) and 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K A. 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 Exhibit 10.1 - Factoring Agreement for Unzipped Apparel, LLC. Exhibit 10.2 - Factoring Agreement - Inventory Supplement (with advances) Exhibit 10.3 - Factoring Agreement - Guaranty/Letter of Credit Supplement Exhibit 10.4 - Interim Factoring Agreement B. Reports on Form 8-K - None 17 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. ------------------------------------------------- (Registrant) Date June 13, 2003 /s/ Neil Cole ------------------- ------------------------------------------------- Neil Cole Chairman of the Board, President And Chief Executive Officer (on Behalf of the Registrant) Date June 13, 2003 /s/ Richard Danderline ------------------- ------------------------------------------------- Richard Danderline Executive Vice President - Finance and Operations Principal Financial and Accounting Officer 18 CERTIFICATION I, Neil Cole, President and Chief Executive Officer, 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 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 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: June 13, 2003 /s/Neil Cole ------------------------------------- President and Chief Executive Officer 19 CERTIFICATION I, Richard Danderline, Executive Vice President - Finance and Operations, 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 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 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: June 13, 2003 /s/Richard Danderline ---------------------------------------------------- Executive Vice President-Finance and Operations, Principal Financial Officer 20 EX-10.1 3 cand_10qex101.txt FACTORING AGREEMENT FOR UNZIPPED APPAREL LLC FACTORING AGREEMENT for UNZIPPED APPAREL LLC THIS FACTORING AGREEMENT (this "Agreement"), made and executed this 25th day of February, 2003, by and between UNZIPPED APPAREL LLC, a Delaware limited liability company (the "Client"); and GE CAPITAL COMMERCIAL SERVICES, INC. (the "Factor"). 1. Sale and Purchase of Accounts Receivable. Client hereby sells and assigns to Factor, and Factor hereby purchases from Client, all of Client's accounts receivable arising from Client's sales of merchandise or rendition of services to customers including, without limitation, all such sales or services arising under any trade names or through any division or selling agent of Client (collectively, the "Accounts Receivable" and individually, an "Account Receivable"). The assignment of Accounts Receivable to Factor vests in Factor all of Client's rights, securities, guaranties and liens with respect to each Account Receivable, including all rights of stoppage in transit, replevin, reclamation, and all claims of lien filed by Client or held by Client on personal property, and all rights and interest in the merchandise sold, and all of Client's defenses and rights of offset with respect to any payments received by Factor on Accounts Receivable, but Factor shall not be obligated to, and shall not be liable for, exercising or refusing to exercise any rights granted to Factor hereby. 2. Single Order Credit Approvals. Except as set forth in Section 3 below, all orders from customers including the amount and terms of each proposed sale or service to such customers shall be submitted by Client to Factor for prior written approval (a "Single Order Approval") in advance of such sale or service, which Single Order Approval may be granted or withheld at Factor's sole discretion. Each Single Order Approval is subject to withdrawal either orally or in writing at any time prior to delivery of merchandise or rendition of services, and shall be deemed no longer effective if Client fails to deliver such merchandise or render such services within thirty (30) days after the date specified for such delivery or rendition on the terms of sale submitted to Factor for its approval, or within thirty (30) days from the date of Factor's approval if no delivery or rendition date has been specified. Each Account Receivable first approved by Factor in writing as to credit risk and terms of sale shall be herein referred to as a "Factor Risk Account Receivable". Any Account Receivable not approved by Factor as to credit risk or terms of sale shall be herein referred to as a "Client Risk Account Receivable". All requests for Single Order Approvals must be submitted to Factor via Factor's internet customer service web site (GECCS.com). Factor will charge a two dollar ($2) manual processing fee for each Single Order Approval request submitted via other means (e.g., telephone or fax). 3. Credit Line Approvals. Submission of orders for Factor's prior written approval shall not be required with regard to a sale made by Client in compliance with any customer credit line which may from time to time be issued in writing to Client by Factor in its sole discretion (a "Credit Line"), provided that shipments are made prior to the expiration date of the Credit Line approval. Any customer Credit Line issued by Factor may be amended or withdrawn by Factor in whole or in part at any time and for any reason without advance notice, but such withdrawal shall not reduce or negate Factor's liability with respect to Accounts Receivable for goods delivered or services rendered prior to withdrawal. The amount of all Accounts Receivable of each customer shall, in the order in which they have arisen, be treated as Factor Risk Accounts Receivable up to the limit of the Credit Line in effect for such customer from time to time. So long as Factor has not withdrawn a Credit Line as to a particular customer, and so long as no Insolvency Event (defined in Section 10 below) has occurred with respect to such customer, when Factor (a) receives payment in collected funds from such customer, or (b) issues a credit to such customer, in either case with respect to existing Factor Risk Accounts Receivable, then additional Accounts Receivable which were not originally treated as Factor Risk Accounts Receivable because they were in excess of the customer Credit Line shall become Factor Risk Accounts Receivable in the order in which they were created, up to the maximum amount of such customer Credit Line. Factor's Credit Line with respect to any particular customer shall be automatically suspended if the aggregate Client Risk Accounts Receivable owing from such customer exceed fifty percent (50%) of Factor's established Credit Line, and all payments received from such customer after such suspension shall be first applied to any outstanding Factor Risk Accounts Receivable. The decision to grant or withdraw any Single Order Approval or Credit Line shall at all times be in Factor's sole discretion, and Factor shall not be liable to Client in any respect for damages or otherwise because of any such credit decisions. 1 4. Purchase Price. The purchase price of each Account Receivable (the "Purchase Price") is the gross amount of the Account Receivable, less any discounts made available or extended to the customer (which shall be computed on the shortest or longest terms, in Factor's discretion, where optional terms are given), returns and allowances of any nature, and Factor's commission. After purchase of an Account Receivable by Factor, a discount, credit, unidentifiable payment or allowance may be claimed solely by the customer, and if not so claimed, such discount, credit, payment or allowance shall, to the extent permissible under applicable law, be the property of Factor, provided, however, that from time to time, but not later than December 31 of each calendar year, Factor will credit Client with 50% of all unapplied cash resulting from unclaimed discounts, provided, further, however, if a customer purports that a discount was applied in error resulting in a customer overpayment and Factor subsequently either repays monies to customer or customer takes a discount against other Accounts Receivable in an effort to recoup an alleged overpayment, Client agrees to indemnify Factor for 50% of such repayment of further discount. 5. Client Reserve Account. (a) Factor shall establish on its books in Client's name a reserve account (the "Reserve Account") and an account that reflects at any time the aggregate outstanding unpaid Accounts Receivable that have been purchased by Factor (the "Unpaid Receivables Account"). Upon the purchase and sale of each Account Receivable Factor shall credit both the Reserve Account and the Unpaid Receivables Account with the Purchase Price of such Account Receivable. Factor shall debit the Reserve Account with any and all disbursements (including advances) made to Client or on its behalf, as well as all credits, discounts available to Client's customers, factoring charges, interest, bank wire transfer fees and any other amounts chargeable to Client under this Agreement or any supplement hereto or any other agreement between Client and Factor. Factor shall reduce the balance of the Unpaid Receivables Account (i) upon actual collection or, with respect to past due Factor Risk Accounts Receivable, deemed collection of the Purchase Price of each Account Receivable in accordance with the provisions of Section 10 of this Agreement, or (ii) if applicable, upon the charge back by Factor of the Account Receivable to Client. (b) Client shall pay to Factor a one-time set-up and integration fee of Two Thousand Five Hundred Dollars ($2,500) for setting the Client up in Factor's system (including the establishment of the Reserve Account). Such set-up and integration fee shall also cover the initial addition of Client's customer base to Factor's computer system and the further introduction of any new customers for a period of six (6) months from the Effective Date of this Agreement. Client shall pay to Factor a monthly fee in the amount of One Thousand Dollars ($1,000) on account of (i) Client's requests that Factor add additional customers to the system, and (ii) Client's requests that Factor change the selling terms to a customer in Factor's system. Factor shall furnish Client with advices of all credits and debits to the Reserve Account. Factor shall furnish Client with a monthly statement of its Reserve Account. Each such statement rendered by Factor shall be deemed correct and conclusively binding unless Factor is notified by Client in writing by certified mail, return receipt requested, within thirty (30) days after the date of the rendering of such statement. In the event a timely objection is properly made, only the items expressly objected to by Client in writing shall be deemed by Factor to be disputed. 6. Remittance of Funds to Client. At least once each week, and more frequently if requested by Client, Factor shall disburse to Client the amount (if any) by which the balance of the Reserve Account exceeds the balance of the Unpaid Receivables Account. All Obligations (as defined in Section 8 below) may be charged to the Reserve Account when due. As goods are shipped and Accounts Receivable evidenced by invoices and shipping documents arise, Factor may, in its sole discretion, from time to time at Client's request make advances to Client up to an aggregate principal amount outstanding at any one time equal to eighty-five percent (85%) (the "Advance Rate") of the Purchase Price of Factor Risk Accounts Receivable outstanding and unpaid at such time; provided, however, that under no circumstances shall advances be made against Accounts Receivable at any time to the extent that the aggregate amount of all of the Accounts Receivable from a single customer exceeds thirty percent (30%) of all Client's Accounts Receivable. In no event without Factor's express written approval shall an advance be made or (if applicable) a letter of credit be issued if such advance or issuance would cause the sum of (a) Funds Employed (defined in Section 15 below), plus (b) the aggregate undrawn amounts of all outstanding letters of credit, plus (c) the aggregate principal amount of Inventory Advances then outstanding under the Factoring Agreement - Inventory Supplement, between Factor and Client of even date herewith, at any time to exceed $25,000,000 (the "Facility Limit"). Factor has the right, at any time and from time to time, to adjust the Advance Rate or to hold any reserves it deems necessary as security for the payment and performance of the Obligations (as defined below). All advances and other Obligations, including, without limitation, Ledger Debt (as defined below) and any debit balance in the Reserve Account, are repayable by Client on demand and may be charged to the Reserve Account when due. For purposes of this Agreement, "Ledger Debt" means any amount owing by Client to Factor or any of its divisions for merchandise or services purchased from any other concern factored or financed by Factor. 