-----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, Q23w/E/2zT3ACG/uKaNSiewGdPpKej/4aw4SDVWKYg+8Da3UJNscsRbTGtqR9op+ Q8/UKJEb5cQTdB4nlWtsdQ== 0000891554-98-000504.txt : 19980504 0000891554-98-000504.hdr.sgml : 19980504 ACCESSION NUMBER: 0000891554-98-000504 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 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: 10-K SEC ACT: SEC FILE NUMBER: 001-10593 FILM NUMBER: 98608169 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 10-K 1 ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 1998 OR [_] 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. (Exact Name of Registrant as Specified 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) Registrant'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 (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 ____ Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, 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-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant (based upon the closing sale price of $7.94 on April 21, 1998) was approximately $95,260,000. As of April 21, 1998, 14,170,364 shares of Common Stock, par value $.001 per share were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None. CANDIE'S, INC.-FORM 10-K TABLE OF CONTENTS
Page ---- PART I................................................................................................. 1 Item 1. Business............................................................................. 1 Item 2. Properties........................................................................... 6 Item 3. Legal Proceedings.................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders.................................. 6 PART II................................................................................................ 6 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 6 Item 6. Selected Financial Data.............................................................. 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 8 Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................ 12 Item 8. Financial Statements and Supplementary Data.......................................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................................... 12 PART III............................................................................................... 12 Item 10. Directors and Executive Officers of the Registrant....................................... 12 Item 11. Executive Compensation................................................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 18 Item 13. Certain Relationships and Related Transactions........................................... 19 PART IV................................................................................................ 20 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 20 Signatures............................................................................................. 21 Consolidated Financial Statements..................................................................... F-1 Financial Statements Schedule..........................................................................S-1 Index to Exhibits...................................................................................... 22
-ii- PART I Item 1. Business Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements which are not historical facts contained in this Annual Report on Form 10-K are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, but are not limited to, uncertainty regarding continued market acceptance of current products and the ability to successfully develop and market new products particularly in light of rapidly changing fashion trends, the impact of supply and manufacturing constraints or difficulties particularly in light of the Company's dependence on foreign manufacturers, uncertainties relating to customer plans and commitments, competition, uncertainties relating to economic conditions in the markets in which the Company operates, the ability to hire and retain key personnel, the ability to obtain additional capital if required, the risks of uncertainty of trademark protection and other risks detailed below and in the Company's Securities and Exchange Commission filings. Introduction Candie's, Inc., which was incorporated in Delaware in 1978, and its subsidiaries (together the "Company") are currently engaged primarily in the design, marketing and importation of a variety of moderately-priced women's and girls' casual and fashion footwear and handbags under the CANDIE'S(R) and BONGO(R) trademarks for distribution to better department and specialty stores worldwide. The Company also markets and distributes, under the CANDIE'S(R) and BONGO(R) trademarks, children's footwear designed by it, and also arranges for the manufacture of footwear products, similar to those produced under the CANDIE'S(R) trademark, for mass market and discount retailers, under one of the Company's other trademarks or under the private label brand of the retailer. Moreover, the Company 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 (ASPEN(R)). The Company began to license the use of the CANDIE'S(R) trademark from New Retail Concepts, Inc. ("NRC") in June 1991 and in March 1993 purchased ownership of the CANDIE'S(R) trademark from NRC together with certain pre-existing licenses of such third party. NRC is a publicly traded company engaged primarily in the licensing and sublicensing of fashion trademarks and a significant shareholder of the Company. NRC's principal shareholder is also the Company's President and Chief Executive Officer. The Proposed Merger The Company and NRC have executed a Merger Agreement dated April 6, 1998, (the "Merger Agreement") which provides that NRC will be merged with and into the Company (the "Merger"), and the Company will be the surviving corporation. At the effective date of the Merger (the "Effective Date"), each issued and outstanding share of NRC common stock $.01 par value (the "NRC Common Stock"), and each issued and outstanding option to purchase shares of NRC Common Stock immediately prior to the Effective Date will be converted, respectively, into 0.405 shares of common stock, $.001 par value, and options of the Company (the "Common Stock"). The completion of the Merger is subject to a number of conditions, including among other things, the approval of the stockholders of both the Company and NRC and the registration of the Common Stock to be issued to the holders of NRC pursuant to the Merger under the Securities Act of 1933, as amended. No assurance can be given that the Company and NRC will be able to successfully obtain the requisite stockholder approval or that the Company will otherwise be able to consummate the Merger. At April 6, 1998, there were 5,693,639 shares of NRC Common Stock issued and outstanding and options to purchase 1,635,000 shares of NRC Common Stock outstanding. NRC currently owns 1,227,696 shares of Common Stock and has options and warrants to purchase an additional 800,000 shares of Common Stock, all of which will be extinguished upon consummation of the Merger. Products CANDIE'S(R) Footwear Products. CANDIE'S(R) brand fashion and casual footwear is designed primarily for girls and women, aged 8 to 40, featuring a variety of styles for a variety of uses. The retail prices of CANDIE'S(R) footwear generally range 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 one-third 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 designers analyze and interpret fashion trends and translate such trends into shoe styles consistent with the CANDIE'S(R) image and price point. Fashion trend information is compiled by the Company's designers through various methods, including travel to Europe and throughout the world 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. CANDIE'S(R) Handbag Products. The Company recently began to market and distribute under the CANDIE'S(R) trademark a line of women's and girls' handbags to the same retail outlets it markets its footwear products. The retail price range for CANDIE'S(R) handbags will generally range from $30 to $100. BONGO(R) Footwear and Handbag Products. The Company designs fashion and casual footwear and handbags for girls and women, aged 14 to 40, and markets and distributes such footwear and handbags under the BONGO(R) trademark pursuant to a license agreement with the owner of such trademark. The retail price range for such footwear is between $30 to $50 and for such handbags is $15 to $30. The Company distributes such footwear and handbags to department and specialty retail stores, including Burdines, Wet Seal/Contempo Casuals, Mervyns and Edison Brothers. Children's Footwear. In the Spring of 1997, the Company began to market and distribute under the CANDIE'S(R) and BONGO(R) trademarks a line of children's footwear, primarily to the same retail outlets to which it markets its women's brand, as well as to selected children's specialty stores. Approximately three-quarters of the children's styles are smaller versions of the best selling women's styles and one-quarter of the children's products are designed specifically for the children's division. The Company's lines of children's footwear have received favorable retailer and consumer response from across the country. Private Label Products. In addition to sales under the CANDIE'S(R) and BONGO(R) trademarks, 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 and is backed by letters of credit opened by such retailers. Bright Star Footwear. Bright Star, acting principally as agent for its customers, designs, markets and distributes a wide variety of men's workboots, hiking boots, winter boots and leisure footwear, which 2 is either unbranded, or marketed under the private label brand names of Bright Star's customers, or under the Company's licensed brand, ASPEN(R). Bright Star's customer base consists of a broad group of retailers, including discounters, specialty retailer and better grade accounts. Bright Star's products are directed toward the moderately-priced market. The retail prices of Bright Star's footwear generally ranges from $25 to $75. The majority of Bright Star's products are sold on a commission agency basis. Manufacturing and Suppliers 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 currently located in Brazil, China, Spain, Italy, and Taiwan. 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 prices of finished products with its suppliers. Such suppliers manufacture the products themselves or subcontract with other manufacturers. Bright Star is 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. Finished goods are purchased primarily on an open account basis, generally payable within 7 to 45 days after shipment. Most raw materials necessary for the manufacture of the Company's footwear are purchased by the Company's suppliers. 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. For the fiscal year ended January 31, 1998 ("Fiscal 1998"), and the fiscal year ended January 31, 1997 ("Fiscal 1997"), Redwood Shoe Corp. ("Redwood") a buying agent for the Company, initiated the manufacture of approximately 60% and 80%, respectively, of the Company's total footwear purchases. At April 29, 1998, the Company had approximately $23,000,000 of open purchase commitments with Redwood. There can be no assurance that, in the future, the capacity or availability of manufacturers or suppliers will be adequate to meet the Company's product 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 3.2% to 48%, 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, other than the duties mentioned hereinabove, imposed on footwear imported by the Company into the United States. 3 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 29, 1998 the Company had an estimated backlog of orders of its products of approximately $75,000,000, as compared to a backlog of approximately $49,000,000 at April 23, 1997. The backlog at any particular time is affected by a number of factors, including seasonality, the buying policies of retailers, scheduling, the 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 In previous years, demand for the Company's footwear peaked during the months of June through August (the fall/back-to-school selling season). As a result, shipment of the Company's products in previous years were heavily concentrated in its second and third fiscal quarters. Accordingly, historically, operating results have fluctuated significantly from quarter to quarter. Although there can be no assurance that the Company will be able to achieve consistent quarterly operating results in future years, the Company believes that fluctuations in its quarterly operating results will be reduced over the next year. Customers and Sales During Fiscal 1998, the Company sold its footwear products to more than 750 retail accounts consisting of department stores, including Federated Stores (which includes Macy's and Bloomingdale's), Nordstrom's and May Company, mass merchandisers, shoe stores and other outlets in the United States. No individual customer accounted for more than 10% of the Company's revenues during Fiscal 1998; although the Company has five customers that each accounted for between approximately 5.7% and 8.8% of the Company's net revenues in Fiscal 1998, and between 7.1% and 8.6% in Fiscal 1997. The Company has also entered into various long-term distribution agreements with United Authentics, GmbH in Germany, Bata Shoe Pte. Ltd. of Singapore and Malaysia and Cravo E. Canala of Brazil. Pursuant to the terms of such distribution agreements, the Company's products will be distributed and marketed in specialty stores throughout Germany, Singapore, Malaysia and Brazil. There can be no assurance that such customers will continue to purchase products from the Company or utilize its services in the future in the United States or abroad. The Company generally requires payment for goods by its customers either by letter of credit or by check, subject to collection, within 30 to 60 days after delivery 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 27 full-time sales persons (including 20 employees and 7 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 customer service department processes customer purchase orders and supports the sales representatives by coordinating orders and shipments with customers. 4 Licensing of the CANDIE'S(R) Trademark During Fiscal 1997, the Company licensed the CANDIE'S(R) trademark for use in connection with the manufacture and distribution of women's intimate apparel and children's footwear. The Company terminated these licenses during Fiscal 1998 because, the Company has commenced to distribute its own line of children's footwear under the CANDIE'S(R) trademark and, as to women's intimate apparel, the Company perceived a conflict between the licensee's level of retail distribution and the current retail market for the Company's footwear. The Company currently intends to offer new license agreements for women's apparel, accessories and related categories. The Company does not intend to aggressively market such licenses but intends to evaluate prospective licensees based on their experience, financial stability, reputation, marketing and distribution ability, the marketability of the proposed product line and compatibility of such proposed product line with the product lines of then existing CANDIE'S(R) licensees. There can be no assurance that the Company will be able to successfully license the CANDIE'S(R) trademark in the future. Trademarks The Company believes that its federally registered trademark, CANDIE'S(R) which expires on June 9, 2001, is of material importance in marketing the Company's products and, accordingly, has significant value. The Company also owns other registered trademarks which it does not consider to be material to its current operations. There can be no assurance that the CANDIE'S(R) trademark or any other trademark which the Company owns, does not, and will not, violate the proprietary rights of others, that any such trademark would be upheld if challenged, or that the Company would, in such an event, not be prevented from using such trademarks, any of which events could have a material adverse effect on the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend an infringement action. The Company sells footwear and handbags under the BONGO(R) trademark and footwear under the ASPEN(R) trademark, each of which the Company licenses from third parties. The BONGO(R) license agreement grants the Company the exclusive right to market and distribute footwear and handbags under the BONGO(R) trademark in North America and certain foreign countries for a term expiring on January 31, 2002, subject to the Company's right to extend the license through January 31, 2006 under certain circumstances. The ASPEN(R) license agreement grants Bright Star the exclusive right to market and distribute certain categories of footwear under the ASPEN(R) trademark in the United States, its territories and Puerto Rico for a term expiring on September 30, 1998. Although the Company will seek to renew the ASPEN(R) license, there can be no assurance that the Company can successfully negotiate a renewal of such license on terms acceptable to it. The BONGO(R) and ASPEN(R) licenses require the Company to pay royalties based on percentages of sales exceeding certain minimum royalties. Competition The footwear industry is extremely competitive in the United States and the Company faces substantial competition in each of its product lines from Skechers, Nine & Co. and Esprit. In general, competitive factors include quality, price, style, name recognition and service. Although the Company believes that it competes favorably in these areas, there can be no assurance that it will be able to do so in the future. In addition, the presence in the marketplace of various fashion trends 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. There can be no assurance that the Company will be able to successfully compete with the companies marketing these products. 5 Employees At April 21, 1998, the Company employed 93 persons, of whom 4 are executives and 89 are management, sales, marketing, product development, administrative, customer service representatives and retail store personnel. None of the Company's employees are represented by a labor union. The Company also utilizes the services of 7 independent contractors who are engaged in sales. The Company considers its relations with its employees to be good. Item 2. Properties The Company currently occupies 19,653 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 $32,755 per month through the expiration date of the lease. The Company also occupies (i) approximately 1,265 square feet of retail space in The Galleria shopping mall in White Plains, New York pursuant to a lease which expires on September 30, 2006, (ii) approximately 1,265 square feet of retail space in the Roosevelt Field shopping mall in Garden City, New York pursuant to a lease which expires on October 22, 2004, and (iii) approximately 2,919 square feet of retail space in the Tanger Outlet shopping mall in Riverhead, New York pursuant to a lease which expires on October 31, 2002. The lease at The Galleria shopping mall provides for a minimum monthly rental of approximately $3,000 through September 30, 1998, increasing to approximately $5,000 for the 12 months ending September 30, 2006, plus additional rent as described below. The lease at the Roosevelt Field shopping mall provides for a minimum monthly rental of approximately $10,000 through October 31, 1999, and increasing to approximately $12,000 for the twelve months ended October 31, 2004, plus additional rent as described below. The lease at the Tanger Outlet shopping mall provides for a minimum monthly rental of approximately $6,300 through October 31, 2002, plus additional rent as described below. Additional rent at all three shopping mall locations is based on percentages of annual gross sales of the retail store exceeding certain amounts and proportionate amounts of monthly real estate taxes, utilities and other expenses relating to the shopping mall. Item 3. Legal Proceedings The Company is a party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these matters will not have a material effect on the Company's financial position or future liquidity. Furthermore, the Company knows of no material legal proceedings, pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's 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. The following table sets forth, for the indicated periods, the high and low sales prices for the Common Stock as reported by NASDAQ: 6 High Low ---- --- Fiscal Year Ended January 31, 1998 Fourth Quarter .............................. $7.25 $4.63 Third Quarter ............................... 7.88 4.13 Second Quarter .............................. 5.69 3.63 First Quarter ............................... 6.88 4.25 Fiscal Year Ended January 31, 1997 Fourth Quarter .............................. $5.69 $1.75 Third Quarter ............................... 2.75 1.72 Second Quarter .............................. 3.06 1.59 First Quarter ............................... 2.75 1.69 As of April 21, 1998, there were approximately 150 holders of record of the Company's Common Stock. The Company believes that, in addition, there are in excess of 1,000 beneficial owners of its Common Stock, which shares are held in "street name." 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 any cash dividends will be paid by the Company in the foreseeable future. During the fiscal quarter ended January 31, 1998, the Company issued five-year options to its employees to purchase an aggregate of 464,500 shares of its common stock at exercise prices of (i) $5.00 for 400,000 shares, (ii) $6.81 for 30,000 shares; (iii) $5.06 for 30,000 shares; and (iv) $6.88 for 4,500 shares. The foregoing options were acquired by the holders for investment in private transactions exempt from registration by virtue of either Sections 2(3) or 4(2) of the Act. Item 6. Selected Financial Data Selected Historical Financial Data (in thousands, except earnings per share amounts) The following table presents selected historical financial data of the Company for the periods indicated. The selected historical financial information is derived from the audited consolidated financial statements of the Company referred to under item 8 of this Annual Report on Form 10-K, and previously published historical financial statements not included in this Annual Report on Form 10-K. The following selected financial data should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements, including the notes thereto, included elsewhere herein.
