U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 1998
OR
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______________to ______________.
Commission File Number 0-10593
CANDIE'S, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------------
Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2975 Westchester Avenue, Purchase, New York 10577
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 694-8600
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant (based upon the closing sale price of $7.94 on April 21, 1998)
was approximately $95,260,000.
As of April 21, 1998, 14,170,364 shares of Common Stock, par value $.001
per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
<PAGE>
CANDIE'S, INC.-FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I................................................................................................. 1
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 6
Item 3. Legal Proceedings.................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.................................. 6
PART II................................................................................................ 6
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 6
Item 6. Selected Financial Data.............................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................ 12
Item 8. Financial Statements and Supplementary Data.......................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................... 12
PART III............................................................................................... 12
Item 10. Directors and Executive Officers of the Registrant....................................... 12
Item 11. Executive Compensation................................................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 18
Item 13. Certain Relationships and Related Transactions........................................... 19
PART IV................................................................................................ 20
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 20
Signatures............................................................................................. 21
Consolidated Financial Statements..................................................................... F-1
Financial Statements Schedule..........................................................................S-1
Index to Exhibits...................................................................................... 22
</TABLE>
-ii-
<PAGE>
PART I
Item 1. Business
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements which are not historical facts contained in this Annual
Report on Form 10-K are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Such factors include, but are not
limited to, uncertainty regarding continued market acceptance of current
products and the ability to successfully develop and market new products
particularly in light of rapidly changing fashion trends, the impact of supply
and manufacturing constraints or difficulties particularly in light of the
Company's dependence on foreign manufacturers, uncertainties relating to
customer plans and commitments, competition, uncertainties relating to economic
conditions in the markets in which the Company operates, the ability to hire and
retain key personnel, the ability to obtain additional capital if required, the
risks of uncertainty of trademark protection and other risks detailed below and
in the Company's Securities and Exchange Commission filings.
Introduction
Candie's, Inc., which was incorporated in Delaware in 1978, and its
subsidiaries (together the "Company") are currently engaged primarily in the
design, marketing and importation of a variety of moderately-priced women's and
girls' casual and fashion footwear and handbags under the CANDIE'S(R) and
BONGO(R) trademarks for distribution to better department and specialty stores
worldwide. The Company also markets and distributes, under the CANDIE'S(R) and
BONGO(R) trademarks, children's footwear designed by it, and also arranges for
the manufacture of footwear products, similar to those produced under the
CANDIE'S(R) trademark, for mass market and discount retailers, under one of the
Company's other trademarks or under the private label brand of the retailer.
Moreover, the Company distributes a variety of men's workboots, hiking boots,
winter boots and outdoor casual shoes designed and marketed by the Company's
wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright Star"), under
private labels and a brand name licensed by the Company from third parties
(ASPEN(R)).
The Company began to license the use of the CANDIE'S(R) trademark from New
Retail Concepts, Inc. ("NRC") in June 1991 and in March 1993 purchased ownership
of the CANDIE'S(R) trademark from NRC together with certain pre-existing
licenses of such third party. NRC is a publicly traded company engaged primarily
in the licensing and sublicensing of fashion trademarks and a significant
shareholder of the Company. NRC's principal shareholder is also the Company's
President and Chief Executive Officer.
The Proposed Merger
The Company and NRC have executed a Merger Agreement dated April 6, 1998,
(the "Merger Agreement") which provides that NRC will be merged with and into
the Company (the "Merger"), and the Company will be the surviving corporation.
At the effective date of the Merger (the "Effective Date"), each issued and
outstanding share of NRC common stock $.01 par value (the "NRC Common Stock"),
and each issued and outstanding option to purchase shares of NRC Common Stock
immediately prior to the Effective Date will be converted, respectively, into
0.405 shares of common stock, $.001 par value, and options of the Company (the
"Common Stock").
The completion of the Merger is subject to a number of conditions,
including among other things, the approval of the stockholders of both the
Company and NRC and the registration of the Common Stock to be issued to the
holders of NRC pursuant to the Merger under the Securities Act of 1933, as
amended. No assurance can be given that the Company and NRC will be able to
successfully obtain the requisite stockholder approval or that the Company will
otherwise be able to consummate the Merger.
<PAGE>
At April 6, 1998, there were 5,693,639 shares of NRC Common Stock issued
and outstanding and options to purchase 1,635,000 shares of NRC Common Stock
outstanding. NRC currently owns 1,227,696 shares of Common Stock and has options
and warrants to purchase an additional 800,000 shares of Common Stock, all of
which will be extinguished upon consummation of the Merger.
Products
CANDIE'S(R) Footwear Products. CANDIE'S(R) brand fashion and casual
footwear is designed primarily for girls and women, aged 8 to 40, featuring a
variety of styles for a variety of uses. The retail prices of CANDIE'S(R)
footwear generally range from $30 to $60. Four times per year, as part of its
Spring and Fall collections, the Company generally designs and markets 30 to 40
different styles of shoes among its footwear categories. Approximately one-third
of such styles are "updates" of the Company's most popular styles from prior
periods and the Company considers such footwear to be "core" products.
The Company designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S(R) image and price
point. Fashion trend information is compiled by the Company's designers through
various methods, including travel to Europe and throughout the world to identify
and confirm seasonal trends, utilization of outside fashion forecasting services
and attendance at trade shows and seminars. Each season, subsequent to the final
determination of that season's line by the design team and management (including
colors, trim, fabrics, constructions and decorations), the design team travels
to the Company's manufacturers to oversee the production of the initial sample
lines.
CANDIE'S(R) Handbag Products. The Company recently began to market and
distribute under the CANDIE'S(R) trademark a line of women's and girls' handbags
to the same retail outlets it markets its footwear products. The retail price
range for CANDIE'S(R) handbags will generally range from $30 to $100.
BONGO(R) Footwear and Handbag Products. The Company designs fashion and
casual footwear and handbags for girls and women, aged 14 to 40, and markets and
distributes such footwear and handbags under the BONGO(R) trademark pursuant to
a license agreement with the owner of such trademark. The retail price range for
such footwear is between $30 to $50 and for such handbags is $15 to $30. The
Company distributes such footwear and handbags to department and specialty
retail stores, including Burdines, Wet Seal/Contempo Casuals, Mervyns and Edison
Brothers.
Children's Footwear. In the Spring of 1997, the Company began to market and
distribute under the CANDIE'S(R) and BONGO(R) trademarks a line of children's
footwear, primarily to the same retail outlets to which it markets its women's
brand, as well as to selected children's specialty stores. Approximately
three-quarters of the children's styles are smaller versions of the best selling
women's styles and one-quarter of the children's products are designed
specifically for the children's division. The Company's lines of children's
footwear have received favorable retailer and consumer response from across the
country.
Private Label Products. In addition to sales under the CANDIE'S(R) and
BONGO(R) trademarks, the Company arranges for the manufacture of women's
footwear, acting as agent for mass market and discount retailers, primarily
under the retailer's private label brand. Under its agency arrangements, the
Company receives a commission based upon the purchase price of the products
purchased from the manufacturer for providing design expertise, arranging for
the manufacturing of the footwear, oversight of production, inspection of the
finished goods and arranging for the sale of the finished goods by the
manufacturer to the retailer. All of the private label footwear is presold
against firm purchase orders and is backed by letters of credit opened by such
retailers.
Bright Star Footwear. Bright Star, acting principally as agent for its
customers, designs, markets and distributes a wide variety of men's workboots,
hiking boots, winter boots and leisure footwear, which
2
<PAGE>
is either unbranded, or marketed under the private label brand names of Bright
Star's customers, or under the Company's licensed brand, ASPEN(R). Bright Star's
customer base consists of a broad group of retailers, including discounters,
specialty retailer and better grade accounts. Bright Star's products are
directed toward the moderately-priced market. The retail prices of Bright Star's
footwear generally ranges from $25 to $75. The majority of Bright Star's
products are sold on a commission agency basis.
Manufacturing and Suppliers
The Company does not own or operate any manufacturing facilities. The
Company's footwear products are manufactured to its specifications by a number
of independent suppliers currently located in Brazil, China, Spain, Italy, and
Taiwan. The Company believes that such diversification permits it to respond to
customer needs and minimizes risks associated with foreign manufacturing. The
Company has developed, and seeks to develop, long-term relationships with
manufacturers that can produce a high volume of quality products at competitive
prices.
The Company negotiates the prices of finished products with its suppliers.
Such suppliers manufacture the products themselves or subcontract with other
manufacturers. Bright Star is responsible for identifying suppliers, planning
production schedules, supervising manufacture, inspecting samples and finished
products and arranging for the shipment of goods directly to customers in the
United States. Finished goods are purchased primarily on an open account basis,
generally payable within 7 to 45 days after shipment.
Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers. Although the Company believes that the
raw materials required (which include leather, nylon, canvas, polyurethane and
rubber), are available from various alternative sources, there can be no
assurance that any such materials will continue to be available on a timely or
cost-effective basis.
Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately three months, the shoe is
offered for sale to wholesale purchasers. After orders are received by the
Company, the acquisition of raw materials, the manufacture of the shoes and
shipment to the customer each take approximately one month. If the shoes are
produced in the United States or shipped via air freight, rather than ocean
freight, the shipment time is reduced.
For the fiscal year ended January 31, 1998 ("Fiscal 1998"), and the fiscal
year ended January 31, 1997 ("Fiscal 1997"), Redwood Shoe Corp. ("Redwood") a
buying agent for the Company, initiated the manufacture of approximately 60% and
80%, respectively, of the Company's total footwear purchases. At April 29, 1998,
the Company had approximately $23,000,000 of open purchase commitments with
Redwood.
There can be no assurance that, in the future, the capacity or availability
of manufacturers or suppliers will be adequate to meet the Company's product
needs.
Tariffs, Import Duties and Quotas
All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule (a
fixed duty structure in effect since January 1, 1989), the Company pays import
duties on its footwear products manufactured outside of the United States
ranging from approximately 3.2% to 48%, depending on whether the principal
component of the product is leather or some other material. Inasmuch as the
Company's products have differing compositions, the import duties vary with each
shipment of footwear products. Since 1981, there have not been any quotas or
restrictions, other than the duties mentioned hereinabove, imposed on footwear
imported by the Company into the United States.
3
<PAGE>
The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company. In addition, other restrictions on the
importation of footwear and apparel are periodically considered by the United
States Congress and no assurance can be given that tariffs or duties on the
Company's goods may not be raised, resulting in higher costs to the Company, or
that import quotas respecting such goods may not be lowered which could restrict
or delay shipment of products from the Company's existing foreign suppliers.
Backlog
At April 29, 1998 the Company had an estimated backlog of orders of its
products of approximately $75,000,000, as compared to a backlog of approximately
$49,000,000 at April 23, 1997. The backlog at any particular time is affected by
a number of factors, including seasonality, the buying policies of retailers,
scheduling, the manufacture and shipment of products. Accordingly, a comparison
of backlog from period to period is not necessarily meaningful and may not be
indicative of eventual actual shipments.
Seasonality
In previous years, demand for the Company's footwear peaked during the
months of June through August (the fall/back-to-school selling season). As a
result, shipment of the Company's products in previous years were heavily
concentrated in its second and third fiscal quarters. Accordingly, historically,
operating results have fluctuated significantly from quarter to quarter.
Although there can be no assurance that the Company will be able to achieve
consistent quarterly operating results in future years, the Company believes
that fluctuations in its quarterly operating results will be reduced over the
next year.
Customers and Sales
During Fiscal 1998, the Company sold its footwear products to more than 750
retail accounts consisting of department stores, including Federated Stores
(which includes Macy's and Bloomingdale's), Nordstrom's and May Company, mass
merchandisers, shoe stores and other outlets in the United States. No individual
customer accounted for more than 10% of the Company's revenues during Fiscal
1998; although the Company has five customers that each accounted for between
approximately 5.7% and 8.8% of the Company's net revenues in Fiscal 1998, and
between 7.1% and 8.6% in Fiscal 1997.
The Company has also entered into various long-term distribution agreements
with United Authentics, GmbH in Germany, Bata Shoe Pte. Ltd. of Singapore and
Malaysia and Cravo E. Canala of Brazil. Pursuant to the terms of such
distribution agreements, the Company's products will be distributed and marketed
in specialty stores throughout Germany, Singapore, Malaysia and Brazil. There
can be no assurance that such customers will continue to purchase products from
the Company or utilize its services in the future in the United States or
abroad.
The Company generally requires payment for goods by its customers either by
letter of credit or by check, subject to collection, within 30 to 60 days after
delivery of the goods. In certain instances, the Company offers its customers a
discount from the purchase price in lieu of returned goods; otherwise, goods may
be returned solely for defects in quality, in which event the Company returns
the goods to the manufacturer for a credit to the Company's account.
The Company currently utilizes the services of 27 full-time sales persons
(including 20 employees and 7 independent contractors), who are compensated on a
commission basis. The Company emphasizes customer service in the conduct of its
operations and maintains a customer service department. The Company customer
service department processes customer purchase orders and supports the sales
representatives by coordinating orders and shipments with customers.
4
<PAGE>
Licensing of the CANDIE'S(R) Trademark
During Fiscal 1997, the Company licensed the CANDIE'S(R) trademark for use
in connection with the manufacture and distribution of women's intimate apparel
and children's footwear. The Company terminated these licenses during Fiscal
1998 because, the Company has commenced to distribute its own line of children's
footwear under the CANDIE'S(R) trademark and, as to women's intimate apparel,
the Company perceived a conflict between the licensee's level of retail
distribution and the current retail market for the Company's footwear.