2 7. Warranties and Representations. Client warrants and represents that (a) Client is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation and agrees that it shall not change such state of incorporation without giving Factor sixty (60) days prior written notice of such change, (b) Client is duly qualified to do business and in good standing in each other jurisdiction where its ownership of property or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a material adverse effect on Client's business or assets, (c) Client operates its business in material compliance with all applicable local, state and federal laws, including without limitation the Fair Labor Standards Act and all applicable tax withholding laws and regulations, and (d) each Account Receivable: (i) is genuine and valid and represents a completed delivery or performance in fulfillment in every respect of the terms, conditions and specifications of a bona fide, uncancelled and unexpired sale or service in the ordinary course of business to a customer which is not affiliated with Client in full compliance with the specifications of such customer; (ii) is enforceable for the full amount thereof and shall at the time submitted to Factor be subject to no dispute or claim by the customer in whole or in part as to price, terms, quality, quantity, delay in shipment, offsets, counterclaims, contra accounts or any other defense of any other kind and character (sometimes referred to herein, individually or collectively, as a "Dispute"), real or claimed which are not shown on the face of the invoice thereof; (iii) is free of all security interests, liens and encumbrances except for the lien granted to Factor under this Agreement; (iv) does not represent a delivery of merchandise upon "consignment," "guaranteed sale," "sale or return," "payment on reorder" or similar terms; (v) is payable in United States Dollars and has been invoiced to the customer by an invoice that bears notice of the sale and assignment to Factor in compliance with the terms of this Agreement; and (vi) does not represent a "pack, bill and hold" transaction unless Client has complied with Factor's requirements in respect thereof. Client further represents and warrants that it shall be the absolute owner of all merchandise and other property involved at the time of delivery or performance. 8. Collateral. Client and Factor intend for each sale of an Account Receivable to Factor pursuant to this Agreement to be a true sale of such Account Receivable and not as a loan from Factor to Client. In the event, however, that the sale of the Accounts Receivable contemplated herein is for any reason not deemed to be a true sale thereof despite the intentions of Client and Factor, and, as security for all obligations, liabilities and indebtedness of Client to Factor, now existing or hereafter incurred, direct or indirect, absolute or contingent, whether created under this Agreement, any supplement hereto or any other agreement between Client and Factor or otherwise (all of the foregoing being herein called the "Obligations"), Client grants Factor a security interest in all of Client's present and future: (a) accounts (including without limitation the Accounts Receivable); (b) Related Security (as defined below) with respect to each Account Receivable; (c) all sums standing to the credit of Client with Factor; (d) any property of Client in Factor's possession; (e) all proceeds of the foregoing; and (f) any other property of Client in which Factor shall be granted a lien or security interest pursuant to any supplement or amendment to this Agreement or any other agreement now existing or hereafter executed by Client with or in favor of Factor (collectively, the "Collateral"). The terms "accounts", "instruments", "documents", "chattel paper", "deposit accounts" and "general intangibles", as used herein, shall have the respective meanings ascribed to such terms in the Uniform Commercial Code as in effect in the state whose laws govern the interpretation and enforcement of this Agreement as set forth in Section 29 hereof, as it may be amended or otherwise modified from time to time (the "UCC"). Recourse to security shall not at any time be required and Client shall at all times remain liable for the repayment upon demand of all Obligations. During the term of this Agreement, Client shall not sell or assign, negotiate, pledge or grant any security interest in any of the Collateral or any of its inventory and proceeds thereof to anyone other than Factor, without Factor's prior written consent, except for sales of inventory in the ordinary course of business. "Related Security" shall mean, with respect to any Account Receivable, the following: (i) all security interests or liens and property subject thereto from time to time purporting to secure payment of such Account Receivable, whether pursuant to the contract related to such Account Receivable or otherwise, including all rights of stoppage in transit, replevin, reclamation, supporting obligations and letter of credit rights (as such terms are defined in the UCC), and all claims of lien filed or held by Client on personal property; (ii) all rights to any goods whose sale gave rise to such Account Receivable, including returned or repossessed goods; (iii) all instruments, documents, chattel paper and general intangibles (each as defined in the UCC) arising from, related to or evidencing such Account Receivable; (iii) all UCC financing statements covering any collateral securing payment of such Account Receivable; (iv) all guaranties and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Account Receivable whether pursuant to the contract related to such Account Receivable or otherwise; (v) all records of any nature evidencing or related to the Accounts Receivable, including contracts, invoices, charges slips, credit memoranda, notes and other instruments and other documents, books, records and other information (including, without limitation, computer data); and (vi) all proceeds and amounts received or receivable arising from any of the foregoing. 3 9. Invoicing. All invoices for merchandise sold or services rendered shall be prepared by Client and, regardless of whether they are transmitted to customers via hard copy or electronically, shall bear a notice that they have been assigned to, are owned by and are payable directly and only to Factor. Client shall furnish Factor with copies of all invoices within twenty-one (21) days from the earlier of the invoice date or shipping date, accompanied by duly executed confirmatory assignment schedules, original shipping or delivery receipts, and such other information or documents as Factor in its discretion may request from time to time. If Client fails to provide Factor with copies of such invoices (or the equivalent) or such proof of shipment or delivery when requested by Factor for any Factor Risk Account Receivable, such Factor Risk Account Receivable shall automatically convert to a Client Risk Account Receivable and immediately upon such conversion, regardless of any prior credit approval, Factor shall have no credit risk with respect to such Account Receivable. Each invoice shall bear the terms of sale and no change from the original terms of sale shall be made without Factor's prior written consent. 10. Payment of Accounts Receivable. Factor shall credit to Client all payments by customers of Accounts Receivable and other payments on behalf of Client promptly after crediting such payment to the customer's account. No check, draft or other instrument received by Factor shall constitute final payment unless and until such check, draft or other instrument shall have been actually collected by Factor in immediately available funds. Client shall pay to Factor a Fifteen Dollar ($15) fee for each check received by Factor as payment (in whole or in part) against Client Risk Accounts Receivable that is returned because of insufficient funds. The amount of the Purchase Price of any Factor Risk Account Receivable which remains unpaid shall be credited to Client as of the earlier of the following dates: (a) the longest maturity date of such Factor Risk Account Receivable if any proceeding or petition is instituted or filed by or against the customer for relief under any federal or state bankruptcy or insolvency law, code or act, or if a receiver or trustee is appointed for the customer (each an "Insolvency Event"); or (b) as of the nintieth (90th) day following its longest maturity date if such Factor Risk Account Receivable remains unpaid as of such date without the occurrence of an Insolvency Event; provided, however, that Factor shall not credit the Purchase Price of any unpaid Factor Risk Accounts if (i) Client has breached any of its representations and warranties with respect to such unpaid Factor Risk Accounts Receivable as set forth in Section 7(d), or (ii) Factor determines that any Factor Risk Account Receivable remains unpaid for any reason other than the customer's financial inability to pay. In either case, such Account Receivable shall be converted to a Client Risk Account Receivable. 11. Remittances. Without limiting Client's obligations under Section 9 to provide customers with notice of assignment, Client shall hold in trust for Factor all remittances received by Client with respect to all of its Accounts Receivable, and Client shall immediately deliver to Factor the identical checks, drafts, monies or other forms of payment received. Factor may endorse Client's name on any check, draft or other form of remittance received, where such endorsement is required to effect collection and Client hereby grants Factor an irrevocable power of attorney to do so. 4 12. Customer Disputes and Claims. Client agrees to notify Factor immediately of all returns and allowances and of all Disputes made by customers and to adjust all Disputes at its own expense, issuing credit memoranda promptly. Factor's practice is to allow thirty (30) days for the settlement of Disputes on a Factor Risk Account Receivable (with the exception of sixty (60) days for proof of delivery Disputes) between Client and Client's customers prior to a charge back to the Reserve Account of the full uncollected amount of the Account Receivable Amount, provided, however, that Factor shall retain the right at any time: (i) to institute a reserve under the facility in an amount equal to the full uncollected Account Receivable Amount involved; and (ii) to adjust any Disputes on a Factor Risk Account Receivable directly with the customer. Factor may at any time charge the Reserve Account the full uncollected amount of: (a) any customer deduction or offset; (b) any Factor Risk Account Receivable which is not paid in full when due for any reason (real or alleged) other than the customer's financial inability to pay; (c) any Account Receivable with respect to which Client breaches any of the warranties or representations set forth in this Agreement; (d) any anticipated deduction by a customer on any Account Receivable; (e) any Client Risk Account Receivable which is not paid in full when due for any reason; and (f) payments received by Factor on Client Risk Accounts Receivable which Factor is required at any time or for any reason to turnover or return (including, without limitation, payments made by Factor in connection with preference claims asserted in a bankruptcy or other insolvency proceeding). Any such charge back shall not be deemed to constitute a reassignment of the Account Receivable, and Factor shall retain a security interest therein as security for all Obligations. In the event that Factor is required to make any payment of the type described in clause (f) above after the termination of this Agreement, Client shall, on demand, reimburse Factor the full amount of any such payment. Such reimbursement obligation shall survive the termination of this Agreement. 13. Collection of Accounts; Returned Goods. As owner of the Accounts Receivable, Factor shall have the right to (a) bring suit, or otherwise enforce collection, of the Account Receivable in the name of Client or Factor, (b) modify the terms of payment, settle, compromise or release, in whole or in part, any amounts owing, on terms Factor may deem advisable, and (c) issue credits in the name of Client or Factor. Should any goods be returned or rejected by Client's customers or otherwise recovered by Client, Client shall segregate and hold such goods in trust for Factor, but at Client's sole risk and expense. Client shall also promptly notify Factor and, at Factor's request, will deliver such goods to Factor, pay Factor the invoice price thereof, or sell such goods at Client's expense for the purpose of paying any outstanding Obligations. Any payments made to either Client or Factor from, or credits issued to, a customer shall be applied first to the Factor Risk Accounts Receivable owing by such customer, irrespective of instructions of the customer or the invoice dates of such Factor Risk Accounts Receivable or the manner in which payment is made, and Factor shall have recourse to Client to the extent any such payment is made directly to Client. 