Year Ended January 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Operating Data: Net revenues ................... $ 92,976 $ 45,005 $ 37,914 $ 24,192 $ 13,164 Operating income (loss) ........ 6,961 966 2,057 (1,391) (5,009) Net income (loss) .............. 4,536 1,145 1,054 27 (6,321)
7 Earnings (loss) per share: Basic ...................... .40 .13 .12 .00 (1.32) Diluted .................... .33 .11 .11 .00 (1.32) Weighted average number of common shares outstanding: Basic ...................... 11,375 9,143 8,726 6,398 4,790 Diluted .................... 13,788 10,152 9,427 6,461 4,790
Year Ended January 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Balance Sheet Data: Current assets ................. $ 23,408 $ 9,039 $ 5,969 $ 4,104 $ 4,407 Total assets ................... 30,881 14,709 11,746 10,290 11,045 Long-term debt ................. -- -- -- -- 4,027 Total stockholders' equity ..... 24,681 8,608 5,586 4,392 (570)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. See "Safe Harbor Statement" in Item 1 of this report which statement is incorporated herein by reference. Results of Operations Fiscal 1998 Compared with Fiscal 1997 Revenues. Net revenues increased by $47,971,000, or 106.6% to $92,976,000, primarily due to increased brand awareness and consumer acceptance due to the Company's increased sales and marketing efforts coupled with increased sales in all product categories, the successful introduction of children's footwear products and increased selling prices. Gross Profit. Gross Profit margins increased to 26.0% from 21.9% in the prior year. The increase is primarily attributable to changes in product mix and the ability to source product at lower prices coupled with increases in units sold and selling prices. Operating Expenses. Selling, general and administrative expenses increased by approximately $8,327,000 to $17,217,000 for Fiscal 1998 compared to $8,890,000 for the prior year. The increase is primarily due to increased selling, shipping and administrative expenses which are directly associated with the increase in net revenues and an increase in marketing and advertising expenses. As a percentage of net revenues, selling, general and administrative expenses decreased 1.3% to 18.5% for Fiscal 1998 from 19.8% for the prior year. 8 Operating Income. As a result of the foregoing, operating income increased approximately sevenfold to $6,960,000, or 7.5% of net revenues for Fiscal 1998, compared to $966,000, or 2.1% of net revenues for the prior year. Interest Expense. Interest expense increased by $374,000, or 49.5%, primarily as a result of increased levels of borrowings under the Company's revolving credit facility with its factor for seasonal working capital requirements to fund the Company's growth. Income Tax Expense. The relationship of the income tax provision in Fiscal 1998 and the benefit in Fiscal 1997, respectively, to income before income taxes was significantly affected by the recognition of deferred tax assets in the amount of $1,347,000 and $1,100,000, respectively, in each year. See Note 10 to the Consolidated Financial Statements and Net Operating Loss Carryforward discussion included later in this management's discussion. Net Income. As a result of the foregoing, net income increased fourfold to $4,536,000 or 4.9% of net revenues for Fiscal 1998, compared to $1,145,000 or 2.5% of net revenues for the prior year. Fiscal 1997 Compared with Fiscal 1996 Revenues and Gross Profit. Net revenues increased by $7,091,000, or 18.7%, 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 sales of footwear under the CANDIE'S brand and the Company's licensed brand, BONGO. These efforts resulted in both an increase in the amount of footwear sold and lower profit margins due to decreased selling prices for certain of the Company's core products, in an effort to maintain retail market share. Accordingly, the Company's gross profit percentage decreased to 21.9% from 27.7% for the fiscal year ended January 31, 1996 ("Fiscal 1996"). Operating Expenses. Selling expenses increased by $494,000, or 9.8%, primarily due to increases in the amount of salesmen's commissions on increases in footwear sales and increases in advertising expenditures. General and administrative expenses decreased by approximately $34,000, or 1.0%, principally due to the Company's cost containment efforts. Total operating expenses increased by 5.5% or approximately $461,000. This increase is principally due to the increases in sales commissions and advertising expense discussed above. Accordingly, operating income decreased by $1,092,000, or 53.1%, to $966,000 for Fiscal 1997, from operating income of $2,057,000 in Fiscal 1996. Interest Expense. Interest expense increased by $28,000, or 3.9%, primarily as a result of increased borrowings under the Company's revolving credit facility with its factor. Income Tax Expense. In Fiscal 1997, income tax expense was credited by a $1.1 million reduction in the valuation allowance previously provided against the Company's net deferred tax assets. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" net deferred tax assets are not recognized when a company has cumulative losses in recent years. However, as a result of its continued profitability, the Company believes it is more likely than not that the Company will generate sufficient taxable income to realize the benefits of these deferred tax assets (see Note 10 of Notes to Consolidated Financial Statements appearing elsewhere herein). This reduction in the valuation allowance of the deferred tax assets resulted in a net income tax benefit for Fiscal 1997 of $1,010,000, as compared to an income tax provision of $163,000 for Fiscal 1996. Net Income. As a result of the foregoing, the Company achieved net income of $1,145,000 for Fiscal 1997, compared to net income of $1,054,000 in Fiscal 1996. 9 Liquidity and Capital Resources 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 used in operating activities totaled $8,830,000 in Fiscal 1998, as compared to net cash provided by operating activities of approximately $663,000 for Fiscal 1997. Net income of $4,536,000 and the effects of non-cash charges for depreciation and amortization of $604,000 and deferred income taxes of $993,000 were more than offset by the Company's requirement to finance increased inventories in the amount of $10,928,000, increased accounts receivable and factoring activity in the amount of $2,888,000 and other changes in operating assets and liabilities, resulting in the Fiscal 1998 use of cash from operating activities. Net cash provided by operating activities for Fiscal 1997 resulted principally from net income of $1,145,000, an increase in accounts payable and accrued expenses of $2,365,000, partially offset by deferred income taxes of $1,100,000, a decrease in due to factor of $719,000, non-cash items of depreciation and amortization of $459,000, an increase in prepaid expenses of $235,000, and an increase in inventories of $1,251,000. The ratio of current assets to current liabilities increased to 3.8:1 at January 31, 1998 from 1.5:1 at January 31, 1997. Working capital increased by approximately $14,223,000 to $17,268,000 at January 31, 1998 compared to working capital of $3,046,000 at January 31, 1997. The Company expects a continuation of the recent trend of increases in revenues through increased sales of women's footwear and handbags under the CANDIES(R) and BONGO(R) trademarks, and revenues from children's footwear products under the CANDIES(R) and BONGO(R) trademarks. Other than short-term borrowings for working capital requirements, the Company is virtually debt-free. The Company sells substantially all of its accounts receivable to a factor without recourse. In circumstances where a customer's account cannot be factored without recourse, the Company may take other measures to reduce its credit exposure which could include credit insurance, requiring the customer to pay in advance or providing a letter of credit covering the sales price of the merchandise ordered. The Company currently has an accounts receivable factoring agreement whereby it sells receivables generally without recourse. The agreement which under its original terms was to expire on November 30, 1998 (as amended), 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 $15,000,000 in inventory) in which the factor has a security interest. The agreement 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 factor reserves an amount equal to 43% of the full amount of each letter of credit to be opened against the Company's available borrowings. The total credit facility is limited to the lesser of (i) available borrowings as determined pursuant to the factor agreement or (ii) $20,000,000. Borrowings bear interest at the rate of three quarters of one percent (3/4%) over the existing prime rate (8-1/2% at January 31, 1998) established by the CoreStates Bank N.A. Factoring commissions on accounts receivable assigned to the factor are at a rate of .60%. The Company's assets are pledged as collateral. The unused portion of the credit lines at April 16, 1998 was approximately $11,500,000. The Company is currently negotiating a new revolving credit and factoring arrangement with prospective lenders. The Company anticipates that the replacement credit facility will be in place shortly with terms and conditions that will be more favorable than its current financial arrangement with its factor. Accordingly, the Company has notified its factor of its intention to terminate its 10 factoring agreement and is currently operating on a month to month basis. The Company has reserved its right to terminate the agreement at will, if necessary, without any penalties or fee upon termination. Subsequent to year-end through February 23, 1998, substantially all of the Company's outstanding Class C warrants ("Warrants") were exercised and the Company received aggregate proceeds of $7,157,000 from the exercise of such Warrants. The proceeds were used to repay short- term borrowings. Each Warrant entitled the holder thereof to purchase one share of Common Stock at an exercise price of $5.00 on that date, at which time the right to exercise such Warrant terminated. In addition, subsequent to January 31, 1998, the Company received proceeds of $1,042,000, in connection with the issuance of common stock relating to the exercise of outstanding stock options and certain underwriters' warrants. The Company believes that it will be able to satisfy its ongoing cash requirements for the foreseeable future, including requirements for its expansion, primarily with cash flow from operations, supplemented by borrowings under its existing replacement credit facility. The Company intends to retain its earnings to finance the development, expansion and growth of its existing business. Accordingly, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the financial condition of the Company and general business conditions. Seasonality The Company's products are marketed primarily for Fall and Spring seasons, with slightly higher volumes of products sold during the second and fourth quarters. Effects of Inflation The Company does not believe that the relatively moderate rates of inflation experienced over the past few years in the United States, where it primarily competes, have had a significant effect on revenues or profitability. Year 2000 Issues. The Company has assessed the issues associated with its existing computer system with respect to a two digit year value as the year 2000 approaches and is in the process of implementing a new computer system which it believes addresses such issues. The Company also believes that implementation of this system is not a material event or uncertainty that would cause expected financial information not to be indicative of future operating results or financial condition. Net Operating Loss Carryforwards At January 31, 1998, the Company had net operating losses of approximately $5,500,000 for income tax purposes, which expire in the years 2008 through 2010. Due to the issuance of 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 the Company's net operating loss carryforwards incurred prior to the ownership change to $275,000 per year. Approximately $4,600,000 of the operating loss carryforwards are subject to this restriction and accordingly, no accounting recognition has been given to approximately $1.8 million of such losses since present restrictions preclude their utilization. 11 After the date of the pre-quasi reorganization the tax benefits of net operating loss carryforwards incurred prior to the reorganization, has been treated for financial statement purposes as direct additions to additional paid-in capital. For Fiscal 1998 and Fiscal 1997, the Company utilized $149,000 and $158,000, respectively, of pre-quasi reorganization net operating loss carryforwards. The related tax benefits of $56,000 and $60,000, at January 31, 1998 and 1997 respectively, have been recognized as increases to additional paid-in capital. Additionally, as of January 31, 1998 and 1997, the Company reduced its valuation allowance for deferred tax assets by $2,392,000 and $1,083,000, respectively, increasing paid-in capital by $1,045,000 and $200,000 and benefiting the income tax provision by $1,347,000 and $1,100,000, respectively. The Company believes it is more likely than not that the operations will generate future taxable income to realize such tax assets. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 and No. 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively, both of which are required to be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130 will require the Company to report in its financial statements all non-owner related changes in equity for the periods being reported. SFAS No. 131 will require the Company to disclose revenues, earnings and other financial information pertaining to the business segments by which the Company is managed, as well as what factors management used to determine these segments. The Company is currently evaluating the effects SFAS No. 130 and No. 131 will have on its financial statements and related disclosures. In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of option, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated in accordance with the SFAS No. 128 requirements. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Not Applicable. Item 8. Financial Statements and Supplementary Data The financial statements required to be submitted in response to this Item 8 are set forth in Part IV, Item 14 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Set forth below is a list of the directors, executive officers and key employees of the Company and their respective ages and positions are as follows: 12
Name Age Position ---- --- -------- Neil Cole 40 Chairman of the Board, President and Chief Executive Officer Lawrence O'Shaughnessy 48 Executive Vice President, Chief Operating Officer and Director David Golden 44 Senior Vice President, Chief Financial Officer Gary Klein 43 Vice President of Finance Barry Emanuel 56 Director Mark Tucker 50 Director
Neil Cole has been Chairman of the Board, President and Chief Executive Officer of the Company since February 23, 1993. From February through April 1992, Mr. Cole served as 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. Lawrence O'Shaughnessy has been a director and Chief Operating Officer of the Company since March 1993 and Executive Vice President of the Company since April 1995. He also served as a director of the Company from April to June 1992. Mr. O'Shaughnessy has served as President of O'Shaughnessy & Company, a management consulting firm, since March 1991. David Golden has been the Senior Vice President and Chief Financial Officer of the Company since March 1, 1998. From April 1994 to February 1998, Mr. Golden was a principal at DMG Consulting Services, a management consulting firm. From September 1991 to March 1994, Mr. Golden was Executive Vice President and Chief Financial and Administrative Officer of Hugo Boss USA, Inc. Gary Klein has served as Vice President of Finance of the Company since October 1994 and has also served in that position from February to December 1993. He also has served as Principal Accounting Officer from December 1993 to October 1994. Mr. Klein has also served as Chief Financial Officer of NRC since May 1990. 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. 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. Mr. Tucker has also been a principal of Redwood, a manufacturer and distributor of footwear since June 1993. From December 1992 to August 1993, he 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 for 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 by the Company's stockholders. Officers are elected by the Company's Board of Directors and serve at the discretion of the Company's Board of Directors. 13 In April 1996, the Company entered into an agreement (the "Redwood Agreement") with Redwood under which, in consideration for the satisfaction in full of certain accounts payable to Redwood aggregating $1,680,000, the Company (i) issued to Redwood 1,050,000 shares of the Company's Common Stock and an option to purchase 75,000 shares of the Company's Common Stock; (ii) paid $50,000 to Redwood; and (iii) agreed, for the three year period ending April 3, 1999, to cause Mark Tucker (or if he is not available, another partner of Redwood designated by it) to be elected as director of the Company; and (iv) agreed to register the shares and the option shares for sale under the Securities Act. Pursuant to the Redwood Agreement, in May 1996, Mr. Tucker was elected as a director of the Company and in October 1996, a registration statement covering the shares and the option shares was declared effective under the Act. The Company has also agreed, if so requested by Redwood to use reasonable efforts to cause the election of Mr. Mark Tucker as a director and continue Mr. Tucker as such until April 3, 1999. If Mr. Tucker is not available to serve, Redwood has the right to designate one of its other partners as a nominee for election as a director. Each of Messrs. Cole and O'Shaughnessy and NRC have agreed to vote their shares of the Company's Common Stock to elect and continue Redwood's nominee in office for such three year period. Compliance with Section 16(a) of Securities Exchange Act of 1934 Section 16(a) of Securities Exchange Act of 1934 requires the Company officers and directors, and persons who beneficially own more than 10 percent of a registered class of the Company equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10 percent owners are required by certain SEC 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 Fiscal 1998, filing requirements applicable to its officers, directors and 10% stockholders of the Common Stock were complied with, except Mr. Cole and Mr. O'Shaughnessy failed to timely file Form 4 reports with respect to the cancellation of options to purchase 400,000 and 41,700 shares of the Common Stock in January 1998 and September 1997, respectively, and the simultaneous grant of options to purchase 400,000 and 100,000 shares of the Common Stock in January 1998 and September 1997, respectively. Item 11. Executive Compensation Executive Compensation The following table sets forth all compensation paid or accrued by the Company for the Fiscal 1998, 1997 and 1996, to or for the Chief Executive Officer and for the other persons that served as executive officers of the Company during Fiscal 1998 whose salaries exceeded $100,000 (collectively, the "Named Executives"): 14 Summary Compensation Table
Long-Term Annual Compensation Compensation Awards -------------------------------------------------------------------- Securities Name and Principal Fiscal Other Annual Underlying Position Year Salary Bonus(1) Compensation(2) Options ------------------ ---- ------ -------- --------------- ------- Neil Cole, 1998 $395,833 $308,909 $5,000 400,000 Chairman, President and 1997 346,000 6,800 2,500 10,000 Chief Executive Officer 1996 300,000 66,500 410,000 Lawrence O'Shaughnessy, 1998 291,667 92,672 5,000 100,000 Executive Vice President 1997 246,000 2,000 2,500 10,000 and Chief Operating 1996 221,500 19,966 210,000 Officer Gary Klein, 1998 110,000 -0- -0- Vice President of Finance 1997 102,000 -0- 60,000 1996 100,000 -0- 18,000
- ---------- (1) Represents bonuses accrued under employment agreements. (2) Represents amounts earned as director's fees. The following table provides information with respect to individual stock options granted during Fiscal 1998 to each of the Named Executives: Option Grants in Fiscal 1998 Year
Individual Grants ---------------------------------------------- Shares % of Total Potential Realizable Value Underlying Options Granted Exercise of Assumed Annual Rates Options To Employees in Price Expiration At Stock Price Appreciation Name Granted(#)* Fiscal Year (per share) Date or Option Term ---- ----------- ----------- ----------- ---------- --------------------------- Neil Cole 400,000 39.9% $ 5.00 1/15/03 $552,563 $1,221,020 Lawrence 100,000 10.0 5.50 9/4/02 151,955 335,781 O'Shaughnessy Gary Klein -- -- -- -- -- --
- ---------- * Stock options granted under the Company's 1997 plan; each option became exercisable on its date of grant and expires five years from that date. The exercisability of certain options granted to Messrs. 15 Cole and O'Shaughnessy is restricted upon the occurrence of certain events related to termination of employment or death of the optionee. In addition, certain options granted to Mr. Cole are subject to termination prior to their expiration upon termination of employment for cause. The following table sets forth information as of January 31, 1998 with respect to exercised and unexercised stock options held by the Named Executives. No options were exercised by any of the Named Executives during Fiscal 1998. Aggregated Fiscal Year-End Option Values
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at January 31, 1998 at January 31, 1998* --------------------------- -------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Neil Cole 1,430,000 -0- 3,454,750 $ -0- Lawrence 363,300 -0- 973,769 -0- O'Shaughnessy Gary Klein 113,000 -0- 335,213 -0-
- ---------- * An option is "in-the-money" if the year-end market value of the Company's Common Stock exceeds the exercise price of such option. As of January 31, 1998, the closing price per share of the Company's Common Stock as reported by NASDAQ was $4.9375. Employment Contracts and Termination and Change-in-Control Arrangements The Company has entered into an employment agreement with Neil Cole for a term expiring on February 28, 2000 at an annual base salary of $400,000 for the 12 months ended February 28, 1998, $450,000 for the 12 months ending February 28, 1999 and $500,000 for the 12 months ending February 28, 2000, subject to annual increases at the discretion of the Company's Board of Directors. Pursuant to the amended employment agreement, Mr. Cole serves as President and Chief Executive 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, including those of NRC which is expected to be merged with and into the Company. Under the agreement, Mr. Cole (i) is entitled to receive a portion of an annual bonus pool equal to 5% of the Company's annual pre-tax profits, if any, as determined by the Company's Board of Directors; and (ii) is entitled to customary benefits, including participation in management incentive and benefit plans, reimbursement for automobile expenses, reasonable travel and entertainment expenses and a life insurance policy in the amount of $1,000,000. Mr. Cole is also entitled to receive any additional bonuses as the Board of Directors may determine. If Mr. Cole terminates his employment with the Company for "good reason" (as defined in the amended agreement) or the Company terminates Mr. Cole's employment without "cause" (as defined in the amended 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 amended employment agreement with Mr. O'Shaughnessy for a term expiring on March 31, 2000 at an annual base salary of $300,000 for the 12 months ended March 31, 1998 and $350,000 thereafter, subject to annual increases at the discretion of the Company's Board of Directors. Pursuant to the agreement, Mr. O'Shaughnessy serves as Executive Vice-President of the Company, 16 devoting a majority of his business time to the Company and the remainder of his business time to other business activities. Under the amended agreement, Mr. O'Shaughnessy (i) is entitled to receive an annual bonus equal to 1.5% of the Company's annual pre-tax profits, if any; and (ii) is entitled to customary benefits, including participation in management incentive and benefit plans, reimbursement for automobile expenses, 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, effective March 1, 1998 with David Golden which provides for his employment as Senior Vice President-Chief Financial Officer at an annual salary of $225,000 for the twelve months ending March 1, 1999 and $250,000 for the twelve months ending March 1, 2000. Under the agreement, Mr. Golden is entitled to receive an annual bonus equal to 0.5% of the Company's annual pre-tax profits, if any, and is entitled to customary benefits including participation in management incentive and benefit plans, and reimbursement for automobile expenses, and reasonable travel and entertainment expenses. In addition, Mr. Golden was granted options to purchase an aggregate of 125,000 shares of the Company's Common Stock at $5.00, which options vested with respect to one-fifth of the aggregate number on the date of grant and thereafter will vest with respect to an additional two fifths of the aggregate number on the first anniversary of the date of grant and an additional one fifth of the aggregate number upon each anniversary of the date of grant until March 1, 2001. If Mr. Golden terminates his employment with the Company for "good reason" (as defined in the agreement) or the Company terminates Mr. Golden's employment without "cause" (as defined in the agreement) the Company is obligated to pay Mr. Golden (i) his full salary (at the annual base salary rate then in effect) through the date of termination and the share of his bonus for such year pro rated for that year through the date of termination; (ii) any accrued vacation amounts through the date of termination and (iii) a severance payment (based upon the annual base salary rate then in effect) for the unexpired portion of the two year term, but in no event less than six months, and all unvested options shall be accelerated and shall vest upon the date of termination. In the event that Mr. Golden terminates his employment with the Company by reason of a change of control of the Company, Mr. Golden shall be entitled to receive the payments specified in items (i) and (ii) in the preceding sentence and an amount equal to twelve months of Mr. Golden's base salary (at the annual base salary rate in effect) and all unvested options shall be accelerated and shall vest upon the date of termination. 