-----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, K4HkRr/YoP4H4Ha7fKw6EjUtleYSEPdMGjKX3ZM2Wxjf8tG7Dc7sKd32Bjp8WdHx WBhLoEmaEUzy7CWx8hYnsw== 0000857737-05-000056.txt : 20050810 0000857737-05-000056.hdr.sgml : 20050810 20050810170837 ACCESSION NUMBER: 0000857737-05-000056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050810 DATE AS OF CHANGE: 20050810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICONIX BRAND GROUP, 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: 051014205 BUSINESS ADDRESS: STREET 1: 215 W. 40TH STREET, 6TH FL. CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 212-730-0030 MAIL ADDRESS: STREET 1: 215 W. 40TH STREET, 6TH FL. CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: CANDIES INC DATE OF NAME CHANGE: 19930604 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 icon_10q063005.txt QUARTERLY REPORT FOR 2ND QUARTER OF 2005 United States Securities and Exchange Commission Washington, D.C. 20549 ------------------------------------ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2005 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 ICONIX BRAND GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2481903 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 215 West 40th Street New York, NY 10018 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 730-0030 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes ___ No. _X__ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.001 Par Value - 28,801,985 shares as of July 20, 2005
INDEX FORM 10-Q Iconix Brand Group, Inc. and Subsidiaries Page No. ----------- Part I. Financial Information Item 1. Financial Statements - (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2005 and December 31, 2004.................... 3 Condensed Consolidated Income Statements - Three and Six Months Ended June 30, 2005 and July 31, 2004.......................................................... 4 Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended June 30, 2005............................................................................ 5 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2005 and July 31, 2004.......................................................... 6 Notes to Condensed Consolidated Financial Statements........................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................... 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 19 Item 4. Controls and Procedures....................................................................... 20 Part II. Other Information.............................................................................. Item 1. Legal Proceedings............................................................................. 20 Exhibits .............................................................................................. 20 Signatures ........................................................................................... 21
Part I. Financial Information Item 1. FINANCIAL STATEMENTS-(Unaudited) Iconix Brand Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
June 30, December 31, 2005 2004 ---------- ---------- (Unaudited) Assets (000's omitted, except par value) Current Assets Cash............................................................... $ 515 $ 798 Accounts receivable, net........................................... 3,982 2,239 Due from factors, net.............................................. - 3,865 Due from affiliate................................................. 463 227 Inventories........................................................ - 279 Deferred income taxes.............................................. 3,349 1,549 Prepaid advertising and other...................................... 297 670 ------- ------- Total Current Assets................................................... 8,606 9,627 Property and equipment, at cost: Furniture, fixtures and equipment.................................. 1,612 1,638 Less: Accumulated depreciation and amortization.................... 1,366 1,292 ------- ------- 246 346 Other assets: Restricted cash.................................................... 2,900 2,900 Goodwill........................................................... 25,241 25,241 Intangibles, net.................................................... 16,121 16,591 Deferred financing costs, net...................................... 1,907 2,149 Deferred income taxes.............................................. 2,073 2,073 Other.............................................................. 1,142 1,233 ------- ------- 49,384 50,187 ------- ------- Total Assets........................................................... $58,236 $60,160 ======= ======= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses.............................. $ 2,194 $ 4,284 Accounts payable, subject to litigation............................ 4,886 4,886 Due to related parties............................................. 434 2,465 Current portion of deferred revenue............................. 1,332 1,413 Current portion of long-term debt............................... 3,024 2,563 ------- ------- Total Current Liabilities.............................................. 11,870 15,611 ------- ------- Deferred revenue....................................................... 183 366 Long-term debt......................................................... 17,818 19,925 Commitments and contingencies.......................................... - - Stockholders' Equity Common stock, $.001 par value - shares authorized 75,000; shares issued 28,751 at June 30, 2005 and 28,293 issued at December 31, 2004.......................................... 30 29 Additional paid-in capital......................................... 76,962 76,154 Accumulated deficit................................................ (47,960) (51,258) Treasury stock - 198 shares at cost................................. (667) (667) ------- ------- Total Stockholders' Equity............................................. 28,365 24,258 ------- ------- Total Liabilities and Stockholders' Equity............................. $ 58,236 $ 60,160 ======= =======
See Notes to Condensed Consolidated Financial Statements. 3 Iconix Brand Group, Inc. and Subsidiaries Condensed Consolidated Income Statements (Unaudited)
Three Months Ended Six Months Ended June 30, July 31, June 30, July 31, --------------- -------------- ---------------- --------------- 2005 2004 2005 2004 (000's omitted, except per share data) Net sales..................................... $ - $26,035 $ - $42,847 Licensing and commission revenue............... 4,287 2,639 8,587 5,052 ------------- ------------ ------------- -------------- Net revenues.................................. 4,287 28,674 8,587 47,899 Cost of goods sold (net of recovery pursuant to an agreement of $737 and $1,725 in the three and six months ended in 2004, respectively).... - 22,780 - 37,063 ------------- ------------ ------------- ------------- Gross profit..................................... 4,287 5,894 8,587 10,836 Operating expenses: Selling, general and administrative expenses (net of recovery pursuant to an agreement of $0 and $296 in the three and six months ended in 2005, respectively)...................... 2,838 4,636 5,517 8,750 Special charges.................................. 328 - 707 99 ------------- ----------- ------------- -------------- 3,166 4,636 6,224 8,849 ------------- ----------- ------------- -------------- Operating income................................ 1,121 1,258 2,363 1,987 Interest expense - net.......................... 400 740 845 1,436 ------------- ----------- ------------- -------------- Income before income taxes...................... 721 518 1,518 551 Income tax benefits - net................ (1,790) - (1,780) - ------------ ----------- ------------- ------------- Net income ..................................... $ 2,511 $ 518 $ 3,298 $ 551 ============ =========== ============= ============= Earnings per common share: Basic.................................. $ 0.09 $ 0.02 $ 0.12 $ 0.02 ============= =========== ============ ============== Diluted................................ $ 0.08 $ 0.02 $ 0.11 $ 0.02 ============= =========== ============= ============== Weighted average number of common shares outstanding: Basic.................................. 28,602 26,602 28,516 26,315 ============= =========== ============ ============== Diluted................................ 30,247 27,735 30,115 27,322 ============= =========== ============ ==============
See Notes to Condensed Consolidated Financial Statements. 4 Iconix Brand Group, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Six Months Ended June 30, 2005 (000's omitted)
Additional Common Stock Paid-In Accumulated Treasury Shares Amount Capital Deficit Stock Total ---------------------------------------------------------------------------- Balance at January 1, 2005 28,293 $ 29 $ 76,154 $ (51,258) $ (667) $ 24,258 Issuance of common stock to directors .... 12 -- 60 -- -- 60 Exercise of stock options................. 446 1 748 -- -- 749 Net income................................ -- -- -- 3,298 -- 3,298 ---------------------------------------------------------------------------- Balance at June 30, 2005 28,751 $ 30 $ 76,962 $ (47,960) $ (667) $ 28,365 ============================================================================
See Notes to Condensed Consolidated Financial Statements. 5 Iconix Brand Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended -------------------------- June 30, July 31, 2005 2004 ----------- ---------- (000's omitted) OPERATING ACTIVITIES: Net cash provided by (used in) operating activities........................ $ 2,642 $ (6,483) ----------- ---------- INVESTING ACTIVITIES: Purchases of property and equipment................................... (26) (4) Purchases of trademarks............................................... (218) - ----------- ---------- Net cash used in investing activities...................................... (244) (4) ----------- ---------- FINANCING ACTIVITIES: Proceeds from long - term debt..................................... - 3,600 Repayment of long - term debt...................................... (1,430) (1,131) Repayment of loans from related party.............................. (2,000) - Prepaid interest expense - long term............................... - (500) Deferred financing costs........................................... - (430) Proceeds from common stock issuance................................ - 2,184 Proceeds from exercise of stock options............... 749 551 Revolving notes payable - bank........................ - 513 ----------- ---------- Net cash (used in) provided by financing activities........................ (2,681) 4,787 ----------- ---------- DECREASE IN CASH........................................................... (283) (1,700) Cash at beginning of period................................................ 798 2,794 ----------- ---------- Cash at end of period...................................................... $ 515 $ 1,094 ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest................................................ $ 775 $ 1,752 =========== ==========
See Notes to Condensed Consolidated Financial Statements. 6 Iconix Brand Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2005 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 primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month ("Current Quarter") and six month period ("Current Six Months") ended June 30, 2005 are not necessarily indicative of the results that may be expected for a full fiscal year. In December, 2004, the Company changed its fiscal year end from January 31 to December 31, effective for the period ending December 31, 2004. As a result, the end of the Current Quarter and the Current Six Months do not coincide with the three months ("Prior Year Quarter") and six months ("Prior Year Six Months") ended July 31, 2004. The financial statements included herein are for the Current Quarter and Current Six Months, and they are compared with the Prior Year Quarter and Prior Year Six Months. The Company has not recast the Prior Year Quarter and Prior Year Six Months to coincide with the Current Quarter and Current Six Months as management believes that such recasting does not materially affect the relative comparability of the data presented herein. Beginning January 2005, the Company changed its business practices with respect to Bright Star Footwear, Inc ("Bright Star"), a subsidiary of the Company, which resulted in a change in revenue recognition for the Current Quarter and Current Six Months. Bright Star now acts as an agent, therefore only net commission revenue is recognized commencing January 1, 2005. As a result there was $512,000 in commission revenue and no sales recorded in the Current Quarter for Bright Star, as compared to $5.3 million in sales and $554,000 in gross profit in the Prior Year Quarter. In the Current Six Months there was $844,000 in commission revenue and no sales recorded for Bright Star, as compared to $10.7 million in sales and $1.0 million in gross profit in the Prior Year Six Months. 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 December 31, 2004. NOTE B STOCK OPTIONS Pursuant to a provision in SFAS No. 123(R), "Accounting for Stock-Based Compensation", the Company has elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, the compensation cost for stock options has been measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, the Company only recognizes compensation expense for stock-based awards to employees for options granted at below-market prices, with the expense recognized over the vesting period of the options. The stock-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards, as well as the resulting pro forma net income and earnings per share using the fair value approach, are presented in the following table. These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. 7
(000's omitted except per share data) Three Months Ended Six Months Ended ------------------ ----------------- June 30, July 31, June 30, July 31, 2005 2004 2005 2004 -------------- ------------- ------------- -------------- Net income - as reported $ 2,511 $ 518 $ 3,298 $ 551 Deduct: Stock-based employee compensation determined under the fair value based method, net of tax (734) (424) (2,440) (894) -------------- ------------- ------------- -------------- Pro forma net income (loss) $ 1,777 $ 94 $ 858 $ (343) ============== ============= ============= ============== Basic earnings (loss) per share: As reported $ 0.09 $ 0.02 $ 0.12 $ 0.02 ============== ============= ============= ============== Pro forma $ 0.06 $ 0.00 $ 0.03 $ (0.01) ============== ============= ============= ============== Basic and diluted earnings (loss) per share: As reported $ 0.08 $ 0.02 $ 0.11 $ 0.02 ============== ============= ============= ============== Pro forma $ 0.06 $ 0.00 $ 0.03 $ (0.01) ============== ============= ============= ==============
NOTE C FINANCING AGREEMENTS In August 2002, IP Holdings, LLC ("IPH"), a subsidiary owned by the Company, issued in a private placement $20 million of asset-backed notes 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. Costs incurred to obtain this financing totaled approximately $2.4 million were deferred and are being amortized over the remaining life of the debt. At June 30, 2005, the unamortized portion of such costs was $1.7 million. As of July 22, 2005, the note has been amended. See Note L. During the Prior Year Quarter, IPH amended the asset-backed notes whereby it borrowed an additional $3.6 million. The additional borrowing matures in August 2009, with a floating interest rate of LIBOR + 4.45% and quarterly principal and interest payments and $500,000 of interest prepaid at closing. The net proceeds of $2.9 million were used for general working capital purposes. Costs incurred to obtain this financing totaling approximately $179,000 were deferred and are being amortized over the remaining life of the debt. As of July 22, 2005, the note has been amended. See Note L. See Note G regarding the former financing agreement of Unzipped Apparel, LLC ("Unzipped"), the Company's wholly-owned subsidiary. NOTE D EARNINGS PER SHARE Basic earnings per share includes no dilution and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, warrants and convertible preferred stock. At June 30, 2005, 6.3 million stock options were outstanding under the Company's option plans. As of July 22, 2005, additional options have been issued. See Note L. The following is a reconciliation of the shares used in calculating basic and diluted earnings per share:
Three Months Ended Six Months Ended, June 30, July 31, June 30, July 31, 2005 2004 2005 2004 --------------------------- ------------------------- (000's omitted) Basic .......................................................... 28,602 26,602 28,516 26,315 Effect of assumed conversions of employee stock options......... 1,645 1,133 1,599 1,007 --------------------------- ------------------------- Diluted ........................................................ 30,247 27,735 30,115 27,322 =========================== =========================
