-----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, LYLbxiwLyVBcC9Hkj6graF5+0qc1ez63SaNXyQFRheo/d7OF/G1oCf50KWNM/Xki Hk+bMcjg0fJER1wf5waPKA== 0000857737-03-000060.txt : 20031215 0000857737-03-000060.hdr.sgml : 20031215 20031215170135 ACCESSION NUMBER: 0000857737-03-000060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031031 FILED AS OF DATE: 20031215 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: 031055159 BUSINESS ADDRESS: STREET 1: 215 W. 40TH STREET, 6TH FL. CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 212-730-0030 MAIL ADDRESS: STREET 1: 215 W. 40TH STREET, 6TH FL. CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 cand_10q103103.txt QUARTERLY REPORT AS OF 10/31/03 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 October 31, 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) 215 West 40th Street New York, NY 10018 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 730-0030 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes__ No. X Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.001 Par Value -- 25,776,039 shares as of December 9, 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 - October 31, 2003 and January 31, 2003.................. 3 Condensed Consolidated Statements of Operations- Three and Nine Months Ended October 31, 2003 and 2002................................................................ 4 Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended October 31, 2003......................................................................... 5 Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31, 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..................................... 17 Item 4. Controls and Procedures........................................................................ 17 Part II. Other Information.............................................................................. Item 1. Legal Proceedings.............................................................................. 18 Item 2. Changes in Securities and Use of Proceeds ..................................................... 18 Item 3. Defaults upon Senior Securities (Not Applicable)............................................... Item 4. Submission of Matters to a Vote of Security Holders ........................................... 18 Item 5. Other Information (Not Applicable)............................................................. Item 6. Exhibits and Reports on Form 8-K............................................................... 18 Signatures ........................................................................................... 19
2 Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited) Candie's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
October 31, January 31, 2003 2003 ---------- ---------- (Unaudited) Assets (000's omitted, except par value) Current Assets Cash............................................................... $ 1,044 $ 1,899 Accounts receivable, net........................................... 2,591 8,456 Due from factors, net.............................................. 11,293 17,966 Due from affiliate................................................. 170 230 Inventories........................................................ 9,427 19,016 Deferred income taxes.............................................. 3,109 3,109 Prepaid advertising and other...................................... 1,218 1,140 ---------- ---------- Total Current Assets................................................... 28,852 51,816 Property and equipment, at cost: Furniture, fixtures and equipment.................................. 2,659 9,157 Less: Accumulated depreciation and amortization.................... 2,051 6,514 ---------- ---------- 608 2,643 Other assets: Restricted cash.................................................... 2,900 2,900 Goodwill........................................................... 25,241 25,241 Intangibles, net.................................................... 16,744 17,818 Deferred financing costs, net...................................... 2,134 2,326 Deferred income taxes.............................................. 513 513 Other.............................................................. 183 180 ---------- ---------- 47,715 48,978 ---------- ---------- Total Assets........................................................... $ 77,175 $103,437 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks.................................... $ 10,451 $ 21,577 Accounts payable and accrued expenses.............................. 9,940 15,493 Due to affiliates.................................................. 2,179 6,203 Current portion of long-term debt............................... 2,671 2,648 ---------- ---------- Total Current Liabilities.............................................. 25,241 45,921 ---------- ---------- Long-term liabilities.................................................. 26,883 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 25,973 at October 31, 2003 and 25,190 issued at January 31, 2003........................................... 26 25 Additional paid-in capital......................................... 70,789 69,812 Retained earnings (deficit)........................................ (45,097) (40,159) Treasury stock - at cost - 198 shares at October 31, 2003 and January 31, 2003............................................... (667) (667) ---------- ---------- Total Stockholders' Equity............................................. 25,051 29,011 ---------- ---------- Total Liabilities and Stockholders' Equity............................. $ 77,175 $103,437 ========== ==========