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 at an annual salary of $110,000 for a two year period expiring November 15, 1998, subject to automatic renewal for successive two year periods, unless earlier terminated by reason of Mr. Klein's death or by the Company for "cause" (as defined in the employment agreement). In addition, the Company provides Mr. Klein with term life insurance in the amount of $110,000. Compensation of Directors Each director received cash compensation of $5,000 for serving on the Company's Board of Directors during Fiscal 1998. Under the Company 1989 Stock Option Plan (the "1989 Plan"), non-employee directors (other than non-employee directors who are members of any Stock Option Committee that may be appointed by the Company's Board of Directors to administer the 1989 Plan) are eligible to be granted non-qualified stock options and limited stock appreciation rights. No stock appreciation rights have been granted under the 1989 Plan. Under the Company's 1997 Stock Option Plan (the "1997 Plan"), non-employee directors are eligible to be granted non-qualified stock options. The Company's Board of Directors or the Stock Option Committee of the 1989 Plan or the 1997 Plan, if one is appointed, had discretion to determine the number of shares subject to each nonqualified option (subject to the number of shares available for grant under the 1989 Plan or the 1997 Plan, as applicable), the exercise price thereof (provided such price is not less than the par value of the underlying shares of the Company's Common Stock), the term thereof (but not in excess of 10 years from the date of grant, subject to earlier termination in certain circumstances), and the manner in which the option becomes exercisable (amounts, 17 intervals and other conditions). No non-qualified options were granted to non-employee directors under the 1989 Plan and 1997 Plan during Fiscal 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of April 21, 1998, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of the Company's Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of the Company's Common Stock; (ii) each of the Named Executives; (iii) each of the Company's directors; and (iv) all executive officers and directors as a group: Amount and Nature Percentage Name and Address of of Beneficial of Beneficial Beneficial Owner (1) Ownership (2) Ownership - -------------------- --------------- --------- Neil Cole 3,497,346(3)(4)(5) 21.3% New Retail Concepts, Inc. 2,027,696(5) 13.5 2975 Westchester Avenue Purchase, New York 10577 Redwood Shoe Corp. 825,000(6) 5.8 8F, 137 Hua Mei West Street SEC.1, Taichung, Taiwan, R.O.C. Mark Tucker 825,000(6) 5.8 Lawrence O'Shaughnessy 427,200(7) 2.9 David Golden 25,000(8) * Gary Klein 121,025(9) * Barry Emanuel 30,000(10) * All executive officers and directors as 4,925,571(3)(4)(5) 29.1 a group (six persons) (6)(7)(8)(9)(10) - ---------- * Less than 1%. (1) Unless otherwise indicated, each beneficial owner has an address at 2975 Westchester Avenue, Purchase, New York 10577. (2) A person is deemed to have beneficial ownership of securities that can be acquired by such person within 60 days of April 21, 1998 upon exercise of warrants or options. Consequently, each beneficial owner's percentage ownership is determined by assuming that warrants or options held by such person (but not those held by any other person) and which are exercisable within 60 days from April 21, 1998 have been exercised. Unless otherwise noted, the Company believes that all persons referred to in the table have sole voting and investment power with respect to all shares of Common Stock reflected as beneficially owned by them. 18 (3) Includes 2,027,696 shares of Common Stock beneficially owned by NRC; Neil Cole, the President and Chief Executive Officer of NRC, owns, beneficially and of record, approximately 44% of NRC's common stock. In addition, as President of NRC, Mr. Cole has or will have the right to vote the 2,027,696 shares of Common Stock beneficially owned by NRC. Mr. Cole disclaims beneficial ownership of these shares. (4) Includes 1,430,000 shares of Common Stock issuable upon exercise of immediately exercisable 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 issued to NRC. (6) Represents 825,000 shares of Common Stock, which shares were issued pursuant to an agreement between the Company and Redwood pertaining to the settlement of certain indebtedness of the Company to Redwood. Mr. Tucker is an affiliate of Redwood. (7) Includes 363,300 shares of Common Stock issuable upon exercise of immediately exercisable options. (8) Represents 25,000 shares of Common Stock issuable upon exercise of immediately exercisable options. (9) Includes 113,000 shares of Common Stock issuable upon exercise of immediately exercisable options. (10) Includes 25,000 shares of Common Stock issuable upon exercise of immediately exercisable options. Item 13. Certain Relationships and Related Transactions Certain Relationships and Related Transactions In March 1993, the Company entered into a Services Allocation Agreement with NRC pursuant to which the Company provides NRC with certain services for which NRC pays the Company an amount equal to the allocable portion of the Company's expenses, including employees' salaries, associated with such services. Pursuant to such agreement, NRC paid the Company $50,000 in Fiscal 1998. As more fully disclosed in Item 1 of this Annual Report on Form 10-K, the Company has executed a Merger Agreement on April 6, 1998 with NRC pursuant to which NRC would be merged with and into the Company, and the related party transaction mentioned above would be terminated. See Item 1 - "The Merger". For Fiscal 1998, Redwood, as buying agent for the Company, initiated the manufacture of approximately 60%, of the Company's total footwear purchases. At April 29, 1998, the Company had placed approximately $23,000,000 of open purchase commitments with Redwood. 19 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) and (2) Financial Statements and Financial Statement Schedule See the accompanying Financial Statements and Financial Statement Schedule filed herewith submitted as a separate section of this report - See F-1. (b) Reports on Form 8-K None (c) Exhibits See the accompanying Exhibit Index filed herewith in response to this portion of Item 14 and submitted as a separate section of this report. (d) Financial Statement Schedule The response to this portion of Item 14 is submitted as a separate section of this report. See F- 1. 20 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANDIE'S, INC. By: /s/ NEIL COLE -------------------- Neil Cole Chief Executive Officer Dated: May 1, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature and Name Capacity in Which Signed Date - ------------------ ------------------------ ---- Chairman of the Board, President and May 1, 1998 /s/ NEIL COLE Chief Executive Officer - ---------------------------- Neil Cole Executive Vice President and Chief May 1, 1998 /s/ LAWRENCE O'SHAUGHNESSY Operating Officer and a Director - ---------------------------- Lawrence O'Shaughnessy May 1, 1998 /s/ BARRY EMANUEL Director - ---------------------------- Barry Emanuel May 1, 1998 /s/ MARK TUCKER Director - ---------------------------- Mark Tucker Senior Vice President and Chief May 1, 1998 /s/ DAVID GOLDEN Financial Officer - ---------------------------- David Golden Vice President of Finance May 1, 1998 /s/ GARY KLEIN [Principal Accounting Officer] - ---------------------------- Gary Klein
21 Annual Report on Form 10-K Item 8, 14(a)(1) and (2), (c) and (d) List of Financial Statements and Financial Statement Schedule Year Ended January 31, 1998 Candie's, Inc. and Subsidiaries F-1 Candie's, Inc. and Subsidiaries Form 10-K Index to Consolidated Financial Statements and Financial Statement Schedule The following consolidated financial statements of Candie's Inc. and subsidiaries are included in Item 8: Report of Independent Auditors............................................ F-3 Consolidated Balance Sheets - January 31, 1998 and 1997................... F-4 Consolidated Statements of Income for the Years ended January 31, 1998, 1997 and 1996....................................... F-5 Consolidated Statements of Stockholders' Equity for the Years ended January 31, 1998, 1997 and 1996................... F-6 Consolidated Statements of Cash Flows for the Years ended January 31, 1998, 1997 and 1996....................................... F-7 Notes to Consolidated Financial Statements................................ F-8 The following consolidated financial statement schedule of Candie's, Inc. and subsidiaries is included in Item 14(d): Schedule II Valuation and qualifying accounts ............................ S-1 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial 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 misstatement. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Candie's, Inc. and subsidiaries at January 31, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP White Plains, New York April 16, 1998 F-3 Candie's, Inc. and Subsidiaries Consolidated Balance Sheets
January 31, --------------------------- 1998 1997 ------------ ------------ Assets Current assets: Cash ............................................................ $ 367,068 $ 389,517 Accounts receivable, net of allowances of $27,000 in 1998 and $34,000 in 1997 ........................... 2,804,503 1,328,814 Inventories ..................................................... 16,179,175 5,251,091 Due from factor ................................................. 831,332 -- Deferred income taxes ........................................... 801,400 1,300,000 Prepaid advertising and marketing ............................... 1,820,659 459,120 Other current assets ............................................ 603,523 310,661 ------------ ------------ Total current assets .................................................... 23,407,660 9,039,203 ------------ ------------ Property and equipment, at cost: Furniture, fixtures and equipment ............................... 1,809,971 1,104,558 Less: Accumulated depreciation and amortization ..................... 958,716 727,413 ------------ ------------ 851,255 377,145 ------------ ------------ Other assets: Deferred income taxes ........................................... 1,442,500 -- Intangibles ..................................................... 4,860,469 5,189,481 Other ........................................................... 319,056 103,516 ------------ ------------ Total other assets ...................................................... 6,622,025 5,292,997 ------------ ------------ Total assets ............................................................ $ 30,880,940 $ 14,709,345 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses ............................... $ 5,950,868 $ 3,788,524 Accounts payable-related party ...................................... 188,338 1,624,395 Due to factor ....................................................... -- 580,515 ------------ ------------ Total current liabilities ............................................... 6,139,206 5,993,434 Long-term liabilities ................................................... 61,216 108,000 Commitments and Contingencies 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 and outstanding: 12,425,014 in 1998 and 9,633,786 in 1997 ......................................... 12,425 9,634 Additional paid-in capital .......................................... 23,452,545 11,918,655 Retained earnings (deficit)* ............................................ 1,215,548 (3,320,378) ------------ ------------ Total stockholders' equity .............................................. 24,680,518 8,607,911 ------------ ------------ Total liabilities and stockholders' equity .............................. $ 30,880,940 $ 14,709,345 ============ ============
* Accumulated since February 28, 1993, deficit eliminated of $27,696,007 See accompanying notes to consolidated financial statements. F-4 Candie's, Inc. and Subsidiaries Consolidated Statements of Income
Year ended January 31, ------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net revenues ........................................ $ 92,976,416 $ 45,005,416 $ 37,914,127 Cost of goods sold .................................. 68,799,226 35,149,271 27,427,508 ------------ ------------ ------------ Gross profit ........................................ 24,177,190 9,856,145 10,486,619 Selling, general and administrative expenses ........ 17,216,712 8,890,173 8,429,143 ------------ ------------ ------------ Operating income .................................... 6,960,478 965,972 2,057,476 Other expenses: Interest expense - net ...................... 1,129,552 755,657 727,210 Other - net ................................. 98,000 75,000 113,000 ------------ ------------ ------------ 1,227,552 830,657 840,210 ------------ ------------ ------------ Income before income taxes .......................... 5,732,926 135,315 1,217,266 Provision (benefit) for income taxes ................ 1,197,000 (1,010,000) 163,310 ------------ ------------ ------------ Net income .......................................... $ 4,535,926 $ 1,145,315 $ 1,053,956 ============ ============ ============ Earnings per share: Basic ............................... $ .40 $ .13 $ .12 ============ ============ ============ Diluted ............................. $ .33 $ .11 $ .11 ============ ============ ============ Weighted average number of common shares outstanding: Basic ............................... 11,375,374 9,142,598 8,725,888 ============ ============ ============ Diluted ............................. 13,788,136 10,151,500 9,426,634 ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 Candie's, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Additional Retained Common Stock Paid-In Earnings Shares Amount Capital (Deficit) Total ------------ ------------ ------------ ------------ ------------ Balance at January 31, 1995 ........................ 8,709,465 $ 8,709 $ 9,902,837 $ (5,519,649) $ 4,391,897 Exercise of warrants ............................ 36,273 37 37,464 -- 37,501 Tax benefit from pre-quasi reorganization carryforward losses ........................... -- -- 103,000 -- 103,000 Net income ...................................... -- -- -- 1,053,956 1,053,956 ------------ ------------ ------------ ------------ ------------ Balance at January 31, 1996 ........................ 8,745,738 8,746 10,043,301 (4,465,693) 5,586,354 Purchase and retirement of treasury shares ...... (179,900) (180) (310,638) -- (310,818) Conversion of trade payables to common stock, net of expenses ........................ 1,050,000 1,050 1,562,950 -- 1,564,000 Exercise of warrants ............................ 174,009 174 199,935 -- 200,109 Issuance of common stock to benefit plan ........ 22,200 22 49,929 -- 49,951 Shares reserved in settlement of litigation and never issued ................... (178,261) (178) 178 -- -- Tax benefit from pre-quasi reorganization carryforward losses ........................... -- -- 260,000 -- 260,000 Stock option compensation ....................... -- -- 113,000 -- 113,000 Net income ...................................... -- -- -- 1,145,315 1,145,315 ------------ ------------ ------------ ------------ ------------ Balance at January 31, 1997 ........................ 9,633,786 9,634 11,918,655 (3,320,378) 8,607,911 Exercise of stock options ....................... 647,889 648 1,482,246 -- 1,482,894 Exercise of warrants ............................ 2,152,561 2,152 8,028,005 -- 8,030,157 Retirement of escrow shares ..................... (20,000) (20) 20 -- -- Issuance of common stock to benefit plan ........ 10,778 11 55,901 -- 55,912 Tax benefit from pre-quasi reorganization carryforward losses ........... -- -- 1,101,500 -- 1,101,500 Stock option compensation ....................... -- -- 36,000 -- 36,000 Tax benefit from exercise of stock options ...... -- -- 830,218 -- 830,218 Net income ...................................... -- -- -- 4,535,926 4,535,926 ------------ ------------ ------------ ------------ ------------ Balance at January 31, 1998 ........................ 12,425,014 $ 12,425 $ 23,452,545 $ 1,215,548 $ 24,680,518 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 Candie's, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended January 31, 1998 1997 1996 ------------ ------------ ------------- Cash flows (used in) provided by operating activities: Net income ...................................................................... $ 4,535,926 $ 1,145,315 $ 1,053,956 Items in net income not affecting cash: Depreciation and amortization ............................................. 604,210 458,740 423,868 Stock option compensation ................................................. 36,000 113,000 -- Deferred income taxes ..................................................... 993,000 (1,100,000) -- Changes in operating assets and liabilities: Restricted cash ................................................... -- -- 100,000 Accounts receivable ............................................... (1,475,689) (100,002) (644,901) Inventories ....................................................... (10,928,084) (1,251,145) (730,788) Prepaid advertising and marketing ................................. (1,361,539) (234,872) (383,714) Other assets ...................................................... (552,297) (496) 27,380 Accounts payable and accrued expenses ............................. 777,017 2,364,992 (1,323,196) Due to/from factor ................................................ (1,411,847) (718,581) 137,061 Long-term liabilities ............................................. (46,784) (14,436) (114,359) Accounts payable trade expected to be refinanced with common stock .................................... -- -- 1,680,000 ---------------------------------------------- Net cash (used in) provided by operating activities ............................. (8,830,087) 662,515 225,307 ---------------------------------------------- Cash flows used in investing activities: Purchases of property and equipment ...................................... (705,413) (301,236) (57,812) ---------------------------------------------- Net cash used in investing activities ........................................... (705,413) (301,236) (57,812) ---------------------------------------------- Cash flows provided by (used in) financing activities: Purchase and retirement of treasury stock ................................ -- (310,818) -- Proceeds from exercise of stock options and warrants ..................... 9,513,051 134,060 37,501 ---------------------------------------------- Net cash provided by (used in) financing activities ............................. 9,513,051 (176,758) 37,501 ---------------------------------------------- Net (decrease) increase in cash and cash equivalents ............................ (22,449) 184,521 204,996 Cash and cash equivalents, beginning of year ............................. 389,517 204,996 -- ============================================== Cash and cash equivalents, end of year ................................... $ 367,068 $ 389,517 $ 204,996 ============================================== Supplemental disclosure of cash flow information: Cash paid during the year: Interest ................................................................. $ 1,130,981 $ 755,657 $ 727,210 ============================================== Income taxes ............................................................. $ 89,000 $ 28,000 $ 59,000 ============================================== Supplemental disclosures of noncash investing and financing activities: Common stock issued to a related party .................................. -- $ 1,680,000 -- ============================================== Tax benefit from pre-quasi reorganization carryforward losses ................................................. $ 1,101,500 $ 260,000 $ 103,000 ============================================== Issuance of common stock to benefit plan ................................ $ 55,912 $ 49,951 -- ============================================== Tax benefit from exercise of stock options .............................. $ 830,218 -- -- ==============================================
See accompanying notes to consolidated financial statements. F-7 Candie's, Inc. and Subsidiaries Notes to Consolidated Financial Statements January 31, 1998 The Company Candie's, Inc. and its subsidiaries (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 and handbags under the CANDIE'S(R) and BONGO(R) trademarks for distribution to better department and specialty stores worldwide. The Company also markets and distributes, under the CANDIE'S(R) and BONGO(R) trademarks, children's footwear designed by it and also arranges for the manufacture of women's and men's footwear products, for mass importation by market and discount retailers, under one of the Company's trademarks or under a private label brand for retailers. 1. Summary of Significant Accounting Policies Principles of consolidation 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"), Candie's Galleria , Inc. ("Candie's Galleria") and the Company's 60% owned subsidiary Intercontinental Trading Group, Inc. ("ITG"), (collectively, the "Company"). All significant intercompany transactions and items have been eliminated in consolidation. 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 amounts reported in these financial statements and accompanying footnotes. Actual results may differ from those estimates and assumptions. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Accounts Receivable-Factored The Company has a factoring agreement with a financial institution whereby it may assign certain receivables generally without recourse as to credit risk. Inventories Inventories, which consist entirely of finished goods, are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out ("FIFO") method. Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation and amortization are determined by the straight line and accelerated methods over the estimated useful lives of the respective assets. F-8 Impairment of Long-Lived Assets When circumstances mandate, the Company evaluates the recoverability of its long-lived assets by comparing estimated future undiscounted cash flows with the assets' carrying value to determine whether a write-down to market value,based on discounted cash flow, is necessary. Intangibles The Candie's trademark is stated at cost in the amount of $5,276,722, net of accumulated amortization of $980,572 and $697,350 at January 31, 1998 and 1997, respectively, as determined by its fair value relative to other assets and liabilities at February 28, 1993, the date of the quasi reorganization. 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. 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, 1998 and 1997 was approximately $282,000 and $245,000, respectively. 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 15 years. Accumulated amortization related to these agreements was $1,488,000 and $1,448,000 at January 31, 1998 and 1997, respectively. Amortization expense amounted to $372,907, $363,581 and $359,328 in 1998, 1997 and 1996, respectively. Revenue Recognition Revenue is recognized upon shipment with related risk and title passing to the customers. The Company's sales are principally derived from its U.S. operations. Export sales accounted for 23%, 30% and 22% of the Company's revenues for the years ended January 31, 1998, 1997 and 1996, respectively. Taxes on Income The Company uses the liability method of accounting for income taxes under Statement of Financial Accounting Standards ("SFAS ") No. 109 "Accounting for Income Taxes". Stock-Based Compensation The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock options granted since the exercise price of the option is the same as the market value of the Company's common stock. As prescribed under SFAS No. 123, "Accounting for Stock Based Compensation," the Company has disclosed in Note 4 the pro-forma effects on net income and earnings per share of recording compensation expense for the fair value of the options granted. Derivative Financial Instruments In 1995, the Company adopted SFAS No. 119. "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" which requires various disclosures about financial instruments and related transactions. The Company's utilization of derivative financial instruments is substantially limited to the use of forward exchange contracts to hedge foreign currency transactions. Unrealized gains and losses are deferred and included in the measurement of the related foreign currency transaction. Gains or losses on these contracts during Fiscal 1998, 1997 and 1996 were immaterial. Fair Value of Financial Instruments The Company's financial instruments approximate fair value at January 31, 1998 and 1997. F-9 Foreign Currency The Company enters into forward exchange contracts to hedge foreign currency transactions and not to engage in currency speculation. The Company's forward exchange contracts do not subject the Company to risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on the assets, liabilities or transactions being hedged. The forward exchange contracts generally require the Company to exchange U.S. dollars for foreign currencies. If the counterparties to the exchange contracts do not fulfill their obligations to deliver the contracted currencies, the Company could be at risk for any currency related fluctuations. The Company limits exposure to foreign currency fluctuations in most of its purchase commitments through provisions that require vendor payments in U.S. dollars. As of January 31, 1998, there were no forward exchange contracts outstanding. Earnings Per Share In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented have been restated in accordance with SFAS No. 128 requirements. Advertising Campaign Costs 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, 1998, 1997 and 1996 amounted to $3,461,357, $664,000, and $533,390 respectively. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 and No. 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively, both of which are required to be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130 will require the Company to report in its financial statements all non-owner related changes in equity for the periods being reported. SFAS No. 131 will require the Company to disclose revenues, earnings and other financial information pertaining to the business segments by which the Company is managed, as well as what factors management used to determine these segments. The Company is currently evaluating the effects SFAS No. 130 and No. 131 will have on its financial statements and related disclosures. 2. Investment in Joint Venture In September 1991, the Company entered into a joint venture agreement (the " Carousel Agreement") with Carousel Group, Inc. ("Carousel") 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 Carousel Agreement were subsequently assigned to Urethane Technologies, Inc. ("Urethane"). 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. The investment had been accounted for under the equity method of accounting. The investment was fully reserved prior to Fiscal 1996 since the Company's recovery of its investment, if any, was indeterminable. The Company sold its share in the joint venture to Urethane during Fiscal 1997 and recorded a gain of $16,000. F-10 3. Factoring Agreement On April 2, 1993, the Company entered into an accounts receivable factoring agreement to sell receivables generally without recourse. The agreement which under its original terms was to expire on November 30, 1998 (as amended; See Note 12), 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 $15 million in inventory) in which the factor has a security interest. The agreement 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 factor reserves an amount equal to 43% of the full amount of each letter of credit to be opened against the Company's available borrowings. The total credit facility is limited to the lesser of (i) available borrowings as determined pursuant to the factor agreement or (ii) $20,000,000. Borrowings bear interest at the rate of three quarters of one percent (3/4%) over the existing prime rate (8 1/2% at January 31, 1998) established by the CoreStates Bank N.A. Factoring commissions on accounts receivable assigned to the factor are at a rate of .60%. The Company's assets are pledged as collateral. The unused portion of the credit lines at April 16, 1998 was approximately $11,500,000. See Note 12. At January 31, 1998 and 1997, the Company had $680,000 and $648,000, respectively, of outstanding letters of credit, and approximately $1,820,000 and $1,852,000, respectively, of available letters of credit. Due from (to) factor is comprised as follows: January 31, ----------------------------- 1998 1997 ----------------------------- Accounts receivable assigned .............. $17,415,403 $ 8,179,473 Outstanding advances ...................... 16,584,071 8,759,988 ----------------------------- Due from (to) factor ...................... $ 831,332 $ (580,515) ============================= Concentration of credit risk is limited due to the large number of customers to which the Company sells its products and the use of a factor to assign invoices for sales to its customers. See Note 12. The Company's five largest customers each accounted for between approximately 5.7% and 8.8% of the Company's net revenues in 1998 and between 7.1% and 8.6% in 1997. 4. Stockholders' Equity Warrants The following schedule represents warrants outstanding at January 31, 1998, 1997 and 1996:
Underwriter's Class (A) Class (B) Class (C) NRC Other Warrants(1) Warrants(2) Warrants(3) Warrants(3) Warrants(5) Warrants(6) ------------------------------------------------------------------------------- Warrants outstanding at January 31, 1995 ....... 1,023,821 54,397 1,475,000 1,475,000 -- 75,000 Warrants issued ................................. -- -- -- -- 700,000 -- Warrants exercised (1) .......................... (32,609) -- -- -- -- -- ------------------------------------------------------------------------------ Warrants outstanding at January 31, 1996 ....... 991,212 54,397 1,475,000 1,475,000 700,000 75,000 Warrants exercised (1) .......................... (174,009) -- -- -- -- Adjustment of underwriter's warrants (4) ....... 40,329 -- -- -- -- -- ------------------------------------------------------------------------------ Warrants outstanding at January 31, 1997 ....... 857,532 54,397 1,475,000 1,475,000 700,000 75,000 Warrants exercised (1) .......................... (650,461) -- (1,431,100) (21,000) -- (50,000) Warrants expired or cancelled ................... -- (54,397) (43,900) -- -- (25,000) ------------------------------------------------------------------------------ Warrants outstanding at January 31, 1998 (7) .... 207,071 -- -- 1,454,000 700,000 -- ==============================================================================