8 NOTE E INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, ("SFAS 109") "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of net operating loss carry forwards pursuant to Internal Revenue Code section 382, future income projections and the overall prospects of the Company's business. Based upon management's assessment of all available evidence, including the Company's completed transition into a licensing business, net income for fiscal year ended December 31, 2004, estimates of future profitability based on minimum guaranteed royalty revenues from its licensees, and the overall prospects of the Company's business, management concluded in the Current Quarter that it is more likely than not that a portion of previously unrecognized deferred income tax benefits will be realized. Accordingly, the Company released a portion of the related valuation allowance which resulted in an approximately $1.8 million tax benefit for the Current Quarter and Current Six Months. NOTE F COMMITMENTS AND CONTINGENCIES On August 5, 2004, the Company, along with Unzipped, its subsidiary Michael Caruso & Co., Inc. ("Caruso") and IPH (collectively, "Plaintiffs") commenced a lawsuit in the Superior Court of California, Los Angeles County, against Unzipped's former manager, former supplier and former distributor, Sweet Sportswear LLC ("Sweet"), Azteca Production International, Inc. ("Azteca") and Apparel Distribution Services, LLC ("ADS"), and a principal of these entities and former Company Board member, Hubert Guez (collectively, "Defendants"). Plaintiffs amended their Complaint on November 22, 2004. In their Amended Complaint, Plaintiffs allege that Defendants fraudulently induced Plaintiffs to purchase Sweet's 50% interest in Unzipped for an inflated price, Sweet and Azteca committed material breaches of the Management Agreement (defined below) and supply and distribution agreements and Guez materially breached his fiduciary obligations to the Company while a member of the Company's Board of Directors, and seeks damages in excess of $50 million. Additionally, Plaintiffs allege that Defendants have imported, distributed and sold goods bearing the Company's BONGO(R) trademarks in violation of federal and California law. Defendants filed a motion to dismiss certain of the claims asserted in the Amended Complaint, and on February 7, 2005, the Court denied Defendants' motion in its entirety. On March 10, 2005, Sweet, Azteca and ADS (collectively, "Cross-Complainants") filed an Answer to Plaintiffs' Amended Complaint and a Cross-Complaint against Plaintiffs and the Company's Chief Executive Officer, Neil Cole ("Mr. Cole") (collectively, "Cross-Defendants") seeking compensatory, punitive and exemplary damages and litigation costs, as well as the establishment of a constructive trust for the benefit of the Cross-Complainants. The Cross-Complainants alleged that some or all of the Cross-Defendants breached the Management Agreement and supply and distribution agreements, IPH and Mr. Cole interfered with Sweet's performance under the Management Agreement and the Company, Caruso and Mr. Cole interfered with Cross-Complainants' relationships with Unzipped and caused Unzipped to breach its agreements with Azteca and ADS. Cross-Complainants also alleged that some or all of the Company, Caruso and Mr. Cole fraudulently induced Sweet to sell its 50% interest in Unzipped for a deflated price and enter into an associated 8% Senior Subordinated Note with the principal amount of $11 million (the "Sweet Note"). The Company had previously entered into a management agreement with Sweet (the "Management Agreement") wherein Sweet guaranteed that the net income of Unzipped, as defined, shall be no less than $1.7 million for each year during the term ("the Guarantee"). In the event that the Guarantee was not met, Sweet is obligated to pay the difference between the actual net income, as defined, and the Guarantee ("the Shortfall Payment"). In the Cross-Complaint, the Cross-Complainants alleged that the Company had breached its obligations to Sweet arising under the Sweet Note by, among other things, understating Unzipped's earnings for the fiscal year ended January 31, 2004 and the first three quarters of the fiscal year ended January 31, 2005 for the purpose of causing Unzipped to fall short of the Guarantee for these periods, and improperly offsetting the Shortfall Payment against the Sweet Note. See Note G. Lastly, Cross-Complainants alleged that the understatements in Unzipped's earnings and offsets against the Sweet Note were incorporated into the Company's public filings for the periods identified above, causing the Company to overstate materially its earnings and understate its liabilities for such period with the effect of improperly inflating the public trading price of the Company's common stock. Cross-Defendants filed a motion to dismiss certain of the claims asserted in the Cross-Complaint, and on June 28, 2005, the Court granted Cross-Defendants' motion in part. On July 22, 2005, Cross-Complainants' amended their Cross-Complaint, omitting their previously asserted claim that some or all of the Company, Caruso and Mr. Cole fraudulently induced Sweet to sell its 50% interest in Unzipped for a deflated price and enter into the Sweet Note. Although the Amended Cross-Complaint no longer seeks relief for this purported fraud, the substance of the allegations remains largely unchanged. Cross-Defendants deny Cross-Complainants' allegations and intend to vigorously defend against the Amended Cross-Complaint. 9 In January 2002, Redwood Shoe Corporation ("Redwood"), one of the Company's former buying agents of footwear filed a complaint in the United States District Court for the Southern District of New York, alleging that the Company breached various contractual obligations to Redwood and seeking to recover damages in excess of $20 million and its litigation costs. The Company filed a motion to dismiss certain counts of the complaint based upon Redwood's failure to state a claim, in response to which Redwood has filed an amended complaint. The Company also moved to dismiss certain parts of the amended complaint. The magistrate assigned to the matter granted, in part, the Company's motion to dismiss, and this ruling is currently pending before the District Court. The Court has stayed discovery pending a ruling on this motion. The Company intends to vigorously defend the lawsuit, and file counterclaims against Redwood after the District Court rules on the pending motion to dismiss. At June 30, 2005 and April 30, 2004, the payable to Redwood totaled approximately $1.8 million which is subject to any claims, offsets or other deductions the Company may assert against Redwood, and was reflected in "Accounts payable, subject to litigation". 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 herein, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. NOTE G UNZIPPED APPAREL, LLC Equity Investment: On October 7, 1998, the Company formed Unzipped with joint venture partner Sweet, the purpose of which was to market and distribute apparel under the BONGO label. The Company and Sweet each had a 50% interest in Unzipped. Pursuant to the terms of the joint venture, the Company licensed the BONGO trademark to Unzipped for use in the design, manufacture and sale of certain designated apparel products. Acquisition: On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped from Sweet for a purchase price of three million shares of the Company's common stock and $11 million in debt evidenced by the Sweet Note. In connection with the acquisition of Unzipped, the Company filed a registration statement with the SEC for the three million shares of the Company's common stock issued to Sweet, which was declared effective by the SEC on July 29, 2003. Revolving Credit Agreement: On February 25, 2003, Unzipped entered into a two-year $25 million credit facility ("the Unzipped Credit Facility") with GE Capital Commercial Services, Inc. ("GECCS" or "the Lender"). Borrowings were limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the Unzipped Credit Facility, Unzipped could also arrange for letters of credit in an amount up to $5 million. The borrowings bore interest at a rate of 2.25% per annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater. Borrowings under the Unzipped Credit Facility were secured by substantially all of the assets of Unzipped. In addition, Unzipped had agreed to subordinate its accounts payable to Azteca, ADS and Sweet to GECCS. Unzipped was required to meet a minimum tangible net worth covenant, as defined. At October 31, 2004, the loan had been repaid in full and the borrowing arrangement with GECCS was terminated. Related Party Transactions: Prior to August 5, 2004, Unzipped was managed by Sweet pursuant to the Management Agreement, pursuant to which Sweet was obligated to manage the operations of Unzipped in return for, commencing in fiscal year ended January 31, 2004 ("Fiscal 2004"), a management fee based upon certain specified percentages of net income that Unzipped would achieve during the three-year term. In addition, Sweet guaranteed that the net income, as defined, of Unzipped commencing in Fiscal 2004 would be no less than $1.7 million for each year during the term. In the event that the Guarantee was not met, under the Management Agreement, Sweet was obligated to pay to the Company the difference between the actual net income of Unzipped, as defined, and the Guarantee. The Shortfall Payment could be offset against the amounts due under the Sweet Note at the option of either Sweet or the Company. 10 For the Current Quarter, Unzipped had no operations, as compared to net loss (as defined, for the purpose of determining if the Guarantee had been met) of $312,400 in the Prior Year Quarter. Consequently for the Current Quarter there was no Shortfall Payment, as compared to a Shortfall Payment of $737,400 in the Prior Year Quarter. The Shortfall Payment had been recorded in the consolidated income statements as a reduction of Unzipped's cost of sales (since the majority of Unzipped's operations are with entities under common ownership with Sweet, including all of the purchases of inventory) and on the balance sheet as a reduction of the Sweet Note based upon the right to offset in the Management Agreement. For the Current Six Months, Unzipped had a net loss (as defined, for the purpose of determining if the Guarantee had been met) of $296,000, as compared to a net loss (as defined, for the purpose of determining if the Guarantee had been met) of $875,400 in the Prior Year Six Months. Consequently for the Current Six Months there was a Shortfall Payment of $438,000, as compared to a Shortfall Payment of $1.7 million in the Prior Year Six Months. The Shortfall Payment had been recorded in the consolidated income statements as a reduction of Unzipped's cost of sales (since the majority of Unzipped's operations were with entities under common ownership with Sweet, including all of the purchases of inventory) and on the balance sheet as a reduction of the Sweet Note based upon the right to offset in the Management Agreement. As of June 30, 2005, as a net result of the offset of the Shortfall Payment, the balance of the Sweet Note was reduced to $2.8 million and was reflected in "Long-term debt". The Company believes that it is entitled to the full Guarantee of $1.7 million for the fiscal year of Unzipped ended January 31, 2005. For the purpose of computing the Shortfall Payment for financial statement presentation, however, the Company has pro-rated the Guarantee to exclude the portion relating to the period subsequent to August 5, 2004 ($827,000, including $142,000 for the month of January 2005). As a result, the net Shortfall Payment reflected as a reduction of cost of sales in the Current Six Months of $296,000, and the Sweet Note balance of $2.8 million includes the above noted $827,000, pending the outcome of the litigation with Sweet and its affiliates. See Note F. After adjusting for the Shortfall Payment, Unzipped reported a net loss of $37,500 for the Current Six Months and net income of $625,000 in the Prior Year Six Months. Due to the immaterial nature of the related amounts, the net loss of $37,500 from Unzipped has been included in the selling, general and administrative expense in the Company's Condensed Consolidated Income Statements for the Current Six Months. For each of the quarters ended July 31, October 31, and December 31, 2004, March 31, 2005 and the Current Quarter, the Company did not make an interest payment on the Sweet Note to partially offset the Shortfall Payment due from Sweet. Such interest payment is to be resumed after the Shortfall Payment is satisfied. Prior to August 5, 2004, there was a distribution agreement between Unzipped and ADS pursuant to which Unzipped paid ADS a per unit fee for warehousing and distribution functions and per unit fee for processing and invoicing orders. The agreement also provided for reimbursement for certain operating costs incurred by ADS and charges for special handling fees at hourly rates approved by Sweet as manager. Prior to August 5, 2004, there was also a supply agreement in effect between Unzipped and Azteca pursuant to which Unzipped paid Azteca cost plus 6% for goods, and was entitled to up to 30 days in which to pay Azteca. Prior to August 5, 2004, Azteca allocated expenses to Unzipped for Unzipped's use of a portion of Azteca's office space, design and production team and support personnel. Unzipped also occupied office space in a building rented by ADS and Commerce Clothing Company, LLC, a related party to Azteca. On August 5, 2004, Unzipped terminated the Management Agreement with Sweet, the supply agreement with Azteca and the distribution agreement with ADS and commenced a lawsuit against Sweet, Azteca, ADS and Hubert Guez. See Note F. At June 30, 2005, the Company included in "accounts payable, subject to litigation" amounts due to Azteca and ADS of $847,000 and $2.3 million respectively. See Note F. At July 31, 2004, included in the "due to related parties" were amounts due to Azteca and ADS $2.6 million and $1.8 million respectively. In a separate transaction concerning Unzipped with Bongo Apparel, Inc. ("BAI"), the amount to due to BAI at June 30, 2005 was $434,000, respectively. BAI is the licensee of the BONGO jeans wear business formerly managed by Sweet and managed the operations of Unzipped following the termination of Sweet as the manager on August 5, 2004. NOTE H 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. The Company's operations are comprised of two reportable segments: licensing/commission/footwear and apparel. Segment revenues are generated from the royalty income from licensees and 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 three months and six months ended June 30, 2005 and July 31, 2004. 11
Licensing/ (000's omitted) Commission/Footwear Apparel Consolidated For three months ended June 30, 2005 Total revenues $ 4,287 $ - $ 4,287 Segment income (loss) 1,121 - 1,121 Net interest expense 400 Income before provision for income taxes $ 721 Capital additions $ 26 $ - $ 26 Depreciation and amortization expenses $ 496 $ - $ 496 For six months ended June 30, 2005 Total revenues $ 8,587 $ - $ 8,587 Segment income 2,401 (38) 2,363 Net interest expense 845 Income before provision for income taxes $ 1,518 Capital additions $ 26 $ - $ 26 Depreciation and amortization expenses $ 987 $ 38 $ 1,029 Total assets as of June 30, 2005 $ 26,315 $ 31,921 $ 58,236 For three months ended July 31, 2004 Total revenues $ 7,905 $ 20,769 $ 28,674 Segment income 763 495 1,258 Net interest expense 740 Income before provision for income taxes $ 518 Capital additions $ - $ 4 $ 4 Depreciation and amortization expenses $ 456 $ 127 $ 583 For the six months ended July 31, 2004 Total revenues $ 15,770 $ 32,129 $ 47,899 Segment income 1,056 931 1,987 Net interest expense 1,436 Income before provision for income taxes $ 551 Capital additions $ - $ 4 $ 4 Depreciation and amortization expenses $ 813 $ 254 $ 1,067 Total assets as of July 31, 2004 $ 28,236 $ 46,178 $ 74,414
NOTE I BADGLEY MISCHKA LICENSING LLC On October 29, 2004 (the "Closing Date"), the Company acquired the principal assets (the "Purchased Assets") of B.E.M. Enterprise, Ltd. ("BEM"), the holding company for the Badgley Mischka designer business from parent company Escada U.S.A. The purchased assets include the BADGLEY MISCHKA(R) trademark, two existing licenses and the rights to operate the existing Badgley Mischka retail store located on Rodeo Drive in Beverly Hills, California. The purchase price for the transaction was $950,000, (excluding $372,000 of fees and expenses related to the acquisition) which was paid by the Company's issuance of 214,981 shares of the Company's common stock. The purchase price of the Purchased Assets was subject to an upward adjustment in the event that the closing sale price of the Company's common stock on the date which was 180 days after the Closing Date was less than the closing sale price on the Closing Date. No such adjustment to the purchase price was necessary as the closing sales price at April 27, 2005 was $4.95, greater than the closing price of $4.44 on the Closing Date. The Company filed a registration statement with the SEC for the resale of the 214,981 shares of the Company's common stock issued to BEM, which was declared effective by the SEC on December 1, 2004. 12 Included in cash on the Company's condensed consolidated financial statements is a term deposit in the principal amount of $100,000 which has been pledged as collateral to the landlord of the Badgley Mischka retail store until December 31, 2005 in connection with the leased premises. Unrestricted access to this fund will revert to the Company on January 1, 2006. The Company was advised in acquisition of the Purchased Assets by UCC Funding Corporation ("UCC"), of which Robert D'Loren, a then director of the Company, is President. In connection with the services provided in the acquisition, Mr. D'Loren, the sole shareholder of UCC, received 50,000 stock options. In addition, UCC will receive a fee of 5% of the gross revenues that the Company derives from the BADGLEY MISCHKA trademark and all derivative trademarks, which right was assigned to Content Holding, which is owned by Mr. D'Loren. In addition, should the Company sell all or substantially all of the acquired assets, UCC will receive a cash payment calculated under a formula based on the sales price NOTE J - SPECIAL CHARGES During the quarter ended June 30, 2005, the Company recorded $328,000 of special charges in connection with its litigation related to Unzipped. See Note F. In the Prior Year Quarter, the Company did not record any special charges. In the Current Six Months, the Company recorded $707,000 of special charges in connection with the Unzipped litigation, compared to $99,000 of special charges consisting primarily of legal and professional fees related to transitioning Unzipped's wholesale business into a licensing business in the Prior Year Six Months. NOTE K RECENT ACCOUNTING STANDARDS In December 2004, the FASB issued SFAS No. 153, "Exchanges of Monetary Assets," which addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. The adoption of SFAS No. 153 will have no impact on our results of operations or our future financial position or results of operations. In December 2004, the FASB issued FAS No. 123(R), "Share-Based Payment," an amendment of FASB Statements 123 and 95. FAS No, 123(R) replaced FAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." This statement required companies to recognize the fair value of stock options and other stock-based compensation to employees beginning with fiscal periods beginning after June 15, 2005. During the first quarter of 2005, the Securities and Exchange Commission approved a new rule for public companies which delays the adoption of this standard for an additional six months. This means that the Company will be required to implement FAS No, 123(R) no later than the quarter beginning January 1, 2006. The Company currently measures stock-based compensation in accordance with APB Opinion No. 25, as discussed above. The impact on the company's financial condition or results of operations will depend on the number and terms of stock options outstanding on the date of change, as well as future options that may be granted. NOTE L SUBSEQUENT EVENTS On July 1, 2005, the Company changed its corporate name to Iconix Brand Group, Inc. and its NASDAQ symbol to ICON. On July 22, 2005, the Company acquired the JOE BOXER (R) brand from Joe Boxer Company, LLC and its affiliates. JOE BOXER is a leading lifestyle brand of apparel, apparel accessories and home goods for men, women, teens and children. The JOE BOXER brand is currently licensed exclusively to Kmart in the United States and internationally to manufacturers in Canada and Europe. 13 The aggregate purchase price paid was $40.0 million in cash, 4.35 million restricted shares of the Company's common stock and an assumption of a debt payable to a licensee in the amount of approximately $10.7 million. Based on the Company's preliminary assessment of the fair value of the assets acquired, approximately $71.0 million will be assigned to the Joe Boxer trademark to be amortized on a straight-line basis over the useful life of 20 years, approximately $1.1 million will be assigned to licensing contracts to be amortized on a straight-line basis over the remaining contractual period of approximately 29 months, and the balance of purchase price will be allocated to goodwill and subject to test for impairment on an annual basis. These allocations of the purchase price have not been finalized and are subject to refinement. Any adjustments resulting from the finalization of the purchase price allocations will affect the amounts assigned to goodwill. As part of this acquisition, the Company has employed an individual as Executive Vice President of the Company and President of the Joe Boxer division. As part his compensation, on July 22, 2005, he was granted 1,425,000 stock options of which 225,000 vested immediately and 1,200,000 will vest upon achievement by the Joe Boxer division of certain revenues levels. Financing for the cash portion of this purchase was obtained through an increase of the asset-backed notes to $63 million (the "Note") in a private placement with IPH. This Note has a fixed interest rate of 8.45% with a 7-year term, secured by the acquired intellectual property as well as by other intellectual properties owned by IPH. See Note C. UCC acted as a financial advisor to IPH in connection with the acquisition. 