The Company currently intends to offer new license agreements for women's
apparel, accessories and related categories. The Company does not intend to
aggressively market such licenses but intends to evaluate prospective licensees
based on their experience, financial stability, reputation, marketing and
distribution ability, the marketability of the proposed product line and
compatibility of such proposed product line with the product lines of then
existing CANDIE'S(R) licensees. There can be no assurance that the Company will
be able to successfully license the CANDIE'S(R) trademark in the future.
Trademarks
The Company believes that its federally registered trademark, CANDIE'S(R)
which expires on June 9, 2001, is of material importance in marketing the
Company's products and, accordingly, has significant value. The Company also
owns other registered trademarks which it does not consider to be material to
its current operations. There can be no assurance that the CANDIE'S(R) trademark
or any other trademark which the Company owns, does not, and will not, violate
the proprietary rights of others, that any such trademark would be upheld if
challenged, or that the Company would, in such an event, not be prevented from
using such trademarks, any of which events could have a material adverse effect
on the Company. In addition, there can be no assurance that the Company will
have the financial or other resources necessary to enforce or defend an
infringement action.
The Company sells footwear and handbags under the BONGO(R) trademark and
footwear under the ASPEN(R) trademark, each of which the Company licenses from
third parties. The BONGO(R) license agreement grants the Company the exclusive
right to market and distribute footwear and handbags under the BONGO(R)
trademark in North America and certain foreign countries for a term expiring on
January 31, 2002, subject to the Company's right to extend the license through
January 31, 2006 under certain circumstances. The ASPEN(R) license agreement
grants Bright Star the exclusive right to market and distribute certain
categories of footwear under the ASPEN(R) trademark in the United States, its
territories and Puerto Rico for a term expiring on September 30, 1998. Although
the Company will seek to renew the ASPEN(R) license, there can be no assurance
that the Company can successfully negotiate a renewal of such license on terms
acceptable to it. The BONGO(R) and ASPEN(R) licenses require the Company to pay
royalties based on percentages of sales exceeding certain minimum royalties.
Competition
The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines from
Skechers, Nine & Co. and Esprit. In general, competitive factors include
quality, price, style, name recognition and service. Although the Company
believes that it competes favorably in these areas, there can be no assurance
that it will be able to do so in the future. In addition, the presence in the
marketplace of various fashion trends and the limited availability of shelf
space can affect competition. Many of the Company's competitors have
substantially greater financial, distribution, marketing and other resources
than the Company and have achieved significant name recognition for their brand
names. There can be no assurance that the Company will be able to successfully
compete with the companies marketing these products.
5
<PAGE>
Employees
At April 21, 1998, the Company employed 93 persons, of whom 4 are
executives and 89 are management, sales, marketing, product development,
administrative, customer service representatives and retail store personnel.
None of the Company's employees are represented by a labor union. The Company
also utilizes the services of 7 independent contractors who are engaged in
sales. The Company considers its relations with its employees to be good.
Item 2. Properties
The Company currently occupies 19,653 square feet of office and showroom
space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease which
expires on April 1, 2000. The monthly rental expense pursuant to the lease is
$32,755 per month through the expiration date of the lease. The Company also
occupies (i) approximately 1,265 square feet of retail space in The Galleria
shopping mall in White Plains, New York pursuant to a lease which expires on
September 30, 2006, (ii) approximately 1,265 square feet of retail space in the
Roosevelt Field shopping mall in Garden City, New York pursuant to a lease which
expires on October 22, 2004, and (iii) approximately 2,919 square feet of retail
space in the Tanger Outlet shopping mall in Riverhead, New York pursuant to a
lease which expires on October 31, 2002. The lease at The Galleria shopping mall
provides for a minimum monthly rental of approximately $3,000 through September
30, 1998, increasing to approximately $5,000 for the 12 months ending September
30, 2006, plus additional rent as described below. The lease at the Roosevelt
Field shopping mall provides for a minimum monthly rental of approximately
$10,000 through October 31, 1999, and increasing to approximately $12,000 for
the twelve months ended October 31, 2004, plus additional rent as described
below. The lease at the Tanger Outlet shopping mall provides for a minimum
monthly rental of approximately $6,300 through October 31, 2002, plus additional
rent as described below. Additional rent at all three shopping mall locations is
based on percentages of annual gross sales of the retail store exceeding certain
amounts and proportionate amounts of monthly real estate taxes, utilities and
other expenses relating to the shopping mall.
Item 3. Legal Proceedings
The Company is a party to certain litigation incurred in the normal course
of business. While any litigation has an element of uncertainty, the Company
believes that the final outcome of any of these matters will not have a material
effect on the Company's financial position or future liquidity. Furthermore, the
Company knows of no material legal proceedings, pending or threatened, or
judgments entered, against any director or officer of the Company in his
capacity as such.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded in the over-the-counter market
and quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since January 22, 1990 (under the symbol "CAND" since February
23, 1993 and, prior to such time, under the symbol "SHOE"). The Common Stock is
currently traded on the NASDAQ National Market. The following table sets forth,
for the indicated periods, the high and low sales prices for the Common Stock as
reported by NASDAQ:
6
<PAGE>
High Low
---- ---
Fiscal Year Ended January 31, 1998
Fourth Quarter .............................. $7.25 $4.63
Third Quarter ............................... 7.88 4.13
Second Quarter .............................. 5.69 3.63
First Quarter ............................... 6.88 4.25
Fiscal Year Ended January 31, 1997
Fourth Quarter .............................. $5.69 $1.75
Third Quarter ............................... 2.75 1.72
Second Quarter .............................. 3.06 1.59
First Quarter ............................... 2.75 1.69
As of April 21, 1998, there were approximately 150 holders of record of the
Company's Common Stock. The Company believes that, in addition, there are in
excess of 1,000 beneficial owners of its Common Stock, which shares are held in
"street name."
The Company has not paid cash dividends on its Common Stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future.
During the fiscal quarter ended January 31, 1998, the Company issued
five-year options to its employees to purchase an aggregate of 464,500 shares of
its common stock at exercise prices of (i) $5.00 for 400,000 shares, (ii) $6.81
for 30,000 shares; (iii) $5.06 for 30,000 shares; and (iv) $6.88 for 4,500
shares. The foregoing options were acquired by the holders for investment in
private transactions exempt from registration by virtue of either Sections 2(3)
or 4(2) of the Act.
Item 6. Selected Financial Data
Selected Historical Financial Data
(in thousands, except earnings per share amounts)
The following table presents selected historical financial data of the
Company for the periods indicated. The selected historical financial information
is derived from the audited consolidated financial statements of the Company
referred to under item 8 of this Annual Report on Form 10-K, and previously
published historical financial statements not included in this Annual Report on
Form 10-K. The following selected financial data should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues ................... $ 92,976 $ 45,005 $ 37,914 $ 24,192 $ 13,164
Operating income (loss) ........ 6,961 966 2,057 (1,391) (5,009)
Net income (loss) .............. 4,536 1,145 1,054 27 (6,321)
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Earnings (loss) per share:
Basic ...................... .40 .13 .12 .00 (1.32)
Diluted .................... .33 .11 .11 .00 (1.32)
Weighted average number of common
shares outstanding:
Basic ...................... 11,375 9,143 8,726 6,398 4,790
Diluted .................... 13,788 10,152 9,427 6,461 4,790
<CAPTION>
Year Ended January 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets ................. $ 23,408 $ 9,039 $ 5,969 $ 4,104 $ 4,407
Total assets ................... 30,881 14,709 11,746 10,290 11,045
Long-term debt ................. -- -- -- -- 4,027
Total stockholders' equity ..... 24,681 8,608 5,586 4,392 (570)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. See "Safe
Harbor Statement" in Item 1 of this report which statement is incorporated
herein by reference.
Results of Operations
Fiscal 1998 Compared with Fiscal 1997
Revenues. Net revenues increased by $47,971,000, or 106.6% to $92,976,000,
primarily due to increased brand awareness and consumer acceptance due to the
Company's increased sales and marketing efforts coupled with increased sales in
all product categories, the successful introduction of children's footwear
products and increased selling prices.
Gross Profit. Gross Profit margins increased to 26.0% from 21.9% in the
prior year. The increase is primarily attributable to changes in product mix and
the ability to source product at lower prices coupled with increases in units
sold and selling prices.
Operating Expenses. Selling, general and administrative expenses increased
by approximately $8,327,000 to $17,217,000 for Fiscal 1998 compared to
$8,890,000 for the prior year. The increase is primarily due to increased
selling, shipping and administrative expenses which are directly associated with
the increase in net revenues and an increase in marketing and advertising
expenses. As a percentage of net revenues, selling, general and administrative
expenses decreased 1.3% to 18.5% for Fiscal 1998 from 19.8% for the prior year.
8
<PAGE>
Operating Income. As a result of the foregoing, operating income increased
approximately sevenfold to $6,960,000, or 7.5% of net revenues for Fiscal 1998,
compared to $966,000, or 2.1% of net revenues for the prior year.
Interest Expense. Interest expense increased by $374,000, or 49.5%,
primarily as a result of increased levels of borrowings under the Company's
revolving credit facility with its factor for seasonal working capital
requirements to fund the Company's growth.
Income Tax Expense. The relationship of the income tax provision in Fiscal
1998 and the benefit in Fiscal 1997, respectively, to income before income taxes
was significantly affected by the recognition of deferred tax assets in the
amount of $1,347,000 and $1,100,000, respectively, in each year. See Note 10 to
the Consolidated Financial Statements and Net Operating Loss Carryforward
discussion included later in this management's discussion.
Net Income. As a result of the foregoing, net income increased fourfold to
$4,536,000 or 4.9% of net revenues for Fiscal 1998, compared to $1,145,000 or
2.5% of net revenues for the prior year.
Fiscal 1997 Compared with Fiscal 1996
Revenues and Gross Profit. Net revenues increased by $7,091,000, or 18.7%,
primarily due to the Company's sales and marketing efforts, including the
Company's decision to emphasize sales of casual, outdoor and fashion footwear
and sales of footwear under the CANDIE'S brand and the Company's licensed brand,
BONGO. These efforts resulted in both an increase in the amount of footwear sold
and lower profit margins due to decreased selling prices for certain of the
Company's core products, in an effort to maintain retail market share.
Accordingly, the Company's gross profit percentage decreased to 21.9% from 27.7%
for the fiscal year ended January 31, 1996 ("Fiscal 1996").
Operating Expenses. Selling expenses increased by $494,000, or 9.8%,
primarily due to increases in the amount of salesmen's commissions on increases
in footwear sales and increases in advertising expenditures. General and
administrative expenses decreased by approximately $34,000, or 1.0%, principally
due to the Company's cost containment efforts. Total operating expenses
increased by 5.5% or approximately $461,000. This increase is principally due to
the increases in sales commissions and advertising expense discussed above.
Accordingly, operating income decreased by $1,092,000, or 53.1%, to $966,000 for
Fiscal 1997, from operating income of $2,057,000 in Fiscal 1996.
Interest Expense. Interest expense increased by $28,000, or 3.9%, primarily
as a result of increased borrowings under the Company's revolving credit
facility with its factor.
Income Tax Expense. In Fiscal 1997, income tax expense was credited by a
$1.1 million reduction in the valuation allowance previously provided against
the Company's net deferred tax assets. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" net deferred tax
assets are not recognized when a company has cumulative losses in recent years.
However, as a result of its continued profitability, the Company believes it is
more likely than not that the Company will generate sufficient taxable income to
realize the benefits of these deferred tax assets (see Note 10 of Notes to
Consolidated Financial Statements appearing elsewhere herein). This reduction in
the valuation allowance of the deferred tax assets resulted in a net income tax
benefit for Fiscal 1997 of $1,010,000, as compared to an income tax provision of
$163,000 for Fiscal 1996.
Net Income. As a result of the foregoing, the Company achieved net income
of $1,145,000 for Fiscal 1997, compared to net income of $1,054,000 in Fiscal
1996.
9
<PAGE>
Liquidity and Capital Resources
The Company has relied in the past primarily upon revenues generated from
operations, borrowings from its factor and sales of securities to finance its
liquidity and capital needs. Net cash used in operating activities totaled
$8,830,000 in Fiscal 1998, as compared to net cash provided by operating
activities of approximately $663,000 for Fiscal 1997. Net income of $4,536,000
and the effects of non-cash charges for depreciation and amortization of
$604,000 and deferred income taxes of $993,000 were more than offset by the
Company's requirement to finance increased inventories in the amount of
$10,928,000, increased accounts receivable and factoring activity in the amount
of $2,888,000 and other changes in operating assets and liabilities, resulting
in the Fiscal 1998 use of cash from operating activities. Net cash provided by
operating activities for Fiscal 1997 resulted principally from net income of
$1,145,000, an increase in accounts payable and accrued expenses of $2,365,000,
partially offset by deferred income taxes of $1,100,000, a decrease in due to
factor of $719,000, non-cash items of depreciation and amortization of $459,000,
an increase in prepaid expenses of $235,000, and an increase in inventories of
$1,251,000.
The ratio of current assets to current liabilities increased to 3.8:1 at
January 31, 1998 from 1.5:1 at January 31, 1997. Working capital increased by
approximately $14,223,000 to $17,268,000 at January 31, 1998 compared to working
capital of $3,046,000 at January 31, 1997.
The Company expects a continuation of the recent trend of increases in
revenues through increased sales of women's footwear and handbags under the
CANDIES(R) and BONGO(R) trademarks, and revenues from children's footwear
products under the CANDIES(R) and BONGO(R) trademarks.