(1) Underwriter's warrants consist of 231,325 units at an exercise price of $3.19 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 number of shares issuable upon the exercise of the underwriter warrants and the attached Class B and C warrants. During the year ended January 31, 1998, 162,301 units (representing a total of 486,904 shares of common stock) were exercised aggregating $1,975,510. In connection with the October 1994 private placement, the Company issued additional warrants to purchase 370,175 shares at an exercise price of $1.15 per share, of which 163,557, 174,009 and 32,609 were exercised during the years ended January 31, 1998, 1997 and 1996 respectively. F-11 (2) From July 1, through December 31, 1990, the Company made an IPO warrant exercise solicitation whereby holders of 54,397 of the Company's IPO warrants who exercised their IPO warrants received new warrants (the "Class A Warrants"). The Class A warrants expired during 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 Class B warrant entitled the holder thereof to purchase one share of common stock at a price of $4.00 and each Class C warrant entitles the holder thereof to purchase one share of common stock at a price of $5.00. These warrants expired on February 23, 1998. The Company redeemed 1,431,000 Class B warrants and upon their exercise realized $5,686,557 net of expenses during the fiscal year ended January 31, 1998.The remaining 43,900 warrants were not exercised and were canceled. During the year ended January 31, 1998, 21,000 Class C Warrants were exercised aggregating $105,000. (4) Pursuant to the warrant agreement, as a result of the issuance of additional shares and their dilutive effect, the Company's underwriters are entitled to exercise additional units. The exercise prices of the existing underwriter warrants have been adjusted. (5) On February 1, 1995, in consideration of loans extended to the Company, NRC was granted warrants to acquire up to 700,000 shares of Company common stock at an exercise price of $1.24 per share. The warrants expire five years from their date of grant. (6) The number of shares of stock purchasable upon the exercise of the warrant is 75,000 of which 50,000 shares were vested and exercisable to date. The exercise price was $1.50. The vested warrants were exercised during the year ended January 31, 1998 and the unvested portion expired on November 28, 1997. (7) See Note 12. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Effects of applying SFAS 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net income for future years (e.g. the first year reflects expense for only one year's vesting, while the second year reflects expense for two years' vesting). Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: January 31, ------------------------------------------ 1998 1997 1996 ------------------------------------------ Expected Volatility............... .759-.812 .770-.904 .525-.875 Expected Dividend Yield........... 0% 0% 0% Expected Life (Term).............. 1-3 years 2-5 years 2-3 years Risk-Free Interest Rate........... 5.25-6.61% 5.70%-6.25% 5.30%-6.85% The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-12 For purposes of pro forma disclosures, the estimated fair value of the option is amortized to expense over the option's vesting period. The Company's pro forma information follows: January 31, -------------------------------------- 1998 1997 1996 -------------------------------------- Pro forma net income ............... $3,601,763 $ 922,804 $ 698,780 Pro forma earnings per share: Basic ......................... $ .32 $ .10 $ .08 Diluted ....................... $ .29 $ .10 $ .08 The weighted-average fair value of options granted (at their grant date) during the years ended January 31, 1998, 1997 and 1996 was $2.20, $.64 and $.37, respectively. In 1989, the Company's Board of Directors adopted, and its stockholders approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan, as amended in 1990, provides for the granting of incentive stock options ("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up to 222,222 shares of common stock. The 1989 Plan terminates on August 1, 1999. Under the 1989 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 ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options" or "NQSO's") may be granted at prices determined by the Board of Directors. Under the 1989 Plan 126,800, 149,300 and 179,300 of ISO's as of January 31, 1998, 1997 and 1996, respectively, were outstanding. On September 4, 1997, the Company's shareholders approved the Company's 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of common stock options to purchase up to 3,500,000 shares of Company common stock. All employees, directors, independent agents, consultants and attorneys of the Company, including those of the Company's subsidiaries, are eligible to be granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007. Under the 1997 Plan, as of January 31, 1998, ISO's covering 165,000 shares of common stock and NQSO's covering 462,000 shares of common stock, were outstanding. Additionally, at January 31, 1998, 1997 and 1996, NQSO's covering 3,298,500, 4,066,311 and 2,866,311 shares of common stock, respectively, were outstanding, which are not part of either the 1989 or 1997 Plans. The options granted under the 1989 and 1997 Plans expire between five and ten years from the date of grant or at the termination of either Plan, whichever comes first. On January 15, 1998, the Company granted 400,000 NQSO's at an exercise price of $5.00 per share, to its Chief Executive Officer and simultaneously cancelled 400,000 NQSO's with an exercise price of $5.00 that were to expire February 23, 1998. On March 15, 1995, the Company granted 400,000 NQSO's at an exercise price of $1.16 per share, to its Chief Executive Officer, in connection with the renewal of an employment agreement. On September 4, 1997, the Company granted its Executive Vice President, Chief Operating Officer 100,000 ISO's at an exercise price of $5.50 per share and simultaneously cancelled 41,700 NQSO's at an exercise price of $3.00 that were to expire April 15, 1998. On April 1, 1995, the Company granted 200,000 NQSO's at an exercise price of $1.16 per share, to its Executive Vice President, Chief Operating Officer, in connection with an employment agreement. A summary of the Company's stock option activity, and related information for the years ended 1998, 1997 and 1996 follows: Weighted-Average Shares Exercise Price -------------------------- Outstanding January 31, 1995 ................. 1,427,667 $3.34 Granted ...................................... 1,710,000 $1.36 Canceled ..................................... (92,056) $2.69 --------- Outstanding January 31, 1996 ................. 3,045,611 $2.25 Granted ...................................... 1,250,000 $2.17 Canceled ..................................... (80,000) $2.63 --------- Outstanding January 31, 1997 ................. 4,215,611 $2.23 Granted ...................................... 1,002,500 $5.48 Canceled ..................................... (517,922) $4.55 Exercised .................................... (647,889) $2.33 --------- Outstanding January 31, 1998 ................. 4,052,300 $2.72 --------- F-13 At January 31, 1998, 1997 and 1996, exercisable stock options totaled 3,456,967, 3,702,611 and 2,782,611 and had weighted average exercise prices of $2.43, $2.25 and $2.30, respectively. Options outstanding and exercisable at January 31, 1998 were as follows:
Options Outstanding Options Exercisable - --------------------------------------------------------------------------------- --------------------------- Weighted Weighted Weighted Range of Number Average Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------- --------------------------- $1.15-1.50................. 1,188,000 2.0 $1.28 1,188,000 $1.28 $1.51-2.50................. 1,535,000 3.3 $2.04 1,260,000 $2.04 $2.51-3.50................. 316,800 2.0 $2.63 316,800 $2.63 $3.51-5.00................. 605,500 4.7 $4.78 531,500 $4.82 $5.01-12.00................ 407,000 4.5 $6.51 160,667 $5.66 - --------------------------------------------------------------------------------- ------------------------ 4,052,300 3.2 $2.72 3,456,967 $2.43 ================================================================================= =========================
At January 31, 1998, common shares reserved for issuance on exercise of stock options and warrants consisted of: Stock Options ........................................... 4,052,300 Underwriters' Warrants .................................. 207,071 Class C Warrants ........................................ 1,454,000 NRC Warrants ............................................ 700,000 -------- 6,413,371 ======== 5. Earnings Per Share The following is a reconciliation of the numerator and denominators of the basic and diluted EPS computations and other related disclosures required by SFAS No. 128:
January 31, --------------------------------------- 1998 1997 1996 --------------------------------------- Numerator: Numerator for basic and diluted earnings per share $ 4,535,926 $ 1,145,315 $ 1,053,956 ======================================= Denominator: Denominator for basic earnings per share 11,375,374 9,142,598 8,725,888 Effect of dilutive securities 2,412,762 1,008,902 700,746 --------------------------------------- Denominator for diluted earnings per share 13,788,136 10,151,500 9,426,634 ======================================= Basic earnings per share $ .40 $ .13 $ .12 ======================================= Diluted earnings per share $ .33 $ .11 $ .11 =======================================
Outstanding options and warrants to purchase 231,400, 5,080,300, and 4,712,000 shares of common stock for 1998, 1997 and 1996, respectively, at exercise prices exceeding the average market price of the common stock were not included in the computation of diluted earnings per share as the effect would have been anti-dilutive. F-14 The Company has granted 75,000 stock options to a related party, which vest based upon the achievement of certain targeted criteria. These shares have not been included in the computation of diluted earnings per share as the targeted criteria has not been met and the exercise price exceeded the market price and, therefore, the effect would have been antidilutive. 6. Commitments and Contingencies The Company is party to certain litigation incurred in the normal course of business. While any litigation has an element of uncertainty, the Company believes that the final outcome of any of these matters will not have a material adverse effect on the Company's financial position or future liquidity. Effective June 17, 1997, the Company is operating under an exclusive amended licensing agreement which enables the Company to sell footwear in North America and certain foreign territories bearing the BONGO trademark. At January 31, 1998, the Company was obligated to pay minimum royalties of $3,780,000 through January 2002. 7. Related Party Transactions The Company has a Service Allocation Agreement (the "Agreement") with New Retail Concepts, Inc. ("NRC"), a significant shareholder of the Company and whose principal shareholder is the Company's President. Pursuant to the Agreement the Company provides NRC with business services for which NRC is 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 during each of the years ended January 31, 1998, 1997, and 1996, respectively. This Agreement terminates upon consummation of the Merger referred to in Note 12. The Company also granted a total of 700,000 warrants to purchase shares of the Company's Stock (contractually valued at $6,500), at an exercise price of $1.24 per share, to NRC for loans made to the Company during fiscal 1996. As collateral for such loans, the Company granted to NRC a security interest in all of the assets of the Company and its subsidiaries, subject to a first lien on such assets in favor of the Company's factor, as defined. All loans made to the Company were fully satisfied during fiscal 1996. On April 3, 1996, the Company entered into an agreement with Redwood (a principal buying agent of footwear products) to satisfy in full certain trade payables (the "Payables") amounting to $1,680,000. Under the terms of the Vendor Agreement, the Company has; (i) issued 1,050,000 shares of the Company's Common Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common Stock at an exercise price of $1.75 which was immediately exercisable and has a five year life; and (iii) made a cash payment of $50,000. The Company purchased approximately $48 million, $24 million, and $12 million in 1998, 1997, and 1996, respectively, of footwear products through Redwood. At January 31, 1998, the Company had approximately $21 million of open purchase commitments with Redwood. 8. Leases Future net minimum lease payments under noncancelable operating lease agreements as of January 31, 1998 are as follows: 1999................................... $ 572,000 2000................................... 575,000 2001................................... 322,000 2002................................... 266,000 2003................................... 247,000 Thereafter............................. 452,000 ---------- Totals................................. $2,434,000 ========== Rent expense was approximately $337,000, $276,000 and $236,000 for the years ended January 31, 1998, 1997 and 1996, respectively. F-15 9. Benefit and Incentive Compensation Plans and Other 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 contributions of $80,000 and $62,000 to the Savings Plan for the years ended January 31, 1998 and 1997, respectively. The Company has certain incentive compensation arrangements with each of its Chief Executive Officer and its Chief Operating Officer pursuant to their employment agreements. The incentive compensation aggregates 6.5% of pre-tax earnings, as defined. Included in accounts payable and accrued expenses are trade payables of $3,097,815 in 1998 and $3,049,067 in 1997, accrued chargebacks of $1,282,000 in 1998 and $350,000 in 1997, and $372,000 of accrued bonuses and $728,000 of accrued royalties in 1998. 10. Income Taxes At January 31, 1998, the Company has net operating losses of approximately $5,500,000 for income tax purposes, which expire in the years 2008 through 2010. Due to the issuance of 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 the Company's net operating loss carryforwards incurred prior to the ownership change to $275,000 per year. Approximately $4,600,000 of the operating loss carryforwards are subject to this restriction and, accordingly, no accounting recognition has been given to approximately $1.8 million of such losses since present restrictions preclude their utilization. After the date of the pre quasi reorganization the tax benefits of net operating loss carryforwards incurred prior to the reorganization, have been treated for financial statement purposes as direct additions to additional paid-in capital. For the years ended January 31, 1998 and 1997, the Company utilized $149,000 and $158,000, respectively, of pre-quasi reorganization net operating loss carryforwards. The related tax benefits of $56,500 and $60,000, at January 31, 1998 and 1997 respectively, have been recognized as increases to additional paid-in capital. Additionally, as of January 31, 1998 and 1997, the Company reduced its valuation allowance for deferred tax assets by $2,392,000 and $1,083,000, respectively, increasing paid-in capital by $1,045,000 and $200,000 and benefiting the income tax provision by $1,347,000 and $1,100,000, respectively. The Company believes it is more than likely than not that the operations will generate sufficient taxable income to realize such assets. The income tax provision (benefit) for Federal and state income taxes in the consolidated statements of income consists of the following: January 31, -------------------------------------------- 1998 1997 1996 -------------------------------------------- Current: Federal ....................... $ 103,000 $ -- $ 33,000 State ......................... 101,000 30,000 27,310 -------------------------------------------- Total current ................. 204,000 30,000 60,310 -------------------------------------------- Deferred: Federal ....................... 738,000 (876,000) -- State ......................... 255,000 (164,000) 103,000 -------------------------------------------- Total deferred ................ 993,000 (1,040,000) 103,000 -------------------------------------------- Total provision (benefit) ..... $ 1,197,000 $(1,010,000) $ 163,310 ============================================ F-16 The following summary reconciles income tax provision at the Federal statutory rate with the actual provision (benefit):
January 31, ----------------------------------------- 1998 1997 1996 ----------------------------------------- Income taxes at statutory rate ..................... $ 1,949,000 $ 46,000 $ 412,000 Non-deductible amortization ........................ 122,000 97,000 -- Utilization of net operating losses ................ -- (60,000) (300,000) Change in valuation allowance of deferred tax assets (1,347,000) (1,100,000) -- Alternative minimum taxes .......................... -- -- 33,000 State provision, net of federal income tax benefit . 235,000 20,000 18,310 Adjustment for estimate of prior year taxes ........ 216,000 Other .............................................. 22,000 (13,000) -- ----------------------------------------- Total income tax provision (benefit) ............... $ 1,197,000 $(1,010,000) $ 163,310 =========================================
The significant components of net deferred tax assets of the Company consist of the following:
January 31, ----------------------------------------- 1998 1997 1996 ----------------------------------------- Accrued bonus....................................... $ 169,200 $ -- $ -- Compensation expense................................ 56,600 42,900 -- Alternative minimum taxes........................... 102,500 -- -- Inventory valuation................................. 411,900 118,000 226,000 Net operating loss carryforwards.................... 1,409,000 3,437,000 3,100,000 Other-net........................................... 94,700 94,100 149,000 ----------------------------------------- Total net deferred tax assets....................... 2,243,900 3,692,000 3,475,000 Valuation allowance................................. -- (2,392,000) (3,475,000) ----------------------------------------- Total deferred tax assets........................... $ 2,243,900 $ 1,300,000 $ -- =========================================
11. Quarterly Financial Data (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------------------------------------------------- Fiscal 1998: Net revenues $16,861,264 $29,725,989 $23,780,001 $22,609,162 Gross profit 5,087,136 6,638,038 6,107,371 6,344,645 Operating income 1,671,374 2,373,451 1,618,747 1,296,965 Net income 823,338 2,194,940(b) 808,504 709,144(a) Diluted earnings per share .06 .17 .06 .05 Weighted average number of common shares Outstanding - diluted 12,730,331 13,150,181 14,453,665 14,690,992
(a) Includes tax benefit of $447,000 resulting from a change in the valuation allowance for net deferred tax assets. (b) Includes tax benefit of $900,000 resulting from a change in the valuation allowance for net deferred tax assets. The first three quarters of fiscal 1998 have been restated to comply with the requirements of SFAS 128. F-17 12. Subsequent Events Subsequent to year-end through February 23, 1998, substantially all of the Company's outstanding Class C warrants ("Warrants") were exercised and the Company received aggregate proceeds of $7,157,025 from the exercise of such warrants. The proceeds were used to repay short-term borrowings. Each Warrant entitled the holder thereof to purchase one share of Common Stock at an exercise price of $5.00 on that date, at which time the right to exercise such Warrant terminated. In addition, subsequent to January 31, 1998, the Company received proceeds of $1,041,867, in connection with the issuance of common stock relating to the exercise of outstanding stock options and certain underwriter's warrants. The Company is currently negotiating a new revolving credit and factoring arrangement with prospective lenders. The Company anticipates that the replacement credit facility will be in place shortly with terms and conditions that will be more favorable than its current financial arrangement with its factor. Accordingly, the Company has notified its factor of its intention to terminate its factoring agreement and is currently operating on a month to month basis. The Company has reserved its right to terminate the agreement at will, if necessary, without any penalties or fee upon termination. The Company and NRC have executed a Merger Agreement dated April 6, 1998, (the "Merger Agreement") which provides that NRC will be merged with and into the Company (the "Merger"), and the Company will be the surviving corporation. At the effective date of the Merger (the "Effective Date"), each issued and outstanding share of NRC common stock $.01 par value (the "NRC Common Stock"), and each issued and outstanding option to purchase shares of NRC Common Stock immediately prior to the Effective Date will be converted, respectively, into 0.405 shares of common stock and options of the Company (the "Common Stock"). The completion of the Merger is subject to a number of conditions, including among other things, the approval of the stockholders of both the Company and NRC and the registration of the Common Stock to be issued to the holders of NRC pursuant to the Merger under the Securities Act of 1933, as amended. No assurance can be given that the Company and NRC will be able to successfully obtain the requisite stockholder approval or that the Company will otherwise be able to consummate the Merger. At April 6, 1998 there were 5,693,639 shares of NRC Common Stock issued and outstanding and options to purchase 1,635,000 shares of NRC Common Stock. NRC currently owns 1,227,696 shares of Common Stock and has options and warrants to purchase an additional 800,000 shares of Common Stock of the Company, all of which will be extinguished upon consummation of the Merger. F-18 Schedule II - Valuation and Qualifying Accounts Candie's, Inc. and Subsidiaries
(a) Column A Column B Column C Column D Column E - ----------------------------------------------------- -------------- ---------- ---------- ---------- Additions ---------- Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period - ----------------------------------------------------- ------------ ---------- ---------- ---------- Year ended January 31, 1998: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $ 34,000 $182,636 $189,636 $ 27,000 ======== ======== ======== ======== Year ended January 31, 1997: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $ 63,400 $ 68,355 $ 97,755 $ 34,000 ======== ======== ======== ======== Year ended January 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $ 45,000 $ 78,498 $ 60,098 $ 63,400 ======== ======== ======== ========
(a) Uncollectible receivables charged against the allowance provided. S-1 Index to Exhibits Exhibit Numbers Description - ------ --------- 2.1 Agreement and Plan of Merger between the Company and New Retail Concepts, Inc. 3.1 Certificate of Incorporation, as amended through October 1994 (1)(3) 3.2 Amendment to Certificate of Incorporation filed November 1994 (2) 3.3 By-Laws (1) 10.1 Trademark Purchase Agreement between the Company and New Retail Concepts, Inc. (3) 10.2 1989 Stock Option Plan of the Company (1) 10.3 1997 Stock Option Plan of the Company (7) 10.4 Discount Factoring Agreement and Supplements between Congress Talcott Corporation and the Company (4) 10.5 General Security Agreement between Congress Talcott Corporation and Intercontinental Trading Group, Inc. (4) 10.6 Personal Guaranty and Waiver of Neil Cole in favor of Congress Talcott Corporation (4) 10.7 Employment Agreement between Neil Cole and the Company (4) 10.8 Amendment to Employment Agreement between Neil Cole and the Company (6) 10.9 Services Allocation Agreement between the Company and New Retail Concepts Inc. (4) 10.10 Indemnity Agreement of Barnet Feldstein (4) 10.11 Amended and Restated Affiliates Transaction Agreement between the Company and New Retail Concepts Inc. dated January 30, 1995 (2) 10.12 Security Agreement among New Retail Concepts, Inc., the Company, Bright Star Footwear, Inc. and Intercontinental Trading Group, Inc., dated February 1, 1995 (2) 10.13 Guarantee of Neil Cole in favor of New Retail Concepts, Inc. dated February 1, 1995 (2) 10.14 Lease with respect to the Company's executive offices (2) 10.15 Employment Agreement between Gary Klein and the Company (2) 10.16 Agreement dated May 16, 1994 between the Company and New Retail Concepts, Inc. (2) 10.17 Agreement dated as of April 3, 1996 between the Company and Redwood Shoe Corp. (5) 10.18 Amendment dated as of September 30, 1996 to agreement dated as of April 3, 1996 between the Company and Redwood Shoe Corp. (6) 10.19 Employment Agreement between Lawrence O' Shaughnessy and the Company. (5) 10.20 Amendment to Employment Agreement between Lawrence O'Shaughnessy and the Company. (6) 10.21 Bongo License Agreement 10.22 December 31, 1996 Amendments to the Discount Factoring Agreement between Congress Talcott Corporation and the Company. (6) 10.23 December 31, 1996 Amendment to the Guarantee of Neil Cole in Favor of Congress Talcott Corporation. (6) 10.24 Employment Agreement between David Golden and the Company. 21 Subsidiaries of the Company. 23 Consent of Independent Auditors 27 Financial Data Schedules. (for SEC use only) - ---------- (1) Filed with the Registrant's Registration Statement on Form S-18 (File 33-32277-NY) and incorporated by reference herein. 22 (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 Registration Statement on Form S-1 (File 33-53878) and incorporated by reference herein. (4) Filed with the Company's Annual Report on Form 10-K for the year ended January 31, 1994, and incorporated by reference herein. (5) Filed with the Company's Annual Report on Form 10-KSB for the year ended January 31, 1996, and incorporated by reference herein. (6) Filed with the Company's Annual Report on Form 10-KSB for the year ended January 31, 1997, and incorporated by reference herein. (7) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1997, and incorporated by reference herein. 23 EX-2.1 2 AGREEMENT AND PLAN OF MERGER EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger dated April 6, 1998, by and between CANDIE'S, INC., a Delaware corporation ("Candie's"), and NEW RETAIL CONCEPTS, INC., a Delaware corporation ("NRC"). (Candie's and NRC are sometimes collectively referred to as the "Constituent Corporations"). WHEREAS, as of the date hereof, the authorized capital stock of Candie's consists of 30,000,000 shares of common stock, $.001 par value, (the "Candie's Common Stock") of which 14,146,990 shares are issued and outstanding, of which 4,723,800 shares are reserved for issuance of outstanding options and warrants; and 5,000,000 shares of Preferred Stock, $.01 par value, (the "Candie's Preferred Stock") none of which are issued and outstanding; WHEREAS, as of the date hereof, the authorized capital stock of NRC consists of 25,000,000 shares of common stock, $.01 par value (the "NRC Common Stock") of which 5,693,639 shares are issued and outstanding, and 1,635,000 shares are reserved for issuance upon the exercise of outstanding options; and 1,000,000 shares of Preferred Stock, $.01 par value, none of which are issued and outstanding; WHEREAS, the respective Boards of Directors of Candie's, and NRC deem it advisable and in the best interests of Candie's and NRC and their respective shareholders that NRC merge with and into Candie's (the "Merger") pursuant to this Agreement and the applicable provisions of the Delaware General Corporation Law ("Delaware Corporate Law"); WHEREAS, the respective Boards of Directors of Candie's, and NRC have approved and adopted this Agreement and have directed that the plan of merger and reorganization set forth in Article I of this Agreement (the "Plan of Merger") be submitted to the shareholders of Candie's and NRC for their approval; and WHEREAS, the Merger is intended to constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended; NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto represent, warrant, covenant and agree as follows: ARTICLE I PLAN OF MERGER 1.1 Surviving Corporation. At the Effective Time (as defined in Section 1.8), NRC shall be merged with and into Candie's pursuant to this Agreement and a plan of merger and reorganization in substantially the form annexed hereto as Exhibit 1.1 (the "Plan of Merger"). Candie's shall be the surviving corporation (the "Surviving Corporation") and shall continue its corporate existence under the laws of the State of Delaware and the separate existence of NRC shall cease. 1.2 Effect of the Merger. At the Effective Time, the Surviving Corporation shall possess all of the rights, privileges, -2- immunities and franchises, of a public as well as of a private nature, of each of the Constituent Corporations and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all other choses in action, and all and every other interest of or belonging to or due to each of the Constituent Corporations, shall be taken and deemed to be transferred and vested in the Surviving Corporation without further act or deed; and the title to any real estate, or any interest therein, vested in either of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger. From and after the Effective Time, the Surviving Corporation shall be responsible and liable for all of the liabilities, debts, duties and obligations of each of the Constituent Corporations; and any claims existing or action or proceeding, whether civil or criminal, pending, by or against either of the Constituent Corporations shall be preserved unimpaired and all debts, liabilities and duties of each of the Constituent Corporations shall attach to the Surviving Corporation and may be enforced against it to the same extent as if those debts, liabilities and duties had been incurred or contracted by it. Neither the rights of creditors nor any liens upon the property of either of the Constituent Corporations shall be impaired by the Merger. 1.3 Additional Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any further assignments or assurances in law or any other acts are necessary or desirable to (a) vest, perfect or confirm, of record or otherwise, in the Surviving Corporation any -3- rights, title or interest in, to or under any of the rights, properties or assets of Candie's or NRC acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger, or (b) otherwise carry out the purposes of this Agreement, then NRC and its appropriate officers and/or directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such proper deeds, assignments and assurances in law and to do all acts necessary or proper, to vest, perfect or confirm title to and possession of such rights, properties or assets in the Surviving Corporation and otherwise to carry out the purposes of this Agreement, and the appropriate officers and/or directors of the Surviving Corporation are hereby fully authorized in the names of NRC or otherwise to take any and all such actions. 