14 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 the Company's continued acquisition of new licensees, 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 licensees' dependence on foreign manufacturers and suppliers, uncertainties relating to customer plans and commitments, the ability of licensees to successfully market and sell branded products, competition, uncertainties relating to economic conditions in the markets in which the Company's licensees operate, the ability to hire and retain key personnel, the ability to obtain capital if required, the risks of litigation and regulatory proceedings, the risks of uncertainty of trademark protection, the uncertainty of marketing and licensing acquired trademarks and other risks detailed in this report and in the Company's other SEC filings, and uncertainty associated with the impact on the Company in relation to recent events discussed above in this report. 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. General Introduction. The Company is in the business of licensing and marketing intellectual property. The Company currently owns four brands, CANDIE'S (R), BONGO (R), JOE BOXER (R) and BADGLEY MISCHKA (R), which it licenses to third parties for use in connection with a variety of apparel, footwear, and fashion products. The Company also arranges through its wholly-owned subsidiary Bright Star Footwear, Inc. ("Bright Star") for the manufacture of footwear products for mass market and discount retailers under the private label brand of the retailer. The Company's business strategy, as a licensing and marketing company, is to maximize the value of its intellectual property by entering into strategic licenses with partners who have been selected based upon the Company's belief that they will be able to produce and sell quality products in the categories of their specific expertise. This licensing strategy is designed to permit the Company to operate its licensing business with minimal working capital, no inventory, production or distribution costs or risks, and utilizing only a small group of core employees. In December, 2004, the Company changed its fiscal year end from January 31 to December 31, effective for the period ending December 31, 2004. As a result, the end of the Current Quarter and the Current Six Months do not coincide with the three months ("Prior Year Quarter") and six months ("Prior Year Six Months") ended July 31, 2004. The financial statements included herein are for the Current Quarter and Current Six Months, and they are compared with the Prior Year Quarter and Prior Year Months. The Company has not recast the Prior Year Quarter and Prior Year Six Months to coincide with the Current Quarter and Current Six Months as management believes that such recasting is not cost justified and does not materially affect the relative comparability of the data presented herein. Beginning January 2005, the Company changed its business practices with respect to Bright Star, which resulted in a change in revenue recognition. Bright Star is now acting as an agent, therefore, only net commission revenue is recognized. As a result of the Company's transition to a licensing business, and to a lesser extent, its change in fiscal year end and the change in its Bright Star revenue reporting, the Company's operating results are not comparable to prior years. Further, since it is anticipated that there will be no revenue other than licensing and commission revenue going forward, the results for the remaining quarters for the year ending December 31, 2005 are also expected to be non-comparable to the corresponding prior year's quarters. Seasonal and Quarterly Fluctuations. The Company's results may fluctuate quarter to quarter as a result of its licensees' businesses as well as a result of holidays, weather, the timing of product shipments, market acceptance of the Company products, the mix, pricing and presentation of the products offered and sold, the hiring and training of personnel, the timing of inventory write downs, fluctuations in the cost of materials, the mix between wholesale and licensing businesses, and the incurrence of operating costs beyond the Company's control as may be caused by general economic conditions, and other unpredictable factors such as 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. 15 In addition, the timing of the receipt of future revenues could be impacted by the recent trend among retailers in the fashion 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 under license to help reduce the dependence on any particular product line and lessen the impact of the seasonal nature of its business. The success of the Company, however, will still largely remain dependent on its ability to contract with and retain key licensees, its licensee's ability to predict accurately upcoming fashion trends among its customer base, to build and maintain brand awareness and to fulfill the product requirements of the 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 establishments, among other factors noted herein, could adversely affect the Company's future operating results. The Company's products are marketed primarily for Fall and Spring seasons. Effects of Inflation. The Company does not believe that the relatively moderate rates of inflation experienced over the past few years in the United States, where it primarily competes, have had a significant effect on revenues or profitability. Summary of Operating Results: The Company had net income of $2.5 million and $3.3 million, respectively, for the Current Quarter and Current Six Months ended June 30, 2005, compared to net income of $518,000 and $551,000, respectively, for the Prior Year Quarter and Prior Year Six Months. The Company's operating income was $1.1 million and $2.4 million for the Current Quarter and the Current Six Months, respectively, compared to operating income of $1.3 million and $2.0 million in the comparable prior year periods, respectively. Results of Operations For the three months ended June 30, 2005 Revenues. During the Current Quarter, consolidated net revenues decreased by $24.4 million to $4.3 million from $28.7 million in the Prior Year Quarter. As a result of the Company licensing its jeans wear business in August 2004, there were no reportable jeans wear sales in the Current Quarter as compared to $20.8 million in the Prior Year Quarter and there will be no jeans wear sales for the remainder of the fiscal year ending December 31, 2005 and thereafter. Further, due to a change in revenue recognition resulting from its change of business practice beginning January 2005, Bright Star recorded only the net commission earned on such transactions in the Current Quarter and will continue to do so in the future. As a result there was $512,000 in commission revenue and no sales recorded in the Current Quarter for Bright Star, as compared to $5.8 million in sales and $554,000 in gross profit in the Prior Year Quarter. Licensing and commission revenue increased $1.6 million, or 62% to $4.3 million in the Current Quarter from $2.6 million in the Prior Year Quarter. The increase was due primarily to revenue generated by new licenses as the Company transitioned from an operating business to a licensing business, and $512,000 commission revenue from Bright Star as mentioned above. Gross Profit. Consolidated gross profit decreased by $1.6 million to $4.3 million in the Current Quarter from $5.9 million in the Prior Year Quarter. There was no reportable gross profit from Unzipped's wholesale jeans wear sales in the Current Quarter, as compared to $3.3 million in the Prior Year Quarter. Unzipped's gross profit in the Prior Year Quarter included $737,000 adjustment from the Shortfall Payment. See Note F to Notes to Condensed Consolidated Financial Statements. As previously discussed above, Bright Star's gross profit decreased from $554,000 in the Prior Year Quarter to $512,000 in the Current Quarter. Operating Expenses. During the Current Quarter, consolidated selling, general and administrative expenses decreased by $1.8 million to $2.8 million from $4.6 million in the Prior Year Quarter. No net income or loss was included in the consolidated selling, general and administrative expenses from Unzipped's operations, as compared to $2.8 million in the Prior Year Quarter as the Company completed its transition of the jeans wear business into a licensing business. See Liquidity and Capital Resources - Matters Pertaining to Unzipped and Note F of Notes to Condensed Consolidated Financial Statements. Operating expense in the Company's licensing division increased by $530,000 to $2.1 million in the Current Quarter, from $1.6 million in the Prior Year Quarter. Operating expense in Bright Star slightly increased by $13,000 to $270,000 in the Current Quarter, from $257,000 in the Prior Year Quarter. Offsetting the decline in selling, general and administrative expenses in the Current Quarter was $422,000 of expenses related to the activities of the Company's Badgely Mischka subsidiary, which was acquired in October 2004. 16 In the Current Quarter, the Company's special charges included $328,000 of legal fees incurred by the Company relating to litigation involving Unzipped. No special charges were recorded in the Prior Year Quarter. See Note F of Notes to Condensed Consolidated Financial Statements. Interest Expense - Net. Interest expense decreased by $340,000 in the Current Quarter to $400,000 (net of interest income of $21,000), compared to $740,000 in the Prior Year Quarter. Included in interest expense in the Current Quarter was $38,000 from the Sweet Note as compared to $165,000 in the Prior Year Quarter. The decrease is due to a lower average outstanding borrowing as the Sweet Note is reduced as a result of the application of Shortfall Payments. See Note F of Notes to the Consolidated Condensed Financial Statements. Interest expense in the Current Quarter associated with the asset backed notes issued by IPH was $383,000, as compared to $391,000 in the Prior Year Quarter. This decrease was due primarily to the decreasing principal balance as the Company was making payment each quarter. Also included in interest expense in the Prior Year Quarter was $182,000 from Unzipped's activities, with no comparable amount in the Current Quarter. Income Tax Provision (Benefit). A provision for $10,000 for minimum taxes was recorded in the Current Quarter. A non-cash tax benefit of $1.8 million was recognized by reducing the valuation allowance in the Current Quarter based on the Company's reasonable projection of future taxable income, which provides sufficient evidence to support realization of the unreserved portion of a tax benefit related to the Company's NOLs. There was no tax expense on income reported for Prior Year Quarter, due to a reduction in the deferred tax valuation reserve, which offsets the income tax provision. See Note E of Notes to Condensed Consolidated Financial Statements. Net Income. The Company recorded net income of $2.5 million, compared to $518,000 in the Prior Year Quarter, resulting from the factors noted above For the six months ended June 30, 2005 Revenues. During the Current Six Months, consolidated net revenues decreased by $39.3 million to $8.6 million from $47.9 million in the Prior Year Six Months. As a result of the Company licensing its jeans wear business in August 2004, there were no reportable jeans wear sales in the Current Six Months as compared to $32.1 million in the Prior Year Six Months and there will be no jeans wear sales for the remainder of the fiscal year ending December 31, 2005 and thereafter. Further, due to a change in revenue recognition resulting from its change of business practice beginning January 2005, Bright Star recorded only the net commission earned on such transactions in the Current Six Months and will continue to do so in the future. As a result there was $844,000 in commission revenue and no sales recorded in the Current Six Months for Bright Star, as compared to $11.7 million in sales and $1.0 million in gross profit in the Prior Year Six Months. Licensing and commission revenue increased $3.5 million, or 70% to $8.6 million in the Current Six Months from $5.1 million in the Prior Year Six Months. The increase was due primarily to revenue generated by new licenses as the Company transitioned from an operating business to a licensing business, and $844,000 commission revenue from Bright Star as mentioned above. Gross Profit. Consolidated gross profit decreased by $2.2 million to $8.6 million in the Current Six Months from $10.8 million in the Prior Year Six Months. There was no reportable gross profit from Unzipped's wholesale jeans wear sales in the Current Six Months as compared to $5.8 million in the Prior Year Six Months. Unzipped's gross profit in the Prior Year Six Months included $1.7 million adjustment from the Shortfall Payment. See Note F to Notes to Condensed Consolidated Financial Statements. As previously discussed above, Bright Star's gross profit decreased from $1.0 million in the Prior Year Six Months to $844,000 in the Current Six Months. Operating Expenses. During the Current Six Months, consolidated selling, general and administrative expenses decreased by $3.2 million to $5.5 million from $8.7 million in the Prior Year Six Months. Included in the consolidated selling, general and administrative expenses were $37,500 of Unzipped's net loss, as compared to $4.8 million of expenses in the Prior Year Six Months as the Company completed its transition of the jeans wear business into a licensing business. See Matters Pertaining to Unzipped and Note F of Notes to Condensed Consolidated Financial Statements. Operating expense in the Company's licensing division increased by $681,000 to $4.1 million in the Current Six Months, from $3.4 million in the Prior Year Quarter. Operating expense in Bright Star slightly increased by $5,000 to $505,000 in the Current Six Months, from $500,000 in the Prior Year Six Month. Offsetting the decline in selling, general and administrative expenses in the Current Quarter was $899,000 of expenses related to the activities of the Company's Badgely Mischka subsidiary which was acquired in October 2004 17 In the Current Six Months, the Company's special charges included $707,000 of legal fees incurred by the Company relating to litigation involving Unzipped, compared to $99,000 of legal professional fees related to transitioning Unzipped's wholesale business into a licensing business in the Prior Year Six Months. See Note F of Notes to Condensed Consolidated Financial Statements. Interest Expense - Net. Interest expense decreased by $591,000 in the Current Six Months to $845,000 (net of interest income of $35,000), compared to $1.4 million in the Prior Year Six Months. Included in interest expense in the Current Six Months was $76,000 from the Sweet Note as compared to $368,000 in the Prior Year Six Months. The decrease is due to a lower average outstanding borrowing as the Sweet Note is reduced as a result of the application of Shortfall Payments. See Note F of Notes to the Consolidated Condensed Financial Statements. Interest expense in the Current Six Months associated with the asset backed notes issued by IPH was $805,000 as compared to $758,000 in the Prior Year Quarter. This increase was due primarily to the additional $3.6 million borrowing in April 2004, partially offset by the decreasing principal balance as the Company was making payment each quarter. Also included in interest expense in the Prior Year Six Months was $305,000 from Unzipped's activities, with no comparable amount in the Current Six Months. Income Tax Provision (Benefits). A provision for $20,000 for minimum taxes was recorded in the Current Six Months. A non-cash tax benefit of $1.8 million was recognized by reducing the valuation allowance in the Current Six Months based on the Company's reasonable projection of future taxable income, which provides sufficient evidence to support realization of the unreserved portion of a tax benefit related to the Company's NOLs. There was no tax expense on income reported for Prior Year Six Months, due to a reduction in the deferred tax valuation reserve, which offsets the income tax provision. See Note E of Notes to Condensed Consolidated Financial Statements. Net Income. The Company recorded net income of $3.3 million in the Current Six Months, compared to $551,000 in the Prior Year Six Months, as a result of the factors noted above. Liquidity and Capital Resources Working Capital. At June 30, 2005, the current ratio of assets to liabilities was 0.69 to 1 as compared to 0.62 to 1 at December 31, 2004 and 0.97 to 1 at July 31, 2004. Included in current liabilities at June 30, 2005 were $4.9 million of accounts payables that are subject to litigation. The Company continues to rely upon cash generated from operations, especially licensing and commission activity to finance its operations. Net cash provided from operating activities totaled $2.6 million in the Current Six Months, as compared to $6.5 million of net cash used in the Prior Year Six Months. The Company believes that such cash from operations will be sufficient to satisfy its anticipated working capital requirements for the foreseeable future. Capital Expenditures. There were $26,000 capital expenditures in the Current Six Months, as compared to $4,000 for the Prior Year Six Months. Matters Pertaining to Unzipped. On April 23, 2002, the Company acquired the remaining 50% interest in Unzipped from Sweet for three million shares of the Company's common stock and $11 million in debt evidenced by the Sweet Note. See Note G of Notes to Condensed Consolidated Financial Statements. Pursuant to the Management Agreement which was terminated on August 5, 2005, Sweet was obligated to pay any Shortfall under the Guarantee and the Shortfall Payment was offset against the Sweet Note. For the Current Six Months, Unzipped had a net loss (as defined, for the purpose of determining if the Guarantee had been met) of $296,000, as compared to net loss (as defined, for the purpose of determining if the Guarantee had been met) of $875,400 in the Prior Year Six Months. Consequently for the Current Six Months there was a Shortfall Payment of $438,000, as compared to a Shortfall Payment of $1.7 million in the Prior Year Six Months. The Shortfall Payment had been recorded in the consolidated income statements as a reduction of Unzipped's cost of sales (since the majority of Unzipped's operations are with entities under common ownership with Sweet, including all of the purchases of inventory) and on the balance sheet as a reduction of the Sweet Note based upon the right to offset in the Management Agreement. 