Other than short-term borrowings for working capital requirements, the
Company is virtually debt-free.
The Company sells substantially all of its accounts receivable to a factor
without recourse. In circumstances where a customer's account cannot be factored
without recourse, the Company may take other measures to reduce its credit
exposure which could include credit insurance, requiring the customer to pay in
advance or providing a letter of credit covering the sales price of the
merchandise ordered.
The Company currently has an accounts receivable factoring agreement
whereby it sells receivables generally without recourse. The agreement which
under its original terms was to expire on November 30, 1998 (as amended),
provides the Company with the ability to borrow funds from the factor, limited
to 85% of eligible accounts receivable and 50% of eligible finished goods
inventory (to a maximum of $15,000,000 in inventory) in which the factor has a
security interest. The agreement provides for the opening of documentary letters
of credit (up to a maximum of $2.5 million) to suppliers, on behalf of the
Company. The factor reserves an amount equal to 43% of the full amount of each
letter of credit to be opened against the Company's available borrowings. The
total credit facility is limited to the lesser of (i) available borrowings as
determined pursuant to the factor agreement or (ii) $20,000,000. Borrowings bear
interest at the rate of three quarters of one percent (3/4%) over the existing
prime rate (8-1/2% at January 31, 1998) established by the CoreStates Bank N.A.
Factoring commissions on accounts receivable assigned to the factor are at a
rate of .60%. The Company's assets are pledged as collateral. The unused portion
of the credit lines at April 16, 1998 was approximately $11,500,000.
The Company is currently negotiating a new revolving credit and factoring
arrangement with prospective lenders. The Company anticipates that the
replacement credit facility will be in place shortly with terms and conditions
that will be more favorable than its current financial arrangement with its
factor. Accordingly, the Company has notified its factor of its intention to
terminate its
10
<PAGE>
factoring agreement and is currently operating on a month to month basis. The
Company has reserved its right to terminate the agreement at will, if necessary,
without any penalties or fee upon termination.
Subsequent to year-end through February 23, 1998, substantially all of the
Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of $7,157,000 from the exercise of such
Warrants. The proceeds were used to repay short- term borrowings. Each Warrant
entitled the holder thereof to purchase one share of Common Stock at an exercise
price of $5.00 on that date, at which time the right to exercise such Warrant
terminated. In addition, subsequent to January 31, 1998, the Company received
proceeds of $1,042,000, in connection with the issuance of common stock relating
to the exercise of outstanding stock options and certain underwriters' warrants.
The Company believes that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, including requirements for its
expansion, primarily with cash flow from operations, supplemented by borrowings
under its existing replacement credit facility.
The Company intends to retain its earnings to finance the development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the financial condition of the Company and
general business conditions.
Seasonality
The Company's products are marketed primarily for Fall and Spring seasons,
with slightly higher volumes of products sold during the second and fourth
quarters.
Effects of Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced over the past few years in the United States, where it
primarily competes, have had a significant effect on revenues or profitability.
Year 2000 Issues.
The Company has assessed the issues associated with its existing computer
system with respect to a two digit year value as the year 2000 approaches and is
in the process of implementing a new computer system which it believes addresses
such issues. The Company also believes that implementation of this system is not
a material event or uncertainty that would cause expected financial information
not to be indicative of future operating results or financial condition.
Net Operating Loss Carryforwards
At January 31, 1998, the Company had net operating losses of approximately
$5,500,000 for income tax purposes, which expire in the years 2008 through 2010.
Due to the issuance of Common Stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275,000 per year. Approximately $4,600,000 of
the operating loss carryforwards are subject to this restriction and
accordingly, no accounting recognition has been given to approximately $1.8
million of such losses since present restrictions preclude their utilization.
11
<PAGE>
After the date of the pre-quasi reorganization the tax benefits of net
operating loss carryforwards incurred prior to the reorganization, has been
treated for financial statement purposes as direct additions to additional
paid-in capital. For Fiscal 1998 and Fiscal 1997, the Company utilized $149,000
and $158,000, respectively, of pre-quasi reorganization net operating loss
carryforwards. The related tax benefits of $56,000 and $60,000, at January 31,
1998 and 1997 respectively, have been recognized as increases to additional
paid-in capital. Additionally, as of January 31, 1998 and 1997, the Company
reduced its valuation allowance for deferred tax assets by $2,392,000 and
$1,083,000, respectively, increasing paid-in capital by $1,045,000 and $200,000
and benefiting the income tax provision by $1,347,000 and $1,100,000,
respectively. The Company believes it is more likely than not that the
operations will generate future taxable income to realize such tax assets.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
and No. 131 "Reporting Comprehensive Income" and "Disclosures about Segments of
an Enterprise and Related Information," respectively, both of which are required
to be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130
will require the Company to report in its financial statements all non-owner
related changes in equity for the periods being reported. SFAS No. 131 will
require the Company to disclose revenues, earnings and other financial
information pertaining to the business segments by which the Company is managed,
as well as what factors management used to determine these segments. The Company
is currently evaluating the effects SFAS No. 130 and No. 131 will have on its
financial statements and related disclosures.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of option, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods presented have been
restated in accordance with the SFAS No. 128 requirements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be submitted in response to this Item
8 are set forth in Part IV, Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is a list of the directors, executive officers and key
employees of the Company and their respective ages and positions are as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Neil Cole 40 Chairman of the Board, President and Chief Executive
Officer
Lawrence O'Shaughnessy 48 Executive Vice President, Chief Operating Officer and
Director
David Golden 44 Senior Vice President, Chief Financial Officer
Gary Klein 43 Vice President of Finance
Barry Emanuel 56 Director
Mark Tucker 50 Director
</TABLE>
Neil Cole has been Chairman of the Board, President and Chief Executive
Officer of the Company since February 23, 1993. From February through April
1992, Mr. Cole served as director and as acting President of the Company. Mr.
Cole has also served as Chairman of the Board, President, Treasurer and a
director of NRC since its inception in April 1985.
Lawrence O'Shaughnessy has been a director and Chief Operating Officer of
the Company since March 1993 and Executive Vice President of the Company since
April 1995. He also served as a director of the Company from April to June 1992.
Mr. O'Shaughnessy has served as President of O'Shaughnessy & Company, a
management consulting firm, since March 1991.
David Golden has been the Senior Vice President and Chief Financial Officer
of the Company since March 1, 1998. From April 1994 to February 1998, Mr. Golden
was a principal at DMG Consulting Services, a management consulting firm. From
September 1991 to March 1994, Mr. Golden was Executive Vice President and Chief
Financial and Administrative Officer of Hugo Boss USA, Inc.
Gary Klein has served as Vice President of Finance of the Company since
October 1994 and has also served in that position from February to December
1993. He also has served as Principal Accounting Officer from December 1993 to
October 1994. Mr. Klein has also served as Chief Financial Officer of NRC since
May 1990.
Barry Emanuel has been a director of the Company since May 1993. For more
than the past five years, Mr. Emanuel has served as President of Copen
Associates, Inc., a textile manufacturer located in New York, New York.
Mark Tucker has been a director of the Company since May 1996. From August
1993 to the present, Mr. Tucker has been a principal of Mark Tucker, Inc., a
family owned business engaged in the design and import of shoes. Mr. Tucker has
also been a principal of Redwood, a manufacturer and distributor of footwear
since June 1993. From December 1992 to August 1993, he was an independent
consultant to the shoe industry. From July 1992 to December 1992, Mr. Tucker was
employed as Director of Far East Shoe Wholesale Operations for United States
Shoe Far East Limited, a subsidiary of U.S. Shoe Corp. For more than five years
prior to July 1992, Mr. Tucker was a principal of Mocambo Ltd., a family owned
shoe design and import company.
Directors are elected by the Company's stockholders. Officers are elected
by the Company's Board of Directors and serve at the discretion of the Company's
Board of Directors.
13
<PAGE>
In April 1996, the Company entered into an agreement (the "Redwood
Agreement") with Redwood under which, in consideration for the satisfaction in
full of certain accounts payable to Redwood aggregating $1,680,000, the Company
(i) issued to Redwood 1,050,000 shares of the Company's Common Stock and an
option to purchase 75,000 shares of the Company's Common Stock; (ii) paid
$50,000 to Redwood; and (iii) agreed, for the three year period ending April 3,
1999, to cause Mark Tucker (or if he is not available, another partner of
Redwood designated by it) to be elected as director of the Company; and (iv)
agreed to register the shares and the option shares for sale under the
Securities Act. Pursuant to the Redwood Agreement, in May 1996, Mr. Tucker was
elected as a director of the Company and in October 1996, a registration
statement covering the shares and the option shares was declared effective under
the Act. The Company has also agreed, if so requested by Redwood to use
reasonable efforts to cause the election of Mr. Mark Tucker as a director and
continue Mr. Tucker as such until April 3, 1999. If Mr. Tucker is not available
to serve, Redwood has the right to designate one of its other partners as a
nominee for election as a director. Each of Messrs. Cole and O'Shaughnessy and
NRC have agreed to vote their shares of the Company's Common Stock to elect and
continue Redwood's nominee in office for such three year period.
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of Securities Exchange Act of 1934 requires the Company
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10 percent owners are required
by certain SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during Fiscal 1998, filing requirements
applicable to its officers, directors and 10% stockholders of the Common Stock
were complied with, except Mr. Cole and Mr. O'Shaughnessy failed to timely file
Form 4 reports with respect to the cancellation of options to purchase 400,000
and 41,700 shares of the Common Stock in January 1998 and September 1997,
respectively, and the simultaneous grant of options to purchase 400,000 and
100,000 shares of the Common Stock in January 1998 and September 1997,
respectively.
Item 11. Executive Compensation
Executive Compensation
The following table sets forth all compensation paid or accrued by the
Company for the Fiscal 1998, 1997 and 1996, to or for the Chief Executive
Officer and for the other persons that served as executive officers of the
Company during Fiscal 1998 whose salaries exceeded $100,000 (collectively, the
"Named Executives"):
14
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
--------------------------------------------------------------------
Securities
Name and Principal Fiscal Other Annual Underlying
Position Year Salary Bonus(1) Compensation(2) Options
------------------ ---- ------ -------- --------------- -------
<S> <C> <C> <C> <C> <C>
Neil Cole, 1998 $395,833 $308,909 $5,000 400,000
Chairman, President and 1997 346,000 6,800 2,500 10,000
Chief Executive Officer 1996 300,000 66,500 410,000
Lawrence O'Shaughnessy, 1998 291,667 92,672 5,000 100,000
Executive Vice President 1997 246,000 2,000 2,500 10,000
and Chief Operating 1996 221,500 19,966 210,000
Officer
Gary Klein, 1998 110,000 -0- -0-
Vice President of Finance 1997 102,000 -0- 60,000
1996 100,000 -0- 18,000
</TABLE>
- ----------
(1) Represents bonuses accrued under employment agreements.
(2) Represents amounts earned as director's fees.
The following table provides information with respect to individual stock
options granted during Fiscal 1998 to each of the Named Executives:
Option Grants in Fiscal 1998 Year
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Shares % of Total Potential Realizable Value
Underlying Options Granted Exercise of Assumed Annual Rates
Options To Employees in Price Expiration At Stock Price Appreciation
Name Granted(#)* Fiscal Year (per share) Date or Option Term
---- ----------- ----------- ----------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Neil Cole 400,000 39.9% $ 5.00 1/15/03 $552,563 $1,221,020
Lawrence 100,000 10.0 5.50 9/4/02 151,955 335,781
O'Shaughnessy
Gary Klein -- -- -- -- -- --
</TABLE>
- ----------
* Stock options granted under the Company's 1997 plan; each option became
exercisable on its date of grant and expires five years from that date. The
exercisability of certain options granted to Messrs.
15
<PAGE>
Cole and O'Shaughnessy is restricted upon the occurrence of certain events
related to termination of employment or death of the optionee. In addition,
certain options granted to Mr. Cole are subject to termination prior to
their expiration upon termination of employment for cause.
The following table sets forth information as of January 31, 1998 with
respect to exercised and unexercised stock options held by the Named Executives.
No options were exercised by any of the Named Executives during Fiscal 1998.
Aggregated Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at January 31, 1998 at January 31, 1998*
--------------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Neil Cole 1,430,000 -0- 3,454,750 $ -0-
Lawrence 363,300 -0- 973,769 -0-
O'Shaughnessy
Gary Klein 113,000 -0- 335,213 -0-
</TABLE>
- ----------
* An option is "in-the-money" if the year-end market value of the Company's
Common Stock exceeds the exercise price of such option. As of January 31, 1998,
the closing price per share of the Company's Common Stock as reported by NASDAQ
was $4.9375.
Employment Contracts and Termination and Change-in-Control Arrangements
The Company has entered into an employment agreement with Neil Cole for a
term expiring on February 28, 2000 at an annual base salary of $400,000 for the
12 months ended February 28, 1998, $450,000 for the 12 months ending February
28, 1999 and $500,000 for the 12 months ending February 28, 2000, subject to
annual increases at the discretion of the Company's Board of Directors. Pursuant
to the amended employment agreement, Mr. Cole serves as President and Chief
Executive Officer of the Company devoting a majority of his business time to the
Company and the remainder of his business time to other business activities,
including those of NRC which is expected to be merged with and into the Company.
Under the agreement, Mr. Cole (i) is entitled to receive a portion of an annual
bonus pool equal to 5% of the Company's annual pre-tax profits, if any, as
determined by the Company's Board of Directors; and (ii) is entitled to
customary benefits, including participation in management incentive and benefit
plans, reimbursement for automobile expenses, reasonable travel and
entertainment expenses and a life insurance policy in the amount of $1,000,000.
