-----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, GXjoA8TU/XX+NTDdG3fex8vbBx8+KQcgiJNFCz6lgOlOnIz9yxIvYHFMtfVRhv87 X/o/KSbgWfveKvUrqkOC1A== 0000891554-96-000631.txt : 19961001 0000891554-96-000631.hdr.sgml : 19961001 ACCESSION NUMBER: 0000891554-96-000631 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANDIES INC CENTRAL INDEX KEY: 0000857737 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 112481930 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10593 FILM NUMBER: 96636917 BUSINESS ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9146948600 MAIL ADDRESS: STREET 1: 2975 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: MILLFELD TRADING CO INC DATE OF NAME CHANGE: 19920703 10KSB/A 1 ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (Amendment No. 1 to Form 10-KSB) (Mark One) [X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 1996 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-10593 CANDIE'S, INC. ---------------------------------------------- (Name of small business issuer in its charter) Delaware 11-2481903 - -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2975 Westchester Avenue, Purchase, New York 10577 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (914) 694-8600 Securities registered under Section 12(b) of the Exchange Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- None Not Applicable Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value and Common Stock Purchase Warrants ---------------------------------------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period 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 [] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ended January 31,1996 were: $37,914,127. The aggregate market value of the voting stock held by non-affiliates of the registrant (based upon the closing sale price) on May 7, 1996 was approximately $18,500,000. As of May 7, 1996, 9,339,677 shares of Common Stock, par value $.001 per share were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS Page ---- PART I Item 1. Description of Business...................................................................... 1 Item 2. Description of Property...................................................................... 8 Item 3. Legal Proceedings............................................................................ 8 Item 4. Submission of Matters to a Vote of Security-Holders.......................................... 10 PART II Item 5. Market for Common Equity and Related Stock Holder Matters............................................................................... 11 Item 6. Management's Discussion and Analysis or Plan of Operation.................................... 12 Item 7. Financial Statements ........................................................................ 19 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................... 19 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ......................................................................... 20 Item 10. Executive Compensation....................................................................... 21 Item 11. Security Ownership of Certain Beneficial Owners and Management............................................................................... 26 Item 12. Certain Relationships and Related Transactions............................................... 27 Item 13. Exhibits, List and Reports on Form 8-K....................................................... 30
PART I Item 1. Business Introduction Candies, Inc. and its subsidiaries (together the "Company") are engaged primarily in the design, marketing and importation of a variety of moderately-priced women's and girls' casual and fashion footwear under the CANDIE'S(R) trademark for distribution to better department and specialty stores nationwide. The Company also arranges for the manufacture of footwear products, similar to those produced under the CANDIE'S trademark, for mass market and discount retailers, under one of the Company's other trademarks or under the private label brand of the retailer, and distributes a variety of men's workboots, hiking boots, winter boots and outdoor casual shoes designed and marketed by the Company's wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright Star") under private labels and a brand name licensed by the Company from third parties specifically for use by Bright Star (ASPEN(R)). The Company has entered into an agreement with the owner of the BONGO(R) trademark to act as exclusive licensee to manufacture and market footwear in North America under the BONGO(R) trademark for an initial period expiring July 31, 1998, which may be extended by the Company under certain circumstances, to July 31, 2001. The Company licenses the CANDIE'S trademark to third parties for the sale of other products (children's footwear and women's intimate apparel) pursuant to exclusive license agreements which require the licensees to pay royalties, including minimum royalties, to the Company. Restructuring and Extinguishment of Indebtedness During its fiscal year ended January 31, 1994 ("Fiscal 1994"), the Company completed a restructuring plan (the "Restructuring Plan") which substantially reduced its liabilities, restructured the terms of continuing obligations, reduced operating costs and acquired new sources of revenue and capital funds by effecting (i) the acquisition of the CANDIE'S and certain other trademarks and the related trademark licensing business from El Greco, Inc. ("El Greco"), a former subsidiary of New Retail Concepts, Inc. ("NRC") that was merged into NRC in 1993, by granting additional licenses for the distribution of products bearing the CANDIE'S trademark and entering into license agreements to obtain additional brand name licenses for its Bright Star division; (ii) the conversion to equity of an outstanding $3.5 million debenture and certain other liabilities of the Company; (iii) the restructuring of the Company's institutional debt and establishment of new credit facilities; (iv) a 1-for-4.5 reverse stock split; (v) sales of its securities; (vi) the settlement of outstanding U.S. Customs Service claims; and (vii) a quasi-reorganization of the Company's accounts. In addition, in March 1993, Neil Cole, President, Chief Executive Officer, a director and a principal stockholder of NRC, joined the Company as its new Chairman of the Board, President and Chief Executive Officer. Although the Restructuring Plan helped improve the Company's financial condition, the Company determined that it would have to take further steps during the fiscal year ending January 31, 1995 ("Fiscal 1995") to further improve its financial condition. During Fiscal 1995, the Company completed a further series of transactions as part of a comprehensive plan (the "Financial Program") intended to significantly improve the Company's financial viability by substantially reducing operating and other expenses and liabilities while improving cash flow. Among other things, as part of the Financial Program, the Company reduced its rental expense by relocating its executive offices and showroom to Westchester, New York, extinguished certain indebtedness to trade creditors through the issuance of shares of its common stock, settled certain litigation and extinguished approximately $3.4 million of institutional indebtedness. As part of its efforts to continue to improve its financial condition, in April 1996 the Company entered into an agreement to, among other things, issue shares of common stock to Redwood Shoe Corp., a principal supplier in contingent satisfaction of $1,680,000 of accounts payable owed to the supplier. See Item 6 - -- "Management's Discussion and Analysis or Plan of Operations." CANDIE'S(R) Footwear Products CANDIE'S(R) brand fashion and casual footwear is designed primarily for girls and women, aged 14 to 40, featuring a variety of styles for a variety of uses. The retail prices of CANDIE'S footwear generally ranges from $30 to $60. Four times per year, as part of its Spring and Fall collections, the Company generally designs and markets 30 to 40 different styles of shoes among its footwear categories. Approximately 25% of such styles are "updates" of the Company's most popular styles from prior periods and the Company considers such footwear to be "core" products. The Company's designers analyze and interpret fashion trends and translate such trends into shoe styles consistent with the CANDIE'S image and price point. Fashion trend information is compiled by the Company's designers through various methods, including travel to Europe, to identify and confirm seasonal trends, utilization of outside fashion forecasting services and attendance at trade shows and seminars. Each season, subsequent to the final determination of that season's line by the design team and management (including colors, trim, fabrics, constructions and decorations), the design team travels to the Company's manufacturers to oversee the production of the initial sample lines. BONGO Footwear Products The Company also designs fashion and casual footwear for girls and women, aged 14 to 40 and markets and distributes such footwear under the Bongo trademark pursuant to a license agreement with the owner of such trademark. Such footwear generally retails at prices range of $30 to $50 and is distributed by the Company to department and specialty retail stores, including Nordstroms, Burdines, Wet Seal/Contempo Casuals, Mervyns and Edison Brothers. Private Label Operations The Company arranges for the manufacture of women's footwear, acting as agent for mass market and discount retailers, primarily under the retailer's private label brand. Under its agency arrangements, the Company receives a commission based upon the purchase price of the products purchased from the manufacturer for providing design expertise, arranging for the manufacturing of the footwear, oversight of production, inspection of the finished goods and arranging for the sale of the finished goods by the manufacturer to the retailer. All of the private label footwear is presold against firm purchase orders. Bright Star Footwear Bright Star Footwear, Inc. ("Bright Star"), a wholly owned subsidiary of the Company, acting principally as agent for its customers, designs, markets and distributes a wide variety of workboots, hiking boots, winter boots and mens' leisure footwear, which is either unbranded or marketed under the private label brand names of Bright Star's customers or under the Company's licensed brand, ASPEN. Bright Star's customer base consists of a broad group of retailers, including discounters, specialty retailer and better grade accounts, which provides Bright Star a distribution base for its footwear. Bright Star's products are directed toward a low to moderately-priced market. The retail prices of Bright Star's footwear generally ranges from $12 to $60. Manufacturing The Company does not own or operate any manufacturing facilities. The Company's footwear products are manufactured to its specifications by a number of independent suppliers located in Korea, China, Brazil, Mexico, Italy, the United States, Taiwan, Indonesia and Thailand. No single supplier accounts for more than 10% of the Company's footwear products, except for Synco Footwear Company, Inc., a company that indirectly supplies the Company with footwear products which the Company orders through its independent buying agent, Redwood Shoe Corp. ("Redwood"). The Company believes that such diversification permits it to respond to customer needs and minimizes risks associated with foreign manufacturing. The Company has developed, and seeks to develop, long-term relationships with manufacturers that can produce a high volume of quality products at competitive prices. The Company negotiates the price of finished products with its suppliers. Such suppliers manufacture the products themselves or subcontract with other 2 manufacturers. Bright Star utilizes unaffiliated agents who are responsible for identifying suppliers, planning production schedules, supervising manufacture, inspecting samples and finished products and arranging for the shipment of goods directly to customers in the United States. Most raw materials necessary for the manufacture of the Company's footwear are purchased by the Company's suppliers from vendors located in the country of manufacture. Goods are purchased by the Company from its suppliers either by the issuance of letters of credit prior to shipment of the goods or on open account generally payable within 30-60 days after shipment of the goods. Although the Company believes that the raw materials required (which include leather, nylon, canvas, polyurethane and rubber), are available from various alternative sources, there can be no assurance that any such materials will continue to be available on a timely or cost-effective basis. Once the design of a new shoe is completed (including the production of samples), which generally requires approximately three months, the shoe is offered for sale to wholesale purchasers. After orders are received by the Company, the acquisition of raw materials, the manufacture of the shoes and shipment to the customer each take approximately one month. If the shoes are produced in the United States or shipped via air freight, rather than ocean freight, the shipment time is reduced. There can be no assurance that, in the future, the capacity or availability of suppliers will be adequate to meet the Company's needs. Tariffs, Import Duties and Quotas All products manufactured overseas are subject to United States tariffs, customs duties and quotas. In accordance with the Harmonized Tariff Schedule (a fixed duty structure in effect since January 1, 1989), the Company pays import duties on its footwear products manufactured outside of the United States ranging from approximately 2.5% to 60%, depending on whether the principal component of the product is leather or some other material. Inasmuch as the Company's products have differing compositions, the import duties vary with each shipment of footwear products. Since 1981, there have not been any quotas or restrictions imposed on footwear imported by the Company into the United States. The Company is unable to predict whether, or in what form, quotas or other restrictions on the importation of its footwear products may be imposed in the future. Any imposition of quotas or other import restrictions could have a material adverse effect on the Company. In addition, other restrictions on the importation of footwear and apparel are periodically considered by the United States Congress and no assurance can be given that tariffs or duties on the Company's goods may not be raised, resulting in higher costs to the Company, or that import quotas respecting such goods may not be lowered which could restrict or delay shipment of products from the Company's existing foreign suppliers. Backlog At April 25, 1996, the Company had an estimated backlog of orders for footwear products of approximately $21.5 million, as compared to a backlog of 3 approximately $24 million at April 25, 1995. The Company anticipates that all of the orders constituting backlog at April 25, 1996 will be filled by the end of Fiscal 1997. The backlog at any particular time is affected by a number of factors, including seasonality, the buying policies of retailers and the scheduling of manufacture and shipment of products. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. Seasonality Demand for the Company's footwear has historically peaked during the months of June through August (the fall/back-to-school selling season). As a result, shipment of the Company's products have been heavily concentrated in the second and third fiscal quarters. Therefore, the Company's results of operations typically fluctuate significantly from quarter to quarter. The Company has sought to reduce fluctuations in its quarterly operating results by marketing additional footwear categories during other selling seasons. However, there can be no assurance that the Company will be able to achieve consistent quarterly operating results in the future by implementing this strategy. The success of this strategy depends upon market acceptance of the additional products offered during selling seasons other than the peak season, of which there can be no assurance. Accordingly, quarterly operating results may continue to fluctuate significantly in the future. Customers and Sales During the fiscal year ended January 31, 1996 ("Fiscal 1996"), the Company sold its footwear products to more than 500 retail accounts consisting of department stores, mass merchandisers, shoe stores and other outlets, including Federated Stores (which includes Macy's and Bloomingdale's), Nordstrom's and Mercantile. During Fiscal 1996, no individual customer accounted for more than 10% of the Company's revenues. There can be no assurance that such customers will continue to purchase products from the Company or utilize its services in the future. The Company generally requires payment for goods by its customers within 10 to 60 days after receipt of the goods. In certain instances, the Company offers its customers a discount from the purchase price in lieu of returned goods; otherwise, goods may be returned solely for defects in quality, in which event the Company returns the goods to the manufacturer for a credit to the Company's account. The Company currently utilizes the services of seven full-time sales persons, including employees and independent contractors, who are compensated on a commission basis. The Company emphasizes customer service in the conduct of its operations and maintains a customer service department. The Company's customer service department processes customer purchase orders and supports the sales representatives to coordinate orders and shipments with customers. 4 Licensing of CANDIE'S Trademark The Company has licensed the CANDIE'S trademark for use in connection with the manufacture and distribution of women's intimate and children's footwear under license agreements expiring in December 1996 and 1998, respectively. Each license agreement requires the licensee to pay royalties based on a specified percentage of the licensee's net sales against a minimum royalty that increases over the term of the license agreement. The licensee for the manufacture and distribution of children's footwear is Kid Nation, Inc., a subsidiary of Brown Group, Inc. (a company which markets footwear under the Buster Brown(R), Dr. Scholls(R) and Disney(R) brand names), and the licensee for women's intimate apparel is Wundies, Inc. The license agreement with Kid Nation, Inc. permits the licensee to extend the term thereof for an additional three years if specified minimum net sales targets are achieved by the licensee and requires the licensee to pay an advertising fee to the Company. The license agreement with Wundies, Inc. is cancellable by either party on six months' notice. Children's footwear marketed under the CANDIE'S trademark retails at between $20 and $40 a pair and is distributed to department and specialty retail stores throughout the United States. It is likely that the success of the Company's licensed product lines will be closely related to the success of the Company's footwear program. The Company intends to seek new license agreements in apparel, accessories and related categories. In evaluating a prospective licensee, the Company will consider its experience, financial stability, performance, reputation, distribution and marketing ability. The Company will also evaluate the marketability of the proposed product categories and their compatibility with the product lines of the Company's existing CANDIE'S licenses. There can be no assurance that the Company can successfully license its products in the future. Trademarks and Trade Names The Company owns federal trademark registrations for the trademark registration for CANDIE'S(R) and believes that such trademark has significant value and is, or will be, important to the marketing of the Company's products and those of its licensees. The Company also owns the trademarks Action Club(R), Full Moon(R), Sugar Babies(R) and Take A Hike(R), which are not considered to be material to the Company's current operations. There can be no assurance that the Company's trademarks do not, and will not, violate the proprietary rights of others, that they would be upheld if challenged or that the Company would, in such an event, not be prevented from using the trademarks, any of which could have a material adverse effect on the Company. In addition, there can be no assurance that the Company will have the financial resources necessary to enforce or defend its trademarks. The Company also sells footwear under the BONGO and ASPEN trademarks, which the Company licenses from third parties. The BONGO license expires on July 31, 1998, subject to the Company's right to extend the license through July 31, 2001, and grants the Company the exclusive right to market and distribute footwear under the BONGO trademark in North America. The BONGO license requires the Company to pay royalties based on a percentage of the sales exceeding certain minimum royalty payments. The ASPEN license expires on September 30, 1996, subject to the Company's right to extend the license through September 30, 5 1997. The inability of the Company to utilize the BONGO trademark, for whatever reason, could have a material adverse effect on its business. Competition The footwear industry is extremely competitive in the United States and the Company faces substantial competition in each of its product lines. In general, competitive factors include quality, price, style, name recognition and service. Although the Company believes that it can compete favorably in these areas, there can be no assurance that it will be able to do so. In addition, the presence in the marketplace of various fashion fads and the limited availability of shelf space can affect competition. Many of the Company's competitors have substantially greater financial, distribution, marketing and other resources than the Company and have achieved significant name recognition for their brand names, such as Esprit(R), Bass(R) and Eastland(R). There can be no assurance that the Company will be able to successfully compete with the companies marketing these products. Employees At April 25, 1996, the Company employed 32 persons, of whom three act in executive capacities, seven are full-time sales and marketing personnel, five are customer service representatives, two are product development personnel and 15 are administrative personnel. None of the Company's employees is represented by a union. The Company also utilizes the services of several independent contractors who are engaged in sales. The Company considers its relations with its employees to be good. Investment in Joint Venture In September 1991, the Company entered into an agreement (the "Agreement") with Carousel Group, Inc. ("Carousel") to form a joint venture (the "Joint Venture") to exploit certain technology relating to the production of footwear soles, as well as other opportunities that may arise utilizing polyurethane technology. Carousel's rights under the Agreement were subsequently assigned to Urethane Technologies, Inc. The Company invested $1,000,000 as its capital contribution for a 50% interest in the Joint Venture to fund equipment acquisition and working capital requirements, while Carousel contributed its technical knowledge and capabilities relating to polyurethane product manufacturing processes. Under the terms of the Agreement, the Company will be entitled to 50% of the net income of the Joint Venture. Under the terms of the Agreement, the Company may be required, under certain conditions, to make additional capital contributions not exceeding $100,000 in any 30 day period. If a joint venturer fails to make such required contributions within such 30 days, it may be contributed by the other joint venturer whose share of income and distributions will be adjusted based on their share of capital. The Joint Venture terminates on December 31, 2025, unless sooner terminated by the occurrence of events as defined in the Agreement. Either party to the Agreement may abandon its interest in the Joint Venture by prior written notice to the other party. 