1.4 Name of Surviving Corporation. The name of the Surviving Corporation shall remain Candie's, Inc. 1.5 Certificate of Incorporation. The Certificate of Incorporation of Candie's as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until and unless thereafter amended as provided by law and such Certificate of Incorporation. 1.6 Bylaws. The Bylaws of Candie's as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by law, the Certificate of Incorporation and such Bylaws. 1.7 Officers and Directors. The officers and directors of Candie's shall remain the directors and officers of the -4- Surviving Corporation and shall hold office until their resignations or until their respective successors have been appointed or duly elected. 1.8 Closing Effective Time. (a) The closing of the Merger shall take place at 10:00 a.m., local time, on a date specified by Candie's and NRC, which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VII at the offices of Tenzer Greenblatt LLP, 405 Lexington Avenue, New York, New York 10174, or such other place as agreed to by the parties (the "Closing"). The Merger shall become effective at the time of filing of a Certificate of Merger in the form attached as Exhibit 1.8, with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the Delaware Corporate Law, which Certificate of Merger shall be so filed immediately following the satisfaction of each of the conditions set forth in Article VII below, or as soon as practicable thereafter. (b) The date and time when the Merger shall become effective is referred to as the "Effective Time." 1.9 Conversion of Shares. (a) By virtue of the Merger, automatically and without any action on the part of the holder thereof, at the Effective Time: (i) Each issued and outstanding share of NRC Common Stock shall cease to exist and shall be converted into and -5- represent the right to receive 0.405 shares of Candie's Common Stock (the "Exchange Ratio"); (ii) Any shares of NRC Common stock issued and held in the treasury of NRC shall be cancelled; (iii) Any shares of NRC Common Stock issued and owned by Candie's immediately preceding the Effective Time shall be cancelled and retired and no payment made with respect thereto; (iv) Any shares of Candie's Common Stock issued and owned by NRC immediately preceding the Effective Time shall be returned to the status of authorized but unissued shares of Candie's Common Stock, and no payment made with respect thereto; (v) Any warrants or options to the purchase shares of Candie's Common Stock issued and owned by NRC immediately preceeding the Effective Time shall be cancelled, and no payment made with respect thereto; and (vi) Each issued and outstanding option to acquire one (1) share of NRC Common Stock outstanding at the Effective Time shall be converted into an option to acquire 0.405 shares of Candie's Common Stock, which option shall be on substantially the same terms and conditions as the option being converted, and shall be exercisable at an exercise price equal to the quotient of (a) the exercise price of the option being converted divided by (b) the Exchange Ratio, which quotient shall then be rounded down to the nearest cent. Between the date hereof and the Effective Date if necessary, Candie's shall amend its stock option plan and reserve sufficient shares so as to permit the -6- issuance of the options to acquire shares of Candie's Common Stock described in this Section 1.9(a)(vi). (b) No rights to receive fractional shares of Candie's Common Stock shall arise under this Agreement. (c) No fractional shares of Candie's Common stock shall be issued, but in lieu thereof, each holder of Candie's Common Stock who would otherwise be entitled to receive a fraction of a share of Candie's Common Stock shall receive from Candie's an amount of cash equal to the price of one share of Candie's Common Stock as of the date of the Merger (which price shall be calculated as the average of the last sales price for Candie's Common Stock during the twenty (20) day period immediately prior to the Effective Date) multiplied by a fraction of a share of Candie's Common Stock for which such holder would be entitled. No shareholder of NRC shall receive cash from Candie's in lieu of fractional shares in an amount greater than the value of one paid share of Candie's Common Stock. 1.10 NRC Dissenting Shareholders. Shares of NRC Common Stock which are issued and outstanding immediately prior to the Effective Time and which are held by NRC shareholders who have not voted such shares in favor of the Merger and who shall have properly exercised their rights of appraisal for such shares in the manner provided by the Delaware Corporate Law ("Dissenting Shares") shall not be converted into or be exchangeable for the right to receive shares of Candie's Common Stock unless and until such holders shall have failed to perfect or shall have effectively withdrawn or lost their dissenters' rights under the Delaware -7- Corporate Law. With respect to any holders who have failed to perfect and have effectively withdrawn or lost their dissenters' rights, such holders' shares shall thereupon be deemed to have been converted into and to have become exchangeable for, at the Effective Time, shares of Candie's Common Stock. NRC shall give Candie's prompt notice of any (i) Dissenting Shares, (ii) attempted withdrawals of such demands for appraisal rights, and (iii) any other communications received by NRC with respect to dissenters' rights. Candie's shall have the right to direct all negotiations and proceedings with respect to any demands for appraisal rights. NRC shall not, except with the prior consent of Candie's, voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal rights. 1.11 Exchange of Certificates. (a) Candie's shall cause Continental Stock Transfer and Trust Company (or such successor as Candie's may designate) as exchange agent (the "Exchange Agent"), to send to each holder of shares of NRC's Common Stock which shall have been converted into Candie's Common Stock an appropriate letter of transmittal for purposes of surrendering such holder's certificates for such shares for exchange pursuant hereto. (b) As soon as practicable after the Effective Time and after surrender to the Exchange Agent of any certificate which prior to the Effective Time shall have represented any shares of NRC's Common Stock (a "Certificate"), subject to the provisions of paragraph (d) of this Section 1.11, Candie's shall cause to be distributed to the person in whose name such Certificate shall have -8- been registered, or in accordance with the written instructions transmitted to the Exchange Agent, certificates registered in the name of such person representing the Candie's Common Stock to which such person shall be entitled as described in paragraph (a) of Section 1.9 and cash payable to such person representing payment in lieu of a fractional share of Candie's Common Stock as determined in accordance with paragraph (c) of Section 1.9 (such cash to be provided in the form of a check). Until surrendered as contemplated by the preceding sentence, each Certificate shall be deemed at and after the Effective Time to represent only the right to receive the certificates and payment contemplated by the preceding sentence. (c) No dividends declared after the Effective Time with respect to Candie's Common Stock and payable to the holders of record thereof after the Effective Time shall be paid to the holder of an unsurrendered Certificate until such Certificate shall be surrendered as provided herein, but (i) upon such surrender there shall be paid to the person in whose name the certificates representing Candie's Common Stock shall be issued the amount of dividends theretofore paid with respect to Candie's Common Stock as of any date subsequent to the Effective Time based on the number of shares of Candie's Common Stock received by such person and the amount of cash payable to such person in lieu of a fractional share of Candie's Common Stock pursuant to paragraph (c) of Section 1.9 and (ii) at the appropriate payment date or as soon as practicable thereafter, there shall be paid to such person the amount of dividends payable with respect to Candie's Common Stock; provided, -9- however, that no dividends with a record date subsequent to the Effective Time shall be payable with respect to fractional shares of Candie's Common Stock, and, subject in any case to any applicable escheat laws and unclaimed property laws. On surrender of a Certificate, no interest shall be payable with respect to the payment of such dividends, and no interest shall be payable with respect to the amount of any cash payable in lieu of a fractional share of Candie's Common Stock. (d) If any cash is to be paid to, or certificates representing Candie's Common Stock are to be issued to, a person other than the person in whose name the Certificate surrendered in exchange therefor is registered, it shall be a condition of the payment or issuance thereof that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of the payment of cash to a person other than, or of the issuance of certificates representing Candie's Common Stock in any name other than that of, the registered holder of the Certificate surrendered, or otherwise required, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (e) After the Effective Time, there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of NRC's Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the -10- Surviving Corporation, they shall be cancelled and exchanged for the cash, if any, and certificates representing the Candie's Common Stock into which they were converted as provided in this Article I. ARTICLE II SHAREHOLDER APPROVAL 2.1 Shareholder Approvals. (a) A meeting of the holders of NRC's Common Stock shall be called in accordance with Delaware Corporate Law to be held on such date as may be mutually agreed by the Boards of Directors of NRC and Candie's, and approved by the Board of Directors of NRC, to consider and vote upon the approval of the Plan of Merger. NRC shall use its best efforts to seek all required approvals of its shareholders in connection with the Plan of Merger. (b) A meeting of the holders of Candie's Common Stock shall be called in accordance with Delaware Corporate Law to be held on such date as may be mutually agreed upon by the Boards of Directors of Candie's and NRC, and approved by the Board of Directors of Candie's, to consider and vote upon the approval of the Plan of Merger and the issuance by Candie's of the Candies securities in connection with the Merger. Candie's shall use its best efforts to seek all required approvals of its shareholders in connection with the Plan of Merger and the issuance of such Candie's securities. (c) If the Plan of Merger is approved as provided in this Article II, and if the Merger is not thereafter terminated as permitted by ss. 251(d) of the Delaware Corporate Law and Article -11- IX of this Agreement, and if each of the conditions to the obligations of NRC and Candie's as provided hereunder have in accordance herewith been either satisfied or waived, then NRC and Candie's shall cause the Certificate of Merger to be promptly executed, acknowledged, delivered and properly and duly filed with the Secretary of State of the State of Delaware on behalf of each of NRC and Candie's. ARTICLE III REPRESENTATIONS AND WARRANTIES OF NRC NRC represents and warrants to Candie's as follows: 3.1 Organization and Related Matters. NRC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. NRC has the requisite corporate power and authority to own, lease, license and operate its properties and assets and carry on its business as now being conducted. 3.2 Subsidiaries. NRC has no direct or indirect subsidiaries. 3.3 Capitalization of NRC. The authorized capital stock of NRC consists of 25,000,000 shares of NRC's Common Stock, $.01 par value, of which 5,693,639 shares are issued and outstanding and 1,635,000 shares are reserved (the "NRC Reserved Shares") for issuance upon the exercise of stock options granted to certain of its directors, employees and consultants (the "NRC Options"), and 1,000,000 shares of NRC Preferred Stock, .01 par value, none of which are issued and outstanding. There are no other outstanding options, warrants or other rights to subscribe for or purchase or -12- acquire from NRC, or any plans, contracts or commitments providing for the issuance of or the granting of rights to acquire, any capital stock of NRC or securities convertible into or exchangeable for capital stock of NRC. All issued shares of NRC capital stock are duly authorized, validly issued and outstanding and are fully paid, nonassessable and free from preemptive rights. 3.4 Authority Relative to Agreement. Except for shareholder approval required by ss. 251(c) of the Delaware Corporate Law, NRC has full corporate power and authority to enter into and perform this Agreement and to carry out the transactions contemplated hereby. The Board of Directors of NRC has duly authorized the execution, delivery and performance of this Agreement and the transactions contemplated hereby, and, except for the shareholder meeting contemplated in Article II hereof, no other corporate proceedings on the part of NRC are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement constitutes the valid and binding agreement of NRC enforceable against it in accordance with its terms, except (a) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar laws affecting the enforcement of creditors rights generally and (b) the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought. 3.5 Compliance. Except as disclosed in Section 3.5 of the Disclosure Statement of NRC attached hereto and made a part hereof (the "NRC Disclosure Statement"), neither the execution and -13- delivery of this Agreement by NRC, nor the consummation by NRC of the transactions contemplated hereby, nor compliance by NRC with the terms and provisions of this Agreement, will (nor with the giving of notice or the lapse of time or both would): (a) conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of NRC; (b) in any manner which would adversely affect the ability of NRC to consummate the transactions provided for in this Agreement in accordance with the terms of this Agreement, (i) violate, result in breach of, give rise to a default, or any right of termination, cancellation or acceleration, or otherwise be in conflict with or result in a loss of material contractual benefits to NRC under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which NRC is a party or by which it or its operations, business, property or assets may be bound, or of which it or its operations, business, properties or assets is a beneficiary, or (ii) require any consent, approval or notice under the terms of any such note, bond, mortgage, indenture, license, agreement or other instrument; (c) violate, result in a breach of or conflict with any order, writ, injunction, decree, law, statute, rule or regulation of any court or governmental authority applicable to NRC, or to which NRC's operations, businesses, properties or assets, including but not limited to the NRC Intellectual Property Rights (as defined in Section 3.11), are subject in any manner which would adversely affect the ability of NRC to consummate the -14- transactions provided for in this Agreement in accordance with the terms of this Agreement; (d) result in the creation or imposition of any lien, claim, restriction, charge or encumbrance upon any of the NRC Common Stock; or (e) to the best of the knowledge of NRC, materially and adversely interfere with or otherwise materially and adversely affect the ability of the Surviving Corporation to carry on NRC's business on substantially the same basis as it is now conducted by NRC, including (in any manner that will materially and adversely affect the Surviving Corporation) violate, result in a breach of, give rise to a default, or otherwise be in conflict with or result in a loss of material contractual benefits to the Surviving Corporation under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which NRC is currently a party or by which NRC, or any of its operations, business, properties or assets currently may be bound or is a beneficiary. 3.6 SEC Filings; Financial Statements. (a) Since April 1, 1995, NRC has filed, and will continue to file, all forms, reports and documents required to be filed by NRC with Securities and Exchange Commission (the "SEC") (collectively, the "NRC SEC Reports"). Except as disclosed in Section 3.6 of the NRC Disclosure Statement, the NRC SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934, as amended (the "Exchange -15- Act"), as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a subsequent filing, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such NRC SEC Reports or necessary in order to make the statements in such NRC SEC Reports, in the light of the circumstances under which they were made, not misleading. (b) Each of the financial statements (including, in each case, any related notes) contained in the NRC SEC Reports, including any NRC SEC Reports filed after the date of this Agreement until the Closing (the "NRC Financial Statements"), complied or will comply as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-QSB or 8-K promulgated by the SEC), and fairly presented or will fairly present the financial position of NRC as and at the respective dates and the results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The unaudited balance sheet of NRC as of December 31, 1997 is referred to herein as the "NRC Balance Sheet." -16- 3.7 Absence of Undisclosed Liabilities. Except as disclosed in Section 3.7 of the NRC Disclosure Statement or as otherwise disclosed in the NRC SEC Reports, NRC does not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with U.S. generally accepted accounting principles), and whether due or to become due, which individually or in the aggregate could reasonably be expected to have a material adverse effect, other than (i) liabilities reflected in the NRC Balance Sheet, (ii) liabilities specifically described in this Agreement or in the NRC Disclosure Statement, (iii) normal or recurring liabilities incurred since December 31, 1997 in the ordinary course of business consistent with past practices, and (iv) liabilities permitted by Section 5.2 hereof. 3.8 Absence of Certain Changes or Events. Except as set forth in Section 4.7 of the NRC Disclosure Statement, since the date of the NRC Balance Sheet, NRC has conducted its business only in the ordinary course in a manner consistent with past practice (except as disclosed in the NRC SEC Reports), and since such date there has not been: (a) any NRC material adverse effect or any facts or circumstances that could reasonably be expected to result in a material adverse effect: (b) any damage, destruction or loss (whether or not covered by insurance) with respect to NRC having a material adverse effect; (c) any material change by NRC in its accounting methods, principles or practices to which Candie's has not previously consented in writing; (d) any revaluation by NRC of any of its assets having a material adverse effect, unless Candie's -17- has previously consented in writing; or (e) except as disclosed in the NRC Disclosure Statement, any other action or event that would have required the consent of Candie's pursuant to Section 5.2 of this Agreement had such action or event occurred after the date of this Agreement and that could reasonably be expected to result in a material adverse effect. 3.9 Taxes. (a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes" means any and all material federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) NRC has accurately prepared and timely filed (or will so file) all material federal, state, local and foreign returns, estimates, information statements and reports ("Returns") required to be filed at or before the Effective Time relating to any and all Taxes concerning or attributable to NRC or to its operations, and such Returns are true and correct in all material respects and have been completed in all material respects in accordance with applicable law. -18- (c) NRC as of the Effective Time: (i) will have paid all Taxes it is required to pay prior to the Effective Time and (ii) will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld, except in each case for Taxes contested in good faith by appropriate proceedings for which adequate reserves have been taken and except where the failure (if any) to pay or withhold such Taxes could not reasonably be expected to have a material adverse effect. (d) There is no Tax deficiency outstanding, proposed or assessed against NRC that is not reflected as a liability on the NRC Balance Sheet nor has NRC executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (e) NRC has no material liability for unpaid federal, state, local or foreign Taxes that has not been accrued for or reserved on the NRC Balance Sheet, whether asserted or unasserted, contingent or otherwise. 3.10 Properties. Except as set forth in Section 3.10 of the NRC Disclosure Statement, NRC owns or has valid leasehold interests in all real property necessary for the conduct of its business as presently conducted. All material leases to which NRC is a party are in good standing, valid and effective in accordance with their respective terms, and NRC is not in default under any of such leases, except where the lack of such good standing, validity and effectiveness or the existence of such default could not reasonably be expected to have a material adverse effect. -19- 3.11 Intellectual Property. (a) Except as disclosed in Section 3.11 of the NRC Disclosure Statement, NRC owns, or licenses or otherwise possess, legally enforceable rights to use, all patents, trademarks, trade names, service marks and copyrights, any applications for and registrations of such patent, trademarks, trade names, service marks and copyrights, and all processes, formulae, methods, schematics, technology, know how, and tangible or intangible proprietary information or material that are necessary to conduct the business of NRC as currently conducted or planned to be conducted by NRC, the absence of which would be reasonably likely to have a material adverse effect (the "NRC Intellectual Property Rights"). (b) Except as disclosed in Schedule 3.11 of the NRC Disclosure Statement, (i) the NRC Intellectual Property Rights which are material to the business of NRC are valid and subsisting; (ii) NRC has not been sued in any suit, action or proceeding which involves a claim of infringement of any of the NRC Intellectual Property Rights or any other proprietary right of any third party; and (iii) to the knowledge of NRC, the manufacturing, marketing, licensing or sale of NRC's products does not infringe any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party, which infringement, either individually or in the aggregate, could reasonably be expected to have a material adverse effect. 3.12 Litigation. Except as disclosed in Section 3.12 of the NRC Disclosure Statement, there is no action, suit or -20- proceeding, claim, arbitration or, to the knowledge of NRC, investigation against NRC, pending or, to the knowledge of NRC, threatened, or as to which NRC has received any written notice of assertion, which, if decided adversely to NRC, could reasonably be expected to have a material adverse effect or a material adverse effect on the ability of NRC to consummate the transactions contemplated by this Agreement. 3.13 Employee Benefit Plans. (a) Except for the NRC stock option plan, a copy of which has been made available to Candie's, NRC has no employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and no bonus, other stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance or other similar employee benefit plans, and no unexpired severance agreements, written or otherwise, for the benefit of, or relating to, any current or former employee of NRC or any trade or business (whether or not incorporated) which is a member or which is under common control with NRC within the meaning of Section 414 of the Code. NRC does not maintain and has never maintained or contributed to any employee benefit plan subject to Title IV of ERISA (including a multiemployer plan as defined in Section 3(37) of ERISA). (b) Except as set forth in Schedule 3.13 of the NRC Disclosure Statement, and except as provided for in this Agreement, NRC is not a party to any oral or written (i) union or collective bargaining agreement, (ii) agreement with any officer or other key employee of NRC, the benefits of which are contingent, or the terms -21- of which are materially altered, upon the occurrence of a transaction involving NRC of the nature contemplated by this Agreement, (iii) agreement with any officer of NRC providing any term of employment or compensation guarantee extending for a period longer than one year from the date hereof or for the payment of compensation in excess of $10,000 per annum, or (iv) agreement or plan, including the NRC stock option plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. 3.14 Accounts Receivable; Inventory. Subject to any reserves set forth in the NRC Balance Sheet, the accounts receivable shown in the NRC Balance Sheet arose in the ordinary course of business; were not, as of the date of the NRC Balance Sheet, subject to any material discount, contingency, claim of offset or recoupment or counter claim; and represented, as of the date of the NRC Balance Sheet, bona fide claims against debtors for sales, leases, licenses and other charges. Other than those accounts receivable due from Candie's set forth on the NRC Balance Sheet, all accounts receivable of NRC arising after the date of the NRC Balance Sheet through the date of this Agreement arose in the ordinary course of business and, as of the date of this Agreement, are not subject to any material discount, contingency, claim of off-set or recoupment or counterclaim, except for normal reserves consistent with past practice. The amount carried for doubtful -22- accounts and allowances disclosed in the NRC Balance Sheet is believed by NRC as of the date of this Agreement to be sufficient to provide for any losses which may be sustained on realization of the accounts receivable shown in the NRC Balance Sheet. NRC has no inventory. 3.15 Board Recommendation. The Board of Directors of NRC has unanimously approved and adopted this Agreement, which vote included the affirmative vote of a majority of the disinterested directors and has recommended that the stockholders of NRC approve and adopt the Plan of Merger. 3.16 Statements True and Correct. No statement, certificate, instrument or other writing furnished or to be furnished by NRC pursuant to this Agreement or any other document, agreement or instrument referred to herein contains or will contain any untrue statement of fact of material fact or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.17 Financial Advisor Opinion. The financial advisor to NRC, CoView Capital, Inc., has delivered to NRC an opinion, as of, or immediately prior to the date of this Agreement to the effect that the Exchange Ratio is fair from a financial point of view to the holders of NRC Common Stock (the "NRC Fairness Opinion"). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CANDIE'S Candie's represents and warrants to NRC as follows: -23- 4.1 Organization and Related Matters. Candie's is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Candie's has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. 4.2 Authority Relative to this Agreement. Candie's has full corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. The Board of Directors of Candie's, has duly authorized the execution, delivery and performance of this Agreement and the transactions contemplated hereby, and, except for the Shareholder meeting contemplated in Article II hereof, no other corporate proceedings on the part of Candie's are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement constitutes the valid and binding agreement of Candie's enforceable against it in accordance with its terms, except (a) such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar laws affecting the enforcement of creditors rights generally and (b) the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought. 4.3 Capitalization of Candie's. The authorized capital stock of Candie's consists of (i) 30,000,000 shares of Candie's Common Stock of which 14,146,990 shares are issued and outstanding, and (ii) 5,000,000 shares of Candie's Preferred Stock, none of which are issued and outstanding. Candie's has reserved for -24- issuance (i) 4,723,800 shares of Candie's Common Stock upon the exercise of outstanding stock options pursuant to the Candie's employee 1989 and 1997 stock option plans and other options and outstanding warrants (the "Prior Reserved Shares") and (ii) up to approximately 2,306,000 shares of Candie's Common Stock to be issued to the NRC Stockholders at the Effective Time of the Merger as contemplated by this Agreement (the "Reserved Shares") and 662,175 shares of Candie's Common stock to be issued upon exercise of the NRC options to be issued to the holders of NRC stock options as contemplated by this Agreement (the "Reserved Option Shares" and together with the Reserved Shares the "Reserved Securities"). All issued and outstanding shares of Candie's Common Stock are duly authorized, validly issued and are fully paid, nonassessable and free from preemptive rights. All of the Prior Reserved Shares, the Reserved Shares and the Reserved Option Shares when issued, will be duly authorized, validly issued and outstanding fully paid, nonassessable and free from preemptive rights. There are no shares held in the treasury and except for the Prior Reserved Shares and the Reserved Shares there are no outstanding options, warrants or other rights to subscribe for or purchase or acquire from Candie's or any plans, contracts or commitments providing for the issuance of or the granting of rights to acquire any capital stock of Candie's or securities convertible into or exchangeable for Candie's Common Stock. 