Mr. Cole is also entitled to receive any additional bonuses as the Board of
Directors may determine. If Mr. Cole terminates his employment with the Company
for "good reason" (as defined in the amended agreement) or the Company
terminates Mr. Cole's employment without "cause" (as defined in the amended
agreement), including by reason of a "change-in-control" of the Company (as
defined in the employment agreement), the Company is obligated to pay Mr. Cole
his full salary (at the annual base salary rate then in effect) through the date
of termination plus full base salary for one year or the balance of the term of
the agreement, whichever is greater.
The Company has entered into an amended employment agreement with Mr.
O'Shaughnessy for a term expiring on March 31, 2000 at an annual base salary of
$300,000 for the 12 months ended March 31, 1998 and $350,000 thereafter, subject
to annual increases at the discretion of the Company's Board of Directors.
Pursuant to the agreement, Mr. O'Shaughnessy serves as Executive Vice-President
of the Company,
16
<PAGE>
devoting a majority of his business time to the Company and the remainder of his
business time to other business activities. Under the amended agreement, Mr.
O'Shaughnessy (i) is entitled to receive an annual bonus equal to 1.5% of the
Company's annual pre-tax profits, if any; and (ii) is entitled to customary
benefits, including participation in management incentive and benefit plans,
reimbursement for automobile expenses, reasonable travel and entertainment
expenses and a life insurance policy in an amount equal to his annual base
salary.
The Company has entered into an employment agreement, effective March 1,
1998 with David Golden which provides for his employment as Senior Vice
President-Chief Financial Officer at an annual salary of $225,000 for the twelve
months ending March 1, 1999 and $250,000 for the twelve months ending March 1,
2000. Under the agreement, Mr. Golden is entitled to receive an annual bonus
equal to 0.5% of the Company's annual pre-tax profits, if any, and is entitled
to customary benefits including participation in management incentive and
benefit plans, and reimbursement for automobile expenses, and reasonable travel
and entertainment expenses. In addition, Mr. Golden was granted options to
purchase an aggregate of 125,000 shares of the Company's Common Stock at $5.00,
which options vested with respect to one-fifth of the aggregate number on the
date of grant and thereafter will vest with respect to an additional two fifths
of the aggregate number on the first anniversary of the date of grant and an
additional one fifth of the aggregate number upon each anniversary of the date
of grant until March 1, 2001. If Mr. Golden terminates his employment with the
Company for "good reason" (as defined in the agreement) or the Company
terminates Mr. Golden's employment without "cause" (as defined in the agreement)
the Company is obligated to pay Mr. Golden (i) his full salary (at the annual
base salary rate then in effect) through the date of termination and the share
of his bonus for such year pro rated for that year through the date of
termination; (ii) any accrued vacation amounts through the date of termination
and (iii) a severance payment (based upon the annual base salary rate then in
effect) for the unexpired portion of the two year term, but in no event less
than six months, and all unvested options shall be accelerated and shall vest
upon the date of termination. In the event that Mr. Golden terminates his
employment with the Company by reason of a change of control of the Company, Mr.
Golden shall be entitled to receive the payments specified in items (i) and (ii)
in the preceding sentence and an amount equal to twelve months of Mr. Golden's
base salary (at the annual base salary rate in effect) and all unvested options
shall be accelerated and shall vest upon the date of termination.
The Company has entered into an employment agreement with Gary Klein which
provides for his employment as the Vice-President of Finance of the Company at
an annual salary of $110,000 for a two year period expiring November 15, 1998,
subject to automatic renewal for successive two year periods, unless earlier
terminated by reason of Mr. Klein's death or by the Company for "cause" (as
defined in the employment agreement). In addition, the Company provides Mr.
Klein with term life insurance in the amount of $110,000.
Compensation of Directors
Each director received cash compensation of $5,000 for serving on the
Company's Board of Directors during Fiscal 1998. Under the Company 1989 Stock
Option Plan (the "1989 Plan"), non-employee directors (other than non-employee
directors who are members of any Stock Option Committee that may be appointed by
the Company's Board of Directors to administer the 1989 Plan) are eligible to be
granted non-qualified stock options and limited stock appreciation rights. No
stock appreciation rights have been granted under the 1989 Plan. Under the
Company's 1997 Stock Option Plan (the "1997 Plan"), non-employee directors are
eligible to be granted non-qualified stock options.
The Company's Board of Directors or the Stock Option Committee of the 1989
Plan or the 1997 Plan, if one is appointed, had discretion to determine the
number of shares subject to each nonqualified option (subject to the number of
shares available for grant under the 1989 Plan or the 1997 Plan, as applicable),
the exercise price thereof (provided such price is not less than the par value
of the underlying shares of the Company's Common Stock), the term thereof (but
not in excess of 10 years from the date of grant, subject to earlier termination
in certain circumstances), and the manner in which the option becomes
exercisable (amounts,
17
<PAGE>
intervals and other conditions). No non-qualified options were granted to
non-employee directors under the 1989 Plan and 1997 Plan during Fiscal 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 21, 1998,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Named
Executives; (iii) each of the Company's directors; and (iv) all executive
officers and directors as a group:
Amount and Nature Percentage
Name and Address of of Beneficial of Beneficial
Beneficial Owner (1) Ownership (2) Ownership
- -------------------- --------------- ---------
Neil Cole 3,497,346(3)(4)(5) 21.3%
New Retail Concepts, Inc. 2,027,696(5) 13.5
2975 Westchester Avenue
Purchase, New York 10577
Redwood Shoe Corp. 825,000(6) 5.8
8F, 137 Hua Mei West Street
SEC.1, Taichung, Taiwan, R.O.C.
Mark Tucker 825,000(6) 5.8
Lawrence O'Shaughnessy 427,200(7) 2.9
David Golden 25,000(8) *
Gary Klein 121,025(9) *
Barry Emanuel 30,000(10) *
All executive officers and directors as 4,925,571(3)(4)(5) 29.1
a group (six persons) (6)(7)(8)(9)(10)
- ----------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has an address at 2975
Westchester Avenue, Purchase, New York 10577.
(2) A person is deemed to have beneficial ownership of securities that can be
acquired by such person within 60 days of April 21, 1998 upon exercise of
warrants or options. Consequently, each beneficial owner's percentage
ownership is determined by assuming that warrants or options held by such
person (but not those held by any other person) and which are exercisable
within 60 days from April 21, 1998 have been exercised. Unless otherwise
noted, the Company believes that all persons referred to in the table have
sole voting and investment power with respect to all shares of Common Stock
reflected as beneficially owned by them.
18
<PAGE>
(3) Includes 2,027,696 shares of Common Stock beneficially owned by NRC; Neil
Cole, the President and Chief Executive Officer of NRC, owns, beneficially
and of record, approximately 44% of NRC's common stock. In addition, as
President of NRC, Mr. Cole has or will have the right to vote the 2,027,696
shares of Common Stock beneficially owned by NRC. Mr. Cole disclaims
beneficial ownership of these shares.
(4) Includes 1,430,000 shares of Common Stock issuable upon exercise of
immediately exercisable options owned by Neil Cole. Also includes 10,000
shares held by a charitable foundation, of which Mr. Cole and his wife are
co-trustees. Mr. Cole disclaims beneficial ownership of the shares held by
such charitable foundation.
(5) Includes 800,000 shares of Common Stock issuable upon exercise of
immediately exercisable options and warrants issued to NRC.
(6) Represents 825,000 shares of Common Stock, which shares were issued
pursuant to an agreement between the Company and Redwood pertaining to the
settlement of certain indebtedness of the Company to Redwood. Mr. Tucker is
an affiliate of Redwood.
(7) Includes 363,300 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(8) Represents 25,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(9) Includes 113,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
(10) Includes 25,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.
Item 13. Certain Relationships and Related Transactions
Certain Relationships and Related Transactions
In March 1993, the Company entered into a Services Allocation Agreement
with NRC pursuant to which the Company provides NRC with certain services for
which NRC pays the Company an amount equal to the allocable portion of the
Company's expenses, including employees' salaries, associated with such
services. Pursuant to such agreement, NRC paid the Company $50,000 in Fiscal
1998.
As more fully disclosed in Item 1 of this Annual Report on Form 10-K, the
Company has executed a Merger Agreement on April 6, 1998 with NRC pursuant to
which NRC would be merged with and into the Company, and the related party
transaction mentioned above would be terminated. See Item 1 - "The Merger".
For Fiscal 1998, Redwood, as buying agent for the Company, initiated the
manufacture of approximately 60%, of the Company's total footwear purchases. At
April 29, 1998, the Company had placed approximately $23,000,000 of open
purchase commitments with Redwood.
19
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedule
See the accompanying Financial Statements and Financial Statement Schedule
filed herewith submitted as a separate section of this report - See F-1.
(b) Reports on Form 8-K
None
(c) Exhibits
See the accompanying Exhibit Index filed herewith in response to this
portion of Item 14 and submitted as a separate section of this report.
(d) Financial Statement Schedule
The response to this portion of Item 14 is submitted as a separate section
of this report. See F- 1.
20
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANDIE'S, INC.
By: /s/ NEIL COLE
--------------------
Neil Cole
Chief Executive Officer
Dated: May 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature and Name Capacity in Which Signed Date
- ------------------ ------------------------ ----
<S> <C> <C>
Chairman of the Board, President and May 1, 1998
/s/ NEIL COLE Chief Executive Officer
- ----------------------------
Neil Cole
Executive Vice President and Chief May 1, 1998
/s/ LAWRENCE O'SHAUGHNESSY Operating Officer and a Director
- ----------------------------
Lawrence O'Shaughnessy
May 1, 1998
/s/ BARRY EMANUEL Director
- ----------------------------
Barry Emanuel
May 1, 1998
/s/ MARK TUCKER Director
- ----------------------------
Mark Tucker
Senior Vice President and Chief May 1, 1998
/s/ DAVID GOLDEN Financial Officer
- ----------------------------
David Golden
Vice President of Finance May 1, 1998
/s/ GARY KLEIN [Principal Accounting Officer]
- ----------------------------
Gary Klein
</TABLE>
21
<PAGE>
Annual Report on Form 10-K
Item 8, 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedule
Year Ended January 31, 1998
Candie's, Inc. and Subsidiaries
F-1
<PAGE>
Candie's, Inc. and Subsidiaries
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Candie's Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors............................................ F-3
Consolidated Balance Sheets - January 31, 1998 and 1997................... F-4
Consolidated Statements of Income for the Years ended
January 31, 1998, 1997 and 1996....................................... F-5
Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 1998, 1997 and 1996................... F-6
Consolidated Statements of Cash Flows for the Years ended
January 31, 1998, 1997 and 1996....................................... F-7
Notes to Consolidated Financial Statements................................ F-8
The following consolidated financial statement schedule of Candie's, Inc. and
subsidiaries is included in Item 14(d):
Schedule II Valuation and qualifying accounts ............................ S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
<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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Candie's, Inc. and subsidiaries at January 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
White Plains, New York
April 16, 1998
F-3
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash ............................................................ $ 367,068 $ 389,517
Accounts receivable, net of allowances of
$27,000 in 1998 and $34,000 in 1997 ........................... 2,804,503 1,328,814
Inventories ..................................................... 16,179,175 5,251,091
Due from factor ................................................. 831,332 --
Deferred income taxes ........................................... 801,400 1,300,000
Prepaid advertising and marketing ............................... 1,820,659 459,120
Other current assets ............................................ 603,523 310,661
------------ ------------
Total current assets .................................................... 23,407,660 9,039,203
------------ ------------
Property and equipment, at cost:
Furniture, fixtures and equipment ............................... 1,809,971 1,104,558
Less: Accumulated depreciation and amortization ..................... 958,716 727,413
------------ ------------
851,255 377,145
------------ ------------
Other assets:
Deferred income taxes ........................................... 1,442,500 --
Intangibles ..................................................... 4,860,469 5,189,481
Other ........................................................... 319,056 103,516
------------ ------------
Total other assets ...................................................... 6,622,025 5,292,997
------------ ------------
Total assets ............................................................ $ 30,880,940 $ 14,709,345
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ............................... $ 5,950,868 $ 3,788,524
Accounts payable-related party ...................................... 188,338 1,624,395
Due to factor ....................................................... -- 580,515
------------ ------------
Total current liabilities ............................................... 6,139,206 5,993,434
Long-term liabilities ................................................... 61,216 108,000
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value
--shares authorized 5,000,000;
none issued or outstanding
Common stock, $.001 par value
--shares authorized 30,000,000;
shares issued and outstanding:
12,425,014 in 1998 and
9,633,786 in 1997 ......................................... 12,425 9,634
Additional paid-in capital .......................................... 23,452,545 11,918,655
Retained earnings (deficit)* ............................................ 1,215,548 (3,320,378)
------------ ------------
Total stockholders' equity .............................................. 24,680,518 8,607,911
------------ ------------
Total liabilities and stockholders' equity .............................. $ 30,880,940 $ 14,709,345
============ ============
</TABLE>
* Accumulated since February 28, 1993, deficit eliminated of $27,696,007
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues ........................................ $ 92,976,416 $ 45,005,416 $ 37,914,127
Cost of goods sold .................................. 68,799,226 35,149,271 27,427,508
------------ ------------ ------------
Gross profit ........................................ 24,177,190 9,856,145 10,486,619
Selling, general and administrative expenses ........ 17,216,712 8,890,173 8,429,143
------------ ------------ ------------
Operating income .................................... 6,960,478 965,972 2,057,476
Other expenses:
Interest expense - net ...................... 1,129,552 755,657 727,210
Other - net ................................. 98,000 75,000 113,000
------------ ------------ ------------
1,227,552 830,657 840,210
------------ ------------ ------------
Income before income taxes .......................... 5,732,926 135,315 1,217,266