18 As of June 30, 2005, as a net result of the offset of the Shortfall Payments, the balance of the Sweet Note was reduced to $2.8 million and was reflected in "Long-term debt". The Company believes that it is entitled to the full Guarantee of $1.7 million for the fiscal year of Unzipped ended January 31, 2005. For the purpose of computing the Shortfall Payment for financial statement presentation, however, the Company has pro-rated the Guarantee to exclude the portion relating to the period subsequent to August 5, 2004 ($827,000, including $142,000 for the month of January 2005). As a result, the net Shortfall Payment reflected as a reduction of cost of sales in the Current Six Months of $296,000, and the Sweet Note balance of $2.8 million includes the above noted $827,000, pending the outcome of its litigation with Sweet and its affiliates. See Note F of Notes to Condensed Consolidated Financial Statements. After adjusting for the Shortfall Payments, Unzipped reported a net loss of $37,500 for the Current Six Months and net income of $625,000 in the Prior Year Six Months. Due to the immaterial nature of the related amounts, the net loss of $37,500 from Unzipped has been included in the selling, general and administrative expense in the Company's Condensed Consolidated Income Statements for the Current Six Months. For each of the quarters ended July 31, October 31, and December 31, 2004, March 31, 2005 and the Current Quarter, the Company did not make an interest payment on the Sweet Note to partially offset the Shortfall Payments due from Sweet. Such interest payment is to be resumed after the Shortfall Payment is satisfied. Revolving Credit Facilities On February 25, 2003 Unzipped entered into a two-year $25 million credit facility ("the Unzipped Credit Facility") with GE Capital Commercial Services, Inc. ("GECCS"). Borrowings under the Unzipped Credit Facility were limited by advance rates against eligible accounts receivable and inventory balances, as defined. Under the Unzipped Credit Facility, Unzipped could also arrange for letters of credit in an amount up to $5 million. The borrowings bore interest at a rate of 2.25% per annum in excess of the 30 day Commercial Paper rate or 3%, whichever is greater. The Unzipped Credit Facility was terminated on October 31, 2004. Bond Financing In August 2002, IPH, a subsidiary indirectly owned by the Company, issued in a private placement $20 million of asset-backed notes 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. Costs incurred to obtain this financing totaled approximately $2.4 million which have been deferred and are being amortized over the life of the debt. During the Prior Year Quarter, IPH amended the asset-backed notes whereby it borrowed an additional $3.6 million. The additional borrowing matures in August 2009 with a floating interest rate of LIBOR + 4.45%, with quarterly principal and interest payments and $500,000 of interest prepaid at closing. The net proceeds of $2.9 million were used for general working capital purposes. Costs incurred to obtain this financing totaling approximately $179,000 were deferred and amortized over the life of the debt. As of July 22, 2005, the notes have been amended through an increase of the asset-backed note to $63 million (the "Note") in the private placement with IPH. This Note has a fixed interest rate of 8.45% with a 7-year term, secured by the acquired Joe Boxer intellectual property as well as by other intellectual properties owned by IPH. Other The Company's cash requirements fluctuate from time to time due to, among other factors, seasonal variations in the timing of licensee shipments and the related royalty payments. The Company believes that it will be able to satisfy its ongoing cash requirements for the foreseeable future, primarily with cash flow from operations. However, if the Company's plans change or its assumptions prove to be incorrect, it could be required to obtain additional capital that may not be available to it on acceptable terms, or at all. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a result of the Company's credit facilities, the Company was exposed to the risk of rising interest rates. The following table provides information on the Company's fixed maturity debt as of June 30, 2005 that was sensitive to changes in interest rates. The IPH's additional assets-backed notes had an average interest rate of 7.22% for the three month period ended March 31, 2005 $3.1 million 19 As of July 22, 2005, the note has been amended. See Notes C and L of Notes to Condensed Consolidated Financial Statements. Item 4. Controls and Procedures The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission's rules and forms. The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting ("Internal Control") to determine whether any changes in Internal Control occurred during the quarter ended June 30, 2005 that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended June 30, 2005. PART II. Other Information Item 1. Legal Proceedings See Note E of Notes to Condensed Consolidated Financial Statements. Item 6. Exhibits 3.1 Certificate of Corporation 10.1 Common Stock Purchase Warrant issued to UCC Consulting Corporation 31.1 Certification of Chief Executive Officer Pursuant To Rule 13a-14 Or 15d-14 Of The Securities Exchange Act Of 1934, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002. 31.2 Certification of Chief Financial Officer Pursuant To Rule 13a-14 Or 15d-14 Of The Securities Exchange Act Of 1934, As Adopted Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002. 32.1 Certification of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. 32.2 Certification of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. 20 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. Iconix Brand Group, Inc. ---------------------------------- (Registrant) Date August 10, 2005 /s/ Neil Cole ----------------------- ---------------------------------- Neil Cole Chairman of the Board, President And Chief Executive Officer (on Behalf of the Registrant) Date August 10, 2005 /s/ Warren Clamen ----------------------- ---------------------------------- Warren Clamen Chief Financial Officer 21 EX-3.1 2 ex3_1.txt CORPORATE CERTIFICATE Exhibit 3.1 CERTIFICATE OF INCORPORATION OF MILLFELD TRADING CO. INC. A CLOSE CORPORATION FIRST: The name of the corporation is Millfeld Trading Co. Inc. SECOND: The address of its registered office in the State of Delaware Is No. 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted is to act as agent or broker, on commission or otherwise for individuals, partnerships, corporations, foreign or domestic and to aid and assist, promote, and conserve the interests of, and afford facilities for the convenient transaction of business by its principals in all parts of the world with respect to the importing into the United States of America men's, women's and children's shoes; to borrow or raise moneys for the aforementioned purposes of the corporation and, from time to time, without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations, of the corporation for its corporate services as are necessary in the furtherance of the aforementioned purposes of the corporation; and, in general, to possess and exercise all of the powers and privileges granted by the General Corporation law of Delaware or by any other law of Delaware or by this Certificate of Incorporation together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the aforementioned purposes of the corporation. FOURTH: The total number of shares which the corporation is authorized to issue is one hundred (100) shares of common stock having a par value of one hundred ($100) dollars per share. Ninety (90) shares shall be classified as Class A voting common stock with a par value of one hundred ($100) dollars per share and ten (10) shares shall be classified as Class B non-voting common stock with a par value of one hundred ($100) dollars per share. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof are as follows: The holders of Class A and Class B shares (regardless of the class of the share) shall participate equally to the same amount per share in all dividends and any distribution of assets upon the liquidation, dissolution or winding up of the corporation or otherwise. The holders of Class A shares shall exclusively possess all the voting power of the corporation for the election of directors, and for all other purposes, and the holders of Class B shares shall have no voting power and no holder thereof shall be entitled to receive notice of any meeting of shareholders. Notwithstanding any other of the articles of this Certificate of Incorporation or the General Corporation Law of the State of Delaware, no amendment to the Certificate of Incorporation of this corporation or other shareholder action affecting a subdivision or consolidation of an outstanding class of common shares may be made unless at the same time a similar subdivision or consolidation of the outstanding shares of the other class is also made, and the directors shall not declare or pay any dividends payable in Class B shares to holders of Class B shares nor in Class A shares to the holders of Class A shares unless at the same time a similar dividend be declared and paid to the holders of shares of all other classes. Share dividends shall not be declared in shares of one class to holders of another class. 2 All of the issued and outstanding stock of all classes shall be held of record by not more than twenty (20) persons, as defined in Section 342 of the General Corporation Law; the corporation shall make no offering of any of its stock of any class which would constitute a "public offering" within the meaning of the United States Securities Act of 1933, as it may be amended from time to time; and the consent of the directors of the corporation shall be required to approve the issuance or transfer of any shares as being in compliance with the foregoing restrictions. No natural person who is a holder of shares of Class A voting common stock shall sell, assign or otherwise dispose of any such share or shares of stock of this corporation to any person, firm, corporation or association, nor shall the executor, administrator, trustee, assignee or other legal representative of such deceased stockholder sell, assign, transfer or otherwise dispose of any such share or shares of the stock of this corporation to any person, firm, corporation or association, nor to any next of kin or legatee or legatees of a deceased stockholder, without first offering the said share or shares of stock for sale to any other natural persons who are holders of Class A voting common stock of the corporation at a price representing the true book value thereof at the time of said offer and said stockholders shall have the right to purchase the sane by the payment of such purchase price at any time within thirty (30) days alter receipt of written notice of said offer. In the event that said stockholders accept the offer to sell such share or shares within thirty (30) days after receipt of the written notice of said offer, the share or shares shall next be offered for sale to any other holders of Class A voting common stock of the corporation, at a price representing the true book value thereof at the time of said offer and such other stockholders shall have the right to purchase the same by payment of such purchase price at any time within thirty (30) days after the receipt of written notice of said offer. In the event that said stockholders do not accept the offer to sell such share or shares within thirty (30) days after receipt of written notice of said offer, the share or shares shall next be offered for sale to the corporation at a price representing the true book value thereof at the time of said offer and the corporation shall have the right to purchase the same by payment of such purchase price at any time within thirty (30) days after the receipt of written notice of said offer. 3 No holder of shares of Class A voting common stock which is a firm, corporation or association shall sell, assign or otherwise dispose of any such share or shares of stock of this corporation to any person, firm, corporation or association, nor shall the executor, administrator, trustee, assignee or other legal representative of such deceased stockholder sell, assign, transfer or otherwise dispose of any such share or shares of the stock of this corporation to any person, firm, corporation or association, nor to any next of kin or legatee or legatees of a deceased stockholder, without first offering the said share or shares of stock for sale to all other holders of Class A voting common stock at a price representing the true book value thereof at the time of said offer and said shareholders shall have the right to purchase the same by the payment of such purchase price at any time within thirty (30) days after receipt of written notice of said offer. In the event that said shareholders do not accept the offer to sell such share or shares within thirty (30) days after receipt of the written notice of said offer, the share or shares shall next be offered for sale to the corporation at a price representing the true book value thereof at the time of said offer and the corporation shall have the right to purchase the same by payment of such purchase price at any time within thirty (30) days after the receipt of written notice of said offer. 4 No holder of shares of Clans B non-voting common stock shall sell, assign or otherwise dispose of any such share or shares of stock of this corporation of either class to any person, firm, corporation or association, nor shall the executor, administrator, trustee, assignee or other legal representative of such deceased stockholder sell, assign, transfer or otherwise dispose of any share or shares of the stock of this corporation to any person, firm, corporation or association, nor to any next of kin or legatee or legatees of a deceased stockholder, without first offering the said share or shares of stock for sale to the corporation at a price representing the true book value thereof at the time of said offer and the corporation shall have, the right to purchase the same by the payment of such purchase price at any time within thirty (30) days after receipt of written notice of said offer. In the event that the corporation does not accept the offer to sell such share or shares within thirty (30) days after receipt of the written notice of said offer, the share or shares shall next be offered for sale to the other stockholder or stockholders of said corporation at a price representing the true book value thereof at the time of said offer and such other stockholder or stockholders shall have the right to purchase the same by payment of such purchase price at any time within thirty (30) days after the receipt of written notice of said offer. Compliance with the foregoing terms and conditions in regard to the sale, assignment, transfer or other disposition of the shares of stock of this corporation shall be a condition precedent to the transfer of such shares of stock on the books of this corporation. The holders of Class A shares and Class B shares shall, upon the issue or sale of Class A shares or Class B shares of stock, respectively, (whether now or hereafter authorized) or any securities convertible into such stock, have the right, during such period of time and on such conditions as the Board of Directors shall prescribe, to subscribe to and purchase such shares, or securities in proportion to their respective holdings of Class A shares or Class B shares, respectively, at such price or prices as the Board of Directors may from time to time fix and as may be permitted by law. 5 FIFTH: The name and .ailing address of each incorporator is as follows: N.A. Ferrucci 100 West Tenth Street Wilmington, Delaware 19801 R.F. Andrews 100 West Tenth Street Wilmington, Delaware 19801 W.J. Reif 100 West Tenth Street Wilmington, Delaware 19801 SIXTH: The name and mailing address of each person, who is to serve as a director until the first annual meeting of the stockholders or until a successor is elected and qualified, is as follows: Name Mailing Address ------------------------ --------------- Gerald F. Mills 108 Oak Hill Drive Sharon, Massachusetts 02067 Marlene Mills 108 Oak Hill Drive Sharon, Massachusetts 02067 Fred Kushmer 241 Main Street Hackensack, New Jersey 07602 SEVENTH: The business and affairs of the corporation shall be managed by the Board of Directors subject to any written agreements restricting the discretion of the directors pursuant to Subchapter XIV, Section 341 et seq. of the General Corporation Law of the State of Delaware entered into among a majority of the shareholders. EIGHTH: Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws. say provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the corporation. Elections of directors need not be by written ballot unless the By-Laws of the corporation shall so provide. 6 NINTH: The corporation reserves the right to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation, in the matter now or hereafter prescribed by statutes, and all rights conferred upon stockholders herein are granted subject to this reservation. We, the undersigned, being each of the incorporator, herein before named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this Certificate, hereby declaring a certifying that this is our act and deed and the facts herein stated are true, and accordingly has hereunto set our hands this 26th day of December, 1978. /s/ M.A. Ferrucci M.A. Ferrucci /s/ R.F. Andrews R.F. Andrews /s/ W.J. Reif W.J. Reif 7 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF MILLFELD TRADING CO. INC. Under Section 242 of the Delaware General Corporation Law MILLFELD TRADING CO. INC., a corporation organized and existing under and by virtue of the General corporation Law of the state of Delaware (the "Corporation") DOES HEREBY CERTIFY: 1. The name of the Corporation is Millfeld Trading Co. Inc. 2. The corporation's Certificate of Incorporation was filed by the Department of State on December 26, 1978. 3. The purpose of this Amendment is among other things, (1) to increase the authorized capital stock of the corporation to 10,000,000 shares of common stock and 5,000,000 shares of preferred stock; (ii) to reduce the par value of the common stock to $.00l per share; (iii) to eliminate the liability of directors to the Corporation and its stockholders to the fullest extent permitted by the General corporation Law of Delaware: and (iv) to indemnify any and all persons whom the Corporation shall have power to indemnify to the fullest extent permitted by the General Corporation Law of Delaware. 4. On August 1, 1989, the Board of Directors of the Corporation adopted the following resolutions by written consent, proposing and declaring advisable the following amendments to the Certificate of Incorporation of the Corporation: 1 RESOLVED, that Article Third of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: THIRD: The nature of the business, and the objects and purposes proposed to be transacted, promoted and carried on, are to do any and all things therein mentioned, as fully and to the same extent as natural persons might or could do, and in any part of the world, viz: To do any lawful act or thing for which corporations may be organized under the General Corporation law of the State of Delaware. RESOLVED, that Article Fourth of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Fifteen Million (15,000,000) consisting of: (a) Ten Million (10,000,000) shares of common stock, $.001 par value (`Common Stock"); and (b) Five Million (5,000,000) shares of Preferred Stock, $.01 par value (`Preferred Stock') having the following voting powers, restrictions, preferences and qualifications: A. Preferred Stock Shares of Preferred Stock may be issued from time to time in one or more series, as may from time to time be determined by the Board of Directors, each of said series to be distinctly designated. All shares of any one series of Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends, if any, thereon shall be cumulative, if made cumulative. The voting powers and the preferences and relative, participating, optional and other special rights of each such series and the qualifications, limitations or restrictions thereof, it any, may differ from those of any and all other series at any time outstanding; and the Board of Directors of the Corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of a particular series of Preferred Stock, the voting powers and the designations, preferences and relative, optional and other special rights, and the qualifications, limitation, and restrictions of such series, including but without limiting the generality of the foregoing, the following: (a) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute each series, which number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (b) The rate and times at which, and the terms and conditions on which, dividends, if any, on Preferred Stock of such series shall be paid, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes or series of stock and whether such dividends shall be cumulative or non-cumulative. (c) the right, if any, of the holders of Preferred Stock of such series to convert the same into, or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock of the Corporation and the terms and conditions of such conversion or exchange. 