4.4 Compliance. Neither the execution and delivery by Candie's of this Agreement or of any agreement to be executed and delivered by it pursuant hereto, nor the consummation of any of the -25- transactions contemplated hereby or thereby, nor the performance by it of any of its obligations hereunder or thereunder, will (nor with the giving of notice or the lapse of time or both would): (a) conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of Candie's; (b) in any manner which would adversely affect the ability of Candie's to consummate the transactions provided for in this Agreement in accordance with the terms of this Agreement; (i) violate, result in a breach of, give rise to a default, or any right of termination, cancellation or acceleration, or otherwise be in conflict with or result in a loss of contractual benefits to Candie's under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which it is a party or by which it, or any of its operations, businesses, properties or assets may be bound, or of which it, any of its securities, or its operations, business, property or assets is a beneficiary, or (ii) require any consent, approval or notice under the terms of any such note, bond, mortgage, indenture' license, agreement or other instrument; (c) violate, result in a breach of or conflict with any order, writ, injunction, decree, law, statute, rule or regulation of any court or governmental authority applicable to Candie's or to which its operations, businesses, properties or assets, including but not limited, to the Candie's Intellectual Property (as defined in Section 4.10), are subject in any manner which would adversely affect the ability of Candie's to consummate -26- the transactions provided for in this Agreement in accordance with the terms of this Agreement; (d) result in the creation or imposition of any lien, claim, restriction, charge or encumbrance upon any of the Candie's Common Stock, options or warrants issued or reserved for issuance pursuant to this Agreement; or (e) the best of the knowledge of Candie's, interfere with or otherwise materially and adversely affect the ability of Candie's, after the Effective Time, to carry on its business on substantially the same basis as it is now conducted by it. 4.5 SEC Filings; Financial Statements. (a) Since February 1, 1995, Candie's has filed, and will continue to file, all forms, reports and documents required to be filed by Candie's with the SEC (collectively, the "Candie's SEC Reports"). Except as disclosed in section 4.5 of the Candie's disclosure statement attached hereto and made a part hereof (the "Candie's Disclosure Statement"), the Candie's SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a subsequent filing, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Candie's SEC Reports or necessary in order to make the statements in such Candie's SEC Reports, in the light of the circumstances under which they were made, not misleading. None of Candie's -27- subsidiaries is required to file any forms, reports or other documents with the SEC. For purposes of this Agreement, all references to "Candie's" shall include all of Candie's subsidiaries unless the context otherwise indicates. (b) Each of the consolidated financial statements (including, in each case, any related notes) contained in the Candie's SEC Reports, including any Candie's SEC Reports filed after the date of this Agreement until the Closing (the "Candie's Financial Statements"), complied or will comply as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q or 8-K promulgated by the SEC), and fairly presented or will fairly present the consolidated financial position of Candie's as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The audited consolidated balance sheet of Candie's as of January 31, 1997 is referred to herein as the "Candie's Balance Sheet." 4.6 Absence of Undisclosed Liabilities. Except as disclosed in the Candie's SEC Reports, Candie's does not have any liabilities, either accrued or contingent (whether or not required -28- to be reflected in financial statements in accordance with U.S. generally accepted accounting principles), and whether due or to become due, which individually or in the aggregate could reasonably be expected to have an material adverse effect, other than (i) liabilities reflected in the Candie's Balance Sheet, (ii) liabilities specifically described in this Agreement or in the Candie's Disclosure Statement, (iii) normal or recurring liabilities incurred since January 31, 1997 in the ordinary course of business consistent with past practices, and (iv) any liabilities permitted by Section 6.2 hereof. 4.7 Absence of Certain Changes or Events. Except as set forth in Section 4.7 of the Candie's Disclosure Statement, since the date of the Candie's Balance Sheet, Candie's has conducted its businesses only in the ordinary course in a manner consistent with past practice (except as disclosed in the Candie's SEC Reports), and since such date there has not been: (a) any material adverse effect or any facts or circumstances that could reasonably be expected to result in an material adverse effect; (b) any damage, destruction or loss (whether or not covered by insurance) with respect to Candie's having an material adverse effect; (c) any material change by Candie's in its accounting methods, principles or practices to which NRC has not previously consented in writing; (d) any revaluation by Candie's of any of its assets having an material adverse effect, unless NRC has previously consented in writing; or (e) except as disclosed in the Candie's Disclosure Statement, any other action or event that would have required the consent of NRC pursuant to Section 6.2 of this Agreement had such -29- action or event occurred after the date of this Agreement and that could reasonably be expected to result in an material adverse effect. 4.8 Taxes. (a) Candie's has accurately prepared and timely filed (or will so file) all Returns required to be filed at or before the Effective Time relating to any and all Taxes concerning or attributable to Candie's or to its operations, and such Returns are true and correct in all material respects and have been completed in all material respects in accordance with applicable law. (b) As of the Effective Time Candie's: (i) will have paid all Taxes it is required to pay prior to the Effective Time and (ii) will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld, except in each case for Taxes contested in good faith by appropriate proceedings for which adequate reserves have been taken and except where the failure (if any) to pay or withhold such Taxes could not reasonably be expected to have an material adverse effect. (c) There is no Tax deficiency outstanding, proposed or assessed against Candie's that is not reflected as a liability on the Candie's Balance Sheet nor has Candies executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (d) Candie's does not have any material liability for unpaid federal, state, local or foreign Taxes that has not been -30- accrued for or reserved on the Candie's Balance Sheet, whether asserted or unasserted, contingent or otherwise. 4.9 Properties. Candie's owns or has valid leasehold interests in all real property necessary for the conduct of its business as presently conducted. All material leases to which Candie's is a party are in good standing, valid and effective in accordance with their respective terms, and Candie's is not in default under any of such leases, except where the lack of such good standing, validity and effectiveness or the existence of such default could not reasonably be expected to have a material adverse effect. 4.10 Intellectual Property. (a) Candies owns, or is licensed or otherwise possesses, legally enforceable rights to use, all patents, trademarks, trade names, service marks and copyrights, any applications for and registrations of such patents, trademarks, trade names, service marks and copyrights, and all processes, formulae, methods, schematics, technology, know how, and tangible or intangible proprietary information or material that are necessary to conduct the business of Candie's as currently conducted or planned to be conducted by Candie's, the absence of which would be reasonably likely to have a material adverse effect (the "Candie's Intellectual Property Rights"). (b) The Candie's Intellectual Property Rights which are material to the business of Candie's, are valid and subsisting; (ii) Candie's has not been sued in any suit, action or proceeding which involves a claim of infringement of any of the Candie's -31- Intellectual Property Rights or other proprietary right of any third party; and (iii) the manufacturing, marketing, licensing or sale of Candie's products does not infringe any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party, which infringement could, either individually or in the aggregate, be reasonably likely to have an material adverse effect. 4.11 Litigation. Except as set forth in Section 4.11 of the Candie's Disclosure Schedule, there is no action, suit or proceeding, claim, arbitration or, to the knowledge of Candie's, investigation against Candie's pending or, to the knowledge of Candie's, threatened, or as to which Candie's has received any written notice of assertion, which, if decided adversely to Candie's, could reasonably be expected to have an material adverse effect or a material adverse effect on the ability of Candie's to consummate the transactions contemplated by this Agreement. 4.12 Employee Benefit Plans. (a) Candie's has made available to NRC all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar employee benefit plans, and all unexpired severance agreements, written or otherwise, for the benefit of, or relating to, any current or former employee of Candie's or any trade or business (whether or not incorporated) which is a member or which is under common control with Candie's within the meaning of Section 414 of the Code (together, the "Candie's Employee Plans"). Candie's does not -32- maintain and has never maintained or contributed to an employee benefit plan subject to Title IV of ERISA (including a multiemployer plan as defined in Section 3(37) of ERISA). (b) With respect to each Candie's Employee Plan, Candie's has made available to NRC, a true and correct copy of (i) the most recent annual report (Form 5500) filed with the IRS with respect to a Candie's Employee Plan subject to such filing requirement, (ii) such Candie's Employee Plan, (iii) each trust agreement and group annuity contract, if any, relating to such Candie's Employee Plan, and (iv) the most recent determination letter issued with respect to any plan which is intended to be qualified under section 401(a) of the Internal Revenue Code. (c) With respect to the Candie's Employee Plans, individually and in the aggregate, no event has occurred, and to the knowledge of Candie's there exists no condition or set of circumstances, in connection with which Candie's could be subject to any material liability under ERISA, the Code or any other applicable law. (d) With respect to the Candie's Employee Plans, individually and in the aggregate, there are no material funded benefit obligations for which contributions have not been made or properly accrued and there are no material unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted in accordance with U.S. generally accepted accounting principles, on the Candie's Financial Statements. -33- (e) Except as set forth in Section 4.12 of the Candie's Disclosure Statement, and except as provided for in this Agreement, Candie's is not a party to any oral or written (i) union or collective bargaining agreement, (ii) agreement with any officer or other key employee of Candie's the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving Candie's of the nature contemplated by this Agreement, (iii) agreement with any corporate officer of Candie's providing any term of employment or compensation guarantee extending for a period longer than one year from the date hereof or for the payment of compensation in excess of $50,000 per annum, or (iv) agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits to which will be accelerate, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. 4.13 Accounts Receivable; Inventory. Subject to any reserves set forth in the Candie's Balance Sheet, the accounts receivable shown in the Candie's Balance Sheet arose in the ordinary course of business; were not, as of the date of Candie's Balance Sheet, subject to any material discount, contingency, claim of offset or recoupment or counterclaim: and represented, as of the date of the Candie's Balance Sheet, bona fide claims against debtors or sales, leases, licenses and other charges. All accounts -34- receivable of Candie's arising after the date of the Candie's Balance Sheet through the date of this Agreement arose in the ordinary course of business and, as of the date of this Agreement, are not subject to any material discount, contingency, claim of offset or recoupment or counterclaim, except for normal reserves consistent with past practice. The amount carried for doubtful accounts and allowances disclosed in the Candie's Balance Sheet is believed by Candie's as of the date of this Agreement to be sufficient to provide for any losses which may be sustained on realization of the accounts receivable shown in the Candie's Balance Sheet. As of the date of the Candie's Balance Sheet, the inventories shown on the Candie's Balance Sheet consisted in all material respects of items of a quantity and quality usable or saleable in the ordinary course of business. All of such inventories were acquired in the ordinary course of business and, as of the date of this Agreement, have been replenished in all material respects in the ordinary course of business consistent with past practices. All such inventories are valued on the Candie's Balance Sheet in accordance with U.S. generally accepted accounting principles applied on a basis consistent with Candie's past practices, and provision has been made or reserves have been established on the Candie's Balance Sheet, in each case in an amount believed by Candie's as of the date of the Candie's Balance Sheet to be adequate, for all slow-moving, obsolete or unusable inventories. 4.14 Board Recommendations. The Board of Directors of Candie's has unanimously approved and adopted this Agreement, which -35- vote included the affirmative vote of a majority of the disinterested directors and has recommended that the stockholders of Candie's approve and adopt the Plan of Merger. 4.15 Financial Advisor Opinion. The financial advisor of Candie's, Ladenburg Thalmann & Co. Inc., has delivered to Candie's an opinion, as of, or immediately prior to the date of this Agreement to the effect that the Exchange Ratio is fair from a financial point of view to the holders of the Candie's Common Stock (the "Candie's Fairness Opinion"). 4.16 Statements True and Correct. No statement, certificate, instrument or other writing furnished or to be furnished by NRC pursuant to this Agreement or any other document, agreement or instrument referred to herein contains or will contain any untrue statement of fact of material fact or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE V COVENANTS OF NRC 5.1 Shareholder Meeting. The Board of Directors of NRC shall take all actions necessary to convene and cause the shareholders of NRC to hold a special shareholders meeting to consider and vote upon the approval of the Plan of Merger by July 31, 1998. 5.2 Conduct of the Business; Prohibited Activities. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the -36- Effective Time, and except as otherwise contemplated by or set forth in this Agreement, NRC (except to the extent that Candie's shall otherwise consent in writing, which consent shall not be unreasonably withheld), shall carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, pay its debts and taxes when due subject to good faith disputes over such debts or taxes, pay or perform its other obligations when due, and, to the extent consistent with such business, use reasonable efforts consistent with past practices and policies to (i) preserve intact its present business organization, (ii) keep available the services of its present officers and key employees, and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it, except where the failure to do so could not reasonably be expected to have a material adverse effect. NRC shall notify Candie's promptly after becoming aware of any event or occurrence not in the ordinary course of business of NRC that would result in a breach of any covenant or agreement of NRC set forth in this Agreement or cause any representation or warranty of NRC set forth in this Agreement to be untrue as of the date of such event or occurrence. Except as expressly contemplated by this Agreement, or as set forth in Section 5.2 of the NRC Disclosure Statement, NRC shall not, without the prior written consent of Candie's, which shall not be unreasonably withheld: (a) accelerate, amend or change the period of exerciseability of options or restricted stock granted under any of the NRC stock option plans or authorize cash payments -37- in exchange for any options granted under any of such plans except as required by the terms of such plans or any related agreements in effect as of the date of this Agreement; (b) transfer or license to any person or entity or otherwise extend, amend or modify any rights to the NRC Intellectual Property Rights other than in the ordinary course of business consistent with past practices or on a non-exclusive basis not materially different from past practices; (c) declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or purchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service by such party; (d) issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the issuance of NRC Common Stock or -38- the grant of options or rights to acquire NRC Common Stock pursuant to the NRC stock option plans in the ordinary course of business substantially consistent as to amount, exercise price, vesting and other terms with past practice, and (ii) the issuance of shares of NRC Common Stock as and to the extent required under the NRC stock option plans; (e) acquire or agree to acquire, by merging or consolidating with, by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other means, any business or any corporation, partnership or other business organization or division, or otherwise acquire or agree to acquire any material amount of assets; (f) sell, lease, license or otherwise dispose of any of its properties or assets which are material, individually or in the aggregate, to the business of NRC, except for sales, leases or licenses of products, services and software in the ordinary course of business; (g) take any action to: (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of officers or employees in accordance with past practices, (ii) grant any additional severance or termination pay to, or enter into any employment or severance agreements with, directors or officers, (iii) grant any severance or termination pay to, or enter into any employment or severance agreement with, any employee, except in accordance with past practices or in settlement of disputes with present or former -39- employees, not material in amount, either individually or in the aggregate, (iv) enter into any collective bargaining agreement, or (v) establish, adopt, enter into or amend in any material respect any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (h) revalue any of its assets, including writing down the value of inventory or writing off notes or accounts receivable, other than in the ordinary course of business or pursuant to arm's length transactions on commercially reasonable terms or where such action will not have a material adverse effect; (i) incur or maintain any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities or guarantee any debt securities of others in excess of a maximum aggregate amount outstanding at any time of $25,000 inclusive of indebtedness outstanding as of the date of this Agreement; (j) amend or propose to amend its Certificate of Incorporation or Bylaws; (k) incur or commit to incur capital expenditures in excess of $25,000 in the aggregate; (l) enter into or amend any agreements pursuant to which any third party is granted exclusive marketing, -40- manufacturing or other rights with respect to any NRC product, process or technology; (m) amend or terminate any material contract, agreement or license to which it is a party except in the ordinary course of business; (n) waive or release any material right claim, except in the ordinary course to business; (o) initiate any litigation or arbitration proceeding; or (p) take, or agree in writing or otherwise to take, any of the actions described in the foregoing clauses (a) through (o), or any action which (i) would make any of NRC's representations or warranties in this Agreement, if made on and as of the date of such action or agreement, untrue or incorrect in any material respect, or (ii) could prevent it from performing, or cause it not to perform, its obligations under this Agreement. 5.3 Commission Filings. NRC shall cooperate fully with Candie's in providing the information required for the Joint Proxy Statement and the Registration Statement (each as defined in Section 6.3). The information supplied by NRC for inclusion in the Joint Proxy Statement and Registration Statement shall not contain, any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement in light of the circumstances under which they were made not misleading, (i) at the time the Registration Statement is -41- declared effective by the SEC, (ii) on the date the Joint Proxy Statement is first mailed to NRC shareholders and the Candie's shareholders and (iii) on the dates of the meetings of NRC shareholders and the Candie's shareholders referred to in Article II hereof, insofar as they relate to NRC. NRC shall correct any information provided by it for use in the Joint Proxy Statement or Registration Statement which shall have become untrue or misleading. ARTICLE VI COVENANTS OF CANDIE'S 6.1 Shareholder Meeting. The Board of Directors of Candie's shall take all actions necessary to convene and cause the shareholders of Candie's to hold a special or annual shareholders meeting to consider and vote upon the approval of the Plan of Merger and the issuance of the Candie's securities in connection with the Merger. 6.2 Conduct of Business Pending Merger. During the period from the date of this Agreement and continuing until the earlier of the termination of the Agreement or the Effective Time, and except as otherwise set forth in Section 6.2 of the Candie's Disclosure Statement, Candie's (except to the extent that NRC shall otherwise consent in writing), shall carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and taxes when due subject to good faith disputes over such debts or taxes, to pay or perform its other obligations when due, and, to the extent consistent with such business, to use all reasonable efforts -42- consistent with past practices and policies to (i) preserve intact its present business organization, (ii) keep available the services of its present officers and key employees, and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it, except where the failure to do so could not reasonably be expected to have an material adverse effect. 6.3 Commission Filings. Promptly after the date hereof, Candie's shall file with the SEC a registration statement on Form S-4 or other appropriate form under the Securities Act, and the rules and regulations thereunder, relating to the shares of Candie's Common Stock and to the extent the form is available for such purpose the Reserved Securities to be issued with respect to the Merger (the "Registration Statement"). The Registration Statement shall contain a proxy statement, together with a form of proxy with respect to each of the meeting of NRC's shareholders, at which the shareholders of NRC will vote upon the Plan of Merger and the meeting of the Candie's shareholders, at which the shareholders will vote upon the Plan of Merger and the issuance of the Candie's securities (the "Joint Proxy Statement"). Candie's shall use all reasonable efforts to have the Registration Statement declared effective under the Securities Act and the Joint Proxy Statement cleared by the Commission as promptly as practicable, and shall cooperate with NRC to promptly thereafter mail the Joint Proxy Statement to the respective shareholders of NRC and Candie's. Candie's shall take any action required to be taken under state blue sky or securities laws. -43- 6.4 The term "Registration Statement" shall mean such Registration Statement at the time it becomes effective and all amendments thereto duly filed and similarly mailed. The term "Joint Proxy Statement" shall mean such proxy or information statement at the time it is initially mailed to Candie's shareholders and NRC's shareholders and all amendments or supplements thereto, if any, similarly filed and mailed. The information set forth in the Registration Statement and the Joint Proxy Statement shall be true and correct in all material respects and shall not omit to state any material fact necessary in order to make such information not misleading, (i) at the time the Registration Statement is declared effective by the SEC, (ii) at the time the Joint Proxy Statement is first mailed to the shareholders of Candie's and NRC and (iii) on the dates of the meetings of the NRC shareholders and Candie's shareholders referred to in Article II. Candie's shall correct any information provided by it for use in the Registration Statement or the Joint Proxy Statement which shall have become untrue or misleading. ARTICLE VII CONDITIONS TO OBLIGATIONS 7.1 Conditions to Obligations of NRC to Effect the Merger. The obligations of NRC to effect the Merger are subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions, of which, subsections (g) and (h) of this Section 7.1 may be waived in writing by NRC: (a) This Agreement and the Merger shall have been approved and adopted by the requisite vote or consent of the -44- shareholders of NRC and Candie's required by the Delaware Corporate Law; (b) The Registration Statement shall have become effective and no stop order suspending such effectiveness or qualification shall have been issued or proceedings for such purpose shall have been instituted or threatened; (c) No preliminary or permanent injunction or other order, decree, action or proceeding shall have been instituted, issued or threatened against any of the parties hereto or their directors or officers, before any court or governmental department, regulatory or administrative agency or commission to restrain or prohibit, or to obtain substantial damages in respect of, this Agreement or the consummation of the transactions contemplated hereby and which in the opinion of NRC or Candie's would make it inadvisable to consummate such transactions; provided, however, that NRC and Candie's shall have used all best efforts to prevent such event; (d) the waiting period, if any, applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR" Act) shall have expired or have been terminated; (e) NRC shall have received a letter, dated as of a date not more than five (5) days prior to the Effective Date, from CoView Capital, Inc. stating that the NRC Fairness Opinion is still in full force and effect as of such date; (f) The shares of Candie's Common Stock to be issued in the Merger shall have been approved for listing on the -45- Nasdaq National Market, or if not available, on the Nasdaq Small Cap Market; (g) The representations and warranties of Candie's set forth in this Agreement shall be true and correct in all material respects as of the date this Agreement and as of the Effective Date (except that representations and warranties which are confined to a specific date shall be true and correct as of such date); (h) NRC shall have received an opinion of Tenzer Greenblatt LLP, counsel to Candie's, in form reasonably acceptable to NRC and its counsel. 