Provision (benefit) for income taxes ................ 1,197,000 (1,010,000) 163,310
------------ ------------ ------------
Net income .......................................... $ 4,535,926 $ 1,145,315 $ 1,053,956
============ ============ ============
Earnings per share:
Basic ............................... $ .40 $ .13 $ .12
============ ============ ============
Diluted ............................. $ .33 $ .11 $ .11
============ ============ ============
Weighted average number of common shares outstanding:
Basic ............................... 11,375,374 9,142,598 8,725,888
============ ============ ============
Diluted ............................. 13,788,136 10,151,500 9,426,634
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1995 ........................ 8,709,465 $ 8,709 $ 9,902,837 $ (5,519,649) $ 4,391,897
Exercise of warrants ............................ 36,273 37 37,464 -- 37,501
Tax benefit from pre-quasi reorganization
carryforward losses ........................... -- -- 103,000 -- 103,000
Net income ...................................... -- -- -- 1,053,956 1,053,956
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1996 ........................ 8,745,738 8,746 10,043,301 (4,465,693) 5,586,354
Purchase and retirement of treasury shares ...... (179,900) (180) (310,638) -- (310,818)
Conversion of trade payables to common
stock, net of expenses ........................ 1,050,000 1,050 1,562,950 -- 1,564,000
Exercise of warrants ............................ 174,009 174 199,935 -- 200,109
Issuance of common stock to benefit plan ........ 22,200 22 49,929 -- 49,951
Shares reserved in settlement of
litigation and never issued ................... (178,261) (178) 178 -- --
Tax benefit from pre-quasi reorganization
carryforward losses ........................... -- -- 260,000 -- 260,000
Stock option compensation ....................... -- -- 113,000 -- 113,000
Net income ...................................... -- -- -- 1,145,315 1,145,315
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1997 ........................ 9,633,786 9,634 11,918,655 (3,320,378) 8,607,911
Exercise of stock options ....................... 647,889 648 1,482,246 -- 1,482,894
Exercise of warrants ............................ 2,152,561 2,152 8,028,005 -- 8,030,157
Retirement of escrow shares ..................... (20,000) (20) 20 -- --
Issuance of common stock to benefit plan ........ 10,778 11 55,901 -- 55,912
Tax benefit from pre-quasi
reorganization carryforward losses ........... -- -- 1,101,500 -- 1,101,500
Stock option compensation ....................... -- -- 36,000 -- 36,000
Tax benefit from exercise of stock options ...... -- -- 830,218 -- 830,218
Net income ...................................... -- -- -- 4,535,926 4,535,926
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998 ........................ 12,425,014 $ 12,425 $ 23,452,545 $ 1,215,548 $ 24,680,518
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended January 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows (used in) provided by operating activities:
Net income ...................................................................... $ 4,535,926 $ 1,145,315 $ 1,053,956
Items in net income not affecting cash:
Depreciation and amortization ............................................. 604,210 458,740 423,868
Stock option compensation ................................................. 36,000 113,000 --
Deferred income taxes ..................................................... 993,000 (1,100,000) --
Changes in operating assets and liabilities:
Restricted cash ................................................... -- -- 100,000
Accounts receivable ............................................... (1,475,689) (100,002) (644,901)
Inventories ....................................................... (10,928,084) (1,251,145) (730,788)
Prepaid advertising and marketing ................................. (1,361,539) (234,872) (383,714)
Other assets ...................................................... (552,297) (496) 27,380
Accounts payable and accrued expenses ............................. 777,017 2,364,992 (1,323,196)
Due to/from factor ................................................ (1,411,847) (718,581) 137,061
Long-term liabilities ............................................. (46,784) (14,436) (114,359)
Accounts payable trade expected to be
refinanced with common stock .................................... -- -- 1,680,000
----------------------------------------------
Net cash (used in) provided by operating activities ............................. (8,830,087) 662,515 225,307
----------------------------------------------
Cash flows used in investing activities:
Purchases of property and equipment ...................................... (705,413) (301,236) (57,812)
----------------------------------------------
Net cash used in investing activities ........................................... (705,413) (301,236) (57,812)
----------------------------------------------
Cash flows provided by (used in) financing activities:
Purchase and retirement of treasury stock ................................ -- (310,818) --
Proceeds from exercise of stock options and warrants ..................... 9,513,051 134,060 37,501
----------------------------------------------
Net cash provided by (used in) financing activities ............................. 9,513,051 (176,758) 37,501
----------------------------------------------
Net (decrease) increase in cash and cash equivalents ............................ (22,449) 184,521 204,996
Cash and cash equivalents, beginning of year ............................. 389,517 204,996 --
==============================================
Cash and cash equivalents, end of year ................................... $ 367,068 $ 389,517 $ 204,996
==============================================
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest ................................................................. $ 1,130,981 $ 755,657 $ 727,210
==============================================
Income taxes ............................................................. $ 89,000 $ 28,000 $ 59,000
==============================================
Supplemental disclosures of noncash investing and financing activities:
Common stock issued to a related party .................................. -- $ 1,680,000 --
==============================================
Tax benefit from pre-quasi reorganization
carryforward losses ................................................. $ 1,101,500 $ 260,000 $ 103,000
==============================================
Issuance of common stock to benefit plan ................................ $ 55,912 $ 49,951 --
==============================================
Tax benefit from exercise of stock options .............................. $ 830,218 -- --
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1998
The Company
Candie's, Inc. and its subsidiaries (the "Company") are engaged primarily in the
design, marketing and importation of a variety of moderately-priced women's and
girls' casual and fashion footwear and handbags under the CANDIE'S(R) and
BONGO(R) trademarks for distribution to better department and specialty stores
worldwide. The Company also markets and distributes, under the CANDIE'S(R) and
BONGO(R) trademarks, children's footwear designed by it and also arranges for
the manufacture of women's and men's footwear products, for mass importation by
market and discount retailers, under one of the Company's trademarks or under a
private label brand for retailers.
1. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Candie's, Inc. and
its wholly owned subsidiaries, Bright Star Footwear, Inc. ("Bright Star"),
Ponca, Ltd. ("Ponca"), Yulong Co., Ltd. ("Yulong"), Candie's Galleria , Inc.
("Candie's Galleria") and the Company's 60% owned subsidiary Intercontinental
Trading Group, Inc. ("ITG"), (collectively, the "Company"). All significant
intercompany transactions and items have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
footnotes. Actual results may differ from those estimates and assumptions.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable-Factored
The Company has a factoring agreement with a financial institution whereby it
may assign certain receivables generally without recourse as to credit risk.
Inventories
Inventories, which consist entirely of finished goods, are stated at the lower
of cost or net realizable value. Cost is determined by the first-in, first-out
("FIFO") method.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization are
determined by the straight line and accelerated methods over the estimated
useful lives of the respective assets.
F-8
<PAGE>
Impairment of Long-Lived Assets
When circumstances mandate, the Company evaluates the recoverability of its
long-lived assets by comparing estimated future undiscounted cash flows with the
assets' carrying value to determine whether a write-down to market value,based
on discounted cash flow, is necessary.
Intangibles
The Candie's trademark is stated at cost in the amount of $5,276,722, net of
accumulated amortization of $980,572 and $697,350 at January 31, 1998 and 1997,
respectively, as determined by its fair value relative to other assets and
liabilities at February 28, 1993, the date of the quasi reorganization. In
connection with the quasi reorganization, the Company's assets, liabilities and
capital accounts were adjusted to eliminate the stockholders' deficiency. The
trademark is being amortized over twenty years.
Goodwill in the amount of $551,093, represents the excess amount paid over the
fair value of assets acquired related to the acquisition of Bright Star and is
being amortized over fifteen years. Accumulated amortization at January 31, 1998
and 1997 was approximately $282,000 and $245,000, respectively.
In connection with the acquisition of Bright Star in 1991, the Company entered
into noncompete agreements with Bright Star's former Chairman and President
whereby the Company paid $1,225,000 and issued $2,275,000 of notes to such
individuals. At February 23, 1993, in connection with the quasi reorganization,
the Company wrote down this asset by $1,718,000. The agreements are being
amortized over 15 years. Accumulated amortization related to these agreements
was $1,488,000 and $1,448,000 at January 31, 1998 and 1997, respectively.
Amortization expense amounted to $372,907, $363,581 and $359,328 in 1998, 1997
and 1996, respectively.
Revenue Recognition
Revenue is recognized upon shipment with related risk and title passing to the
customers. The Company's sales are principally derived from its U.S. operations.
Export sales accounted for 23%, 30% and 22% of the Company's revenues for the
years ended January 31, 1998, 1997 and 1996, respectively.
Taxes on Income
The Company uses the liability method of accounting for income taxes under
Statement of Financial Accounting Standards ("SFAS ") No. 109 "Accounting for
Income Taxes".
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock options
granted since the exercise price of the option is the same as the market value
of the Company's common stock. As prescribed under SFAS No. 123, "Accounting for
Stock Based Compensation," the Company has disclosed in Note 4 the pro-forma
effects on net income and earnings per share of recording compensation expense
for the fair value of the options granted.
Derivative Financial Instruments
In 1995, the Company adopted SFAS No. 119. "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments" which requires
various disclosures about financial instruments and related transactions. The
Company's utilization of derivative financial instruments is substantially
limited to the use of forward exchange contracts to hedge foreign currency
transactions. Unrealized gains and losses are deferred and included in the
measurement of the related foreign currency transaction. Gains or losses on
these contracts during Fiscal 1998, 1997 and 1996 were immaterial.
Fair Value of Financial Instruments
The Company's financial instruments approximate fair value at January 31, 1998
and 1997.
F-9
<PAGE>
Foreign Currency
The Company enters into forward exchange contracts to hedge foreign currency
transactions and not to engage in currency speculation. The Company's forward
exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains,
respectively, on the assets, liabilities or transactions being hedged. The
forward exchange contracts generally require the Company to exchange U.S.
dollars for foreign currencies. If the counterparties to the exchange contracts
do not fulfill their obligations to deliver the contracted currencies, the
Company could be at risk for any currency related fluctuations. The Company
limits exposure to foreign currency fluctuations in most of its purchase
commitments through provisions that require vendor payments in U.S. dollars. As
of January 31, 1998, there were no forward exchange contracts outstanding.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share" which replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods presented have been restated in accordance with
SFAS No. 128 requirements.
Advertising Campaign Costs
The company records national advertising campaign costs as an expense upon the
first showing of the related advertising and other advertising costs when
incurred. Advertising expenses for the years ended January 31, 1998, 1997 and
1996 amounted to $3,461,357, $664,000, and $533,390 respectively.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 and
No. 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information," respectively, both of which are required to
be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130 will
require the Company to report in its financial statements all non-owner related
changes in equity for the periods being reported. SFAS No. 131 will require the
Company to disclose revenues, earnings and other financial information
pertaining to the business segments by which the Company is managed, as well as
what factors management used to determine these segments. The Company is
currently evaluating the effects SFAS No. 130 and No. 131 will have on its
financial statements and related disclosures.
2. Investment in Joint Venture
In September 1991, the Company entered into a joint venture agreement (the "
Carousel Agreement") with Carousel Group, Inc. ("Carousel") to exploit certain
technology relating to the production of footwear soles as well as other
opportunities that may arise utilizing polyurethane technology. Carousel's
rights under the Carousel Agreement were subsequently assigned to Urethane
Technologies, Inc. ("Urethane"). The Company invested $1,000,000 as its capital
contribution for a 50% interest to fund equipment acquisition and working
capital requirements, while Carousel contributed its technical knowledge and
capabilities relating to polyurethane products manufacturing processes. The
investment had been accounted for under the equity method of accounting. The
investment was fully reserved prior to Fiscal 1996 since the Company's recovery
of its investment, if any, was indeterminable. The Company sold its share in the
joint venture to Urethane during Fiscal 1997 and recorded a gain of $16,000.
F-10
<PAGE>
3. Factoring Agreement
On April 2, 1993, the Company entered into an accounts receivable factoring
agreement to sell receivables generally without recourse. The agreement which
under its original terms was to expire on November 30, 1998 (as amended; See
Note 12), provides the Company with the ability to borrow funds from the factor,
limited to 85% of eligible accounts receivable and 50% of eligible finished
goods inventory (to a maximum of $15 million in inventory) in which the factor
has a security interest. The agreement provides for the opening of documentary
letters of credit (up to a maximum of $2.5 million) to suppliers, on behalf of
the Company. The factor reserves an amount equal to 43% of the full amount of
each letter of credit to be opened against the Company's available borrowings.
The total credit facility is limited to the lesser of (i) available borrowings
as determined pursuant to the factor agreement or (ii) $20,000,000. Borrowings
bear interest at the rate of three quarters of one percent (3/4%) over the
existing prime rate (8 1/2% at January 31, 1998) established by the CoreStates
Bank N.A. Factoring commissions on accounts receivable assigned to the factor
are at a rate of .60%. The Company's assets are pledged as collateral. The
unused portion of the credit lines at April 16, 1998 was approximately
$11,500,000. See Note 12.
At January 31, 1998 and 1997, the Company had $680,000 and $648,000,
respectively, of outstanding letters of credit, and approximately $1,820,000 and
$1,852,000, respectively, of available letters of credit.
