-----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, ST9eWQigKgZdEt98aHhCvzG4JwQcr5CVciStHeADVvm49XW7S8Np1dmW43pMTM4U sPoTjylEuUgz905oExsLzg== 0000857737-02-000042.txt : 20021213 0000857737-02-000042.hdr.sgml : 20021213 20021213155814 ACCESSION NUMBER: 0000857737-02-000042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20021213 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: 02857165 BUSINESS ADDRESS: STREET 1: 400 COLUMBUS AVE. CITY: VALHALLA STATE: NY ZIP: 10595 BUSINESS PHONE: 9147698600 MAIL ADDRESS: STREET 1: 400 COLUMBUS AVE. CITY: VALHALLA STATE: NY ZIP: 10595 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 cand_10q103102.txt 10Q FOR CANDIE'S INC U.S. Securities and Exchange Commission Washington, D.C. 20549 ------------------------------------ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended October 31, 2002 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ________ to ________ Commission file number 0-10593 CANDIE'S, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2481903 - ---------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Columbus Avenue Valhalla, NY 10595 - ---------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) (914) 769-8600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No .. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes__ No X . Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.001 Par Value -- 24,961,469 shares as of November 26, 2002 - - INDEX FORM 10-Q CANDIE'S, INC. and SUBSIDIARIES
Page No. ----------- Part I. Financial Information Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheets - October 31, 2002 and January 31, 2002...................... 2 Condensed Consolidated Statements of Operations - Three and Nine Months Ended October 31, 2002 and 2001.................................................................... 3 Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended October 31, 2002................................................................................... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31, 2002 and 2001...................................................................................... 5 Notes to Condensed Consolidated Financial Statements............................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................................... 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 15 Item 4. Controls and Procedures....................................................................... 15 Part II. Other Information Item 1. Legal Proceedings.............................................................................. 16 Item 2. Changes in Securities and Use of Proceeds ..................................................... 16 Item 3. Defaults upon Senior Securities (Not Applicable)............................................... Item 4. Submission of Matters to a Vote of Security Holders (Not Applicable)........................... Item 5. Other Information (Not Applicable)............................................................. Item 6. Exhibits and Reports on Form 8-K............................................................... 16 Signatures ........................................................................................... 18 Certifications of Principal Executive Officer and Principal Financial Officer........................... 19 Exhibit index........................................................................................... 21
-1- Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited) Candie's, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
October 31, January 31, 2002 2002 ---------- ---------- (Unaudited) Assets (000's omitted, except par value) Current Assets Cash............................................................... $ 1,391 $ 636 Accounts receivable, net........................................... 6,516 4,674 Due from factors, net.............................................. 20,660 5,791 Due from affiliate................................................. 322 565 Inventories........................................................ 18,713 8,368 Deferred income taxes.............................................. 1,881 1,881 Prepaid advertising and other...................................... 1,403 718 Other current assets............................................... 182 97 ---------- ---------- Total Current Assets................................................... 51,068 22,730 Property and equipment, at cost: Furniture, fixtures and equipment.................................. 11,357 9,618 Less: Accumulated depreciation and amortization.................... 5,755 4,470 ---------- ---------- 5,602 5,148 Other assets: Restricted cash.................................................... 2,900 - Goodwill, net...................................................... 23,687 1,868 Intangibles, net.................................................... 19,411 18,158 Deferred financing costs........................................... 2,391 741 Deferred income taxes.............................................. 1,741 1,741 Other.............................................................. 266 284 ---------- ---------- 50,396 22,792 ---------- ---------- Total Assets........................................................... $107,066 $ 50,670 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Revolving notes payable - banks.................................... $ 21,039 $ 12,366 Accounts payable and accrued expenses.............................. 17,468 12,672 Current portion of long-term debt............................... 2,435 1,225 Losses in excess of joint venture investment....................... - 250 ---------- ---------- Total Current Liabilities.............................................. 40,942 26,513 ---------- ---------- Other liabilities...................................................... 816 638 Long-term debt......................................................... 28,815 - Stockholders' Equity Preferred and common stock to be issued............................ - 2,000 Preferred stock, $.01 par value - shares authorized 5,000; none issued and outstanding................................... - - Common stock, $.001 par value - shares authorized 75,000; shares issued 24,987 at October 31, 2002 and 20,400 issued at January 31, 2002........................................... 24 20 Additional paid-in capital......................................... 69,762 58,188 Retained earnings (deficit)........................................ (32,626) (36,214) Treasury stock - at cost - 198 shares at October 31, 2002 and 113 shares at January 31, 2002................................ (667) (475) ---------- ---------- Total Stockholders' Equity............................................. 36,493 23,519 ---------- ---------- Total Liabilities and Stockholders' Equity............................. $107,066 $ 50,670 ========== ========== See notes to condensed consolidated financial statements.
-2- Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended October 31, October 31, 2002 2001 2002 2001 ------------ ----------- ------------ ----------- (000's omitted, except per share data) Net sales............................................. $ 41,792 $ 25,325 $ 114,200 $ 78,547 Licensing income...................................... 1,434 1,411 4,206 3,929 ------------ ----------- ------------ ----------- Net revenues.......................................... 43,226 26,736 118,406 82,476 Cost of goods sold.................................... 31,839 18,277 84,331 56,577 ------------ ----------- ------------ ----------- Gross profit.......................................... 11,387 8,459 34,075 25,899 Operating expenses: Selling, general and administrative expenses.......... 10,703 7,714 28,326 22,923 Special charges....................................... 207 120 300 363 ------------ ----------- ------------ ----------- 10,910 7,834 28,626 23,286 ------------ ----------- ------------ ----------- Operating income...................................... 477 625 5,449 2,613 Other expenses: Interest expenses..................................... 1,265 328 2,250 949 Equity income in joint venture........................ - - (250) - ------------ ----------- ------------ ----------- 1,265 328 2,000 949 ------------ ----------- ------------ ----------- Income (loss) before income taxes..................... (788) 297 3,449 1,664 Income tax benefit.................................... - - (139) - ------------ ----------- ------------ ----------- Net income (loss)..................................... $ (788) $ 297 $ 3,588 $ 1,664 ============ =========== ============ =========== Earnings (loss) per common share: Basic............................................ $ (0.03) $ 0.02 $ 0.15 $ 0.09 ============ =========== ============ =========== Diluted.......................................... $ (0.03) $ 0.01 $ 0.14 $ 0.07 ============ =========== ============ =========== Weighted average number of common shares outstanding: Basic............................................ 24,845 19,407 23,249 19,237 ============ =========== ============ =========== Diluted.......................................... 24,845 22,681 25,591 22,497 ============ =========== ============ ===========
See notes to condensed consolidated financial statements. -3- Candie's, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Nine Months Ended October 31, 2002 (000's omitted)
Preferred & Common Additional Retained Common Stock Stock to be Paid-In Earnings Treasury Shares Amount Issued Capital (Deficit) Stock Total ---------------------------------------------------------------------------------- Balance at February 1, 2002 20,400 $ 20 $ 2,000 $ 58,188 $(36,214) $ (475) $ 23,519 Issuance of common stock to retirement plan 35 -- -- 54 -- -- 54 Exercise of stock options 844 1 -- 1,112 -- -- 1,113 Shares granted to board members 34 -- -- 90 -- -- 90 Options granted to non-employees -- -- -- 71 -- -- 71 Purchase of treasury shares -- -- -- -- -- (192) (192) Acquisition of Unzipped Apparel, LLC 3,000 3 -- 8,247 -- -- 8,250 Issuance of common stock to shareholders in connection with previous litigation 674 -- (2,000) 2,000 -- -- -- Net income -- -- -- -- 3,588 -- 3,588 ---------------------------------------------------------------------------------- Balance at October 31, 2002 24,987 $ 24 $ -- $ 69,762 $ (32,626) $ (667) $ 36,493 ==================================================================================
See notes to condensed consolidated financial statements. -4- Candie's, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended --------------------------- October 31, October 31, 2002 2001 --------------------------- (000's omitted) OPERATING ACTIVITIES: Net cash provided (used) in operating activities........................... $ (12,956) $ (348) --------------------------- INVESTING ACTIVITIES: Purchases of property and equipment................................... (1,418) (967) --------------------------- Net cash used in investing activities...................................... (1,418) (967) --------------------------- FINANCING ACTIVITIES: Restricted cash....................................................... (2,900) - Proceeds from exercise of stock options and warrants.................. 1,113 594 Purchase of treasury stock............................................ (192) (296) Capital lease payments................................................ (1,053) (663) Debt payable.......................................................... 18,161 2,186 --------------------------- Net cash provided by financing activities.................................. 15,129 1,821 --------------------------- INCREASE IN CASH........................................................... 755 506 Cash at beginning of period................................................ 636 366 --------------------------- Cash at end of period...................................................... $ 1,391 $ 872 =========================== Supplemental disclosure of cash flow information: Cash paid for interest................................................ $ 2,250 $ 950 =========================== Value of common shares and subordinated note issued to acquire Unzipped Apparel, LLC.................................. $ 19,250 $ - ===========================
See notes to condensed consolidated financial statements. -5- Candie's, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) October 31, 2002 NOTE A BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended October 31, 2002 are not necessarily indicative of the results that may be expected for a full fiscal year. Certain reclassifications have been made to conform prior year data with the current presentation. Warehousing and distribution costs of $405,000 for the three months ended October 31, 2001, and $1.7 million for the nine months ended October 31, 2001, have been included in SG&A expenses in the consolidated statements of income. The Company had previously included such expenses in cost of goods sold. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended January 31, 2002. NOTE B REVENUE RECOGNITION Wholesale revenues are recognized upon the shipment of products to the customers FOB shipping point. Allowances for chargebacks, returns and other charges are recorded at the sales date based on customer specific projections as well as historical rates of such allowances. Retail revenues are recognized at the "point of sale," which occur when merchandise is sold "over the counter" in retail stores. NOTE C FINANCING AGREEMENTS On January 23, 2002, the Company entered into a three-year $20 million credit facility ("the Credit Facility") with CIT Commercial Services ("CIT") replacing its arrangement with Rosenthal & Rosenthal, Inc ("Rosenthal"). Borrowings under the Credit Facility are formula based and originally included a $5 million over advance provision with interest at 1.00% above the prime rate. In June 2002, the Company agreed to amend the Credit Facility to increase the over advance provision to $7 million and include certain retail inventory in the availability formula. Borrowings under the amended Credit Facility bear interest at 1.5% above the prime rate. Borrowings under the amended Credit Facility were $5.9 million at October 31, 2002 at an average interest rate of 5.88%. In August 2002 IP Holdings LLC, an indirect wholly owned subsidiary of the Company, issued in a private placement $20 million of asset-backed notes in a private placement secured by intellectual property assets (tradenames, trademarks and license payments thereon). The notes have a 7-year term with a fixed interest rate of 7.93% with quarterly principal and interest payments of approximately $859,000. The notes are subject to a liquidity reserve account of $2.9 million, funded by a deposit of a portion of the proceeds of the notes. The net proceeds of $16.2 million were used to reduce amounts due by the Company under its existing revolving credit facilities. Concurrently with this payment, the Credit Facility was further amended to eliminate the over advance provision along with certain changes in the availability formula. Costs incurred to obtain this financing totaled approximately $2.4 million which amount has been deferred and is being amortized over the life of the debt. See Note F of the Notes to the Condensed Consolidated Financial Statements regarding the financing agreement of Unzipped Apparel, LLC. At October 31, 2002, consolidated borrowings totaled $41.3 million at an average interest rate of 6.52% -6- NOTE D EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share includes no dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon the conversion of preferred stock to be issued and the exercise of stock options and warrants. The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
Three Months Ended October 31, Nine Months Ended October 31, ------------------------------ ----------------------------- 2002 2001 2002 2001 ------------------------------ ----------------------------- (000's omitted) Basic .......................................................... 24,845 19,407 23,249 19,237 Effect of assumed conversions of employee stock options......... - 1,850 1,840 1,443 Effect of assumed conversions of preferred stock to be issued... - 1,424 502 1,817 ------------------------------ ----------------------------- Diluted ........................................................ 24,845 22,681 25,591 22,497 ============================== =============================
NOTE E COMMITMENTS AND CONTINGENCIES On August 4, 1999, the staff of the SEC advised the Company that it had commenced a formal investigation into the actions of the Company and others in connection with, among other things, certain accounting issues concerning the restatement of certain of the Company's financial statements in prior years. In January 2002, Redwood Shoe Corp ("Redwood"), one of the Company's former buying agents and a supplier of footwear to the Company, filed a Complaint in the United States District Court for the Southern District of New York, alleging that the Company breached various contractual obligations to Redwood and seeking to recover damages in excess of $20 million and its litigation costs. The Company moved to dismiss the Amended Complaint based upon Redwood's failure to state a claim, and on November 13, 2002, the Magistrate issued an Opinion and Recommended Order dismissing Redwood's complaint to the extent Redwood sought to recover damages for breach of an oral contract for alleged guaranteed commissions. The parties are now awaiting a determination from the District Court whether the Recommended Order will be accepted. Thereafter, the Company will file an answer to the remaining counts of the Amended Complaint, as well as counterclaims against Redwood. On June 10, 2002 the Company was sued by Bank One Leasing Corp. in the Franklin County Court of Common Pleas (Ohio) to recover on an accelerated basis certain capitalized lease payments which otherwise would have been due in various installments through April. On October 7, 2002, the parties reached a settlement agreement, and the case was dismissed with prejudice. The Company paid Bank One Leasing Corp $1.1 million, of which $346,000 was in excess of the recorded amount of the debt. The $346,000 was recorded as interest expense. From time to time, the Company is also made a party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not have a material effect on the Company's financial position or future liquidity. Except as set forth above, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. NOTE F INVESTMENT IN JOINT VENTURE Equity Investment: On October 7, 1998, the Company formed Unzipped Apparel, LLC ("Unzipped") with joint venture partner Sweet Sportswear LLC ("Sweet"), the purpose of which was to market and distribute apparel under the BONGO label. The Company and Sweet each had a 50% interest in Unzipped. The Company was entitled to receive an advertising royalty from Unzipped equal to 3% of Unzipped's net sales. For the nine months ended October 31, 2002 and 2001, respectively, included in royalty income from Unzipped was $414,000 and $983,000. Acquisition: On April 23, 2002, the Company, through a subsidiary, acquired Sweet's 50% interest in Unzipped for $19.3 million payable in the form of 3 million shares of the Company's common stock valued at a price of $2.75 per share, totaling -7- $8.3 million, and an additional $11 million obligation to be evidenced by an 8% senior subordinated note with interest due quarterly and principal due in 2012. The original purchase agreement indicated that $11 million would be issued as redeemable preferred stock and at July 31, 2002, the $11 million was classified as redeemable preferred stock and $200,000 of dividends were recorded in the quarter. During the third quarter, the agreement was revised and the $11 million was retroactively changed to debt. Thus, the obligation was reclassified to debt at October 31, 2002 and the dividend charge from the second quarter was reclassified to interest expense. The debt is subordinated to the Company's Credit Facility (See Note C of the Notes to the Condensed Consolidated Financial Statements) and is collaterized by the shares of stock of a subsidiary which owns the royalty rights to the Company's trademarks. The acquisition was recorded as of April 30, 2002. Accordingly the operations of Unzipped have been included beginning May 1, 2002. The following table shows the value of assets and liabilities recorded for the purchase of Unzipped, adjusted to reflect changes in fair value of assets and liabilities and purchase accounting liabilities: (000's omitted) Accounts receivable, net $ 593 Due from factors and accounts receivable, net 7,509 Inventories 5,485 Prepaid advertising and other 61 Property and equipment 156 Other assets 11 ---------- Total assets acquired 13,815 Revolving notes payable - banks 10,512 Accounts payable and accrued expenses 8,167 ---------- Total liabilities assumed 18,679 ---------- Net assets acquired $ (4,864) ========== The excess purchase price over net assets acquired of $21.8 million has been recorded as goodwill and $2.4 million as other intangible assets. The Company is in the process of obtaining a third party valuation of certain intangible assets; thus the allocation of the purchases price is subject to change. The following unaudited pro-forma information presents a summary of the Company's consolidated results of operations as if the Unzipped acquisition and its related financing had occurred on February 1, 2001. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on February 1, 2001, or which may result in the future.
Three months ended Nine months ended October 31, October 31, 2002 2001 2002 2001 -------------------------------------------------------------------- (000's omitted, except per share) Total net revenues $43,226 $38,426 $131,099 $114,494 Operating income $477 $1,451 $5,515 $5,141 Net income (loss) ($788) $684 $2,933 $3,191 Basic earnings (loss) per common share ($0.03) $0.03 $0.13 $0.14 Diluted earnings (loss) per common share ($0.03) $0.03 $0.11 $0.13
Revolving Credit Agreement: Unzipped has a credit facility with Congress Financial Corporation ("Congress"). Under the facility as amended, Unzipped may borrow up to $15 million under revolving loans until September 30, 2002. The facility was further amended to extend its expiration on a month-to-month basis through January 31, 2003. Borrowings are limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the facility, Unzipped may also arrange for letters of credit. The borrowings bear interest at the lender's prime rate or at a rate of 2.25% per annum in excess of the Eurodollar rate. Borrowings under the facility are secured by substantially all of the assets of Unzipped and are guaranteed by a principal of Sweet who is also a director of the Company and his family trust, with such guarantee being limited to $500,000. The Company has agreed to cause these guarantees to be released on or before February 1, 2003. -8- At October 31, 2002, Unzipped's borrowings totaled $15.1 million under the revolving credit agreement. The facility requires Unzipped to be in compliance with certain financial and nonfinancial covenants. At January 31, 2002, Unzipped was required to have a minimum members' equity balance of $750,000. Unzipped obtained an amendment to the facility dated March 15, 2002, under which the minimum members' equity balance was waived for the period from November 1, 2001 through February 28, 2002. In consideration for the amendment, Azteca Production International, Inc.("Azteca"), a company that shares common ownership with Sweet, agreed to increase the amount of a subordinated loan that Azteca previously made to Unzipped from $3.5 million to $5 million. In connection with its acquisition of the remaining interest in Unzipped, the Company agreed that on or before February 1, 2003, it will pay any amount remaining due under the subordinated loan made to Unzipped by Azteca. Related Party Transactions: Unzipped has a supply agreement with Azteca for the development, manufacturing, and supply of certain products bearing the Bongo trademark for the exclusive use by Unzipped. As consideration for the development of the products, Unzipped pays Azteca pursuant to a separate pricing schedule. For the three and nine months ended October 31, 2002, Unzipped purchased $17.6 and $31.7 million of products from Azteca. The supply agreement was consummated upon Unzipped's formation and originally extended through January 31, 2003, and was amended and restated on substantially the same terms effective April 23, 2002 through January 31, 2005. Azteca also allocates expenses to Unzipped for Unzipped's use of a portion of Azteca's office space, design and production team and support personnel. For the three and nine months ended October 31, 2002, Unzipped incurred $106,962 and $213,924 of such allocated expenses. In connection with the acquisition, the Company has entered into a management agreement with Sweet for a term ending January 31, 2005, which provides for Sweet to manage the operations of Unzipped in return for a management fee based upon certain specified percentages of net income that Unzipped achieves during the three-year term. Unzipped has a distribution agreement with Apparel Distribution Services (ADS), an entity that shares common ownership with Sweet for a term ending January 31, 2005. The agreement provides for a per unit fee for warehousing and distribution functions and per unit fee for processing and invoicing orders. For the three and nine months ended October 31, 2002, Unzipped incurred $827,261 and $1.8 million for such services. The agreement also provides for reimbursement for certain operating costs incurred by ADS and charges for special handling fees at hourly rates approved by management. These rates can be adjusted annually by the parties to reflect changes in economic factors. The distribution agreement was consummated upon Unzipped's formation and was amended and restated on substantially the same terms effective April 23, 2002 through January 31, 2005. Unzipped occupies office space in a building rented by ADS and Commerce Clothing Company, LLC (Commerce), a related party to Azteca. Amounts due to related parties at October 31, 2002 and included in accounts payable and accrued expenses, consist of the following: Azteca $ (110,136) ADS 4,030,000 Commerce (86,000) ------------ $ 3,833,864 NOTE G SEGMENT INFORMATION The Company identifies operating segments based on, among other things, the way the Company's management organizes the components of its business for purposes of allocating resources and assessing performance. With the recent acquisition of Unzipped, the Company has redefined the reportable operating segments. The Company's operations are now comprised of two reportable segments: footwear and -9- apparel. Segment revenues are generated from the sale of footwear, apparel and accessories through wholesale channels and the Company's retail locations. The Company defines segment income as operating income before interest expense and income taxes. Summarized below are the Company's segment revenues, income (loss) and total assets by reportable segments for the fiscal quarter and nine months ended October 31, 2002.
