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