14. Commissions. (a) Client shall pay Factor a commission equal to (0.40%) of the gross amount of Accounts Receivable, but in no event less than (i) $1 for each invoice transmitted electronically via GECCS.com, and (ii) $5 for each invoice submitted manually via other means (e.g., telephone or fax); provided, however, that an additional surcharge shall be charged on the gross amount of Accounts Receivable due from each customer identified on Schedule A attached to this Agreement. All commissions payable hereunder on Accounts Receivable are due and charged to the Reserve Account upon Factor's purchase of such Accounts Receivable. The foregoing commission is based upon (i) Client's maximum selling terms of no longer than sixty (60) days and (ii) Client's agreement to, beginning no later than the ninetieth (90th) day after the Effective Date of this Agreement, transmit electronically all Accounts Receivable and conduct all inquiries concerning, and retrieval of, customer credit information and approvals (collectively, "Transaction Data") via GECCS.com. Accordingly, (1) on sales for which extended or additional terms are granted, the commission shall be increased by twenty five basis points (0.25%) for each thirty (30) days, or portion thereof, by which Client's selling terms are extended and (2) if after the expiration of such ninety (90) day period the Client continues to transmit any Transaction Data by other than the electronic means described above, then the otherwise applicable commission rate shall be increased by five basis points (0.05%). (b) The minimum commissions (hereafter "Minimum Commissions") payable by Client under this Agreement for the period from the date hereof through the first Anniversary Date, and thereafter for the period from each Anniversary Date to the next Anniversary Date, shall be Two Hundred and Fifty Thousand Dollars ($250,000). Such Minimum Commissions shall accrue monthly and be reconciled quarterly. To the extent of any deficiency at the end of any quarter (after giving effect to commissions previously paid for such period), the difference between the accrued minimum (i.e., $62,500 at the end of the first quarter, $125,000 at the end of the second quarter, $187,500 at the end of the third quarter and $250,000 at year end, each a "Quarterly Commission Benchmark") and the amount already paid for such year shall be due and payable and chargeable to the Reserve Account as of the end of such quarter. If, as of any Anniversary Date, Client has paid commissions in excess of the Minimum Commissions for the year then ended (collectively, "Excess Commissions"), and provided that Client is not in default of this Agreement, Factor shall credit to the Reserve Account 5 any amounts (up to a maximum amount equal to the Excess Commissions) which had been previously charged to the Reserve Account to meet any Quarterly Commission Benchmarks during such prior year. If this Agreement is terminated for any reason at any time prior to the 2nd Anniversary Date of the Effective Date, or prior to any Anniversary Date occurring thereafter, as applicable, all annual Minimum Commissions through such 2nd Anniversary Date or any Anniversary Date occurring thereafter, as applicable, shall, nothwithstanding anything to the contrary contained in the foregoing, be fully earned, due and payable as of such termination date. (An "Anniversary Date" means the date one year from the Effective Date of this Agreement and the same day in each year thereafter.) 15. Interest. Client shall pay interest upon the average daily Funds Employed at the close of business each day at a per annum rate equal to (a) two and one-half percent (2.50%) over the Index Rate or (b) three percent (3%), whichever is greater (the "Governing Rate"); provided, however, that if an Event of Default (defined below) has occurred and is continuing, such Governing Rate shall be increased by three percent (3%) until such Event of Default is cured or waived by Factor. "Funds Employed" shall mean at any time the amount by which the balance of the Unpaid Receivables Account exceeds the balance of the Reserve Account. If the Reserve Account should show a debit balance, such debit balance shall be added to the balance of the Unpaid Receivables Account in determining Funds Employed. The "Index Rate" shall mean the latest rate for 30-day dealer placed commercial paper (which for purposes hereof shall mean high grade unsecured notes sold through dealers by major corporations in multiples of $1,000), which normally is published in the "Money Rates" section of The Wall Street Journal (or if such rate ceases to be published, as quoted from such other generally available and recognizable source as Factor may select). The Index Rate shall be determined (i) on the first business day immediately prior to the Effective Date (defined in Section 18 below) and (ii) thereafter, on the last business day of each calendar month for calculation of interest for the following month. Interest shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of three hundred sixty (360) days) and shall be charged to the Reserve Account as of the last day of each month. For the purpose of computing interest payable by Client under this Agreement and any supplement hereto, all customer checks and other payments received by Factor shall be deemed applied to the Obligations two (2) calendar days after being credited to Client consistent with the provisions of Section 10 of this Agreement. 16. Financial Statements and Information; Inspections. Client shall furnish Factor with: (a) monthly company prepared, interim financial statements, no later than 20 days following the conclusion of each calendar month; (b) for each fiscal quarter of Client, quarterly reviewed financial statements prepared by an independent accountant acceptable to Factor, no later than 60 days following the conclusion of each fiscal quarter of Client; (c) for each fiscal year of Client, annual audited financial statements prepared by an independent accountant acceptable to Factor, no later than 90 days following the conclusion of each fiscal year of Client; and (d) projections, in form acceptable to Factor which projections will include, without limitation, an income statement, balance sheet and cash flow statement, with such projections to be provided upon request and, in any event, to be provided no later than 30 days prior to July 31st and January 31st of each year. For purposes of the prior sentence, the accounting firm of BDO Seidman shall be deemed acceptable to Factor. Client shall also furnish to Factor on a timely basis any other financial information upon Factor's request. At any time during the existence of an Event of Default or upon 24 hours prior notice in the absence of an Event of Default, Client shall permit any representative of Factor to visit and inspect any of the properties of Client, to examine all books of accounts, records, reports and other papers, to make copies and extracts therefrom, and to discuss the affairs, finances and accounts of Client with its officers, employees, independent public accountants, creditors and depository institutions. 17. Financial Condition. Client warrants that that there has been no material adverse change in Client's financial condition as reflected in the financial statements delivered to Factor since the date thereof nor do such statements fail to disclose any fact or facts which might materially adversely affect Client's financial condition; and there is no litigation pending or threatened, which taken in the aggregate if adversely determined, can reasonably be expected to have a material adverse affect on Client's financial condition. 6 18. Term of Agreement; Termination. This Agreement shall take effect on the date of acceptance by Factor (the "Effective Date") and shall remain in full force and effect until the 2nd Anniversary Date unless terminated earlier by Factor (a) upon sixty (60) days written notice, or (b) without notice upon the occurrence of an Event of Default (defined below). This Agreement shall be automatically renewed on each Anniversary Date occurring thereafter for an additional one year term unless Client or Factor provides the other written notice of non-renewal of this Agreement no later than thirty (30) days prior to the applicable Anniversary Date. In the event that this Agreement is terminated by Client for any reason or by Factor based on the occurrence of an Event of Default (and the expiration of any applicable cure period set forth herein) prior to the 2nd Anniversary Date, or prior to any Anniversary Date occurring thereafter, as applicable, Client shall immediately pay Factor: (a) the unpaid portion of the Minimum Commissions which would have been payable to Factor pursuant to Section 14(b) of this Agreement through the 2nd Anniverary Date, or through any Anniversary Date occurring thereafter, as applicable; and (b) an early termination fee to compensate Factor for its lost profits in an amount equal to: (i) Three Hundred and Fifty Thousand Dollars ($350,000), if such termination occurs after the Effective Date and on or prior to the 1st Anniversary Date of the Effective Date; (ii) Seventy-Five Thousand Dollars ($75,000), if such termination occurs after the 1st Anniversary Date of the Effective Date and on or prior to the 2nd Anniversary Date of the Effective Date; or (v) Seventy-Five Thousand Dollars ($75,000) if such termination occurs at any time thereafter including during a renewal of the term of the Agreement. In view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Factor's lost profits as a result thereof, Client agrees that such fee is reasonable and that it will pay same. 19. Events of Default; Remedies. Factor may terminate this Agreement without notice if any of the following events (each, an "Event of Default") shall occur: (a) Client shall default in the payment of any of the Obligations on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise); (b) any representation or warranty made by Client to Factor shall prove incorrect or misleading in any material respect when made or furnished; (c) (i) Client shall breach any covenant or agreement contained in Sections 1-2, 6-9, 11-12 or 27 of this Agreement or Sections 5 or 11 of the Factoring Agreement - Inventory Supplement of even date, or (ii) Client shall breach any covenant or agreement contained in the Agreement (other than those set forth in the Sections referred to in clause (i) immediately above) or any supplement hereto or any other agreement between Client and Factor, and such covenant or agreement is not remediable or, if remediable, continues unremedied for a period of ten (10) days after the earlier to occur of (x) the date on which such breach is known or reasonably should have become known to any officer of Client and (y) the date on which Factor shall have notified Client of such breach; (d) Client or any guarantor of the Obligations shall file or have filed against it a petition, answer or consent seeking relief under Title 11 of the United States Bankruptcy Code, as now constituted or hereafter amended, or any other applicable Federal or state bankruptcy law or other similar law (except that with respect to any of such actions filed against Client or any guarantor, Client shall have up through the earlier to occur of (i) sixty (60) days following such filing or (ii) the entry of an order granting the relief sought in such action, to cause such action to be dismissed), or a receiver, liquidator, assignee, trustee or similar official shall be appointed for Client or any guarantor of the Obligations or any substantial part of its or his property; (e) Client fails, closes, suspends, or goes out of business; or (f) there is a change (by death or otherwise) in Client's principal stockholders or owners. At any time after the occurrence of an Event of Default that is not waived by Factor, Factor shall have, in addition to all of the rights and remedies of a secured party under Article 9 of the UCC and other applicable law, the right to remove from any of Client's premises any and all books and records that may pertain to the Accounts Receivable or any other collateral hereunder, and the right to receive, open and dispose of all mail addressed to Client and notify postal authorities to change the address for delivery of Client's mail to such address as Factor may designate, provided, that Factor, upon Client's request, agrees to provide copies of any of the foregoing to Client at Client's expense. Client hereby appoints Factor or such persons as Factor designates as Client's attorney-in-fact to do all acts and things necessary, in Factor's determination after an Event of Default that is not waived by Factor, to fulfill Client's obligations under this Agreement. 20. Effect of Termination. Upon the effective date of termination, all Obligations shall become immediately due and payable without further notice or demand irrespective of any maturity dates established prior thereto. However, no such termination shall release or abrogate any security interest held by Factor in any collateral of Client until all Obligations are paid in full. In the event that Factor shall cease to act as factor for Client, Factor may hold any balance remaining to Client's credit in the Reserve Account as security for the Obligations until Client has furnished Factor with an indemnity satisfactory to cover all Obligations. Factor shall allow Client to continue to electronically access account data for a period of ninety (90) days after termination. If Client requires extended access beyond such ninety (90) day period, Client shall pay an access fee of $350 per month, payable on the first day of each month. 7 21. Collection Costs. Client shall pay or reimburse Factor on demand for all reasonable costs and expenses, including the reasonable fees and expenses of all legal counsel (including allocated costs of staff counsel) and auditors (whether employed directly or retained by Factor), incurred by Factor to obtain or enforce payment of any Obligations or in the prosecution or defense of any action or proceeding concerning any matter arising out of or related to this Agreement or the factoring of the Accounts Receivable by Factor (other than Factor Risk Accounts Receivable that remain unpaid due to the customer's financial inability to pay). 