See notes to condensed consolidated financial statements. 3 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended October 31, October 31, -------------------------------------- -------------------------------------- 2003 2002 2003 2002 (000's omitted, except per share data) Net sales........................................ $ 25,305 $ 41,792 $106,382 $114,200 Licensing income................................ 1,808 1,434 4,827 4,206 ------------- -------------- -------------- -------------- Net revenues.................................... 27,113 43,226 111,209 118,406 Cost of goods sold.............................. 21,189 31,839 84,322 84,331 ------------- -------------- -------------- -------------- Gross profit.................................... 5,924 11,387 26,887 34,075 Operating expenses: Selling, general and administrative expenses.... 6,251 10,703 25,668 28,326 Special charges................................. 764 207 3,648 300 ------------- -------------- -------------- -------------- 7,015 10,910 29,316 28,626 ------------- -------------- -------------- -------------- Operating (loss) income......................... (1,091) 477 (2,429) 5,449 Other expenses: Interest expense................................. 746 1,265 2,462 2,250 Equity income in joint venture................... - - - (250) ------------- -------------- -------------- -------------- 746 1,265 2,462 2,200 ------------- -------------- -------------- -------------- (Loss) income before income taxes................ (1,837) (788) (4,891) 3,449 Income tax expense (benefit)..................... 47 - 47 (139) ------------- -------------- -------------- -------------- Net (loss) income................................ $(1,884) $ (788) $(4,938) $ 3,588 ============= ============== ============== ============== (Loss) Earnings per common share: Basic....................................... $ (0.07) $ (0.03) $ (0.20) $ 0.15 ============= ============== ============== ============== Diluted..................................... $ (0.07) $ (0.03) $ (0.20) $ 0.14 ============= ============== ============== ============== Weighted average number of common shares outstanding: Basic....................................... 25,372 24,845 25,153 23,249 ============= ============== ============== ============== Diluted..................................... 25,372 24,845 25,153 25,591 ============= ============== ============== ==============
See notes to condensed consolidated financial statements. 4 Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Nine Months Ended October 31, 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 25,190 $ 25 $ -- $ 69,812 $(40,159) $ (667) $ 29,011 Shares granted to non-employee Board members......................... 52 -- -- 58 -- -- 58 Exercise of stock options................. 731 1 -- 826 -- -- 827 Re-grant of stock options................. -- -- -- 93 -- -- 93 Net loss.................................. -- -- -- -- (4,938) -- (4,938) -------------------------------------------------------------------------------- Balance at October 31, 2003 25,973 $ 26 $ -- $ 70,789 $(45,097) $ (667) $ 25,051 ================================================================================
See notes to condensed consolidated financial statements. 5 Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended -------------------------- October 31, October 31, 2003 2002 ----------- ---------- (000's omitted) OPERATING ACTIVITIES: Net cash provided by (used in) operating activities........................ $ 11,265 $(12,956) ----------- ---------- INVESTING ACTIVITIES: Purchases of property and equipment................................... (133) (1,418) ----------- ---------- Net cash used in investing activities...................................... (133) (1,418) ----------- ---------- FINANCING ACTIVITIES: Restricted cash.................................................... - (2,900) Payment of long-term debt.......................................... (1,599) - Deferred financing costs........................................... (89) - Proceeds from exercise of stock options............................ 827 1,113 Revolving notes payable - bank..................................... (11,126) 18,161 Capital lease reduction............................................... - (1,053) Purchase of treasury stock......................................... - (192) ----------- ---------- Net cash (used in) provided by financing activities........................ (11,987) 15,129 ----------- ---------- INCREASE (DECREASE) IN CASH................................................ (855) 755 Cash at beginning of period................................................ 1,899 636 ----------- ---------- Cash at end of period...................................................... $ 1,044 $ 1,391 =========== ========== Supplemental disclosure of cash flow information: Cash paid for interest................................................ $ 2,365 $ 1,850 =========== ========== 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) October 31, 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 and nine-month periods ended October 31, 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. 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 (loss) income if the fair value based method had been applied to all awards, as well as the resulting pro forma net (loss) income and (loss) 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 Nine Months Ended October 31, October 31, ------------------------- ----------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ----------- Net (loss) income - as reported $ (1,884) $ (788) (4,938) 3,588 Add: Stock-based employee compensation included in reported net income - - - - Deduct: Stock-based employee compensation determined under the fair value based Method (686) (325) (1,421) (915) ------------ ------------ ----------- ----------- Pro forma net (loss) income $ (2,570) $ (1,113) $ (6,359) $ 2,673 ============ ============ =========== =========== Basic (loss) earnings per share: As reported $ (0.07) $ (0.03) $ (0.20) $ 0.15 ============ ============ =========== =========== Pro forma $ (0.10) $ (0.04) $ (0.25) $ 0.11 ============ ============ =========== =========== Diluted (loss) earnings per share: As reported $ (0.07) $ (0.03) $ (0.20) $ 0.14 ============ ============ =========== =========== Pro forma $ (0.10) $ (0.04) $ (0.25) $ 0.10 ============ ============ =========== ===========