Due from (to) factor is comprised as follows:
January 31,
-----------------------------
1998 1997
-----------------------------
Accounts receivable assigned .............. $17,415,403 $ 8,179,473
Outstanding advances ...................... 16,584,071 8,759,988
-----------------------------
Due from (to) factor ...................... $ 831,332 $ (580,515)
=============================
Concentration of credit risk is limited due to the large number of customers to
which the Company sells its products and the use of a factor to assign invoices
for sales to its customers. See Note 12. The Company's five largest customers
each accounted for between approximately 5.7% and 8.8% of the Company's net
revenues in 1998 and between 7.1% and 8.6% in 1997.
4. Stockholders' Equity
Warrants
The following schedule represents warrants outstanding at January 31, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
Underwriter's Class (A) Class (B) Class (C) NRC Other
Warrants(1) Warrants(2) Warrants(3) Warrants(3) Warrants(5) Warrants(6)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding at January 31, 1995 ....... 1,023,821 54,397 1,475,000 1,475,000 -- 75,000
Warrants issued ................................. -- -- -- -- 700,000 --
Warrants exercised (1) .......................... (32,609) -- -- -- -- --
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1996 ....... 991,212 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) .......................... (174,009) -- -- -- --
Adjustment of underwriter's warrants (4) ....... 40,329 -- -- -- -- --
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1997 ....... 857,532 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) .......................... (650,461) -- (1,431,100) (21,000) -- (50,000)
Warrants expired or cancelled ................... -- (54,397) (43,900) -- -- (25,000)
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1998 (7) .... 207,071 -- -- 1,454,000 700,000 --
==============================================================================
</TABLE>
(1) Underwriter's warrants consist of 231,325 units at an exercise price of
$3.19 per unit entitling the holder to one share of common stock, one Class
B warrant and one Class C warrant. The shares reserved represent the number
of shares issuable upon the exercise of the underwriter warrants and the
attached Class B and C warrants. During the year ended January 31, 1998,
162,301 units (representing a total of 486,904 shares of common stock) were
exercised aggregating $1,975,510. In connection with the October 1994
private placement, the Company issued additional warrants to purchase
370,175 shares at an exercise price of $1.15 per share, of which 163,557,
174,009 and 32,609 were exercised during the years ended January 31, 1998,
1997 and 1996 respectively.
F-11
<PAGE>
(2) From July 1, through December 31, 1990, the Company made an IPO warrant
exercise solicitation whereby holders of 54,397 of the Company's IPO
warrants who exercised their IPO warrants received new warrants (the "Class
A Warrants"). The Class A warrants expired during July 1997.
(3) In connection with a secondary offering, the Company issued 1,475,000
shares of common stock, 1,475,000 class B redeemable warrants and 1,475,000
class C redeemable warrants to each registered holder. Each Class B warrant
entitled the holder thereof to purchase one share of common stock at a
price of $4.00 and each Class C warrant entitles the holder thereof to
purchase one share of common stock at a price of $5.00. These warrants
expired on February 23, 1998. The Company redeemed 1,431,000 Class B
warrants and upon their exercise realized $5,686,557 net of expenses during
the fiscal year ended January 31, 1998.The remaining 43,900 warrants were
not exercised and were canceled. During the year ended January 31, 1998,
21,000 Class C Warrants were exercised aggregating $105,000.
(4) Pursuant to the warrant agreement, as a result of the issuance of
additional shares and their dilutive effect, the Company's underwriters are
entitled to exercise additional units. The exercise prices of the existing
underwriter warrants have been adjusted.
(5) On February 1, 1995, in consideration of loans extended to the Company, NRC
was granted warrants to acquire up to 700,000 shares of Company common
stock at an exercise price of $1.24 per share. The warrants expire five
years from their date of grant.
(6) The number of shares of stock purchasable upon the exercise of the warrant
is 75,000 of which 50,000 shares were vested and exercisable to date. The
exercise price was $1.50. The vested warrants were exercised during the
year ended January 31, 1998 and the unvested portion expired on November
28, 1997.
(7) See Note 12.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Effects of applying SFAS 123 for providing
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years (e.g. the first year reflects expense for
only one year's vesting, while the second year reflects expense for two years'
vesting).
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
January 31,
------------------------------------------
1998 1997 1996
------------------------------------------
Expected Volatility............... .759-.812 .770-.904 .525-.875
Expected Dividend Yield........... 0% 0% 0%
Expected Life (Term).............. 1-3 years 2-5 years 2-3 years
Risk-Free Interest Rate........... 5.25-6.61% 5.70%-6.25% 5.30%-6.85%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-12
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the option is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
January 31,
--------------------------------------
1998 1997 1996
--------------------------------------
Pro forma net income ............... $3,601,763 $ 922,804 $ 698,780
Pro forma earnings per share:
Basic ......................... $ .32 $ .10 $ .08
Diluted ....................... $ .29 $ .10 $ .08
The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 1998, 1997 and 1996 was $2.20, $.64 and $.37,
respectively.
In 1989, the Company's Board of Directors adopted, and its stockholders
approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan,
as amended in 1990, provides for the granting of incentive stock options
("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up
to 222,222 shares of common stock. The 1989 Plan terminates on August 1, 1999.
Under the 1989 Plan, ISO's are to be granted at not less than the market price
of the Company's common stock on the date of the grant. Stock options not
covered by the ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options"
or "NQSO's") may be granted at prices determined by the Board of Directors.
Under the 1989 Plan 126,800, 149,300 and 179,300 of ISO's as of January 31,
1998, 1997 and 1996, respectively, were outstanding.
On September 4, 1997, the Company's shareholders approved the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of
common stock options to purchase up to 3,500,000 shares of Company common stock.
All employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007.
Under the 1997 Plan, as of January 31, 1998, ISO's covering 165,000 shares of
common stock and NQSO's covering 462,000 shares of common stock, were
outstanding.
Additionally, at January 31, 1998, 1997 and 1996, NQSO's covering 3,298,500,
4,066,311 and 2,866,311 shares of common stock, respectively, were outstanding,
which are not part of either the 1989 or 1997 Plans.
The options granted under the 1989 and 1997 Plans expire between five and ten
years from the date of grant or at the termination of either Plan, whichever
comes first.
On January 15, 1998, the Company granted 400,000 NQSO's at an exercise price of
$5.00 per share, to its Chief Executive Officer and simultaneously cancelled
400,000 NQSO's with an exercise price of $5.00 that were to expire February 23,
1998. On March 15, 1995, the Company granted 400,000 NQSO's at an exercise price
of $1.16 per share, to its Chief Executive Officer, in connection with the
renewal of an employment agreement.
On September 4, 1997, the Company granted its Executive Vice President, Chief
Operating Officer 100,000 ISO's at an exercise price of $5.50 per share and
simultaneously cancelled 41,700 NQSO's at an exercise price of $3.00 that were
to expire April 15, 1998. On April 1, 1995, the Company granted 200,000 NQSO's
at an exercise price of $1.16 per share, to its Executive Vice President, Chief
Operating Officer, in connection with an employment agreement.
A summary of the Company's stock option activity, and related information for
the years ended 1998, 1997 and 1996 follows:
Weighted-Average
Shares Exercise Price
--------------------------
Outstanding January 31, 1995 ................. 1,427,667 $3.34
Granted ...................................... 1,710,000 $1.36
Canceled ..................................... (92,056) $2.69
---------
Outstanding January 31, 1996 ................. 3,045,611 $2.25
Granted ...................................... 1,250,000 $2.17
Canceled ..................................... (80,000) $2.63
---------
Outstanding January 31, 1997 ................. 4,215,611 $2.23
Granted ...................................... 1,002,500 $5.48
Canceled ..................................... (517,922) $4.55
Exercised .................................... (647,889) $2.33
---------
Outstanding January 31, 1998 ................. 4,052,300 $2.72
---------
F-13
<PAGE>
At January 31, 1998, 1997 and 1996, exercisable stock options totaled 3,456,967,
3,702,611 and 2,782,611 and had weighted average exercise prices of $2.43, $2.25
and $2.30, respectively.
Options outstanding and exercisable at January 31, 1998 were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
$1.15-1.50................. 1,188,000 2.0 $1.28 1,188,000 $1.28
$1.51-2.50................. 1,535,000 3.3 $2.04 1,260,000 $2.04
$2.51-3.50................. 316,800 2.0 $2.63 316,800 $2.63
$3.51-5.00................. 605,500 4.7 $4.78 531,500 $4.82
$5.01-12.00................ 407,000 4.5 $6.51 160,667 $5.66
- --------------------------------------------------------------------------------- ------------------------
4,052,300 3.2 $2.72 3,456,967 $2.43
================================================================================= =========================
</TABLE>
At January 31, 1998, common shares reserved for issuance on exercise of stock
options and warrants consisted of:
Stock Options ........................................... 4,052,300
Underwriters' Warrants .................................. 207,071
Class C Warrants ........................................ 1,454,000
NRC Warrants ............................................ 700,000
--------
6,413,371
========
5. Earnings Per Share
The following is a reconciliation of the numerator and denominators of the basic
and diluted EPS computations and other related disclosures required by SFAS No.
128:
<TABLE>
<CAPTION>
January 31,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share $ 4,535,926 $ 1,145,315 $ 1,053,956
=======================================
Denominator:
Denominator for basic earnings per share 11,375,374 9,142,598 8,725,888
Effect of dilutive securities 2,412,762 1,008,902 700,746
---------------------------------------
Denominator for diluted earnings per share 13,788,136 10,151,500 9,426,634
=======================================
Basic earnings per share $ .40 $ .13 $ .12
=======================================
Diluted earnings per share $ .33 $ .11 $ .11
=======================================
</TABLE>
Outstanding options and warrants to purchase 231,400, 5,080,300, and 4,712,000
shares of common stock for 1998, 1997 and 1996, respectively, at exercise prices
exceeding the average market price of the common stock were not included in the
computation of diluted earnings per share as the effect would have been
anti-dilutive.
F-14
<PAGE>
The Company has granted 75,000 stock options to a related party, which vest
based upon the achievement of certain targeted criteria. These shares have not
been included in the computation of diluted earnings per share as the targeted
criteria has not been met and the exercise price exceeded the market price and,
therefore, the effect would have been antidilutive.
6. Commitments and Contingencies
The Company is party to certain litigation incurred in the normal course of
business. While any litigation has an element of uncertainty, the Company
believes that the final outcome of any of these matters will not have a material
adverse effect on the Company's financial position or future liquidity.
Effective June 17, 1997, the Company is operating under an exclusive amended
licensing agreement which enables the Company to sell footwear in North America
and certain foreign territories bearing the BONGO trademark. At January 31,
1998, the Company was obligated to pay minimum royalties of $3,780,000 through
January 2002.
7. Related Party Transactions
The Company has a Service Allocation Agreement (the "Agreement") with New Retail
Concepts, Inc. ("NRC"), a significant shareholder of the Company and whose
principal shareholder is the Company's President. Pursuant to the Agreement the
Company provides NRC with business services for which NRC is charged an
allocation of the Company's expenses, including employees' salaries associated
with such services. Pursuant to such Agreement, NRC paid the Company
approximately $50,000 during each of the years ended January 31, 1998, 1997, and
1996, respectively. This Agreement terminates upon consummation of the Merger
referred to in Note 12.
The Company also granted a total of 700,000 warrants to purchase shares of the
Company's Stock (contractually valued at $6,500), at an exercise price of $1.24
per share, to NRC for loans made to the Company during fiscal 1996. As
collateral for such loans, the Company granted to NRC a security interest in all
of the assets of the Company and its subsidiaries, subject to a first lien on
such assets in favor of the Company's factor, as defined. All loans made to the
Company were fully satisfied during fiscal 1996.
On April 3, 1996, the Company entered into an agreement with Redwood (a
principal buying agent of footwear products) to satisfy in full certain trade
payables (the "Payables") amounting to $1,680,000. Under the terms of the Vendor
Agreement, the Company has; (i) issued 1,050,000 shares of the Company's Common
Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $1.75 which was immediately exercisable and has a
five year life; and (iii) made a cash payment of $50,000. The Company purchased
approximately $48 million, $24 million, and $12 million in 1998, 1997, and 1996,
respectively, of footwear products through Redwood. At January 31, 1998, the
Company had approximately $21 million of open purchase commitments with Redwood.
8. Leases
Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 1998 are as follows:
1999................................... $ 572,000
2000................................... 575,000
2001................................... 322,000
2002................................... 266,000
2003................................... 247,000
Thereafter............................. 452,000
----------
Totals................................. $2,434,000
==========
Rent expense was approximately $337,000, $276,000 and $236,000 for the years
ended January 31, 1998, 1997 and 1996, respectively.
F-15
<PAGE>
9. Benefit and Incentive Compensation Plans and Other
The Company sponsors a 401(k) Savings Plan (the "Savings Plan") which covers all
eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company may
contribute additional amounts to the Savings Plan. The Company made
contributions of $80,000 and $62,000 to the Savings Plan for the years ended
January 31, 1998 and 1997, respectively.
The Company has certain incentive compensation arrangements with each of its
Chief Executive Officer and its Chief Operating Officer pursuant to their
employment agreements. The incentive compensation aggregates 6.5% of pre-tax
earnings, as defined.
Included in accounts payable and accrued expenses are trade payables of
$3,097,815 in 1998 and $3,049,067 in 1997, accrued chargebacks of $1,282,000 in
1998 and $350,000 in 1997, and $372,000 of accrued bonuses and $728,000 of
accrued royalties in 1998.
10. Income Taxes
At January 31, 1998, the Company has net operating losses of approximately
$5,500,000 for income tax purposes, which expire in the years 2008 through 2010.