22. Lien Perfection. Client irrevocably authorizes Factor at any time and from time to time to file in any jurisdiction all financing statements and amendments thereto provided for by the UCC. Client grants Factor an irrevocable power of attorney to execute and deliver such other documents or instruments which may be required by law or which Factor may request to perfect its first priority security interest hereunder. Client shall cooperate with Factor in the filing, recording or renewal thereof (and shall if requested execute such documents as may be necessary in such regard), and to pay all out-of-pocket search, filing and recording fees and expenses related thereto, and, to the extent required or permitted by applicable law, Client authorizes Factor to sign Client's name thereon. Client shall execute, acknowledge and/or deliver such other instruments or assurances as Factor may reasonably request to effectuate the purposes of this Agreement. Client also ratifies any previous authorization for Factor to have filed in any jurisdiction any such financial statements or amendments thereto if filed before the date of this Agreement. Client covenants and agrees with Factor that: (a) without giving Factor at least thirty (30) days prior written notice, Client shall not change its name, its principal place of business or, if more than one, its chief executive office, or its mailing address or organizational identification number if it has one, (b) if Client does not have an organizational identification number and later obtains one, Client shall forthwith notify Factor of such organizational identification number, and (c) Client shall not change its state of incorporation or organization or its type of organization, jurisdiction of organization or other legal structure. 23. Notices. Any notices, demands, consents, or other writings or communications permitted or required by this Agreement shall be given by facsimile transmitter, overnight air courier or certified mail, return receipt requested, addressed to the party to be notified as follows: (a) If to Factor: GE Capital Commercial Services, Inc. 505 N. Brand Boulevard, Suite 700 Glendale, California 91203 Facsimile No. 818-409-1606 Attn: Region Portfolio Manager (b) If to Client: Unzipped Apparel LLC 5804 E. Slauson Avenue Commerce, California 90040 Facsimile No. 323-728-1641 Attn: Hubert Guez or to such other address as each party may designate for itself by notice given in accordance with this Section 23. Any written notice or demand that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 24. Confidentiality. Except as otherwise required by law, Client shall treat as confidential both the form and substance of all information received from Factor with respect to Client's Reserve Account, all credit approval processes, accounting procedures and invoice processing procedures, together with all reports, statements, fee schedules or notices related to any of the foregoing, whether provided to in writing or through GECCS.com. No such information may be disclosed by the Client publicly or privately except to those individuals who are Client's officers, employees or advisors who have a need to know as a result of being involved in Client's factoring facility and then only on the condition that such matters may not be further disclosed. No one shall, except as required by law, use the name of, or refer to, GE Capital Commercial Services, Inc., or any of its affiliates in any correspondence, press releases, discussions, advertisement or disclosure made in connection with this Agreement and the transactions hereunder without the prior consent of Factor. Client's access to and use of GECCS.com shall be subject to the terms of use published on such website, and Client agrees in advance to be bound by such terms of use and any additional terms and conditions that GECCS in its sole discretion may deem to be appropriate in connection with the ongoing use of the GECCS.com service. 8 25. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, FACTOR AND CLIENT HEREBY WAIVE, IRREVOCABLY AND UNCONDITIONALLY, TRIAL BY JURY IN ANY ACTION BROUGHT ON, UNDER OR BY VIRTUE OF OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY SUPPLEMENT HERETO OR ANY OF THE OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH, OR ANY CLAIM, DEFENSE, RIGHT OF SETOFF OR OTHER ACTION PERTAINING HERETO, OR TO ANY OF THE FOREGOING. 26. Documentation; Payment of Fees. (a) Client agrees to pay Factor all reasonable fees and expenses of its outside counsel incurred as a result of the preparation, negotiation, execution, delivery, performance and enforcement of this Agreement and any ancillary documents that comprise Client's initial document package (collectively, the "Factoring Documents"). Should Client request or seek any amendment, waiver, consent or other modification of this Agreement or any other Factoring Document, Client shall pay to Factor a documentation fee for the preparation of each and any such amendment, waiver, consent or modification. The amount of such fee shall be determined by Factor in relation to the scope of the amendment, waiver, consent or modification requested. If Factor, in its sole discretion, determines that the assistance of outside counsel is required with respect to any of the foregoing, Client shall, in lieu of the documentation fee otherwise payable to Factor, reimburse Factor for all reasonable fees and expenses of such outside counsel. (b) The initial integration and documentation fees for this Agreement shall be due and payable on the Effective Date. All other fees, including any special fees set forth on Schedule A attached hereto or any fees for additional services requested by Client as set forth on Factor's Service Fee Schedule, shall, unless otherwise indicated, be due and payable on demand. Client authorizes Factor to collect any such fees on their respective due dates by charging Client's Reserve Account. 27. Special Covenants. For so long as any of the Obligations are outstanding, Client covenants that, unless otherwise consented to by Factor in writing, it shall comply with the covenants set forth in Schedule B attached hereto. Conditions Precedent and Subsequent. This Agreement is subject to the conditions precedent and subsequent set forth in Schedule C attached hereto. - ---------- 29. Electronic Data Transmission. Factor may authorize Client to send to Factor or receive from Factor assignments, invoices, credit memoranda, credit approval requests, credit approvals, and other reports to be delivered to or transmitted by Factor under this Agreement by electronic means (each, an "Electronic Transmission"). Any documents authorized by Factor to be sent by Electronic Transmission shall be deemed (a) to have been transmitted by a person duly authorized to do so, and (b) to have been received by the person for whom such documents were intended on the actual date of receipt of such documents, unless such day is not a business day, in which event such documents shall be deemed to have been received on the first business day following actual receipt. Each party may rely upon, and assume the authenticity of, any signatures contained in any documents Factor authorizes to be transmitted by Electronic Transmission, and such signatures shall have the same effect and weight as original signatures and shall be sufficient to satisfy the requirements of the UCC or any applicable statute, rule of law, or rule of evidence. Electronic Transmissions which are not readily capable of bearing either a signature or a reproduction of a signature (e.g., e-mail transmissions) shall be deemed signed, for purposes of the UCC and all other rules of law and evidence, if they contain the name or an abbreviation of the name of the party sending the Electronic Transmission, it being agreed that such name or abbreviation serves as a symbol adopted by the sender with the intent to authenticate such writing. On the request of either party, the other party shall immediately confirm the receipt of any documents transmitted by Electronic Transmission. The sender of any documents transmitted by Electronic Transmission shall maintain backup paper documents for such documents until at least the third anniversary of the date of the termination of this Agreement and shall, on request of the receiving party, furnish such backup paper documents within two business days of the receipt of a request therefor; provided, however, that the absence of any such backup documentation with respect to the assignment of Accounts Receivable by Client shall not affect the validity of any assignment of Accounts Receivable transmitted to Factor, whether by Electronic Transmission or otherwise. Each party may rely upon documents authorized by Factor to be sent by Electronic Transmission to the same extent as if original documents had been personally delivered. 9 30. Miscellaneous. This Agreement, together with any supplement hereto, contains the entire agreement between the parties, and cannot be modified or amended orally. This Agreement is intended solely for the benefit of Factor and Client, and no other person or party (including any guarantor) is intended to be benefited hereby in any way. The captions in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Failure of Factor to exercise any rights granted to it hereunder upon any breach or default by Client shall not be deemed a waiver thereof in the event of further breaches or defaults. The remedies of Factor hereunder shall be deemed to be cumulative and not exclusive. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Agreement is made and accepted and shall be construed, interpreted and enforced in accordance with the laws of the State of California, without regard to conflict of laws principles, and Client irrevocably consents and submits to the jurisdiction of state courts of, and federal courts in, the State of California for the purpose of any suit, action or proceeding relating hereto. 10 Intending to be legally bound, the parties hereto have duly executed this Agreement on the day and year first above written. UNZIPPED APPAREL LLC By: /s/Hubert Guez Title: CEO Accepted in Los Angeles ----------- GE CAPITAL COMMERCIAL SERVICES, INC. By: /s/ Michael Gardner Title: Sr. Vice President Date: 2/13/03 11 SCHEDULE A TO FACTORING AGREEMENT Surcharge Customers; Special Fees I. Surcharge Customers Customer* Surcharge** -------- --------- Value City Net 30 terms - 1.00% Net 60 terms - 1.50% *Factor reserves the right in its discretion to add or delete surcharge customers from time to time, with such additions and deletions to be reflected on Factor's website, GECCS.com. **Such surcharge is in addition to the commission rate otherwise payable under the terms of Section 14 II. Schedule of Special Fees In addition to any other fees set forth in the Agreement, Client shall pay to Factor: In consideration of Factor's entering into this Agreement, Client shall pay Factor a yearly facility fee (the "Facility Fee") in an amount equal to four-tenths of one percent (0.40%) of the Facility Limit, for each yearly period commencing from the Effective Date of this Agreement through the 2nd Anniversary Date thereof, with all such amounts being fully earned and payable in advance of each year. In the event the term of this Agreement is thereafter extended beyond the 2nd Anniverarsy Date, on one or more occasions, Client shall pay Factor a Facility Fee for each yearly period of any extension in an amount equal to four-tenths of one percent (0.40%) of the Facility Limit (in effect at the time of the extension), with all such amounts being fully earned and payable in advance of each year. 1. 12 SCHEDULE B TO FACTORING AGREEMENT Special Covenants 1. Minimum Tangible Net Worth. On the Effective Date and at all times thereafter, Client shall have a Tangible Net Worth of not less than Seven Million Dollars ($7,000,000), with such amount to increase to the following amounts for the following time periods: Applicable Time Period Applicable Minimum Tangible Net Worth April 30, 2003 through but not $7,375,000 including July 31, 2003 July 31, 2002 through but not $7,750,000 including October 31, 2003 October 31, 2003 through but not $8,125,000 including January 31, 2003 January 31, 2003 through but not $8,500,000 including April 30, 2003 April 30, 2004 and thereafter To be determined in Factor's sole and absolute discretion upon receipt of Client's projections and other financial information covering the time periods commencing April 30,2004 and thereafter. 2. Fixed Charge Coverage Ratio. Client shall maintain a Fixed Charge Coverage Ratio of not less than 1.0:1.0 based on a rolling twelve (12) month period, measured each fiscal quarter of Client commencing with the first such fiscal quarter occurring after the Effective Date. 3. Affiliate Debt. On the Effective Date and at all times thereafter, Client shall have no indebtedness owing from any Affiliate. 4. Excess Availability. Client shall have Excess Availability of $500,000 as of the Effective Date and at all times thereafter until such time that Client delivers to Factor its fiscal year ending January 31, 2003 financial statements and Factor has had the opportunity to confirm the accuracy of Client's perpetual inventory costing. Thereafter, Factor will reevaluate and establish, in its discretion, a new ongoing Excess Availability requirement. 