6 Item 2. Description of Property The Company currently occupies 14,430 square feet of office and showroom space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease which expires on April 1, 2000. The monthly rental expense pursuant to the lease is $19,240 per month through March 1997, $21,645 per month for the next 12 months and, thereafter, $24,050 per month through the expiration date of the lease. Item 3. Legal Proceedings Except as set forth below, no material proceedings to which the Company is a party, or to which any of its properties are subject, are pending or are known to be contemplated, and 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. In April 1991, an action was commenced in the Supreme Court of the State of New York, County of Nassau by Stuart Beloff, derivatively on behalf of the Company, against Barry Feldstein, Glenn Feldstein, Michael Callahan and Dale Whitney, former officers and directors of the Company; Michael Epstein, Steven Gold and Ronald Nigro, former directors of the COmpany; and the Company, as a nominal defendant. The complaint alleges that the Company's actions in connection with a public offer to exchange warrants of the Company and the reacquisition of International Trading Group, Inc., a subsidiary of the Company ("ITG"), were detrimental to the Company's financial condition. Plaintiff seeks an accounting by the Company and payment by the individual defendants of an unspecified amount of damages. In September 1991, defendants moved to dismiss the complaint for failure to state a cause of action. The motion was granted in October 1991 based upon the Court's mistaken belief that the plaintiff had defaulted with respect to the motion. The parties agreed to reinstate the motion in June 1992, and the motion has again been submitted to the Court for its determination. The COmpany and the individual defendants intend to defend the action vigorously. Inasmuch as the Company is only a nominal defendant in the action, the Company does not believe that the outcome of the action, if decided in favor of the plaintiff, will materially adversely affect its operations. The Company has agreed to indemnify certain of the defendants in such action who are former officers and/or directors of the Company. In December 1994, the Company settled an action that was instituted in the United States District Court for the Southern District of New York against the Company and Barry Feldstein, its former president, by Pentland USA, Inc. ("Pentland") and its parent company. Pursuant to the settlement agreement, the Company agreed to pay $445,000 to Pentland, of which $362,200 has been paid and the balance is to be paid over a six month period expiring in October 1996. In July 1992, a class action was instituted in the United States District Court for the Southern District of New York against the Company and its former directors by Food and Allied Service Trades Department, AFL-CIO, for itself and on behalf of all other similarly situated stockholders. In 1995, the Company entered into a agreement with the plaintiffs to settle this action, which agreement was approved by the court in December 1995. Pursuant to the settlement, the Company made a $100,000 cash payment to the plaintiffs and will issue to the plaintiffs that number of shares of its Common Stock (up to a maximum of 600,000 shares) which would allow the plaintiffs to realize an additional $550,000 upon the sale of such shares over a two-year period. If the plaintiffs do not realize $550,000 from the sale of such shares, the Company will be required to pay the amount of any deficiency to the plaintiffs. In October 1994, an action was commenced against the Company and New Retail Concepts, Inc. ("NRC"), a principal stockholder of the Company, in the United States District Court for the Southern District of New York by a former employee of the Company and NRC, in which the employee alleged that pursuant to a services allocation agreement between the Company and NRC, the Company undertook to perform NRC's obligations under an employment agreement between the plaintiff and NRC. In June 1995, the Company, NRC and the plaintiff entered into a settlement agreement under which the Company and NRC agreed to be jointly responsible to pay $226,000 to the plaintiff, of which approximately $125,500 has been paid and the balance is to be paid over an eight month period expiring in December 1996. Each of NRC and the Company, as between themselves, has agreed to pay 50% of the $226,000 settlement amount. 7 In February 1996, the Company settled a proceeding pending before the U.S. Securities and Exchange Commission ("SEC") with respect to alleged violations of Section 5 of the Securities Act of 1993 in connection with the Company's 1993 Regulation S offering (the "Offering") of shares of Common Stock in the aggregate amount of $2,000,000. In the proceeding, the SEC found that the sales of Common Stock in the Offering did not qualify for an exemption from the registration requirements of Section 5 of the Securities Act of 1933. In accepting the settlement with the SEC, the Company neither admitted nor denied the SEC's allegations and findings, and consented to the entry of an order in which it agreed to permanently cease and desist from committing or causing any violation, and any future violations, of Section 5 of the Securities Act of 1933. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's Common Stock has been traded in the over-the-counter market and quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since January 22, 1990 (under the symbol "CAND" since February 23, 1993 and, prior to such time, under the symbol "SHOE"); the Common Stock is currently traded on the NASDAQ National Market System. The following table sets forth, for the indicated periods, the high and low sales for the Common Stock as reported by NASDAQ: High Low ------ ------ Fiscal Year Ended January 31, 1995 First Quarter....................................... $ 2.75 $ 1.75 Second Quarter...................................... 2.63 1.50 Third Quarter....................................... 2.63 1.63 Fourth Quarter...................................... 2.00 .88 Fiscal Year Ended January 31, 1996 First Quarter....................................... $ 1.69 $1.06 Second Quarter...................................... 2.81 1.13 Third Quarter....................................... 4.44 1.94 Fourth Quarter...................................... 2.94 1.69 As of April 29, 1996, there were 142 holders of record of the Company's Common Stock. The Company believes that, in addition, there are in excess of 300 beneficial owners of its Common Stock, which shares are held in "street name." 8 The Company has not paid cash dividends on its Common Stock since its inception. The Company anticipates that for the foreseeable future, earnings, if any, will be retained for use in the business or for other corporate purposes, and it is not anticipated that cash dividends will be paid. 9 Item 6. Management's Discussion and Analysis or Plan of Operations This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, among others, those discussed below as well as those discussed elsewhere in this Report on Form 10-KSB. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. Liquidity and Capital Resources At January 31, 1996, the Company had a working capital deficit of $68,360 compared to a working capital deficit of $1,541,894 at January 31, 1995 and the Company had indebtedness to Congress Talcott Corporation ("Congress") of $1,299,096 as compared to $1,162,035 at January 31, 1995. At January 31, 1996, the Company had continuing obligations under various settlement agreements with certain vendors entered into during Fiscal 1995 amounting to $262,311, all of which will be paid during Fiscal 1997. The Company's allowance for doubtful accounts increased from $45,000 at January 31, 1995 to $63,400 at January 31, 1996. Receivables are typically factored and therefore, the risk of non-collection by reason of financial inability to pay passes from the Company to the factor. The Company expects a continuation of the recent trend of increases in revenues through increased sales of footwear under the licensed BONGO trademark, increased royalty income from licensing of the CANDIE'S trademark and continued aggressive marketing of CANDIE'S footwear. The Company plans to aggressively market the CANDIE'S trademark during Fiscal 1997. The Company and/or its designees have been granted an option to purchase until July 31, 1996, subject to earlier termination, from a stockholder of the Company, up to 450,000 shares of the Company's common stock at $1.63 per share. There can be no assurance that the Company will acquire any shares pursuant to this option. The Company has relied in the past primarily upon revenues generated from operations, borrowings from its factor, and sales of securities to finance its liquidity and capital needs. Net cash provided by operating activities totaled approximately $225,000 in Fiscal 1996 as compared to cash used in operating activities of approximately $1,625,000 in Fiscal 1995. Net cash provided by operating activities in Fiscal 1996 resulted primarily from net income of $1,053,956, an increase in accounts payable of $627,969, an increase in due to factor of $137,061, non-cash items of depreciation and amortization of $423,868, offset by an increase in accounts receivable of $692,739, an increase in prepaid expenses of $383,714, an increase in inventories of $730,788 and a decrease in accrued expenses of $374,165. Net cash used in operating activities for Fiscal 1995 resulted principally from net income from operations of $27,000, an increase in accounts payable of $712,000, a decrease of inventory of $304,000 and non-cash items of depreciation and amortization of $496,000, offset by a decrease in amounts due to factor of $620,000, an increase in restricted cash of $100,000, provisions for anticipated costs of terminating the Company's pension 10 plan of $340,000, a reduction in amounts due to vendors of $510,000 and a gain on extinguishment of debt of $2,186,000. Net cash used in investing activities of $58,000 and $67,000 for Fiscal 1996 and Fiscal 1995, respectively, resulted from certain capital expenditures. Net cash provided by financing activities of $37,501 in Fiscal 1996 resulted from the exercise of common stock warrants previously outstanding. Net cash provided by financing activities in Fiscal 1995 of approximately $1,578,000 resulted primarily from the net proceeds from private placements of securities of $2,137,000, which was offset by the Company's use of $570,000 to repay long term debt. Under the Company's accounts receivable factoring agreement with Congress, the Company may borrow up to $10 million from Congress limited to 85% of the value of eligible accounts receivable and 50% of the value of eligible finished goods inventory (to a maximum of $6 million of inventory value) in which Congress has a security interest. Congress has also agreed to arrange for the opening, for the Company's account, of documentary letters of credit (up to a maximum of $2.5 million) for the benefit of suppliers of the Company. The Company must deposit with Congress an amount equal to 43% of the amount of each letter of credit to be opened. Borrowings bear interest at an annual rate equal to the prime rate of Philadelphia National Bank in effect from time to time plus 1.5% (currently 9.75% per annum) and factoring commissions on accounts receivable assigned to Congress at the rate of .75%. The Company has been selling footwear under the BONGO trademark since February 1995 pursuant to a license agreement with the owner of the BONGO trademark. The Company paid the licensor $200,000 upon execution of the license agreement. The license provides for the payment of $820,000, the minimum royalties over the initial term of the license which expires on July 31, 1998. Management continues to seek means of reducing costs while increasing revenues. In this connection, in June 1995, the Company entered into a settlement of a litigation initiated in October 1994 by a former employee of the Company and NRC pursuant to which NRC and the Company agreed to pay the plaintiff $226,000 in installments over an 18 month period, 50% (113,000) of which amount was allocated to the COmpany and recirded as a charge against income for Fiscal 1996. In addition, the Company entered into an agreement with Redwood dated April 3, 1996 (the "Redwood Agreement") to pay $50,000 to Redwood and to issue 1,050,000 shares of Common Stock (the "Redwood Shares") and an option to purchase 75,000 shares of Common Stock (the "Option Shares") at $1.75 per share to Redwood in contingent satisfaction of $1,680,000 of accounts payable to Redwood. Under the Redwood Agreement, the Company has agreed to file a registration statement with respect to the Redwood Shares and the Option Shares and Redwood has agreed that the Company's liability for such accounts payable will be released upon the earliest of (a) such registration statement being declared effective by the SEC under the Securities Act of 1933, as amended (the "Act"), (b) the date Redwood sells all of the Redwood Shares, and (c) the date Redwood receives an opinion of counsel that the Redwood Shares may be sold pursuant to Rule 144(k) under the Act. The effect of such release will be to increase the Company's working capital and stockholders' equity by $1,680,000. 11 Redwood has supplied the Company with approximately 50% and 90% of the Company's total purchases for Fiscal 1995 and Fiscal 1996, respectively. Total open purchase commitments with Redwood amounted to approximately $4,900,000 at January 31, 1996. The Company expects to incur a loss for the three months ending April 30, 1996, primarily as a result of the seasonal nature of its business. Notwithstanding the increased cash flow required to fund the anticipated first quarter loss, management believes that its on-going cost containment efforts plus the support of its trade vendors and institutional lenders, will provide the Company with sufficient working capital and net income for the 12 months ending January 31, 1997. However, there can be no assurance that the Company will be able to generate sufficient funds to meet future operating expenses thereafter, and the Company may therefore be required to seek to obtain additional financing from, among other sources, institutional lenders and the sale of its securities. There can be no assurance that if required, the Company will be able to obtain any such financing. At January 31, 1996 and 1995, the Company had $342,708 and $1,782,708, respectively, of outstanding letters of credit and approximately $2,157,000 and $540,000, respectively, of available letters of credit under its factoring arrangement with Congress. This decrease in outstanding letters of credit is principally due to the amounts of open account credit extended by the Company's principal footwear supplier. Such amounts are generally paid on 30 day terms. Inflation The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on the Company's revenues or profitability. 12 Results of Operations The following table reflects the results of operations for the periods indicated. (In Thousands) Year Ended January 31 --------------------- 1996 1995 ---- ---- Net revenues..................................... $37,914 $ 24,192 Cost of goods sold............................... 27,427 17,827 ------- -------- Gross profit..................................... 10,487 6,365 Selling expense.................................. 5,066 4,575 General and administrative expense........................................ 3,363 3,521 Income on defined benefit plan curtailment.................................... - (340) ------- -------- Operating income (loss).......................... 2,057 (1,390) Loss on settlement of obligations.................................... (113) (77) Insurance claim proceeds......................... - 275 Interest expense, net............................ (727) (647) Loss on abandonment of fixed assets................................... - (61) ------- ------- Income (loss) before income taxes and extraordinary item......................... 1,217 (1,901) Provision of income taxes................................... 163 34 ------- ------- Net income (loss) before extraordinary item...................... 1,054 (1,935) Extraordinary item............................... - 1,962 ------- -------- Net income (loss) ............................... $ 1,054 $ 27 ======= ======== Fiscal 1996 Compared with Fiscal 1995 Net revenues increased by $13,721,994 (56.7%) primarily due to the Company's sales and marketing efforts, including the Company's decision to emphasize sales of casual, outdoor and fashion footwear and the sales from the initial year of the Company's licensed brand, BONGO. These efforts resulted in both an increase in the amount of footwear sold as well as higher profit margins. Accordingly, the Company's gross profit percentage increased to 27.7% from 26.3% a year ago. Selling expenses increased by $490,997, or 10.7%, primarily due to increases in the amount of the salesmen's commissions on increases in footwear sales. General and administrative expenses decreased by $157,473, or 4.5%, principally due to management's efforts to reduce overhead costs through, among others, a reduction in administrative payroll costs and 13 rental expense. Professional fees also declined as a result of the settlement of certain litigation. Total operating expenses increased by 8.7% or $673,524. This increase is principally due to the $340,000 reduction in Fiscal 1995 operating expenses due to the curtailment of the Company's defined benefit plan and the changes in selling, general and administrative expenses noted above. Operating income increased by $3,448,000 to $2,057,476 for Fiscal 1996 from an operating loss of $1,390,524 in Fiscal 1995. Interest expense increased by $79,770 (12.3%) primarily as a result of increased borrowings under the Company's arrangements with Congress and an increased interest rate paid on outstanding indebtedness, offset by the reduction in interest expense due to the indebtedness with the Institutional Lender that was extinguished in October 1994. During Fiscal 1995, the Company recognized extraordinary income of $1,962,175, representing a gain on the extinguishment of debt due to the Institutional Lender. There was no comparable item in Fiscal 1996. As a result of the foregoing, the Company achieved net income of $1,053,956 for Fiscal 1996, compared to net income of $27,259 in Fiscal 1995. Income Taxes At January 31, 1996, the Company and its wholly-owned subsidiaries had net operating losses of approximately $10,200,000 for income tax purposes, which expire in the years 2008 and 2010. The Company cannot utilize these losses unless it is profitable. If the Company achieves taxable income in the future, it will be able to utilize these net operating loss carryforwards to satisfy its tax liabilities to the extent such carryforwards are available. Under certain provisions of the Internal Revenue Code, the use of approximately $5,700,000 of these operating loss carryforwards will be restricted to $275,000 per year. As a result, the Company may not be able to fully utilize these restricted operating loss carryforwards. This restriction may be reduced by the occurrence of certain events. Intercontinental Trading Group, Inc. ("ITG"), a 60% owned subsidiary of the Company, files a separate Federal income tax return. At January 31, 1996, ITG had net operating loss carryforwards of approximately $6,900,000 which expire in the years 2006 through 2011. The utilization of these net operating loss carryforwards may also be subject to limitation. Item 7. Financial Statements The response to this Item is submitted as a separate section of this report commencing on page S-1. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 14 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The directors and executive officers of the Company are as follows: Name Age Position - ---- --- -------- Neil Cole 39 Chairman of the Board, President and Chief Executive Officer Gary Klein 41 Vice President-Finance Lawrence O'Shaughnessy 47 Chief Operating Officer, Executive Vice President and Director Barry Emanuel 55 Director Mark Tucker 49 Director Neil Cole became Chairman of the Board, President and Chief Executive Officer of the Company on February 23, 1993. During February through April 1992, Mr. Cole served as a director and as acting President of the Company. Mr. Cole has also served as Chairman of the Board, President, Treasurer and a director of NRC, since its inception in April 1985, and as President of El Greco, Inc. from 1984 to 1985. Gary Klein has been Vice President-Finance of the Company from February 23, 1993 until December 1993 and from October 1994 to present and was Chief Financial Officer from December 1993 to October 1994. From May 1989 to May 1990, Mr. Klein was Chief Financial Officer of NRC. From May 1990 to the present, Mr. Klein has served as Vice President-Finance of NRC. He is a graduate of George Washington University, with a BBA degree in accounting, and a licensed certified public accountant in the State of New York. Lawrence O'Shaughnessy has been a director and Chief Operating Officer of the Company since March 1993 and has been Executive Vice President of the Company since April 1, 1995. He also served as a director of the Company from April to June 1992. Mr. O'Shaughnessy has been President of O'Shaughnessy & Company, a management consulting firm, since March 1991. Since April 1992, Mr. O'Shaughnessy has been President, a director and a principal stockholder of Major League Footwear, Inc. ("MLF"). Until October 1994, when it ceased active operations, MLF was engaged in the importation and distribution of footwear bearing the names and logos of major league baseball teams. From March 1985 15 through February 1991, Mr. O'Shaughnessy was President of Breeze-Eastern division of TransTechnology Corporation, a designer and manufacturer of airborne hoisting, winching and cargo handling systems. Barry Emanuel has been a director of the Company since May 1993. For more than the past five years, Mr. Emanuel has served as President of Copen Associates, Inc., a textile manufacturer located in New York, New York. Mr. Emanuel received his B.A. degree from the University of Rhode Island. Mark Tucker has been a director of the Company since May 1996. From August 1993 to the present Mr. Tucker has been a principal of Mark Tucker, Inc., a family owned business engaged in the design and import of shoes. From December 1992 to August 1993 Mr. Tucker was an independent consultant to the shoe industry. From July 1992 to December 1992 Mr. Tucker was employed as Director of Far East Shoe Wholesale Operations of United States Shoe Far East Limited, a subsidiary of U.S. Shoe Corp. For more than five years prior to July 1992 Mr. Tucker was a principal of Mocambo Ltd., a family owned shoe design and import company. Directors are elected annually by the stockholders. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company has agreed through March 3, 1998, if so requested by Whale Securities Co., L.P., the underwriter of the Company's public offering in February 1993 (the "Underwriter"), to nominate and use its best efforts to cause the election of a designee of the Underwriter as a director of the Company or, at the Underwriter's option, as a non-voting advisor to the Company's Board of Directors. The Company's officers and directors and holders (as of February 1993) of 5% or more of the outstanding shares of the Company's Common Stock have agreed to vote their shares of Common Stock in favor of such designee. The Underwriter has not yet exercised its right to designate such person. In addition, the Company has agreed, for the three year period expiring on April 3, 1999, upon the receipt of written notice from Redwood, to use its best efforts to cause Mr. Mark Tucker, as Redwood's nominee (or another partner of Redwood, if Mr. Tucker is unavailable to serve) to be elected as a director of the Company. Pursuant to the agreement between the Company and Redwood Mr. Tucker has been appointed as a director of the Company. Compliance with Section 16(a) of Securities Exchange Act of 1934 Section 16(a) of Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who beneficially own more than 10 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Commission. Officers, directors and greater than 10 percent owners are required by certain Commission regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms received by it, the Company believes that during the year ended January 31, 1996, except as set forth below, filing requirements applicable to its officers, directors 16 and 10% stockholders of Common Stock were complied with: Mr. Cole failed to timely file a Form 4 with respect to the grant of warrants to NRC to purchase up to 700,000 shares of the Company's common stock and the grant to Mr. Cole in December 1995 of an option to purchase 10,000 shares of common stock. Mr. O'Shaughnessy and Mr. Klein each failed to timely file a Form 4 with respect to the grant to each of them in December 1995 of options to purchase 10,000 shares of the Company's common stock. 17 Item 10. Executive Compensation The following table discloses for Fiscal 1994, 1995 and 1996, respectively, compensation for the person that served as Chief Executive Officer during Fiscal 1996 and for the those persons that served as executive officers of Candie's, Inc. during such fiscal year whose salaries exceeded $100,000 (collectively, the "Named Executives"). Summary Compensation Table Long-Term Annual Compensation Compensation Awards ------------------------ ------------ Securities Name and Principal Underlying Position Year Salary($) Bonus($) Options(#) -------- ---- ---------- --------- ----------- Neil Cole 1996 300,000 66,500(1) 410,000 President and Chief 1995 225,000 46,100(2) 410,000 Executive Officer 1994 163,136(3) -0- 600,000 Gary Klein 1996 100,000 -0- 18,000 Chief Financial Officer 1995 106,667 -0- 15,000 and Vice President- 1994 103,969 -0- 20,000 Finance Lawrence O'Shaughnessy 1996 221,500 19,966(4) 210,000 Chief Operating 1995 186,000 -0- 10,000 Officer 1994 149,083 -0- 75,000 - --------------- (1) Represents bonus accrued in Fiscal 1996 under Mr. Cole's employment agreement. (2) Represents bonus accrued in Fiscal 1995 under Mr. Cole's employment agreement. (3) Includes $69,062, which represents the fair market value as of February 23, 1993 of 16,250 shares of the Company's Stock awarded to Mr. Cole on that date in lieu of $65,000 of salary accrued but not paid by the Company to Mr. Cole during its Fiscal 1993 and Fiscal 1994, of which approximately $43,300 was accrued in Fiscal 1993 and the balance in Fiscal 1994. Such accrued salary was converted into shares of Common Stock at the rate of 18 $4.00 per share. The fair market value of the shares of Common Stock issued to Mr. Cole is based on the per share closing sale price of the Common Stock on February 23, 1993 ($4.25) as reported by NASDAQ. (4) Represents bonus accrued in Fiscal 1996 under Mr. O'Shaughnessy's employment agreement. The following table provides information with the respect to individual stock options granted during Fiscal 1996 to each of the Named Executive officers: Option Grants in Last Fiscal Year (Individual Grants) % of Total Options Shares Granted to Underlying Employees Exercise Options in Fiscal Price Expiration Name Granted(#) Year ($/sh) Date - ---- ---------- ---- -------- ---------- Neil Cole 10,000(1) 00.6 1.9375 12/11/99 400,000(1) 23.2 1.1600 03/14/99 Gary Klein 10,000(1) 00.6 1.9375 12/11/00 4,000(1) 00.2 1.2500 05/18/00 4,000(2) 00.2 1.2500 05/18/05 Lawrence 10,000(1) 00.6 1.9375 12/11/00 O'Shaughnessy 200,000(1) 11.7 1.1600 03/31/00 - -------------------- (1) Non-qualified non-plan stock options; each option became exercisable on its date of grant and expires five years from that date. The options for 410,000 shares granted to Mr. Cole and the option for 10,000 shares granted to Mr. O'Shaughnessy are subject to termination prior to their stated expiration dates upon occurrence of certain events related to termination of employment or death. (2) Qualified options granted pursuant to the Company's 1989 Stock Option Plan. The option became exercisable on its date of grant and expires 10 years from that date. 19 The following table sets forth information at January 31, 1996 respecting exercised and unexercised stock options held by the Named Executives. None of the Named Executives exercised any stock options during Fiscal 1996. Fiscal Year-End Option Values Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at January 31, 1996 at January 31, 1996* ------------------------------ -------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Neil Cole 1,420,000 -0- $749,125 $-0- Gary Klein 45,000 8,000 21,125 -0- Lawrence 295,000 -0- 231,125 -0- O'Shaughnessy - ---------------- *Options are "in-the-money" if the fair market value of the Common Stock exceeds the exercise price. At January 31, 1996, the closing sale price per share of the Common Stock as reported by NASDAQ was $2.25. Compensation of Directors Directors receive no cash compensation for serving on the Board. However, non-employee directors of the Company are eligible to be granted non-qualified stock options and limited stock appreciation rights under the Company's 1989 Stock Option Plan (the "Plan"). No stock appreciation rights have been granted under the Plan. Non-qualified stock options may be granted under the 1989 Plan for up to 10 years from the date of grant at such exercise prices as the Board of Directors may determine. No non-qualified stock options were granted to non-employee directors under the 1989 Plan during Fiscal 1996. However, in Fiscal 1995, Mr. Barry Emanuel was granted five-year non-plan non-qualified stock options to purchase an aggregate of 25,000 shares of Common Stock at $1.9375 per share. Employment Contracts and Termination and Change-in-Control Arrangements The Company has entered into an employment agreement with Neil Cole, which agreement, as amended, expires on February 28, 1997. Pursuant to such agreement, Mr. Cole received an annual base salary of $300,000 for the year ended February 28, 1996. Mr. Cole's annual base salary under such agreement for the year ending February 28, 1997 is $350,000. Pursuant to the employment agreement, Mr. Cole serves as President and Chief Executive Officer of the Company, devotes a majority of his business time to the Company and the remainder of his business time to other business activities, including those of NRC. Pursuant to the agreement, Mr. Cole (i) is entitled to receive a portion of an annual bonus pool equal to five percent of the Company's annual pre-tax profits, if any, divided among the Company's executive officers, as determined by the Board of Directors; (ii) was granted an 20 immediately exercisable non-qualified five-year option to purchase 400,000 shares of the Company's Common Stock at an exercise price of $5.00 per share; and (iii) is entitled to customary benefits, including participation in management incentive and benefit plans, reimbursement for automobile, reasonable travel and entertainment expenses and a life insurance policy in the amount of $1,000,000. Mr. Cole is also entitled to receive such additional bonuses as the Board of Directors may determine. In March 1995, Mr. Cole was granted an immediately exercisable five-year option to purchase 400,000 shares of Common Stock at $1.16 per share in consideration for his agreement to extend the term of his employment to the current expiration date. If Mr. Cole terminates his employment with the Company for "good reason" (as defined in the employment agreement) or the Company terminates Mr. Cole's employment without "cause" (as defined in the employment agreement), including by reason of a "change-in-control" of the Company (as defined in the employment agreement), the Company is obligated to pay Mr. Cole his full salary (at the annual base salary rate then in effect) through the date of termination plus full base salary for one year or the balance of the term of the agreement, whichever is greater. The Company has entered into an employment agreement with Mr. O'Shaughnessy with respect to his continued employment as an officer of the Company, which agreement expires on March 31, 1997. Pursuant to such agreement, Mr. O'Shaughnessy received an annual base salary of $225,000 for the year ended March 31, 1996, and will receive an annual base salary of $250,000 for each subsequent year during the term of such agreement, subject to annual increases at the discretion of the Company's Board of Directors. Pursuant to such agreement, Mr. O'Shaughnessy will serve as Executive Vice-President and Chief Operating Officer of the Company, devoting a majority of his business time to the Company and the remainder of his business time to other business activities. Pursuant to such agreement, Mr. O'Shaughnessy (i) will be entitled to receive an annual bonus equal to 1.5% of the Company's annual pre-tax profits, if any; (ii) was granted an immediately exercisable non-qualified five-year option to purchase 200,000 shares of the Company's Common Stock at an exercise price of $1.16 per share; and (iii) will be entitled to customary benefits, including participation in management incentive and benefit plans, reimbursement for automobile, reasonable travel and entertainment expenses and a life insurance policy in an amount equal to his annual base salary. The Company has entered into an employment agreement with Gary Klein which provides for his employment as the Vice-President of Finance of the Company for a two year period expiring on November 15, 1996 at an annual salary of $100,000. In addition, the Company will provide Mr. Klein with term life insurance in the amount of $110,000. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of May 7, 1996, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of Common Stock by (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock; (ii) each person named in the Summary Compensation Table; (iii) each of the Company's directors; and (iv) all executive officers and directors as a group: 21
Percentage Name and Address of Amount and Nature of of Beneficial Beneficial Owner (1) Beneficial Ownership(2) Ownership -------------------- ----------------------- ------------- Neil Cole ................................. 3,508,946(3)(4)(5) 30.3% New Retail Concepts, Inc. ................. 2,027,696(3)(5) 20.0% Terren Peizer.............................. 650,000 7.0% c/o Beechwood Financial Company, Inc. 723 Pacific Coast Highway Suite 322 Santa Monica, California Redwood Shoe Corp.......................... 1,125,000(6) 11.9% 8F, 137 Hua Mei West Street SEC. 1, Taichung, Taiwan, R.O.C. Mark Tucker ............................... 1,125,000(7) 11.9% Lawrence O'Shaughnessy..................... 355,000(8) 3.7% Gary Klein................................. 50,000(9) * Barry Emanuel.............................. 25,000(10) * All executive officers and directors as a group (five persons).................. 3,938,946(3)(4) 32.9% (5)(7)(8)(9)(10)
- ---------------- * Less than 1% (1) Unless otherwise noted the address of each person listed below is c/o the Company at 2975 Westchester Avenue, Purchase, New York 10577. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of warrants or options. Consequently, each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from May 7, 1996 have been exercised. Unless otherwise noted, the Company believes that all of the persons named in the above table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. 22 (3) Neil Cole, the President and Chief Executive Officer of NRC, owns, beneficially and of record, approximately 30% of NRC's outstanding common stock. In addition, as President of NRC, Mr. Cole has or will have the right to vote the 2,027,696 shares of the Company's Common Stock beneficially owned by NRC. Mr. Cole disclaims beneficial ownership of these shares. (4) Includes 1,445,000 shares of Common Stock issuable upon exercise of immediately exercisable warrants and options owned by Neil Cole. Also includes 10,000 shares held by a charitable foundation, of which Mr. Cole and his wife are co-trustees. Mr. Cole disclaims beneficial ownership of the shares held by such charitable foundation. (5) Includes 800,000 shares of Common Stock issuable upon exercise of immediately exercisable options and warrants. (6) Includes 75,000 shares of Common Stock issuable upon exercise of immediately exercisable options. (7) Represents 1,050,000 shares of Common Stock and an option to purchase 75,000 shares of Common Stock owned of record by Redwood Shoe Corp. Mr. Tucker is a partner of Redwood Shoe Corp. (8) Includes 295,000 shares of Common Stock issuable upon exercise of immediately exercisable options. (9) Includes 45,000 shares of Common Stock issuable upon exercise of immediately exercisable options. (10) Represents shares of Common Stock issuable upon exercise of immediately exercisable options. Item 12. Certain Relationships and Related Transactions In March 1993, El Greco Inc., ("El Greco"), a former subsidiary of NRC that was merged into NRC in 1993, assigned to the Company certain trademarks (collectively, the "Trademarks"), including the CANDIE'S trademark, all of El Greco's business operations associated with the Trademarks and all of its existing licensing agreements with respect to the Trademarks (including the existing license agreement between El Greco and the Company relating to the CANDIE'S trademark). In connection therewith, El Greco received from the Company in March 1993 (the "Closing Date"), 900,000 shares of Common Stock, a subordinated note of the Company in the principal amount of $325,000 maturing two years from the Closing Date (the "El Greco Note") and $75,000 as reimbursement for its expenses, including attorney's fees, relating to the foregoing transactions. In July 1994, the Company issued 240,740 shares of Common Stock to NRC in full payment of the El Greco Note. In March 1993, the Company entered into a Services Allocation Agreement with NRC pursuant to which the Company provides NRC with certain business 23 services for which NRC pays the Company an amount equal to an allocable portion of the Company's expenses, including employees' salaries, associated with such services. Pursuant to such agreement, NRC paid the Company an aggregate of approximately $74,000 in Fiscal 1995 and approximately $50,000 in Fiscal 1996. Effective as of December 16, 1993, the Company entered into an agreement with MLF (the "Inventory Purchase Agreement") to purchase certain finished goods inventory items from MLF. Lawrence O'Shaughnessy, Executive Vice President and Chief Operating Officer of the Company, is the President of MLF. In July 1994, pursuant to the Inventory Purchase Agreement, the Company issued an aggregate of 260,000 shares of Common Stock to MLF in satisfaction of the Company's obligation to make payments in an amount equal to the purchase price of approximately $614,000, by the Company. In August 1994, Mr. Cole was granted a five-year option to purchase 400,000 shares of the Company's Common Stock at $1.50 per share and his annual salary was increased to $250,000 per annum in consideration of granting his unlimited guaranty of certain indebtedness of the Company to Congress. In January 1995, the Company and NRC entered into an Amended and Restated Affiliated Transaction Agreement which generally provides that the Company will not enter into any transactions with NRC or any subsidiary of NRC, except (a) where the transaction is approved by either a majority of the Company's disinterested directors (as defined in the agreement) or its stockholders, or (b) for certain specified transactions. On February 1, 1995 (the "Closing Date"), the Company and NRC entered into a securities purchase agreement (the "Purchase Agreement") pursuant to which NRC loaned to the Company an aggregate of $600,000, which loans were repaid to NRC, together with interest in the amount of approximately $33,500 in Fiscal 1996. In consideration for such loans, the Company issued warrants to purchase up to 700,000 shares of Common Stock to NRC, which warrants are currently exercisable at $1.2375 per share of Common Stock (110% of the closing bid price of the Common Stock on the NASDAQ National Market System on January 31, 1995). The shares of Common Stock underlying such Warrants are entitled to the benefit of "piggyback" registration rights granted by the Company to NRC. The Company entered into an agreement with Redwood Shoe Corp. ("Redwood") dated April 3, 1996 (the "Redwood Agreement") to pay $50,000 to Redwood and to issue 1,050,000 shares of COmmon Stock (the "Redwood Shares") and an option to purchase 75,000 sahres of Common Stock (the "Option Shares") at $1.75 per share to Redwood in contingent satisfaction of $1,680,000 of accounts payable to Redwood. Under the Redwood Agreement, the Company has agreed to file a registration statement with respect to the Redwood Shares and the Option Shares and Redwood has agreed that the COmpany's liability for such accounts payable will be released upon the earliest of (a) such registration statement being declared effective by the SEC under the Securities Act of 1933, as amended (the "Act"), (b) the date Redwood sells all of the Redwood Shares, and (c) the date Redwood receives an opinion that the Redwood Shares may be sold pursuant to Rule 144(k) under the Act. Pursuant to the Agreement Redwood has the right to designate a partner of Redwood as a director of the Company for a three year period expiring April 3, 1999. Mr. Mark Tucker has been appointed to the Company's Board of Directors as the designee of Redwood. 24 The Company has no reason to believe that the terms of the transactions described hereunder were on terms that were less favorable than those that could have been obtained from non-affiliated parties, although the Company has no independent basis to believe that they were in fact comparable. Item 13. Exhibits, List and Reports on Form 8-K (a) (1) and (2) (a) Exhibits numbered in accordance with Item 601 of Regulation S-B. Exhibit Numbers Description - ------- ----------- 3.1(1) Certificate of Incorporation, as amended through October 1994 (1) 3.2 Amendment to Certificate of Incorporation filed November 1994 (2) 3(b) By-Laws (1) 4.1 Form of Warrants to Purchase Common Stock issued to Whale Securities Co., L.P. (4) 10.1 Trademark Purchase Agreement between the Company and New Retail Concepts, Inc. (4) 10.2 1989 Stock Option Plan (1) 10.3 Discount Factoring Agreement and Supplements between Congress Talcott Corporation and the Company (5) 10.4 General Security Agreement between Congress Talcott Corporation and Intercontinental Trading Group, Inc. (5) 10.5 Personal Guaranty and Waiver of Neil Cole in favor of Congress Talcott Corporation (5) 10.6 Employment Agreement between Neil Cole and the Company (5) 10.7 Amendment to Employment Agreement between Neil Cole and the Company (2) 10.8 Services Allocation Agreement between the Company and New Retail Concepts Inc. (5) 10.9 Joint Venture Agreement between Carousel Group, Inc. and the Company (4) 25 10.10 Sublease Termination Agreement between the Company and Fieldcrest Cannon, Inc. (5) 10.11 Indemnity Agreement of Barnet Feldstein (5) 10.12 Amended and Restated Affiliates Transaction Agreement between the Company and New Retail Concepts Inc. dated January 30, 1995 (2) 10.13 Securities Purchase Agreement between New Retail Concepts, Inc. and the Company dated February 1, 1995 (2) 10.14 Security Agreement among New Retail Concepts, Inc., the Company, Bright Star Footwear, Inc. and Intercontinental Trading Group, Inc., dated February 1, 1995 (2) 10.15 Guarantee of Neil Cole in favor of New Retail Concepts, Inc. dated February 1, 1995 (2) 10.16 Lease with respect to the Company's executive offices (2) 10.17 Employment Agreement between Gary Klein and the Company (2) 10.18 License Agreement between El Greco, Inc. and Wundie's, Inc. (2) 10.19 Settlement Agreement dated October 6, 1994 by and among the Company, Intercontinental Trade Group, Inc., Bright Star Footwear, Inc. and Shanghai Commercial Bank, Ltd. (2) 10.20 Agreement dated May 16, 1994 between the Company and New Retail Concepts, Inc. (2) 10.21 Agreement dated May 16, 1994 between the Company and Major League Footwear, Inc. (2) 10.22 Settlement Agreement dated July 22, 1994 between the Company and Starter Corporation. (2) 10.23 Settlement Agreement dated July 13, 1994 between the Company and Saintday International Co. Ltd. (2) 10.24 Agreement dated as of April 3, 1996 between the Company and Redwood Shoe Corp. 10.25 Employment Agreement between Lawrence O' Shaughnessy and the Company. 