(000's omitted) Footwear Apparel Elimination Consolidated --------------------------------------------------------------------- For the fiscal quarter ended October 31, 2002 Total revenues $ 24,551 $ 18,767 $ (92) $ 43,226 Segment income (loss) (1,188) 1,665 - 477 Net interest expense 1,265 ------------ Loss before income tax provision $ (788) ============ For the fiscal nine months ended October 31, 2002 Total revenues $ 79,924 $ 38,595 $ (113) $ 118,406 Segment income 1,883 3,566 - 5,449 Net interest expense 2,250 ------------ Income before income tax provision $ 3,449 ============ Total assets as of October 31, 2002 $ 84,905 $ 45,832 $(23,671) $ 107,066 =====================================================================
NOTE H RECENT ACCOUNTING STANDARDS In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," which changes the accounting for goodwill from an amortization method to an impairment-only approach. The amortization of goodwill totaled $36,000 and $107,000, respectively, in the quarter and nine months ended October 31, 2001. Under SFAS No. 142, beginning on February 1, 2002, amortization of goodwill ceased. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a business. SFAS No. 144 is effective for the fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted SFAS No. 144 as of February 1, 2002, and the adoption of the Statement did not have a significant impact on the Company's financial position and results of operations. In November 2001, the FASB Emerging Issues Task Force released Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor consideration to any purchasers of the vendor's products at any point along the distribution chain, regardless of whether the purchaser receiving the consideration is a direct customer of the vendor. The adoption, effective February 1, 2002, required the Company to reclassify cooperative advertising expenses from a deduction against revenues to a selling, general and administrative ("SG&A") expense. As a result, restated net sales, gross profit and SG&A expenses for the fiscal nine months ended October 31, 2002 increased by $477,000. The calculation of this reclassification for the prior year was deemed impractical but was expected to be immaterial. -10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this Form 10-Q are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the Company, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, but are not limited to, uncertainty regarding continued market acceptance of current products and the ability to successfully develop and market new products, particularly in light of rapidly changing fashion trends, the impact of supply and manufacturing constraints or difficulties relating to the Company's dependence on foreign manufacturers, uncertainties relating to customer plans and commitments, competition, uncertainties relating to economic conditions in the markets in which the Company operates, the ability to hire and retain key personnel, the ability to obtain capital if required, the risks of litigation, the risks of uncertainty of trademark protection, the uncertainty of marketing and licensing trademarks and other risks detailed below and in the Company's other Securities and Exchange Commission filings. The words "believe", "expect", "anticipate", "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement, was made. Seasonal And Quarterly Fluctuations. The Company's quarterly results may fluctuate quarter to quarter as a result of holidays, weather, the timing of footwear shipments, market acceptance of the Company's products, the mix, pricing and presentation of the products offered and sold, the hiring and training of additional personnel, the timing of inventory write downs, fluctuations in the cost of materials, the timing of licensing payments and reporting, and other factors beyond the Company's control, such as general economic conditions and the action of competitors. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, the timing of the receipt of future revenues could be impacted by the recent trend among retailers in the Company's industry to order goods closer to a particular selling season than they have historically done so. The Company continues to seek to expand and diversify its product lines to help reduce the dependence on any particular product line and lessen the impact of the seasonal nature of its business. However, the success of the Company will still remain largely dependent on its ability to predict accurately upcoming fashion trends among its customer base, build and maintain brand awareness and to fulfill the product requirements of its retail channel within the shortened timeframe required. Unanticipated changes in consumer fashion preferences, slowdowns in the United States economy, changes in the prices of supplies, consolidation of retail chains, among other factors noted herein, could adversely affect the Company's future operating results. Results of Operations General As of May 1, 2002, the operating results of Unzipped, the Company's Bongo jeanswear business, have been consolidated. For the three months ended October 31, 2002 Revenues. Net revenues increased by $16.5 million to $43.2 million from $26.7 million in the comparable period of the prior year. The net revenue increase resulted primarily from the sales of $18.7 million by Unzipped, partially offset by a decrease of $2.1 million to $24.6 million from $26.7 million in footwear in the comparable period of the prior year. The net revenue decrease in footwear resulted primarily from decreases in sales in wholesale footwear of $474,000 and the Company's private label men's division of $2.3 million. These decreases were partially offset by $527,000 of retail store sales increases. The private label men's division sales decrease resulted primarily from significantly reduced sales to K-Mart, which is retrenching as a result of its bankruptcy filing and associated store closings. Retail store sales increased to $2.7 million, as compared to $2.2 million in the third quarter of the prior year. The retail sales increase resulted from the sales of $1.2 million in nine new stores, which was partially offset by decreases of $197,000 in comparable store sales and $430,000 from one store that has been sold to a licensee and one under performing store that has been closed. Comparable licensing income increased $380,000, as the prior year period licensing income included $357,000 of royalties from Unzipped, which royalty payment ceased with the Company's acquisition of the remaining interest in Unzipped on April 23, 2002. -11- Gross Profit. Gross profit increased by $2.9 million to $11.4 million as compared to $8.5 million in the prior year quarter. The gross profit increase of $3.7 million is attributable to Unzipped, partially offset by a decrease of $882,000 to $7.6 million from $8.5 million in footwear in the comparable period of the prior year. Gross profit margin decreased, as a percentage of net revenues, by 5.3% to 26.3% as compared to 31.6% in the third quarter of the prior year. The decrease in gross profit margin percentage is primarily attributable to Unzipped, which had gross margins of 20.3% for apparel sales in the current year quarter. Gross profit margin in footwear slightly decreased, as a percentage of net revenues, by 0.7% to 30.9% as compared to 31.6% in the comparable prior year quarter. The gross profit decrease in footwear is attributable $826,000 to wholesale footwear, of which $701,000 resulted from lower margins and $125,000 from lower sales, and $205,000 to the Company's private label men's division, partially offset by gross profit increases of $126,000 in retail stores and $23,000 in licensing income. Operating Expenses and Special Charges. Operating expenses and special charges increased by $3.1 million to $10.9 million from $7.8 million in the prior year quarter. $2.1 million of this increase resulted from the operations of Unzipped. Operating expenses in footwear increased by $700,000 to $8.4 million from $7.7 million in the prior year quarter. The operating expense increase in footwear resulted primarily from $720,000 of incremental costs associated with the opening of new retail stores and $242,000 of selling, general and administrative expenses increases in wholesale footwear, partially offset by $50,000 of operating expense decrease in the comparable stores and $212,000 of operating expense savings in the two discontinued retail stores. Included in special charges for the three months ended October 31, 2002 were $145,000 of employee severance payments. Net Interest Expense. Net interest expense increased by $937,000 to $1.3 million from $328,000 in the prior year quarter. Included in the interest expenses were $197,000 from the operations of Unzipped, and $200,000 from the 8% senior subordinated note issued in the Unzipped acquisition. See Note F of the Notes to the Condensed Consolidated Financial Statements. Interest expense in the current fiscal quarter associated with the asset backed notes issued by a subsidiary of the Company was $352,000, see Note C of the Notes to the Condensed Consolidated Financial Statements. $346,000 of interest expenses was an adjustment of interest payment associated with a $3.5 million master lease and loan agreement with Bank One Leasing Corp. in connection with a litigation settlement, see Note E of the Notes to the Condensed Consolidated Financial Statements. Net interest expense in footwear decreased by $127,000 to $170,000 from $297,000, excluding $31,000 interest expense paid under the above master lease agreement in the prior year quarter. The net interest expense decrease in footwear resulted from lower average interest rates and lower average outstanding borrowing as compared with the comparable prior year period. Net loss. As a result of the foregoing, the Company recorded a net loss of $788,000 in the quarter ended October 31, 2002, compared to net income of $297,000 in the comparable prior year quarter. For the nine months ended October 31, 2002 Revenues. Net revenues increased by $35.9 million to $118.4 million from $82.5 million in the comparable period of the prior year. The net revenue increase resulted primarily from $38.6 million sales in Unzipped partially offset by the net revenue decrease of $2.6 million in footwear to $79.9 million from $82.5 million in the comparable period of the prior year. The net revenue decrease in footwear resulted primarily from sales decreases of $1.2 million in the wholesale footwear and $3.0 million in the Company's private label men's division, partially offset by retail store increases of $1.3 million and a $278,000 increase in licensing income. The private label men's division sales decrease resulted primarily from significantly reduced sales to K-Mart, which is retrenching as a result of its bankruptcy filing and associated store closings. Retail store sales increased to $7.3 million, as compared to $5.9 million in the comparable nine months of the prior year. The retail sales increase resulted from $2.8 million of sales in nine new stores, partially offset by a decrease of $245,000 in comparable retail stores and $1.2 million from one store sold to a licensee and one under performing store that was closed. Licensing income increased to $4.2 million as compared to $3.9 million in the comparable prior year nine month period. Comparable licensing income increased $980,000, as the prior year second and third quarter licensing income included $346,000 and $357,000 of royalties from Unzipped, respectively, which royalty payment ceased with the acquisition of the remaining interest in Unzipped on April 23, 2002. Gross Profit. Gross profit increased by $8.2 million to $34.1 million as compared to $25.9 million in the prior year nine- month period. The gross profit increase of $7.7 million is attributable to Unzipped and $360,000 to footwear. -12- Gross profit margin decreased, as a percentage of net revenues, by 2.6% to 28.8% as compared to 31.4% for the nine months ended October 31, 2001. The decrease in gross profit margin percentage is primarily attributable to Unzipped, which had gross margins of 20.3% for apparel sales in the current year period, partially offset by improved margins in footwear. Gross profit in footwear increased by $360,000 to $26.3 million as compared to $25.9 million in the nine months of the prior year. Gross profit margin in footwear increased, as a percentage of net revenues, by 1.6% to 33.0% as compared to 31.4% for the nine months ended October 31, 2001. The increase in gross profit in footwear is primarily attributable $24,000 to improved margins in the wholesale footwear, $363,000 to retail stores, and $278,000 to licensing income, partially offset by gross profit decrease of $305,000 in the Company's private label men's division. Operating Expenses and Special Charges. Operating expenses and special charges increased by $5.3 million to $28.6 million from $23.3 million in the comparable nine month period of the prior year. $4.2 million of the increase resulted from the operations of Unzipped. Operating expenses in footwear increased by $1.2 million to $24.1 million from $22.9 million in the comparable nine month period of the prior year. Operating expense increase in footwear resulted primarily from $1.8 million of the incremental costs associated with the opening of new retail stores and $60,000 of operating expense increase in the comparable stores, partially offset by $151,000 of cost reduction in the wholesale footwear and $569,000 of operating expense savings in the two discontinued retail stores. Included in special charges for the nine months ended October 31, 2002 were $145,000 of employee severance payments. Net Interest Expense. Net interest expense increased by $1.3 million to $2.3 million from $949,000 in the prior year comparable nine month period. Included in the interest expenses were $470,000 from the operations of Unzipped, and $400,000 from the 8% senior subordinated note issued in the Unzipped acquisition. See Note F of the Notes to the Condensed Consolidated Financial Statements. Interest expense in the nine months ended October 31, 2002 associated with the asset backed notes issued by a subsidiary of the Company was $352,000, see Note C of the Notes to the Condensed Consolidated Financial Statements. $346,000 of interest expenses was an adjustment of interest payment associated with a $3.5 million master lease and loan agreement with Bank One Leasing Corp. in connection with a litigation settlement, see Note E of the Notes to the Condensed Consolidated Financial Statements. Net interest expense in footwear decreased by $161,000 to $682,000 from $843,000, excluding $106,000 interest expense paid to Bank One Leasing Corp. in the prior year nine month period. The net interest expense decrease in footwear resulted from lower average interest rates and lower average outstanding borrowing as compared with the comparable prior year period. Equity Income in Joint Venture. During the quarter ended April 30, 2002, the Company eliminated the remaining $250,000 liability in connection with the acquisition of Unzipped. See Note E of Notes to Condensed Consolidated Financial Statements. Income Tax Benefit. In the quarter ended April 30, 2002, the Company recorded $139,000 of income tax benefit resulting from the utilization of net operating losses to recover previously recorded minimum statutory taxes. No tax expense was recorded for the current and prior year quarter, due to a reduction in the valuation reserve, which offset the income tax provision. Net Income. As a result of the foregoing, the Company recorded net income of $3.6 million for the nine month ended October 31, 2002, compared to $1.7 million in the comparable nine months of the prior year. Liquidity and Capital Resources Working Capital. At October 31, 2002, the current ratio was 1.25 to 1, as compared to 1.08:1 a year ago. The Company continues to rely upon trade credit, revenues generated from operations, especially private label and licensing activity, as well as borrowings under its Credit Agreement to finance its operations. Net cash used in operating activities for the nine months ended October 31, 2002 totaled $13 million, compared to cash used of $348,000 for the nine months ended October 31, 2001. The increase in cash used in operating activities resulted primarily from an increase in factoring and trade receivables related to the acquisition of Unzipped. In anticipation of continued margin pressure resulting from a difficult retail environment, the Company implemented, in November 2002, a reduction in personnel which the Company anticipates will result in a $540,000 reduction in general and administrative expenses for the fourth quarter of the fiscal year ending January 31, 2003. -13- Capital Expenditures. Capital expenditures for the nine months ended October 31, 2002 were $1.4 million, compared to $967,000 for the comparable period in the prior year. The Company anticipates additional capital expenditures of approximately $100,000 in the fiscal year ending January 31, 2003. The Company believes that it will be able to fund these anticipated expenditures primarily with cash from borrowings under its Credit Facility. The Company is not planning on opening any additional retail Candie's concept stores within the next 12 months. The Company currently has a license and supply agreement with Casual Male Retail Group ("CMRG)", pursuant to which CMRG is obligated to open Candie's outlet stores. CMRG has advised the Company, however, that it does not intend to open any additional outlet stores and is seeking to terminate the agreement. There are currently 12 Candie's outlet stores that were opened and are currently being operated by CMRG. Under the agreement the Company has the right to take over these stores from CMRG. If the Company exercises its right and takes over the operation of the existing outlet stores it will require the Company to make additional capital expenditures. The Company does not anticipate any material adverse impact on its business, operations or financial condition if the CMRG agreement is terminated. Current Revolving Credit Facility. On January 23, 2002, the Company entered into a three-year $20 million Credit Facility with CIT replacing its arrangement with Rosenthal. Borrowings under the Credit Facility are formula based and include a $5 million over advance provision with interest at 1.00% above the prime rate. Subsequent to April 30, 2002, the Company agreed to amend the Credit Facility to increase the over advance provision to $7 million and include certain retail inventory in the availability formula. Borrowing under the amended Credit Facility bear interest at 1.5% above the prime rate. In August 2002, $16.2 million from the net proceeds from a private placement of asset backed notes by a subsidiary of the Company were used to reduce amounts due under this Credit Facility. Concurrently with this payment the Credit Facility was further amended to eliminate the over advance provision along with certain changes in the availability formula. See Note C of the Notes to the Condensed Consolidated Financial Statements. Unzipped has a credit facility with Congress Financial Corporation which expired on September 30, 2002, and was amended to extend its expiration on a month-to-month basis through January 31, 2003. Under the facility as amended, Unzipped may borrow up to $15 million under revolving loans. Borrowings are limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the facility, Unzipped may also arrange for letters of credit. The borrowings bear interest at the lender's prime rate or at a rate of 2.25% per annum in excess of the Eurodollar rate. The Company is presently negotiating with prospective lenders in an effort to obtain a new credit facility for Unzipped prior to the expiration of Unzipped's existing credit facility. In August 2002 IP Holdings LLC, an indirect wholly owned subsidiary of the Company, issued in a private placement $20 million of asset-backed notes secured by intellectual property assets (tradenames, trademarks and license payment thereon). The notes have a 7-year term with a fixed interest rate of 7.93% with quarterly principal and interest payments of approximately $859,000. The notes are subject to a liquidity reserve account of $2.9 million, funded by a deposit of a portion of the proceeds of the notes. The net proceeds of $16.2 million were used to reduce amounts due by the Company under its existing revolving credit facilities. See Note C of the Notes to the Condensed Consolidated Financial Statements. Other On April 23, 2002, the Company, through a subsidiary, acquired Sweet's 50% interest in Unzipped for $19.3 million payable in the form of 3 million shares of the Company's common stock at a price of $2.75 per share, totaling $8.3 million, and an additional $11 million obligation to be evidenced by an 8% senior subordinated note with interest due quarterly and principal due in 2012. The original purchase agreement indicated that $11 million would be issued as redeemable preferred stock and at July 31, 2002, the $11 million was classified as redeemable preferred stock and $200,000 of dividends were recorded in the quarter. During the third quarter, the agreement was revised and the $11 million was retroactively changed to debt. Thus, the obligation was reclassified to debt at October 31, 2002 and the dividend charge from the second quarter was reclassified to interest expense. The debt is subordinated to the Company's Credit Facility (See Note C of the Notes to the Condensed Consolidated Financial Statements) and is collaterized by the shares of stock of IP Holdings, LLC, which owns the royalty rights to the Company's trademarks. In connection with its acquisition of Unzipped (See Note F of the Notes to Condensed Consolidated Financial Statements), the Company has agreed that on or before February 1, 2003, it will pay Azteca for all receivables due from Unzipped for purchases of product that are more than 30 days past due and any amount remaining under the subordinated loan between Unzipped and Azteca. On October 31, 2002 these obligations totaled $3.8 million. In addition, borrowings under Unzipped existing credit facility are guaranteed by a principal of Sweet, who is also a director of the Company and his family trust, with such guarantee being limited to $500,000. The Company has agreed to cause these guarantees to be released on or before February 1, 2003. -14- Item 3. Quantitative and Qualitative Disclosures about Market Risk As a result of the Company's and Unzipped variable rate credit facilities, the Company is exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of October 31, 2002 that are sensitive to changes in interest rates. The Company's Credit Facility had an average interest rate of 5.88% for the three month period ended October 31, 2002 $5.9 million The Unzipped Credit Facility had an average interest rate of 6.75% for the three month period ended October 31, 2002 $15.1 million Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's chief executive officer and chief financial officer have concluded that the disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. -15- PART II. Other Information Item 1. Legal Proceedings On August 4, 1999, the staff of the SEC advised the Company that it had commenced a formal investigation into the actions of the Company and others in connection with, among other things, certain accounting issues concerning the restatement of certain of the Company's financial statements in prior years. In January 2002, Redwood, one of the Company's former buying agents and a supplier of footwear to the Company, filed a Complaint in the United States District Court for the Southern District of New York, alleging that the Company breached various contractual obligations to Redwood and seeking to recover damages in excess of $20 million and its litigation costs. The Company moved to dismiss the Amended Complaint based upon Redwood's failure to state a claim, and on November 13, 2002, the Magistrate issued an Opinion and Recommended Order dismissing Redwood's complaint to the extent Redwood sought to recover damages for breach of an oral contract for alleged guaranteed commissions. The parties are now awaiting a determination from the District Court whether the Recommended Order will be accepted. Thereafter, the Company will file an answer to the remaining counts of the Amended Complaint, as well as counterclaims against Redwood. On June 10, 2002 the Company was sued by Bank One Leasing Corp. in the Franklin County Court of Common Pleas (Ohio) to recover on an accelerated basis certain capitalized lease payments which otherwise would have been due in various installments through April 2002. On October 7, 2002, the parties reached a settlement agreement, and the case was dismissed with prejudice. From time to time, the Company is also made a party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these routine matters will not have a material effect on the Company's financial position or future liquidity. Except as set forth above, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. Item 2. Changes in Securities and Use of Proceeds During the quarter ended October 31, 2002, the Company issued a total of 674,309 shares of its common stock to the plaintiff class and its counsel which constituted the final payment made by the Company in connection with the settlement of the stockholder class action captioned Willow Creek Capital Partners, L.P. v Candie's, Inc. which had been commenced in the U.S. District Court for the Southern District of New York. This share issuance is in addition to the Company's prior issuance of 1,908,682 shares of its common stock made to the plaintiff class and its counsel in connection with the settlement. The issuance of the shares was made pursuant to a court approved settlement of the class action after appropriate fairness hearings. The shares were issued pursuant to the exemption from registration under Section 3(a)(10) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 3.1 - Amendment to Certificate of Incorporation dated June 24, 2002. Exhibit 10.1 - Equity Acquisition Agreement between Michael Caruso & Co., Inc., Candie's, Inc. and Sweet Sportswear, LLC dated as of April 23, 2002. Exhibit 10.2 - 8% Senior Subordinated Note due 2012 of Candie's Inc. payable to Sweet Sportswear, LLC. Exhibit 10.3 - Collateral Pledge Agreement dated October 18, 2002 between Candie's, Inc., Michael Caruso & Co., Inc. and Sweet Sportswear LLC. Exhibit 99.1 - Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -16- b. Reports on Form 8-K - During the quarter ended October 31, 2002 the Company filed a Current Report on Form 8-K under Item 5 of that form to report that on August 20, 2002 a subsidiary of the Company issued $20 million of asset backed securities in a private placement. -17- Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. -------------------------------- (Registrant) Date December 13, 2002 /s/ Neil Cole --------------------------- -------------------------------- Neil Cole Chairman of the Board, President And Chief Executive Officer (on Behalf of the Registrant) Date December 13, 2002 /s/ Richard Danderline --------------------------- -------------------------------- Richard Danderline Executive Vice President of Finance And Operations -18- Candie's, Inc. Certification of Principal Executive Officer I, Neil Cole, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Candie's, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 13, 2002 /s/ Neil Cole --------------------------- Neil Cole Chief Executive Officer (Principal Executive Officer) -19- Candie's, Inc. Certification of Principal Financial Officer I, Richard Danderline, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Candie's, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 13, 2002 /s/ Richard Danderline -------------------------------------------------- Richard Danderline Executive Vice President of Finance and Operations (Principal Financial Officer) -20- Candie's Inc and Subsidiaries FORM 10-Q EXHIBIT INDEX Exhibit No. Description - --------------- --------------- 3.1 Amendment to Certificate of Incorporation dated June 24, 2002. 