Due to the issuance of common stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275,000 per year. Approximately $4,600,000 of
the operating loss carryforwards are subject to this restriction and,
accordingly, no accounting recognition has been given to approximately $1.8
million of such losses since present restrictions preclude their utilization.
After the date of the pre quasi reorganization the tax benefits of net operating
loss carryforwards incurred prior to the reorganization, have been treated for
financial statement purposes as direct additions to additional paid-in capital.
For the years ended January 31, 1998 and 1997, the Company utilized $149,000 and
$158,000, respectively, of pre-quasi reorganization net operating loss
carryforwards. The related tax benefits of $56,500 and $60,000, at January 31,
1998 and 1997 respectively, have been recognized as increases to additional
paid-in capital. Additionally, as of January 31, 1998 and 1997, the Company
reduced its valuation allowance for deferred tax assets by $2,392,000 and
$1,083,000, respectively, increasing paid-in capital by $1,045,000 and $200,000
and benefiting the income tax provision by $1,347,000 and $1,100,000,
respectively. The Company believes it is more than likely than not that the
operations will generate sufficient taxable income to realize such assets.
The income tax provision (benefit) for Federal and state income taxes in the
consolidated statements of income consists of the following:
January 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Current:
Federal ....................... $ 103,000 $ -- $ 33,000
State ......................... 101,000 30,000 27,310
--------------------------------------------
Total current ................. 204,000 30,000 60,310
--------------------------------------------
Deferred:
Federal ....................... 738,000 (876,000) --
State ......................... 255,000 (164,000) 103,000
--------------------------------------------
Total deferred ................ 993,000 (1,040,000) 103,000
--------------------------------------------
Total provision (benefit) ..... $ 1,197,000 $(1,010,000) $ 163,310
============================================
F-16
<PAGE>
The following summary reconciles income tax provision at the Federal statutory
rate with the actual provision (benefit):
<TABLE>
<CAPTION>
January 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate ..................... $ 1,949,000 $ 46,000 $ 412,000
Non-deductible amortization ........................ 122,000 97,000 --
Utilization of net operating losses ................ -- (60,000) (300,000)
Change in valuation allowance of deferred tax assets (1,347,000) (1,100,000) --
Alternative minimum taxes .......................... -- -- 33,000
State provision, net of federal income tax benefit . 235,000 20,000 18,310
Adjustment for estimate of prior year taxes ........ 216,000
Other .............................................. 22,000 (13,000) --
-----------------------------------------
Total income tax provision (benefit) ............... $ 1,197,000 $(1,010,000) $ 163,310
=========================================
</TABLE>
The significant components of net deferred tax assets of the Company consist of
the following:
<TABLE>
<CAPTION>
January 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Accrued bonus....................................... $ 169,200 $ -- $ --
Compensation expense................................ 56,600 42,900 --
Alternative minimum taxes........................... 102,500 -- --
Inventory valuation................................. 411,900 118,000 226,000
Net operating loss carryforwards.................... 1,409,000 3,437,000 3,100,000
Other-net........................................... 94,700 94,100 149,000
-----------------------------------------
Total net deferred tax assets....................... 2,243,900 3,692,000 3,475,000
Valuation allowance................................. -- (2,392,000) (3,475,000)
-----------------------------------------
Total deferred tax assets........................... $ 2,243,900 $ 1,300,000 $ --
=========================================
</TABLE>
11. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1998:
Net revenues $16,861,264 $29,725,989 $23,780,001 $22,609,162
Gross profit 5,087,136 6,638,038 6,107,371 6,344,645
Operating income 1,671,374 2,373,451 1,618,747 1,296,965
Net income 823,338 2,194,940(b) 808,504 709,144(a)
Diluted earnings per share .06 .17 .06 .05
Weighted average number of common shares
Outstanding - diluted 12,730,331 13,150,181 14,453,665 14,690,992
</TABLE>
(a) Includes tax benefit of $447,000 resulting from a change in the
valuation allowance for net deferred tax assets.
(b) Includes tax benefit of $900,000 resulting from a change in the
valuation allowance for net deferred tax assets.
The first three quarters of fiscal 1998 have been restated to comply with the
requirements of SFAS 128.
F-17
<PAGE>
12. Subsequent Events
Subsequent to year-end through February 23, 1998, substantially all of the
Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of $7,157,025 from the exercise of such
warrants. The proceeds were used to repay short-term borrowings. Each Warrant
entitled the holder thereof to purchase one share of Common Stock at an exercise
price of $5.00 on that date, at which time the right to exercise such Warrant
terminated. In addition, subsequent to January 31, 1998, the Company received
proceeds of $1,041,867, in connection with the issuance of common stock relating
to the exercise of outstanding stock options and certain underwriter's warrants.
The Company is currently negotiating a new revolving credit and factoring
arrangement with prospective lenders. The Company anticipates that the
replacement credit facility will be in place shortly with terms and conditions
that will be more favorable than its current financial arrangement with its
factor. Accordingly, the Company has notified its factor of its intention to
terminate its factoring agreement and is currently operating on a month to month
basis. The Company has reserved its right to terminate the agreement at will, if
necessary, without any penalties or fee upon termination.
The Company and NRC have executed a Merger Agreement dated April 6, 1998, (the
"Merger Agreement") which provides that NRC will be merged with and into the
Company (the "Merger"), and the Company will be the surviving corporation. At
the effective date of the Merger (the "Effective Date"), each issued and
outstanding share of NRC common stock $.01 par value (the "NRC Common Stock"),
and each issued and outstanding option to purchase shares of NRC Common Stock
immediately prior to the Effective Date will be converted, respectively, into
0.405 shares of common stock and options of the Company (the "Common Stock").
The completion of the Merger is subject to a number of conditions, including
among other things, the approval of the stockholders of both the Company and NRC
and the registration of the Common Stock to be issued to the holders of NRC
pursuant to the Merger under the Securities Act of 1933, as amended. No
assurance can be given that the Company and NRC will be able to successfully
obtain the requisite stockholder approval or that the Company will otherwise be
able to consummate the Merger.
At April 6, 1998 there were 5,693,639 shares of NRC Common Stock issued and
outstanding and options to purchase 1,635,000 shares of NRC Common Stock. NRC
currently owns 1,227,696 shares of Common Stock and has options and warrants to
purchase an additional 800,000 shares of Common Stock of the Company, all of
which will be extinguished upon consummation of the Merger.
F-18
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Candie's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(a)
Column A Column B Column C Column D Column E
- ----------------------------------------------------- -------------- ---------- ---------- ----------
Additions
----------
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ----------------------------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended January 31, 1998:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 34,000 $182,636 $189,636 $ 27,000
======== ======== ======== ========
Year ended January 31, 1997:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 63,400 $ 68,355 $ 97,755 $ 34,000
======== ======== ======== ========
Year ended January 31, 1996:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 45,000 $ 78,498 $ 60,098 $ 63,400
======== ======== ======== ========
</TABLE>
(a) Uncollectible receivables charged against the allowance provided.
S-1
<PAGE>
Index to Exhibits
Exhibit
Numbers Description
- ------ ---------
2.1 Agreement and Plan of Merger between the Company and New Retail
Concepts, Inc.
3.1 Certificate of Incorporation, as amended through October 1994 (1)(3)
3.2 Amendment to Certificate of Incorporation filed November 1994 (2)
3.3 By-Laws (1)
10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (3)
10.2 1989 Stock Option Plan of the Company (1)
10.3 1997 Stock Option Plan of the Company (7)
10.4 Discount Factoring Agreement and Supplements between Congress Talcott
Corporation and the Company (4)
10.5 General Security Agreement between Congress Talcott Corporation and
Intercontinental Trading Group, Inc. (4)
10.6 Personal Guaranty and Waiver of Neil Cole in favor of Congress Talcott
Corporation (4)
10.7 Employment Agreement between Neil Cole and the Company (4)
10.8 Amendment to Employment Agreement between Neil Cole and the Company (6)
10.9 Services Allocation Agreement between the Company and New Retail
Concepts Inc. (4)
10.10 Indemnity Agreement of Barnet Feldstein (4)
10.11 Amended and Restated Affiliates Transaction Agreement between the
Company and New Retail Concepts Inc. dated January 30, 1995 (2)
10.12 Security Agreement among New Retail Concepts, Inc., the Company, Bright
Star Footwear, Inc. and Intercontinental Trading Group, Inc., dated
February 1, 1995 (2)
10.13 Guarantee of Neil Cole in favor of New Retail Concepts, Inc. dated
February 1, 1995 (2)
10.14 Lease with respect to the Company's executive offices (2)
10.15 Employment Agreement between Gary Klein and the Company (2)
10.16 Agreement dated May 16, 1994 between the Company and New Retail
Concepts, Inc. (2)
10.17 Agreement dated as of April 3, 1996 between the Company and Redwood
Shoe Corp. (5)
10.18 Amendment dated as of September 30, 1996 to agreement dated as of April
3, 1996 between the Company and Redwood Shoe Corp. (6)
10.19 Employment Agreement between Lawrence O' Shaughnessy and the Company.
(5)
10.20 Amendment to Employment Agreement between Lawrence O'Shaughnessy and
the Company. (6)
10.21 Bongo License Agreement
10.22 December 31, 1996 Amendments to the Discount Factoring Agreement
between Congress Talcott Corporation and the Company. (6)
10.23 December 31, 1996 Amendment to the Guarantee of Neil Cole in Favor of
Congress Talcott Corporation. (6)
10.24 Employment Agreement between David Golden and the Company.
21 Subsidiaries of the Company.
23 Consent of Independent Auditors
27 Financial Data Schedules. (for SEC use only)
- ----------
(1) Filed with the Registrant's Registration Statement on Form S-18 (File
33-32277-NY) and incorporated by reference herein.
22
<PAGE>
(2) Filed with the Registrant's Annual Report on Form 10-KSB for the year ended
January 31, 1995, and incorporated by reference herein.
(3) Filed with the Registrant's Registration Statement on Form S-1 (File
33-53878) and incorporated by reference herein.
(4) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1994, and incorporated by reference herein.
(5) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1996, and incorporated by reference herein.
(6) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1997, and incorporated by reference herein.
(7) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1997, and incorporated by reference herein.
23
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger dated April 6, 1998, by and between
CANDIE'S, INC., a Delaware corporation ("Candie's"), and NEW RETAIL CONCEPTS,
INC., a Delaware corporation ("NRC"). (Candie's and NRC are sometimes
collectively referred to as the "Constituent Corporations").
WHEREAS, as of the date hereof, the authorized capital stock of Candie's
consists of 30,000,000 shares of common stock, $.001 par value, (the "Candie's
Common Stock") of which 14,146,990 shares are issued and outstanding, of which
4,723,800 shares are reserved for issuance of outstanding options and warrants;
and 5,000,000 shares of Preferred Stock, $.01 par value, (the "Candie's
Preferred Stock") none of which are issued and outstanding;
WHEREAS, as of the date hereof, the authorized capital stock of NRC
consists of 25,000,000 shares of common stock, $.01 par value (the "NRC Common
Stock") of which 5,693,639 shares are issued and outstanding, and 1,635,000
shares are reserved for issuance upon the exercise of outstanding options; and
1,000,000 shares of Preferred Stock, $.01 par value, none of which are issued
and outstanding;
WHEREAS, the respective Boards of Directors of Candie's, and NRC deem it
advisable and in the best interests of Candie's and NRC and their respective
shareholders that NRC merge with and into Candie's (the "Merger") pursuant to
this Agreement and the
<PAGE>
applicable provisions of the Delaware General Corporation Law ("Delaware
Corporate Law");
WHEREAS, the respective Boards of Directors of Candie's, and NRC have
approved and adopted this Agreement and have directed that the plan of merger
and reorganization set forth in Article I of this Agreement (the "Plan of
Merger") be submitted to the shareholders of Candie's and NRC for their
approval; and
WHEREAS, the Merger is intended to constitute a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended;
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
represent, warrant, covenant and agree as follows:
ARTICLE I
PLAN OF MERGER
1.1 Surviving Corporation. At the Effective Time (as defined in Section
1.8), NRC shall be merged with and into Candie's pursuant to this Agreement and
a plan of merger and reorganization in substantially the form annexed hereto as
Exhibit 1.1 (the "Plan of Merger"). Candie's shall be the surviving corporation
(the "Surviving Corporation") and shall continue its corporate existence under
the laws of the State of Delaware and the separate existence of NRC shall cease.
1.2 Effect of the Merger. At the Effective Time, the Surviving Corporation
shall possess all of the rights, privileges,
-2-
<PAGE>
immunities and franchises, of a public as well as of a private nature, of each
of the Constituent Corporations and all property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, and all
other choses in action, and all and every other interest of or belonging to or
due to each of the Constituent Corporations, shall be taken and deemed to be
transferred and vested in the Surviving Corporation without further act or deed;
and the title to any real estate, or any interest therein, vested in either of
the Constituent Corporations shall not revert or be in any way impaired by
reason of the Merger. From and after the Effective Time, the Surviving
Corporation shall be responsible and liable for all of the liabilities, debts,
duties and obligations of each of the Constituent Corporations; and any claims
existing or action or proceeding, whether civil or criminal, pending, by or
against either of the Constituent Corporations shall be preserved unimpaired and
all debts, liabilities and duties of each of the Constituent Corporations shall
attach to the Surviving Corporation and may be enforced against it to the same
extent as if those debts, liabilities and duties had been incurred or contracted
by it. Neither the rights of creditors nor any liens upon the property of either
of the Constituent Corporations shall be impaired by the Merger.