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"). 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 1.50% above the prime rate. At October 31, 2003, there were no borrowings outstanding under the Credit Facility. In August 2002, IP Holdings LLC, an indirect wholly-owned subsidiary of the Company, issued in a private placement $20 million of asset-backed notes 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. NOTE D (LOSS) EARNINGS PER SHARE Basic (loss) 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 (loss) earnings per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, warrants and convertible preferred stock. At October 31, 2003, 5.9 million potentially dilutive shares relating to stock options were not included in the computation of diluted EPS because to do so would have been antidilutive. The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
Three Months Ended October 31, Nine Months Ended October 31, ------------------------------ ----------------------------- 2003 2002 2003 2002 ------------------------------ ----------------------------- (000's omitted) Basic .......................................................... 25,372 24,845 25,153 23,249 Effect of assumed conversions of employee stock options......... - - - 1,840 Effect of assumed conversions of preferred stock to be issued... - - - 502 ------------------------------ ----------------------------- Diluted ........................................................ 25,372 24,845 25,153 25,591 ============================== =============================
NOTE E COMMITMENTS AND CONTINGENCIES 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. In addition, the Company previously moved for summary judgment with respect to another of the claims asserted by Redwood in the Amended Complaint. This motion has been denied by 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 connection with the closing of a certain retail location during the fiscal year ended January 31, 2003, certain litigation has been brought by the landlord pursuant to the Company's obligations on the lease. The Company has previously recorded approximately $217,000 for the above lease obligation representing its estimate of the amount it will pay to settle the future obligation. 8 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(R) label. The Company and Sweet each had a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the Company licensed the BONGO trademark to Unzipped for use in the design, manufacture and sale of certain designated apparel products. 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). Prior to the acquisition described 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. In connection with the acquisition, the Company filed and had declared effective on July 29, 2003 a registration statement with the SEC for the 3 million shares of the Company's common stock issued to Sweet. Since the registration statement was not declared effective on or before April 23, 2003, the Company was required to pay $82,500 to Sweet as a penalty. The Company recorded $82,500 expense for such penalty in the quarter ended April 30, 2003. Revolving Credit Agreement: 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. Borrowings under the new facility are secured by substantially all of the assets of Unzipped. In addition, Unzipped has agreed to subordinate all of its accounts payable to related parties to GECCS. Unzipped is also required to meet certain financial covenants including tangible net worth minimums and a fixed charge coverage ratio, as defined. 9 At October 31, 2003, total borrowings under the Unzipped Credit Facility were $10.5 million at an interest rate of 3.81%. 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(R) trademark. As consideration for the development of the products, Unzipped pays Azteca pursuant to a separate pricing schedule. 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. 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 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. 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. 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. The related party transactions are summarized as follows:
('000 omitted) Three Months Ended Nine Months Ended October October 31, 31, ------------------------- --------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- - Products purchased from Azteca $ 9,939 $17,600 $38,317 $ 31,700 - Allocated office space, design and production team 112 107 342 214 and support personnel expense from Azteca - Management fee (75) - 402 - - Expenses of distribution services per distribution 581 827 2,663 1,821 agreement with ADS