5. Inventory Segregation. All inventory of Client maintained with Azteca Production Int'l ("Azteca") will be clearly identified and segregated from inventory belonging to third parties. For purposes of the covenants of this Schedule B, the following terms shall have the meanings set forth below: "Affiliate" - shall mean any other person: (i) which directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, Client; (ii) which beneficially owns or holds 5% or more of any class of the stock or other ownership interest of Client; or (iii) in which Client beneficially owns or holds 5% or more of the stock (or in the case of a person which is not a corporation, 5% or more of the equity interest). 13 "EBITDA" shall mean, for any period, the net income (loss) of Client for such period, plus interest expense, income tax expense, amortization expense, depreciation expense and extraordinary losses and minus extraordinary gains, in each case, of Client for such period determined in accordance with GAAP. "Excess Availability" means, as of any date of determination, Client's unrestricted cash and cash equivalents, plus unused advance availability pursuant to the Agreement, less accounts payable that are 60 days or more past due, less checks made by Client, but not yet issued to the payees on such checks (held checks), less book overdrafts. "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of the following for Client determined in accordance with GAAP: (a) EBITDA for such period less (i) capital expenditures for such period which are not financed through the incurrence of any indebtedness (excluding advances under the Agreement), less (ii) taxes to the extent accrued or otherwise payable with respect to such period, less (iii) dividends paid to (b) the sum of (i) interest expense paid or accrued in respect of any indebtedness during such period, plus (ii) regularly scheduled payments of principal paid or that were required to be paid during such period on (A) the current portion of Client's long term indebtedness and (B) the portion of Client's indebtedness which matures less than one year from the date of creation thereof. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time, consistently applied. "Tangible Net Worth" shall mean, as of any date, the total assets of Client (excluding intangible assets) minus the total liabilities of Client (excluding liabilities subordinated to Factor on terms and conditions satisfactory to Factor), calculated in conformity with GAAP. 14 SCHEDULE C TO FACTORING AGREEMENT Conditions Precedent and Subsequent Conditions Precedent. As conditions precedent to any advances by Factor under this Agreement or any supplements or riders hereto, Client shall execute and deliver, or cause to be executed and delivered, to Factor, in form and substance satisfactory to Factor and its counsel, the following: 1. Financing statements (form UCC-1) and fixture filings in form satisfactory for filing and recording with the appropriate governmental authorities. 2. Certified extracts from the minutes of the meetings of Client's members and managers authorizing the borrowings and the granting of the security interest provided for herein and authorizing specific member and managers to execute and deliver the agreements provided for herein. 3. A certified copy of Client's Articles of Organization and any amendments thereto, and a copy of Client's operating agreement, together with a certificate of good standing showing that Client is in good standing under the laws of the State of its organization and certificates indicating that Client has qualified to transact business and is in good standing in any other state in which the conduct of its business or its ownership of property requires that it be so qualified. 4. UCC searches, tax lien and litigation searches, fictitious business statement filings, insurance certificates, notices or other similar documents which Factor may require and in such form as Factor may require, in order to reflect, perfect or protect the priority of Factor's security interests in the collateral granted to Factor under this Agreement, any supplements or riders to this Agreement or in any other agreements between Factor and Client. 5. Evidence satisfactory to Factor that Client has obtained insurance policies or binders, with such insurers and in such amounts as may be acceptable to Factor, respecting the inventory of Client and any other tangible personal property comprising the Collateral and naming Factor as a loss payee on a lender's loss payee endorsement acceptable to Factor in its sole discretion. 6. Separate subordination agreements, in a form acceptable to Factor in its sole discretion, duly executed and delivered by affiliates of Client, respectively, or, alternatively, satisfactory evidence of the conversion of Client indebtedness to equity, to the extent needed so that Client can comply with the Tangible Net Worth covenant requirement set forth in Schedule B to the Agreement. Payments on any such subordinated amounts owing by Client to its affiliates will be allowed pursuant to the terms and conditions set forth in each respective subordination agreement. 7. Evidence satisfactory to Factor, in its sole discretion, that Client has recorded fictitious business name statements in the appropriate governmental offices regarding all of the trade names used by Client in its business. 8. A separate waiver and consent by real property owner, containing terms and conditions acceptable to Factor in its sole discretion, for each facility where inventory of Client is located, executed by the owner of such facility and notarized for recording in the real estate records of the county where such facility is located. 9. A separate waiver by warehouseman, containing terms and conditions acceptable to Factor in its sole discretion, for each location where inventory of Client is warehoused, executed by the owner of such warehouse. 15 10. A letter of indemnity from CIT, containing terms and conditions acceptable to Factor in its sole discretion. 11. Review of all license agreements and management contracts of Client, with the results of such review to be acceptable to Factor and its counsel. 12. As deemed necessary by Factor and its counsel, separate Collateral Assignment of Rights Agreements from Client, containing terms and conditions acceptable to Factor in its sole discretion, with respect to license agreements to which Client is a party, and containing the consent of the licensor. Alternatively, as deemed necessary by Factor and its counsel, separate license use agreements containing terms and conditions acceptable to Factor in its sole discretion, with respect to license agreements to which Client is a party, wherein the licensor agrees to a limited use of the license by Factor. Through such agreements Factor shall obtain the right to utilize off price retailers at our discretion. 13. Review of IP Holdings LLC's license agreement with Michael Caruso, with the results of such review to be acceptable to Factor and its counsel. 14. Review of the IP Holdings LLC's "Bond" in favor of its bondholders, with the results of such review to be acceptable to Factor and its counsel. 15. Receipt of additional information concerning Apparel Distribution Services, with the form and substance of such additional information to be acceptable to Factor. 16. Review of JC Penney's purchase order including, without limitation, its cancellation provisions, with the results of such review to be acceptable to Factor and its counsel. 17. Receipt by Factor of a satisfactory bank reference for Azteca Production Int'l. 18. Receipt of a payoff letter from Congress Financial Corporation ("Congress"), in form and substance acceptable to Factor, which provides, among other things, that Factor is authorized to terminate all liens held by Congress against Client's assets upon satisfaction of Client's obligations to Congress. 19. Satisfactory review of Client's and its affilliates' corporate structure, with the results of such review to be acceptable to Factor and its counsel. Conditions Subsequent. As conditions subsequent to the initial closing hereunder, Client shall perform or cause to be performed the following (the failure by Client to so perform or cause to be performed shall constitute an event of default under this Agreement): 1. Within 15 days following the Effective Date, a separate notification and acknowledgment of security interest by customs broker, containing terms and conditions acceptable to Factor in its sole discretion, for each customs broker in possession of goods owned by Client, if any, with such customs broker agreement to provide, among other things, for L/C Inventory to be consigned to Client until such time that Factor notifies the custom broker that L/C Inventory may only be consigned to Factor. Client acknowledges that until such time that such a customs broker agreement is provided to Factor, Client shall not have the ability to have Letters of Credit issued through Factor nor will Client have the ability to obtain "Inventory Advances" pursuant to the Factoring Agreement, Inventory Supplement, dated of even date. 16 EX-10.2 4 cand_10qex102.txt FACTORING AGREEMENT - INVENTORY SUPPLEMENT Exhibit 10.2 FEBRUARY 11, 2003 FACTORING AGREEMENT - INVENTORY SUPPLEMENT (with advances) THIS FACTORING AGREEMENT - INVENTORY SUPPLEMENT (this "Supplement"), made and executed this 25th day of February, 2003, by and between UNZIPPED APPAREL LLC, a Delaware limited liability company (the "Client"); and GE CAPITAL COMMERCIAL SERVICES, INC. (the "Factor"). 1. Integration with Factoring Agreement. This is a Supplement to that certain Factoring Agreement, dated as of even date herewith (such Factoring Agreement, as amended, modified, supplemented or restated from time to time, being herein called the "Agreement") between Client and Factor. This Supplement is hereby incorporated into the Agreement and is made a part thereof. 2. Definitions. All capitalized terms used but not defined in this Supplement shall have the meanings ascribed to such terms in the Agreement. In addition to the terms defined elsewhere in this Supplement or in the Agreement, the following terms shall have the following meanings: "Agreement Term" - the period from the date that the Agreement becomes effective until the termination thereof by Client or Factor in accordance with Section 18 of the Agreement. "Eligible Inventory" - Client's Inventory consisting of finished goods which in each case (i) is readily marketable in its current form, (ii) is in good, new and saleable condition and not spoiled, obsolete or unmerchantable, (iii) is subject to Factor's duly perfected first priority lien, (iv) is located at one of Client's owned or leased facilities listed on Schedule A hereto, provided, however, in the case of such Inventory located at a leased facility of Client, no such Inventory shall be Eligible Inventory unless Client shall have procured for Factor's benefit a written agreement of the owner of such facility, in form and substance acceptable to Factor, to waive for the benefit of Factor any lien or security interest which such owner may at any time have in such Inventory and to afford Factor access to and the right to repossess or take possession of such Inventory; (v) is not subject to any license or other agreement that would condition or restrict Client's or Factor's right to sell or otherwise dispose of such Inventory, (vi) meets all standards imposed by any governmental agency or authority, (vii) conforms in all material respects to the covenants, warranties and representations of Client set forth in this Supplement, and (viii) is deemed by Factor, in its good faith discretion, to be Eligible Inventory. Raw Materials and work in process shall not be deemed Eligible Inventory. In addition, the following Inventory shall not be deemed Eligible Inventory: (a) "Sylvain" Inventory, (b) closeout Inventory, and (b) Inventory with no sales during the preceding nine (9) month period (the "Slow Moving Inventory"). "Eligible L/C Inventory" - finished goods Inventory owned by Client and covered by documentary Letters of Credit, which finished goods Inventory is in transit to Client's premises located at 5804 E. Slauson Avenue, Commerce, California, and which finished goods Inventory (a) is owned by Client, (b) is fully insured, (c) is subject to a first priority security interest in and lien upon such goods in favor of Factor (except for any processor lien upon such goods in the possession of a freight carrier or shipping company securing only the freight charges for the transportation of such goods to Client), (d) is evidenced or deliverable pursuant to documents, notices, instruments, statements and bills of lading that have been delivered to Factor or an agent acting on its behalf, and (e) is otherwise deemed to be Eligible Inventory. "Inventory" - all of Client's inventory, including, without limitation, all goods intended for sale or lease by Client, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Client's business, whether now owned or hereafter acquired by Client, and wherever located. 