10.1 Equity Acquisition Agreement between Michael Caruso & Co., Inc., Candie's, Inc. and Sweet Sportswear, LLC dated as of April 23, 2002. 10.2 8% Senior Subordinated Note due 2012 of Candie's Inc. payable to Sweet Sportswear, LLC. 10.3 Collateral Pledge Agreement dated October 18, 2002 between Candie's, Inc., Michael Caruso & Co., Inc. and Sweet Sportswear LLC. 99.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -21- EX-3.(I) ARTICLES OF 3 ex3_1.txt AMENDMENT TO CERTIFICATE OF INCORPORATION CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CANDIE'S, INC. --------------------------------------------------------------------- Adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware ---------------------------------------------------------------------- THE UNDERSIGNED, President of Candie's, Inc., a corporation existing under the laws of the State of Delaware (the "Corporation"), does hereby certify as follows: FIRST: That the Certificate of Incorporation of the Corporation has been amended as follows by striking out the first sentence of Article FOURTH as it now exists and inserting in lieu and instead thereof a new first sentence of Article FOURTH, reading as follows: "The total number of shares of stock which the Corporation shall have authority to issue is eighty million (80,000,000) shares, of which seventy-five million (75,000,000) shares shall be common stock, of the par value of $.001 per share, and five million (5,000,000) shares shall be preferred stock, of the par value of $.01 per share." SECOND: That such amendment has been duly adopted in accordance with the provisions of the General Corporation Law of the State of Delaware by the affirmative vote of the holders of a majority of the stock entitled to vote at a meeting of stockholders. IN WITNESS WHEREOF, the undersigned has executed this Certificate this 24th day of June, 2002. /s/ Neil Cole --------------------- Name: Neil Cole Title: President EX-10.1 MATERIAL CON 4 ex10_1.txt EQUITY ACQUISITION AGREEMENT EXECUTION COPY EQUITY ACQUISITION AGREEMENT between MICHAEL CARUSO & CO., INC. CANDIE'S, INC. and SWEET SPORTSWEAR, LLC Dated as of April 23, 2002 TABLE OF CONTENTS
Page ARTICLE I. PURCHASE AND SALE OF UNZIPPED INTEREST.................................................................1 SECTION 1.01 Sale of Interest..............................................................1 SECTION 1.02 Purchase Price................................................................2 SECTION 1.03 Closing.......................................................................2 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND MC..................................................3 SECTION 2.01 Organization, Qualifications and Corporate Power..............................3 SECTION 2.02 Authorization; No Conflict; NonContravention..................................3 SECTION 2.03 Consents and Approvals........................................................4 SECTION 2.04 Validity......................................................................4 SECTION 2.05 Authorized Capital Stock......................................................5 SECTION 2.06 SEC Reports...................................................................6 SECTION 2.07 Litigation; Compliance with Law...............................................7 SECTION 2.08 Taxes.........................................................................8 SECTION 2.09 Offering of the Shares........................................................8 SECTION 2.10 Registration Rights...........................................................9 ARTICLE III. REPRESENTATIONS and WARRANTIES OF SWEET..............................................................9 SECTION 3.01 Investment Representations....................................................9 SECTION 3.02 Organization; Authorization, Noncontravention................................10 SECTION 3.03 Validity.....................................................................10 SECTION 3.04 Consents and Approvals.......................................................10 SECTION 3.05 Unencumbered Title...........................................................10 SECTION 3.06 Financial Statements of Unzipped.............................................11 SECTION 3.07 Litigation; Compliance with Law..............................................11 SECTION 3.08 Taxes........................................................................12 SECTION 3.09 Acknowledgement Regarding Intellectual Property..............................12 ARTICLE IV. CONDITIONS TO CLOSING................................................................................12 SECTION 4.01 Conditions to Sweet's Obligations at the Closing.............................12 SECTION 4.02 Conditions to the Company's and MC's Obligations at the Closing..............14 ARTICLE V. COVENANTS OF THE COMPANY..............................................................................16 SECTION 5.01 Directors and Officers Insurance.............................................16 SECTION 5.02 Board Rights.................................................................16 SECTION 5.03 Expenses of Director.........................................................16 SECTION 5.04 Payment of Azteca Receivables/Debt; Release of Azteca........................16 SECTION 5.05 Compliance with Law; Corporate Existence.....................................17 ARTICLE VI. COVENANTS of SWEET...................................................................................17 SECTION 6.01 Restrictions on Transfer.....................................................17 SECTION 6.02 Voting Restriction...........................................................18 SECTION 6.03 Legends......................................................................18 -(i)- ARTICLE VII. SURVIVAL; INDEMNIFICATION...........................................................................19 SECTION 7.01 Survival of Representations and Warranties...................................19 SECTION 7.02 Indemnification by the Company...............................................19 SECTION 7.03 Indemnification by Sweet.....................................................19 SECTION 7.04 Procedure for Indemnification................................................20 SECTION 7.05 Assistance...................................................................21 SECTION 7.06 Other Remedies...............................................................21 ARTICLE VIII. RELEASE OF CERTAIN LIABILITIES.....................................................................21 SECTION 8.01 The Release..................................................................21 SECTION 8.02 Statutory Waiver.............................................................21 ARTICLE IX. Miscellaneous........................................................................................22 SECTION 9.01 Expenses.....................................................................22 SECTION 9.02 Brokerage....................................................................22 SECTION 9.03 Parties in Interest..........................................................22 SECTION 9.04 Specific Performance.........................................................22 SECTION 9.05 Further Assurances...........................................................22 SECTION 9.06 Submission to Jurisdiction; Consent to Service of Process....................23 SECTION 9.07 Notices......................................................................23 SECTION 9.08 Governing Law................................................................24 SECTION 9.09 Entire Agreement.............................................................24 SECTION 9.10 Attorney's Fees..............................................................25 SECTION 9.11 Counterparts.................................................................25 SECTION 9.12 Amendments and Waivers.......................................................25 SECTION 9.13 Successors and Assigns.......................................................25 SECTION 9.14 Severability.................................................................25 SECTION 9.15 Titles and Subtitles.........................................................25 SECTION 9.16 Adjustments for Stock Splits, Etc............................................25 SECTION 9.17 Construction.................................................................26 SECTION 9.18 Schedules....................................................................26 SECTION 9.19 Remedies.....................................................................26 SECTION 9.20 Certain Defined Terms........................................................26 SECTION 9.21 Incorporation of Exhibits, Annexes and Schedules.............................28
INDEX TO EXHIBITS EXHIBIT A Note EXHIBIT B Investor Rights Agreement EXHIBIT C Management Agreement EXHIBIT D Amended Supply Agreement EXHIBIT E Amended Distribution Agreement EXHIBIT F Collateral Pledge Agreement EXHIBIT G Sweet Proxy EXHIBIT H Opinions of Company's Counsel EXHIBIT I Indemnification Agreement EXHIBIT J Opinion of Sweet's Counsel EXHIBIT K Transfer Restriction Agreement for A Shares -(ii)- EXHIBIT L Transfer Restriction Agreement for B Shares EXHIBIT M Transferee Proxy EXHIBIT N Unzipped Financial Statements -(iii)- INDEX OF DEFINED TERMS Defined Term Location of Definition A Shares Section 1.02 Acceleration Recitals ADS Section 1.03 Agreement Preamble Affiliate Section 9.20 Affiliated Transferee Section 6.02 Amended Distribution Agreement Section 1.03 Amended Supply Agreement Section 1.03 Azteca Section 1.03 B Shares Section 1.02 Bylaws Section 2.02 Capital Contribution Agreement Section 3.09 Certificate of Designations Section 2.02 Charter Section 2.02 Claims Section 8.01 Closing Section 1.03 Closing Date Section 1.03 Collateral Pledge Agreement Section 1.03 Common Stock Section 1.02 Company Preamble Company Basket Amount Section 7.03(b) Company Lawsuit Section 9.06(a) Company's knowledge Section 9.20 Effective Date Preamble Encumbrances Section 3.05 Exchange Act Section 9.20 Financial Statements Section 9.20 GAAP Section 9.20 Indemnified Company Parties Section 7.03(a) Indemnified Company Parties' Losses Section 7.03(a) Indemnified Sweet Parties Section 7.02(a) Indemnified Sweet Parties' Losses Section 7.02(a) Interest Section 1.01 Investor Rights Agreement Section 1.03 IP Holdings Section 3.09 Lien Section 9.20 Management Agreement Section 1.03 Material Adverse Effect Section 9.20 MC Preamble Note Section 1.02 Operating Agreement Recitals -(iv)- Permits Section 9.20 Person Section 9.20 Permitted Transferee Section 6.01(b) Preferred Stock Section 2.05(a) Purchase Price Section 1.02 Purchase/Sell Obligation Recitals Recent SEC Reports Section 2.06(a) Schedules Section 9.18 SEC Section 2.06(a) SEC Reports Section 2.06(a) Securities Act Section 2.05(b) Shares Section 1.02 Subsidiary Section 9.20 Sweet Preamble Sweet Basket Amount Section 7.02(b) Sweet Interest Section 9.20 Sweet Lawsuit Section 9.06(a) Sweet Proxy Section 1.03 Sweet Representative Section 8.01 Sweet's knowledge Section 9.20 Term Sheet Recitals Transaction Documents Section 9.20 Transfer Restriction Agreement for A Shares Section 6.01(b) Transfer Restriction Agreement for B Shares Section 6.01(c) Transferee Proxy Section 6.02 Unzipped Recitals Unzipped Financial Statements Section 9.20 -(v)- This EQUITY ACQUISITION AGREEMENT (this "Agreement"), made as of April 23, 2002 (the "Effective Date"), is entered into by and between Candie's, Inc., a Delaware corporation (the "Company") and Michael Caruso & Co., Inc., a California corporation and a wholly-owned subsidiary of the Company ("MC"), on the one hand, and Sweet Sportswear, LLC, a California limited liability company ("Sweet"), on the other hand. Certain capitalized terms used herein are defined in Section 9.20 of this Agreement. RECITALS WHEREAS, pursuant to Section 12 of that certain Limited Liability Company Operating Agreement of Unzipped Apparel LLC, dated as of October 7, 1998 (as subsequently amended and/or modified prior to the Effective Date, the "Operating Agreement"), among Sweet, MC, and Unzipped Apparel LLC ("Unzipped"), the Company had an obligation to purchase and Sweet had an obligation to sell, all of Sweet's interest in Unzipped on January 31, 2003 (the "Purchase/Sell Obligation"); WHEREAS, the Company desired to accelerate the consummation of its purchase of Sweet's interest in Unzipped and to purchase such interest through the Company's wholly-owned subsidiary, MC; WHEREAS, Sweet desired to accept the acceleration of the Purchase/Sell Obligation subject to the modification of the terms set forth in Section 12 of the Operating Agreement relating to, among other things, the consideration payable to Sweet by the Company; and WHEREAS, on the Effective Date, the Company, Sweet and MC entered into that certain binding term sheet (the "Term Sheet") pursuant to which Sweet and the Company accelerated, effective as of the Effective Date, the consummation of each of Sweet's and the Company's obligations with respect to the Purchase/Sell Obligation, subject to certain modifications, including modifications to the terms of the consideration payable by the Company pursuant to the Purchase/Sell Obligation (the "Acceleration"); and WHEREAS, the parties desire to set forth in more detail and with more definitive language the terms and conditions relating to the Acceleration and to modify and supersede the terms and conditions of the parties' agreement set forth in the Term Sheet. NOW, THEREFORE, in consideration of the premises, representations, warranties and the mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE I. PURCHASE AND SALE OF UNZIPPED INTEREST SECTION 1.01 Sale of Interest. On the Effective Date, pursuant to the terms and conditions of the Term Sheet (as modified, clarified and superseded on the Closing Date, effective as of the Effective Date, by the terms and conditions of this Agreement), Sweet, in full satisfaction of Sweet's obligations with respect to the Purchase/Sell Obligation, sold and transferred -1- to MC, and MC, in full satisfaction of the Company's obligations with respect to the Purchase/Sell Obligation, purchased, all of Sweet's right, title and interest in the Sweet Interest in Unzipped in exchange for the Purchase Price described in Section 1.02 below. Effective as of the Effective Date, Sweet is no longer a party to the Operating Agreement and neither Sweet nor any of its designees are members or managers of Unzipped under the Operating Agreement or (other than as set forth in the Management Agreement, defined below) otherwise or have any rights thereunder, and neither Sweet nor the Company has any further obligations with respect to Section 12 thereof. SECTION 1.02 Purchase Price. The Company has issued to Sweet 3,000,000 shares (as such shares may be adjusted for any stock dividends, stock splits, combinations, mergers, reorganizations and similar events, the "Shares") of the Company's Common Stock, par value $.001 per share (the "Common Stock"), as of May 17, 2002, as evidenced by Stock Certificate No. 61-6035 for 2,000,000 Shares (the "A Shares") and Stock Certificate No. 61-6034 for 1,000,000 Shares (the "B Shares"), and, at the Closing (as defined in Section 1.03 hereof), the Company shall issue to Sweet, in lieu of the Preferred Stock referred to in the Term Sheet, an 8% Senior Subordinated Note of the Company due in 2012 (the "Note"), each in consideration for the Sweet Interest in Unzipped (the "Purchase Price"), on the terms and subject to the conditions of this Agreement. SECTION 1.03 Closing. The Closing shall take place at 10:00 a.m. at the offices of Blank Rome Tenzer Greenblatt LLP in New York City, on October 18, 2002, or at such other location, date and time as may be agreed upon among the parties hereto (such closing being called the "Closing" and such date and time being called the "Closing Date"). Except to the extent prohibited by applicable law, and regardless of the actual Closing Date, the Closing will be considered to have been effective at 12:01 a.m. on the Effective Date. At the Closing, effective as of the Effective Date, (a) the Company shall issue and deliver to Sweet (i) the Note substantially in the form attached hereto as Exhibit A, executed by the Company, (ii) the Investor Rights Agreement substantially in the form attached hereto as Exhibit B (the "Investor Rights Agreement"), executed on behalf of the Company, (iii) the Management Services Agreement substantially in the form attached hereto as Exhibit C (the "Management Agreement"), executed on behalf of Unzipped, the Company and MC, (iv) the Amended and Restated Supply Agreement between Unzipped and Azteca Production International, Inc. ("Azteca") substantially in the form attached hereto as Exhibit D (the "Amended Supply Agreement"), executed on behalf of Unzipped, (v) the Amended and Restated Distribution Agreement between Unzipped and Apparel Distribution Services, LLC ("ADS") in substantially the form attached hereto as Exhibit E (the "Amended Distribution Agreement"), executed on behalf of Unzipped, and (vi) the Collateral Pledge Agreement substantially in the form attached hereto as Exhibit F (the "Collateral Agreement"); and (b) Sweet shall deliver to the Company (i) an instrument of transfer and assignment or such other documentation as the Company deems reasonably necessary to evidence the transfer of the Sweet Interest in Unzipped to MC, (ii) the Investor Rights Agreement, executed on behalf of Sweet, (iii) the proxy substantially in the form attached hereto as Exhibit G (the "Sweet Proxy"), executed on behalf of Sweet, (iv) the Management Agreement, executed on behalf of Sweet, (v) the Amended Supply Agreement, executed on behalf of Azteca, and (vi) the Amended Distribution Agreement, executed on behalf of ADS. -2- ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND MC The Company, and, as to Sections 2.01(b), 2.02(b), 2.03(b) and 2.04(b) below, MC, each represents and warrants to Sweet (except not to the extent such representations and warranties extend to or encompass the operations of Unzipped, as to which no representation or warranty is made) that, as of the Effective Date (or in the event and in such instances as other dates are specifically set forth in this Article II, as of such other dates): SECTION 2.01 Organization, Qualifications and Corporate Power. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and, as of the Closing Date, is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification, except where the failure to be so licensed, qualified or in good standing would not cause or could not reasonably be expected to cause a Material Adverse Effect. As of May 17, 2002, the Company had the requisite corporate power and authority to issue and deliver the Shares to Sweet and, as of the Closing Date, the Company has the requisite corporate power and authority to own and hold its properties and to carry on its business as now conducted and to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents. (b) MC is a corporation duly organized, validly existing and in good standing under the laws of the State of California, is a wholly-owned subsidiary of the Company, and, as of the Closing Date, has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. SECTION 2.02 Authorization; No Conflict; NonContravention. (a) The Company's (i) execution and delivery of this Agreement and each of the other Transaction Documents and performance of its obligations hereunder and thereunder, and (ii) issuance and delivery of the Shares, have been duly authorized by all requisite corporate action (in the case of (i), as of the Closing Date, and in the case of (ii), as of May 17, 2002) and will not (A) result in a violation of the Company's Certificate of Incorporation (the "Charter") in effect as of, in the case of (i), the Closing Date, and in the case of (ii), May 17, 2002, or the Company's Bylaws, as amended (the "Bylaws"), (B) result in a violation of any applicable law, rule or regulation, or any material order, injunction, judgment or decree of any court or other agency of government, (C) conflict with, result in a breach of, or constitute (or, with due notice or lapse of time or both, would constitute) a default under, or give rise to any right of termination, acceleration or cancellation under, any material indenture, agreement, contract, license, arrangement, understanding, evidence of indebtedness, note, lease or other instrument to which the Company or any of its properties or assets is bound, or (D) result in the creation or imposition of any material Lien, charge, restriction, claim or encumbrance of any nature whatsoever upon the Company or any of the Company's material properties or assets. -3- (b) MC's (i) execution and delivery of this Agreement and performance of its obligations hereunder, and (ii) purchase of the Sweet Interest in Unzipped, have each been duly authorized by all requisite corporate action (in the case of (i) above, as of the Closing Date, and in the case of (ii) above, as of the Effective Date) and will not (A) result in a violation of MC's Certificate of Incorporation in effect as of, in the case of (i), the Closing Date, and in the case of (ii), the Effective Date, or MC's Bylaws, as amended, (B) result in a violation of any applicable law, rule or regulation, or any material order, injunction, judgment or decree of any court or other agency of government, (C) conflict with, result in a breach of, or constitute (or, with due notice or lapse of time or both, would constitute) a default under, or give rise to any right of termination, acceleration or cancellation under, any material indenture, agreement, contract, license, arrangement, understanding, evidence of indebtedness, note, lease or other instrument to which MC or any of its properties or assets is bound, or (D) result in the creation or imposition of any material Lien, charge, restriction, claim or encumbrance of any nature whatsoever upon MC or any of MC's material properties or assets. SECTION 2.03 Consents and Approvals. (a) Subject to the accuracy of Sweet's representations and warranties set forth in Section 3.01 below, no registration or filing with, or consent or approval of or other action by, any federal, state or other governmental agency or instrumentality or any third party is or will be necessary for the Company's valid execution, delivery and performance of this Agreement and the other Transaction Documents to which the Company is a party, or was necessary, as of May 17, 2002, for the Company's issuance and delivery of the Shares, other than those (i) which have previously been obtained or made or will be obtained on or prior to the Closing Date or (ii) which are required to be made under federal or state securities laws, which will be obtained or made, and will be effective within the time periods required by law. (b) Subject to the accuracy of Sweet's representations and warranties set forth in Section 3.01 below, no registration or filing with, or consent or approval of or other action by, any federal, state or other governmental agency or instrumentality or any third party is or will be necessary for MC's valid execution, delivery and performance of this Agreement and the other Transaction Documents to which MC is a party, other than those (i) which have previously been obtained or made or will be obtained on or prior to the Closing Date or (ii) which are required to be made under federal or state securities laws, which will be obtained or made, and will be effective within the time periods required by law. SECTION 2.04 Validity. (a) On the Closing Date, effective as of the Effective Date, this Agreement and each of the other Transaction Documents to which the Company is a party have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except to the extent limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application related to the enforcement of creditors' rights generally and (ii) general principles of equity, and except that enforcement of rights to indemnification and contribution contained therein and herein may be limited by applicable federal or state laws or the public policy underlying such laws, regardless of whether enforcement is considered in a proceeding in equity or at law. -4- (b) On the Closing Date, effective as of the Effective Date, this Agreement and each of the other Transaction Documents to which MC is a party, have been duly executed and delivered by