10.26 Bongo License Agreement 11 Computation of Earnings Per Share. 26 21 Subsidiaries of the Company. 27 Financial Data Schedule. - ---------- (1) Filed with the Registrant's Registration Statement on Form S-18 (File 33-32277-NY) and incorporated by reference herein. (2) Filed with the Registrant's Annual Report on Form 10-KSB for the year ended January 31, 1995 and incorporated by reference herein. (3) Filed with the Registrant's Annual Report on Form 10-K for the year ended January 31, 1992 and incorporated by reference herein. (4) Filed with the Registrant's Registration Statement on Form S-1 (File 33-53878) and incorporated by reference herein. (5) Filed with the Company's Annual Report on Form 10-K for the year ended January 31, 1994 and incorporated by reference herein. (b) Reports on Form 8-K No reports on Form 8-K were filed in the last quarter of the period covered by this report. 27 Consolidated Financial Statements Form 10-KSB Item 7 Candie's, Inc. and Subsidiaries Years ended January 31, 1996 and 1995 Candie's, Inc. and Subsidiaries Form 10-KSB Item 7 Index to Consolidated Financial Statements Report of Independent Auditors............................................ S-3 Consolidated Balance Sheets - January 31, 1996 and 1995................... S-4 Consolidated Statements of Income for the Years ended January 31, 1996 and 1995........................................ S-6 Consolidated Statements of Stockholders' Equity for the Years ended January 31, 1996 and 1995..................... S-7 Consolidated Statements of Cash Flows for the Years ended January 31, 1996 and 1995........................................ S-9 Notes to Consolidated Financial Statements................................ S-11 S-2 Report of Independent Auditors The Stockholders of Candie's, Inc. We have audited the accompanying consolidated balance sheets of Candie's Inc. and subsidiaries as of January 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Candie's, Inc. and subsidiaries at January 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP ERNST & YOUNG LLP New York, New York April 12, 1996 S-3 Candie's, Inc. and Subsidiaries Consolidated Balance Sheets January 31, 1996 1995 ------------------------------ Assets Current assets: Cash and cash equivalents $ 204,996 $ -- Restricted cash -- 100,000 Accounts receivable, net of allowances of $63,400 (1996) and $45,000 (1995) 1,228,812 583,911 Inventories 3,999,946 3,269,158 Prepaid expenses 534,909 151,195 ------------------------------- Total current assets 5,968,663 4,104,264 ------------------------------- Property and equipment -net 121,068 142,960 ------------------------------- Other assets: Noncompetition agreements 374,466 414,234 Trademark 4,831,466 5,114,282 Other 450,150 514,274 ------------------------------- Total other assets 5,656,082 6,042,790 ------------------------------- Total assets $11,745,813 $10,290,014 =============================== See accompanying notes to consolidated financial statements. S-4 Candie's, Inc. and Subsidiaries Consolidated Balance Sheets (continued)
January 31, 1996 1995 ------------------------------------ Liabilities and stockholders' equity Current liabilities: Accounts payable-trade $ 1,874,412 $ 2,926,443 Due to factor 1,299,096 1,162,035 Accrued expenses 1,183,515 1,557,680 Accounts payable-trade, expected to be refinanced with common stock 1,680,000 -- ------------------------------------ Total current liabilities 6,037,023 5,646,158 ------------------------------------ Total liabilities 6,159,459 5,898,117 Commitments, contingencies and other matters Stockholders' equity: Preferred stock, $.01 par value--shares authorized 5,000,000; none issued or outstanding Common stock, $.001 par value--shares authorized 30,000,000; shares issued: 8,745,738 and 8,709,465 at January 31, 1996 and 1995, respectively 8,746 8,709 Additional paid-in capital 10,043,301 9,902,837 Deficit, since February 28, 1993, (deficit eliminated $27,696,007) (4,465,693) (5,519,649) ------------------------------------ Total stockholders' equity 5,586,354 4,391,897 ------------------------------------ Total liabilities and stockholders' equity $11,745,813 $10,290,014 ====================================
S-5 Candie's, Inc. and Subsidiaries Consolidated Statements of Income
Year ended January 31, 1996 1995 ---------------------------- Net revenues $ 37,914,127 $ 24,192,133 Cost of goods sold 27,427,508 17,827,038 ---------------------------- Gross profit 10,486,619 6,365,095 Operating expenses: Selling expenses 5,065,652 4,574,655 General and administrative expenses 3,363,491 3,520,964 Income on defined benefit curtailment -- (340,000) ---------------------------- 8,429,143 7,755,619 Operating income (loss) 2,057,476 (1,390,524) Other (deductions) income: Interest expense - net (727,210) (647,440) Other - net (113,000) 136,548 ---------------------------- (840,210) (510,892) Income (loss) before provision for income taxes and extraordinary item 1,217,266 (1,901,416) Provision for income taxes 163,310 33,500 ---------------------------- Net income (loss) before extraordinary item 1,053,956 (1,934,916) Extraordinary item--gain, net of income taxes of $121,000 -- 1,962,175 ---------------------------- Net income $ 1,053,956 $ 27,259 ============================ Earnings (loss) per share: Net income (loss) before extraordinary item $ .12 $ (.30) Extraordinary item - gain, net of income taxes of $.02 -- .30 ---------------------------- Net income $ .12 $ .00 ============================ Weighted average number of common shares outstanding 8,725,888 6,398,488 ============================
* Certain amounts from 1995 have been reclassified to conform to the current years presentation. See accompanying notes to consolidated financial statements. S-6
Candie's, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Common Stock Preferred Stock Additional Paid-In Capital Deficit -------------------------------------------- Shares Amount Shares Amount --------------------------------------------------------------------------- Balance at January 31, 1994 5,022,735 $ 5,023 - $ - $ 6,042,737 $ (5,546,908) Issuance of common stock (including 100,000 shares issued and in escrow) in conjunction with settlements of litigation and other obligations 910,000 910 - - 1,067,590 - Issuance of common stock in full satisfaction of a note payable 240,740 241 - - 324,759 - Issuance of common stock pursuant to private placements in May 1994, net of related expenses of $66,881 281,481 281 - - 317,838 - Issuance of common stock and 8% Series A Convertible Preferred Stock pursuant to private placements in October 1994, net of related expenses of $398,400; and 55,000 shares of common stock in lieu of payment of professional fees 1,011,525 1,012 10,286 103 1,729,085 - Capital Contribution - - - - 740,000 - Conversion of 8% Series A Convertible Preferred Stock into common stock 894,432 894 (10,286) (103) (791) - Issuance of common stock to NRC 86,957 87 - - 99,913 - Retirement of treasury shares (216,666) (217) - - (1,070,816) - Shares reserved in connection with settlement of litigation 478,261 478 549,522 Tax effect of utilization of pre-quasi- reorganization operating loss carryforwards - - - - 103,000 - - - - - - 27,259 -------------------------------------------------------------------------- Net income for the year ended January 31, 1995 8,709,465 $ 8,709 - $ - $ 9,902,837 $ (5,519,649)
Treasury Stock -------------------------- Total Shares Amount ------------------------------------------- Balance at January 31, 1994 (216,666) $(1,071,033) $ (570,181) Issuance of common stock (including 100,000 shares issued and in escrow) in conjunction with settlements of litigation and other obligations - - 1,068,500 Issuance of common stock in full satisfaction of a note payable - - 325,000 Issuance of common stock pursuant to private placements in May 1994, net of related expenses of $66,881 - - 318,119 Issuance of common stock and 8% Series A Convertible Preferred Stock pursuant to private placements in October 1994, net of related expenses of $398,400; and 55,000 shares of common stock in lieu of payment of professional fees - - 1,730,200 Capital Contribution - - 740,000 Conversion of 8% Series A Convertible Preferred Stock into common stock - - - Issuance of common stock to NRC - - 100,000 Retirement of treasury shares 216,666 1,071,033 - Shares reserved in connection with settlement of litigation 550,000 Tax effect of utilization of pre-quasi reorganization operating loss carryforwards - - 103,000 - - 27,259 ------------------------------------------ Net income for the year ended January 31, 1995 - $ - $ 4,391,897
See accompanying notes to consolidated financial statements. S-7
Candie's, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (continued) Common Stock Preferred Stock Additional Paid-In Capital Deficit -------------------------------------------- Shares Amount Shares Amount --------------------------------------------------------------------------- Balance at January 31, 1995 (carryforward) 8,709,465 $ 8,709 - - $ 9,902,837 $ (5,519,649) Issuance of common stock in connection with exercise of a warrant 32,609 33 - - 37,464 - Issuance of common stock 3,664 4 - - - - Tax effect of utilization of pre-quasi reorganization operating loss carryforwards - - - - 103,000 - Net income for the year ended January 31, 1996 - - - - - 1,053,956 ------------------------------------------------------------------------- Balance at January 31, 1996 8,745,738 $ 8,746 - - $10,043,301 $ (4,465,693) =========================================================================
Treasury Stock -------------------------- Total Shares Amount ----------------------------------------- Balance at January 31, 1995 (carryforward) - - $4,391,897 Issuance of common stock in connection with exercise of a warrant - - 37,497 Issuance of common stock - - 4 Tax effect of utilization of pre-quasi reorganization operating loss carryforwards - - 103,000 Net income for the year ended January 31, 1996 - - 1,053,956 --------------------------------------- Balance at January 31, 1996 - - $ 5,586,354 =======================================
See accompanying notes to consolidated financial statements. S-8 Candie's, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended January 31, 1996 1995 ------------------------- Cash flows from operating activities: Net income $ 1,053,956 $ 27,259 Items in net income not affecting cash: Depreciation and amortization 423,868 496,119 Gain on extinguishment of debt -- (2,083,175) Tax effect of utilization of pre-quasi reorganization NOL's 103,000 -- Loss on settlements of litigation and other obligation -- 77,697 Provision for allowances and bad debts expense 47,838 187,217 Income on defined benefit plan curtailment -- (340,000) Straight line rent obligation no longer required -- (126,329) Gain on settlement of vendor liability -- (509,888) Loss on abandonment of property and equipment -- 60,755 Changes in operating assets and liabilities: Restricted cash 100,000 (100,000) Accounts receivable (692,739) (544,535) Inventories (730,788) 303,575 Prepaid expenses (383,714) 122,637 Refundable income taxes -- 219,876 Other assets 27,380 (38,089) Accounts payable-trade (1,052,031) 711,996 Due to factor 137,061 (620,378) Accrued expenses (374,165) 323,619 Long term liabilities (114,359) 206,213 Accounts payable trade expected to be refinanced with common stock 1,680,000 -- ------------------------- Net cash provided by (used in) operating activities 225,307 (1,625,431) -------------------------
See accompanying notes to consolidated financial statements. S-9 Candie's, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year ended January 31, 1996 1995 ---------------------------- Cash flows used in investing activities: Capital expenditures $ (57,812) $ (67,041) ---------------------------- Net cash used in investing activities (57,812) (67,041) ---------------------------- Cash flows from financing activities: Repayments of long-term debt -- (570,000) Proceeds from private placements, net of expenses and finders' fees of $465,281 -- 2,048,319 Proceeds from sale of stock 37,501 100,000 ---------------------------- Net cash provided by financing activities 37,501 1,578,319 ---------------------------- Net increase (decrease) in cash and cash equivalents 204,996 (114,153) Cash and cash equivalents, beginning of year -- 114,153 ---------------------------- Cash and cash equivalents, end of year $ 204,996 $ -- ============================ Supplemental cash flow information: Cash paid during the period for interest $ 727,220 $ 1,117,468 ============================ Cash paid during the period for income taxes $ 59,601 $ 62,682 ============================ Supplemental disclosures of non cash investing and financing activities: Issuance of 910,000 shares of common stock in connection with settlements of litigation and other obligations, including 200,000 ($270,000) shares of common stock in settlement of sublease obligations and 100,000 shares ($115,000) in escrow, in settlement of sublease indemnification -- $ 1,068,500 ============================ Capital contribution -- $ 740,000 ============================ Shares of common stock (478,261) reserved for issuance in connection with settlement of litigation -- $ 550,000 ============================ Extinguishment of debt by the Company's Institutional Lender -- $ 1,962,175 ============================ Issuance of 240,740 shares of common stock in settlement of note payable in connection with acquisition of CANDIES trademark -- $ 325,000 ============================ Issuance of 55,000 shares of common stock in lieu of cash with respect to legal fees relating to the offering -- $ 55 ============================
S-10 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements January 31, 1996 1. Basis of Presentation and Description of Business The consolidated financial statements include the accounts of Candie's, Inc. and its wholly owned subsidiaries, Bright Star Footwear, Inc. ("Bright Star"), Ponca, Ltd. ("Ponca"), Yulong Co., Ltd. ("Yulong"), and the Company's 60% owned subsidiary Intercontinental Trading Group, Inc. ("ITG"), (collectively, the "Company"). Yulong was formed on July 21, 1995. Ponca was formed March 15, 1994. All intercompany transactions and balances have been eliminated from the consolidated financial statements for all periods presented. The Company designs, markets, imports and distributes a variety of moderately-priced, leisure and fashion footwear for women and girls under the trademarks CANDIE'S, BONGO, ASPEN and certain others. The Company's product line also includes a wide variety of workboots, hiking shoes and men's leisure shoes designed, marketed and distributed by Bright Star. The Company sells to retailers throughout the United States. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Inventories Inventories, which consist entirely of finished goods, are valued at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets (5-10 years) using accelerated methods. Goodwill and Candie's Trademark Goodwill in the amount of $551,093, represents the excess amount paid over the fair value of assets acquired related to the acquisition of Bright Star and is being amortized over fifteen years. Accumulated amortization at January 31, 1996 and 1995 was approximately $208,000 and $171,500, respectively. S-11 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Goodwill and Candies Trademark (continued) The Candie's trademark is stated at cost, net of amortization, as determined by its fair value relative to other assets and liabilities at the time of a quasi reorganization. The quasi reorganization was approved by the Company's stockholders effective February 28, 1993. In connection with the quasi reorganization, the Company's assets, liabilities and capital accounts were adjusted to eliminate the stockholders' deficiency. The trademark is being amortized over twenty years. The Company believes that the goodwill and trademark have continuing value, as evidenced by sales and expected profitability of the related products, which will be realized over the course of its useful life. Revenue Recognition Revenue, which include product sales and commissions, on an agency basis, is recognized when the related goods have been shipped and legal title has passed to the customer. Commissions received amounted to $4,011,436 and $3,956,721 for the years ended January 31, 1996 and 1995 respectively. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, " Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 31, 1995 and prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. S-12 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Stock-Based Compensation (continued) SFAS 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations with pro forma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. The Company intends to continue to account for its stock based compensation plans in accordance with the provisions of APB 25. Taxes on Income The Company uses the liability method of accounting for income taxes under Financial Accounting Statement No. 109 "Accounting for Income Taxes" ("FASB 109"). Earnings Per Share Net income (loss) per common share is computed on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding during each year, retroactively adjusted to give effect to all stock splits. Common stock equivalents include stock options and warrants and the computation of net income (loss) per common share includes the dilutive effect of stock options and warrants, as appropriate, adjusted for treasury shares assumed to be purchased from the proceeds using the modified treasury stock method. Fully diluted net income (loss) per common share is not materially different from primary net income (loss) per common share. In calculating net income (loss) per common share for 1996 and 1995 based on the modified treasury stock method, the results were antidilutive. Accordingly, no additional income (earnings from investing the excess proceeds upon the exercise of common stock equivalents) nor common stock equivalents were included in the calculation of net income (loss) per common share. Reclassifications Certain amounts from the January 31, 1995 financial statements have been reclassified to conform to the current year's presentation. Cash Flows For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. 3. Acquisition of Bright Star Footwear, Inc. In connection with the acquisition of Bright Star in 1991, the Company entered into noncompete agreements with Bright Star's former Chairman and President whereby the Company paid $1,225,000 and issued $2,275,000 of notes to such individuals. At February 23, 1993, in connection with the quasi-reorganization, the Company wrote down this asset by $1,718,000. The agreements are being amortized over their respective terms. Accumulated amortization related to these agreements was $1,408,000 and $1,368,000 at January 31, 1996 and 1995 respectively. S-13 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Prepaid Expenses Prepaid expenses consist of the following: January 31, -------------------------- 1996 1995 -------- -------- Advertising and marketing $236,087 $ 22,000 Royalties 113,185 20,108 Trade shows 94,340 80,011 Other 91,297 29,076 -------- -------- Totals $534,909 $151,195 ======== ======== The Company records national advertising campaign costs as an expense upon the first showing of the related advertising and other advertising costs when incurred. Advertising expenses for the years ended January 31, 1996 and 1995 amounted to $466,000 and $457,000, respectively. 