7.2 Conditions to Obligations of Candie's to Effect the Merger. The obligations of Candie's to effect the Merger shall be subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions, of which subsections (g), (h), (i), and (j) of this section 7.2 may be waived in writing by Candie's: (a) This Agreement and the Merger shall have been approved and adopted by the requisite vote or consent of the shareholders of Candie's and NRC required by the Delaware Corporate Law; (b) The Registration Statement shall have become effective and no stop order suspending such effectiveness or qualification shall have been issued or proceedings for such purpose shall have been instituted or threatened; (c) No preliminary or permanent injunction or other order, decree, action or proceeding shall have been instituted, -46- issued or threatened against any of the parties hereto or their directors or officers, before any court or governmental department, regulatory or administrative agency or commission to restrain or prohibit, or to obtain substantial damages in respect of, this Agreement or the consummation of the transactions contemplated hereby and which in the opinion of Candie's or NRC would make it inadvisable to consummate such transactions; provided, however, that Candie's shall have used all best efforts to prevent such event; (d) the waiting period, if any, applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR" Act) shall have expired or have been terminated; (e) Candie's shall have received a letter, dated as of a date not more than five (5) days prior to the Effective Date, from Ladenburg & Thalmann & Co. Inc. stating that the Candie's Fairness Opinion is still in full force and effect as of such date; (f) The shares of Candie's Common Stock to be issued in the Merger shall have been approved for listing on the Nasdaq National Market, or if not available, on the Nasdaq Small Cap Market; (g) The representations and warranties of NRC set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Date (except that representations and warranties which are confined to a specific date shall be true and correct as of such date); -47- (h) NRC shall have terminated any and all employment agreements with any of its officers, directors and employees and shall have executed and delivered all documentation in connection with such termination to Candie's; (i) Candies shall have received an opinion of Littman Krooks Roth & Ball P.C., counsel to NRC, in form reasonably acceptable to Candie's and its counsel; and (j) NRC shall have obtained and delivered to Candie's copies of all consents or approvals of all persons needed for the consummation of the transactions contemplated hereby and all such consents and approvals shall be in full force and effect, unless the failure to obtain such consent or approval is not reasonably likely to have a material adverse effect on Candie's taken as a whole giving effect to the transactions contemplated hereby. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification by NRC of Candie's. NRC shall indemnify and hold Candie's harmless from any and all damages or deficiencies resulting from any misrepresentation, breach of any representation or warranty, or nonfulfillment of any covenant or agreement on the part of NRC, whether contained in the Agreement, the NRC Disclosure Statement or in any Exhibit hereto or in any statement, or certificate furnished by NRC in connection with the consummation of the transactions contemplated by this Agreement; and any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing, -48- including but not limited to reasonable attorneys' fees and expenses. 8.2 Indemnification by Candie's of the Shareholders, Directors and Officers of NRC. (a) Candie's shall indemnify and hold the shareholders of NRC harmless from any and all damages or deficiencies resulting from any misrepresentation, breach of any representation or warranty, or nonfulfillment of any covenant or agreement on the part of Candie's whether contained in this Agreement or any Exhibit hereto or in the Candie's Disclosure Statement or any certificate furnished by Candie's in connection with the consummation of the transactions contemplated by the Agreement; and any and all actions, suits, proceedings, demands, assessments, judgments, costs, and expenses incident to any of the foregoing, including but not limited to reasonable attorneys' fees and expenses. (b) For a period of three (3) years after the Effective Time, Candie's shall indemnify and hold harmless the current officers and directors of NRC to the fullest extent permitted by Section 145 of the Delaware Corporate Law, as the same may be amended and supplemented, for damages arising out of or resulting from actions in their capacity as an officer or director of NRC. 8.3 Termination of Indemnification Obligations Upon Closing. Except for the indemnification obligations set forth in Section 8.2(b), the respective indemnification obligations of NRC and Candies set forth in this Article VIII shall expire with, and be terminated and extinguished upon, consummation of the Merger, -49- and thereafter neither NRC nor Candie's shall have any liability whatsoever with respect to any such indemnification obligation. ARTICLE IX TERMINATION, AMENDMENT AND WAIVER 9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether prior to or after approval by the shareholders of NRC: (a) By mutual written consent of the Boards of Directors of Candie's and NRC; or (b) By NRC: (i) If the Effective Time shall not have occurred on or before July 31, 1998 after the date hereof; or (ii) If Candie's fails to perform in any material respect any of its material obligations under this Agreement; or (c) By Candie's: (i) If the Effective Time shall not have occurred on or before July 31, 1998 after the date hereof; (ii) If NRC fails to perform in any material respect any of its material obligations under the Agreement. 9.2 Effect of Termination. In the event of the termination of this Agreement as provided in Section 9.1, this Agreement shall forthwith become void, and there shall be no liability on the part of Candie's or NRC. 9.3 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties -50- hereto; provided, however, after approval by the shareholders of NRC, such amendment shall not: (i) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of such Constituent Corporation; and (ii) Alter or change any of the terms or conditions of this Agreement if such alteration or change would adversely affect the holder of any class or series thereof of any Constituent Corporation. 9.4 Waiver. At any time prior to the Effective Time, whether before or after the meetings of the NRC shareholders or the Candie's shareholders referred to in Article II, any party hereto, by action taken by its Board of Directors, may (i) extend the time for the performance of any of the obligations or other acts of any other party hereto or, (ii) excepting the provisions contained in Section 9.3, waive compliance with any of the agreements of any other party or with any conditions to its own obligations. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. ARTICLE X NO SOLICITATION From and after the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with Section 9.1, neither Candie's nor NRC shall, nor shall its stockholders directly or indirectly, through any officer, -51- director, employee, representative, agent or affiliate, (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, sale or purchase of substantial assets or stock, tender or exchange offer, or other business combination or change in control or similar transaction involving such party, other than the transactions contemplated or permitted by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as a "Competing Offer"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Competing Offer, or (iii) agree to, approve or recommend any Competing Offer. ARTICLE XI MISCELLANEOUS 11.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 11.2 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Inclusion of information in any Disclosure Statement does not constitute an admission or acknowledgment of the materiality of such information. 11.3 Representations and Warranties. The respective representations and warranties of NRC and Candie's contained herein, and the covenants, obligations, agreements and liabilities of each of them shall expire with, and be terminated and extinguished upon, consummation of the Merger, and thereafter -52- neither NRC nor Candie's nor any officer, director or principal thereof shall be under any liability whatsoever with respect to any such representation or warranty. This Section shall have no effect upon any other obligation of the parties hereto, whether to be performed before or after the consummation of the Merger. 11.4 Brokers and Agents. Candie's and NRC each represents and warrants to the other that it has not employed any broker or agent in connection with the transactions contemplated by this Agreement. 11.5 Expenses. Except as otherwise specifically provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs or expenses, whether or not the transactions contemplated hereby are consummated. 11.6 Mutual Drafting. This Agreement is the mutual product of the parties hereto, and each provision hereof has been subject to mutual consultation, negotiation and agreement of each of the parties, and shall not be construed for or against any party hereto. 11.7 Entire Agreement. This Agreement (together with the other agreements, instruments and documents delivered pursuant hereto) including the Non-Disclosure Agreement dated February 19, 1998 executed by the parties hereto, constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings -53- between the parties hereto, oral and written with respect to the subject matter hereof. 11.8 Public Statements. NRC and Candie's shall consult with each other prior to issuing any press release or otherwise making any public statement with respect to the contents of this document or the transactions contemplated hereby, and none of the parties hereto shall issue any press release or make any such public statement prior to such consultation, except as may be required by law or NASDAQ regulations. 11.9 Due Diligence Investigation. Upon reasonable notice and subject to applicable law and other legal obligation, Candie's and NRC shall each afford to the officers, employees, accountants, financial advisors, counsel and other representatives of the other, access during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records, concerning its business, properties and personal as such other party may reasonably request. Unless otherwise required by law, the parties shall hold all such information confidential and treat such information as "Evaluation Material" in accordance with the Non-Disclosure Agreement dated February 19, 1998 between the parties hereto. 11.10 Cooperation. Each of the parties hereto shall cooperate and take any and all actions, and execute and acknowledge, deliver, file and/or record any and all documents and instruments as the other party hereto reasonably requests from time to time in order to have fully protect and perfect the rights intended to be granted hereunder. -54- 11.11 Notices. All notices or other communications required or permitted hereunder shall be sufficiently given: (i) on the date of delivery, if delivered by hand or by courier; (ii) upon receipt of confirmation of transmission if transmitted by telecopier, and (iii) on the third business day after mailing if mailed by registered or certified mail, postage prepaid, return receipt requested, as set forth below: If to Candie's to: Candie's Inc. 2975 Westchester Avenue Purchase, New York 10577 Attn: Neil Cole, President Fax: (914) 694-8606 Copy to: Tenzer Greenblatt LLP 405 Lexington Avenue New York, New York 10174 Attn: Michael S. Mullman, Esq. Fax: (212) 885-5001 If to NRC: New Retail Concepts, Inc. 2975 Westchester Avenue Purchase, New York 10577 Attn: Gary Klein, Vice President-Finance Fax: (914) 694-8606 Copy to: Littman Krooks Roth & Ball P.C. 655 Third Avenue New York, New York 10017 Attn: Mitchell Littman, Esq. Fax: (212) 490-2990 or such other address that shall be furnished in writing by either party. 11.12 No Assignment. This Agreement and the rights, interests and obligations hereunder may not be assigned by any -55- party hereto, by operation of law or otherwise without the prior written consent of the other party hereto, and any such purported assignment without such consent shall be null and void. 11.13 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered to each of the other parties hereto and each of which shall be deemed an original. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date hereof. CANDIE'S INC. a Delaware corporation By: /s/ David Golden ----------------------------- Name: David Golden Title: Senior Vice President- Chief Financial Officer NEW RETAIL CONCEPTS, INC. a Delaware corporation By:/s/ Neil Cole ----------------------------- Name: Neil Cole Title: President - Chief Executive Officer -56- DISCLOSURE STATEMENT TO AGREEMENT AND PLAN OF MERGER BY AND BETWEEN CANDIES, INC. AND NEW RETAIL CONCEPTS, INC. DATED APRIL 6, 1998 -57- Section 3.5 Compliance Consummation of the transactions will violate the following agreements without the prior consent of the other party thereto: 1. Purchase and Sale Agreement dated as of December 31, 1992 between NRC and Stantrob Associates, Ltd. 2. Settlement Agreement dated as of November 3, 1995 between NRC and Stantrob Associates, Ltd. 3. License Agreement as of April 1, 1997 between NRC and Montgomery Ward & Co., Incorporated. 4. Agreement dated as of April 1, 1992, as extended, between NRC and Wal-Mart Stores, Inc. 5. Affiliate Transactions Agreement between NRC and Candie's dated March 3, 1993, as amended January 30, 1995. -58- Section 3.6 SEC Filings, Financial Statements Certain Form 5 filings with respect to deferred reporting of options grants and gift transactions have not been timely filed. The Company failed to timely file its Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997. -59- Section 3.7 Absence of Undisclosed Liabilities As an inducement to join Candie's and in consideration of foregoing certain future bonus opportunities pursuant to their respective employment agreements with NRC, each of Messrs Neil Cole, Lawrence O'Shaughnessy and Gary Klein received the following option grants and upon termination will receive the following bonuses: Options Bonus ------- ----- Neil Cole 626,543 @ $1.75 $525,000 Lawrence O'Shaughnessy 74,074 @ $1.75 $ 50,000 Gary Klein 49,383 @ $1.75 $ 25,000 -60- Section 3.10 Properties NRC has a use of premises agreement with Candie's with respect to its executive offices pursuant to a Services Allocation Agreement dated as of March 3, 1993. -61- Section 3.11 Intellectual Property NRC rights to the No ExcusesR name are subject to its license agreements with Stantrob Associates, Ltd. -62- Section 3.12 Litigation Carlos Cu, et al v. El Greco, et al, Index No. 22716/91, Queens Supreme Court. Eric Knipe and Eyk International v. New Retail Concepts, Inc. and Neil Cole, individually. Los Angeles Supreme Court, Case Number -63- Section 3.13 Employee Benefit Plans Employment Agreement dated January 1, 1989 between NRC and Neil Cole, as amended: Employment Agreement dated November 15, 1994 between NRC and Gary Klein. Letter dated May 18, 1995 from NRC to Lawrence O'Shaughnessy with respect to the retention of Mr. O'Shaughnessy by NRC as business advisor until March 31, 1997. See items listed in Section 3.7 of this NRC Disclosure Statement. -64- Section 4.5 SEC Filings Certain Form 5 Filings with respect to deferred reporting of option grants and gift transactions have not been timely filed. -65- Section 4.7 Certain Changes Candie's has served written notice of termination of its factoring arrangements to Congress Talcott Corporation, effective April 27, 1998, and is in the process of obtaining new financing arrangements with Nations Bank pursuant to the commitment letter attached hereto. -66- Section 4.11 Litigation Petition for Order Compelling Arbitration by Lucky Brand Dungarees of America; Inc. v. Candies, Inc., U.S. District Court, Central District of California. -67- Section 4.12 Employee Benefit Plans 1. Employment Agreement dated February 23, 1993 between Neil Cole and Candie's, as amended March 6, 1995 and February 28, 1997. 2. Employment Agreement dated April 1, 1995 between Lawrence O'Shaughnessy and Candie's as amended on March 17, 1997. 3. Employment Agreement dated November 15, 1994 between Gary Klein and Candie's. 4. Employment Agreement dated March 1, 1998 between David Golden and Candie's. 5. Employment Agreement dated November 30, 1994 between Lynn Miller and Candie's, as amended on July 8, 1997. -68- EX-10.21 3 LICENSE AGREEMENT Exhibit 10.21 LICENSE AGREEMENT THIS LICENSE AGREEMENT is entered into this 16th day of June 1997, by Michael Caruso & Co., lnc., a California corporation, ("Licensor"), whose address is 4560 Loma Vista Avenue, Vernon, California 90058 and Candie's, 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 (collectively "Footwear") and handbags, backpacks and sport bags (collectively "Handbags") under and in connection with the Trademarks (the "Licensed Items"); C. The parties entered into a License Agreement on January 13, 1995 whereby Licensor granted Licensee the license to manufacture and market footwear under and in connection with the Trademarks (the "1995 License Agreement"). D. The parties desire to provide for the early termination of the 1995 License Agreement and to replace the 1995 License Agreement with this Agreement. THE AGREEMENT: 1. 1995 LICENSE AGREEMENT 1 1.1 Ratification and Validity. Licensor and Licensee each expressly acknowledge that the 1995 License Agreement is valid and binding and, subject to the provisions of paragraph 1.2, in addition to the rights and obligations created hereunder, that the mutual waiver and release of each party's respective obligations owing to the other under the 1995 License Agreement is good and valuable consideration supporting the parties' agreement to terminate the 1995 License Agreement as hereinafter provided. 1.2 Early Termination of the 1995 License Agreement. The parties agree to terminate the 1995 License Agreement as of 11:59 p.m. PST January 31, 1998; provided, however, that Licensee shall not thereby be relieved of its obligations under Paragraphs 6 and/or 7 of the 1995 License Agreement to render to Licensor its report(s) of sales of the Licensed Items or to remit to Licensor any and all royalties due Licensor for sales of the Licensed Items made through January 31, 1998. 2. LICENSE 2 2.1 Grant of License and Designation of Licensed Items. Effective February 1, 1998, Licensor grants to Licensee the exclusive license to use the Trademarks within the geographic area described in Paragraph 5 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 of Licensor. 2.2 Right to Sublicense. Licensee shall have the right, exercisable in its 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 relieve Licensee of any obligations owing to Licensor hereunder. 3. TERM 3.1 Initial Term. The initial term of this Agreement (the "Initial Term") shall commence on February 1, 1998, and shall end on January 31, 2002, unless sooner terminated in accordance with the terms of this Agreement. The period beginning February 1, 1998 and ending January 31, 1999, and each subsequent twelve (12) month period ending on January 31 during the Initial Term and the First Extended Term (as hereinafter defined) is herein referred to as a "Contract Year." 3.2 First Extended Term. Provided that the aggregate Minimum Net 3 Sales (as hereinafter defined) required to be achieved for the first three (3) Contract Years of the Initial Term ending January 31, 2001 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 February 1, 2002 and ending on January 31, 2006, unless sooner terminated in accordance with this 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. The amount of Minimum Net Sales (as hereinafter defined) to be achieved by Licensee during the First Extended Term is set forth in Paragraph 4.2. 4. PAYMENTS. 4.1 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 by Licensee in any Contract Year, less any refunds, allowances, deductions and credits for returns 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. 4.2 Minimum Net Sales. During each contract year, Licensee shall achieve the following minimum Net Sales ("Minimum Net Sales") of the Licensed Items within the Territory: 4 First Contract Year: Footwear: $ 8,000,000; and Handbags: $ 1,000,000. Second Contract Year: Footwear: $11,000,000; and Handbags: $ 2,000,000. Third Contract Year: Footwear: $12,000,000; and Handbags: $ 3,000,000. Fourth Contract Year: Footwear: $13,000,000; and Handbags: $ 4,000,000. First Extended Term (each contract year): Footwear: $15,000,000; and Handbags: $ 5,000,000. 4.2.1 Option to Exclude Handbags. If in any Contract Year, whether during the Initial Term or Extended Term of this Agreement, Licensee fails to achieve the Minimum Net Sales of handbags required to be achieved for such Contract Year, Licensor at its sole option may elect to terminate Licensee's license hereunder with respect to handbags. Licensor shall notify Licensee of its election to exercise the option in writing within thirty (30) days of Licensor's receipt from Licensee of the annual report required under Paragraph 8, in which event Licensee shall be entitled to dispose of its remaining inventory of handbags in accordance with the provisions of Paragraph 19. 4.3 Royalty. During the term of this Agreement, Licensee shall pay to Licensor a royalty (the "Royalty") equal to (i) five percent (5%) of the Minimum Net Sales 5 for the Contract Year (the "Minimum Guaranteed Royalty"), or (ii) five percent (5%) of the actual net sales for the Contract Year, whichever is greater. 4.4 Advertising Royalty. In addition to the Royalty to be paid under Paragraph 4.3 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) two percent (2%) of the combined Minimum Net Sales for such Contract Year, or (ii) two percent (2%) of the actual combined Net Sales of Licensed Items for such Contract Year. The Advertising 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. Licensor shall use its best efforts to utilize Licensee's products in all Licensor advertising. 5. GEOGRAPHIC AREA. The rights granted to Licensee hereunder shall be exclusively exercised by Licensee within the United States and its territories, and all foreign countries and jurisdictions worldwide in which Licensor owns the Trademarks or the rights to use the Trademarks (the "Territory"). 6. 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 generally accepted accounting procedures. Licensor or its duly authorized agents or representatives shall have the right to inspect said records at Licensee's premises during Licensee's regular 6 business hours. Licensor shall give Licensee at least ten (10) days' advance written notice of Licensor's intention to do so. 7. LICENSEE'S REPORTS OF SALES AND PAYMENT OF ROYALTIES. 7.1 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, 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. 7.2 Royalty Payments. Licensee shall remit to Licensor with the Monthly Reports rendered in the months of November, February, May and August 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. 8. LICENSEE'S ANNUAL REPORTS. On or before April 30 following the end of each Contract Year, Licensee shall deliver to Licensor an annual 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 by Licensee during the just ended Contract Year. If said annual statement discloses that the amount of royalties paid to Licensor during the Contract Year to which said statement relates is less than the amounts required to be paid to Licensor pursuant to Paragraph 4 above, Licensee shall pay said deficiency to Licensor concurrently with the delivery of such annual statement. If said annual statement discloses that Licensee has paid to Licensor royalties in excess of the amounts required to be paid by Licensee 7 pursuant to Paragraph 4 above, Licensee shall be entitled to a 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 also provide with each annual statement an estimated projection of net shipments of the Licensed Items for the succeeding Contract Year. 9. AUDIT BY LICENSOR. Should an audit, pursuant to Paragraph 6, disclose 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 that 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. 10. BEST EFFORTS OF LICENSEE. Licensee shall use it best efforts to manufacture and market the Licensed Items. A cessation of best efforts for a 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 8 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. 11. 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 efforts. 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. 12. ADDITIONAL OBLIGATIONS OF LICENSEE AS TO QUALITY, 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 of 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 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 9 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. 13. 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. 14. 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. 15. 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 any applicable law so as to give appropriate notice of any trademark, trade names or other rights therein. 10 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 or allegation by any person(s) that the Trademarks, or any of them, are invalid. 16. INFRINGEMENT AND OTHER TRADEMARK LITIGATION. Licensee shall notify Licensor as soon as practicable of any infringement of the Trademarks, or any of 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 for any damages awarded or recovered against Licensee, nor shall Licensor have any liability to any other person for any damages awarded to or recovered by such other person, including but not limited to any action or proceeding alleging any violation of any antitrust, trade regulation, unfair competition, or similar statute. If Licensor is made a party to any such action or proceeding, Licensee shall indemnify and hold Licensor harmless from any and all attorneys' fees, costs, damages, 11 liabilities and awards as may be incurred, assessed, imposed or adjudicated by reason thereof; provided, however, that such action or proceeding results from the manufacture or marketing by Licensee of the Licensed Items. 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, in which event 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. 17. 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"). 12 18. DEFAULTS BY LICENSEE. Except as provided, in the event Licensee materially defaults in the performance of any of the terms and conditions hereunder, and if such 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 not 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 a general assignment for the benefit of creditors, of 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 material 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. 19. 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 shall not thereafter manufacture or market any of said designs. Licensee may, however, dispose of its on- 13 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 paid. All Royalties due Licensor by reason of the sell-off of such on-hand inventory of 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. 20. ADDITIONAL RIGHTS UPON TERMINATION. During the last six (6) months of the final Contract Year of this Agreement, 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 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). 14 However, any successor Licensee may solicit orders during the last six (6) months of the final Contract Year. 21. GOOD WILL. Licensee acknowledges 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. 22. INSURANCE. Licensee and its sublicensees, if any, agree to carry product liability insurance on the Licensed Items, with a limit of liability of $5,000,000. 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 policy. The Licensee shall deliver to Licensor a certificate evidencing the existence of such insurance policies after their issuance. 23. 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. 24. 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 15 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 Angeles. The law applicable thereto shall be the law of the State of California. 25. NON-AGENCY OF PARTIES. This Agreement does not make Licensee an 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. 26. ADDRESSES FOR NOTICE. All notices required under this Agreement shall be in writing, by certified 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. 27. WAIVER BY LICENSOR. In the event Licensor shall waive any of its rights under this Agreement, or the performance by Licensee of any of its obligations, such waiver shall not be a continuing waiver or a waiver of any other rights or obligations. 28. 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. 29. SEPARABILITY OF PROVISIONS. Any provision of this Agreement found 16 invalid shall not invalidate the remaining provisions. Titles to the paragraphs shall have no substantive effect. 30. 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. 31. 