2 (d) Whether or not Preferred Stock of such series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, Preferred Stock of such series may be redeemed. (e) The rights, if any, of the holders of Preferred Stock of such series upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding- up of the Corporation; (f) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such series; and (g) The voting powers, if any, of the holders of such series of Preferred Stock which may, without limiting the generality of the foregoing, include the right, voting as a series by itself or together with other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the Corporation if there shall have been a default in the payment of dividends on any one or mote series of Preferred Stock or under such other circumstances as the Board of Directors may determine. B. Common Stock 1. After the requirements with respect to preferential dividends on the Preferred Stock (fixed in accordance with the provisions of paragraph A of this Article Fourth), it any, shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of paragraph A of this Article Fourth), and subject further to any other condition which may be fixed in accordance with the provisions of Paragraph A of this Article Fourth, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. 2. After distribution in full of the preferential amount, if any (fixed in accordance with the provisions of Paragraph A of this Article Fourth), to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up, of the Corporation, the holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively 3. Except as may otherwise be required by law or by the provisions of such resolution or resolutions as may be adopted by the Board of Directors pursuant to paragraph A of this Article Fourth, each holder of Common Stock shall have one vote in respect of each share of Common Stock held by him on all matters voted upon by stockholders. 3 C. Other Provisions 1. The relative powers, preferences and rights of each series of Preferred Stock in relation to the powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution of resolutions adopted pursuant to authority granted in paragraph A of this Article Fourth and the consent, by class or series vote or otherwise, of the holders of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; provided, however, that the Board of Directors may provide in the resolution or resolutions adopted pursuant to paragraph A of this Article Fourth as to any series of Preferred Stock that the consent Of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock. 2. Subject to the provisions of subparagraph 1 of this paragraph C, shares of any series of Preferred Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 3. Shares of Common Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 4. The authorized amount of shares of Common Stock may, without a vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon. RESOLVED, that Article Fifth of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: "FIFTH: The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase `whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies, No election of directors need be by written ballot. 4 After the original or other Bylaws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-Laws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however, that any provision for the classification of directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-Law or in a By-Law adopted by the stockholders entitled to vote of the Corporation unless provisions for such classification shall be set forth in this Certificate of Incorporation. Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at any meeting of stockholders. Whenever the Corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the Certificate of Incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrees, in the number of authorized shares of said class. The directors shall have power to make and to alter or amend the Bylaws; to fix the amount to be reserved as working capital, and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchises of the Corporation. With the consent in writing, and pursuant to a vote of the holders of a majority of the capital stock issued and outstanding, the Directors shall have authority to dispose, in any manner, of the whole property of the Corporation, The By-Laws shall determine whether and to what extent the accounts and books of this Corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right of inspecting any account, or book, or document of the Corporation, except as conferred by Law or the By-Laws or by resolution of the stockholders. The stockholder, and directors shall have power to hold their meetings and keep the books, documents and papers of the Corporation outside the State of Delaware, at such places as may be from time to time designated by the By-Laws or by resolution of the stockholders or directors, except as otherwise required by the laws of Delaware. It is the intention that the objects, purposes and powers specified in Article Fifth hereof shall, except where otherwise specified in Article Fifth, be in nowise limited or restricted by reference to or inference from the terms of any other article, clause or paragraph in this Certificate of Incorporation, but that the objects, purposes and powers specified in Article Fifth and in each of the articles, clauses or paragraphs of this charter shall be regarded as independent objects, purposes and powers. 5 RESOLVED, that Article Sixth of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: SIXTH: The Corporation is to have perpetual existence. ----- RESOLVED, that Article Seventh of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: SEVENTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of the Corporation, as the case may be, and also on the Corporation" RESOLVED, that Article Eighth of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: "EIGHTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. RESOLVED, that Article Ninth of the Certificate of Incorporation be deleted in its entirety and the following substituted therefor: "NINTH: The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same say be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the indemnification provided for 6 herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person." RESOLVED, that a new Article Tenth be added to the Certificate of Incorporation as set forth below: "TENTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for the payment of unlawful dividends or unlawful stock repurchases or redemptions under Section 174 of the Delaware General Corporation Law: or (iv) for any transaction from which the director derived an improper personal benefit" RESOLVED, that a new Article Eleventh be added to the Certificate of Incorporation as set forth below: "ELEVENTH: From time to time any of the provisions of the Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the law of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by the Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH" 5. On August 1, 1989, these Amendments to the Certificate of Incorporation were approved by written consent of the sole stockholder of the Corporation, 6. The aforesaid Amendments to the Corporation's Certificate of Incorporation were duly adopted in accordance with the applicable provisions of Sections 242 of the General Corporation Law of the State of Delaware. 7 IN WITNESS WHEREOF, MILLFELD TRADING CO. INC, has caused the certificate to be signed by Barry Feldstein, its President, and attested by Glen Feldstein, its Secretary this 1st day of September, 1989. MILLFELD TRADING CO. INC. By: /s/ Barry Feldstein ---------------------------------------- Name: Barry Feldstein Title: President Attest; By: /s/ Glen Feldstein ---------------------------- Name: Glen Feldstein Title: Secretary 8 STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On this 1st day of September, 1989, before me personally came BARRY FELDSTEIN, to me known, who being by me duly sworn, did depose and say that he resides at 32 Elm Street Woodbury, New York l1797; that he is the President of MILLFELD TRADING CO. INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of the said corporation. /s/ Rachel Petrou ------------------------------------------------------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On this 1st day of September, 1989, before me personally came GLEN FELDSTEIN, to me known, who being by me duly sworn, did depose and say that he resides at _______________________; that he is the Secretary of MILLFELD TRADING CO. INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of the said corporation. /s/ Rachel Petrou ------------------------------------------------------------- Notary Public 9 CERTIFICATE OF OWNERSHIP OF BRIGHT STAR, INC.. (a Delaware corporation) AND MILLFELD TRADING CO., INC. (a Delaware corporation) UNDER SECTION 253 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE The undersigned corporations organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY: TENTH: That the name and state of incorporation of each of the constituent corporations of the merger are as follows: NAME STATE OF INCORPORATION Bright Star, Inc. Delaware Millfeld Trading Co., Inc. Delaware - -------------------------------------------------------------------------------- ELEVENTH: That 100% of the outstanding stock of Bright Star, Inc. is owned by Millfeld Trading Co., Inc. TWELFTH: That the name of the surviving corporation of the merger shall be changed to Candies, Inc. THIRTEENTH: That the Board of Directors of Millfeld Trading Co., Inc. adopted the following resolution byunanimous joint written consent on the 20th day of February, 1992: RESOLVED, that the Company's wholly-owned subsidiary, Bright Star, Inc., be merged with and into the Company, and that upon the filing of the appropriate certificate of Merger with the Secretary of State of the State of Delaware, the Company's name shall be changed to Candies, Inc. 1 IN WITNESS WHEREOF, the undersigned have executed this Certificate this 20th day of February, 1992. ATTEST: MILLFELD TRADING CO., INC. By: /s/ Felix F. Ruchel By: /s/ Michael Callahan --------------------------------- ----------------------------------- Title: Asst. Sect'y Title: Vice President ATTEST: BRIGHT STAR, INC. By: /s/ Felix F. Ruchel By: /s/ Michael Callahan --------------------------------- ----------------------------------- Title: Asst. Sect'y Title: Vice President 2 CERTIFICATE OF OWNERSHIP OF MILLFELD SUB, INC.. (a Delaware corporation) AND CANDIES, INC. (a Delaware corporation) UNDER SECTION 253 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE The undersigned corporations organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger are as follows: NAME STATE OF INCORPORATION Millfeld Sub, Inc. Delaware Candies, Inc. Delaware - -------------------------------------------------------------------------------- SECOND: That 100% of the outstanding stock of Millfeld Sub, Inc. is owned by Candies, Inc. THIRD: That the name of the surviving corporation of the merger shall be changed to Millfeld Trading Co., Inc. 1 FOURTH: That the Board of Directors of Candies, Inc. adopted the following resolution by unanimous joint written consent on the 25th day of February, 1992: RESOLVED, that the Company's wholly-owned subsidiary, Millfeld Sub, Inc., be merged with and into the Company, and that upon the filing of the appropriate certificate of Merger with the Secretary of State of the State of Delaware, the Company's name shall be changed to Millfeld Trading Co., Inc. IN WITNESS WHEREOF, the undersigned have executed this Certificate this 25th day of February, 1992. ATTEST: CANDIES, INC. By: /s/ Felix F. Ruchel By: /s/ Michael Callahan ------------------------------------ --------------------------------- Title: Asst. Sect'y Title: Vice President ATTEST: MILLFELD SUB, INC. By: /s/ Felix F. Ruchel By: /s/ Michael Callahan ------------------------------------ --------------------------------- Title: Asst. Sect'y Title: Vice President 2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OP INCORPORATION OF MILLFELD TRADING CO., INC. The undersigned, being, respectively, President and Secretary of Millfeld Trading Co., Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: FIRST: That the Board of Directors of the Corporation adopted a resolution proposing and declaring advisable that the Corporation change its name to Candie's, Inc. by adoption of the following amendment to the Certificate of Incorporation of said corporation: "FIRST, the name of the corporation shall be Candle's, Inc." SECOND: That the Board of Directors of the Corporation adopted a resolution proposing and declaring advisable a reverse split of the Corporation's Common Stock, $.01 par value per share, on a one-for-4.5 basis by adoption of the following amendment to the Certificate of Incorporation of said corporation: "FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is FIFTEEN MILLION (15,000,000) shares, of which 10,000,000 shall be shares of common stock of the par value of $.001 each, and 5,000,000 shares be preferred stock, $.0l per value per share. A. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof of the Preferred Stock, and of the Common Stock are as follows: A. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article 4, to provide for the issuance of the Preferred Stock in series and by filing a Certificate pursuant to the Delaware General Corporation Law to establish the number of shares to be included in each such series. The Preferred Stock may be issued either as a class without series, or as so determined from time to time by the Board of Directors, either in whole or in part in one or more series, each series to be appropriately designated by a distinguishing number, letter or title prior to the issue of any shares thereof. Whenever the term "Preferred Stock" is used in this Article 4, it shall be 1 deemed to mean and include Preferred Stock issued as a class without series, or one or more series thereof, or both, unless the context shall otherwise require. There is hereby expressly granted to the Board of Directors of the Corporation authority, subject to the limitations provided by law, to fix the voting power, the designations, and the relative preferences, powers, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of each series of said Preferred Stock and the variations in the relative powers, rights, preferences and limitations as between series, and to increase the number of shares constituting each series, and to decrease such number of shares (but not to less than the number of outstanding shares of the series), in the resolution or resolutions adopted by the Board of Directors providing for the issue of said Preferred Stock. The authority of the Board of Directors of the Corporation with respect to each series shall include, but shall not be limited to, the authority to determine the following: 1. The designation of the series; 2. The number of shares initially constituting such series; 3. The increase, and the decrease to a number not less than the number of the outstanding shares of such series, of the number of shares constituting such series theretofore fixed: 4. The rate or rates and the times and conditions under which dividends on the shares of such series shall be paid, and, (i) if such dividends are payable in preference to, or in relation to, the dividends payable on any other class or classes of stock, the terms and conditions of such payment, and (ii) if such dividends shall be cumulative, the date or dates from and after which they shall accumulate; 5. Whether or not the shares of such series shall be redeemable, and, if such shares shall be redeemable, the terms and conditions of such redemption, including, but not limited to, the date or dates upon or after which such shares shall be redeemable and the amount per share which shall be payable upon such redemption, which amount may vary under conditions and at different redemption dates; 6. The amount payable on the shares of such series in the event of the dissolution of, or upon any distribution of the assets of, the Corporation, 7. Whether or not the shares of such series may be convertible into, or exchangeable for, shares of any other class or series and the price or prices and the rates of exchange and the terms of any adjustments to be made in connection with such conversion or exchange; 2 8. Whether or not the shares of such series shall have voting rights in addition to the voting rights provided by law, and, if such shares shall have such voting rights, the terms and conditions thereof, including but not limited to, the right of the holders of such shares to vote as a separate class either alone or with the holders of shares of one or more other series of Preferred Stock and the right to have more or less than one vote per share; 9. Whether or not a purchase fund shall be provided for the shares of such series, and, if such a purchase fund shall be provided, the terms and conditions thereof; 10. Whether or not a sinking fund shall be provided for the redemption of the shares of such series and if such a sinking fund shall be provided, the terms and conditions thereof; and 11. Any other powers, preferences and relative, participating, optional, or other special rights, and qualifications, limitations or restrictions thereof, as shall not be inconsistent with the provisions of this Article 4 or the limitations provided by law, B. Common Stock. 1. Subject to the rights of the Preferred Stockholders, the holders of the Common Stock shall be entitled to receive such dividends as may be declared thereon by the Board of Directors of the Corporation in its discretion, from time to time, out of any funds or assets of the Corporation lawfully available for the payment of such dividends. 2. In the event of any liquidation, dissolution or winding up of the Corporation, or any reduction of its capital, resulting in a distribution of its assets to its Stockholders whether voluntary or involuntary, then, after there shall have been paid or set apart for the holders of the Preferred Stock the full preferential amounts to which they are entitled, the holders of the Common Stock shall be entitled to receive as a class, pro rata, the remaining assets of the Corporation available for distribution to its stockholders. 3. For any and all purposes of this Certificate of Incorporation, neither the merger or consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or substantially all of the assets of the Corporation, or any other transaction or series of transactions having the effect of a reorganization shall be deemed to be a liquidation, dissolution or winding-up of the Corporation. 4. Except as otherwise expressly provided by law or in a resolution of the Board of Directors providing voting rights to the holders of the Preferred Stock, the holders of the Common Stock shall possess exclusive voting power for the election of directors and for all other purposes and each holder thereof shall be entitled to one vote for each share thereof." 