MC and constitute the legal, valid and binding obligations of MC, enforceable against MC in accordance with their terms, except to the extent limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application related to the enforcement of creditors' rights generally and (ii) general principles of equity, and except that enforcement of rights to indemnification and contribution contained therein and herein may be limited by applicable federal or state laws or the public policy underlying such laws, regardless of whether enforcement is considered in a proceeding in equity or at law. SECTION 2.05 Authorized Capital Stock. (a) The Company's authorized capital stock consists of (i) 5,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), 18,000 of which have been designated Series A Junior Participating Preferred Stock, and (ii) 30,000,000 shares of Common Stock as of the Effective Date, and 75,000,000 shares of Common Stock as of the Closing Date. As of the Effective Date, there were approximately 20,916,139 shares of Common Stock (not including the Shares) validly issued and outstanding, fully paid and nonassessable and no shares of Preferred Stock were outstanding. In addition, as of the Effective Date, there were approximately 7,062,025 shares of Common Stock reserved for issuance upon exercise of outstanding options, warrants or other securities exchangeable for or convertible into Common Stock, 1,158,125 additional shares of Common Stock reserved for issuance upon exercise of options available for grant under the Company's stock option and incentive stock plans, and 84,500 shares of Common Stock held in the Company's treasury. As of the Closing Date, the designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of the Company's authorized capital stock are as set forth in the Charter in effect as of the Closing Date, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. Except as set forth in the Schedule 2.05 hereto, as of October 18, 2002: (i) no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company was authorized or outstanding and (ii) there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible or exchangeable securities, or other such rights or to distribute to holders of any of its outstanding equity securities any evidence of indebtedness or asset. Except as set forth in Schedule 2.05 hereto, the Company has no obligation (contingent or other) to purchase, repurchase, redeem, retire or otherwise acquire any of its outstanding equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. Other than as set forth herein, there are no voting trusts or agreements, stockholder's agreements, pledge agreements, buy sell agreements, rights of first refusal, preemptive rights or other similar rights or proxies relating to any of the Company's outstanding securities. All of the outstanding securities of the Company were issued in compliance with all applicable federal and state securities laws. -5- (b) The Shares have been duly authorized and, when issued, were duly and validly issued, fully paid and nonassessable shares of Common Stock. As of May 17, 2002, the Shares were free and clear of all Liens, charges, restrictions, claims and encumbrances, other than restrictions on transfer imposed by this Agreement, the Investor Rights Agreement, the Sweet Proxy, the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities laws. The issuance, sale or delivery of the Shares is not subject to any preemptive right of the Company's stockholders or to any right of first refusal or other right in favor of any Person. The consummation of the transactions contemplated hereunder will not result in any anti-dilution adjustment or other similar adjustment to any of the Company's outstanding securities. SECTION 2.06 SEC Reports. (a) As of each of the Effective Date and the Closing Date, the Company has filed all forms, reports and other documents required to be filed by the Company with the Securities and Exchange Commission (the "SEC") as of such dates ("SEC Reports"). As of their respective dates, all of such SEC Reports filed since January 1, 2002 (as such documents have since the time of their filing been amended or supplemented, the "Recent SEC Reports") complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the Recent SEC Reports (including all financial statements included therein and all exhibits and schedules thereto and documents incorporated by reference therein) contained (as of their respective filing dates) any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading, except for such statements, if any, as have been modified or superseded by any subsequent filings. The Financial Statements comply in all material respects with the rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), and fairly present the consolidated financial position of the Company and its Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. (b) As of the date hereof, none of the Company's Subsidiaries is a reporting company under the Exchange Act, and none is required to file any regular and periodic filings, notices, forms, reports, or statements with the United States Department of Justice, the Federal Trade Commission, the NASD or the SEC. (c) To the best of the Company's knowledge (as such term is defined in Section 9.20 below), except as disclosed in SEC Reports, or as contemplated by or disclosed in this Agreement, since January 31, 2002 (or, in the case of (vi) below, since October 18, 2002), the Company's business has been conducted in the ordinary course and there has not been any: (i) event, situation or occurrence that individually or in the aggregate has had a Material Adverse Effect on the Company; (ii) amendment to the Company's or any of the Company's Subsidiaries' charter, bylaws or other organizational documents; -6- (iii)sale, assignment, disposition, transfer, pledge, mortgage or lease of any material portion of the assets primarily used in the Company's business taken as a whole, other than to a wholly-owned subsidiary of the Company or in the ordinary course of business; (iv) incurrence of any material indebtedness, other than that arising in the ordinary course of business, consistent with past practice; (v) increase in the compensation or fringe benefits payable or to become payable to any executive officer of the Company, other than routine increases made in the ordinary course of business and consistent with past practice or as required by law or under any existing agreements heretofore disclosed to Sweet; (vi) amendment, alteration or modification in the terms of any currently outstanding options, warrants or other rights to purchase any capital stock or equity interest in the Company or any securities convertible into or exchangeable for such capital stock or equity interest, including without limitation any reduction in the exercise or conversion price of any such rights or securities, any change to the vesting or acceleration terms of any such rights or securities, or any change to the terms relating to the grant of any such rights or securities; (vii)declaration or payment of any dividend or other distribution, or the transfer of any assets, by the Company to any stockholders of the Company with respect to the Common Stock, or any redemption, repurchase or other acquisition by the Company of its capital stock, except in the ordinary course of business; (viii) change by the Company in any of its significant accounting principles, methods or practices; (ix) material closure, shut down or other elimination of any of the Company's offices, franchises or any other change in the character of its business, properties or assets, except for closures, shut downs, or other eliminations or changes that have not had a Material Adverse Effect on the Company; (x) loan or advance to or other such agreement with any of its stockholders, officers, directors, employees, agents, consultants or other representatives, except in the ordinary course of business, consistent with past practice; (xi) damage, destruction or loss with respect to any of the properties or assets of the Company that would reasonably be expected to have a Material Adverse Effect on the Company; or (xii) agreement to do, cause or suffer any of the foregoing. SECTION 2.07 Litigation; Compliance with Law. Other than as set forth in the SEC Reports, there is no (a) action, suit, claim, proceeding or investigation pending or, to the best of the Company's knowledge, threatened, -7- against or adversely affecting the Company or its properties or assets, at law or in equity, or before or by any federal, state, municipal or other governmental body, department, commission, board, bureau, agency or instrumentality, domestic or foreign, (b) arbitration proceeding pending or, to the best of the Company's knowledge, threatened, against or adversely affecting the Company or its properties or assets or (c) governmental inquiry pending or, to the best of the Company's knowledge, threatened, against or adversely affecting the Company or its properties or assets (including without limitation any inquiry as to the Company's qualification to hold or receive any license or permit), except, in the case of each of (a), (b) and (c) above, those which could not reasonably be expected to have a Material Adverse Effect, and, to the best of the Company's knowledge, there is no basis for any of the foregoing. To the best of the Company's knowledge, the Company is not in default with respect to any order, writ, judgment, injunction or decree known to or served upon the Company of any court or of any federal, state, municipal or other governmental body, department, commission, board, bureau, agency or instrumentality, domestic or foreign except those defaults which could not reasonably be expected to have a Material Adverse Effect. To the best of the Company's knowledge, there is no action, suit or proceeding by the Company pending, threatened or contemplated against others other than those which are immaterial in nature and instituted in the ordinary course of business. SECTION 2.08 Taxes. To the best of the Company's knowledge, the Company has filed all federal, state, municipal and local tax returns (whether relating to income, sales, franchise, withholding, real or personal property or other types of taxes) required to be filed under the laws of the United States and applicable states or has duly obtained extensions of time for the filing thereof, and has paid in full all taxes which have become due pursuant to such returns or claimed to be due by any taxing authority other than those being contested in good faith and, to the best of the Company's knowledge, each of the tax returns heretofore filed by the Company correctly and accurately reflects the amount of its tax liability thereunder. To the best of the Company's knowledge, except as set forth on Schedule 2.8 hereto, the Company has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company. SECTION 2.09 Offering of the Shares. Assuming the accuracy of Sweet's representations and warranties set forth in Section 3.01 below, as of May 17, 2002, the Company has complied with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Shares. Neither the Company nor any Person authorized or employed by the Company as agent, broker, dealer or otherwise has taken or will take any action (including, without limitation, any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with the Shares under the Securities Act or the rules and regulations of the Commission promulgated thereunder), in either case so as to subject the offering, issuance or sale of the Shares to the registration provisions of the Securities Act, and neither the Company nor any such Person acting on its behalf has offered the Shares to any Person by means of general or public solicitation or general or public advertising, such as by newspaper or magazine advertisements, by broadcast media, or at any seminar or meeting whose attendees were solicited by such means. -8- SECTION 2.10 Registration Rights. Except for the rights specifically granted to Sweet under the Investors Rights Agreement, no Person has demand or other rights to cause the Company to file any registration statement under the Securities Act relating to any securities of the Company or any right to participate in any such registration statement, including, without limitation, piggyback registration rights. ARTICLE III. REPRESENTATIONS and WARRANTIES OF SWEET Sweet represents and warrants to the Company that, as of the Effective Date (or in the event and in such instances as other dates are specifically set forth in this Article III, as of such other dates): SECTION 3.01 Investment Representations. As of May 17, 2002: (a) Sweet was an "accredited investor" within the meaning of Rule 501(a)(8) of Regulation D under the Securities Act; (b) Sweet acquired the Shares for its own account for investment purposes only; (c) Sweet understood that (i) the issuance by the Company of the Shares to Sweet was not registered under the Securities Act or the securities laws of any state, based upon applicable exemptions from such registration requirements, (ii) the Shares are "restricted securities," as said term is defined in rule 144 of the Rules and Regulations promulgated under the Securities Act, (iii) the Shares may not be sold or otherwise transferred unless they have been first registered under the Act and all applicable state securities laws, or unless exemptions from such registration provisions are available with respect to said resale or transfer, (iv) a legend to the foregoing effect may be placed on the certificate or certificates representing the Shares, and (v) stop transfer instructions with respect to the foregoing will be placed with the transfer agent for the Common Stock with respect to the Shares; (d) Sweet acknowledges that representatives of Sweet have reviewed copies of the Recent SEC Reports available via EDGAR, including in each case, the exhibits thereto and all of the documents incorporated by reference therein, and representatives of Sweet have had the opportunity to ask questions of and receive answers from representatives of the Company concerning the business and financial condition of the Company and the terms and conditions of this Agreement, and all of such questions have been answered to the satisfaction of Sweet and its representatives. Such acknowledgment, however, shall in no event have any impact on Sweet's right or ability to rely upon the representations and warranties of the Company to Sweet set forth in Article II above; and (e) Sweet acknowledges that the Company has relied on the representations contained herein and that the statutory basis for exemption from the requirements of Section 5 of the Securities Act may not be present if, notwithstanding such representations, Sweet were acquiring the Shares for resale or distribution upon the occurrence or non-occurrence of some predetermined event. -9- SECTION 3.02 Organization; Authorization, Noncontravention. Sweet is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California and, as of the Closing Date, has full limited liability company power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents to which it is a party. Sweet's (a) execution and delivery of this Agreement and each of the other Transaction Documents to which it is a party and performance of its obligations hereunder and thereunder, and (b) sale, assignment and transfer of the Sweet Interest in Unzipped, have all been duly authorized by all requisite limited liability company action, in the case of (a) above, as of the Closing Date, and in the case of (b) above, as of the Effective Date, and will not (i) result in a violation of the Limited Liability Company Operating Agreement of Sweet in effect as of, in the case of (a) above, the Closing Date, and in the case of (b) above, the Effective Date, (ii) result in a violation of any applicable law, rule or regulation, or any material order, injunction, judgment or decree of any court or other agency of government, (iii) conflict with, result in a breach of, or constitute (or, with due notice or lapse of time or both, would constitute) a default under, or give rise to any right of termination, acceleration or cancellation under, any material indenture, agreement, contract, license, arrangement, understanding, evidence of indebtedness, note, lease or other instrument to which Sweet or any of its properties or assets is bound, or (iv) result in the creation or imposition of any material Lien, charge, restriction, claim or encumbrance of any nature whatsoever upon Sweet or any of Sweet's material properties or assets. SECTION 3.03 Validity. This Agreement and the other Transaction Documents to which Sweet is a party have been duly executed and delivered by Sweet as of the Closing Date, effective as of the Effective Date, and constitute the legal, valid and binding obligations of Sweet, enforceable against Sweet in accordance with their terms, except to the extent limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application related to the enforcement of creditors' rights generally and (b) general principals of equity, and except that enforcement of rights to indemnification and contribution contained therein and herein may be limited by applicable federal or state laws or the public policy underlying such laws, regardless of whether enforcement is considered in a proceeding in equity or at law. SECTION 3.04 Consents and Approvals. No registration or filing with, or consent or approval of or other action by, any federal, state or other governmental agency or instrumentality or any third party is or will be necessary for Sweet's valid execution, delivery and performance of this Agreement and the other Transaction Documents other than those (a) which have previously been obtained or made or will be obtained on or prior to the Closing Date (b) those which are required to be made under federal or state securities laws, which will be obtained or made, and will be effective within the time periods required by law. SECTION 3.05 Unencumbered Title. At all times prior to the Effective Date, Sweet was the sole owner of the Sweet Interest and had no equity-related rights in or to and no ownership interest in Unzipped other than the Sweet Interest. On the Effective Date, all of the Sweet Interest was transferred to MC pursuant to the terms and conditions of the Term Sheet (as modified, clarified and superseded on the Closing Date, effective as of the Effective Date, by the terms -10- and conditions of this Agreement). At the time of such transfer, the Sweet Interest was not subject to any Lien, charge, restriction, claim or encumbrance or to any option, warrant or right (collectively, "Encumbrances") that restricted Sweet from transferring good and marketable title to the Sweet Interest to MC, free and clear of any Encumbrances. Following Sweet's transfer of the Sweet Interest to MC, Sweet has not had any equity-related rights in or to and no ownership interest in Unzipped. SECTION 3.06 Financial Statements of Unzipped. (a) Sweet hereby represents and warrants to the Company that the Unzipped Financial Statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and, as of the dates thereof, (A) the Unzipped Financial Statements were to the best of Sweet's knowledge, as defined in Section 9.20 below, true and accurate in all material respects and fairly presented the financial position of Unzipped as of such dates and the results of its operations and cash flows for the periods then ended, and (B) Unzipped had no liabilities (including off balance sheet liabilities), contingent or otherwise, which were material individually or in the aggregate, except liabilities provided for or reserved against in the Unzipped Financial Statements. (b) To the best of Sweet's knowledge, except as described in the Unzipped Financial Statements, since January 31, 2002, Unzipped's business has been conducted in the ordinary course, and there has not been any: (i) event, situation or occurrence that individually or in the aggregate has had a Material Adverse Effect on Unzipped; (ii) sale, assignment, disposition, transfer, pledge, mortgage or lease of any material portion of the assets primarily used in Unzipped's business taken as a whole; (iii)incurrence of any liabilities or indebtedness, contingent or otherwise, which are material individually or in the aggregate, other than those arising in the ordinary course of business, consistent with past practice; (iv) material change in the character of Unzipped's business, properties or assets, except for changes that have not had a Material Adverse Effect on Unzipped; (v) damage, destruction or loss with respect to any of the properties or assets of Unzipped that would reasonably be expected to have a Material Adverse Effect on Unzipped; or (vi) agreement to do, cause or suffer any of the foregoing. SECTION 3.07 Litigation; Compliance with Law. Other than as set forth in Schedule 3.07 hereto, there is no (a) action, suit, claim, proceeding or investigation pending or, to the best of Sweet's knowledge, threatened, against or adversely affecting Unzipped or its properties or assets, at law or in equity, or before or by any federal, state, municipal or other governmental body, department, commission, board, bureau, agency or instrumentality, domestic -11- or foreign, (b) arbitration proceeding pending or, to the best of Sweet's knowledge, threatened, against or adversely affecting Unzipped or its properties or assets or (c) governmental inquiry pending or, to the best of Sweet's knowledge, threatened, against or adversely affecting Unzipped or its properties or assets (including without limitation any inquiry as to the Unzipped's qualification to hold or receive any license or permit), except, in the case of each of (a), (b) and (c) above, those which could not reasonably be expected to have a Material Adverse Effect, and, to the best of Sweet's knowledge, there is no basis for any of the foregoing. To the best of Sweet's knowledge, Unzipped is not in default with respect to any order, writ, judgment, injunction or decree known to or served upon Unzipped of any court or of any federal, state, municipal or other governmental body, department, commission, board, bureau, agency or instrumentality, domestic or foreign except those defaults which could not reasonably be expected to have a Material Adverse Effect. To the best of Sweet's knowledge, there is no action, suit or proceeding by Unzipped pending, threatened or contemplated against others. SECTION 3.08 Taxes. To the best of Sweet's knowledge, Unzipped has filed all federal, state, municipal and local tax returns (whether relating to income, sales, franchise, withholding, real or personal property or other types of taxes) required to be filed under the laws of the United States and applicable states or has duly obtained extensions of time for the filing thereof, and has paid in full all taxes which have become due pursuant to such returns or claimed to be due by any taxing authority other than those being contested in good faith, and, to the best of Sweet's knowledge, each of the tax returns heretofore filed by Unzipped correctly and accurately reflects the amount of its tax liability thereunder. To the best of Sweet's knowledge, Unzipped has not executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against Unzipped. SECTION 3.09 Acknowledgement Regarding Intellectual Property. Sweet agrees and acknowledges that the Company does not retain any right, title or interest in or to any Assets (as defined in the Capital Contribution Agreement) conveyed by the Company to IP Holdings LLC ("IP Holdings") pursuant to that certain Capital Contribution Agreement dated as of August 20, 2002 by and among the Company and MC, as transferors, and IP Holdings, as transferee (as amended or modified from time to time, the "Capital Contribution Agreement"). ARTICLE IV. CONDITIONS TO CLOSING SECTION 4.01 Conditions to Sweet's Obligations at the Closing. Sweet's obligations under this Agreement are subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in whole or in part by Sweet: (a) Opinions of Company's Counsel. Sweet shall have received (i) from Blank Rome Tenzer Greenblatt LLP, counsel for the Company, an opinion dated the Closing Date that the Shares were duly authorized and validly issued and are fully paid and non-assessable and (ii) an opinion of Deborah Sorrell Stehr, in-house counsel for the Company, as to the due authorization, execution and delivery of this Agreement and the other Transaction Documents, in substantially the forms set forth in Exhibit H hereto. -12- (b) Representations and Warranties to be True and Correct. The representations and warranties of the Company and MC contained in Article II shall be true, complete and correct at and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of such date. (c) Performance. Each of the Company and MC shall have performed and complied in all material respects with all agreements and covenants contained herein required to be performed or complied with by it prior to or at the Closing Date. (d) All Proceedings to be Satisfactory. All corporate and other proceedings to be taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto, including without limitation, the Company obtaining all necessary approvals from the Board, including an approval of the transactions contemplated hereby in satisfaction of the requirements of Section 203 of the General Corporation Law of the State of Delaware, shall be satisfactory in form and substance to Sweet and its counsel and Sweet and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request. (e) Approvals. Each of the Company and MC shall have obtained any and all consents, waivers, registrations, approvals or authorizations, with or by any governmental body and all consents, waivers, approvals or authorizations of any other Person required for the valid execution of this Agreement and each of the other Transaction Documents to which it is a party and for the consummation of the transactions contemplated hereby and thereby. (f) No Injunction. No governmental body or any other Person shall have issued an order, injunction, judgment, decree, ruling or assessment which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby or under any of the other Transaction Documents, nor, shall any such order, injunction, judgment, decree, ruling or assessment be pending or, to