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 30th day of May, 1997. MICHAEL CARUSO & CO., INC., CANDIE'S, INC., a California Corporation a Delaware Corporation By /s/ Brian Kail, President By /s/ Neil Cole, CEO ---------------------------- ---------------------------- (Name and Title) (Name and Title) 17 EX-10.24 4 EMPLOYMENT AGREEMENT EXHIBIT 10.24 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of March 1, 1998, by and between Candie's Inc., a Delaware corporation with an address at 2975 Westchester Avenue, Purchase, New York (the "Company"), and David Golden, an individual residing at 25 Woodmont Road, Melville, NY 11747 (the "Executive"). W I T N E S S E T H: WHEREAS, the parties desire to enter into this agreement to reflect their mutual agreements with respect to the employment of the Executive by the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereby mutually agree as follows: Section 1. Employment. The Company hereby employs Executive, and the Executive hereby accepts such employment, as the Company's Senior Vice President and Chief Financial Officer, pursuant to the terms and conditions set forth in this Agreement. Section 2. Duties. The Executive shall serve as the Company's Senior Vice President and Chief Financial Officer and shall be responsible for and perform all tasks, activities and duties normally inherent in such capacity and which are customary for such position, including without limitation, (i) assisting in the day-to-day business operations of the Company and such executive and administrative duties as may be reasonably assigned by the Chief Executive Officer or the Chief Operating Officer in furtherance of the Company's business, (ii) the hiring, supervising and terminating of personnel involved in the finance department of the Company, (iii) communicating with the investors and the financial community, (iv) managing the financial activities of the Company, and (v) overseeing the Company's independent auditors. Throughout the Term (as hereinafter defined),the Executive shall devote his best efforts and full business time to the business and affairs of the Company and its affiliates; provided however, that the Executive may serve on certain advisory boards and boards of directors of charitable organizations in the sole discretion of the Chief Executive Officer of the Company. The Executive shall report directly to the Chief Executive Officer of the Company and receive direction and supervision from the Chief Operating Officer. Section 3. Term of Employment; Vacation. 3.1 Term. The initial term of the Executive's employment shall be for a period of two years commencing March 1, 1998 ( the "Start Date" and "Anniversary Date") and, continue, unless earlier terminated by either party in accordance with the terms herewith (such term of employment is referred to hereinafter as the "Term"). Upon expiration of the initial Term, this Agreement shall be automatically renewed for successive renewal terms of two years at compensation levels and conditions mutually acceptable to the parties, unless not less than 120 days prior to the expiration of the initial or any renewal Term either the Company or the Executive notifies the other of its or his election not to renew this Agreement. In the event that the Company elects not to renew this Agreement, the Company shall pay Executive, as severance, for two (2) months of Base Salary following the end of the Term. 3.2 Vacation. The Executive shall be entitled to four (4) weeks paid vacation during each year falling within the Term. Vacations shall be taken at such times as the Executive and the Company determine is consistent with the proper performance of his duties and responsibilities hereunder. For purposes hereof, the term "year" shall mean each twelve month period commencing on the Start Date. Section 4. Compensation of Executive. 4.1 Salary. The Company shall remunerate the Executive at an annual base salary (the "base salary") of Two Hundred Twenty Five Thousand Dollars ($225,000) during the first year of the initial Term. The Base Salary shall be increased to Two Hundred Fifty Thousand Dollars ($250,000) on the first Anniversary Date. Any further increase shall be in the sole discretion of the Chief Executive Officer and/or the Compensation Committee of the Board of Directors (the "Compensation Committee"). All salaries payable to Executive shall be paid at such regular weekly, biweekly or semi-monthly time or times as the Company makes payment of its regular payroll in the regular course of business. 4.2 Bonuses; Options. (a) Each year during the Term, the Company shall pay to the Executive a bonus (the "Bonus") of not less than 1/2% (.5%) of the Company's annual pre-tax income, as -3- reported by the Company in filings made with the Securities and Exchange Commission or, if the Company is no longer subject to the reporting requirements of the Federal Securities Laws, as would have been required by the Securities and Exchange Commission. The Bonus shall be payable within 120 days from the end of the Company's fiscal year. Additional Bonuses, if any, may be determined by the Compensation Committee based upon established targets for financial and qualitative performance criteria established by it. The Bonus shall be pro rated during any period where the Executive has not worked for the Company for the entire fiscal year to which the Bonus relates. The Compensation Committee may determine that such Additional Bonuses, if any, be paid in cash or options, or any combination thereof. (b) Upon the execution of this Agreement, the Executive shall receive stock options (the "Options") exercisable for 125,000 shares of the Company's common stock, per .001 per share, exercisable for a period of five (5) years at the closing sales price on February 5, 1998 (i.e., $ ). The Options shall vest and first become exercisable as follows; 25,000 shares on the Start Date, 50,000 shares on the first Anniversary Date and 25,000 shares on each of the second and third Anniversary Dates. The Options shall be subject to the approval of the Board of Directors of the Company. The Options will be substantially in the form of Exhibit A attached hereto and the shares of Common Stock issuable upon the exercise thereof shall be reserved for issuance pursuant to the Company's 1989 Stock Option Plan, as amended. To the extent the options are available under the Company's 1997 Stock Option Plan, the Options shall be issued under such plan. (c) The Company shall lease a car for the Executive for his exclusive use provided, however, that the monthly lease payments shall not exceed $700 per month. In addition, the Company shall reimburse the Executive for all, maintenance, repairs, insurance, gas and tolls, and other reasonable upkeep and related expenses on such car. The Company shall reimburse the Executive for all such expenses promptly after presentation by the Executive, from time to time, of an itemized and documented accounting of such expenditures. 4.3 Expenses. During the Term, the Company shall promptly reimburse the -4- Executive for all reasonable and necessary travel expenses and other disbursements for promoting the business of the Company and those incurred by the Executive in the performance of the Executive's duties hereunder. 4.4 Benefits. The Executive shall be permitted during the Term (without the imposition of any waiting periods but only to the extent that the Company can cause such waiting periods to be waived) to participate in any and all benefit plans, hospitalization, major medical or disability insurance plans, health or other insurance programs, pension and 401K plans, bonus plans or similar benefits that may be available or in effect from time to time during the Term hereof for the benefit of its executive officers on the same terms and conditions as other senior executives of the Company (including coverage under any officers and directors liability insurance policy), subject to such eligibility rules as are applied to senior executives generally. The various employee benefits specified herein shall be extended also to the member of the Executives immediate family in the same manner as the member of the immediate families of other employees of the Company are extended such benefits. In addition, the Company shall reimburse the Executive for expenses incurred in connection with a platinum health sports club membership at the Doral Arrowwood in an amount not to exceed $2,000 per annum. Section 5. Disability of the Executive. 5.1 During the Term, the Executive shall receive a disability insurance policy comparable to that of the other senior executives of the Company. 5.2 If the Executive is disabled or unable to perform his duties by reason of disability, illness or other incapacity for a period of more than one hundred eighty (180) consecutive days, or more than one hundred eighty (180) days, whether or not consecutive, in any 365 day period, the Company, at its option, may terminate this Agreement at once upon 30 days prior notice to the Executive. The terms "disability" and "illness" or other "incapacity" shall mean the inability of the Executive to engage in the performance of his duties as provided in Section 2 hereof of this Agreement. Any question regarding the Executive's "disability" and "illness" or other "incapacity" shall be finally determined by a physician jointly selected by the Company and the Executive. -5- Section 6. Death of the Executive. During the Term, Executive shall receive, at the Company's expense, a life insurance policy in amount equal to his Base Salary. The amount of such policy shall be adjusted in accordance with any changes in the Base Salary. Executive shall cooperate in the Company's efforts to obtain such a policy including submission to a physical examination. Section 7. Termination. If the Executive's employment is terminated by the Company during the Employment Term of this Agreement, except in connection with the termination of the Executive for Cause, as defined in Section 1(a), the Executive will have the option to voluntarily resign from the employ of the Company and publicly announce such resignation, if Executive so desires. The Company and its current or future management will support such resignation in any disclosures to third parties or inquiries from third parties. 7.1 Cause. The Company may terminate the employment of the Executive and all of the Company's obligations under this Agreement at any time for Cause (as hereinafter defined) by giving the Executive prior notice of such termination, with reasonable specificity of the details thereof. As use herein, the term "Cause" shall be limited to and mean (a) an action by the Executive involving willful malfeasance having a material adverse effect on the Company, (b) the failure to act by Executive involving material nonfeasance having a material adverse effect on the Company, or (c) the Executive being convicted of a felony, or of any economic, business or commercial crime; provided, however, that any action or failure to act by Executive shall not be constitute "Cause" if, in good faith, Executive reasonably believed such action or failure to act to be in or not opposed to the best interests of the Company or was pursuant to the instructions, directions or with the consent of either the Chief Executive Officer or Chief Operating Officer, or the Executive believes in good faith that the action or failure to act would be inconsistent with law, professional ethics, accepted or accredited standards or business behavior. A termination pursuant to Section 7.1(a), or (b), (other than as a result of a conviction) shall take effect 15 days after the giving of the notice contemplated hereby unless the Executive shall, during such 15 day period, remedy to the reasonable satisfaction of the Chief Executive Officer and/or the Board of Directors of the Company the breach specified in such notice; provided, -6- however, that such termination shall take effect immediately upon the giving of such prior notice if the Chief Executive Officer and/or Board of Directors of the Company shall, in its reasonable discretion, have determined that such breach is not remediable (which determination shall be stated in such notice). A termination pursuant to Section 7.1(c) (as a result of a conviction of a crime) shall take effect immediately upon the giving of the notice contemplated hereby. For purposes of this Agreement, a "Notice of Termination" shall mean delivery of notice specifying particulars thereof in detail. For purposes of this Agreement, no such purported termination of Executive's employment shall be effective without such Notice of Termination. 7.2 Without Cause. The Company may terminate the employment of the Executive and all of the Company's obligations under this Agreement (except as hereinafter provided) at any time during the Term without Cause by giving the Executive written notice of such termination, to be effective 30 days following the giving of such written notice. For convenience of reference, the date upon which any termination of the employment of the Executive pursuant to Sections 5, 6 or 7 shall be effective shall be hereinafter referred to as the "Termination Date". 7.3 Termination For Good Reason. Executive may terminate his employment hereunder for Good Reason at any time during the Employment Term, in which event Executive shall resign from all of his positions with Company. For purposes of this Agreement, "Good Reason" shall mean any of the following (without the Executive's express prior consent ): (a) The assignment to Executive by the Company of duties inconsistent with Executive's position as Senior Vice President and Chief Financial Officer of the Company, or any reduction or significant change in either the position, stature, job function, (including the person to whom you shall report), except in connection with the termination of Executives employment for Cause; (b) A reduction by the Company in the initial Base Salary and/or benefits as defined in Section 4 in effect on the Start Date or the Company's failure to increase the Executive's salary on the first anniversary date pursuant to Section 4; (c) A failure by the Company to discharge its obligations under any bonus -7- arrangement described in Section 4.2 (a) or (b) hereof; or (d) an event having a substantial change in the nature of the business of the Company or its affiliates or the way in which such business is presently conducted. A termination pursuant to this Section 7.3 shall take effect 15 days after the giving of the notice contemplated hereby unless the Company shall, during such 15 day period, remedy to the reasonable satisfaction of the Executive the breach specified in such notice; provided, however, that such termination shall take effect immediately upon the giving of such notice if the Executive, in his reasonable discretion, shall have determined that such breach is not remediable (which determination shall be stated in such notice). 7.4 Change of Control. If a Change of Control (as hereinafter defined) occurs, the Executive shall have the right to terminate this Agreement upon 180 days prior notice to the Company; provided, however, the Company shall have the option to shorten such period. At least ten (10) days prior to any such proposed Change of Control, the Company shall notify the Executive of its intention to effect such Change of Control, and the Executive shall thereupon have thirty (30) days from the actual receipt of such notice to give notice of his intention to terminate this Agreement. As used herein, the term "Change of Control" shall mean: (i) when any "person" as defined in Section 3(a)(9) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company or any subsidiary or any affiliate of the Company or any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of such plan acting as trustee), becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act) of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) when, during any period of twelve (12) consecutive months, the individuals who, at the beginning of such period, constitute the Board of Directors (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 12 month period shall be deemed to have satisfied such 12 month requirement (and be an Incumbent Director) if such director was elected by, or on -8- the recommendation of or with the approval of, at least two thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 12 month period) or through the operation of this proviso; or (iii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary or an affiliated company of the Company through purchase of assets, or by merger, or otherwise; provided, however, in the event a Change of Control occurs and neither Neil Cole nor Lawrence O'Shaughnessy remains with the Company or its successor in a substantial decision making capacity for twelve months (12) subsequent to any event described above; then the Executive may terminate the Agreement within thirty (30) days after such period and receive the payments described in Section 8.5(a)(iv). Section 8. Effect of Termination of Employment. 8.1 Disability or Death. Upon the termination of the Executive's employment for disability or death, neither the Executive nor the Executive's beneficiaries or estate shall have any further right to compensation under this Agreement or any claims against the Company arising out of this Agreement except as provided in Sections 5 or 6 and the right to receive (i) the unpaid portion of the Base Salary provided for in Section 4.1, earned through the Termination Date and the share of the Bonus and other benefits for such year pro-rated for that portion of the year up to the Termination Date (the "Unpaid Salary Amount") (ii) reimbursement for any expenses for which the Executive shall not have theretofore been reimbursed as provided in Section 4.3 (the "Expense Reimbursement Amount"), and (iii) payment for any vacation days accrued but not taken (the "Accrued Vacation Amount") and (iv) all unvested Options shall vest as of the Termination Date. 8.2 Cause. Upon the termination of the Executive's employment for Cause, the Executive shall be entitled to the right to receive (i) the Unpaid Salary Amount, (ii) the Expense Reimbursement Amount, and (iii) the Accrued Vacation Amount. 8.3 Without Cause or For Good Reason. Upon the termination of the Executive's employment for other than Cause, Disability or Death, neither the Executive nor the Executive's -9- beneficiaries or estate shall have any further rights to compensation under this Agreement or any claims against the Company arising out of this Agreement, except the Executive shall have the right to receive (i) the Unpaid Salary Amount, (ii) the Expense Reimbursement Amount, (iii) the Accrued Vacation Amount, and (iv) severance compensation (based upon the then existing compensation level) equal to the Base Salary for the (including medical benefits) unexpired portion of the Term but in no event less than 6 months, payable in equal monthly installments during the period commencing thirty (30) days following the Termination Date and continuing until paid. In addition, (i) thirty 30 days following the Termination Date, the Company shall pay to the Executive the Bonus for the current fiscal year pro-rated through the Termination Date (the "Pro Rated Bonus Amount"), in accordance with Section 4.2 and (ii) all unvested Options shall vest as of the Termination Date. 8.4 Mitigation. Any severance amount payable under the Agreement shall be reduced by the amount of any compensation earned from comparable employment during the term of the Agreement. The Executive shall use his best efforts to secure comparable employment. 8.5 Change of Control. (a) In the event that a Change of Control occurs and the Executive elects to terminate this Agreement, the Executive shall be entitled to receive in cash, within ten (10) days of termination of this Agreement, (i) the Expense Reimbursement Amount, (ii) the Unpaid Salary Amount, (iii) the Accrued Vacation Amount, (iv) an amount equal to the twelve months of Executive's Base Salary, and (v) all unvested Options shall vest as of the Termination Date. (b) In the event that any payment (or portion thereof) to Executive under this Section 8.5 is determined to constitute an "excess parachute payment," under Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended, the following calculations shall be made: (i) the after-tax value to Executive of the payments under this Section 8.5 without any reduction; and (ii) the after-tax value to Executive of the payments under this -10- Section 8.5 as reduced to the maximum amount (the "Maximum Amount") which may be paid to Executive without any portion of the payments constituting an "excess parachute payment". If, after applying the agreed upon calculations set forth above, it is determined that the after-tax value to the Executive determined under clause (ii) above is greater that the after-tax value determined under clause (i) above, the payments to Executive under this Section 8 shall be reduced to the Maximum Amount. Section 9. Disclosure of Confidential Information. Executive recognizes that he has had and will continue to have access to secret and confidential information regarding the Company, including but not limited to its customer list, products, know-how, and business plans. Executive acknowledges that such information is of great value to the Company, is the sole property of the Company, and has been and will be acquired by him in confidence. In consideration of the obligations undertaken by the Company herein, Executive will not, at any time, during or after his employment hereunder, reveal, divulge or make known to any person, any information acquired by Executive during the course of his employment, which is treated as confidential by the Company and not otherwise in the public domain, other than in the ordinary course of business during his employment hereunder. The Executive shall not be deemed to have breached this Section 9 if the Executive shall be specifically compelled by lawful order of any judicial, legislative, or administrative authority or body to disclose any confidential material or else face civil or criminal penalty or sanction. The provisions of this Section 9 shall survive Executive's employment hereunder. Section 10. Covenant Not To Compete. 10.1 Executive recognizes that the services to be performed by him hereunder are special, unique and extraordinary. The parties confirm that it is reasonably necessary for the protection of Company that Executive shall not, directly or indirectly, at any time during the term of the Agreement and the "Restricted Period" (as defined in Section 10.4 below). (a) employ or engage, or cause or authorize, directly or indirectly, to be employed or engaged, for or on behalf of himself or any third party, any employee or agent of Company -11- or any affiliate thereof. (b) for or on behalf of himself or any third party, at any time during the Term and during the Restricted Period solicit any customers of the Company or any affiliate thereof in a manner which directly or indirectly competes with the business the Company is engaged in at the Termination Date. 10.2 If any of the restrictions contained in this Section 10 shall be deemed to be unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, geographical scope, or other provisions hereof, and in its reduced form this Section shall then be enforceable in the manner contemplated hereby. 10.3 The term "Restricted Period," as used in this Section 10, shall mean the period of Executive's actual employment hereunder plus in the event the Executive's employment is terminated with Cause for a period of twelve (12) months thereafter. 10.4 The provisions of this Section 10 shall survive the end of the Term as provided in Section 10.3 hereof. Section 11. Miscellaneous. 11.1 Injunctive Relief. Executive acknowledges that the services to be rendered under the provisions of this Agreement are of a special. unique and extraordinary character and that it would be difficult or impossible to replace such services. Accordingly, any breach or threatened breach by Executive of this Agreement shall entitle the Company, in addition to all other legal remedies available to it, to apply to any court of competent jurisdiction to seek to enjoin such breach or threatened breach. The parties understand and intend that each restriction agreed to by Executive herein above shall be construed as separable and divisible from every other restriction, that the unenforceability of any restriction shall not limit the enforceability, in whole or in part, of any other restriction, and that one or more or all of such restrictions may be enforced in whole or in part as the circumstances warrant. In the event that any restriction in this Agreement -12- is more restrictive than permitted by law in the jurisdiction in which Company seeks enforcement thereof, such restriction shall be limited to the extent permitted by law. 11.2 Assignments. Except as provided in Section 7.4, neither the Executive nor the Company may assign, hypothecate or delegate any of their rights or duties under this Agreement without the express written consent of the other party. 11.3 Entire Agreement. This Agreement constitutes and embodies the full and complete understanding and agreement of the parties with respect to Executive's employment by Company, supersedes all prior understandings and agreements, whether oral or written, between Executive and Company, and shall not be amended, modified or changed except by an instrument in writing executed by the party to be charged. The invalidity or partial invalidity of one or more provisions of this Agreement shall not invalidate any other provision of this Agreement. No waiver by either party of any provision or condition to be performed shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. 11.4 Binding Effect. This Agreement shall inure to the benefit of, be binding upon and enforceable against, the parties hereto and their respective successors, heirs, beneficiaries and permitted assigns. 11.5 Headings. The headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 11.6 Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, sent by registered or certified mail, return receipt requested, postage prepaid, or by private overnight mail service (e.g. Federal Express) to the party at the address set forth above or to such other address as either party may hereafter give notice of in accordance with the provisions hereof. Notices shall be deemed given on the sooner of the date actually received or the third business day after sending. 11.7 Governing Law. This Agreement shall be governed by and construed -13- in accordance with the laws of the State of New York without giving effect to such State's conflicts of laws provisions and each of the parties hereto irrevocably consents to the jurisdiction and venue of the Federal and State courts located in the State of New York, County of New York. 11.8 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one of the same instrument. 11.9 Separability; Legal Fees. If any of the restrictions contained in this Agreement shall be deemed to be unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, geographical scope, or other provisions hereof, and in its reduced form this Agreement shall then be enforceable in the manner contemplated hereby. If any provision of the Agreement shall be declared to be invalid or unenforceable, in whole or in part, such invalidity or unenforceability shall not effect the remaining provisions hereof which shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by an officer thereunto duly authorized and the Executive has hereunto set his hand of the date set forth above. CANDIE'S INC. By: /s/ Larry O'Shaughnessy --------------------------------- Name: Larry O'Shaughnessy Title: Exec. VP, COO /s/ David Golden --------------------------------- David Golden -14- EX-21 5 SUBSIDIARIES OF CANDIE'S, INC. EXHIBIT 21 SUBSIDIARIES OF CANDIE'S, INC. Bright Star Footwear, Inc. wholly-owned a New Jersey corporation Intercontinental Trading Group., Inc. majority-owned a New York corporation Ponca, Ltd. wholly-owned a Hong Kong corporation Yulong Co., Ltd. wholly-owned a British Virgin Islands corporation Candie's Galleria, Inc. wholly-owned a New York corporation EX-23 6 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-62697 and Form S-3 No. 333-7659) of Candie's, Inc. and in the related Prospectuses and the Registration Statement (Form S-8 No. 333-27655) pertaining to the 1989 Stock Option Plan; Consultant's Stock Options of our report dated April 16, 1998, with respect to the consolidated financial statements and schedule of Candie's, Inc. and subsidiaries included in its Annual Report (Form 10-K) for the year ended January 31, 1998. /s/ ERNST & YOUNG LLP White Plains, New York April 27, 1998 EX-27 7 FDS-FOR 1998 FORM 10-K
5 12-MOS JAN-31-1998 JAN-31-1998 367,068 0 2,831,503 27,000 16,179,175 23,407,660 1,809,971 958,716 30,880,940 6,139,206 0 0 0 12,425 24,668,093 30,880,940 92,976,416 92,976,416 68,799,226 68,799,226 0 182,636 1,129,552 5,732,985 1,197,059 4,535,926 0 0 0 4,535,926 0.40 0.33
EX-27.1 8 FDS -- FOR FORM 10-K
5 12-MOS JAN-31-1997 JAN-31-1997 389,517 0 1,362,814 34,000 5,251,091 9,039,203 1,104,558 727,413 14,709,345 5,993,434 0 0 0 9,634 8,598,277 8,607,911 45,005,416 45,005,416 35,149,271 35,149,271 0 68,355 755,657 135,315 (1,100,000) 1,145,315 0 0 0 1,145,315 0.13 0.11
EX-27.2 9 FDS -- FOR FORM 10-K
5 12-MOS JAN-31-1996 JAN-31-1996 204,996 0 1,292,212 63,400 3,999,946 5,968,663 828,625 707,557 11,745,813 6,037,023 0 0 0 8,746 5,577,608 5,586,354 37,914,127 37,914,127 27,427,508 27,427,508 0 78,498 727,210 1,217,266 163,310 1,053,956 0 0 0 1,053,956 0.12 0.11
EX-27.3 10 FDS -- FOR FORM 10-K
5 3-MOS JAN-31-1998 APR-30-1997 196,685 0 1,411,466 0 5,873,437 12,534,062 1,107,967 764,031 18,082,774 7,098,946 0 0 0 10,171 10,868,657 18,082,774 16,861,264 16,861,264 11,774,127 11,774,127 0 0 274,523 1,328,338 505,000 823,338 0 0 0 823,338 0.08 0.06
EX-27.4 11 FDS -- FOR FORM 10-K
5 3-MOS JAN-31-1998 JUL-31-1997 392,641 0 1,749,144 0 11,779,143 19,009,557 344,874 0 24,452,554 5,358,621 0 0 0 11,680 18,972,253 24,452,554 46,587,253 46,587,253 34,862,079 34,862,079 0 0 528,035 3,418,277 400,000 3,018,277 0 0 0 3,018,277 0.29 0.23
EX-27.5 12 FDS -- FOR FORM 10-K
5 3-MOS JAN-31-1998 OCT-31-1997 800,886 0 2,362,747 0 10,850,133 19,034,535 504,282 0 24,544,556 2,580,705 0 0 0 12,363 21,851,488 24,544,556 70,367,254 70,367,254 52,534,710 52,534,710 0 0 833,277 4,731,781 905,000 3,826,781 0 0 0 3,826,781 0.35 0.28
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