3 THIRD: The foregoing amendments have been duly adopted by the Stockholders of the Corporation in accordance with Section 242 or the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Michael Callahan, its President and attest~ by Dominick Gallo, its Secretary, this 23rd day of February, 1993. /s/ Michael Callahan ---------------------- Michael Callahan President ATTEST /s/ Dominick Gallo Dominick Gallo, Secretary 4 CANDIE'S, INC. CERTIFICATE OF DESIGNATION OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK SETTING FORTH THE POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS. LIMITATIONS AND RESTRICTIONS OF SUCH SERIES OF PREFERRED STOCK Pursuant to Section 151 of the General Corporation Law of the State of Delaware, Candie's, Inc. (the "Corporation'), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority given to the Board of Directors of the corporation by paragraph A of Article Fourth of the Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation on September 13, 1994, adopted the following resolution creating a series of Preferred Stock designated as Series A Cumulative Convertible Preferred Stock: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the General Corporation Law of the State of Delaware and the provisions of the Certificate of Incorporation, a series of the class of authorized Preferred Stock, par value $.01 per share, of the corporation is hereby created and that the designation and number of shares thereof and the voting powers, preferences and relative, participating. optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof, are as follows: Section 1. Designation and Number. (a) The shares of such series shall be designated "Series A Cumulative Convertible Preferred Stock" (the "Series A Preferred Stock"). The number of shares initially constituting the Series A preferred Stock shall be 14,400, which number may be decreased (but not increased) by the Board of Directors without a vote of stockholders, provided, however, that such number may not be decreased below the number of then outstanding shares of Series A Preferred Stock. (b) The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, dissolution or winding up, rank prior to the Common Stock, par value $.001 per share, of the Corporation (the "Common Stock") and any other issue of Preferred Stock. Section 2. Dividends and Distributions. (a) The holders of Shares of Series A Preferred Stock, in preference to the holders of shares of Common Stock and of any shares of other capital stock of the Corporation ranking junior to the Series A Preferred Stock as to payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors, out of the assets of the Corporation legally available therefor, cumulative cash dividends at a rate of $8.00 per annum per share, subject to appropriate adjustment in the event of any stock split, reverse stock split or other recapitalization. Dividends shall accrue and be payable semiannually, in arrears, on the last business day of April and October in each year (each such date being referred to herein as a `Dividend Payment Date'), commencing April 1, 1995. 1 (b) Dividends payable pursuant to paragraph (a) of this Section 2 shall begin to accrue and be cumulative from the Issue Date, whether or not earned or declared. The amount of dividends so payable shall be determined on the basis of twelve 30-day months and a 360-day year. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend declared hereon, which record date shall be no more than sixty days prior to the date fixed for the payment thereof. (c) The holders of shares of Series A Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Voting Rights. In addition to any voting rights provided by law, the holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Until the date commencing six months from the initial issuance of shares of Series A Preferred Stock, the holders of shares of Series A Preferred Stock shall be entitled to vote on or to consent to corporate action with the holders of the Common Stock, having the number of votes equal to the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock on the date set forth in Section 3(c) hereof, with respect to any matter submitted to stockholders for a vote at such meeting or adjournment thereof or written consent in lieu thereof (or as otherwise required by applicable law). (b) The affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Series A Preferred Stock, voting together as a class, in person or by proxy, at a special or annual meeting of stockholders called for the purpose, shall be necessary to (i) authorize, increase the authorized number of shares of, or issue (including on conversion or exchange of any convertible or exchangeable securities or by reclassification), any shares of any class or classes of the Corporation's capital stock ranking pari passu with or prior to (either as to dividends or upon voluntary or involuntary liquidation. dissolution or winding up) the Series A Preferred Stock, (ii) increase the authorized number of shares of, or issue (including on conversion or exchange of any convertible or exchangeable securities or by reclassification) any shares of Series A Preferred Stock; or (iii) authorize, adopt or approve an amendment to the Certificate of Incorporation of the Corporation which would increase or decrease the par value of the shares of Series A Preferred Stock, or alter or change the powers, preferences or special rights of the shares of Series A Preferred Stock so as to affect such shares of Series A Preferred Stock adversely. (c) For the taking of any action as provided in this Section 3 by the holders of shares of Series A Preferred Stock each such holder shall have one vote for each share of Series A Preferred Stock, or such number of votes as the number of shares of Common Stock into which such shares of Series A Preferred Stock are convertible, as the case may be, in each case standing in his name on the transfer books of the Corporation as of any record date fixed for such purpose or, if no such date be fixed, at the close of business on the Business Day (as defined in Section 9) next preceding the day on which notice is given, or if notice is waived, at the close of business on the Business Day next preceding the day on which the meeting is held. 2 Section 4. Certain Restrictions. (a) Whenever semiannual dividends payable on shares of Series A Preferred Stock as provided in Section 2 are not paid in full, thereafter and until all unpaid dividends payable on the outstanding shares of Series A Preferred Stock, whether or not declared, shall have been paid in full, the Corporation shall not; (A) declare or pay dividends, or make any other distributions, on any shares of Junior Stock (as defined in Section 9), other than dividends or distributions payable in Junior, Stock, or (B) declare or pay dividends, or make any other distributions, on any shares of Parity Stock, except (1) dividends or distributions payable in Junior Stock and (2) dividends or distributions paid ratably on the Series A Preferred Stock and all Parity Stock on which dividends are payable or in arrears, in proportion to the total amounts to which the holders of all shares of the Series A Preferred Stock and such Parity Stock are then entitled. (b) Whenever semiannual dividends payable on shares of Series A Preferred Stock as provided in Section 2 are not paid in full, thereafter and until all unpaid dividends payable, whether or not declared, on the outstanding shares of Series A Preferred Stock shall have been paid in full, the Corporation shall not: redeem, purchase or otherwise acquire for consideration any shares of Junior Stock or Parity Stock; provided, however, that (1) the Corporation may at any time redeem, purchase or otherwise acquire shares of Junior Stock or Parity Stock in exchange for any shares of Junior Stock, (2) the Corporation may accept shares of any Parity Stock or Junior Stock for conversion and (3) the Corporation may at any time redeem, purchase or otherwise acquire shares of any Parity Stock pursuant to any mandatory redemption, put, sinking fund or other similar obligation, pro rata with the Series A Preferred Stock in proportion to the total amount then required to be applied by it to redeem, repurchase or otherwise acquire shares of Series A Preferred Stock and shares of such Parity Stock. (c) The Corporation shall not permit any Subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of capital stock of the Corporation unless the Corporation could, pursuant to Section 4(b), purchase such shares at such time and in such manner. Section 5. Required Shares. Any shares of Series A Preferred Stock converted, redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares of Series A Preferred Stock shall upon their cancellation, and upon the filing of an appropriate certificate with the Secretary of State of the State of Delaware, become authorized but unissued shares of preferred Stock, $.01 par value, of the Corporation and may be reissued as part of another series of Preferred Stack, par value $.01 per share, at the Corporation, subject to the conditions or restrictions on issuance set forth herein. 3 Section 6. Liquidation, Dissolution or Winding Up. (a) If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable federal or state bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 150 consecutive days and on account of any such event the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, no distribution shall be made (i) to the holders of shares of Junior Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received the Liquidation Preference with respect to each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such shares or (ii) to the holders of shares of Parity Stock unless the holders of shares of Series A Preferred Stock shall have received distributions made ratably to the holders of the Series A Preferred Stock and the Parity Stock in proportion to the total amounts to which the holders of all such shares of Series A Preferred Stock and Parity Stock would be entitled upon such liquidation, dissolution or winding up. (b) Neither the consolidation, merger or other business combination of the Corporation with or into any other Person or Persons nor the sale of all or substantially all the assets of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. Section 7. Conversion. (a) Upon the effectiveness of an amendment to the Certificate of Incorporation of the Corporation raising the number of authorized shares of Common Stock of the Corporation to a number not less than 30,000,000, each share of Series A Preferred Stock shall automatically be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by applying the Conversion Ratio. The Conversion Ratio shall initially be 86.9565 shares of Common Stock for each share of Series A Preferred Stock, subject to adjustment from time to time pursuant to Section 7(e). (b) Upon the occurrence of an automatic conversion pursuant to Section 7(a) hereof, and as soon as practicable thereafter, each holder of Series A Preferred Stock shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for Series A Preferred Stock and the Corporation shall issue and deliver at such office to the holders of Series A Preferred Stock, or to the nominee or nominees of such holders, a certificate or certificates for the number of shares of Common Stock to which such holders shall be entitled as aforesaid. Regardless of the time at which such certificates are issued, the conversion shall be deemed to have been made immediately upon the occurrence of the event described in Section 7(a) and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 4 (c) The Conversion Ratio shall be subject to adjustment from time to time in certain instances as hereinafter provided upon conversion the holder of shares of Series A Preferred Stock shall be entitled to receive, in cash, any accrued and unpaid dividends on the shares of Series A Preferred Stock surrendered for conversion to the date of such conversion. (d) In connection with the conversion of any shares of Series A Preferred Stock, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price per share of Common Stock on the Trading Day on which such shares of Series A Preferred Stock are deemed to have been converted. If more than one share of Series A Preferred Stock shall be surrendered for conversion by the same holder at the same time, the number of full shares of Common Stock issuable on conversion thereof shall be computed on the basis of the total number of shares of Series A Preferred Stock so surrendered. (e) The Conversion Ratio will be subject to adjustment from time to time as follows: (i) In case the Corporation shall at any time or from time to time after the Issue Date (A) pay a dividend, or make a distribution, on the outstanding shares of Common Stock in shares of Common Stock or declare, order, pay or make a dividend or other distribution of stock or other securities or property or rights or warrants to subscribe for securities of the Corporation or any of its Subsidiaries by way of dividend or spinoff, (B) subdivide the outstanding shares of Common Stock, (C) combine the outstanding shares of Common Stock into a smaller number of shares or (D) issue by reclassification of the shares of Common Stock any shares of capital stock of the Corporation, then, and in each such case, provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive, upon conversion of the Series A Preferred Stock, the number of shares of stock or other securities or property of the Corporation or otherwise, to which the holders of Series A Preferred Stock would have received if they had converted their shares of Series A Preferred Stock immediately prior to the happening of such event or the record date therefor, whichever is earlier. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 7(e) with respect to the rights of the holders of the Series A Preferred Stock after such event to the end that the provisions of this Section 7(e) (including adjustment of the Conversion Ratio then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. An adjustment made pursuant to this clause shall become effective (x) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective. No adjustment shall be made pursuant to this clause (i) in connection with any transaction to which Section 7(f) applies. (ii) For purposes of this Section 7(e), the number of shares of Common Stock at any time outstanding shall not include any share of Common stock then owned or held by or for the account of the Corporation. (iii) The term "dividend," as used in this Section 7(e) shall mean a dividend or other distribution upon stock of the Corporation. 5 (iv) Anything in this Section 7(e) to the contrary notwithstanding, the Corporation shall not be required to give affect to any adjustment in the Conversion Ratio unless and until the net effect of one or more adjustments (each of which shall be carried forward), determined as above provided shall have resulted in a change of the Conversion Ratio by at least one-tenth of one share of Common Stock, and when the cumulative net effect of more than one adjustment so determined shall be to change the Conversion Ratio by at least one-tenth of one share of Common Stock, such change in Conversion Ratio shall thereupon be given effect. (v) The certificate of any firm of independent public accountants of recognized standing selected by the Board of Directors of the Corporation (which may be the independent public accountants regularly employed by the Corporation) shall be presumptively correct for any computation made under this Section 7(e). (vi) If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to stockholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the number of shares of Common Stock issuable upon exercise of the right of conversion granted by this Section 7 or in the Conversion Ratio than in effect shall be required by reason of the taking of such record. (f) In case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of all or substantially all of the assets or property of the Corporation (each of the foregoing being referred to as a "Transaction"), at the option of the holder of any shares of Series A Preferred Stock, each share of Series A preferred Stock then outstanding shall thereafter be convertible into, in lieu of the Common stock issuable upon such conversion prior to consummation of such transaction, the kind and amount of shares of stock and other securities and property receivable (including cash) upon the consummation of such Transaction by a holder of that number of shares of Common Stock into which one share of Series A Preferred Stock was convertible immediately prior to such Transaction (including, on a pro rata basis, the cash, securities or property received by holders of Common Stock in any tender or exchange offer that is a step in such Transaction). In case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this Section 7 shall be deemed to apply, so far as appropriate and nearly as ray be, to such other securities or property. Section 8. Reports as to Adjustments. Upon any adjustment of the Conversion Ratio then in effect and any increase or decrease in the number of shares of Common stock issuable upon the operation of the conversion set forth in Section 7, then, and in each such case, the Corporation shall promptly deliver to each holder of Series A Preferred Stock and to the Transfer Agent of the Common Stock, a certificate signed by the president or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the conversion ratio then in effect following such adjustment and the increased or decreased number of shares issuable upon the conversion granted by Section 7. 6 Section 9. Definitions. For the purposes of this Certificate of Designation of Series A Cumulative Convertible Preferred Stock, the following terms shall have the meanings indicated; "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the state of New York are authorized or obligated by law or executive order to close. "Current Market Price" shall mean the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Corporation, which may be based on an opinion of an independent investment banking firm with an established national reputation as a valuer of securities. "Issue Date" shall mean the first date on which shares of Series A Preferred Stock are issued. "Junior Stock" shall mean any capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock. "Liquidation Preference" with respect to a share of Series A Preferred Stock shall mean $100 per share. "Parity Stock" shall mean any capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Subsidiary" of any Person means any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. "Trading Day' means a Business Day or, if the Common Stock is listed or admitted to trading on any national securities exchange, a day on which such exchange is open for the transaction of business. 