Unzipped occupies office space in a building rented by ADS and Commerce Clothing Company, LLC (Commerce), a related party to Azteca. Amounts due to related parties at October 31, 2003 and included in accounts payable and accrued expenses, consist of the following (Note - all amounts are non-interest bearing): (`000 omitted) Azteca $ 1,658 Sweet 402 ADS 119 ----------- $ 2,179 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 October 31, 2003. 10 (000's omitted) Footwear Apparel Consolidated ------------------------------------ For the fiscal quarter ended October 31, 2003 Total revenues $ 14,347 $ 12,766 $ 27,113 Segment (loss) income (719) (372) (1,091) Net interest expense 746 Loss before provision for income taxes $ (1,837) For the nine months ended October 31, 2003 Total revenues $ 57,592 $ 53,617 $111,209 Segment (loss) income (5,191) 2,762 (2,429) Net interest expense 2,462 Loss before provision for income taxes $ (4,891) Total assets as of October 31, 2003 $ 36,276 $ 40,899 $ 77,175 For the fiscal quarter ended October 31, 2002 Total revenues $ 24,459 $ 18,767 $ 43,226 Segment income (1,188) 1,665 477 Net interest expense 1,265 Income before provision for income taxes $ (788) For the nine months ended October 31, 2002 Total revenues $ 79,811 $ 38,595 $118,406 Segment income 1,883 3,566 5,449 Net interest expense 2,250 Income before provision for income taxes $ 3,449 Total assets as of October 31, 2002 $ 61,234 $ 45,832 $107,066 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 closing and the closing of operations related to the footwear wholesale business. NOTE I SPECIAL CHARGES During the quarter ended July 31, 2003, the Company entered into two footwear license agreements (See "Recent Developments" in Item 2) for its CANDIE'S AND BONGO brands. Sebsequently, the Company ceased shipping Bongo footwear products, has shipped a substantially reduced amount of Candie's footwear products, reduced overhead with the termination of employees, office consolidation and a reduction in operating activities related to footwear, and made a decision to close all of its retail stores ("the Transition"). The Company, in connection with the Footwear Licenses and due to the continuing retail environment, expects to close its 10 outlet stores by January 31, 2004. Any lease termination liabilities that may result from these closings will be recorded in the period(s) the stores are closed. During the three months and nine months ended October 31, 2003 the Company incurred expenses related to the Transition (Items A, B, D and E), defined below, and certain other expenses (Items C&F) classified as special charges. These expenses are outlined in the summary below: 11
Three Months Ended Nine Months Ended (000's omitted) October 31, October 31, ------------------------ ----------------------- 2003 2002 2003 2002 ----------- ------------ ----------- ----------- Write-off of computer equipment & software, $ - $ - $ 1,510 $ - leasehold improvements, furniture & fixtures, trade show booths and displays. (A) Store termination costs for stores closed to date. (B) 272 - 763 - Professional fees for the SEC investigation and litigation. (C) 87 78 519 93 Severance pay and other benefits for terminated employees. (D) 158 - 418 - Impairment loss and disposal of assets related to current and future store closings in Fiscal 2004. (E) - - 108 - Penalty payment to Sweet. (F) - - 83 - Accrued lease expense for the closed office space through the end of the lease. (G) 247 - 247 - ----------- ------------ ----------- ----------- $ 764 $ 78 $3,648 $ 93 =========== ============ =========== ===========
(A) Incurred in connection with the closing of the Valhalla headquarters and operations and systems supporting both wholesale and retail activities, Bongo footwear products no longer being shipped and reduced shipping of Candie's footwear products, the office consolidation in NYC and the overall reduction of operating activities, the Company disposed of or recognized impairments on assets related to these activities. (B) During the quarter and nine months ended October 31, 2003, the Company closed three and six retail concept stores, respectively, incurring leasehold termination charges with the landlords of these stores. At October 31, 2003, $669 had been paid and $94 accrued for these termination charges. (C) In connection with certain matters related to the SEC focused primarily on a former officer of the Company the Company incurred professional fees and other related costs in connection with the indemnification of the former officer and the testimony of certain former employees. (D) For the three and nine months ended October 31, 2003, in connection with the Transition, the Company terminated 37 and 68 employees, respectively, and incurred $158 and $418, respectively, in severance pay. As of October 31, 2003, the Company has $11 accrued for unpaid severances which will be paid by the year end. (E) In the second quarter of Fiscal 2004, the Company recorded $108 for the write-off of leasehold improvements, store fixtures and equipment for the 10 outlet stores which the Company will close prior to the year end. (F) See Note F of Notes to the Condensed Consolidated Financial Statements. (G) In the quarter ended October 31, 2003, the Company closed its office in Valhalla, New York, which was sublet by the Company to a third company through July 2005, the end of the lease. The Company estimates that the remaining future costs related to the Transition for lease terminations and severance pay will total approximately $985,000, which amount will be expensed in the period that the events occur. It is expected that the Transition will be completed by January 31, 2004. NOTE J RELATED PARTY TRANSACTIONS In addition to the disclosure of the related party transactions in connection with Unzipped , see Note F, the Company granted Kenneth Cole Productions, Inc. ("KCP") the exclusive worldwide license to design, manufacture, sell, distribute and market footwear under the BONGO brand. The CEO and Chairman of KCP is Kenneth Cole, who is the brother of Neil Cole, the CEO and President of the Company. In the three months and nine months ended October 31, 2003, the Company recorded licensing income from KCP of $233,000 and $473,000, respectively. 