5. Property and Equipment Major classes of property and equipment consist of the following: January 31, ------------------------ 1996 1995 -------- -------- Furniture, fixtures and equipment $807,875 $750,063 Transportation equipment 20,750 44,443 -------- -------- 828,625 794,506 Less: accumulated depreciation 707,557 651,546 -------- -------- Net property and equipment $121,068 $142,960 ======== ======== During the year ended January 31, 1996, transportation equipment with a net book value of approximately $15,200 was retired. A related liability in the same amount was also written off. 6. Investment in Joint Venture In September 1991, the Company entered into a joint venture agreement (the "Agreement") with Carousel Group, Inc. ("Carousel") an affiliate of Terren Peizer, a then 13.5% shareholder. Carousel's right under the joint venture agreement were subsequently assigned to Urethane Technologies, Inc. ("UTI"), a company which is also affiliated with Mr. Peizer. The joint venture was formed primarily to exploit certain technology relating to the production of footwear soles as well as other opportunities that may arise utilizing polyurethane technology. The Company invested $1,000,000 as its capital contribution for a 50% interest to fund equipment acquisition and working capital requirements, while Carousel contributed its technical knowledge and capabilities relating to polyurethane products manufacturing processes. Under the terms of the Agreement, the Company will be entitled to 50% of the net income of the Joint Venture. S-14 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Investment in Joint Venture (continued) Although the Company may be required, under certain conditions, to make additional capital contributions not to exceed $100,000 in any thirty day period, and the Company fails to make such required contribution within thirty days, it may be contributed by the other joint venturer whose share of income and distributions will be adjusted based on their share of capital. The Company's investment in the Joint Venture has been accounted for under the equity method of accounting. Management believes that the Company's recovery of its investment, if any, will be realized over an indeterminate future period; therefore, the investment has been fully reserved. The joint venture shall terminate December 31, 2025, unless sooner terminated by the occurrence of events as defined in the agreement. The following is the unaudited summarized financial information of the Joint Venture at January 31, 1996 and 1995: January 31, -------------------------- 1996 1995 -------- -------- (unaudited) Cash $202,350 $184,472 Trade accounts receivable 36,691 25,290 Due from UTI -- 89,521 Other current assets 1,034 309 Organization costs, net 2,288 5,721 Equipment, net 85,917 123,261 -------- -------- Total assets 328,280 428,574 Accounts payable -- 15,773 -------- -------- Net assets $328,280 $412,801 ======== ======== Year Ended January 31, --------------------------------- (unaudited) 1996 1995 --------- --------- Income $ 13,731 $ 245,952 Expenses 98,252 425,714 --------- --------- Net loss ($ 84,521) ($179,762) ========= ========= 7. Factor Agreement On April 2, 1993, the Company entered into an accounts receivable factoring agreement. The agreement provides the Company with the ability to borrow funds from the factor, limited to 85% of eligible accounts receivable and 50% of eligible finished goods inventory (to a maximum of $6 million in inventory) in which the factor has a security interest. The agreement also provides for the opening of documentary letters of credit (up to a maximum of $2.5 million) to suppliers, on behalf of the Company. The total credit facility is limited to $10 million. The factor requires a deposit equal to 43% of the amount of the letter of credit to be opened. Borrowings bear interest at the rate of one and one-half percent (1-1/2%) over the existing prime rate established by the Philadelphia National Bank. The Company's President has personally guaranteed any and all borrowings with the factor. S-15 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Factor Agreement (continued) At January 31, 1996 and 1995, the Company had $342,708 and $1,782,708, respectively, of outstanding letters of credit, and approximately $2,157,292 and $540,000, respectively, of available letters of credit. Due to factor is comprised as follows: January 31, ---------------------------- 1996 1995 ---------------------------- Accounts receivable assigned $4,804,121 $3,478,771 Outstanding advances 6,103,217 4,640,806 --------------------------- Due to Factor $1,299,096 $1,162,035 ============================ Although the Company obtains credit insurance on the majority of its customers, the Company may incur losses on accounts receivable as a result of customer chargebacks and disputes. 8. Long-Term Liabilities At January 31, 1996 maturities of long term liabilities (principally deferred rents) are as follows: $19,677 (1998); $47,663 (1999); $52,470 (2000); $2,626 (2001). S-16 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Stockholder's Equity (a) Warrants The following schedule represents the outstanding warrants at January 31, 1996 and 1995:
Underwriter's Class (A) Class (B) Class (C) Other Warrants(1) Warrants(2) Warrants(3) Warrants(3) Warrants(5) Warrants outstanding at January 31, 1994 442,500 54,397 1,475,000 1,475,000 Issued in connection with research report 75,000 Adjustment of underwriter's warrants (4) 211,146 Pursuant to private placement (1) 337,566 ----------------------------------------------------------------------------- Warrants outstanding at January 31, 1995 & 1996 991,212 54,397 1,475,000 1,475,000 75,000 =============================================================================
(1)--At January 31, 1996, underwriter's warrants consist of 217,882 units at an exercise price of $3.38 per unit entitling the holder to one share of common stock, one Class B warrant and one Class C warrant. The shares reserved represent the amount of shares issuable upon the exercise of the underwriter warrants and the attached Class B and C warrants. In connection with the October 1994 private placement, the Company issued warrants to purchase 370,175 shares at an exercise price of $1.15 per share of which 32,609 were exercised during the year ended January 31, 1996, and 337,566 remain outstanding. (2)--From July 1, through December 31, 1990, the Company entered into an IPO warrant exercise solicitation whereby holders of 54,397 of the Company's IPO warrants who exercised their IPO warrants received a new warrant (the "Class A Warrants"). These warrants are currently exercisable at a price of $22.50 and expire July 1997. (3)--In connection with a secondary offering, the Company issued 1,475,000 shares of common stock, 1,475,000 class (B) redeemable warrants and 1,475,000 class (C) redeemable warrants to each registered holder. Each warrant entitles the holder to purchase one share of common stock at a price of $4.00 and $5.00, respectively. These warrants expire on February 23, 1998. (4)--Pursuant to the Warrant Agreement, as a result of the issuance of shares and their dilutive effect, the Company's underwriters are entitled to exercise additional units, as described in (1) above. The adjustment represents the additional shares reserved for issuance in connection with these additional units. The exercise prices of the existing underwriter warrants have been adjusted, as defined. (5)--In connection with the research report agreement of "The Research Works, Inc. The number of shares of stock purchasable upon the exercise of the warrant is 75,000. The exercise price is $1.50. The warrant shall expire on November 28, 1997. S-17 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Stockholders' Equity (continued) (b) Common Stock Private Placement Offerings (i) In May 1994, the Company consummated two private placements of its common stock as follows: (a) 33,333 shares at $1.50 per share, resulting in aggregate proceeds of $50,000. (b) 248,148 shares at $1.35 per share, resulting in aggregate proceeds of $335,000. In connection with these private placements of its common stock, the Company incurred fees and expenses of approximately $66,900. (ii) In October 1994, the Company issued 956,522 shares of its common stock at $1.15 per share and 10,286 shares of its 8% Series A Convertible Preferred Stock at $100 per share for aggregate proceeds of approximately $1,730,200, net of related expenses of approximately $398,400. The Company used a portion of those funds to repay principal and accrued interest on its institutional indebtedness. In conjunction with these offerings, the Company issued 55,000 shares of its common stock in lieu of payment of professional fees incurred. (iii) In November 1994, the Company sold 86,957 shares of common stock to NRC for $100,000. Increase in Common Stock Authorized In November 1994, the Stockholders held a Special Meeting to approve the proposal to amend the Company's Certificate of Incorporation to increase the authorized common stock from 10,000,000 to 30,000,000 shares. Concurrently with the amendment, the holders of the Company's outstanding 8% Series A Convertible Preferred Stock converted such shares into 894,431 shares of common stock. S-18 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Stockholders' Equity (continued) Treasury Stock The Company retired its Treasury Stock, resulting in a reduction of additional paid-in capital of $1,071,033 during the year ended January 31, 1995. Stock Options In 1989, the Company's Board of Directors adopted and its stockholders approved the Company's 1989 Stock Option Plan (the "Plan"). The Plan, as amended in 1990, provides for the granting of incentive stock options ("ISOs"), nonqualified stock options ("NQSOs") and limited stock appreciation rights ("Limited Rights"), covering up to 222,222 shares of common stock. The Plan terminates on August 1, 1999. Under the Plan, ISO's are to be granted at not less than the market price of the Company's common stock on the date of the grant. Stock options not covered by the Plan ("Non-Plan Options") may be granted at prices determined by the Board of Directors. Under the Plan as of January 31, 1996 and 1995, ISO's covering 179,300 and 156,300 shares of common stock, respectively, were outstanding. There were no NQSOs outstanding at either date. Additionally, at January 31, 1996 and 1995, Non-Plan Options covering 3,566,311 and 1,971,367 shares of common stock, respectively, were outstanding. The options granted under the Plan expire between five and ten years from the date of grant or at the termination of the Plan, whichever comes first. Changes in options outstanding are summarized as follows: Shares Exercise Price January 31, 1994 1,262,667 $1.00 - $45.00 Grant 1,075,000 $1.15 - $ 2.13 Terminated (210,000) $1.94 - $ 2.63 ---------- January 31, 1995 2,127,667 $1.00- $45.00 Grant 1,710,000 $1.16 - $ 2.13 Terminated (92,056) $1.25 - $45.00 ---------- January 31, 1996 3,745,611 $1.00 - $ 5.00 ========= Options are exercisable at various dates from 1996 through 2002. At January 31, 1996 and 1995, 3,482,611 and 1,623,167 options, respectively, were vested and exercisable at prices ranging from $1.00 to $5.00 and from $1.00 to $45.00 respectively. On April 1, 1995, the Company granted 200,000 Non-Plan Options at an exercise price of $1.16 per share, to its Executive Vice President in connection with an employment agreement. S-19 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Stockholders' Equity (continued) On March 15, 1995, the Company granted 400,000 Non-Plan Options at an exercise price of $1.16 per share, to its President, in connection with the renewal of an employment agreement. The Company also granted a total of 700,000 Non-Plan options, at an exercise price of $1.24 per share, to New Retail Concepts, Inc. ("NRC") for loans made to the Company during fiscal 1996. All loans made to the Company were fully satisfied during the year. On August 1, 1994, the Company granted 400,000 Non-Plan Options, at an exercise price of $1.50 per share to its President, in connection with his personal guarantee of any and all borrowings above the Company's eligible receivable and inventory formulas with its factor. At January 31, 1996, common shares reserved for issuance on exercise of stock options and warrants consisted of: Stock Options 3,745,611 Underwriters' Warrants 991,212 Class A Warrants 54,397 Class B Warrants 1,475,000 Class C Warrants 1,475,000 Other Warrants 75,000 ---------- 7,816,220 ========== S-20 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Settlement Agreements Settlements of Litigation and Other Obligations During the year ended January 31, 1995, in connection with the Company's settlements of litigation and other obligations, the Company, in addition to certain cash payments, issued shares of its common stock. The settlements are summarized as follows:
Dollar Value Cash of Shares Requirements for Gain (Loss) on Description Issued Settlement Settlement* Shares Issued - ---------------------------------------------------------------------------------------------------------------------- Settlements of Litigation Starter Corporation (a) 100,000 $135,000 $150,000 $ 247,031 American Sporting Goods (b) - - 100,000 (100,000) Pentland USA Inc. (c) - - 445,000 (220,000) AFL-CIO (d) 478,261 550,000 100,000 (320,000) ------- ------- -------- --------- Total Litigation Settlements 578,261 $685,000 $795,000 $(392,969) Settlements of Obligations Major League Footwear Inc. (e) 260,000 $298,500 $ - $ 315,272 Note Payable (f) 240,740 325,000 - - ----------------------------------------------------------------------- Total Obligation Settlements 500,740 $623,500 $ - $ 315,272 ----------------------------------------------------------------------- Total Loss on Settlements of Litigation and Other Obligations included in Other deductions $ (77,697) ===================
* Gain (loss) represents additional (provisions) credits from amounts accrued in prior year. S-21 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Settlement Agreements (continued) (a) Settlement with Starter Corporation In May 1992, Starter Corporation instituted a legal action against the Company for approximately $532,000 of unpaid royalties and interest which was accrued by the Company during the year ended January 31, 1994. In July 1994, the Company issued 100,000 shares of common stock to be registered for resale and agreed to pay $150,000 over a fifteen-month period beginning in July 1994. The Company, based on a value of $1.35 per share for the shares issued and the payment of $150,000, recognized income of $247,031 from this settlement. This obligation was fully satisfied during the fiscal year ended January 31, 1996. (b) Settlement with American Sporting Goods In July 1994, in connection with a settlement with American Sporting Goods ("ASG"), Bright Star agreed to pay ASG $100,000 over a ten-month period. This obligation was fully satisfied during the fiscal year ended January 31, 1996. (c) Settlement with Pentland USA Inc. In December 1994, in connection with a settlement with Pentland USA Inc.("Pentland"), the Company agreed to pay Pentland $445,000, of which $220,000 was accrued by the Company at January 31, 1994. The Company paid $175,000 upon the execution of the settlement agreement and the remaining $270,000 was fully paid as of January 31, 1996. (d) Settlement with Food and Allied Services Trade Department, AFL-CIO The United States District Court for the Southern District of New York approved the settlement of an action instituted in July 1992 against the Company and its former directors by the Food and Allied Services Trades Department, AFL-CIO, and on behalf of the class of all other similarly situated stockholders. The settlement requires the Company to make a $100,000 cash payment to the plaintiffs and to issue to the plaintiffs that number of shares of its Common stock (up to a maximum of 600,000 shares) which would allow the plaintiffs to realize an additional $550,000 upon their sale over a two-year period. If the plaintiffs do not realize $550,000 from the sale of such shares, the Company will be required to pay to the plaintiffs the amount of the shortfall. The Company has provided for the stock portion of the settlement, based upon a value of $1.15 per share on the date of settlement. S-22 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Settlement Agreements (continued) (e) Settlement with Major League Footwear Inc. In May 1994, in connection with a settlement with Major League Footwear, Inc. ("MLF"), a company under common management, the Company issued 110,000 shares of common stock to be registered for resale, valued at $1.35 per share, and 150,000 shares of common stock, valued at $1.00 per share, in satisfaction of an outstanding liability to MLF in the amount of $613,771 for inventory purchased by the Company during the fiscal year ended January 31, 1994. The Company recognized income of $315,272 from this settlement. (f) Settlement of Note Payable In May 1994, the Company entered into an agreement with NRC pursuant to which the Company issued 240,740 shares of its common stock, to be registered for resale, to NRC in full payment of a note payable. The Company valued each share at its fair market value of $1.35 at the time of issuance. (g) Forgiveness of Debt In October 1994, the Company consummated an agreement with an institutional lender (the "Lender") to extinguish its outstanding indebtedness of approximately $3,378,000. As part of the extinguishment, the Company paid $555,000 of principal and approximately $140,000 of accrued interest. The Lender also received the proceeds from the sale of 322,222 shares of the Company's previously issued common stock (approximating $370,000) and certain real property, subject to an existing mortgage of approximately $260,000, from the Company's former President, both previously pledged as collateral (the "Collateral"). The Company has been informed by the Lender that the fair value of the real property approximates $370,000 which is based on a contract of sale between the Lender and a third party for $630,000 and the existing mortgage. The total fair value of the Collateral (approximately $740,000) has been treated as a reduction of the extraordinary gain on the extinguishment and a corresponding capital contribution. The principal and interest payments were made from funds raised through private placements of the Company's stock completed in October 1994. The extinguishment resulted in an extraordinary gain of approximately $1,962,175, net of income taxes. S-23 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Settlement Agreements (continued) Other Settlements (a) Settlement with Former Landlord In connection with the sublease of its former headquarters, the Company entered into an agreement in April 1994 with its former sublandlord to terminate the sublease agreement and in connection therewith, issued 200,000 shares of its common stock to the sublandlord as consideration for all rental obligations ($270,000) through June 30, 1994. Additionally, the Company deposited into escrow, 100,000 shares of common stock (the "Escrow Shares") to indemnify the sublandlord for any loss, as defined, suffered by the sublandlord from the period July 1, 1994 through April 28, 1997. (i) The amount of indemnifiable loss determined above shall be paid as follows: (a) the Shares shall be valued as of July 1, 1994, as defined; and (b) to the extent that the value of the shares (as computed) exceeds $270,000, then the amount of such excess shall be applied against the amount of indemnifiable loss. (ii) After the full amount of such excess, if any has been applied to the indemnifiable loss, the Company's liability for the indemnifiable loss shall be limited to 50% of any shortfall in the amount of indemnifiable loss on a monthly basis (a "Loss Shortfall"), which liability shall be satisfied solely through releases from escrow of a certain amount of Escrow Shares as defined. The maximum number shares of common stock which the sublandlord is entitled to under the settlement agreement is a total of 300,000 shares of common stock. The shares and Escrow Shares, if any will be "restricted securities" (as such term is defined in Rule 144 under the Securities Act of 1933) and may not be sold or otherwise disposed of unless the same have been registered under such Act or exemption from registration is available. The Company believes that the fair value (approximately $115,000 provided during the year ended January 31, 1995) of the 100,000 shares deposited into escrow is the maximum amount of the Company's share of the indemnifiable loss and that no additional obligation will be incurred. Additionally, a straight line rent obligation of $126,329 for the year ended January 31, 1995 was no longer required and therefore credited to income. S-24 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Settlement Agreements (continued) Other Settlements (continued) (b) Settlement with Vendor In July 1994, the Company paid $100,000 in cash and issued 250,000 shares of common stock in settlement of an outstanding payable of $859,587. The Company, based on a fair market value of $1.00 per share, recorded a gain of $509,888 from this settlement as a reduction of cost of goods sold. The settlement was related to the reduction of excess charges previously billed for inferior quality merchandise and other chargeback items. (c) Insurance Claim In connection with the above mentioned legal actions, the Company filed a claim with its insurance company and received a settlement of $275,000 relating to its director's and officer's liability insurance, included in other income for the year ended January 31, 1995. (d) Former Employee In October 1994, a former employee of the Company and NRC, commenced an action in the United States District Court for the Southern District of New York against the Company and NRC, alleging the existence and breach of employment agreements with NRC and, assumption of the agreements by the Company. The former employee claimed damages for unpaid compensation, bonuses and unreimbursed expenses aggregating in excess of $500,000. On June 21, 1995, this suit was settled for (i) $226,000, payable in 36 equal semimonthly installments over eighteen months, which was allocated equally to the Company and NRC and (ii) NRC agreed to acquire 495,000 shares of NRC's common stock held by the plaintiff for $105,000. Provision for the Company's pro rata share of the settlement ($113,000) is included in the January 31, 1996 financial statements. The Company and NRC are jointly and severally liable for the $226,000 settlement. (e) Tax Liabilities In fiscal 1995, the Company settled amounts due for federal and state tax liabilities in the aggregate amount of approximately $526,000. These liabilities were fully paid at January 31, 1996. S-25 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Settlement Agreements (continued) Other Settlements (continued) (f) In February 1996, the Company settled an administrative proceeding brought against it by the Securities and Exchange Commission (the"Commission") with respect to alleged violations of Section 5 of the Securities Act of 1933 in connection with the Company's 1993 Regulation S offering (the "Offering") of shares of Common Stock in the aggregate amount of $2,000,000. In the proceeding, the Commission found that the sales of Common Stock in the Offering did not qualify for an exemption from the Securities Act of 1933. In accepting the settlement with the Commission, the Company neither admitted nor denied the Commission's allegations and findings, and it consented to the entry of an order in which it agreed to permanently cease and desist from committing or causing any violation, and future violation, of Section 5 of the Securities Act of 1933. 