7 IN WITNESS WHEREOF, CANDIES, INC. has caused this Certificate to be duly executed under its corporate name on this 14th day of September 1994. CANDIES, INC. By: /s/ Neil Cole ------------------------ Name: Neil Cole Title: President 8 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 Candies's, Inc., a corporation existing under the lawn of the State of Delaware (the "Corporation"), does hereby certify as follows: FIRST: That the Certificate of Incorporation of the corporation has been amended an 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 thirty-five million (35,000,000) shares, of which thirty million (30,000,000) shall be common stock, of the par value of $.001 per share, and five million (5,000,000) 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 29th day of November, 1994. /s/ Neil Cole Name: Neil Cole Title: President CERTIFICATE OF MERGER OF NEW RETAIL CONCEPTS, INC. (a Delaware corporation) INTO CANDIE'S, INC. (a Delaware corporation) New Retail Concepts, Inc., a corporation formed under the laws of the State of Delaware, desiring to merge with and into Candie's, Inc. pursuant to the provisions of Section 251(c) of the Delaware General Corporation law, DOES HEREBY CERTIFY as follows: FIRST: That the names and states of incorporation of each Constituent Corporations are: NAME STATE OF INCORPORATION Candie's, Inc. Delaware New Retail Concepts, Inc. Delaware - -------------------------------------------------------------------------------- SECOND: That the Agreement and Plan of Merger has been approved, adopted, certified, executed and acknowledged by each of the Constituent Corporations in accordance with Section 251(c) of the Delaware General Corporation Law. THIRD: That the name of the surviving corporation is Candie's, Inc. FOURTH: The Certificate of Incorporation of Candies shall be the Certificate of Incorporation of the surviving corporation. FIFTH: That an executed Agreement and Plan of Merger is on file at the principal place of business of Candie's, Inc. 2973 Westchester Avenue, Purchase, New York 10577 and that a copy of the Agreement and Plan of Merger will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of any Constituent Corporation. IN WITNESS WHEREOF, Candie's, Inc. has caused this Certificate of Merger to be executed by its president thereunto duly authorized this 17th day of August, 1998. ATTEST: CANDIE'S, INC. (a Delaware cc ration) /s/ Gary Klein By: /s/ Neil Cole - ------------------------------- ----------------------------------------- Secretary Neil Cole, President Gary Klein CERTIFICATE OF ELIMINATION OF CANDIE'S, INC. CANDIE'S, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: That the following resolutions were adopted by the Board of Directors of CANDIE'S, INC. on January 25, 2000: "RESOLVED, that this Corporation will not in the future issue any shares of its Series A Cumulative Convertible Preferred Stock, par value $.01 per share, no shares of which are currently outstanding, pursuant to the Certificate of Designation for the Series A Convertible Preferred Stock that was filed on September 13, 1994 with the office of the Secretary of State of the State of Delaware; and further RESOLVED, that the Chief Executive Officer of this Corporation be, and hereby is, authorized and directed to file a certificate setting forth these resolutions pursuant to Section 151(g) of the General Corporation Law of the State of Delaware so that, pursuant to such Section 151(g), the Certificate of Designation shall be eliminated from this Corporation's Certificate of Incorporation and the shares previously designated by the Certificate of Designation shall revert to the status of authorized and unissued shares of Preferred Stock of this Corporation for which powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, if any, shall not have been set forth in the Certificate of Incorporation of this Corporation or any amendment thereto; and further RESOLVED, that the Chief Executive Officer of this Corporation be, and hereby is, authorized, for and on behalf of this Corporation, to execute and deliver any and all agreements, instruments and documents, and to do any and all other acts and things as they or any of them may deem necessary or appropriate to carry out fully the intent and purpose of the foregoing resolutions." Dated: February 2, 2000. CANDIE'S, INC. By: /s/ Deborah Sorell Stehr Deborah Sorell Stehr, Senior Vice President CANDIE'S, INC. CERTIFICATE OF DESIGNATION OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS, AND OF THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS, OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK ($.01 Par Value Per Share) Pursuant to Section 151 of the General Corporation Law of the State of Delaware --------------------- The undersigned hereby certifies that the following resolution was duly adopted by the Board of Directors of Candie's, Inc. (the "Corporation"), a corporation organized and existing by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), on January 25, 2000: RESOLVED, that pursuant to authority conferred upon the Board of Directors of the Corporation by its Certificate of Incorporation, a Series A Junior Participating Preferred Stock of the Corporation is hereby created, and the designation and amount thereof and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof, are as follows: Section 1. Designation and Number of Shares. The shares of such series shall be designated as "Series A Junior Participating Cumulative Preferred Stock" ("Series A Preferred Stock"). The number of shares initially constituting the Series A Stock shall be 18,000; provided, however, that, if more than a total of 18,000 shares of Series A Preferred Stock shall be at any time issuable upon the exercise of Rights (the "Rights") issued pursuant to the Rights Agreement, dated as of January 26, 2000, between the Corporation and Continental Stock Transfer and Trust Company, as Rights Agent, as amended from time to time (the "Rights Agreement"), the Board of Directors, pursuant to Section 151(g) of the DGCL, shall direct by resolution or resolutions that a certificate be properly executed, acknowledged, filed and recorded, in accordance with the provisions of Section 103 thereof, providing for the total number of shares of Series A Preferred Stock authorized to be issued to be increased (to the extent that the Certificate of Incorporation then permits) to the largest number of whole shares (rounded up to the nearest whole number) then issuable upon exercise of such Rights. Section 2. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date 1 after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 2 Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided in this Certificate of Incorporation, in any Preferred Stock Designation or in any certificate of designations creating any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or 3 (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired promptly after the acquisition thereof. All such shares shall upon their retirement become authorized but unissued shares of Series A Preferred Stock and may be reissued as part of a new series of Series A Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an amount equal to the greater of $1.00 per share or an aggregate amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up; provided, however, that in the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 4 Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, junior to all other series of the Corporation's Preferred Stock. Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. Dated: February 2, 2000 CANDIE'S, INC. By: /s/ Deborah Sorell Stehr Deborah Sorell Stehr, Senior Vice President 5 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 CERTIFICATE OF OWNERSHIP AND MERGER OF ICONIX BRAND GROUP, INC. INTO CANDIE'S, INC. -------------------------------------------------------- Adopted in accordance with the provisions of Section 253 of the Delaware General Corporation Law -------------------------------------------------------- CANDIE'S, INC., a Delaware corporation, desiring to merge with ICONIX BRAND GROUP, INC., a Delaware corporation, pursuant to the provisions of Section 253 of the Delaware General Corporation Law, hereby certifies as follows: 1. Candie's, Inc. is a corporation formed under the laws of the State of Delaware (the "Corporation"). 2. The Corporation is the owner of all of the outstanding shares of each class of stock of Iconix Brand Group, Inc., a corporation formed under the laws of the State of Delaware. 3. On June 28, 2005, the Board of Directors of the Corporation adopted the following resolutions to merge Iconix Brand Group, Inc. into the Corporation: "WHEREAS, the Corporation owns 100% of the issued and outstanding common stock of the Iconix Brand Group, Inc. ("Subsidiary"); and WHEREAS, it is in the best interests of the Corporation to merge the Subsidiary with and into the Corporation in order that all the estate, property, rights, privileges and franchises of the Subsidiary shall vest in and be possessed by the Corporation; NOW, THEREFORE, be it: 1 RESOLVED, that the Board of Directors of the Corporation hereby approves and adopts the following plan to merge the Subsidiary into the Corporation: 1. The name of the corporation proposing to merge is Iconix Brand Group, Inc. (the "Subsidiary") and the name of the surviving corporation is Candie's, Inc. (the "Corporation") 2. The Subsidiary shall merge into the Corporation and upon the effective date of such merger the Subsidiary shall cease to exist and shall no longer exercise its powers, privileges and franchises subject to the laws of the State of Delaware. The Corporation shall succeed to the property and assets of and exercise all the powers, privileges and franchises of the Subsidiary and shall assume and be liable for all of the debts and liabilities, if any, of the Subsidiary. 3. The shares of the Subsidiary shall not be converted as a result of the merger, but shall be cancelled, and the authorized capital stock of the Corporation shall be and remain the same as before the merger. 4. The Certificate of Incorporation of the Corporation shall be amended to change the name of the Corporation to Iconix Brand Group, Inc. upon the effective date of the merger. and further RESOLVED, that the President of the Corporation, or such other officer of he Corporation designated by the President, is hereby authorized to execute, in the name of the Corporation, a Certificate of Merger, and to file such Certificate in the Office of the Secretary of State of the State of Delaware, and to do all the other acts and things that may be necessary to carry out and effectuate the purpose of these resolutions." 4. The effective time and date of the merger shall be 9 A.M., July 1, 2005. IN WITNESS WHEREOF, CANDIE'S, INC. has caused this Certificate to be executed by its duly authorized officer thereunto duly authorized this 28th day of June, 2005. CANDIE'S, INC. (a Delaware corporation) By: /s/ Neil Cole ---------------------------------------- Name: Neil Cole Title: President 2 EX-10.1 3 ex10_1.txt COMMON STOCK PURCHASE WARRANT (UCC) Exhibit 10.1 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT OR UNDER STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO THE EXPRESS PROVISIONS OF THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH PROVISIONS SHALL HAVE BEEN COMPLIED WITH. Date of Issuance: June 7, 2005 CANDIES, INC. Stock Purchase Warrant (Void after June 8, 2015) Candies, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies and agrees that UCC Consulting Corporation or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after the date hereof (the "Date of Issuance") and on or before the tenth (10th) anniversary of the Date of Issuance but not later than 5:00 p.m. New York time (such date and time, the "Expiration Time"), up to One Million (1,000,000) duly authorized, validly issued, fully paid and nonassessable shares of the Company's common stock, $0.001 par value per share (the "Common Stock") at an initial exercise price equal to $5.98 (five dollars and ninety-eight cents) per share, subject to adjustment in certain cases as described herein. The shares purchasable upon exercise of this Warrant, and the purchase price per share, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. The term "Warrant" as used herein shall include this Warrant and any other warrants delivered in substitution or exchange therefor, as provided herein. The Warrant Shares shall vest as follows: (a) 333,334 Warrant Shares (the "First Tranche") upon consummation of the first acquisition of a Target (as such term is defined in that certain investment banking agreement dated as of even date herewith between the Company and UCC Consulting Corporation (the "IB Agreement")), (b) 333,333 Warrant Shares (the "Second Tranche") upon consummation of the second acquisition of a Target and (c) 333,333 Warrant Shares (the "Third Tranche") upon consummation of the third acquisition of a Target, provided, however, no such vesting shall occur with respect to a Minor Acquisition (as such term is defined in IB Agreement). 1 1. Exercise. 1.1 Method of Exercise. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with a Notice of Exercise in the form of Annex A hereto (the "Notice of Exercise") duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company set forth on the signature page hereto, or at such other office or agency as the Company may designate in writing (the "Company's Office"), accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of shares of Warrant Shares purchased upon such exercise. (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which the Company receives at the Company's Office the Warrant together with the appropriate completed Notice of Exercise. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in Section 1.1(c) hereof shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (c) As soon as practicable after the exercise of this Warrant, in full or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and (ii) in case such exercise is in part only, a new Warrant or Warrants (dated the date hereof) of like tenor, representing in the aggregate the balance of the Warrant Shares that may be purchased thereunder. 1.2 Exercise by Surrender of Warrant. In addition to the method of payment set forth in Section 1.1 and in lieu of any cash payment required thereunder, the Warrant may be exercised by surrendering the Warrant in the manner specified in this Section 1.2, together with irrevocable instructions to the Company to issue in exchange for the Warrant the number of shares of Common Stock equal to the product of (x) the number of shares of Common Stock underlying the Warrants multiplied by (y) a fraction, the numerator of which is the Market Value (as defined below) of the Common Stock less the Exercise Price and the denominator of which is such Market Value. As used herein, the phrase "Market Value" at any date shall be deemed to be (i) the last reported sale price on the day prior to such date, or (ii) in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as (a) officially reported 2 by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the Nasdaq National Market System, or, (b) if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market System, the closing sale price as furnished by (i) the National Association of Securities Dealers, Inc. through Nasdaq or (ii) similar organization if Nasdaq is no longer reporting such information, or (c) if such information is no longer reported by NASDAQ or similar organization, the fair market value of the Common Stock as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it, but in the case of any such determination made under this clause (c), in no event less than the greater of (x) the per share Common Stock price of the last sale or issuance by the Company or (y) the last closing sale price as available under clause (a) or (b) above prior to such date. 2. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance by the Company, be validly issued, fully paid and nonassessable, and free from preemptive rights and free from all taxes, liens and charges with respect thereto (other than any lien which may be imposed by the Registered Holder(s) of the Warrants). The Company further covenants and agrees that, from and after the Date of Issuance and during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserve, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Market Value for each fractional share of the Company's Common Stock which would be issuable upon exercise of this Warrant. 4. Requirements for Transfer. 4.1 Warrant Register. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Registered Holder or Registered Holders. Any Registered Holder of this Warrant or any portion thereof may change its address as shown on the Warrant Register by written notice to the Company requesting such change, and the Company shall promptly make such change. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Registered Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary; provided, however, that if and when this Warrant is properly assigned in blank, the Company may, but shall not be obligated to, treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 4.2 Warrant Agent. The Company may, by written notice to the Registered Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 4.1 hereof, issuing the Common Stock issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, may be made at the office of such agent. 3 4.3 Transfer. This Warrant is transferable only with the prior written consent of the Company; provided, however, the Registered Holder may transfer the Warrant to any employee or other "affiliated person," as such term is defined in the Securities Exchange Act of 1934, as amended, of the Registered Holder without the consent of the Company. Neither this Warrant nor any rights hereunder may be transferred unless the Company receives from the Registered Holder such documents and representations as the Company may request to assure that the proposed transfer complies with applicable state and federal securities laws and the regulations of any stock exchange or quotation medium on which the Common Stock is listed for trading. Subject to the provisions of this Section 4, this Warrant and all rights hereunder are transferable, in whole or in part, upon the surrender of this Warrant with a properly executed Assignment Form in substantially the form attached hereto as Annex B (the "Assignment") at the principal office of the Company. 4.4 Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment and subject to the provisions of this Warrant and with the limitations on assignments and transfers as contained in this Section 4, the Company at its expense shall issue to or on the order of the Registered Holder a new warrant or warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (on payment by the Registered Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. 5 Investment Representation and Legend. The Registered Holder, by acceptance of this Warrant, represents and warrants to the Company that the holder is acquiring the Warrant for its own account for investment purposes and not with a view toward the distribution thereof. Unless the offering and sale of the Warrant Shares to be issued upon the particular exercise of the Warrant shall have been effectively registered under the 1933 Act, the Company shall be under no obligation to issue the Warrant Shares covered by such exercise unless and until the Registered Holder who exercises the Warrant shall provide the Company with such information that it may reasonably request to satisfy itself that the issuance of the Warrant Shares upon exercise of the Warrant complies with an applicable federal and state securities laws, including, but not limited to, a representation by such Registered Holder to the Company, at the time of such exercise, that such person or entity is acquiring such Warrant Shares for his or her or its own account, for investment and not with a view to, or for sale in connection with, the distribution of any such Warrant Shares, in which event the person acquiring such Warrant Shares shall be bound by the provisions of a legend, substantially as follows, which shall be endorsed upon the certificate(s) evidencing the Warrant Shares issued pursuant to such exercise: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"). Such shares may not be sold, transferred or otherwise disposed of unless they have first been registered under the Act or, unless, in the opinion of counsel satisfactory to the Company's counsel, such registration is not required." 4 6. Adjustment of Exercise Price. 6.1 Adjustment. If at any time after the date of grant of this Warrant the Company shall engage in a split-up, subdivision or combination or exchange of its Common Stock, then the number of shares covered by this Warrant and the Exercise Price shall be proportionately adjusted for any such change by the Board of Directors of the Company, whose determination shall be conclusive. 6.2 Dividend or Distribution. If the Company shall pay a dividend with respect to the Common Stock or make any other distribution with respect to the Common Stock, except any distribution specifically provided for in this Section 6, payable in shares of Common Stock, then the Exercise Price shall be adjusted, from and after the date of determination of the stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. 