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. Recent Developments In May 2003, the Company entered into a license with Steven Madden, Ltd. ("Steve Madden") to design, manufacture, sell, distribute and market footwear under the CANDIE'S (R) brand, and with KCP to design, manufacture, sell, distribute and market footwear under the BONGO (R) brand (collectively referred to as the "Footwear Licenses"). In connection with the Transition, as a result of the Company's grant of the Footwear Licenses, the Company ceased shipping Bongo footwear product, shipped a substantially reduced amount of Candie's footwear product, reduced overhead with the termination of employees, office consolidation and a reduction in operating activities related to footwear, and closed certain retail stores ("the Transition"). As a result of the Transition, past and future operating results will not be comparable. When compared to the prior year quarter, the Transition has caused substantial reductions in net sales, net revenues, operating expenses and interest expense, along with increases in licensing income. The Company anticipates that that these reductions will continue through the remainder of Fiscal 2004. The Company also anticipates additional cash special charges relating to the Transition for retail store lease termination charges, employee severance, and the termination of certain contractual arrangements. As a result of the Footwear Licenses, the Company has also substantially reduced and will continue to reduce its borrowing needs from its Credit Facility and therefore its interest expense has and will continue to decrease significantly. Additionally, the Company's revenues have and will continue to decrease significantly, as it will no longer recognize revenues from the sale of its footwear. In addition, the Company has eliminated 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 closed its offices in Valhalla, New York and reduced its offices in New York City to approximately 5,000 square feet. The Company signed a sublease agreement with a third party for its Valhalla office space through the lease end date of July 2005. 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 and its licensees' products, the mix, pricing and presentation of the products offered and sold, 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 and its licensees' ability to predict accurately upcoming fashion trends among their respective customer bases, build and maintain brand awareness and to fulfill the product requirements of their respective retail channels within the shortened timeframe required. 13 Unanticipated changes in consumer fashion preferences, slowdowns in the United States economy, changes in the prices of supplies, consolidation of retail chains, among other factors noted herein, could adversely affect the Company's future operating results. Results of Operations For the three months ended October 31,2003 Revenues. Consolidated net revenues decreased by $16.1 million to $27.1 million from $43.2 million in the comparable period of the prior year. The net revenue decrease resulted primarily from a $10.5 million decrease in net footwear sales resulting from the Transition (see "Recent Developments") and a decrease of $6.0 million in net sales by the Unzipped jeans wear business, to $12.8 million from $18.8 in the comparable period of the prior year. The decrease of net sales of Unzipped resulted from $5.1 million from unit sales decreases, $780,000 in lower unit sales prices and $117,000 of higher sales returns and allowances in the current year quarter. This decrease was partially offset by an increase of $374,000 in licensing income, to $1.8 million as compared to $1.4 million in the prior year quarter, primarily resulting from the Footwear Licenses, an increase of 26.1%. Gross Profit. Consolidated gross profit decreased by $5.5 million to $5.9 million as compared to $11.4 million in the prior year quarter. Gross profit on footwear sales decreased by $3.2 million to $4.4 million from $7.6 million in the prior year period. This gross profit decrease is primarily attributable to the net sales decrease resulting from the Transition as well as a lower gross profit percentage realized on the lower sales base, partially offset by the increase in licensing income from the Footwear Licenses. Unzipped recorded gross profit of $1.5 million compared to $3.8 million in the comparable prior year quarter, a decrease of $2.3 million. Consolidated gross profit margin decreased, as a percentage of net revenues, by 450 basis points to 21.8% as compared to 26.3% in the third quarter of the prior year. The total footwear gross profit margin percentage decreased by 50 basis points to 30.5% from 31.0% in the prior year quarter. Footwear gross margins (exclusive of licensing income) decreased 610 basis points to 20.5% as the Company, as a result of the Transition, experienced higher sales returns and allowances as a percentage of sales as well as lower margin sales on the remaining wholesale and retail inventory resulting from the Transition. This was partially offset by an increase in licensing income further benefited by licensing income increasing to 12.6% of total footwear net revenues as compared to 5.9% in the comparable prior year period. Gross profit margin in the Unzipped jeans wear business decreased, as a percentage of net revenues, by 820 basis points to 12.1% as compared to 20.3% in the comparable prior year quarter, primarily