11. Commitments and Contingencies (a) In April 1991, an action was commenced derivatively on behalf of Candie's, Inc. against certain of the Company's former and current directors and the Company as a nominal defendant (the "Defendants"). The complaint alleges that the Company's actions in connection with a public offering to exchange warrants of the Company and the reacquisition of ITG were detrimental to the Company's financial condition. The plaintiff seeks an accounting by the Company and payment by the Board of Directors of an unspecified amount of damages. In September 1991, the defendants moved to dismiss the complaint for failure to state a cause of action. The motion was granted in October 1991 based upon the court's mistaken belief that the plaintiff had defaulted with respect to the motion. The parties agreed to reinstate the motion in June 1992 and the motion has again been submitted to the Court for its determination. The Company and the individual defendants intend to defend the action. (b) As of January 31, 1996, the Company is obligated under employment agreements with four executives to provide aggregate minimum compensation of approximately $921,000 and $279,000 during the fiscal years ended January 31, 1997 and 1998, respectively. (c) Effective February 1, 1995, the Company is operating under an exclusive licensing arrangement which enables the Company to sell footwear in the North America bearing the BONGO trademark. The Company paid a $200,000 minimum fee, and is required to pay additional minimum amounts totaling $820,000 over a three and one-half year period. The agreement provides for the Company to pay additional royalties, based on the percentage of sales, exceeding minimum amounts, as defined. S-26 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Related Party Transactions The Company entered into a Services Allocation Agreement with NRC, (a significant shareholder of the Company, and an entity whose principal shareholder is the Company's President) pursuant to which the Company will provide NRC with financial, marketing, sales and other business services for which NRC will be charged an allocation of the Company's expenses, including employees' salaries associated with such services. Pursuant to such agreement, NRC paid the Company approximately $50,000 and $74,000 during the years ended January 31, 1996 and 1995, respectively. 13. Leases In August 1994, the Company entered into a new lease agreement and relocated its corporate headquarters to Purchase, NY. In connection with the relocation, the Company recorded a loss on abandonment of assets of $60,755, which was included in other deductions during the year ended January 31, 1995. Rent expense was approximately $236,000 and $234,000 for the years ended January 31, 1996 and 1995, respectively. As of January 31, 1996, future net minimum lease payments under noncancelable operating lease agreements are as follows: 1997 $ 231,000 1998 255,000 1999 283,000 2000 289,000 2001 48,000 ---------- $1,106,000 ========== 14. Retirement Plans As of December 31, 1994, the Company suspended benefit accruals for future service for participants and elected to terminate its defined benefit pension plan effective February 10, 1995. In connection with this curtailment, the Company's actuary determined the Company's liability, based upon the funded status, to be approximately $52,000. As a result, the Company reduced its accrued pension liability by $340,000 during the year ended January 31, 1995. Effective May 1, 1995, the Company sponsors a 401(k) Savings Plan (the "Savings Plan") which covers all eligible full-time employees. Participants may elect to make pretax contributions subject to applicable limits. At its discretion, the Company may contribute additional amounts to the Savings Plan. The Company made a contribution of $55,501 to the Savings Plan for the year ended January 31, 1996. S-27 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Income Taxes For Federal income tax purposes, Candie's, Inc. files a consolidated tax return with its wholly-owned subsidiaries. At January 31, 1996, Candie's, Inc. and its wholly-owned subsidiaries have net operating losses of approximately $10,200,000 for income tax purposes, which expire in the years 2008 through 2010. Due to the issuance of the common stock on February 23, 1993, an "ownership change," as defined in Section 382 of the Internal Revenue Code, occurred. Section 382 restricts the use of net operating loss carryforwards incurred prior to the ownership change to $275,000 per year. Approximately $5,700,000 of the operating loss carryforwards are subject to this restriction and, as a result, the Company may not be able to fully utilize these restricted operating loss carryforwards. ITG files a separate Federal income tax return. At January 31, 1996, ITG has net operating loss carryforwards of approximately $6,900,000 which expire in the years 2006 through 2011. The utilization of these net operating loss carryforwards may also be subject to limitation. After the date of the Quasi-reorganization the tax benefits of net operating loss carryforwards subsequently recognized will be treated for financial statement purposes as direct additions to additional paid-in capital. For the years ended January 31, 1996 and 1995, the Company utilized $275,000 of pre quasi-reorganization net operating loss carryforwards (totalling $550,000). The related tax benefit of $103,000 (totalling $206,000) has been recognized as an increase to additional paid-in capital. The significant components of deferred tax assets of the Company consist of the following: January 31, 1996 1995 ------------------------------- Allowance for doubtful accounts $ 24,000 $ 19,000 Inventory valuation 226,000 239,000 Net operating loss carryforwards 3,100,000 3,875,000 Provision for litigation -- 372,000 Other 125,000 155,000 ------------------------------- Total deferred tax assets 3,475,000 4,660,000 Valuation allowance (3,475,000) (4,660,000) ------------------------------- Net deferred assets $ -- $ -- =============================== S-28 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Income Taxes (continued) The provision for Federal and state income taxes in the consolidated statements of income consists of the following: January 31, ------------------- 1996 1995 -------- -------- Current: Federal $ 33,000 $ -- State 27,310 33,500 -------- -------- Total Current 60,310 33,500 -------- -------- Deferred: Federal 103,000 -- -------- -------- Total deferred 103,000 -- -------- -------- Total provision $163,310 $ 33,500 ======== ======== The current provision at January 31, 1996 and 1995 reflects minimum taxes for federal and state purposes. The following summary reconciles taxes (benefit) from continuing operations at the Federal statutory rate with the actual provision (benefit): January 31, ---------------------- 1996 1995 --------- --------- Income taxes (benefit) at statutory rate $ 412,000 ($646,481) Unrecognized tax benefit of net operating losses -- (646,481) Utilization of net operating loss carryforwards (300,000) -- Alternative minimum taxes 33,000 -- State provision, net of Federal income tax benefit 18,310 33,500 --------- --------- Total provision (benefit) $ 163,310 $ 33,500 ========= ========= 16. Fourth Quarter Adjustments The net loss for the fourth quarter of 1995 of approximately $1,777,000 included material adjustments resulting primarily from changes in estimated losses in the areas of accounts receivable ($166,000), inventories ($523,000) and an accrual for the settlement of litigation ($400,000). The fourth quarter also included an adjustment to decrease cost of sales $294,000, net relating to settlements of obligations. S-29 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 17. Subsequent Event On April 3, 1996 the Company entered into an agreement (the "Vendor Agreement") with a principal supplier of footwear products (the "Vendor") to satisfy in full, certain trade payables (the "Payables") amounting to $1,680,000. Under the terms of the Vendor Agreement, the Company has agreed to; (i) issue 1,050,000 shares of the Company's Common Stock (the "Vendor Shares") with certain registration rights; (ii) issue an option to purchase 75,000 shares of the Company's Common Stock at $1.75 per share; and (iii) make a future payment of $50,000. The Company has agreed to file a registration statement (the "Registration") covering the Vendor Shares. The Company's payables will be released by the Vendor upon the earlier of the date the Registration is declared effective, the date the Vendor sells all the shares or the Vendor receives an opinion of counsel that the Vendor shares may be sold under rule 144(k). The Vendor has supplied the Company with approximately 90% and 50% of the Company's total purchases, for the years ended January 31, 1996 and 1995, respectively. Total open purchase commitments at January 31, 1996 with the Vendor amounted to approximately $4,900,000. S-30 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. By: /s/ Neil Cole ------------------------- Neil Cole Chief Executive Officer (Principal Executive and Accounting Officer) Dated: September 3, 1996 EX-10.24 2 PAYMENT OF OUTSTANDING DEBTS CANDIE'S, INC. 2975 Westchester Avenue Purchase, NY 10577 April 3, 1996 Redwood Shoe Corp. 8F.137 Hua Mei West St. SEC.1, Taichung, Taiwan Attention: Mr. Howard Kwan, President Re: Payment of Outstanding Indebtedness Gentlemen: Candie's, Inc. (the "Company") proposes, in full payment and satisfaction of the Indebtedness (as defined below) of the Company to Redwood Shoe Corp. (the "Vendor"), (i) to issue to the Vendor (a) 1,050,000 shares (the "Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), and (b) a five-year non-qualified stock option (the "Option") to purchase 75,000 shares (the "Option Shares") of Common Stock at an exercise price of $1.75 per share, (ii) to grant the Vendor certain registration rights with respect to the Shares and the Option Shares as hereinafter set forth, and proposes (iii) to authorize Vendor to withdraw $50,000 from the deposit account established by the Company's subsidiary, Yulong International Limited, at Citibank in Taichung Taiwan. For purposes of this Agreement, "Indebtedness" owed by the Company to the Vendor consists of (i) $1,680,000, representing the purchase price of the goods previously shipped by the Vendor to the Company pursuant to the invoices set forth on Exhibit A attached hereto and (ii) any and all accrued past interest owed by the Company to the Vendor through March 1, 1996 relating to any indebtedness previously incurred by the Company from the Vendor. Accordingly, the Company and Vendor, for good and valuable consideration, the receipt of which is hereby acknowledged, by their respective signatures appearing on this Agreement hereby agree as follows: 1. The Company will issue the Shares to the Vendor after receipt by the Company of the executed counterpart of this Agreement, the Option Agreement representing the Option and the Certificate attached hereto as Exhibit B, duly executed by Vendor. 2. The certificate representing the Shares will be issued in the name of Redwood Shoe Corp. and, unless the Vendor instructs the Company otherwise, the Certificate and the Option Agreement representing the Option will be delivered to the Vendor at the Vendor's address set forth above. 3. The Company will file a registration statement covering the Shares and the Option Shares (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933 (the "Act") within 60 days from the date hereof and shall use its reasonable efforts to cause such Registration Statement to become effective under the Act as soon as practicable thereafter and shall maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Shares have been sold by the Vendor (ii) three years from the date the Registration Statement is declared effective by the SEC, or (iii) the date that all of the holders of Shares receive an opinion of counsel reasonably satisfactory to the Company and the Vendor or its counsel that the Shares may be sold under the provisions of Rule 144(k) promulgated under the Securities Act of 1933 (the "Act") (or any successor provision), so as to permit the public offer and sale of the Shares. In connection with the filing of a Registration Statement the Company shall: a. furnish to the holders of Shares such number of copies of a summary prospectus or other prospectus, in conformity with the requirements of the Act, and such other documents, as such holders may reasonably request; b. use its reasonable efforts to register or qualify the securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions within the United States as the holders of Shares shall reasonably request (provided, however, the Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any jurisdiction in which it is not then qualified or to file any general consent to service of process); and c. promptly notify in writing the holders of Shares of the happening of any event, during the period of distribution, as a result of which the Registration Statement includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing (in which case, the holders shall promptly take action to cease any offers of the Shares until receipt and distribution of such revised or supplemental prospectuses). -2- 4. All expenses incurred in complying with Section 3 of this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, and expenses (including attorneys' fees) of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 3(b), except to the extent required to be paid by participating selling security holders by state securities or blue sky laws, shall be paid by the Company, except that the Company shall not be liable for any fees, discounts or commissions to any underwriter or broker or any fees or disbursements of counsel or any advisor for the holders of Shares in respect of the Shares sold by the holders. The Company shall not be required to undergo any special audit in connection with any registration hereunder. 5. The Company's obligations under Section 3 are expressly conditioned upon the holders of Shares and Option Shares furnishing to the Company in writing such information concerning the holders and the holders' controlling persons and the terms of the holders' proposed offering of Shares and Option Shares as the Company shall reasonably request for inclusion in the Registration Statement. 6. The Company agrees that the Vendor shall have the right, upon written notice ("Notice") provided to the Company, to designate Mark Tucker as a nominee for election as a director of the Company. Upon receipt of the Notice the Company will use its reasonable efforts to cause such person to be elected as a director of the Company and to continue in office for a period expiring three years from the date of this Agreement. If Mark Tucker is not available to serve as the nominee of the Vendor, the Vendor may nominate one of its other partners for nominee as a director of the Company. Each of Neil Cole, Lawrence O'Shaughnessy and New Retail Concepts, Inc., agree to vote all of the Common Stock owned by them so as to elect and continue in office as director of the Company the Vendor's nominee for the period set forth in this Section 6. 7. The Vendor hereby releases the Company, its subsidiaries, their respective officers, directors, legal representatives, successors and assigns (collectively, the "Releasees") from all legal and equitable claims and cause of action against the Releasees the Vendor ever had, now or hereafter may have, based upon or arising out of the Indebtedness and any promissory note, guarantee or other instrument issued by the Company or any subsidiary of the Company in favor of the Vendor in connection with the Indebtedness. The foregoing release shall not become effective until the earlier of (i) the date the Registration Statement is declared effective by the SEC, (ii) the date the Vendor has disposed of all of the Shares, or (iii) the date the Vendor receives an opinion of counsel, reasonably acceptable to it, that the Shares may be publicly sold pursuant to Rule 144(k) promulgated under the Act. -3- 8. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Agreement shall be deemed given upon receipt and shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged, delivered by reputable overnight courier, or mailed by registered or certified mail, return receipt requested, postage prepaid, to the respective addresses set forth in this Agreement. 9. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto; provided, however, that the Vendor's rights hereunder may not be transferred without the prior written consent of the Company. 10. This Agreement shall be governed by the laws of the State of New York, without regard to the provisions thereof relating to conflict of laws. The Vendor (a) agrees that any legal suit, action or proceeding arising out of or relating to this letter agreement will be instituted exclusively in New York State Supreme Court, New York County, or the United States District Court for the Southern District of New York, (b) waives any objection the Vendor may now or hereinafter have to the venue of any such suit or proceeding, (c) irrevocably consents to the jurisdictions of the New York State Supreme Court, New York County and the United States District Court for the Southern District of New York in any such suit, action or proceeding, and (d) agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in such New York State Supreme or New York Southern District courts, which service may be made upon the Vendor by certified mail to the Vendor's address set forth herein. 11. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provisions shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 12. This Agreement may be executed in separate counterparts, all of which shall constitute one agreement. 13. The Vendor hereby represents to the Company that (i) except for the Shares to be issued to it as noted above (unless otherwise noted by the Vendor in a schedule attached hereto), the Vendor owns no shares of the Company's Common Stock and has no other rights, contractual or otherwise, to acquire shares of the Company's Common Stock or any security convertible into shares of the Company's Common Stock except for shares of Common Stock issuable upon exercise of the Option; (ii) the Vendor has no underwriting or similar arrangements with any -4- broker-dealer or underwriter with respect to the Shares; (iii) the undersigned has the full power and authority to enter into this Agreement on behalf of the Vendor; and (iv) the Vendor will notify the Company of any change in its ownership of the Company's securities or if it enters into any underwriting or similar arrangement with a broker-dealer or underwriter with respect to the Shares prior to the effective date of the Registration Statement. 14. The parties agree to take such other and further steps, including, but not limited to, executing any additional documents, as may be reasonably necessary to give effect to the transactions contemplated herein. 15. This Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement supersedes all prior representations, understandings, and promises (if any) by or between the parties in respect of the subject matters set forth above, constitutes the complete agreement between the parties with respect thereto and may not be modified, supplemented, or terminated except in a writing signed by each of the parties to this Agreement. Very truly yours, CANDIE'S, INC. By: /s/ Neil Cole ----------------------------------- Name: Neil Cole Title:President AGREED TO AND ACCEPTED: REDWOOD SHOE CORP. By: /s/ Howard Kwan --------------------------------- Name:Howard Kwan Title:President -5- Each of the undersigned hereby accepts and agrees to be bound by the provisions of Section 6 of this Agreement insofar as it relates to the agreement of the undersigned to vote shares of Common Stock owned by the undersigned in favor of the Vendor's nominee as a director of the Company for the period specified in Section 6. /s/ Neil Cole ----------------------------------- Neil Cole /s/ Lawrence O'Shaughnessy ----------------------------------- Lawrence O'Shaughnessy New Retail Concepts, Inc. By: /s/ Neil Cole ---------------------------------- Name: Neil Cole Title:President EX-10.25 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT, made as of this 1st day of April, 1995, by and between Candie's, Inc., with offices located at 2975 Westchester Avenue, Purchase, New York 10577 (the "Company"), and Lawrence O'Shaughnessy residing at 247 Old Chester Road, Chester, New Jersey 07930 (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive possesses unique personal knowledge, experience and expertise concerning the business and operations to be conducted by the Company; and WHEREAS, the Executive desires to commit himself to serve the Company in the capacities set forth hereinafter; and WHEREAS, the Company seeks to ensure the services of the Executive upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Term of Employment. (a) The Company agrees to employ the Executive as its Executive Vice-President, and the Executive agrees to be employed by the Company as such, subject to the immediate supervision and direction of the Company's President and Board of Directors, for a period of two (2) years commencing with the date of this Agreement and expiring on March 31, 1997 (the "Term"), unless this Agreement is sooner terminated pursuant to the provisions herein. 2. Attention to Business; Duties. (a) The Executive shall serve in the capacities set forth in Section 1 above, subject only to policy directions from the President and Board of Directors of the Company. The Executive shall have supervision and control over, and responsibility for, among other things, the executive, business and financial operations of the company and shall have such other powers and duties as may be from time to time prescribed by the President and Board of Directors of the Company, provided that the nature of the Executive's powers and duties so prescribed shall not be inconsistent with the Executive's position and duties hereunder. (b) The Executive agrees to devote at least 80% of his time, attention, skill, and efforts to the performance of his duties and responsibilities to the Company, and to any subsidiary or subsidiaries of the Company, all under the supervision and direction of the Company's Board of Directors, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods required for: (i) serving as a director or member of a committee of organization or corporation involving no conflict of interest with the interests of the Company and with written consent of the Company, said consent not to be unreasonably withheld; (ii) delivering lectures, fulfilling speaking engagements, and any writing or publication relating to his area of expertise; -2- (iii) engaging in professional organization and program activities; (iv) serving as a consultant in his area of expertise to government, industrial, and academic panels where it does not conflict with the interests of the Company; (v) managing his personal investments; and (vi) engaging in any other noncompeting business. (c) During the Term, unless this Agreement shall be sooner terminated, the Board of Directors shall vote to recommend the election of the Executive by the Company's stockholders as a director. 