6.3 Reclassification, Merger, etc. In the case of any reclassification of the Common Stock or in the case of any consolidation or merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the surviving corporation and which does not result in any reclassification of the Common Stock) or in the case of any sale of all or substantially all of the assets of the Company, then the Company, or such successor or purchasing corporation, as the case may be, shall execute a new Warrant Certificate, providing that the Holder shall have the right to exercise such new warrant (the "New Warrant") and upon such exercise to receive, in lieu of each share of Common Stock theretofore issuable upon exercise of this Warrant, the number and kind of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation or merger by a holder of shares of the Common Stock with respect to one share of Common Stock. Such New Warrant certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for herein. The provisions of this Section 6.3 shall similarly apply to successive reclassifications, changes, consolidations or mergers. 6.4 Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then and in each such case the Company shall give notice thereof to the Registered Holder, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 5 6.5 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 6, the number of securities issuable upon the exercise of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 7. Notices of Record Date, Etc. In case the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice unless such prior notice is waived by the Registered Holder. Failure by the Company to give such notice or any defect therein shall not affect the validity of any action taken by the Company in connection with the declaration or payment of any such dividend or distribution, or the issuance of any subscription or other rights, or any proposed reorganization, reclassification, consolidation, merger, transfer, liquidation, dissolution or winding up or other corporate action referred to in this Section 7; provided, however, in the event of failure to give notice or any defect therein, the Registered Holder shall not waive any rights he would have otherwise had had timely notice been given. 8. No Rights of Stockholders. Subject to other Sections of this Warrant, the Registered Holder shall not be entitled to vote, to receive dividends or subscription rights, nor shall anything contained herein be construed to confer upon the Registered Holder, as such, any of the rights of a stockholder of the Company, including, without limitation, any right to vote for the election of directors or upon any matter submitted to stockholders, to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance, or otherwise), to receive notices, or otherwise, until the Warrant shall have been exercised as provided herein. 6 9. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 10. Registration Rights. 10.1 Demand Registration. (a) Upon the vesting of the First Tranche (the "Trigger Date"), the Registered Holders of at least a majority of the Registrable Securities may deliver a written request to the Company requesting that the Company file, on one (1) occasion, a registration statement under the Act covering the registration of the Registrable Securities (as hereinafter defined); provided, however, that (i) the Company shall not be obligated to effect any such registration pursuant to this Section 10.1 if Form S-3 is not available for such offering by the Registered Holders and (ii) the Company shall not be required to enter into any underwriting agreement with respect to any registration statement filed under Section 10.1 If the Company shall receive any such written request, then the Company shall use its commercially reasonable efforts to file a registration statement (the "Registration Statement") with the Securities and Exchange Commission ("SEC") as soon as practicable, and in any event within forty-five (45) days of the receipt of such request ("Request Date") as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities that the Registered Holders request to be registered; provided, however, that the 45 day period shall be subject to availability of audited financial statements of the Company or to an event which the Company must report on Form 8-K, or another appropriate SEC form, that prevents such filing, in which case such Registration Statement shall be filed as soon as practicable following the availability of audited financial statements or the reporting of such event on Form 8-K or other appropriate form. The Company shall (i) use commercially reasonable efforts to have such Registration Statement declared effective by the SEC as soon thereafter as is practical, but in any event within one hundred and fifty (150) days of its receipt of the written request to effect the registration, and (ii) cause such Registration Statement to remain effective until the date which is the earlier of such time as (A) the Registered Holders have completed the distribution described in the Registration Statement relating thereto or (B) the Registered Holders have publicly sold the Registrable Securities other than pursuant to the registration statement or (C) all of the Registrable Securities thereunder may be sold pursuant to Rule 144(k) under the 1933 Act or any successor rule (the "Effectiveness Period") provided, however, that the Company shall not be obligated to maintain the 7 effectiveness of any such registration pursuant to this Section 10.1 if Form S-3 is not available for such offering by the Registered Holders. However, in the event of any failure of the Company to maintain the effectiveness of the Registration Statement for the period set forth above other than by reason of Form S-3 not being available, the demand registration provisions of this Section 10.1 (limited to the filing of one additional registration statement only on Form S-3 if available) shall be available to the Registered Holders, as if such holders had never made a demand for registration pursuant to the provisions of this Section 10.1. For purposes of this Agreement, the term "Registrable Securities" shall mean the Warrant Shares issuable upon the exercise of the Warrants; provided, however, that securities shall only be treated as Registrable Securities if and only for so long as they (A) have not been disposed of pursuant to a registration statement declared effective by the SEC, or (B) have not been sold in a transaction exempt from the registration and prospectus delivery requirements of the 1933 Act (such as Rule 144(k) or any successor rule) so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale or (C) are not eligible to be sold pursuant to Rule 144(k) or any successor rule. (b) Notwithstanding the requirement to file the Registration Statement as described above, if the Company shall furnish to the Registered Holders a certificate signed by the Chief Executive Officer or President of the Company stating that in the good faith judgment of the Board of Directors of the Company it would not be in the best interest of the Company for such registration statement to be filed, the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after the date of such certificate; provided, however, that the Company shall not defer its obligation in this manner more than once in any twelve (12) month period. (c) All expenses (other than (i) underwriting discounts and commissions, brokerage fees and applicable transfer taxes and (ii) any fees or expenses of any advisor or counsel to the Registered Holders (except as may arise under subsection (e) below) incurred in connection with registrations, filings or qualifications pursuant to Section 10 hereof, including, without limitation, all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company shall be borne by the Company. Further, the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance obtained by the Company and the expenses and fees for listing or authorizing for quotation the securities to be registered on each securities exchange, market or automated quotation system on which it Common Stock is then listed or quoted. (d) Prior to any resale of Registrable Securities by any Registered Holder, the Company shall register or qualify or cooperate with the Registered Holder in connection with the registration or qualification (or exemption from the registration or qualification) of such Registrable Securities for the resale by the Registered Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Registered Holder reasonably 8 requests in writing and as reasonably acceptable to the Company, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, consent to service of process in any jurisdiction in which it has not so consented, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction. (e) Each of the Company and each Registered Holder shall indemnify the other party hereto and their respective officers, directors, employees and agents against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) by the indemnifying party of a material fact contained in any prospectus or other document (including any related registration statement, notification or the like) incident to any registration of the type described in this Section 10, or any omission (or alleged omission) by the indemnifying party to state in any such document a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such indemnified party for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action; provided that no party will be eligible for indemnification hereunder to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished by such party for use in connection with such registration. Notwithstanding the foregoing, no Requesting Holder shall be entitled to indemnification under this Section 10 where either (i) a prospectus was required to be delivered to the purchaser of Registrable Securities and was available to be delivered by the selling Registered Holder or its broker but was not so delivered, (ii) prior to consummation of such sale either a supplement or amendment to the Company's prospectus correcting any alleged untrue statement or alleged untrue statement or omission or alleged omission was transmitted to the selling Registered Holder but not transmitted by the Registered Holder or its broker to the purchaser of the Registrable Securities or (iii) the Registered Holder was advised by the Company in writing that the prospectus could no longer be used. In addition, if the indemnifying party is a Registered Holder, in no event shall its indemnification obligation exceed the net proceeds received by the Registered Holder upon a sale of the Registrable Securities. (f) Each Registered Holder shall furnish to the Company such information regarding the Registered Holder and the distribution proposed by it as the Company may reasonably request in connection with any registration or offering referred to in this Section 10 and the Company's registration obligations under this Section 10 shall be subject to the Company's receipt of such information. Each Registered Holder shall cooperate as reasonably requested by 9 the Company in connection with the preparation of the registration statement with respect to such registration, and for so long as the Company is obligated to file and keep effective such registration statement, shall provide to the Company, in writing, for use in the registration statement, all such information regarding the Registered Holder and its plan of distribution of the Registrable Securities included in such registration as may be reasonably necessary to enable the Company to prepare such Registration Statement, to maintain the currency and effectiveness thereof and otherwise to comply with all applicable requirements of law in connection therewith. 10.2 Piggyback Registration. In addition to the demand registration provisions of Section 10.1, if at any time during the term of this Warrant, the Company shall determine to prepare and file with the SEC a registration statement relating to an offering for its own account or the account of others under the 1933 Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business, any share exchange or recapitalization or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to each Registered Holder a written notice of such determination and, if within 15 days after the date of such notice, the Registered Holder shall so request in writing delivered to the Company, the Company shall include in such registration statement all or any part of such Registrable Securities such Registered Holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights (other than the holder that exercised a demand registration right that has contractual priority rights with respect to such cutbacks); provided, that, the Company shall not be required to register any Registrable Securities pursuant to this Section 10.2 that are eligible for resale pursuant to Rule 144(k) or that are the subject of a then effective Registration Statement or that have been publicly sold. Notwithstanding the provisions of this Section 10.2, the Company shall have the right at any time after it shall have given notice pursuant to this Section 10.2 (irrespective of whether any written request for inclusion of such securities shall have already been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. Whether or not such registration is withdrawn, the registration expenses of such withdrawn registration shall be borne by the Company in accordance with Section 10.1(c) hereof. 11. Mailing of Notices, Etc. All notices and other communications from the Company to each Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the last address furnished to the Company in writing by the Registered Holder of this Warrant. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, then it shall give prompt written notice to each Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 10 12. Change or Waiver; Severability. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. If any provision of this Warrant shall be held to be invalid and unenforceable, such invalidity or unenforceability shall not affect any other provision of this Warrant. 13. Headings; Severability. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. If any provision of this Warrant shall be held to be invalid and unenforceable, such invalidity or unenforceability shall not affect any other provision of this Warrant. 14. Governing Law and Submission to Jurisdiction. This Warrant will be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict or choice of laws of any jurisdiction. The parties hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to this Warrant shall be brought and enforced in the courts of the State of New York, and irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive. 15. Certificate. Upon request by a Registered Holder of this Warrant, the Company shall promptly deliver to such holder a certificate executed by its President or Chief Financial Officer setting forth the total number of outstanding shares of capital stock, convertible debt instruments and options, rights, warrants or other agreements relating to the purchase of such capital stock or convertible debt instruments, together with its calculation of the number of shares remaining available for issuance upon exercise of this Warrant, and a certificate of the accuracy of the statements set forth therein. 16. Supplements and Amendments. The Company and the initial Registered Holder may from time to time supplement or amend this Warrant in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Holder may deem necessary or desirable. 17. Successors. All the covenants and provisions of this Warrant shall be binding upon and inure to the benefit of the Company and the Registered Holders and their respective successors and assigns hereunder. 18. Benefits of this Warrant. Nothing in this Warrant shall be construed to give to any person, entity or corporation other than the Company and the Registered Holder(s) of the Warrant Certificate any legal or equitable right, remedy or claim under this Warrant; and this Warrant shall be for the sole and exclusive benefit of the Company and the Registered Holder(s) of the Warrant Certificate. 19. Counterparts. This Warrant may be executed in any number of counterparts and each such counterpart shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 11 IN WITNESS WHEREOF, CANDIES, INC. has caused this Warrant to be signed by its duly authorized officers under its corporate seal and to be dated on the day and year first written above. CANDIES, INC. By:/s/ Neil Cole ------------- Name: Neil Cole Title: Chief Executive Officer Principal Office: 215 West 40th Street New York, NY 10018 12 ANNEX A NOTICE OF EXERCISE FORM To: Candies, Inc. Attention: President 1. The undersigned hereby elects to purchase _______________ (leave blank if you choose Alternative No. 2 below) shares of Common Stock of Candies, Inc. pursuant to the terms of this Warrant, and tenders herewith payment of the purchase price of such shares in full. (Initial here if the undersigned elects this alternative). _________ 2. In lieu of exercising the attached Warrant for cash or check, the undersigned hereby elects to effect the exercise by surrender of warrant provision of Section 1.2 of this Warrant and receive ____________ (leave blank if you choose Alternative No. 1 above) shares of Common Stock of Candies, Inc. pursuant to the terms of this Warrant. (Initial here if the undersigned elects this alternative). ___________ 3. Please issue a certificate or certificates representing said securities in the name of the undersigned or in such other name as is specified below: - ---------------------------------------------------------------- (Name) - ---------------------------------------------------------------- (Address) - ----------------------------------------------------- Signature - ----------------------------------------------------- Date: ANNEX B ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares Dated: Signature: Dated: Witness: EX-31.1 4 ex31_1.txt CEO 302 CERTIFICATE Exhibit 31.1 ICONIX BRAND GROUP, INC. CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Neil Cole, President and Chief Executive Officer of Iconix Brand Group, Inc, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2005 of Iconix Brand Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2005 /s/ Neil Cole ------------------------------------- Neil Cole President and Chief Executive Officer EX-31.2 5 ex31_2.txt CFO 302 CERTIFICATE Exhibit 31.2 ICONIX BRAND GROUP, INC. CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Warren Clamen, Chief Financial Officer of Iconix Brand Group, Inc, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2005 of Iconix Brand Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 10, 2005 /s/ Warren Clamen ----------------------------------- Warren Clamen Chief Financial Officer EX-32.1 6 ex32_1.txt CEO 906 CERTIFICATE Exhibit 32.1 ICONIX BRAND GROUP, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Iconix Brand Group, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2005 (the "Report"), I, Neil Cole, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Neil Cole - ------------------------------------- Neil Cole President and Chief Executive Officer August 10, 2005 EX-32.2 7 ex32_2.txt CFO 906 CERTIFICATE Exhibit 32.2 ICONIX BRAND GROUP, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Iconix Brand Group, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2005 (the "Report"), I, Warren Clamen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Warren Clamen - ------------------------------------- Warren Clamen Chief Financial Officer August 10, 2005 -----END PRIVACY-ENHANCED MESSAGE-----