the Company's knowledge, threatened. (g) Deliveries. The Company shall have delivered each of the closing deliveries identified in Section 1.03(a) hereof. (h) Indemnification Agreement. The Company shall have executed and delivered to Hubert Guez an Indemnification Agreement, in the form attached hereto as Exhibit I. (i) Supporting Documents. Sweet and its counsel shall have received copies of the following documents: (i) (A) the Charter, certified as of a recent date by the Secretary of State of the State of Delaware and (B) a certificate of said Secretary dated as of a recent date as to the Company's due incorporation and good standing and the Company's payment of all franchise taxes, and listing all documents of the Company on file with said Secretary; -13- (ii) a certificate of the Company's Secretary dated the Closing Date, certifying: (A) that attached thereto is a true, correct and complete copy of the Bylaws as in effect on the date of such certification and that no amendments or modifications to such Bylaws have been authorized; (B) that attached thereto is a true, correct and complete copy of all resolutions adopted by the Board authorizing the execution, delivery and performance of each of the Transaction Documents, MC's purchase of the Sweet Interest, and the issuance, sale and delivery of the Shares, and that all such resolutions are in full force and effect, have not been amended, modified or rescinded and are the only resolutions adopted by the Board in connection with the transactions contemplated by the Transaction Documents; (C) that the Charter has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(A) above; and (D) to the incumbency of each officer of the Company executing any of the Transaction Documents, the stock certificates representing the Shares and any certificate or instrument furnished pursuant thereto, and a certification by another authorized officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this clause (ii); (iii)a certificate, executed by an officer of the Company, dated the Closing Date, certifying to the fulfillment of the specific conditions set forth in Sections 4.01(b) and 4.01(c) hereto and to the fulfillment of all of the conditions in this Section 4.01 in general; and (iv) such additional supporting documents and other information with respect to the Company's operations and affairs as Sweet or its counsel reasonably may request. All such documents shall be satisfactory in form and substance to Sweet and its counsel. SECTION 4.02 Conditions to the Company's and MC's Obligations at the Closing. The Company's and MC's obligations under this Agreement, are subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in whole or in part by the Company and MC: (a) Opinion of Sweet's Counsel. The Company and MC shall have received from Deborah Greaves, in-house counsel for Sweet, an opinion dated the Closing Date, as to the due authorization, execution and delivery of this Agreement and the other Transaction Documents, in substantially the form set forth in Exhibit J. (b) Representations and Warranties to be True and Correct. The representations and warranties of Sweet contained in Article III shall be true, complete and correct at and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of such date. (c) Performance. Sweet shall have performed and complied in all material respects with all agreements and covenants contained herein required to be performed or complied with by it prior to or at the Closing Date. -14- (d) All Proceedings to be Satisfactory. All corporate and other proceedings to be taken by Sweet in connection with the transactions contemplated hereby and all documents incident thereto, including without limitation, Sweet obtaining all necessary approvals from its members and/or managers, shall be satisfactory in form and substance to the Company and its counsel and the Company and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request. (e) Deliveries. Sweet shall have delivered to the Company each of the closing deliveries identified in Section 1.03(b), hereof. (f) Approvals. Sweet shall have obtained any and all consents, waivers, registrations, approvals or authorizations, with or by any governmental body and all consents, waivers, approvals or authorizations of any other Person required for the valid execution of this Agreement and each of the other Transaction Documents and for the consummation of the transactions contemplated hereby and thereby. (g) No Injunction. No governmental body or any other Person shall have issued an order, injunction, judgment, decree, ruling or assessment which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby or under any of the other Transaction Documents, nor, shall any such order, injunction, judgment, decree, ruling or assessment be threatened or pending. (h) Supporting Documents. The Company and its counsel shall have received copies of the following documents: (i) certificate of Sweet's Manager dated the Closing Date, certifying: (A) that attached thereto is a true, correct and complete copy of all resolutions adopted by the members and/or managers of Sweet authorizing the execution, delivery and performance of each of the Transaction Documents and the transfer, sell and assignment of the Sweet Interest to MC, and that all such resolutions are in full force and effect, have not been amended, modified or rescinded and are the only resolutions adopted in connection with the transactions contemplated by the Transaction Documents; and (B) to the incumbency of each officer or manager of Sweet executing any of the Transaction Documents and any certificate or instrument furnished pursuant thereto, and a certification by another authorized officer or manager of Sweet as to the incumbency and signature of the officer signing the certificate referred to in this clause (i) certificate; (ii) certificate, executed by an officer of Sweet, dated the Closing Date, certifying to the fulfillment of the specific conditions set forth in Sections 4.02(b) and 4.02(c) hereto and to the fulfillment of all of the conditions in this Section 4.02 in general; and (iii)such additional supporting documents and other information with respect to Sweet's and Unzipped's operations and affairs as the Company or its counsel reasonably may request. All such documents shall be satisfactory in form and substance to the Company and its counsel. -15- ARTICLE V. COVENANTS OF THE COMPANY The Company covenants and agrees with Sweet that: SECTION 5.01 Directors and Officers Insurance. The Company shall maintain customary directors and officers liability insurance and shall at all times maintain and exercise the powers granted to it by its Charter, its Bylaws, and by applicable law to indemnify and hold harmless to the fullest extent permitted by applicable law present or former directors and officers of the Company against any threatened or actual claim, action, suit, proceeding or investigation made against them arising from their service in such capacities. SECTION 5.02 Board Rights. Until the later of (i) the expiration and/or termination of the Management Agreement, (ii) such date as the Note has been repaid in full, or (iii) such date as Sweet and/or Sweet's Permitted Transferees (as defined in Section 6.01 hereof) shall cease to own all of the Shares, the Company shall recommend and include Hubert Guez on the slate of director nominees included in the Company's proxy statements soliciting proxies in connection with the Annual Meeting of Shareholders relating to the election of directors, unless the Company has reasonable grounds for objecting to his continuance as a director in which case Sweet shall have the right to designate a replacement nominee satisfactory to the Company. SECTION 5.03 Expenses of Director. The Company shall promptly reimburse Hubert Guez, or, in the event a replacement nominee designated by Sweet is elected as a member of the Company's Board of Directors, such replacement nominee, in full for all of his reasonable out-of-pocket expenses incurred as a member of the Company's Board of Directors in attending each meeting of the Board or any committee thereof. SECTION 5.04 Payment of Azteca Receivables/Debt; Release of Azteca. On or prior to February 1, 2003, the Company shall: (a) remit payment to Azteca for all receivables due to Azteca from the Company and/or Unzipped which are or will be greater than 30 days past due as of February 1, 2003; (b) pay or cause Unzipped to pay to Azteca all amounts (including principal and interest) outstanding as of such payment date under that certain commercial loan note, dated as of March 15, 2002, by Unzipped in favor of Azteca; and (c) obtain from Congress Financial a release, in form and substance reasonably satisfactory to Sweet, of Sweet, Hubert Guez, Azteca and each of their respective Affiliates from any obligations to Congress Financial with respect to Unzipped's line of credit with Congress Financial dated as of December 21, 1998, including any of their obligations as guarantors thereunder. The Company hereby expressly acknowledges that Azteca is a third party beneficiary to the provisions of this Section 5.04. -16- SECTION 5.05 Compliance with Law; Corporate Existence. The Company shall, and shall cause each of its Subsidiaries to (subject, in the case of Unzipped, to Sweet's compliance with the provisions of Section 8 of the Management Agreement), comply in all material respects with all applicable laws, rules, statutes, regulations, decrees and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of their business and the ownership of their property except where failure to comply could not reasonably be expected to have a Material Adverse Effect. The Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its or its successor's corporate existence and the corporate, partnership or other existence of each of its Subsidiaries in accordance with the respective charter documents of such Subsidiary (charter and statutory), licenses and franchises of the Company and each of its Subsidiaries, provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any Subsidiary, if the Board shall determine, in the exercise of business judgment, that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole, and the loss thereof would not have a Material Adverse Effect. ARTICLE VI. COVENANTS OF SWEET SECTION 6.01 Restrictions on Transfer. Without in any way limiting the representations set forth above in Section 3.01, Sweet shall abide by each of the following transfer restrictions: (a) Sweet shall not make any disposition of all or any portion of the Shares at any time (i) unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement, or (ii) Sweet shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and with an opinion of counsel that such disposition will not require registration of such securities under the Securities Act; and (b) Sweet shall not make any disposition of all or any portion of the A Shares until April 23, 2003, except (i) to one of Sweet's current members, (ii) to the estate of any such member, or (iii) for the transfer by gift, will or intestate succession by any such member to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing (each a "Permitted Transferee"), who has executed and delivered to the Company a transfer restriction agreement in the form attached hereto as Exhibit K ("Transfer Restriction Agreement for A Shares"); and (c) Sweet shall not make any disposition of all or any portion of the B Shares until April 23, 2004, except to Permitted Transferees in the manner set forth in Section 6.01(b) above, each of whom has executed and delivered to the Company a transfer restriction agreement in the form attached hereto as Exhibit L ("Transfer Restriction Agreement for B Shares"). -17- SECTION 6.02 Voting Restriction. Sweet shall be bound by and subject to the voting restrictions relating to the Shares set forth in the Sweet Proxy, and, in addition to any transfer restrictions set forth in Section 6.01 above, if the transfer of Shares by Sweet is to a transferee that is (i) an officer, manager or member of Sweet, (ii) an affiliate of Sweet or any of the persons or entities set forth in (i) above, or (iii) a family member of any of the persons set forth in (i) or (ii) above (each, an "Affiliated Transferee"), Sweet shall not, without the prior written consent of the Company, dispose of all or any portion of such Shares, unless such Affiliated Transferee executes and delivers to the Company a proxy in the form attached hereto as Exhibit M ("Transferee Proxy"). SECTION 6.03 Legends. Sweet acknowledges that the certificates evidencing the Shares will bear the legends set forth below: (a) Securities Act Legend. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR (II) AN OPINION OF COMPANY COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. The legend set forth above shall be removed by the Company from any certificate evidencing Shares, and the Company shall issue a certificate without such legend to the holder thereof, if the holder receives an opinion of counsel reasonably satisfactory to the Company (which may be counsel for the Company) that all of the Shares may be freely transferred in a public sale (without limitation or restriction as to quantity or timing and without registration under the Securities Act) under rule 144(k) promulgated under the Securities Act or otherwise. (b) Contractual Restrictions Legend. THE TRANSFER AND VOTING OF THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN CONTRACTUAL RESTRICTIONS AGREED TO BY THE HOLDER OF THIS CERTIFICATE AND CANDIE'S INC. AND A COPY OF SUCH RESTRICTIONS ARE AVAILABLE AT THE OFFICES OF CANDIE'S, INC. The legend set forth above shall be removed by the Company from any certificate evidencing Shares, and the Company shall issue a certificate without such legend to the holder thereof, if the holder receives an opinion of counsel to the Company that none of the contractual restrictions referred to in the legend are applicable to any of the Shares evidenced by such certificate. -18- ARTICLE VII. SURVIVAL; INDEMNIFICATION SECTION 7.01 Survival of Representations and Warranties. All representations and warranties of the parties contained in or made pursuant to this Agreement or in any certificate or instrument delivered pursuant to or in connection with this Agreement shall survive the execution and delivery of all of the Transaction Documents and the issuance, sale and delivery of the Shares, provided, however, that, other than the representations and warranties in the first sentence of Section 2.05(b) and those in Sections 2.08, 3.01 and 3.08 hereof which shall survive the Closing for the applicable period of time under the statute of limitations for the matters described therein, the other representations and warranties of the parties set forth herein shall only survive the Closing for a period of one year. SECTION 7.02 Indemnification by the Company.(a) Subject to the limitations of Section 7.02(b) below, the Company shall indemnify, defend and hold harmless Sweet and its members (and each officer and director thereof), directors, managers, officers, employees, Affiliates, agents and permitted assigns) (collectively, "Indemnified Sweet Parties") from and against any and all losses, claims, liabilities, damages, deficiencies, costs or expenses (including, without limitation, interest, penalties, reasonable attorneys' fees, disbursements and related charges and any costs or expenses that an Indemnified Sweet Party incurs to enforce its right to indemnification) (collectively, "Indemnified Sweet Parties' Losses"), any of them may sustain, suffer or incur and which arise out of, are caused by, or result or occur in connection with any material misrepresentation of a material fact contained in any representation of the Company contained herein or the breach by the Company of any warranty or covenant made by the Company herein. (b) The Company shall not be obligated to indemnify the Indemnified Sweet Parties unless and until the Indemnified Sweet Parties' Losses equal or exceed $100,000 (the "Sweet Basket Amount"), in which case the Company shall be obligated to indemnify the Indemnified Sweet Parties for the excess of the aggregate amount of all Indemnified Sweet Parties' Losses over the Sweet Basket Amount. Notwithstanding anything contained herein to the contrary, the Company's liability for indemnity under this Section 7.02 shall be limited to $17,0500,000. SECTION 7.03 Indemnification by Sweet.(a) Subject to the limitations of Section 7.03(b) below, Sweet shall indemnify, defend and hold harmless the Company and its subsidiaries (and each officer and director thereof), directors, officers, stockholders, employees, Affiliates, agents and permitted assigns) (collectively, "Indemnified Company Parties") from and against any and all losses, claims, liabilities, damages, deficiencies, costs or expenses (including, without limitation, interest, penalties, reasonable attorneys' fees, disbursements and related charges and any costs or expenses that an Indemnified Company Party incurs to enforce its right to indemnification) (collectively, "Indemnified Company Parties' Losses"), any of them may sustain, suffer or incur and which arise out of, are caused by, or result or occur in connection with any material misrepresentation of a material fact contained in any representation of Sweet contained herein or the breach by Sweet of any warranty or covenant made by Sweet herein. -19- (b) Sweet shall not be obligated to indemnify the Indemnified Company Parties unless and until the Indemnified Company Parties' Losses equal or exceed $100,000 (the "Company Basket Amount"), in which case Sweet shall be obligated to indemnify the Indemnified Company Parties for the excess of the aggregate amount of all Indemnified Company Parties' Losses over the Company Basket Amount. Notwithstanding anything contained herein to the contrary, Sweet's liability for indemnity under this Section 7.03 shall be limited to $17,000,000 and may be offset against amounts outstanding under the Note. SECTION 7.04 Procedure for Indemnification. If a claim by a third party is made against any party or parties hereto and the party or parties against whom said claim is made intends to seek indemnification with respect thereto under Sections 7.02 or 7.03 hereof, the party or parties seeking such indemnification shall promptly notify the indemnifying party or parties, in writing, of such claim; provided, however, that the failure to give such notice shall not affect the rights of the indemnified party or parties hereunder, except to the extent that such failure materially and adversely affects the indemnifying party or parties due to the inability to timely defend such action. The indemnifying party or parties shall have ten (10) business days after said notice is given to elect, by written notice given to the indemnified party or parties, to undertake, conduct and control, through counsel of their own choosing (subject to the consent of the indemnified party or parties, such consent not to be unreasonably withheld) and at their sole risk and expense, the good faith settlement or defense of such claim, and the indemnified party or parties shall cooperate with the indemnifying parties in connection therewith; provided: (a) all settlements require the prior reasonable consultation with the indemnified party and the prior written consent of the indemnified party, which consent shall not be unreasonably withheld, and (b) the indemnified party or parties shall be entitled to participate in such settlement or defense through counsel chosen by the indemnified party or parties, provided that the fees and expenses of such counsel shall be borne by the indemnified party or parties. Notwithstanding the foregoing, with respect to any third-party claim, the defense, negotiation or settlement of which the indemnifying party has taken control, the indemnified party shall have the right to retain separate counsel to represent it, and the indemnifying party shall pay the reasonable fees and expenses of such separate counsel, if the third-party claim includes both indemnifying and indemnified parties and the indemnified party reasonably determines that a conflict of interest may exist or that defenses are available to it that are unavailable to the indemnifying party. So long as the indemnifying party or parties are contesting any such claim in good faith, the indemnified party or parties shall not pay or settle any such claim; provided, however, that notwithstanding the foregoing, the indemnified party or parties shall have the right to pay or settle any such claim at any time, provided that in such event they shall waive any right of indemnification therefor by the indemnifying party or parties. If the indemnifying party or parties do not make a timely election to undertake the good faith defense or settlement of the claim as aforesaid, or if the indemnifying parties fail to proceed with the good faith defense or settlement of the matter after making such election, then, in either such event, the indemnified party or parties shall have the right to contest, settle or compromise (provided that all settlements or compromises require the prior reasonable consultation with the indemnifying party and the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld) the claim at their exclusive discretion, at the risk and expense of the indemnifying parties. -20- SECTION 7.05 Assistance. Regardless of which party is controlling the defense of any claim, each party shall act in good faith and shall provide reasonable documents and cooperation to the party handling the defense. SECTION 7.06 Other Remedies. The provisions of this Article VII shall not limit or impair any right or remedy of either Sweet or the Company arising from breach of this Agreement. In addition to any other remedy provided by law, injunctive relief may be obtained by either party to enjoin the breach, or threatened breach, of any provision of this Agreement and either party shall be entitled to specific performance by the other of its obligations hereunder. All of a party's remedies under this Agreement, by law or as may otherwise be afforded, shall be cumulative. ARTICLE VIII. RELEASE OF CERTAIN LIABILITIES SECTION 8.01 The Release. Each of the Company, MC and Unzipped hereby releases and forever discharges Sweet and its officers, directors, employees and members, solely in their capacities as such (each a "Sweet Representative"), from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, controversies, agreements, promises, variances, trespasses, damages, liabilities, judgments, extents, executions, claims and demands whatsoever, in law or equity, which the Company, MC and/or Unzipped ever had, now has or hereafter can, shall or may have against Sweet or a Sweet Representative, arising out of Sweet's obligations with respect to Unzipped (whether to Unzipped or to third parties), from the beginning of the world to the Closing Date (collectively, "Claims"), other than any such Claims arising from the fraud, willful misconduct, or gross negligence of Sweet or a Sweet Representative and provided that no release is given hereunder with respect to any obligation, representation, warranty or covenant (or any Claim arising therefrom) of Sweet or a Sweet Representative contained in this Agreement or any other Transaction Document. SECTION 8.02 Statutory Waiver (a) Each of the Company, MC and Unzipped hereby warrants, represents and agrees that it is fully aware of the provisions of California Civil Code Section 1542, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." (b) Each of the Company and Unzipped knowingly and voluntarily waives the provisions of California Civil Code Section 1542, and any other statutes or common law principle of similar effect, as to any and all Claims, other than any -21- such Claims arising from (i) the fraud, willful misconduct, or gross negligence of Sweet or a Sweet Representative or (ii) any obligation, representation, warranty or covenant of Sweet or a Sweet Representative contained in this Agreement or any other Transaction Document. ARTICLE IX. Miscellaneous SECTION 9.01 Expenses. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares. SECTION 9.02 Brokerage. Each party hereto will indemnify and hold harmless the others against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party. SECTION 9.03 Parties in Interest. All representations, warranties, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Except as set forth in Sections 5.04, 7.02 and 7.03 above and as provided below, nothing in this Agreement shall create or be deemed to create any third-party beneficiary rights in any Person not a party to this Agreement. Whether or not any express assignment has been made, the provisions of the first sentence of Section 2.05(b) and Section 2.10 of this Agreement, each of which are for the benefit of Sweet as a holder of Shares (or any securities for which such Shares may be converted or exchanged), are also for the benefit of and enforceable (to the same extent such provisions would have been enforceable by Sweet) by any subsequent holder of such Shares who (a) is a Permitted Transferee, (b) has agreed in writing with the Company to be bound by the terms of Article VI of this Agreement to the same extent as if the transferee were Sweet hereunder, and (c) acquires at least 500,000 of the Shares. Without the consent of the other parties to this Agreement, this Agreement may not be assigned by any party hereto. SECTION 9.04 Specific Performance. Each party hereto acknowledges and agrees that the other parties hereto would be irreparably damaged if any provision of this Agreement is not performed in accordance with its specific terms or is otherwise breached. Accordingly, each party hereto agrees that the other parties hereto will be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to specifically enforce this Agreement and its terms and provisions in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties in the matter subject to Sections 8.06 and 8.08 hereof, in addition to any other remedy to which they may be entitled, at law or in equity. SECTION 9.05 Further Assurances. The Company and Sweet each agree to take such actions and execute and deliver such other documents or agreements as may be necessary or reasonably requested for the implementation of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, including those necessary or reasonably desirable to reflect Sweet's relinquishment of any rights, control or authority with respect to Unzipped arising out of the Operating Agreement. -22- SECTION 9.06 Submission to Jurisdiction; Consent to Service of Process. (a) Sweet hereby irrevocably agrees that any lawsuit commenced by Sweet against the Company or MC in connection with any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby (each, a "Sweet Lawsuit") shall be brought by Sweet solely in a federal or state court located within the County of New York, State of New York, and, in connection with each Sweet Lawsuit, each of the parties hereto irrevocably agrees to submit to the exclusive jurisdiction of any federal or state court located within the County of New York, State of New York and irrevocably agrees to waive, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any Sweet Lawsuit brought in such court or any defense of inconvenient forum for the maintenance of such Sweet Lawsuit in such court. Each of the Company and MC hereby irrevocably agrees that any lawsuit commenced by the Company or MC against Sweet in connection with any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby (each, a "Company Lawsuit") shall be brought by the Company or MC, as the case may be, solely in a federal or state court located within the County of Los Angeles, State of California, and, in connection with each Company Lawsuit, each of the parties hereto irrevocably agrees to submit to the exclusive jurisdiction of any federal or state court located within the County of Los Angeles, State of California and irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any Company Lawsuit brought in such court or any defense of inconvenient forum for the maintenance of such Company Lawsuit in such court. Each of the parties hereto agrees that a judgment in any Sweet Lawsuit or Company Lawsuit may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action or proceeding by the mailing of a copy thereof in accordance with the provisions of Section 9.07 hereof. SECTION 9.07 Notices. Any notice, request, demand or other communication required or permitted to be given to a party pursuant to the provisions of this Agreement shall be in writing and (a) personally delivered, (b) sent via facsimile, with confirmed transmission and receipt, and followed promptly by delivery of the original, or (c) sent by a nationally-recognized courier or overnight service such as Federal Express (for next business day delivery), postage prepaid, as follows: If to Sweet: Sweet Sportswear, LLC 5804 E. Slauson Avenue Commerce, CA 90040 Fax: (323) 728-1641 Attn: Deborah Greaves, General Counsel -23- With a copy to (which does not constitute notice): Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East - Suite 2400 Los Angeles, California 90067 Phone: (310) 229-1000 Fax: (310) 229-1001 Attn: David Antheil, Esq. If to the Company: Candie's, Inc. 400 Columbus Avenue Valhalla, New York Phone: (914) 769-8600 Fax: (914) 769-8103 Attn: Deborah Sorell Stehr, Senior Vice President & General Counsel With a copy to (which does not constitute notice): Blank Rome Tenzer Greenblatt LLP 405 Lexington Avenue New York, NY 10174 Phone: (212) 885-5555 Fax: (212) 885-5001 Attn: Robert J. Mittman, Esq. Any party hereto (and such party's permitted assigns) may change such party's address for receipt of future notices hereunder by giving written notice to the Company and the other parties hereto in the manner provided herein. Notices shall be deemed given and received at the time of personal delivery or completed facsimile transmission, or, if sent by Federal Express or such other overnight delivery service one business day after such sending. SECTION 9.08 Governing Law. This Agreement and the performance of the transactions and the obligations of the parties hereunder will be governed by and construed and enforced in accordance with the laws of the State of Delaware, without giving effect to any choice of law principles. SECTION 9.09 Entire Agreement. This Agreement, together with the Exhibits and Schedules hereto, the certificates, documents, instruments and writings that are delivered pursuant hereto and each of the other Transaction Documents, constitutes the entire agreement and understanding of the parties hereto in respect of its subject matters and supersedes all prior understandings, agreements, or representations, including, without limitation, the Term Sheet, by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof or the transactions contemplated hereby. -24- SECTION 9.10 Attorney's Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all reasonable fees, costs and expenses of appeals. SECTION 9.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument. SECTION 9.12 Amendments and Waivers. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and Sweet. No action taken pursuant to this Agreement, including without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. SECTION 9.13 Successors and Assigns. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. SECTION 9.14 Severability. The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision hereof will not affect the validity or enforceability of the other provisions hereof; provided that if any provision of this Agreement, as applied to any Party or to any circumstance, is adjudged by a court, governmental body not to be enforceable in accordance with its terms, the Parties agree that the court, governmental body, making such determination will have the power to modify the provision in a manner consistent with its objectives such that it is enforceable, and/or to delete specific words or phrases, and in its reduced form, such provision will then be enforceable and will be enforced. SECTION 9.15 Titles and Subtitles. The article and section headings contained in this Agreement and in the Exhibits and Schedules thereto are inserted for convenience only and will not affect in any way the meaning or interpretation of this Agreement. SECTION 9.16 Adjustments for Stock Splits, Etc. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or Preferred Stock of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement with respect to any period following the date of such adjustment will automatically be proportionally adjusted to reflect the effect of such subdivision, combination or stock dividend on the outstanding shares of such class or series of stock. -25- SECTION 9.17 Construction. The parties hereto have jointly participated in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties hereto and no presumption or burden of proof will arise favoring or disfavoring any party hereto because of the authorship of any provision of this Agreement. Any reference to any federal, state, local or foreign law will also be deemed to refer to such law as amended and all rules and regulations promulgated thereunder, unless the context otherwise requires. The word "including" means "including, without limitation". Pronouns in masculine, feminine and neuter genders will be construed to include any other gender, and words in the singular form will be construed to include the plural and vice versa, unless the context otherwise requires. The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The parties hereto intend that each representation, warranty and covenant contained herein will have independent significance. If any party hereto has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which such party has breached, will not detract from or mitigate the fact that such party is in breach of the first representation, warranty or covenant. SECTION 9.18 Schedules. The Schedules delivered pursuant to this Agreement (collectively, the "Schedules") are an integral part hereof, and are considered to be part of the representations and warranties to which they relate. Each such Schedule shall be in writing and shall indicate the subparagraph pursuant to which it is being delivered. Notwithstanding anything to the contrary in Section 9.17 hereof, for purposes of this Agreement, information which is necessary to make a given Schedule complete and accurate, but is omitted therefrom, shall nevertheless be deemed to be contained therein if it is contained on any other Schedule; but only if such information appears on such other Schedule in such form and detail that it is responsive to the requirements of such given Schedule. A party may, at its option, include in one or more of the Schedules delivered by it pursuant hereto items which are not "material" or otherwise required to be disclosed; and the inclusion of any such item shall not be deemed to be an acknowledgement by such party that it is "material" or that it is required to be disclosed. SECTION 9.19 Remedies. The parties hereto shall have all remedies for breach of this Agreement available to them as provided by this Agreement, law or equity. SECTION 9.20 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means, with respect to any Person, (a) any other Person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with such Person, or (b) an officer or director of such Person or of an Affiliate of such Person within the meaning of clause (a) of this definition. For purposes of clause (a) of this definition, (i) a Person shall be deemed to control another Person if such Person (A) has -26- sufficient power to enable such Person to elect a majority of the board of directors of such Person, or (B) owns a majority of the beneficial interests in income and capital of such Person; and (ii) a Person shall be deemed to control any partnership of which such Person is a general partner. "Company's knowledge" means the actual knowledge of Neil Cole, Deborah Sorell Stehr or Richard Danderline. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "GAAP" means United States generally accepted accounting principals as in effect on the date hereof. "Financial Statements" means the Company's (a) audited consolidated financial statements for the year ended January 31, 2002, including its consolidated balance sheet as of January 31, 2002, and the related consolidated income statements, statement of stockholder's equity and statement of cash flows for the year ended January 31, 2002, and the notes with respect to such statements, in each case as contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2002 filed with the SEC on May 1, 2002; and (b) unaudited consolidated financial statements for the three and six months ended July 31, 2002, including its consolidated balance sheet as of July 31, 2002 and the related consolidated statements of income for the three and the six months ended July 31, 2002, and the related consolidated statement of stockholder's equity and statement of cash flows for the six months ended July 31, 2002, and the notes with respect to such statements in each case as contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2002 filed with the SEC on September 16, 2002. "Lien" shall mean a mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or otherwise, including, without limitation, any lien for taxes), security interest, preference, participation interest, priority or security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of any document under the law of any applicable jurisdiction to evidence any of the foregoing. "Material Adverse Effect" shall mean a material adverse effect on the business, operations, assets, liabilities, properties, financial condition or results of operations of the relevant entity and its subsidiaries taken as a whole. "Permits" shall mean permits, consents, approvals, authorizations, certifications and registrations. "Person" shall mean an individual, corporation, trust, partnership, limited liability company, joint venture, unincorporated organization, government body or any agency or political subdivision thereof, or any other entity. -27- "Subsidiary" shall mean, as to the Company, any entity of which more than fifty percent (50%) of the outstanding stock or equity or capital interests, as the case may be, having ordinary voting power to elect a majority of the Board of Directors of such entity (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company, or by one or more of its subsidiaries, or by the Company and one or more of its subsidiaries. "Sweet's knowledge" shall means the actual knowledge of Hubert Guez, Dov Haddad, Deborah Greaves or Fred Kalmar. "Sweet Interest" shall mean Sweet's 50% share of Unzipped's Profits, Losses and distributions of Cash Flow (each as defined in the Operating Agreement) and its 50% equity ownership interest in Unzipped. "Transaction Documents" shall mean this Agreement, the Note, the Collateral Agreement, the Investor Rights Agreement, the Sweet Proxy, the Management Agreement, the Amended Distribution Agreement and the Amended Supply Agreement. Unzipped Financial Statements" shall mean Unzipped's (a) audited financial statements for the fiscal year ended January 31, 2002, including its balance sheet as of January 31, 2002, and related statement of income and retained earnings and statement of cash flows for the fiscal year ended January 31, 2002, and the notes with respect to such statements, in each case as attached hereto as part of Exhibit N; and (b) unaudited financial statements for the three and six months ended July 31, 2002, including its balance sheet as of July 31, 2002 and the related statement of income and retained earnings for the three and six months ended July 31, 2002 and statement of cash flows for the six months ended July 31, 2002, in each case as attached hereto as part of Exhibit N. SECTION 9.21 Incorporation of Exhibits, Annexes and Schedules. The exhibits, annexes and schedules identified in this Agreement are incorporated herein by reference and made a part hereof. [SIGNATURE PAGES FOLLOW] -28- IN WITNESS WHEREOF, the Company and Sweet have executed this Equity Acquisition Agreement as of the day and year first above written. COMPANY: CANDIE'S, INC. By: /s/ Neil Cole -------------------------------- Name: Neil Cole Title: Chief Executive Officer and President MC: MICHAEL CARUSO & CO., INC. By: /s/ Neil Cole -------------------------------- Name: Neil Cole Title: Chief Executive Officer SWEET: SWEET SPORTSWEAR, LLC By: /s/ Hubert Guez -------------------------------- Name: Hubert Guez Title: Manager For purposes of consenting to the modification of the Operating Agreement, including the Purchase/Sell Obligation, and in order to induce Sweet to enter into this Agreement, the undersigned hereby consents and agrees to the terms and provisions set forth herein, including but not limited to the provisions of Article VIII hereto, and the transactions contemplated hereby as of the date first above written. UNZIPPED APPAREL LLC By: Michael Caruso & Co., Inc., its Manager By: /s/ Neil Cole ----------------------------- Name: Neil Cole Title: Chief Executive Officer -29- The Registrant will supplementally provide the Securities and Exchange Commission with copies of the omitted Schedules and Exhibits to the Equity Acquisition Agreement upon request. Schedules Schedule 2.05 - Capitalization Schedule 2.08 - Taxes Schedule 3.07 - Litigation Exhibits EXHIBIT A Note EXHIBIT B Investor Rights Agreement EXHIBIT C Management Agreement EXHIBIT D Amended Supply Agreement EXHIBIT E Amended Distribution Agreement EXHIBIT F Collateral Pledge Agreement EXHIBIT G Sweet Proxy EXHIBIT H Opinions of Company's Counsel EXHIBIT I Indemnification Agreement EXHIBIT J Opinion of Sweet's Counsel EXHIBIT K Transfer Restriction Agreement for A Shares EXHIBIT L Transfer Restriction Agreement for B Shares EXHIBIT M Transferee Proxy EXHIBIT N Unzipped Financial Statements -30- EX-10.2 MATERIAL CON 5 ex10_2.txt 8% SENIOR SUBORDINATED NOTE EXECUTION COPY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS. NO INTEREST IN THIS NOTE MAY BE OFFERED OR SOLD EXCEPT: (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. CANDIE'S, INC. 8% SENIOR SUBORDINATED NOTE DUE 2012 $11,000,000 Dated: As of April 23, 2002 FOR VALUE RECEIVED, the undersigned, Candie's, Inc., a Delaware corporation (the "Company"), hereby promises to pay to the order of Sweet Sportswear, LLC ("Payee"), at Payee's address as specified below (or at such other place as the holder of this Note (the "Holder") may from time to time hereafter direct by notice in writing to the Company), the principal amount of $11,000,000 on April 23, 2012 (the "Maturity Date"). 1. Interest and Payment. 1.1. The principal amount of this Note outstanding from time to time shall bear interest at the annual rate of 8% commencing as of February 1, 2003, payable in arrears beginning May 16, 2003, and payable quarterly in arrears on each August 16th, November 16th, February 16th and May 16th thereafter (each, an "Interest Payment Date"), and, together with the principal amount of this Note at the time outstanding, on the Maturity Date. If the principal of, or any installment of interest on, this Note is not paid when due, then the overdue amount shall bear interest ("Default Interest") at the annual rate of 10%, which interest shall accrue from the date such overdue amount became due through the date payment of such overdue amount (including interest thereon) has been duly made or provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months, for the actual number of days elapsed. All accrued Default Interest shall be payable on demand. Notwithstanding anything to the contrary contained in this Note, the Company shall not be obligated to pay, and the Holder shall not be entitled to charge, collect or receive interest in excess of the maximum rate allowed by applicable law. If during any period of time the interest rate specified herein exceeds such maximum rate, then, any amounts of interest collected by the Holder in excess of such maximum rate shall be applied to the reduction of the unpaid principal amount of this Note. -1- 1.2. All payments of the principal of, accrued interest on, and other amounts payable under this Note shall be payable in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts. At the option of the Holder of this Note, the Company will make all payments on account of this Note by electronic funds transfer in funds immediately available at the place of payment to a deposit account with a commercial bank designated by the Holder in writing at least three business days prior to the relevant Interest Payment Date, Maturity Date or prepayment date. All payments received on account of this Note shall be applied first to the payment of accrued and unpaid interest on this Note and then to the reduction of the unpaid principal amount of this Note. 1.3. In the event that the date for the payment of any amount payable under this Note falls due on a Saturday, Sunday or public holiday under the laws of the State of New York, the time for payment of such amount shall be extended to the next succeeding business day and any principal amount otherwise due and payable shall continue to bear interest until paid in full on such extended payment date. 2. Prepayment. The Company may, upon at least five business days prior written notice to the Holder of this Note, prepay the principal of this Note outstanding at any time, in whole at any time and in part from time to time, without penalty or premium, together with interest on the principal amount being prepaid accrued through the date of prepayment. 3. Covenants. The Company covenants and agrees that for so long as any portion of the indebtedness evidenced by this Note, whether principal, accrued and unpaid interest or any other amount at any time due hereunder, remains unpaid: 3.1. The Company will not, without the consent of the Holder, which consent shall not be unreasonably withheld, delayed or conditioned: (a) Issue, create, incur, assume, permit, guarantee or suffer to exist any indebtedness or other obligations for money borrowed, except for (i) trade credit in the ordinary course of the Company's business, (ii) indebtedness under this Note and any extension, renewal or refinancing thereof, (iii) Senior Indebtedness (as such term is defined in Section 7.9 below), and (iv) indebtedness or other obligations for money borrowed which are subordinated (in right of payment) in all respects to this Note. (b) Effect a merger or consolidation in which neither the Company nor a wholly-owned subsidiary of the Company is the surviving entity unless such merger or consolidation is in compliance with the provisions of Section 8 hereof. (c) Liquidate, wind up its affairs or dissolve. (d) Except as may be required under the Company's Share Purchase Rights Plan, (i) redeem, purchase or otherwise acquire for cash consideration any shares of the Company's common stock, par value $.001 per share ("Shares"); provided; however, that the Company may at any time repurchase Shares issued pursuant to any Stock Option Plan of the Company from employees, consultants and directors upon termination of their relationships with the Company or (ii) declare, pay or set aside sums for payment of any cash dividends or make any other cash distributions on any Shares. -2- 3.2. The Company will: (a) Do or cause to be done all things reasonably necessary to preserve, renew and keep in full force and effect its corporate existence, rights and franchises, provided that the Company may effect a transaction in accordance with Section 8 hereof. (b) Promptly following the occurrence of any event that is or, with the passage of time or the giving of notice or both, would be, an Event of Default ("Default"), furnish to the Holder a statement of the Company's President or Chief Financial Officer setting forth the details of such Default and the action which the Company proposes to take with respect thereto. 4. Events of Default. If any of the following events (each an "Event of Default") shall occur: 4.1. The Company fails to pay the principal of, any installment of interest accrued on, or any other amount at anytime owing under, the Note, within ten days of when the same becomes due and payable hereunder; or 4.2. The Company defaults in the due observance or performance of or breaches any of its covenants contained in this Note and such default is not cured within 30 days after the Company has received written notice of the occurrence of such default; or 4.3. The Company shall (i) become insolvent, however evidenced, (ii) apply for or consent to the appointment of, or the taking of possession by, a receiver, trustee or similar official of or for itself or of or for all or a substantial part of its property, (iii) make an assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code, as now or hereafter in effect (the "Code"), (v) file a petition seeking to take advantage of any other bankruptcy, insolvency, moratorium, reorganization or other similar law of any jurisdiction ("Other Laws"), (vi) acquiesce as to, or fail to controvert in a timely or appropriate manner, an involuntary case filed against it under the Code, or (vii) take any corporate action in furtherance of any of the foregoing; or 4.4. A proceeding or involuntary case shall be commenced, without the application or consent of the Company, in any court of competent jurisdiction (i) under the Code, (ii) seeking liquidation, reorganization, dissolution, winding up or composition or readjustment of its debts under any Other Laws, or (iii) seeking the appointment of a trustee, receiver or similar official for it or for all or any substantial part of its assets, and any such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 90 days; or 4.5. A final non-appealable judgment for the payment of money shall be rendered by a court of competent jurisdiction against the Company and the Company shall not discharge the same, or procure a stay of execution thereof within 90 days from the date of entry thereof and within such 90 day period or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, and such judgment, together with all other judgments against the Company, shall exceed in the aggregate $1,000,000 in excess of any insurance as to the subject matter of such judgments, as to which coverage has not been declined or the underlying claim rejected by the applicable insurer; or -3- 4.6. The liquidation or dissolution of the Company or any vote in favor thereof by the board of directors and shareholders of the Company; or 4.7. A proceeding is commenced to foreclose a security interest in or lien on any asset of the Company as a result of a default in the payment or performance of any indebtedness of the Company in excess of $1,000,000, together with accrued unpaid interest thereon and related costs (other than the Note) and such proceeding has not been dismissed within 90 days of the commencement of such proceeding; or 4.8. An attachment or garnishment is levied against the assets of the Company involving an amount in excess of $1,000,000 and the lien created by such levy is not vacated, bonded or stayed within 90 days after such lien has attached to such assets; or 4.9. The Company defaults in the payment (regardless of amount) when due of the principal of, interest on, or any other liability on account of, any indebtedness of the Company (other than this Note) having an unpaid principal amount in excess of $1,000,000 and the holder of such indebtedness accelerates the maturity of such indebtedness, or a default occurs in the performance or observance by the Company of any covenant or condition (other than for the payment of money) contained in any note (other than this Note) or agreement evidencing or pertaining to any indebtedness of the Company (other than this Note) having an unpaid principal amount in excess of $1,000,000 and the holder of such indebtedness accelerates the maturity of such indebtedness; then, (i) upon the occurrence and continuance of any Event of Default (other than an Event of Default referred to in clause (ii) below), the Holder may declare the outstanding principal amount of this Note and accrued unpaid interest thereon to be due and payable, whereupon such principal and accrued and unpaid interest shall be due and payable forthwith, and (ii) upon the occurrence and continuance of any Event of Default specified in Section 4.3, 4.4 or 4.6, the unpaid principal balance of this Note, together with accrued and unpaid interest on this Note through the date of such Event of Default, shall become and be immediately due and payable without any declaration or other action by the Holder of this Note and without presentment, demand, protest or other notice or other requirements of any kind, all of which are hereby expressly waived by the Company. 