3. Compensation (a) For all services to be rendered by the Executive in any capacity hereunder (including services as an officer, director, member of any committee or otherwise), the Company agrees to provide the Executive with the following compensation, for so long as he shall be employed hereunder: (i) Base Salary - The Executive shall be entitled to a fixed full base salary at the rate of Two Hundred Twenty-Five Thousand Dollars ($225,000) per annum during the first year of the Term, and Two Hundred Fifty Thousand Dollars ($250,000) per annum during the second year of the Term (the "Base Salary"), payable in equal semi- monthly installments, as determined by the Board of Directors. (ii) Annual Bonus - Ninety days after each fiscal year of the Company, the Executive shall be entitled to receive, in addition to all other compensation, an annual bonus (the "Annual Bonus") in an amount equal to one and one-half percent (1.5%) of the Company's net pre-tax income for such fiscal year. (iii) Stock Bonus - In further consideration of entering into this Agreement, Executive shall receive a bonus of options to purchase 200,000 -3- shares of the Company's common stock, exercisable for five years from the date of grant ("Stock Bonus Options"), as set forth in a certain Option Certificate being executed simultaneously herewith. (iv) Expenses - The Company shall pay to the Executive the reasonable expenses incurred by him in the performance of his duties hereunder, including, without limitation, those incurred in connection with the use of an automobile, business related travel or entertainment, or, if such expenses are paid directly by the Executive, the Company shall promptly reimburse him for such payments, provided that the Executive properly accounts for such expenses in accordance with the Company's policy. (v) Compensation Plans - The Executive shall be entitled to participate in any management incentive compensation plans adopted by the Company's Board of Directors or otherwise in effect during the Term on a basis to be determined by the Board of Directors consistent with such management incentive compensation plans. (vi) Stock Option Plan - The Executive shall be entitled to participate, to the extent determined by the Board of Directors or appropriate committee, in any stock option plan established for eligible employees by the Company's Board of Directors. (vii) Benefit Plans - The Executive and his dependents shall be a participant in, and beneficiary of, all pension, profit sharing, life, dental, medical, disability and other group benefit plans provided by the Company for eligible employees during the Term (viii) Life and Disability Insurance Coverage - The Company shall purchase life insurance covering the life of the Executive for the benefit of his designee in an amount equal to the Base Salary, and disability insurance to the extent of the compensation and benefits due to the Executive as an employee of the Company, for the term of this Agreement. (ix) Automobile - The Company shall provide to the Executive a luxury automobile for the Executive's use for business of the Company. -4- The Company shall pay all of the expenses of maintaining, insuring, operating and parking the automobile upon the receipt of presentation of appropriate vouchers and/or receipts to the extent that the Company does not pay such expenses directly. (x) Vacation - The Executive shall be entitled to a vacation of four (4) weeks per year, during which time his compensation will be paid in full. 4. Rights of Indemnification (a) Subject to the provisions of the Company's Certificate of Incorporation and Bylaws, each as amended from time to time, the Company shall indemnify the Executive to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, for all amounts (including without limitation, judgments, fines, settlement payments, expenses and attorney's fees) incurred or paid by the Executive in connection with any action, suit, investigation or proceeding arising out of or relating to the performance by the Executive of services for, or the acting by the Executive as a director, officer or employee of the Company, or any other person or enterprise at the Company's request. (b) The Company shall use its best efforts to obtain and maintain in full force and effect during the Term, directors' and officers' liability insurance policies providing full and adequate protection to the Executive for his capacities, provided that the Board of Directors of the Company shall have no obligation to purchase such insurance if, in its opinion, coverage is available only on unreasonable terms. -5- 5. Place of Performance (a) In connection with his employment by the Company, the Executive shall be based at the principal executive offices of the Company, which shall be in Purchase, New York, and the Executive shall have discretion regarding his absence therefrom on travel status or otherwise during any calendar year. (b) The Executive shall not be required to move his present residence in order to perform the services contemplated hereby. Subject to the foregoing, in connection with any relocation or transfer of the principal executive offices of the Company consented to by the Executive, the Company will promptly pay (or reimburse the Executive for), all reasonable moving and moving-related expenses (including any losses incurred as a result of the sale of the Executive's personal residence) incurred by the Executive as a consequence of a change of his principal residence in connection with any such relocation of the Company's principal executive offices. 6. Competition with the Company Subject to the provisions of section 2(b)(vii) of this Agreement, the Executive agrees that during the term of his employment, he will not directly or indirectly, for his own benefit, or on behalf of others, compete, or be an officer, director, employee or controlling shareholder of the capital stock or other equity interest of any corporation or other entity located within a fifty (50) mile radius of the location of any the Company's offices which competes with any business conducted by the Company, its subsidiaries, or affiliates during the Term -6- of his employment. Any breach or threatened breach of any provision of this Section 6, which the Executive agrees would cause the Company irreparable harm for which the Company will have no adequate remedy at law, shall entitle the Company to legal remedies including but not limited to injunctive relief. 7. Disclosure of Information The Executive agrees that during the Term of his employment, he will not disclose to any third party any information which is treated by the Company as confidential, including, but not limited to, information relating to patent applications filed or to be filed by the Company, any of the Company's inventions, processes, methods of distribution, customers, trade secrets relating to the Company's devices and systems, and information relating to the Company's research and development activities, to any person, firm, corporation, association or other entity. The performance of any services as an officer, employee and director of New Retail Concepts as set forth in Section 2(b)(vii) is not to be construed as violative of this Section 7. Disclosure of confidential information may be made if such disclosure (i) is required by law; or (ii) is in the Company's best interest; or (iii) was public knowledge at the time the disclosure was made. 8. Return of Documents Upon leaving the employ of the Company, the Executive shall not take with him, without written consent of an Executive Officer of the Company, any manuals, records, drawings, blueprints, data, tables, calculations, letters, documents, or -7- any copy or other reproduction thereof, or any other property or confidential information, of or pertaining to the Company or any of its subsidiaries. All of the foregoing shall be returned to the Board of Directors on or before the date of termination of employment. 9. Change in Control (a) For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of the nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change of control shall be deemed to have occurred: (i) if any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly by acquisition, or otherwise, of securities of the Company representing twenty-five (25%) percent or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period. (b) If any of the events described in this Section 11 hereof constituting a change in control of the Company shall have occurred, the Executive shall be entitled to the benefits provided in Section 11. -8- 10. Termination The termination of this Agreement by the Company or the Executive shall be governed by the following provisions: (a) Disability The Company may terminate this Agreement for Disability of the Executive at any time if within thirty (30) days after written notice of termination is given, the Executive has not returned to full time performance of his duties. For purposes of this Agreement, "Disability" shall mean if, as a result of incapacity due to a physical or mental condition, the Executive shall have been absent from his duties with the Company on a full time basis for 60 consecutive business days. (b) Retirement For purposes of this Agreement, Termination by the Company or the Executive of his employment based on "Retirement" shall mean termination at any time in accordance with the retirement policy of the Company, including early retirement, generally applicable to its employees or in accordance with any retirement arrangement established with consent of the Executive with respect to himself. (c) Cause The Company may terminate the Executive's employment for Cause at any time. For purposes of this Agreement, the Company shall have "Cause" to terminate the employment of the Executive hereunder upon (i) the willful and continued failure by him to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to a physical or mental condition),after a written demand for substantial performance is delivered to the Executive by the Board of Directors which -9- specifically identifies the manner in which the Board believes that he has not substantially performed his duties, or (ii) the willful engaging by the Executive in misconduct materially and demonstrably injurious to the Company. For purposes of this Section l0(c) (ii), no act, or failure to act, on the part of the Executive shall be considered "willful" unless done, or omitted to be done, by him in bad faith and without reasonable belief that his action or omission was in the interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board, other than the Executive, at a meeting of the Board held for such purpose (after at least seven days prior written notice to the Executive and an opportunity for him, together with his counsel, to be heard before said Board), finding that in the good faith opinion of said Board the Executive was guilty of conduct set forth above in subsections (i) or (ii) above and specifying the particulars thereof in detail. In the event that the Board shall consist of less than four members, the affirmative vote of at least two-thirds of the entire membership of the Board will be required for purposes of this Section. (d) Good Reason The Executive may terminate his employment for Good Reason at any time. For purposes of this Agreement, "Good Reason" shall mean: (i) without the express written consent of Executive, the assignment to him of any duties materially inconsistent with his positions, -10- duties, responsibilities and status with the Company, or a material change in his reporting responsibilities, titles, or offices, or any removal of him from his office or any failure to re-elect him as an officer of the Company, except because of the termination of his employment for Cause, Disability or Retirement or as a result of his death; (ii) the failure of the Company to obtain the assumption of an agreement to perform this Agreement by any successor as contemplated in Section 12 hereof; or (iii) the purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements subparagraph (f) below, and for purposes of this Agreement, no such purported termination shall be effective. (e) Death If the Executive dies during the Term of his employment hereunder, the Executive's legal representatives shall be entitled to receive his Base Salary, Salary Adjustment and any proportional amounts due under Section 3 hereof, to the last day of the calendar month in which the Executive's death shall have occurred. (f) Notice of Termination Any termination by the Company pursuant to Sections 10(a) (Disability), 10(b) (Retirement), or 10(c) (Cause), or by the Executive pursuant to Section 10(d) (Good Reason), shall be communicated by written Notice of Termination to the other party or parties hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for -11- termination of the employment of the Executive under the provision so indicated. (g) Date of Termination For purposes of this Agreement, "Date of Termination" shall mean: (i) if this Agreement is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period); and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given the party or parties receiving such Notice of Termination notifies the other party or parties that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 11. Compensation Upon Termination (a) If Executive shall be terminated for disability as provided in Section 10(a) hereof, the Company shall pay him Base Salary and all expenses or accrued benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement through the Date of Termination at the rate in effect at the time of Notice of Termination and the Company shall have no further obligations to the Executive under this Agreement, except as expressly herein provided. Any payments required to be made to Executive during any period of disability after the termination of the Agreement shall be in accordance with the provisions of the insurance disability policy provided -12- to Executive under Section 3(a)(viii) hereof and if no policy shall be in effect, the Company shall pay Executive the amounts otherwise payable under the policy. In the event that Executive shall become disabled and Company does not exercise any right of termination, then, in such event, amounts payable to Executive shall be reduced by any payments made pursuant to such disability insurance policy. (b) If the Executive's employment shall be terminated for Cause, the Company shall pay him the Base Salary and all expenses or accrued benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligations to the Executive under this Agreement. (c) If the Executive shall terminate his employment for Good Reason or the Company shall terminate the Executive without Cause, then the Company shall pay the Executive the following amounts: (i) The Executive's full Base Salary (and any Salary Adjustment) through the Date of Termination at the rate in effect at the time Notice of Termination is given, and all expenses or accrued benefits arising prior to such termination which are payable to the Executive pursuant to this Agreement. (ii) The Executive's full Base Salary (and any Salary Adjustment) at the rate in effect at the time the Notice of Termination is given, payable in monthly installments, shall continue for the balance of the term of this Agreement, or one year, whichever is greater. -13- (iii) The Company shall also pay all indemnity payments and all legal fees and expenses incurred by the Executive as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement). (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, nor shall any sums earned by the Executive during the period in which payments are due under section 11(c) reduce the payments required pursuant to such section. 12. Successors; Binding Agreement (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled hereunder if the Executive terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of -14- Termination. As used in this section, "Company" shall mean the Company as hereinbefore defined, and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of the Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 13. Notices For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered, or one day after having been sent via overnight mail delivery service, addressed to the respective addresses set forth on the first page of this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. -15- 14. Miscellaneous (a) This written Agreement contains the sole and entire agreement between the parties, and shall supersede any and all other agreements between the parties. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by any party which are not set forth expressly in this Agreement. (b) No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and such officers as may be specifically designated by the Board of Directors of the Company. No waiver by any party hereto at any time of the breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 15. Validity The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. -16- 17. Applicable Law: Jurisdiction The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of New York. The parties hereto hereby consent to the jurisdiction of the United States District Court for the Districts of New York and the courts situated within the State of New York, to adjudicate and determine any dispute, questions or causes of action arising under or related to this Agreement and consent to its venue. 18. Legal Fees and Court Costs In the event that the Executive initiates legal action against the Company for an alleged breach of any provision of this Agreement, and in the event the Executive's action is finally adjudicated or arbitrated in his favor and against the Company, all reasonably necessary expenses incurred by the Executive pursuant to such legal action will be reimbursed to the Executive by the Company within ten (10) days after the Executive has presented an invoice to the Company. The provisions of this Section 18 shall survive any termination of this Agreement by the Company or the Executive and remain enforceable. -17- IN WITNESS WHEREOF, the Company has caused this agreement to be executed and its seal to be affixed thereto by an officer thereof and thereunto duly authorized, and the Executive has signed and sealed this Agreement as of the day and year first written above. CANDIE'S, INC. By: /s/ Neil Cole ----------------------------------- Neil Cole President /s/ Larence O'Shaughnessy ----------------------------------- Lawrence O'Shaughnessy -18- EX-10.26 4 LICENSE AGREEMENT LICENSE AGREEMENT THIS LICENSE AGREEMENT is entered into this 10th day of May, 1995, by Michael Caruso & Co., Inc, a California corporation, ("Licensor"), whose address is 4560 Loma Vista Avenue, Vernon, California 90058 and Candies, Inc. ("Licensee"), a Delaware corporation, whose address is 2975 Westchester Avenue, Purchase,New York 10577, with reference to the following: A. Licensor is the owner of Trademarks and Trade Names which include "BONGO" and "B BONGO" (collectively, the "Trademarks"). B. Licensee wishes to manufacture and market mens', womens' and childrens' footwear (the "Licensed Items"). C. The parties desire that Licensor grant to Licensee a license to use the Trademarks in the manufacture and marketing of the Licensed Items. THE AGREEMENT: 1. LICENSE 1.1 Grant of License and Designation of Licensed Items. Effective February 1, 1995, Licensor grants to Licensee the exclusive license to use the Trademarks within the geographic area described in Paragraph 4 hereof, in the manufacture and marketing of the Licensed Items. Questions regarding the definition of the Licensed Items shall be decided by the Licensor. The rights granted to Licensee are limited to use in connection with the Licensed Items. Licensee agrees not to use the Trademarks or give consent to their use except as allowed in this Agreement, without written consent to Licensor. 1.2 Right to Sublicense. Licensee shall have the right, exercisable in it sole discretion, to sublicense its rights and obligations under this Agreement to its wholly owned subsidiary, to wit, INTERNATIONAL TRADING GROUP, INC., a New York corporation; provided, however, that a grant of such sublicense shall not in any way relieves Licensee of any obligations owing to Licensor hereunder 2. TERM. 2.1 Initial Term. The initial term of this Agreement (the "Initial Term") shall commence on February 1, 1995, and shall end on July 31, 1998, unless sooner terminated in accordance with the terms of this Agreement. The period beginning February 1, 1995, and ending July 31, 1996, and each subsequent twelve (12) month period ending on July 31 during the Initial Term and the First Extended Term (as hereinafter defined) and herein referred to as a "Contract Year." 2.2 First Extended Term. Provided that minimum Net Sales for the Contract Year ending July 31, 1998, are met and as of the last day of the Initial Term, Licensee is not in default under this Agreement nor has there occurred any event that, with the passage of time or the giving of notice, or both, would constitute a default under this Agreement by Licensee, the term of this Agreement may be extended by Licensee for the period (the "First Extended Term") beginning on August 1, 1998 and ending on July 31, 2001, unless sooner terminated in accordance with this -2- Agreement provided notice of such extension is given in writing to Licensor at least six (6) months prior to the end of the Initial Term and the parties agree in writing prior to the beginning of the First Extended Term as to the amount of Minimum Net Sales (as hereinafter defined) to be achieved by Licensee during the First Extended Term. 3. PAYMENTS. 