as a result of increased sales returns and allowances on a lower gross sales base. Operating Expenses. Consolidated operating expenses (before special charges) decreased by $4.4 million to $6.3 million from $10.7 million in the prior year quarter. Unzipped's operating expenses decreased by $231,000 to $1.9 million from $2.1 million in the prior year quarter, primarily from $156,000 of the variable costs associated with the decrease in sales as well as $75,000 due to a reduction in the accrual of a management fee based on Unzipped net income. Operating expenses in the footwear segment (before special charges) were $4.3 million, a decrease of $4.2 million compared to $8.5 million in the prior year quarter. The operating expense decrease resulted from $3.9 million cost reduction in wholesale footwear resulting from the Transition, partially offset by $314,000 of incremental costs associated with net new retail stores. Included in the $764,000 of special charges for the three months ended October 31, 2003 were $642,000 of charges related to the Transition and $122,000 of other special charges as compared to a total of $78,000 in the prior year quarter (see Note I of the Notes to the Condensed Consolidated Financial Statements). Interest Expense. Consolidated net interest expense decreased by $519,000 to $746,000 from $1,3 million in the prior year quarter. In the prior year quarter, $346,000 of interest expense resulted from an adjustment of interest payment associated with a litigation settlement. The remainder of the decrease resulted primarily from a decrease of $122,000 in net interest expense on Candie's revolving debt to $48,000 from $170,000 in the prior year quarter and a decrease of $62,000 in Unzipped revolving debt interest expense to $135,000 from $197,000 in the prior year quarter. Net interest expense decrease in Candie's and Unzipped resulted primarily from lower average outstanding borrowing as compared with the comparable prior year period. Income Tax Expense. A $47,000 provision for local income taxes was recorded for the current year quarter from the separate earnings of Unzipped. In the prior year quarter, no tax expense was recorded as the Company reported a consolidated loss before income taxes. Net (Loss) Income. The Company recorded a consolidated net loss of $1.9 million as compared to a consolidated net loss of $788,000 in the comparable quarter of prior year. 14 For the Nine Months ended October 31, 2003 In addition to the effects of the Transition as noted above in "Recent Developments", the comparability of the current year nine months consolidated results with the prior year nine month results is further impacted by the acquisition of Unzipped, with its results being consolidated beginning with the quarter ended July 31,2002. Accordingly, the results of the nine months ended October 31, 2002 include only six months of Unzipped operations, while the current year period includes a full nine months. Revenues. Consolidated net revenues decreased by $7.2 million to $111.2 million from $118.4 million in the comparable period of the prior year. The net revenue decrease resulted primarily from a $22.2 million decrease in footwear net sales resulting from the Transition (see "Recent Developments"), partially offset by a $15.0 million increase in Unzipped net sales, comprised of $17.2 million in the first quarter of Fiscal 2004 (there were no comparable Unzipped sales in the first quarter of Fiscal 2003) and a net $2.2 million net sales decrease in the second and third quarter of Fiscal 2004 from prior year comparable period. Licensing income increased by $621,000 to $4.8 million as compared to $4.2 million in the prior year nine month period. Comparable licensing income increased $1.0 million, as the prior year nine month 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. Consolidated gross profit decreased by $7.2 million to $26.9 million as compared to $34.1 million in the prior year nine month period. Gross profit on footwear sales decreased by $9.6 million to $16.6 million from $26.2 million in the prior year period. The gross profit decrease in footwear sales is primarily attributable to the net sales decrease resulting from the Transition as well as a lower gross profit percentage realized on the lower sales base, partially offset by the increase in licensing income from the Footwear Licenses. Unzipped gross profit increased by $2.5 million to $10.3 million as compared to $7.8 million in the prior year nine months, comprised of $3.3 million of gross profit in the first quarter of Fiscal 2004 (there were no comparable Unzipped gross profit in the first quarter of Fiscal 2003) and a net increase of $800,000 in Unzipped's gross profit in the second and third quarter from the prior year comparable period. Consolidated gross profit margin decreased, as a percentage of net revenues, by 460 basis points to 24.2% as compared to 28.8% in the nine months of the prior year. The footwear gross profit margin percentage decreased by 400 basis points to 28.9% from 32.9% in the prior year nine month period. Footwear gross margins (exclusive of licensing income) decreased 690 basis points from 29.2% to 22.3% as the Company, primarily as a result of the Transition, experienced higher sales returns and allowances as a percentage of sales as well as lower margin sales on the remaining wholesale and retail inventory. This was partially offset by an increase in licensing income further benefited by licensing income increasing to 8.4% of total footwear net revenues as compared to 5.3% in the comparable prior year period. Gross profit margin in the Unzipped's jeans wear business decreased, as a percentage of net revenues, by 