1 "Inventory Advances" - the loans and advances made from time to time by Factor to Client under this Supplement. "Inventory Line Amount"- the sum of Eight Million Dollars ($8,000,000); provided, however that aggregate outstanding Inventory Advances may never exceed the amount of accounts receivable advances available under the Agreement. "Inventory Borrowing Base" - at any date of the determination thereof, an amount equal to the sum of (i) the lower of (a) sixty percent (60%) of the value of Client's Eligible Inventory at such date, calculated on the basis of lower of cost or market with cost calculated on a first-in, first-out basis, or (b) ninety percent (90%) of the net orderly liquidation value of Client's Eligible Inventory at such date, as determined by Factor, plus (ii) sixty percent of the value of Client's Eligible L/C Inventory at such date, calculated on the basis of lower of cost or market with cost calculated on a first-in, first-out basis, plus (iii) thirty percent (30%) of the value of certain finished goods Slow Moving Inventory (as selected by Factor), which, but for the fact that such inventory has had no sales during the preceding nine (9) months, satisfies all other requirements of Eligible Inventory, with such percentage to be reduced by ten percent (10%) per month on each monthly anniversary of the Effective Date until eliminated, and with the value of such finished goods Inventory to be calculated on the basis of lower of cost or market with cost calculated on a first-in, first-out basis, and less (iv) reserves which Factor, in its discretion, determines should be established from time to time with respect to such matters, events, conditions or contingencies. 3. Additional Collateral. As security for all of the Obligations, Client hereby pledges and grants to Factor a continuing general lien on and security interest in all following property and interests in property of Client, whether now owned or hereafter acquired and wherever located (the "Inventory Collateral"): (a) All Inventory; (b) All cash and non-cash proceeds of the Inventory; and (c) All books and records (including, without limitation, credit files, computer programs, print-outs, and other computer materials and records) of Client pertaining to any of the types or items of property described in any of clauses (a) through (b) above. 4. Attachment of Lien. Factor's lien and security interest shall extend and attach to Inventory which is presently in existence and which is owned by Client or in which Client has an interest, and all Inventory which Client purchases or in which Client may acquire an interest at any time and from time to time in the future, whether such Inventory is in transit or in Client's constructive, actual or exclusive occupancy or possession or not, or held by Client or others for Factor's account and wherever the same may be located, including, but without limiting the generality of the foregoing, all Inventory which may be located on Client's premises or upon the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents, finishers, converters or other third parties who may have possession of the Inventory. 2 5. Advances. Upon Client's request at any time during the Agreement Term so long as no Event of Default has occurred and is continuing, Factor shall make Inventory Advances to Client, on a revolving credit basis, provided, that at no time shall the maximum principal amount of such Inventory Advances outstanding at any time exceed the least of (a) the Inventory Line Amount, (b) the Inventory Borrowing Base as calculated at such time, or (c) the resulting amount of the following: $25,000,000, less the total outstanding advances from Factor under the Agreement, less the aggregate undrawn amounts of all outstanding letters of credit. If Factor so requires, Client will execute a promissory note or notes or other instruments of indebtedness in form satisfactory to Factor evidencing the Inventory Advances made to Client hereunder. Client shall pay interest on the outstanding Inventory Advances at a rate equal to three percent (3.0%) per annum over the Index Rate; provided, however, that if an Event of Default has occurred and is continuing, such interest rate shall be increased by three percent (3.0%) until such Event of Default is cured or waived by Factor. Interest will be calculated on a daily basis (computed on the actual number of days elapsed over a year of three hundred sixty (360) days) and shall be payable on the last day of each month. The applicable Index Rate for the month hereof shall be the Index Rate in effect on the last day of the month preceding the date of this Supplement and the applicable Index Rate for each month thereafter shall the Index Rate in effect on the last day of the preceding calendar month. However, in no event shall the rate of interest agreed to or charged to Client hereunder exceed the maximum rate of interest permitted to be agreed to or charged to Client under applicable law. All of the Inventory Advances shall be payable by Client upon the earlier of the expiration of the Agreement Term or Factor's demand. Recourse to the security for the Inventory Advances will not be required at any time. 6. Representations and Warranties of Client. Client warrants and represents to Factor that all Inventory is and will be owned by Client, free of all other liens, security interests and encumbrances; that the lien and security interest created hereby is and shall at all times be a first and only lien on the Inventory; that Client has the unrestricted right and power to enter into this Supplement and grant Factor a lien and security interest on the Inventory Collateral. Client shall at all times keep the Inventory Collateral at the locations set forth on Schedule A attached hereto except for sales in the ordinary course of business. Client will, at Client's sole expense, forever warrant and defend the Inventory Collateral against any and all claims or demands of any other person, firm, entity or corporation adverse to Factor's interest therein. 7. Continuing Lien. Factor's lien on the Inventory shall continue through all stages of manufacture and shall, without further act, attach to goods in process, to finished goods, to the accounts receivable or other proceeds resulting from the sale or other disposition thereof and to all such Inventory as may be returned to Client by customers. From time to time hereafter, Client shall provide Factor with one or more separate written statements, dated and signed by Client, describing, designating, identifying and evaluating all Inventory now and hereafter owned by Client, and confirming Factor's lien and security interest. Upon the sale, exchange, or other disposition of the Inventory, the security interest and lien created and provided for herein shall continue in and attach to the instruments for the payment of money, accounts, contract rights, documents of titles, shipping documents, exchange or disposition, including Inventory returned or rejected by customers or repossessed by either Client or Factor. As to any such sale, exchange or disposition, Factor shall have all of the rights of an unpaid seller, including stoppage in transit, replevin and reclamation. 8. Taxes. Client will promptly pay, when due, all taxes, assessments, claims or other charges levied or assessed upon the Inventory. In the event Client fails to pay such taxes, assessments, claims or other charges or fails to keep the Inventory Collateral free from any other lien or security interest, Factor may on Client's behalf make expenditures for such purposes and any amount so expended shall be an Obligation secured hereby to be repaid with interest at the rate applicable to the Inventory Advances. 9. Sales of Inventory; Proceeds. Except for sales made in the regular course of Client's business for so long as no Event of Default shall exist, Client shall not sell, encumber or dispose of or permit the sale, encumbrance or disposal of any Inventory Collateral without Factor's prior written consent. As sales are made in the regular course of business, Client shall, in accordance with the provisions of the Agreement, immediately execute and deliver to Factor schedules and assignments of accounts receivables created by Client that are sold and assigned to Factor under the Agreement. If sales are made for cash, Client shall immediately deliver or cause to be delivered to Factor the identical checks, cash or other forms of payment which Client receives. All payments received by Factor on account of cash sales of Inventory, as well as on account of accounts receivable sold and assigned by Client under the Agreement, will be applied against the Obligations in accordance with the provisions of the Agreement. 3 10. Third Party Notification; Reporting. If any Inventory remains in the possession or control of any of Client's agents or processors, Client shall notify such agents or processors of Factor's lien, and upon request shall instruct them to hold all such Inventory for Factor's account and subject to Factor's instructions. Client agrees to maintain books and records pertaining to the Inventory Collateral in such detail, form and scope as Factor shall reasonably require. Client will also advise Factor promptly, in sufficient detail, of any substantial change relating to the type, quantity or quality of the Inventory, or any event which would have a material effect on the value of the Inventory or on the lien and security interest granted to Factor herein. A physical listing of all Inventory, wherever located, shall be taken by Client whenever reasonably requested by Factor, and a copy of each such physical listing shall be supplied to Factor. Factor may examine and inspect the Inventory Collateral at any time during regular business hours. Factor will have collateral audits conducted on a periodic basis, in its discretion, with Client agreeing to pay to Factor audit fees for such audits at the rate of $750 per person per day, plus out of pocket expenses, together with all reasonable travel expenses incurred in connection with such audit. Factor reserves the right to adjust such fees and costs for subsequent years. Client will execute and deliver to Factor from time to time, upon demand, such supplemental agreements or documents relating to the Inventory Collateral in order that the full intent and purpose of this Supplement may be carried into effect. Client agrees that semi-annual appraisals of the Inventory, conducted by an appraiser acceptable to Factor, will be conducted at Borrower's cost and expense. In addition, Client agrees to provide Factor with the following month-end reporting of Inventory within 20 days following the end of each month: (a) a perpetual Inventory report by Inventory type, (b) a separate reporting of Sylvain Inventory, (c) a report of Slow Moving Inventory, (d) a backlog report, and (e) a report of open orders with vendors/allocated to sell, with the form and substance of all such reporting to be acceptable to Factor in its sole discretion. Lastly, Client agrees to provide Factor with a monthly accounts payable report, in form and substance acceptable to Factor, within 20 days following the end of each month. 11. Insurance. At Client's sole expense, Client shall keep the Inventory (whether or not in transit) continuously insured in amounts not less than its full insurable value by a reputable and highly rated insurance company or companies acceptable to Factor against loss or damages from fire, hazards included within the term "extended coverage", theft and such other risks as Factor may require. Each insurance policy shall provide under a long form loss payable clause that loss and proceeds thereunder shall be payable to Factor as its interest may appear, shall provide at least ten (10) days' written notice of cancellation to Factor, and shall specify that the interest of Factor shall not be impaired or invalidated by any act or neglect of Client or the owner of the Inventory or by the occupation of the premises for purposes more hazardous than are permitted by such policy. Client shall deliver to Factor all such insurance policies or other evidence of compliance satisfactory to Factor and Client shall renew each policy at its own expense and shall deliver satisfactory evidence thereof to Factor not less than thirty (30) days before its expiration date. If Client fails to do so, Factor may procure such insurance and the cost of such insurance shall be additional Obligations secured hereby and payable with interest at the interest rate applicable to the Inventory Advances. Factor may act as attorney-in-fact for Client in obtaining, adjusting, settling and canceling such insurance and endorsing any instruments relating thereto, and in the event of loss or damages to the Inventory, Factor shall have the option to apply the insurance proceeds to the Obligations (whether or not matured) or to the repair or replacement of the Inventory after receiving proof satisfactory to Factor of such repair or replacement. 