3.1 Initial License Fee. Concurrently with the execution of this Agreement, Licensee shall pay to Licensor the sum of Two Hundred Thousand Dollars ($200,000.00) (the "Initial Licensee Fee"), the receipt of which is hereby acknowledged. Licensor and Licensee agree that the Initial Licensee Fee is fully earned by Licensor upon and for the grant set forth in Paragraph 1 hereof and that the Initial License Fee is neither refundable nor contingent on Licensee actually designing, manufacturing or selling any of the Licensed Items. However, the Initial Licensee Fee may be used by Licensee as an offset against payment of future royalties under Paragraphs 3.4, 3.S, 6.1 and/or 6.2 of this Agreement. 3.2 Net Sales. For purposes of this Agreement the term "Net Sales" shall mean and refer to the aggregate gross invoice price for all Licensed Items sold to Licensee in any Contract Year, less any refunds, allowances, deductions and credits for return actually made by Licensee's retail customers. For purposes of this Agreement, Licensed Items shall be considered sold upon the date of invoicing, shipment or payment, whichever event first occurs. -3- 3.3 Minimum Net Sales. During each contract year, Licensee shall achieve a the following minimum Net Sales ("Minimum Net Sales") of the Licensed Items within the Territory: First Contract Year $3,000,000; Second Contract Year: $5,000,000; and Third Contract Year: $7,000,000. 3.4 Royalty. During the term of this Agreement, Licensee shall pay to Licensor a royalty (the "Royalty") as follows: 3.4.1 First Contract Year: Zero. 3.4.2 Second Contract Year. Either (i) three percent (3%) of the Minimum Net Sales for the Contract Year (the "Minimum Guaranteed Royalty"), or (ii) three percent (3%) of the actual net sales for the Contract Year, whichever is greater. 3.4.3 Third Contract Year. Either (i) six percent (6%) of the Minimum Net Sales for the Contract Year (the "Minimum Guaranteed Royalty"), or (ii) six percent (6%) of the actual net sales for the Contract Year, whichever is greater. 3.5 Advertising Royalty. In addition to the Royalty to be paid under Paragraph 3.4 hereof, for purposes of Licensor advertising the Licensed Items and the Trademarks in the Territory, Licensee shall pay to Licensor a royalty (the "Advertising Royalty") for each Contract Year during the term of such Contract Year an amount equal to the greater of (i) three percent (3%) of the Minimum Net Sales for such Contract Year, or (ii) three percent (3%) of the actual Net Sales of Licensed Items for such Contract Year. The Advertising -4- Royalty shall be applied by Licensor to the production and placement of print, radio and television advertising for the Licensed items, utilizing creative, graphics and other material of Licensor. 4. GEOGRAPHIC AREA. The rights granted to Licensee hereunder shall be exclusively exercised by Licensee within the United States and its territories, including U.S. Military Post Exchanges, and the Republic of Panama (the "Territory"). Licensor may extend, upon Licensee's request, the areas in which Licensee may exercise said right of first refusal for all other territories for Licensed Items. Each such extension shall be in a written amendment to this Agreement. Licensee shall have the right of first refusal for all other territories for Licensed Items. 5. LICENSEE'S RECORDS. Licensee shall maintain at its regular place of business complete records of all business transacted by Licensee in connection with the Licensed Items. Such records shall be maintained in accordance with the generally accepted accounting procedures. Licensor or any duly authorized agents or representatives shall have the right to inspect said records at Licensee's premises during Licensee's regular business hours. Licensor shall give Licensee at least ten (10) days' advance written notice of Licensor's intention to do so. 6. LICENSEE'S REPORTS OF SALES AND PAYMENT OF ROYALTIES. 6.1 Monthly Reports. On or before the 15th day of each month during the term of this Agreement, Licensee shall deliver to Licensor a written statement, -5- certified to be true by the Chief Financial Officer of Licensee, setting forth the Gross and Net Sales of Licensed Items by Licensee for the preceding month. 6.2 Royalty Payments. Subject to the provisions of Paragraph 3.1 hereof, Licensee shall remit to Licensor with each Monthly Report rendered during the First Contract Year an amount equal to one eighteenth of the Advertising Royalty set forth in Paragraph 3.5. During the Second and Third Contract Years, Licensee shall remit to Licensor with the Monthly Reports rendered in May, August, November and February, in an amount equal to the sum of one-fourth (1/4) of the Minimum Guaranteed Royalty plus one-fourth (1/4) of the Advertising Royalty for the three (3) month period just ended. 7. LICENSEE'S ANNUAL REPORTS. On or before the ninetieth (90th) day following the end of Licensee's fiscal year, Licensee shall deliver to Licensor a statement, audited and certified by the certified public accountant employed by Licensee, showing gross and Net Sales of Licensed items, and royalties (including the Advertising Royalty) due and royalties paid for Licensee's just ended fiscal year, and for any Contract Year which ends within said fiscal year. If said statement discloses that the amount of royalties is paid to Licensor during any period to which said statement relates is less than the amount required to be paid to Licensor pursuant to Paragraph 3 above, Licensee shall pay said deficiency to Licensor concurrently with the delivery of such statement. If said statement discloses that Licensee has paid to Licensor -6- royalties in excess of the amounts required to be paid by Licensee pursuant to Paragraph 3 above, Licensee shall be entitled to credit equal to such royalties against the royalties next accruing under this Agreement. In the event the foregoing occurs during the final Contract Year of this Agreement, adjustments shall be made in cash rather than in the form of a credit. Licensee shall a provide an estimated projection of net shipments of the Licensed Items for the succeeding Contract Year. 8. AUDIT BY LICENSOR. Should an audit, pursuant to Paragraph 5, disclosed that Licensee has understated sales or underpaid royalties to Licensor, Licensee shall upon written demand pay to Licensor the amount by which the actual royalties owing exceed royalties paid. If Licensee has understated either gross or net sales or royalties by an amount in excess of five percent (5%) of actual sales or the amount due for any Contract Year, Licensee shall forthwith and upon written demand also pay to Licensor all expenses incurred by Licensor in conducting such audit. Should such audit disclose the royalties paid exceed the actual royalties due, Licensee shall be entitled to a credit, equal to such excess royalties against the royalties next accruing under this Agreement except that when such audit is conducted at the expiration of the Agreement, any excess royalties paid will be remitted by check to the Licensee within thirty (30) days. 9. BEST EFFORTS OF LICENSEE. Licensee shall use it best efforts to manufacture and market the Licensed Items. A cessation of best efforts for a -7- continuous period of one hundred eighty (180) days shall be grounds for termination of this Agreement. Licensor shall have the right to inspect Licensee's facilities during regular business hours, on twenty four (24) hours prior written notice. Licensor shall use its best efforts to make such inspection in the presence of an officer of Licensee. 10. LICENSED ITEMS TO BE KEPT DISTINCTIVE. Licensee shall consistently distinguish the Licensed Items from other products manufactured and sold by Licensee and shall maintain distinct lines in all merchandising. Licensor agrees to render reasonable assistance and advice to Licensee concerning styles and trends. In the event Licensor shall create any design or style and submit the same for use by Licensee, Licensee shall not be required to use the same, but if Licensee elects not to do so, Licensee shall have no right thereto and shall not use the same in connection with any product or service of Licensee. 11. MERCHANDISING AND OTHER ASPECTS OF LICENSED ITEMS Licensee shall furnish to Licensor, without request, photographs of samples and finished production models of Licensed Items for Licensor's approval. Approval shall be based on styling, materials and manufacturing quality. Licensee shall also furnish to Licensor, without request, samples of each proposed new model and material of a Licensed Item. Failure to Licensor to notify Licensee of disapproval within fourteen (14) days after receipt of a sample shall constitute Licensor's approval. Prior to submission of samples to Licensor, Licensee shall conduct its usual tests on each such sample to assure that quality of the -8- Licensed Item is at least equal to the quality of similar non- licensed items manufactured by Licensee, sold at retail, at comparable prices. Each Licensed Item shall contain at least one representation of one of the Trademarks. Licensor reserves the right to withhold approval of any Trademark representation which does not conform to Licensor's standard as to such representation. 12. RESTRICTIONS UPON SUBCONTRACTS. Licensee shall have the right to enter into subcontracts for the manufacture of Licensed Items. Licensee shall not permit any subcontractor to further subcontract the work contracted for. 13. PROHIBITION OF ASSIGNMENTS AND TRANSFERS. Without written consent of Licensor, Licensee shall not voluntarily, involuntarily or by operation of law assign or transfer this Agreement or any of Licensee's rights, interests, or duties hereunder (except as specifically provided herein). The consent of Licensor to one assignment, transfer or sublicense shall not be deemed to be consent to any subsequent assignment; transfer or sublicense. Any assignment, transfer or sublicense without Licensor's written consent shall be void and at the option of the Licensor shall constitute a default hereunder. 14. NO DILUTION OF TRADEMARKS: NO ATTACK UPON TRADEMARKS. Licensee shall not use the Trademarks or any material utilizing either of them in such manner as will adversely affect any rights of ownership of Licensor in and to the Trademarks. or any of them. Licensee shall cause to appear on all Licensed Items and on all materials on which the Trademarks are used, such indications as may be required by -9- any applicable law so as to give appropriate notice of any trademark, tradenames or other rights therein. Licensee shall not contest the validity of the Trademarks or any of the rights of Licensor under which this license is granted, nor will Licensee willingly become an adverse party to litigation in which others contest the Trademarks or Licensor's said rights. Licensee shall not seek to avoid its obligations hereunder because of the assertion and allegation by any person(s) that the Trademarks, or any of them, are invalid. 15. INFRINGEMENT AND OTHER TRADEMARK LITIGATION. Licensee shall notify Licensor as soon as practicable of any infringement of the Trademarks, or any them, which comes to Licensee's attention. Licensor at its sole expense, and in its own name, shall prosecute and defend any action or proceeding which Licensor deems necessary or desirable to protect the Trademarks. Licensee may, and upon written request by Licensor shall, join Licensor at Licensor's sole cost in any such action or proceeding. Licensee shall not commence any action or proceeding to protect the Trademarks without the written consent of Licensor and shall not defend any such action without Licensor's written consent. Any damages recovered in any action or proceeding commenced by Licensor shall belong solely and exclusively to Licensor. Licensor shall have no liability to Licensee or to any other person for any damages awarded or recovered against Licensee or such other person, including but not limited to any action or proceeding alleging any -10- violation of any antitrust, trade regulation, unfair competition or similar statute. But Licensor shall indemnify and hold Licensee harmless from any liability arising solely from Licensee's use of the Trademarks licensed hereunder. Licensee may, at its option, choose to be represented in any threatened or actual action or proceeding to which this Paragraph pertains by Licensor's counsel at no cost to Licensee. Licensor shall control such representation. If Licensor's counsel cannot thereafter represent both Licensor and Licensee, Licensor's counsel shall continue to represent Licensor only. 16. ADDITIONAL RESTRICTIONS UPON USE OF TRADEMARKS. Licensee shall not use or permit the use of any of the Licensed Items, or on any packaging which is received by the general public (as opposed to retailers), any identification which includes with the name "BONGO," the name of Licensee or of any other person or entity (e.g. "BONGO by Candies") nor shall Licensee include or permit the inclusion, with the name BONGO or any of the Trademarks, in any advertising or promotional material featuring any of the Licensed Items which is disseminated to the general public (as opposed to trade advertising) the name of Licensee or of any other person or entity. In addition to the foregoing, Licensee shall not use or permit the use of any of the Trademarks, including the name BONGO on or in connection with any product or service other than the Licensed Items, which is manufactured or sold by Licensee, or which is licensed by Licensee to others for manufacture or sale (e.g. "CANDIES by the makers of BONGO"). -11- 17. DEFAULTS BY LICENSEE. Except as provided, in the event Licensee defaults in the performance of any of the terms and conditions hereunder, and if said default involves the payment of money not cured within ten (10) days after receipt of written notice or if such default involves performance other than the payment of money, and Licensee shall nat have commenced curing the same within thirty (30) days after receipt of written notice, or if a Receiver is appointed to, or one or more creditors take possession of all or substantially all of Licensee's assets, or if Licensee shall make general assignment for the benefit of creditors, or if any action is taken or suffered by Licensee under any insolvency or bankruptcy act, then in such event Licensor may cancel and terminate this Agreement. Such cancellation and termination will not relieve Licensee of any of its obligations as may by then have accrued hereunder. If Licensee commits three or more defaults and corrections thereof during the term or extension of this Agreement, Licensor may terminate this Agreement with written notice to Licensee. The time for performance of any act required of either party shall be extended by a period equal to the period during which a party was reasonably prevented from performance, by fire, flood, storm or like casualty. 18. LICENSOR'S RIGHTS TO DESIGNS, ETC., UPON TERMINATION. In the event this Agreement is cancelled or terminated for any reason, Licensee shall assign and transfer to Licensor any and all rights in the Trademarks, and in the designs of the Licensed Items, and the goodwill associated therewith, and -12- shall not thereafter manufacture or market any of said designs. Licensee may, however, dispose of its hand stock of Licensed Items for a period not to exceed six (6) months after the date of cancellation or termination of this Agreement, provided all Royalties then due Licensor have been paid and provided further that Licensee provides a schedule of all inventory of Licensed Items in Licensee's possession (actual or otherwise). Neither Licensee nor any other person or entity may, other than in the regular course of Licensee's business, sell or transfer any Licensed Item unless all sums due Licensor from Licensee have been all paid. All Royalties due Licenser by reason of the sell-off of such on-hand inventory Licensed Items shall be paid to Licensor within fifteen (15) days of the end of the month during which the sell-off is completed or terminates, but in no event beyond six (6) months from the date this Agreement is cancelled and terminated. Upon termination or cancellation of this Agreement, all packaging, advertising, and other items bearing representation of Trademarks shall, without cost to Licensor, become the property of Licensor and be delivered to Licensor's place of business. The reasonable cost of such delivery shall be paid by the Licensor. 19. ADDITIONAL RIGHTS UPON TERMINATION. During the final Contract Year or the First Extended Term, Licensor shall have the right to design and manufacture merchandise of the types covered by this Agreement and to negotiate agreements which grant a license to a party of any of the rights herein mentioned. No merchandise identified as Licensed Items shall be shipped by -13- Licensor or any third party other than Licensee prior to the expiration or termination of this Agreement (exclusive of the additional six (6) month period for the disposition of the Licensed Items). However, any successor Licensee may solicit orders during the final Contract Year. 20. GOOD WILL. Licensee acknowledged that the Trademarks have acquired a valuable secondary meaning and good will. Accordingly, Licensee agrees not to use the Trademarks, or any of them, so as to detract from their repute. 21. INSURANCE. Licensee and its sublicensees, if any, agree to carry product liability insurance on the Licensed Items, with a limit of liability of $5,000.00. Licensor shall be named as an additional insured on each such insurance policy. Such insurance may be obtained in conjunction with a policy of product liability insurance which covers products other than the Licensed Items. The policy shall provide for at least ten (10) days prior written notice to Licensor of the cancellation or substantial modification of the policies. The Licensee shall deliver to Licensor a certificate evidencing the existence of such insurance policies after their issuance. 22. RESERVED RIGHTS. Rights not specifically granted to Licensee are reserved by Licensor and may be used by Licensor without limitation. Any use by Licensor of such reserved rights, including but not limited to the use or authorization of the use of the Trademarks, or any of them, shall not be deemed unfair competition. interference with or infringement of any of Licensee's rights under. -14- 23. ATTORNEY'S FEES; CHOICE OF FORUM: APPLICABLE LAW. In the event either party shall commence any action or proceeding against the other by reason of any breach or claimed breach in the performance of this Agreement, or seeks a judicial declaration of rights hereunder, the prevailing party in such action or proceeding shall be entitled to reasonable attorney's fees fixed by the trial court. Any legal action or proceeding against Licensor by or on behalf of Licensee shall be brought in the County of Los AngeIes. The law applicable thereto shall be the law of the State of California. 24. NON-AGENCY OF PARTIES. This Agreement does not makes Licensee and agent of Licensor, or Licensor an agent of Licensee. Licensee is not granted any authority to create any obligation on behalf of Licensor and Licensor is not granted any right to create any obligation on behalf of Licensee. No joint venture or partnership between the parties is intended or shall be inferred. 25. ADDRESSES FOR NOTICE. All notices required under this Agreement shall be in writing, by certificate mail addressed to Licensee at 2975 Westchester Avenue, Purchase, New York 10577 and to Licensor at 4560 Loma Vista Avenue, Vernon, California 90058, and shall be deemed given seventy-two (72) hours after being deposited in the mail. 26. WAIVER BY LICENSOR. In the event Licensor shall waive any of its rights under this Agreement, or the performance any Licensee of any of its obligations, -15- such waiver shall not be a continuing waiver or a waiver of any other rights or obligations. 27. INTEGRATED AGREEMENT. This Agreement constitutes the entire agreement between the parties as to the Licensed Items. No modifications of this Agreement shall be of any force unless it be in writing and executed by the parties hereto. 28. SEPARABILITY OF PROVISIONS. Any provision of this Agreement found invalid shall not invalidate the remaining provisions. Titles to the paragraphs shall have no substantive effect. 29. BINDING UPON SUCCESSORS. This Agreement shall be binding upon the parties hereto, and their successors and assigns; provided, however, this Paragraph shall not modify the Agreement's prohibition against assignment or transfer. 30. Interpretation. No provision in the Agreement is to be interpreted for or against either party because that party or that party's legal representative drafted such provision. Dated this 10th day of May, 1995. MICHAEL CARUSO & CO, INC., a California Corporation By /s/ Michael Caruso - ----------------------------- (Name and Title) CANDIE'S, INC., a Delaware Corporation By/s/ Neil Cole - ----------------------------- (Name and Title) -16- EX-11 5 COMPUTATIONS OF EARNINGS PER SHARE EXHIBIT 11 ---------- CANDIE'S, INC. AND SUBSIDIARIES COMPUTATIONS OF EARNINGS PER SHARE Year Ended January 31, 1996 1995 ------------- ----------- Income (loss) before extraordinary $ 1,053,956 ($1,934,916) Extraordinary item: Gain on debt extinguishment -- 1,962,175 ------------- ----------- TOTAL EPS INCOME (loss) $ 1,053,956 $ 27,259 ============= =========== Weighted average number of shares outstanding 8,725,888 6,398,488 Common stock equivalents 0 0 ------------- ----------- Total shares outstanding 8,725,888 6,398,488 ============= =========== Income (loss) per share: Income (loss) before extraordinary item $ .12 $ (.30) Extraordinary item-Gain on extinguishment of debt, net of income taxes of $.02 for 1995 -- .30 ------------- ----------- NET INCOME (LOSS) PER SHARE PRIMARY AND FULLY DILUTED $ .12 $ 0.00 ============= =========== No additional income (earnings from investing the excess proceeds upon the exercise of common stock equivalents) nor common stock equivalents were included in the calculation of net income (loss) per share. The results would have been antidulitive. EX-21 6 CANDIE'S, INC'S. SUBSIDIARIES Exhibit 21 CANDIE'S, INC's. SUBSIDIARIES Subsidiary Jurisdiction of Inc. - ---------- -------------------- Intercontinental Trading Group, Inc. New York State Bright Star Footwear, Inc. New Jersey Yulong Company, Ltd. British Virgin Islands Ponca, Ltd. Hong Kong EX-27 7 ART. 5 FDS FOR 10-KSB FISCAL YEAR ENDED 1/31/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB FOR JANUARY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JAN-31-1996 JAN-31-1996 204,996 0 1,228,812 63,400 3,999,946 5,968,663 121,068 0 11,745,813 6,037,023 0 0 0 8,746 5,577,608 11,745,813 37,914,127 37,914,127 27,427,508 27,427,508 0 113,000 727,210 1,217,266 163,310 1,053,956 0 0 0 1,053,956 .12 .12
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