5. Suits for Enforcement and Remedies. If any one or more Events of Default shall occur and shall continue, the Holder may proceed to (i) protect and enforce Holder's rights either by suit in equity or by action at law, or both, whether for the specific performance of any covenant, condition or agreement contained in this Note or in any agreement or document referred to herein or in aid of the exercise of any power granted in this Note or in any agreement or document referred to herein, (ii) enforce the payment of this Note, or (iii) enforce any other legal or equitable right of the Holder. No right or remedy herein or in any other agreement or instrument conferred upon the holder of this Note is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 6. Restriction on Transfer. This Note has been acquired for investment and has not been registered under the securities laws of the United States of America or any state thereof. Accordingly, neither this Note nor any interest therein may be offered for sale, sold or transferred in the absence of registration and -4- qualification of this Note under applicable federal and state securities laws or an opinion of counsel of the Holder reasonably satisfactory to the Company that such registration and qualification are not required. 7. Subordination. 7.1. The Company covenants and agrees, and the Holder, by his or its acceptance hereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Section 7, the indebtedness represented by this Note and the payment of the principal of accrued interest on, and all other amounts payable in respect of this Note are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness; provided, however, that, notwithstanding the foregoing or anything else to the contrary contained in this Section 7, payments, if any, in respect of this Note from the sale of Pledged Collateral under the circumstances and in the manner set forth in the Collateral Pledge Agreement between the Company and Michael Caruso & Co., Inc. ("Caruso"), on the one hand, and Payee, on the other hand, dated as of April 23, 2002 and attached hereto as Exhibit A (the "Pledge Agreement"), shall not be subordinate, and shall, in fact, be senior in right of payment, to the Senior Indebtedness and enforcement by Payee of its rights under the terms and conditions of such Pledge Agreement shall not be impaired or limited by reason of this Section 7. 7.2. Upon any distribution of assets of the Company in the event of: (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, or (d) any other event which would constitute an Event of Default specified in Section 4.3 or Section 4.4 hereof, then, and in any such event, the holders of Senior Indebtedness shall be entitled to receive: (1) payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall be made for such payment, before the Holder is entitled to receive any payment on account of the principal of, accrued interest on, or any other amount payable or in respect of this Note, and (2) any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in respect of this Note in any such case, proceeding, dissolution, liquidation or other winding up or event, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of this Note. -5- In the event that, notwithstanding the foregoing provisions of this Section 7.2, the Holder shall have received in respect of this Note any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of this Note, before all Senior Indebtedness is paid in full, or payment thereof provided for, and if prior to the time of such payment or distribution, the Holder shall have received written notice from the Company or a holder of Senior Indebtedness of the occurrence of any such event and the fact that the Senior Indebtedness has not been paid in full, then, in such event, all such payments or distributions received following such notice shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay, or provide for the payment of, all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. 7.3. The Company may not make any payment of the principal of, accrued interest on, or any other amount payable in respect of, the Note, nor may the Company acquire the Note for cash or property (other than for capital stock of the Company) if: (a) a payment default on any Senior Indebtedness has occurred and is continuing beyond any applicable grace period with respect thereto; or (b) a default (other than a default referred to in the preceding clause (1)) on any Senior Indebtedness occurs and is continuing that permits holders of such Senior Indebtedness to accelerate the maturity thereof and the default is the subject of judicial proceedings or the Company receives a notice of default thereof from any person or other entity which may give such notice pursuant to the instrument evidencing or document governing such Senior Indebtedness (a "Senior Indebtedness Default Notice"). If the Company receives a Senior Indebtedness Default Notice, then a similar notice received within one year thereafter relating to the same default on the same issue of Senior Indebtedness shall not be effective for purposes of this Section 7.3. The Company may resume payment on the Note and may acquire the Note if and when: (1) the default referred to above is cured or waived as provided or permitted in accordance with the terms of the applicable Senior Indebtedness; or (2) in the case of a default referred to in clause (b) of the preceding paragraph, 90 or more days pass after the receipt by the Company of the Senior Indebtedness Default Notice described in clause (b) above; and this Note otherwise permits the payment or acquisition at that time. In the event that, notwithstanding the foregoing, the Company makes a payment to the Holder prohibited by the foregoing provisions of this Section 7.3, and the Holder receives written notice from the Company or a holder of Senior Indebtedness prior to the receipt of such payment that any such payment is prohibited, then, and in such event, such payment shall (to the extent permitted by law) be paid over and delivered forthwith to the Company by or on behalf of the person or entity holding such payment for the benefit of the holders of the Senior Indebtedness. The Company shall provide the Holder with -6- copies of all Senior Indebtedness Default Notices that the Company receives from a holder of Senior Indebtedness. The provisions of this Section 7.3 shall not apply to any payment with respect to which Section 7.2 would be applicable. 7.4. Nothing contained in this Section 7.4 or elsewhere in this Note shall prevent the Company, at any time, except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company referred to in Section 7.2 or under the conditions described in Section 7.3, from making payments at any time of the principal of, accrued interest on, or other amounts payable, in respect of this Note. 7.5. Subject to payment in full of all Senior Indebtedness to the extent and in the manner set forth in this Section 7, the Holder shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Section 7 to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property and securities applicable to the Senior Indebtedness until the principal amount of, or other amount payable, accrued interest on, or other amount payable, in respect of, the Note shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holder of this Note would be entitled, except for the provisions of this Section 7, and no payments over pursuant to the provisions of this Section 7 to the holders of Senior Indebtedness by the Holder of this Note, shall as among the Company, its creditors other than holders of Senior Indebtedness and the Holder, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. 7.6. The provisions of this Section 7 are and are intended solely for the purpose of defining the relative rights of the Holder of this Note, on the one hand, and the holders of Senior Indebtedness, on the other hand. Nothing contained in this Section 7 or elsewhere in the Note is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holder, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Section 7 of the holders of Senior Indebtedness, is intended to rank senior to all other general obligations of the Company), to pay to the Holder the principal of, accrued interest on, or other amounts in respect of the Note, as and when the same shall become due and payable in accordance with the terms of the Note; or (b) affect the relative rights against the Company of the Holder and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Holder from exercising all remedies otherwise permitted by applicable law upon default under the Note, subject to the rights, if any, under this Section 7 of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Holder. 7.7. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Note, regardless of any knowledge thereof any such holder may have or be otherwise charged with. -7- Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holder of this Note, without incurring responsibility to the Holder of this Note and without impairing or releasing the subordination provided in this Section 7 or the obligations hereunder of the Holder of this Note to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew, increase or alter, Senior Indebtedness, or otherwise amend, replace, restate or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. 7.8. Upon any payment or distribution of assets of the Company referred to in this Section 7, the Holder of this Note shall be entitled to rely upon any final, nonappealable order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Holder of this Note for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 7. 7.9. As used in this Section 7, the following capitalized terms will have the definition set forth below: "Senior Indebtedness" means, without duplication, (a) the principal of, and premium (if any), and unpaid interest, fees and other amounts on (i) all present and future obligations incurred by the Company (whether as borrower or guarantor) under or pursuant to any loan or credit agreement between or among the Company and one or more banks and/or other institutional lenders (including but not limited to the factoring agreement between the Company and CIT Commercial Services, Inc. dated as of January 23, 2002) (each, a "Financing Agreement"), or any agreement between or among the Company and one or more banks and/or other institutional lenders providing for the extension, amendment, renewal, refunding, expansion or refinancing of such obligations (a "Refinancing Agreement"), whether now existing or hereafter entered into or contracted, including, without limitation, the principal balance of all loans made thereunder and interest and fees accruing with respect to such loans and (ii) all other present and future obligations, liabilities, and indebtedness incurred by the Company under or pursuant to any present or future Financing Agreement or Refinancing Agreement, including, without limitation, reimbursement obligations with respect to letters of credit issued pursuant to a Financing Agreement or a Refinancing Agreement (and all fees, commissions and charges incurred in connection with the issuance and maintenance of such letters of credit) or obligations with respect to acceptances issued or overdrafts extended pursuant to a Financing Agreement or a Refinancing Agreement; (b) indebtedness incurred by the Company to finance the acquisition by it of assets classified as capital assets under GAAP, provided such indebtedness is not secured by any of the Company's assets other than the assets being acquired ("Purchase Money Debt"); and (c) obligations of the Company as lessee under leases required to be capitalized on the balance sheet of the lessee under GAAP, provided such -8- obligations are not secured by any of the Company's assets other than such leases; in each case, (1) whether now existing or hereafter arising and whether such indebtedness or obligations arise or accrue before or after the commencement of any bankruptcy, insolvency or receivership proceedings, including, without limitation, interest and fees accruing pre-petition or post-petition at the rate or rates prescribed in a Financing Agreement, a Refinancing Agreement and/or Purchase Money Debt and/or any extension, amendment, renewal, refunding, expansion or refinancing of any of the foregoing, and costs, expenses, and attorneys' fees and disbursements, whenever incurred (and, whether or not such claims, interest, costs, expenses, fees or disbursements are allowed or allowable in any such proceeding); and (2) unless the document, instrument or agreement creating or evidencing the indebtedness or obligation or pursuant to which the same is outstanding, provides (A) that such indebtedness is not superior in right of payment to the Note or (B) that such indebtedness or obligation shall be subordinated to any other such indebtedness or obligation, unless such indebtedness or obligation expressly provides that it shall be senior in right of payment to the Note. 8. Consolidation, Merger, Conveyance, Transfer or Lease. 8.1. (a) Without the consent of the Holder, the Company will not (i) merge with or into or consolidate with any other person, permit any other person to merge or consolidate with or into it, or (ii) sell all or substantially all of its property to any other person; provided, however, that the foregoing restriction does not apply to the merger or consolidation of the Company with another entity or the transfer of all or substantially all of the property of the Company to any other person or entity if: (1) (A) the corporation that results from such merger or consolidation or to which all or substantially all of the property of the Company is transferred (the "Surviving Corporation") is organized under the laws of, and conducts substantially all of its business and has substantially all of its properties within, the United States of America or any jurisdiction or jurisdictions thereof; (B) the Surviving Corporation is Creditworthy, as defined in Section 8.1(b) below; (C) the due and punctual payment of the principal of, and interest on this Note, according to their tenor, and the due and punctual performance and observance of all the covenants in this Note, to be performed or observed by the Company, are expressly assumed pursuant to such assumption agreements and instruments in such forms as shall be approved reasonably by the Holder, or assumed by operation of law, by the Surviving Corporation; and (D) immediately prior to, and immediately after the consummation of the transaction, and after giving effect thereto, no Default or Event of Default exists or would exist, or (2) (A) the Company is the Surviving Corporation; (B) the stockholders of the Company immediately prior to such transaction own at least a majority of the voting securities of the Company following the transaction; and (C) immediately prior to, and immediately after the consummation of the transaction, and after giving effect thereto, no Default or Event of Default exists or would exist. (b) For purposes of this Section 8.1, "Creditworthy" shall mean that the Debt to Cash Flow Ratio of the Surviving Corporation is not greater than the Debt to Cash Flow Ratio of the Company for the most recent fiscal quarter ending immediately prior to such merger or consolidation and (ii) the shareholders' equity of the Surviving Corporation (excluding goodwill from the calculation of its assets) immediately after such transaction is equal to or greater than the shareholders' equity of the Company (excluding goodwill from the calculation of its assets) immediately prior to such merger or consolidation. For purposes hereof, "Debt to Cash Flow Ratio" shall mean the ratio of (1) (A) all obligations of the Company or the Surviving Corporation, as the case may be, for borrowed money, (B) all obligations of the Company or the Surviving Corporation, -9- as the case may be, evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, and (C) all guaranties of the Company or the Surviving Corporation, as the case may be, with respect to indebtedness of the type referred to in this definition of another person, to (2) the cash flow of the Company or the Surviving Corporation, as the case may be, each as determined in accordance with GAAP. (c) In connection with any transaction as to which Section 8.1(a) shall apply, the Company shall deliver to the Holder an Officer's Certificate stating that such consolidation, merger, conveyance, transfer, lease or other disposition, comply with this Section 8 and that all conditions precedent herein provided for relating to such transaction have been complied with, and an Opinion of Counsel that, to its knowledge, no Default or Event of Default exists. 8.2. Upon any consolidation of the Company with, or merger of the Company into, any other entity or any conveyance, transfer, sale, lease or other disposition of all or substantially all the properties and assets of the Company in accordance with Section 8.1, the successor entity formed by such consolidation or into which the Company is merged, or to which such conveyance, transfer, sale, lease or other disposition is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Note with the same effect as if such successor entity had been named as the Company herein, and thereafter, except in the case of a conveyance, transfer, sale, lease or other disposition, the predecessor entity shall be relieved of all obligations and covenants under this Note. 8.3. The consolidation of the Company with, or merger of the Company into, another entity or the liquidation or dissolution of the Company following the conveyance, transfer, sale, lease or other disposition of all or substantially all the properties and assets of the Company in accordance with Section 8.1, shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this Note if the entity formed by such consolidation or into which the Company is merged or the entity which acquires by conveyance or transfer such assets substantially as an entirety, as the case may be, shall, as part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Section 8.1. 9. Miscellaneous. 9.1. The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. 9.2. If, following the occurrence and continuance of an Event of Default, the Holder of this Note shall seek to enforce the collection of any amount of principal and/or accrued interest on this Note, there shall be immediately due and payable by the Company, in addition to the then unpaid principal of, and accrued unpaid interest on, this Note, all reasonable costs and expenses incurred by the Holder of this Note in connection therewith, including, without limitation, reasonable attorneys' fees and disbursements. 9.3. No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver or as an acquiescence in any Default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. -10- 9.4. This Note may not be modified or discharged (other than by payment), except by a writing duly executed by the Company and Holder. 9.5. The headings of various sections and subsections of this Note are for convenience of reference only and shall in no way modify any of the terms or provisions of this Note. 9.6. The Company and, by its acceptance of this Note, the Holder agree that any notice, request, demand or other communication required or permitted to be given to the Company or the Holder pursuant to the provisions of this Note shall be in writing and (a) personally delivered, (b) sent via facsimile, with confirmed transmission and receipt, and followed promptly by delivery of the original, or (c) sent by a nationally-recognized courier or overnight service such as Federal Express, (for next business day delivery) postage prepaid, as follows: (i) if to the Company, to: Candie's, Inc. 400 Columbus Avenue Valhalla, New York 10595 Attn: Deborah Sorell Stehr, Esq, Senior Vice President and General Counsel Facsimile No.: (914) 769-8103 With a copy to (which does not constitute notice): Blank Rome Tenzer Greenblatt LLP 405 Lexington Avenue New York, NY 10174 Attn: Robert J. Mittman, Esq. Fax: (212) 885-5001 (ii) if to the Holder of this Note, to the address or the facsimile number (as the case may be) of such Holder as shown on the Company's books and records; the address for the Payee is as follows: Sweet Sportswear, LLC 5804 E. Slauson Avenue Commerce, California 90040 Attn: Deborah Greaves, General Counsel Facsimile No.: (323) 728-1641 With a copy to (which does not constitute notice): Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East - Suite 2400 Los Angeles, California 90067 Fax: (310) 229-1001 Attn: David Antheil, Esq. -11- Either the Company or the Holder (and each of their permitted assigns) may change its address for receipt of future notices hereunder by giving written notice to the other in the manner provided herein. Notices shall be deemed given and received at the time of personal delivery or completed facsimile transmission, or, if sent by Federal Express or other overnight delivery service one business day after such sending. 9.7. The Company may not delegate its obligations under this Note. The Holder may assign, pledge or otherwise transfer this Note without prior written consent of the Company. This Note inures to the benefit of Payee, its successors and its assignee of this Note and binds the Company, and its successors and assigns, and the terms "Payee" and "the Company" whenever occurring herein shall be deemed and construed to include such respective successors and assigns. 9.8. This Note shall continue to be effective or be reinstated, as the case may be, if at any time any payment made pursuant to it is rescinded or must otherwise be returned by the Holder upon bankruptcy or reorganization or otherwise of the Company, all as though such payment had not been made. 9.9. This Note shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal substantive laws of the State of New York, without giving effect to the choice of law rules thereof. 9.10. The Company and, by its acceptance of this Note, the Holder agree as follows: (a) The Holder hereby irrevocably agrees that any lawsuit commenced by the Holder against the Company in connection with any dispute arising out of or relating to this Note (each, a "Holder Lawsuit") shall be brought by the Holder, unless otherwise agreed to in writing by the Company, solely in a federal or state court located within the County of New York, State of New York, and, in connection with each Holder Lawsuit, each of the Company and the Holder irrevocably agrees to submit to the exclusive jurisdiction of any federal or state court located within the County of New York, State of New York and irrevocably agrees to waive, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any Holder Lawsuit brought in such court or any defense of inconvenient forum for the maintenance of such Holder Lawsuit in such court. (b) The Company hereby irrevocably agrees that any lawsuit commenced by the Company against the Holder in connection with any dispute arising out of or relating to this Note (each, a "Company Lawsuit") shall be brought by the Company, unless otherwise agreed to in writing by such Holder, solely in a federal or state court located within the County of Los Angeles, State of California, and, in connection with each Company Lawsuit, each of the Company and the Holder irrevocably agrees to submit to the exclusive jurisdiction of any federal or state court located with the County of Los Angeles, State of California and irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any Company Lawsuit brought in such court or any defense of inconvenient forum for the maintenance of such Company Lawsuit in such court. -12- (c) Each of the Company and the Holder agrees that a judgment in any Holder Lawsuit or Company Lawsuit may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (d) Each of the Company and the Holder consents to process being served by any party to this Agreement in any suit, action or proceeding by the mailing of a copy thereof in accordance with the provisions of Section 9.6 hereof. 9.11. This Note is exchangeable, without expense, upon the surrender hereof by the Holder at the principal executive office of the Company, for two or more new Notes of like tenor and date (except for the principal amounts thereof) representing in the aggregate the same principal amount as this Note, in such denominations as shall be designated by the Holder thereof at the time of such surrender, provided that such new Notes shall be issuable in minimum denominations of $10,000 and integral multiples thereof. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note, if mutilated, the Company will make and deliver a new Note of like date and tenor, in lieu thereof. 