4 12. Remedies Upon Default. If an Event of Default shall occur, or if for any reason the Agreement is terminated, then Factor, without demand or notice, may declare all of the Obligations immediately due and payable (notwithstanding that the maturity date or dates expressed in any evidence of such indebtedness may be otherwise) and Factor may foreclose its lien or security interest in the Inventory Collateral in any way permitted by law, and shall have, without limitation, the remedies of a secured party under the Uniform Commercial Code as enacted in California. Factor may thereupon enter Client's premises without legal process and without incurring liability to Client and may remove the Inventory Collateral to such place as Factor may deem advisable, or Factor may require Client to assemble and make the Inventory Collateral available to Factor at a convenient place, or take and maintain possession on Client's premises and, with or without having the Inventory Collateral at the time or place of sale, Factor may sell or otherwise dispose of all or any part of the Inventory Collateral whether in its then condition or after further preparation or processing, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, at any time or place, in one or more sales, and upon such terms and conditions as Factor may elect. Client agrees that ten (10) days written notice to Client of any public or private sale or other disposition of the Inventory Collateral shall be reasonable notice thereof. At any such sale Factor may be the purchaser. If any Inventory Collateral shall require rebuilding, repairing, maintenance, preparation, or is in process or other unfinished state, Factor shall have the right, at Factor's option, to do such rebuilding, repairing, preparation, processing or completion of manufacturing, for the purpose of putting the Inventory Collateral in such saleable form as Factor shall deem appropriate. Factor is hereby granted a license or other right to use, without charge, Client's labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Inventory, in advertising for sale and selling any of the Inventory, and Client's rights under all licenses and all franchise agreements shall inure to Factor's benefit. 13. Application of Proceeds. In the event of any sale or other disposition of the Inventory, the proceeds from any sale shall be applied first, to the costs, expenses and attorneys' fees incurred by Factor in collecting the Obligations, enforcing the rights of Factor under the Agreement and this Supplement and collecting, retaking, completing, protecting, removing, storing, repairing, advertising and finishing for sale, selling and delivering any Inventory, and all other expenses of sale; second, to the interest due upon any of the Obligations; and third, to the principal of the Obligations in such order as Factor may determine. Any deficiency will be paid to Factor forthwith upon demand and any surplus will be paid to Client or other person legally entitled thereto. The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. 14. No Limitation of Remedies. To the extent that any of the Obligations are now or hereafter secured by property other than the Inventory Collateral or by the guaranty, endorsement or property of any other person, firm or corporation, then Factor shall have the right to proceed against such other property, guarantor or endorser, and Factor shall have the right in its sole discretion to determine which rights, security, liens, security interests or remedies Factor shall at any time pursue, relinquish, modify or take any other action with respect thereto, without in any way modifying or affecting any of them or any of Factor's rights hereunder. 15. No Waiver. The lien, rights and security interest granted to Factor hereunder are to continue in full force and effect, notwithstanding the termination of the Agreement, until the payment in full of all of the Obligations, and Factor's delay or omission to exercise any such lien, right or security interest shall not be deemed a waiver thereof or of any other right, lien or security interest unless such waiver be in writing and signed by Factor. A waiver on one occasion shall not be construed as a bar to or waiver of any other rights or remedies on any future occasion. 16. Lien Perfection. Client hereby reaffirms the authorization granted to Factor under Section 22 of the Agreement and acknowledges that such authorization applies to any and all liens granted to Factor pursuant to this Supplement. 17. Amendment; Application of Other Provisions in Agreement. This Supplement, which is subject to modification only in writing, is supplementary to and is to be considered as a part of the Agreement and shall take effect when accepted and signed by Factor. All miscellaneous provisions of the Agreement (such as choice of law, waiver of jury trial, etc.) shall apply to this Supplement and any notices, demands, consents, or other writings or communications permitted or required by this Supplement shall be given in the manner and to the address as set forth in the Agreement. 5 IN WITNESS WHEREOF, the parties hereto have duly executed this Supplement on the day and year first above written. UNZIPPED APPAREL LLC By: /s/ Hubert Guez Title: CEO Accepted in Los Angeles GE CAPITAL COMMERCIAL SERVICES, INC. By: Michael Gardner Title: Sr. Vice President Date: 2/13/2003 6 SCHEDULE A TO FACTORING AGREEMENT - INVENTORY SUPPLEMENT Schedule of Eligible Inventory Locations 5804 E. Slauson Avenue Commerce, California 90040 EX-10.3 5 cand_10qex103.txt FACTORING AGREEMENT - GUARANTY/LETTER OF CREDIT Exhibit 10.3 FEBRUARY 11, 2003 FACTORING AGREEMENT GUARANTY/LETTER OF CREDIT SUPPLEMENT THIS FACTORING AGREEMENT - GUARANTY/LETTER OF CREDIT SUPPLEMENT (this "Supplement"), made and executed this 25th day of February, 2003, by and between UNZIPPED APPAREL LLC, a Delaware limited liability company (the "Client"); and GE CAPITAL COMMERCIAL SERVICES, INC. (the "Factor"). 1. This is a Supplement to that certain Factoring Agreement, dated as of even date herewith (such Factoring Agreement, as amended, modified, supplemented or restated from time to time, being herein called the "Agreement") between Client and Factor. This Supplement is hereby incorporated into the Agreement and is made a part thereof. 2. All capitalized terms used in this Supplement without definition shall have the meanings ascribed to such terms in the Agreement. In addition to the terms defined elsewhere in this Supplement or in the Agreement, the following terms shall have the following meanings: "Beneficiary" - the Vendor or the Opening Bank that is the beneficiary of a Factor Guaranty. "Contract Term" - the period from the date that the Agreement becomes effective until the termination thereof by Client or Factor in accordance with paragraph 18 of the Agreement. "Drawing Document" - any document required to be submitted by a Beneficiary for a drawing under a Letter of Credit or Factor Guaranty. "Factor Guaranty" - a guaranty issued by Factor at Client's request pursuant to this Supplement, in form and upon terms satisfactory to Factor, in favor of an Opening Bank to guaranty Client's reimbursement obligations to the Opening Bank under a Letter of Credit or in favor of a Vendor to guaranty Client's obligations to pay the purchase price of inventory sold and delivered by such Vendor to Client. "Factor Guaranty Obligations" - all outstanding obligations incurred by Factor, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance of a Factor Guaranty. The amount of such Factor Guaranty Obligations at any time shall equal the maximum amount which may be payable by Factor thereupon or pursuant thereto at such time and shall include all duty, freight, taxes, costs, insurance and any other charges and expenses in connection therewith. "Factor Guaranty/Letter of Credit Line Amount" - the lesser of (a) Five Million Dollars ($5,000,000), or (b) the resulting amount of the following: $25,000,000, less the aggregate principal amount of Inventory Advances then outstanding under the Factoring Agreement - Inventory Supplement between the parties accepted by Factor on even date herewith ("Inventory Supplement"), less the total outstanding advances from Factor under the Agreement. "Letter of Credit" - A letter of credit at any time issued by an Opening Bank for the account of Client to support Client's obligations for the purchase of inventory. "Opening Bank" - First Union or any other bank approved by Factor which opens a Letter of Credit for the account of Client pursuant to this Supplement. "Vendor" - a vendor of inventory to Client. 3. Factor may, in its sole discretion, from time to time during the Contract Term issue Factor Guaranties, as requested by Client, with the aggregate face amount of Factor Guaranties outstanding at any one time not to exceed the Factor Guaranty/Letter of Credit Line Amount. As a condition for the issuance of any Factor Guaranty to an Opening Bank with respect to a Letter of Credit, Client shall enter into an application and agreement with the Opening Bank for such Letter of Credit. 4. Upon Factor's issuance of a Factor Guaranty, Factor shall establish a reserve against the amount of advances which Client is entitled to have outstanding under the Agreement in an amount equal to one hundred percent (100%) of the face amount of the Factor Guaranty Obligation with respect to such Factor Guaranty. 5. Any amounts paid by Factor under or with respect to any Factor Guaranty shall be (a) treated for all purposes as an advance to Client under the Agreement, (b) charged to the Reserve Account as of the date paid by Factor, (c) payable upon demand, together with interest thereon at the rate and calculated in the manner as specified in the Agreement, and (d) secured by all of the Collateral granted to Factor under the Agreement and under any supplement thereto or under any other agreement between Factor and Client. 6. Client agrees to pay Factor the fees set forth in Schedule A attached hereto in the amounts and on the dates set forth therein and authorizes Factor to pay such fees on their respective due dates by charging Client's Reserve Account. In addition, Client shall reimburse Factor for all fees and charges paid by Factor on account of any Factor Guaranty or Factor Guaranty Obligations to an Opening Bank. 7. All Factor Guaranty Obligations shall be incurred by Factor solely as an accommodation to Client and for Client's account. Client shall unconditionally reimburse Factor for the total amount of all Factor Guaranty Obligations paid by Factor immediately upon the date of payment by Factor (whether with the proceeds of an advance under the Agreement or otherwise). If Client shall fail to reimburse Factor for the total amount of all Factor Guaranty Obligations paid by Factor, in addition to Factor's rights under the Agreement and applicable law, Factor shall be fully subrogated to the rights and remedies of the Beneficiary of such Factor Guaranty with respect to Client's obligations to such Beneficiary which were paid or discharged with the proceeds of the Factor Guaranty, and Factor shall be entitled to exercise all rights and remedies which the Beneficiary had against Client, whether under any application for the issuance of a Letter of Credit, any purchase order with a Vendor, any other agreement between such Beneficiary and Client, or under applicable law, as fully as if Factor were the Beneficiary. 8. Client's Obligations to Factor with respect to any Factor Guaranty or Factor Guaranty Obligation shall be evidenced by Factor's records and shall be absolute, unconditional and irrevocable and shall not be affected, modified or impaired by: (a) any lack of validity or enforceability of the transactions contemplated by or related to such Factor Guaranty or Factor Guaranty Obligation; (b) any amendment or waiver of or consent to depart from all or any of the terms of the transactions contemplated by or related to such Factor Guaranty or Factor Guaranty Obligation; (c) the existence of any claim, set-off, defense or other right which Client may have against Factor, the Beneficiary or any other person, whether in connection with the Agreement, this Supplement or such Factor Guaranty or the transactions contemplated thereby or any unrelated transactions; or (d) the fact that any draft, affidavit, letter, certificate, invoice, bill of lading or other Drawing Document presented under or delivered in connection with such Factor Guaranty proves to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue or incorrect in any respect. 2 9. Client hereby agrees to indemnify Factor from and to hold Factor harmless against any and all claims, liabilities, losses, costs and expenses (including, attorneys' fees and expenses) which Factor may (other than as a result of its own gross negligence or willful misconduct) incur or be subject to as a consequence, directly or indirectly, of: (a) the issuance of or payment of or failure to pay under any Factor Guaranty or Factor Guaranty Obligation or (b) any suit, investigation or proceeding as to which Factor is or may become a party as a consequence, directly or indirectly, of the issuance of any Factor Guaranty, the incurring of any Factor Guaranty Obligation or any payment of or failure to pay under any Factor Guaranty or Factor Guaranty Obligation. The obligations of Client under this paragraph shall survive any termination of the Agreement and the payment in full of the Obligations. 