100 basis points to 19.2% as compared to 20.2% in the comparable prior year nine month period. Operating Expenses. Consolidated operating expenses (before special charges) decreased by $2.7 million to $25.6 million from $28.3 million in the prior year nine month period. The operating expense decrease resulted primarily from a decrease of $5.9 million from $24.1 million to $18.2 million in footwear operating expense primarily due to the Transition, partially offset by an increase of $3.3 million from $4.2 million to $7.5 million in Unzipped's operating expenses as compared in the prior year nine month period. The operating expense decrease of $5.9 million in footwear operation resulted from $6.6 million in cost reduction in footwear segment resulting primarily from the Transition, partially offset by $714,000 of incremental costs associated with net new retail stores. The $3.3 million increase in Unzipped operating expense primarily resulted from $2.5 million in the first quarter of Fiscal 2004 (there were no comparable operating expenses in the first quarter of Fiscal 2003) and a net increase of $800,000 in the second and third quarter of Fiscal 2004 from the prior year comparable period. Included in the $3.6 million of special charges for the nine months ended October 31, 2003 were $3.0 million of charges related to the Transition and $637,000 of other special charges as compared to a total of $300,000 in the prior year nine month period (see Note I of the Notes to the Condensed Consolidated Financial Statements). Net Interest Expense. Consolidated net interest expense increased by $212,000 to $2.5 million from $2.3 million in the prior year nine month period. Interest expense resulted from the 8% senior subordinated note issued in the Unzipped Acquisition (see Note F of the Notes to the Condensed Consolidated Financial Statements) increased by $159,000 to $559,000 in the nine month period of Fiscal 2004 from $400,000 in the prior year nine month period (there was no comparable interest expense in the first quarter of Fiscal 2003). Interest expense associated with the asset backed notes issued by a subsidiary of the Company (see Note C of the Notes to the Condensed Consolidated Financial Statements) increased by $756,000 to $1.1 million in the nine month period of Fiscal 2004 from $352,000 in prior year nine month period (there was no comparable interest expense in the first and second quarter of Fiscal 2003). Interest on Unzipped's revolving debt increased by $65,000 to $535,000 from $470,000 in the prior year 15 nine month period, which included $211,000 in the first quarter of Fiscal 2004 (there was no comparable Unzipped interest expense in the first quarter of Fiscal 2003), partially offset by total decrease of $146,000 in Unzipped's interest expenses in the second and third quarter of Fiscal 2004 from the prior year comparable period. Offsetting these increases was a decrease of $422,000 interest expense in the footwear revolving debt to $260,000 from $682,000 in the prior year nine month period, primarily resulted from the Transition. In the prior year third quarter, $346,000 of interest expense resulted from an adjustment of interest payment associated with a litigation settlement. The decreases in the Company's comparable revolving debt interest expenses resulted from lower average interest rates and lower average outstanding borrowing as compared with the comparable prior year period. Equity Income in Joint Venture. During the quarter ended April 30, 2002, the Company reduced the remaining $250,000 liability in connection with the acquisition of Unzipped. See Note E of Notes to Condensed Consolidated Financial Statements. Income Tax Expense (Benefit). A $47,000 provision for local income taxes was recorded in the current year third quarter from the separate earnings of Unzipped. For the prior year nine month period, no tax expense was reported due to a reduction in the valuation reserve, which offset the income tax provision. In addition, 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 (Loss) Income. The Company recorded a consolidated net loss of $4.9 million as compared to a consolidated net income of $3.6 million in the comparable nine month period of the prior year. Liquidity and Capital Resources Working Capital. At October 31, 2003, the current ratio of assets to liabilities was 1.14 to 1 as compared to 1.25 to 1 at October 31, 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 provided by operating activities totaled $11.3 million, compared to cash used of $13.0 million in the prior year nine months period. The increase in cash provided by operating activities resulted primarily from reduced working capital requirements in the footwear and retail business' primarily due to lower cash requirements for inventory purchases and factored receivables due to the Transition. In addition, the Company had non-cash adjustments to income, including a $1.6 million write-off and disposal of assets used in operating activities prior to the Transition and $2.1 million of depreciation and amortization. The factored receivables and inventories in the footwear and retail businesses decreased by $9.4 million and $9.3 million, respectively, at October 31, 2003 when compared to October 31, 2002. Capital Expenditures. Capital expenditures for the nine months ended October 31, 2003 was $133,000, compared to $1.4 million for the nine months ended October 31, 2002. The Company does not anticipate any material additional capital expenditures for the reminder of Fiscal 2004. Current Revolving Credit Facilities. On January 23, 2002, the Company entered into a three-year $20 million credit facility with CIT. 