United States Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended 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.
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(Exact name of registrant as specified in its charter)
Delaware 11-2481903
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Columbus Avenue
Valhalla, NY 10595
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(Address of principal executive offices) (Zip Code)
(914) 769-8600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
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)
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Total Stockholders' Equity............................................. 29,767 29,011
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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
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(000's omitted, except per
share data)
Net sales............................................ $ 40,863 $ 24,190
Licensing income...................................... 1,178 1,427
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Net revenue........................................... 42,041 25,617
Cost of goods sold.................................... 30,147 16,924
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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)
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873 27
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Income before income tax benefit...................... 726 926
Income tax benefit.................................... - (139)
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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
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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
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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
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(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