9.12. By acceptance of this Note, the Holder agrees and acknowledges that the Company does not retain any right, title or interest in or to any Assets (as defined in the Capital Contribution Agreement) conveyed by the Company to IP Holdings LLC ("IP Holdings") pursuant to that certain Capital Contribution Agreement dated as of August 20, 2002 by and among the Company and Caruso, as transferors, and IP Holdings, as transferee (as amended or modified from time to time, the "Capital Contribution Agreement"). CANDIE'S, INC. By: /s/ Neil Cole -------------------------------------------- Name: Neil Cole Title: Chief Executive Officer and President Receipt of this Note is hereby accepted and acknowledged this 18th day of October, 2002, by: SWEET SPORTSWEAR, LLC By: /s/ Hubert Guez ----------------------------- Name: Hubert Guez Title: Manager -13- EXHIBIT A COLLATERAL PLEDGE AGREEMENT -14- EX-10.3 MATERIAL CO 6 ex10_3.txt COLLATERAL PLEDGE AGREEMENT EXECUTION COPY COLLATERAL PLEDGE AGREEMENT This Collateral Pledge Agreement ("Agreement"), is made and entered into this 18th day of October, 2002, effective as of April 23, 2002, by and between Candie's, Inc. ("Candie's") and Michael Caruso & Co., Inc. (together with Candie's, the "Pledgor") and Sweet Sportswear LLC ("Secured Party"). Background A. To induce Secured Party to extend credit to Candie's pursuant to the terms of that certain 8% Senior Subordinated Note due 2012 issued by Candie's to Secured Party as of April 23, 2002 (the "Note"), Pledgor and Secured Party are entering into this Agreement. B. This Agreement is given and is intended to provide Secured Party with certain security for (i) (x) the obligations of Candie's under the Note and (y) all other obligations and liabilities (including, without limitation, indemnities, fees, and interest thereon) of Pledgor, whether now existing or hereafter incurred, under, arising out of, or in connection with the Note and the due performance and compliance by Pledgor with all of the terms, conditions, and agreements contained in the Note; (ii) any and all sums advanced by Secured Party in order to preserve the Pledged Collateral or preserve its lien and security interest in the Pledged Collateral; (iii) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities referred to in clauses (i) and (ii) above, the reasonable expenses of any exercise by Secured Party of its rights hereunder, together with reasonable attorneys' fees and court costs; and (iv) to the extent not otherwise included in clauses (i), (ii), and (iii) above, Pledgor's obligations set forth in Section 17 (the "Obligations"). C. All capitalized terms used herein and not otherwise defined shall have the same meanings assigned to such terms in the Note. NOW THEREFORE, for other good and sufficient consideration, the receipt of which is hereby acknowledged, Pledgor, intending to be legally bound hereby, covenants and agrees as follows: 1. Pledgor, for the purpose of granting a continuing lien and security interest, does hereby assign, pledge, hypothecate, deliver, and set over to Secured Party, its successors, and assigns (i) all of the shares of capital stock of IP Holdings and Management Corporation, a Delaware corporation ("IPHM"), identified in Schedule I, whether now owned or hereafter acquired by Pledgor, together with all certificates representing such shares (collectively, the "Pledged Collateral"), (ii) all ownership interests of any class or character of a successor entity formed by or resulting from a consolidation or merger in which IPHM is not the surviving entity, and (iii) all shares, securities, moneys, or property representing a dividend on any of the Pledged Collateral, or representing a distribution or return of capital upon or in respect of the Pledged Collateral, or resulting from a split-up, revision, reclassification, or other like change of the Pledged Collateral or otherwise received in exchange therefor, and any subscription warrants, rights, or options issued to the holders of, or otherwise in respect of, the Pledged Collateral. -1- 2. The pledge and security interest described herein shall continue in effect to secure the Obligations until such Obligations have been paid in full. Unless the Pledged Collateral is disposed of by Secured Party in accordance with the provisions of Section 8 below, Secured Party shall return the certificates representing the Pledged Collateral to Pledgor upon Secured Party's receipt of payment in full of the Obligations. 3. Contemporaneously with the execution hereof, Pledgor agrees to deliver to Secured Party or its nominee all certificates representing or evidencing the Pledged Collateral, accompanied by duly executed instruments of transfer or assignments in blank, to be held by Secured Party or its nominee in accordance with the terms hereof. 4. Pledgor hereby authorizes Secured Party, and agrees itself to take all such other actions and to execute and deliver and file, or cause to be filed, such other instruments or documents, as Secured Party may reasonably require in order to establish and maintain a perfected, valid, and continuing first priority security interest and lien in the Pledged Collateral in accordance with this Agreement and the UCC and other applicable law. 5. Pledgor shall (i) give prompt written notice to Secured Party of, and (ii) defend the Pledged Collateral against, any suit, action, or proceeding related to the Pledged Collateral or which could adversely affect the security interests and liens granted hereunder. 6. Pledgor hereby represents and warrants that: (a) Except as pledged herein, (i) Pledgor is and will be the sole legal and beneficial owner of all of the Pledged Collateral now owned or hereafter acquired, (ii) Pledgor has not sold, assigned, transferred, pledged, or granted any option or security interest in or otherwise hypothecated the Pledged Collateral, and (iii) the Pledged Collateral is pledged herewith free and clear of any and all liens, security interests, encumbrances, claims, pledges, restrictions, legends, and options; (b) As of the date hereof and on the date of delivery or transfer to Secured Party of any Pledged Collateral under this Agreement, Pledgor has good and marketable title to the Pledged Collateral; (c) The Pledged Collateral (i) is, and all the other Pledged Collateral in which Pledgor shall hereafter acquire an interest will be, duly authorized, validly existing, fully paid, and non-assessable (in the case of any equity interest in a corporation) and duly issued and outstanding (in the case of any equity interest in any other entity), and none of such Pledged Collateral is or will be subject to any contractual restriction, or any restriction under the charter, bylaws, partnership agreement, or other organizational document of the respective issuer, upon the transfer of such Pledged Collateral, and (ii) constitutes all of the issued and outstanding shares of capital stock of IPHM as set forth in Schedule I beneficially owned by Pledgor on the date hereof (whether or not registered in the name of Pledgor) and Schedule I correctly identifies, as at the date hereof, IPHM as the issuer of such Pledged Collateral and the respective class and par value of the shares constituting such Pledged Collateral and the respective number of shares (and registered owners thereof) represented by each such certificate. -2- (d) Pledgor has the full power and authority to execute, deliver, and perform under this Agreement and to pledge the Pledged Collateral hereunder; and (e) This Agreement constitutes the valid and binding obligation of Pledgor, enforceable in accordance with its terms, and the pledge of the Pledged Collateral referred to herein is not in violation of and shall not create any default under any agreement, undertaking, or obligation of Pledgor. 7. Unless and until an Event of Default (as defined below) has occurred and is continuing, Pledgor shall be entitled to receive and retain any dividends, distributions, or proceeds in respect of the Pledged Collateral. If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not Secured Party exercises any available right to declare any Obligation due and payable or seeks or pursues any other relief or remedy available to it hereunder or under the Note or applicable law, all dividends and other distributions on the Pledged Collateral shall be paid directly to Secured Party and either, at the Pledgor's option (a) retained by the Secured Party as part of the Pledged Collateral, subject to the terms of this Agreement, or (b) in the case of cash dividends or distributions, applied against the Pledgor's Obligations in reduction thereof, and, if Secured Party shall so request, Pledgor agrees to execute and deliver to Secured Party appropriate additional dividend, distribution, and other orders and documents to that end. 8. (a) Notwithstanding anything to the contrary or inconsistent herewith contained in the Note, an "Event of Default" shall exist hereunder if (i) Candie's shall commence a voluntary case, or acquiesce as to an involuntary case filed against it, under the Federal Bankruptcy Code, as now or hereafter in effect (the "Code"), or (ii) a proceeding or involuntary case shall be commenced against Candie's under the Code in any court of competent jurisdiction, without the application or consent of Candie's, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of ninety (90) days. Upon, and only upon, the occurrence of an Event of Default hereunder, Secured Party shall have the right to and may, at its sole option, exercise any and/or all rights and remedies with respect to the Pledged Collateral available to it hereunder, under the Uniform Commercial Code as adopted in the State of New York ("UCC"), or otherwise available to it, at law or in equity, to enforce the pledge granted herein, including, without limitation, the right to dispose of the Pledged Collateral at a public or private sale. (b) Without precluding any other methods of sale or other disposition, the sale or other disposition of the Pledged Collateral or any portion thereof shall have been made in a commercially reasonable manner if conducted in conformity with reasonable commercial practices of creditors disposing of similar property; but in any event Secured Party may sell, lease, deliver, grant options to purchase, or otherwise retain, liquidate, or dispose such Pledged Collateral on such terms and to such purchaser(s) (including Secured Party if such sale is a public sale) as Secured Party in its absolute discretion may choose, and for cash or for credit or for future delivery, without assuming any credit risk, at public or private sale or other disposition, without demand of performance, and without any obligation to advertise or give notice of any kind other than that necessary under applicable law. Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Pledged Collateral after sale or other disposition hereunder, and all rights, if any, of marshalling the Pledged Collateral and any other security for the Obligations or otherwise. At any such public sale or other public disposition, unless prohibited by applicable law, Secured Party may bid for and purchase all or any part of the Pledged Collateral so sold free from any such right or equity of redemption. Secured Party shall not be liable for failure to collect or realize upon any or all of the Pledged Collateral or for any delay in so doing nor shall it be under any obligation to take any action whatsoever with regard thereto. -3- (c) Secured Party shall incur no liability as a result of the sale of the Pledged Collateral, or any part thereof, at any private sale pursuant to this Agreement conducted in a commercially reasonable manner and otherwise in accordance with applicable law. Assuming the disposition is conducted in a commercially reasonable manner and in accordance with applicable law, Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which the Pledged Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if Secured Party accepts the first offer received and does not offer the Pledged Collateral to more than one offeree. 9. Pledgor may at any time sell all or any portion of the Pledged Collateral provided that the full amount of the then outstanding Obligations are paid to Secured Party in conjunction with the closing of such sale. 10. The proceeds of any Pledged Collateral received by Secured Party at any time, whether from the sale of Pledged Collateral or otherwise, shall be applied to or on account of the Obligations and any excess proceeds, after payment in full of the Obligations, shall be immediately remitted to Pledgor. In case of any deficiency and if permitted by applicable law, Pledgor shall, whether or not then due, remain liable therefor. 11. In the event that any change is made or declared in the capital structure of IPHM, or Pledgor acquires or in any other manner receives additional shares in IPHM, any and all new, substituted, or additional certificates representing or evidencing such shares which have been issued by reason of any such change, shall be delivered to and held by Secured Party under the terms hereof in the same manner as the Pledged Collateral originally pledged hereunder. 12. Pledgor (i) shall give five (5) business days' prior written notice to Secured Party of any merger, consolidation, share exchange, reorganization, or other business combination affecting or involving IPHM or IP Holdings, LLC, a wholly owned subsidiary of IPHM ("IP Holdings"), (ii) shall not take any action as a shareholder of IPHM that would cause or permit IPHM to (a) sell, assign, license, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any of IPHM's membership interests in IP Holdings or (b) create, incur, or permit to exist any lien or encumbrance on or with respect to any of the assets of IPHM, any interest therein, or any proceeds thereof, except for the security interests, liens, and/or encumbrances created with respect to the Bond Transaction, defined below, or any modification thereof or any refinancing thereof by or through IP Holdings or any affiliate of IP Holdings (a "Refinancing"), and (iii) shall not take any action as a shareholder of IPHM that would cause or allow IP Holdings to (a) prior to the payment in full of the Asset-Backed Notes or any Refinancing thereof, sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any of the assets of IP Holdings in contravention of the terms of the Bond Documents, defined below, or the documents relating to the Refinancing, as the case may be, or, following the payment in full of the Asset-Backed Notes and any Refinancing thereof, sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any of the intellectual property assets of IP Holdings (but in no event shall the foregoing be construed to limit IP Holdings' right to license its intellectual property assets either before or after the repayment of -4- the Asset-Backed Notes) or (b) create, incur, or permit to exist any lien or encumbrance on or with respect to any of the assets of IP Holdings, any interest therein, or any proceeds thereof, except for the security interests and liens created with respect to the Bond Transaction or any modification thereof or any Refinancing. As used herein the term "Bond Transaction" shall mean and refer to the series of transactions described in and/or contemplated by the documents set forth on Schedule II (the "Bond Documents") including the issuance by IP Holdings of $20,000,000 principal amount of its 7.93% asset-backed notes on August 20, 2002 (the "Asset-Backed Notes") and all of the transactions effected in contemplation, or as a result, thereof or in connection therewith. 13. So long as no Event of Default has occurred hereunder, and, thereafter, until Secured Party notifies Pledgor in writing of the exercise of its rights hereunder, Pledgor shall retain the sole right to vote the Pledged Collateral and exercise all rights of ownership with respect to all corporate questions for all purposes not inconsistent with the terms hereof. 14. To the extent Secured Party is required by law to give Pledgor prior notice of any public or private sale, or other disposition of the Pledged Collateral, Pledgor agrees that ten (10) business days prior written notice to Pledgor shall be a commercially reasonable and sufficient notice of such sale or other intended disposition. 15. Without limiting any rights or powers granted to Secured Party pursuant to this Agreement, applicable law or otherwise, Pledgor hereby appoints Secured Party as its attorney-in-fact, with full power and authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party's discretion to take any and all action and to execute, file, and record any and all instruments, agreements, and documents which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement. The appointment set forth in this Section 15 is coupled with an interest and is irrevocable. 16. If Pledgor fails to perform any agreement, covenant, or obligation contained herein after reasonable notice from Secured Party, Secured Party may itself perform, or cause performance of such agreement, covenant, or obligation and the expenses and costs of Secured Party incurred in connection therewith shall be payable by Pledgor. 17. Secured Party shall not have any liability to any person and shall be indemnified and held harmless by Pledgor for any liability incurred by reason of taking or refraining from taking any action with respect to the Pledged Collateral, except in the case of Secured Party's gross negligence or willful misconduct. Pledgor agrees to indemnify Secured Party from and against any and all claims, losses, and liabilities arising out of or connected with this Agreement (including, without limitation, enforcement of this Agreement), except such claims, losses, or liabilities resulting solely from Secured Party's gross negligence or willful misconduct. This Section 17 shall survive any termination of this Agreement. 18. This Agreement constitutes the entire agreement between the parties hereto regarding the subject matter hereof and may be modified only by a written instrument signed by Pledgor and Secured Party. -5- 19. This Agreement is made in and shall be governed by and construed in accordance with the laws of the State of New York, without regard to New York conflicts of law rules, and the provisions hereof shall be deemed severable in the event of the invalidity of any provision. 20. Any amendment, modification, or waiver of any provision of this Agreement shall be in writing and executed by the parties hereto, and any such waiver shall be effective only for the specific purpose for which it is given and for the specific time period, if any, contemplated therein. 21. No failure or delay by Secured Party in exercising any right, power, privilege, or remedy hereunder or under the UCC or any other applicable law shall operate as a waiver hereof or thereof and no single or partial exercise by Secured Party of any right, power, privilege, or remedy of Secured Party hereunder or thereunder shall preclude any subsequent or further exercise by Secured Party thereof or of any other right, power, privilege, or remedy hereunder or thereunder. 22. If any provision of this Agreement is invalid or unenforceable, then, to the extent possible, all of the remaining provisions of this Agreement shall remain in full force and effect and shall be binding on the parties hereto. 23. Upon any consolidation of Candie's with, or merger of Candie's into, any other entity or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the properties and assets of Candie's in accordance with Section 8.1 of the Note, the successor entity formed by such consolidation or into which Candie's is merged, or to which such conveyance, transfer, sale, lease or other disposition is made, shall succeed to, and be substituted for, and may exercise every right and power of the Pledgor under this Agreement with the same effect as if such successor entity had been named as the Pledgor herein, and thereafter, the predecessor entity shall be relieved of all obligations and covenants under this Agreement. Other than as set forth in the preceding sentence, Pledgor shall not have the right to assign its rights or delegate its obligations hereunder or any part thereof to any other person without Secured Party's prior written consent. 24. Pledgor and Secured Party agree as follows: (a) Secured Party hereby irrevocably agrees that any lawsuit commenced by Secured Party against Pledgor in connection with any dispute arising out of or relating to this Agreement (each, a "Secured Party Lawsuit") shall be brought by Secured Party, unless otherwise agreed to in writing by Pledgor, solely in a federal or state court located within the County of New York, State of New York, and, in connection with each Secured Party Lawsuit, each of Secured Party and Pledgor irrevocably agrees to submit to the exclusive jurisdiction of any federal or state court located within the County of New York, State of New York, and irrevocably agrees to waive, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any Secured Party Lawsuit brought in such court or any defense of inconvenient forum for the maintenance of such Secured Party Lawsuit in such court. (b) Pledgor hereby irrevocably agrees that any lawsuit commenced by Pledgor against Secured Party in connection with any dispute arising out of or relating to this Agreement (each, a "Pledgor Lawsuit") shall be brought by Pledgor, unless otherwise agreed to in writing by Secured Party, solely in a federal or state court located within the County of Los Angeles, State of California, and, in connection with each Pledgor Lawsuit, each of Pledgor and Secured Party -6- irrevocably agrees to submit to the exclusive jurisdiction of any federal or state court located with the County of Los Angeles, State of California, and irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any Pledgor Lawsuit brought in such court or any defense of inconvenient forum for the maintenance of such Pledgor Lawsuit in such court. (c) Each of Pledgor and Secured Party agrees that a judgment in any Secured Party Lawsuit or Pledgor Lawsuit may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (d) Each of Pledgor and Secured Party consents to process being served by any party to this Agreement in any suit, action, or proceeding by the mailing of a copy thereof in accordance with the provisions of Section 25 below. 25. Any notice, request, demand, or other communication required or permitted to be given to Pledgor or Secured Party pursuant to the provisions of this Agreement shall be in writing and (i) personally delivered, (ii) sent via facsimile, with confirmed transmission and receipt, and followed promptly by delivery of the original, or (iii) sent by a nationally-recognized courier or overnight service such as Federal Express, (for next business-day delivery) postage prepaid, as follows: (a) if to Pledgor, to: Candie's, Inc. or Michael Caruso & Co., Inc., as the case may be, each at: 400 Columbus Avenue Valhalla, New York 10595 Attn.: Deborah Sorell Stehr, Esq. Senior Vice President and General Counsel Facsimile No.: (914) 769-8103 With a copy to (which does not constitute notice): Blank Rome Tenzer Greenblatt LLP 405 Lexington Avenue New York, NY 10174 Attn.: Robert J. Mittman, Esq. Facsimile No.: (212) 885-5001 (b) if to Secured Party, to: Sweet Sportswear LLC 5804 E. Slauson Avenue Commerce, California 90040 Attn.: Deborah Greaves General Counsel Facsimile No.: (323) 728-1641 -7- With a copy to (which does not constitute notice): Akin Gump Strauss Hauer & Feld LLP 2029 Century Park East, Suite 2400 Los Angeles, California 90067 Attn.: David Antheil, Esq. Facsimile No.: (310) 229-1001 Either Pledgor or Secured Party may change its address for receipt of future notices hereunder by giving written notice to the other in the manner provided herein. Notices shall be deemed given and received at the time of personal delivery or completed facsimile transmission, or, if sent by Federal Express or other overnight delivery service, one (1) business day after such sending. 26. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns. [Signature pages follow] -8- IN WITNESS WHEREOF, this Collateral Pledge Agreement has been executed and delivered as of the date first set forth above. CANDIE'S, INC. By: /s/ Neil Cole ---------------------------------------- Name: Neil Cole Title: Chief Executive Officer and President MICHAEL CARUSO & CO., INC. By: /s/ Neil Cole ---------------------------------------- Name: Neil Cole Title: Chief Executive Officer SWEET SPORTSWEAR LLC By: /s/ Hubert Guez ---------------------------------------- Name: Hubert Guez Title: Manager -9- SCHEDULE I Pledged Collateral All of the outstanding shares of common stock of IP Holdings and Management Corporation, a Delaware corporation ("IPHM"), par value $0.01 per share (the "Shares"), are hereby pledged by Candie's, Inc. ("Candie's") and Michael Caruso & Co., Inc. ("Michael Caruso"), the sole stockholders of IPHM, as outlined below, to Sweet Sportswear LLC pursuant to the Collateral Pledge Agreement to which this Schedule is attached: Number Number of of Shares of IPHM Shares of IPHM (and Stock (and Stock Total Total Certificate Certificate Number Number Number) Number) of of Issued Issued Shares Authorized Shares Issued by to to to be Issued by IPHM IPHM Candie's Michael Caruso - ------------------------------------------------------------------------------ 60 Shares/ 40 Shares/ 100 Shares 100 Shares Certificate Certificate No. 1 No. 2 - ------------------------------------------------------------------------------ -10- SCHEDULE II Bond Documents 1. Indenture, dated August 20, 2002, between IP Holdings LLC ("IP Holdings") and Wilmington Trust Company, a Delaware Business Trust ("Trustee") 2. Capital Contribution Agreement, dated August 20, 2002, by and among Candie's, Inc. ("Candie's"), Michael Caruso & Co., Inc. ("Caruso") and IP Holdings 3. Capital Contribution Agreement, dated August 20, 2002, by and among Candie's, Caruso and IP Holdings and Management Corporation ("IPHM") 4. Assignment and Acceptance Agreement, dated August 20, 2002, by and among Candies', Caruso and IPHM 5. Servicing Agreement, dated August 20, 2002, between UCC Servicing, LLC (the "Servicer") and IP Holdings 6. Management Agreement, dated August 20, 2002, by and among IP Management LLC ("IP Management"), IP Holdings, IPHM and Servicer 7. Back-up Manager Management Agreement, dated August 20, 2002, by and among Strategic Consulting Network, LLC (d/b/a/ Jassin-O'Rourke Group, LLC) (the "Back-Up Manager"), IP Holdings and Servicer 8. Management Support Agreement, dated August 20, 2002, between Candie's and IP Management 9. Operating Agreement of IP Holdings 10. Operating Agreement of IP Management 11. By-Laws of IPHM 12. Certificate of Incorporation of IPHM (Certificate of Incorporation, dated August 15, 2002 and Amendment to Certificate of Incorporation, dated August 20, 2002) -11- EX-99.1 CERTIFICATIO 7 ex99_1.txt CERTIFICATION OF CEO Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Candie's, Inc. (the "Company") on Form 10-Q for the period ended October 31, 2002 (the "Report"), I, Neil Cole as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Neil Cole -------------------------------- Neil Cole Chief Executive Officer (Principal Executive Officer) Dated: December 13, 2002 EX-99.2 CERTIFICATIO 8 ex99_2.txt CERTIFICATION OF CFO Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Candie's, Inc. (the "Company") on Form 10-Q for the period ended October 31, 2002 (the "Report"), I, Richard Danderline as Executive Vice President of Finance and Operations of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard Danderline Richard Danderline Executive Vice President of Finance and Operations (Principal Financial Officer) Dated: December 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----