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. As of October 31, 2003, there were no borrowings outstanding under the Company's Credit Facility. On February 25, 2003 Unzipped entered into a two-year $25 million credit facility with GECCS. 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. 16 At October 31, 2003, borrowings under the Unzipped Credit Facility totaled $10.5 million and availability under the formula was $2.6 million. 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 $859,000. 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. Other 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 corresponding interest expense 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 variable rate credit facilities, the Company is exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of October 31, 2003 that are sensitive to changes in interest rates. The Unzipped Credit Facility had an interest rate of 3.81% for the three month period ended October 31, 2003 $10.5 million Item 4. Controls and Procedures An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures as of the end of the quarter ended October 31, 2003. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, during the quarter ended October 31, 2003 there were 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. 17 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 October 31, 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 730,000 shares of its common stock at the price of ranging from $1.72 to $1.85 per share (an average of $1.75 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 4. Submission of Matters to a Vote of Security-Holders. At the Company's Annual Meeting of Stockholders held on August 13, 2003, the stockholders voted to elect the five individuals named below to serve as Directors of the Company and to ratify the appointment of BDO Seidman, LLP as the Company's independent auditors for the fiscal year ending January 31, 2004. Messrs. Neil Cole, Barry Emanuel, Steven Mendelow, Ann Iverson and Hubert Guez were elected to serve as members of the Company's Board of Directors for the ensuing year and until the election and qualification of their successors. The votes cast by stockholders with respect to the election of Directors were as follows: Votes Cast Votes Director "For" "Withheld" -------- -------------- ---------- Neil Cole 20,270,656 194,037 Barry Emanuel 20,284,895 179,798 Steven Mendelow 20,286,378 178,315 Ann Iverson 20,286,662 178,031 Hubert Guez 19,187,999 1,276,694 The ratification of the appointment of BDO Seidman, LLP as the Company's independent auditors for the fiscal year ending January 31, 2004 was approved by the stockholders. The votes cast by stockholders with respect to the ratification of the appointment of BDO Seidman, LLP as the Company's independent auditors for the fiscal year ending January 31, 2004 were as follows: Votes Cast "For" Votes Cast "Against" Votes "Abstaining" ---------------- -------------------- ------------------ 20,409,039 32,469 23,185 Item 6. Exhibits and Reports on Form 8-K A. Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 B. Reports on Form 8-K - None 18 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. ---------------------------------- (Registrant) Date December 15, 2003 /s/ Neil Cole --------------------- ---------------------------------- Neil Cole Chairman of the Board, President And Chief Executive Officer (on Behalf of the Registrant) Date December 15, 2003 /s/ Richard Danderline --------------------- ---------------------------------- Richard Danderline Executive Vice President - Finance and Operations Principal Financial and Accounting Officer 19 EX-31.1 3 cand_ex311q3.txt CEO 302 CERTIFICATION Exhibit 31.1 CANDIE'S, INC. CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Neil Cole, President and Chief Executive Officer of Candie's , Inc, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended October 31, 2003 of Candie's, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 15, 2003 /s/Neil Cole ----------------------- Neil Cole President and Chief Executive Officer EX-31.2 4 cand_ex312q3.txt CFO 302 CERTIFICATION Exhibit 31.2 CANDIE'S, INC. CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard Danderline, Executive Vice President - Finance and Operations of Candie's , Inc, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended October 31, 2003 of Candie's, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 15, 2003 /s/ Richard Danderline ----------------------- Richard Danderline Executive Vice President - Finance and Operations (Principal Financial Officer) EX-32.1 5 cand_ex321q3.txt CEO 906 CERTIFICATION Exhibit 32.1 CANDIE'S, INC. 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 ending October 31, 2003 (the "Report"), I, Neil Cole, 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 to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) 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 result of operations of the Company. /s/ Neil Cole - ------------------------------------- Neil Cole President and Chief Executive Officer December 15, 2003 EX-32.2 6 cand_ex322q3.txt CFO 906 CERTIFICATION Exhibit 32.2 CANDIE'S, INC. 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 ending October 31, 2003 (the "Report"), I, Richard Danderline, 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 to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) 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 result of operations of the Company. /s/ Richard Danderline - ------------------------------------- Richard Danderline Executive Vice President - Finance and Operations (Principal Financial Officer) December 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----