10. Client hereby assumes all risks of the acts, omissions or misuse of each Factor Guaranty by the Beneficiary thereof and, in connection therewith, Factor shall not be responsible (a) for the validity, sufficiency, genuineness or legal effect of any Drawing Document even if it should in fact prove in any respect to be invalid, insufficient, inaccurate, untrue, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or Factor Guaranty or any rights or benefits thereunder or any proceeds thereof, in whole or in part, even if it should prove to be invalid or ineffective for any reason; (c) for the failure of any Beneficiary of a Factor Guaranty to comply fully with the terms thereof, including the conditions required in order to effect or pay a drawing thereunder; (d) for any errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, telecopy, telex or otherwise; (e) for any loss or delay in the transmission or otherwise of any Drawing Document; or (f) for any consequences arising from causes beyond the direct control of Factor. 11. In the event that any Factor Guaranty Obligations are outstanding when the Agreement is terminated for any reason, whether on account of an Event of Default or otherwise, Client will either (a) cause each underlying Factor Guaranty to be returned and canceled and each corresponding Factor Obligation to be terminated, or (b) pay to Factor, in immediately available funds, an amount equal to 105% of the maximum amount then available to be drawn under all Factor Guaranties not so returned and canceled to be held by Factor as cash collateral in a cash collateral account to be established by Factor on its books and records and in which Factor shall have a lien and security interest as security for the outstanding Factor Guaranty Obligations. All funds in the cash collateral account shall be held by Factor as a reserve to fund future payments on those Factor Guaranties and Factor Guaranty Obligations still outstanding. At such time as all Factor Guaranties have expired by their stated terms or have been returned and canceled, and all of the Factor Guaranty Obligations have been indefeasibly paid in full, any remaining balance in the cash collateral account shall be returned to Client. 12. This Supplement, which is subject to modification only in writing, is supplementary to and is to be considered as a part of the Agreement and shall take effect when accepted and signed by Factor. This Supplement shall be interpreted according to the laws of the State of California and shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Any notices, demands, consents, or other writings or communications permitted or required by this Agreement shall be given in the manner and to the address as set forth in the Agreement. 13. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, FACTOR AND CLIENT HEREBY WAIVE, IRREVOCABLY AND UNCONDITIONALLY, TRIAL BY JURY IN ANY ACTION BROUGHT ON, UNDER OR BY VIRTUE OF OR RELATING IN ANY WAY TO THE AGREEMENT OR THIS SUPPLEMENT OR ANY OF THE OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH, OR ANY CLAIM, DEFENSE, RIGHT OF SETOFF OR OTHER ACTION PERTAINING HERETO, OR TO ANY OF THE FOREGOING. 3 IN WITNESS WHEREOF, the parties hereto have duly executed this Supplement on the day and year first above written. UNZIPPED APPAREL LLC By: /s/ Hubert Guez Title: CEO Accepted in by Factor: GE CAPITAL COMMERCIAL SERVICES, INC. By:/s/ Michale Gardner Title: Sr. Vice President Date: February 13, 2003 SCHEDULE A TO FACTORING AGREEMENT GUARANTY/LETTER OF CREDIT SUPPLEMENT Schedule of Fees 1. An issuance fee for each Factor Guaranty issued from time to time by Factor under this Supplement equal to one-eighth percent (1/8%) of the undrawn face amount of such Factor Guaranty, (but in no event less than $100.00). The issuance fee for each Factor Guaranty shall be fully earned and payable upon issuance of such Factor Guaranty and shall not be subject to rebate or proration upon the termination of the Agreement for any reason. 2. A negotiation fee for each drawing made under a Factor Guaranty by the Beneficiary thereof equal to one-eighth percent (1/8%) (but in no event less than $100.00) of the amount of such drawing. The negotiation fee for each drawing shall be payable upon such drawing and shall not be subject to rebate or proration upon the termination of the Agreement for any reason. 3. An amendment fee of $100.00 for any changes requested by the Client to the existing facility; provided, however, if the amendment serves to increase the face amount of the Letter of Credit, then in such event, the amendment fee shall be the greater of $100.00 or one-eighth percent (1/8%) of the amount of any such increase. 4. A cancellation fee of $50.00 per cancellation of a letter of credit. 5. A telex fee of $15.00 per telex. 6. A courier fee of $15.00 per item couriered. 7. A fee of $75.00 per Air Release issued. Once paid, all such fee shall be non-refundable EX-10.4 6 cand_10qex104.txt INTERIM FACORING AGREEMENT Exhibit 10.4 GE CAPITAL COMMERCIAL SERVICES, INC. 505 N. Brand Boulevard, 7th Floor Glendale, California 91203 February 24 2003 Unzipped Apparel LLC 5804 E. Slauson Avenue Commerce, California 90040 Re: Factoring Agreement, entered into concurrently herewith, by and between Unzipped Apparel LLC, a Delaware limited liability company ("Client") and GE Capital Commercial Services, Inc. ("Factor") (the "Factoring Agreement") Ladies and Gentlemen: Reference is hereby made to the Factoring Agreement and any and all supplements and agreements entered into in connection therewith (collectively, the "Factoring Documents") pursuant to which, among other things, Factor has agreed to factor Client's accounts receivable (the "Factored Accounts") and make advances to Client against the purchase price of certain Factored Accounts (the "Advances"). The terms and the provisions of the Factoring Agreement are hereby incorporated by this reference and except as specifically provided herein all of the terms and provisions of the Factoring Agreement shall control the relationship of the parties. All initially capitalized terms used but not defined herein shall have the meanings attributed to same in the Factoring Agreement. Client's accounts receivable are presently being factored with The CIT Group/Commercial Services ("CIT"). Pursuant to the terms of the factoring agreement between Client and CIT the existing factoring relationship with CIT is scheduled to continue until September 30, 2003. As a result, no Accounts will be factored and no Advances will be made under the Factoring Agreement (i) until the Client's factoring relationship with CIT has terminated, (ii) the Client has provided Factor with a payoff letter/letter of indemnity from CIT, in form and substance acceptable to Factor in its sole and absolute discretion, and (iii) there does not then exist an Event of Default under the Factoring Agreement (collectively, the "Triggering Event"). During the interim period from the Effective Date through the Triggering Event, Factor may, in its sole discretion, from time to time at Client's request provide Client with advances against factor balances owing from CIT to Client (the "Due From Factor Advances") up to an aggregate principal amount outstanding at any one time equal to eighty-five percent (85%) of confirmed factor balances owing from CIT to Client. Factor has the right, at any time and from time to time, to adjust this advance rate, hold any reserves it deems necessary as security for the payment and performance of the Obligations, and to impose other limitations that it deems necessary on Client's ability to obtain Due From Factor Advances. In no event shall a Due From Factor Advance be made or (if applicable) a letter of credit be issued if such Due From Factor Advance or issuance would cause the sum of (a) outstanding Due From Factor Advances (as determined and calculated in Factor's sole discretion), plus (b) the aggregate undrawn amounts of all outstanding letters of credit, plus (c) the aggregate principal amount of Inventory Advances then outstanding under the Factoring Agreement - Inventory Supplement, between Factor and Client of even date herewith, at any time exceed $25,000,000. Due From Factor Advances may be made available by Factor as provided herein, provided that: (i) Factor has received satisfactory evidence of termination of the assignment by Client to Congress of all factor balances owing to Client by CIT, with the form and substance of same to be acceptable to Factor in its sole and absolute discretion; (ii) CIT has agreed to the assignment by Client to Factor of all factor balances pursuant to an assignment of factor balances agreement executed by and among Client, Factor and CIT, with the form and substance of same to be acceptable to Factor in its sole and absolute discretion; (iii) Client has not (1) obtained any loans or advances from CIT, (2) obtained CIT's guarantee of any amount due or to become due from Client to any third party, or (3) opened any letters of credit through CIT; (iv) Client is not factoring its accounts receivable with any other entity other than CIT; (v) no event of default has occurred under the factoring agreement between CIT and Client; (vi) no Event of Default has occurred under the Factoring Agreement; and (vii) Factor is in receipt of evidence of the amount of the factor balances owing from CIT to Client, with such evidence to be provided on an ongoing basis as requested by Factor, with the form and substance of same to be acceptable to Factor in its sole and absolute discretion. All Due From Factor Advances shall be made according the terms and subject to the conditions of the Factoring Agreement (including, without limitation, terms and conditions applicable to Advances such as interest calculations and repayment obligations) and for all purposes shall constitute "Obligations" under the Factoring Agreement secured by the Collateral. Client and Factor agree that the terms and provisions of the Factoring Documents which contemplate the factoring of accounts receivable and the payment of certain commissions and fees in connection with such factoring activities will be postponed until such time that the Triggering Event occurs, if ever. Assigned factor balances proceeds will be applied against Client's outstanding Obligations in such order and manner as determined by Factor in its sole and absolute discretion. Upon the occurrence of the Triggering Event, any outstanding Due From Factor Advances shall become outstanding Advances. Notwithstanding anything to the contrary contained in the foregoing, in the event that the Triggering Event has not occurred on or before September 30, 2003, Factor may, at its option, deem the non-occurrence of the Triggering Event an Event of Default under the Factoring Agreement entitling Factor to, among other things, terminate the Factoring Agreement. Upon the termination of the Factoring Agreement as a result of the failure of the Triggering Event to occur on or before September 30, 2003, all Due From Factor Advances, plus any and all accrued interest thereon shall be immediately due and payable, together with any and all early termination fees and other Obligations that became due and owing as a result of such termination, as more particularly described in the Factoring Agreement. In consideration of Factor's agreement to provide Due From Factor Advances, Client agrees to pay: (i) interest on such outstanding Due From Factor Advances at the interest rate applicable to outstanding Advances under the Factoring Agreement; (ii) a monthly accommodation fee of $10,000 per month, with such fee to be prorated for any partial months; and (iii) any other fees set forth in the Factoring Documents that do not specifically relate to the factoring of accounts receivable. Please acknowledge your agreement to the foregoing by executing where indicated below. Sincerely, GE CAPITAL COMMERCIAL SERVICES, INC. By: /s/ Michale Gardner ------------------------------------------------- Name: Michale Gardner ----------------------------------------------- Title: Sr. Vice President ---------------------------------------------- Agreed to and accepted: UNZIPPED APPAREL LLC By: /s/ Hubert Guez ------------------------------------------------- Name: Hubert Guez ----------------------------------------------- Title: CEO ---------------------------------------------- EX-99.1 7 cand_10qex991.txt CEO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Candie's, Inc. (the "Company") on Form 10-Q for the period ended April 30, 2003 (the "Report"), I, Neil Cole, as President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Neil Cole ------------------------------------- Neil Cole President and Chief Executive Officer (Principal Executive Officer) Dated: June 13, 2003 A signed original of this written statement required by Section 906 has been provided to Candie's Inc. and will be retained by Candies, Inc and furnished to the Securities and Exchange Commission upon request. EX-99.2 8 cand_10qex992.txt CFO CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Candie's, Inc. (the "Company") on Form 10-Q for the period ended April 30, 2003 (the "Report"), I, Richard Danderline, as Executive Vice President - Finance and Operations of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Richard Danderline ---------------------------------- Richard Danderline Executive Vice President - Finance and Operations, (Principal Financial Officer) Dated: June 13, 2003 A signed original of this written statement required by Section 906 has been provided to Candie's Inc. and will be retained by Candies, Inc and furnished to the Securities and Exchange Commission upon request. -----END PRIVACY-ENHANCED MESSAGE-----