1.3 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further assignments
or assurances in law or any other acts are necessary or desirable to (a) vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation any
-3-
<PAGE>
rights, title or interest in, to or under any of the rights, properties or
assets of Candie's or NRC acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger, or (b) otherwise
carry out the purposes of this Agreement, then NRC and its appropriate officers
and/or directors shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such proper deeds,
assignments and assurances in law and to do all acts necessary or proper, to
vest, perfect or confirm title to and possession of such rights, properties or
assets in the Surviving Corporation and otherwise to carry out the purposes of
this Agreement, and the appropriate officers and/or directors of the Surviving
Corporation are hereby fully authorized in the names of NRC or otherwise to take
any and all such actions.
1.4 Name of Surviving Corporation. The name of the Surviving Corporation
shall remain Candie's, Inc.
1.5 Certificate of Incorporation. The Certificate of Incorporation of
Candie's as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until and unless
thereafter amended as provided by law and such Certificate of Incorporation.
1.6 Bylaws. The Bylaws of Candie's as in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation until thereafter
amended as provided by law, the Certificate of Incorporation and such Bylaws.
1.7 Officers and Directors. The officers and directors of Candie's shall
remain the directors and officers of the
-4-
<PAGE>
Surviving Corporation and shall hold office until their resignations or until
their respective successors have been appointed or duly elected.
1.8 Closing Effective Time.
(a) The closing of the Merger shall take place at 10:00 a.m., local time,
on a date specified by Candie's and NRC, which shall be no later than the second
business day after satisfaction or waiver of the conditions set forth in Article
VII at the offices of Tenzer Greenblatt LLP, 405 Lexington Avenue, New York, New
York 10174, or such other place as agreed to by the parties (the "Closing"). The
Merger shall become effective at the time of filing of a Certificate of Merger
in the form attached as Exhibit 1.8, with the Secretary of State of the State of
Delaware in accordance with the relevant provisions of the Delaware Corporate
Law, which Certificate of Merger shall be so filed immediately following the
satisfaction of each of the conditions set forth in Article VII below, or as
soon as practicable thereafter.
(b) The date and time when the Merger shall become effective is referred to
as the "Effective Time."
1.9 Conversion of Shares.
(a) By virtue of the Merger, automatically and without any action on the
part of the holder thereof, at the Effective Time:
(i) Each issued and outstanding share of NRC Common Stock shall cease
to exist and shall be converted into and
-5-
<PAGE>
represent the right to receive 0.405 shares of Candie's Common Stock (the
"Exchange Ratio");
(ii) Any shares of NRC Common stock issued and held in the treasury of
NRC shall be cancelled;
(iii) Any shares of NRC Common Stock issued and owned by Candie's
immediately preceding the Effective Time shall be cancelled and retired and
no payment made with respect thereto;
(iv) Any shares of Candie's Common Stock issued and owned by NRC
immediately preceding the Effective Time shall be returned to the status of
authorized but unissued shares of Candie's Common Stock, and no payment
made with respect thereto;
(v) Any warrants or options to the purchase shares of Candie's Common
Stock issued and owned by NRC immediately preceeding the Effective Time
shall be cancelled, and no payment made with respect thereto; and
(vi) Each issued and outstanding option to acquire one (1) share of
NRC Common Stock outstanding at the Effective Time shall be converted into
an option to acquire 0.405 shares of Candie's Common Stock, which option
shall be on substantially the same terms and conditions as the option being
converted, and shall be exercisable at an exercise price equal to the
quotient of (a) the exercise price of the option being converted divided by
(b) the Exchange Ratio, which quotient shall then be rounded down to the
nearest cent. Between the date hereof and the Effective Date if necessary,
Candie's shall amend its stock option plan and reserve sufficient shares so
as to permit the
-6-
<PAGE>
issuance of the options to acquire shares of Candie's Common Stock
described in this Section 1.9(a)(vi).
(b) No rights to receive fractional shares of Candie's Common Stock shall
arise under this Agreement.
(c) No fractional shares of Candie's Common stock shall be issued, but in
lieu thereof, each holder of Candie's Common Stock who would otherwise be
entitled to receive a fraction of a share of Candie's Common Stock shall receive
from Candie's an amount of cash equal to the price of one share of Candie's
Common Stock as of the date of the Merger (which price shall be calculated as
the average of the last sales price for Candie's Common Stock during the twenty
(20) day period immediately prior to the Effective Date) multiplied by a
fraction of a share of Candie's Common Stock for which such holder would be
entitled. No shareholder of NRC shall receive cash from Candie's in lieu of
fractional shares in an amount greater than the value of one paid share of
Candie's Common Stock.
1.10 NRC Dissenting Shareholders. Shares of NRC Common Stock which are
issued and outstanding immediately prior to the Effective Time and which are
held by NRC shareholders who have not voted such shares in favor of the Merger
and who shall have properly exercised their rights of appraisal for such shares
in the manner provided by the Delaware Corporate Law ("Dissenting Shares") shall
not be converted into or be exchangeable for the right to receive shares of
Candie's Common Stock unless and until such holders shall have failed to perfect
or shall have effectively withdrawn or lost their dissenters' rights under the
Delaware
-7-
<PAGE>
Corporate Law. With respect to any holders who have failed to perfect and have
effectively withdrawn or lost their dissenters' rights, such holders' shares
shall thereupon be deemed to have been converted into and to have become
exchangeable for, at the Effective Time, shares of Candie's Common Stock. NRC
shall give Candie's prompt notice of any (i) Dissenting Shares, (ii) attempted
withdrawals of such demands for appraisal rights, and (iii) any other
communications received by NRC with respect to dissenters' rights. Candie's
shall have the right to direct all negotiations and proceedings with respect to
any demands for appraisal rights. NRC shall not, except with the prior consent
of Candie's, voluntarily make any payment with respect to, or settle or offer to
settle, any such demand for appraisal rights.
1.11 Exchange of Certificates.
(a) Candie's shall cause Continental Stock Transfer and Trust Company (or
such successor as Candie's may designate) as exchange agent (the "Exchange
Agent"), to send to each holder of shares of NRC's Common Stock which shall have
been converted into Candie's Common Stock an appropriate letter of transmittal
for purposes of surrendering such holder's certificates for such shares for
exchange pursuant hereto.
(b) As soon as practicable after the Effective Time and after surrender to
the Exchange Agent of any certificate which prior to the Effective Time shall
have represented any shares of NRC's Common Stock (a "Certificate"), subject to
the provisions of paragraph (d) of this Section 1.11, Candie's shall cause to be
distributed to the person in whose name such Certificate shall have
-8-
<PAGE>
been registered, or in accordance with the written instructions transmitted to
the Exchange Agent, certificates registered in the name of such person
representing the Candie's Common Stock to which such person shall be entitled as
described in paragraph (a) of Section 1.9 and cash payable to such person
representing payment in lieu of a fractional share of Candie's Common Stock as
determined in accordance with paragraph (c) of Section 1.9 (such cash to be
provided in the form of a check). Until surrendered as contemplated by the
preceding sentence, each Certificate shall be deemed at and after the Effective
Time to represent only the right to receive the certificates and payment
contemplated by the preceding sentence.
(c) No dividends declared after the Effective Time with respect to Candie's
Common Stock and payable to the holders of record thereof after the Effective
Time shall be paid to the holder of an unsurrendered Certificate until such
Certificate shall be surrendered as provided herein, but (i) upon such surrender
there shall be paid to the person in whose name the certificates representing
Candie's Common Stock shall be issued the amount of dividends theretofore paid
with respect to Candie's Common Stock as of any date subsequent to the Effective
Time based on the number of shares of Candie's Common Stock received by such
person and the amount of cash payable to such person in lieu of a fractional
share of Candie's Common Stock pursuant to paragraph (c) of Section 1.9 and (ii)
at the appropriate payment date or as soon as practicable thereafter, there
shall be paid to such person the amount of dividends payable with respect to
Candie's Common Stock; provided,
-9-
<PAGE>
however, that no dividends with a record date subsequent to the Effective Time
shall be payable with respect to fractional shares of Candie's Common Stock,
and, subject in any case to any applicable escheat laws and unclaimed property
laws. On surrender of a Certificate, no interest shall be payable with respect
to the payment of such dividends, and no interest shall be payable with respect
to the amount of any cash payable in lieu of a fractional share of Candie's
Common Stock.
(d) If any cash is to be paid to, or certificates representing Candie's
Common Stock are to be issued to, a person other than the person in whose name
the Certificate surrendered in exchange therefor is registered, it shall be a
condition of the payment or issuance thereof that the Certificate so surrendered
shall be properly endorsed and otherwise in proper form for transfer and that
the person requesting such exchange shall pay to the Exchange Agent any transfer
or other taxes required by reason of the payment of cash to a person other than,
or of the issuance of certificates representing Candie's Common Stock in any
name other than that of, the registered holder of the Certificate surrendered,
or otherwise required, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(e) After the Effective Time, there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of NRC's Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the
-10-
<PAGE>
Surviving Corporation, they shall be cancelled and exchanged for the cash, if
any, and certificates representing the Candie's Common Stock into which they
were converted as provided in this Article I.
ARTICLE II
SHAREHOLDER APPROVAL
2.1 Shareholder Approvals.
(a) A meeting of the holders of NRC's Common Stock shall be called in
accordance with Delaware Corporate Law to be held on such date as may be
mutually agreed by the Boards of Directors of NRC and Candie's, and approved by
the Board of Directors of NRC, to consider and vote upon the approval of the
Plan of Merger. NRC shall use its best efforts to seek all required approvals of
its shareholders in connection with the Plan of Merger.
(b) A meeting of the holders of Candie's Common Stock shall be called in
accordance with Delaware Corporate Law to be held on such date as may be
mutually agreed upon by the Boards of Directors of Candie's and NRC, and
approved by the Board of Directors of Candie's, to consider and vote upon the
approval of the Plan of Merger and the issuance by Candie's of the Candies
securities in connection with the Merger. Candie's shall use its best efforts to
seek all required approvals of its shareholders in connection with the Plan of
Merger and the issuance of such Candie's securities.
(c) If the Plan of Merger is approved as provided in this Article II, and
if the Merger is not thereafter terminated as permitted by ss. 251(d) of the
Delaware Corporate Law and Article
-11-
<PAGE>
IX of this Agreement, and if each of the conditions to the obligations of NRC
and Candie's as provided hereunder have in accordance herewith been either
satisfied or waived, then NRC and Candie's shall cause the Certificate of Merger
to be promptly executed, acknowledged, delivered and properly and duly filed
with the Secretary of State of the State of Delaware on behalf of each of NRC
and Candie's.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NRC
NRC represents and warrants to Candie's as follows:
3.1 Organization and Related Matters. NRC is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
NRC has the requisite corporate power and authority to own, lease, license and
operate its properties and assets and carry on its business as now being
conducted.
3.2 Subsidiaries. NRC has no direct or indirect subsidiaries.
3.3 Capitalization of NRC. The authorized capital stock of NRC consists of
25,000,000 shares of NRC's Common Stock, $.01 par value, of which 5,693,639
shares are issued and outstanding and 1,635,000 shares are reserved (the "NRC
Reserved Shares") for issuance upon the exercise of stock options granted to
certain of its directors, employees and consultants (the "NRC Options"), and
1,000,000 shares of NRC Preferred Stock, .01 par value, none of which are issued
and outstanding. There are no other outstanding options, warrants or other
rights to subscribe for or purchase or
-12-
<PAGE>
acquire from NRC, or any plans, contracts or commitments providing for the
issuance of or the granting of rights to acquire, any capital stock of NRC or
securities convertible into or exchangeable for capital stock of NRC. All issued
shares of NRC capital stock are duly authorized, validly issued and outstanding
and are fully paid, nonassessable and free from preemptive rights.
3.4 Authority Relative to Agreement. Except for shareholder approval
required by ss. 251(c) of the Delaware Corporate Law, NRC has full corporate
power and authority to enter into and perform this Agreement and to carry out
the transactions contemplated hereby. The Board of Directors of NRC has duly
authorized the execution, delivery and performance of this Agreement and the
transactions contemplated hereby, and, except for the shareholder meeting
contemplated in Article II hereof, no other corporate proceedings on the part of
NRC are necessary to authorize this Agreement or the transactions contemplated
hereby. This Agreement constitutes the valid and binding agreement of NRC
enforceable against it in accordance with its terms, except (a) such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium, or similar laws
affecting the enforcement of creditors rights generally and (b) the availability
of the equitable remedy of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding may be brought.
3.5 Compliance. Except as disclosed in Section 3.5 of the Disclosure
Statement of NRC attached hereto and made a part hereof (the "NRC Disclosure
Statement"), neither the execution and
-13-
<PAGE>
delivery of this Agreement by NRC, nor the consummation by NRC of the
transactions contemplated hereby, nor compliance by NRC with the terms and
provisions of this Agreement, will (nor with the giving of notice or the lapse
of time or both would):
(a) conflict with or result in a breach of any provision of the
Certificate of Incorporation or Bylaws of NRC;
(b) in any manner which would adversely affect the ability of NRC to
consummate the transactions provided for in this Agreement in accordance
with the terms of this Agreement, (i) violate, result in breach of, give
rise to a default, or any right of termination, cancellation or
acceleration, or otherwise be in conflict with or result in a loss of
material contractual benefits to NRC under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation to which NRC is a party or by which it or
its operations, business, property or assets may be bound, or of which it
or its operations, business, properties or assets is a beneficiary, or (ii)
require any consent, approval or notice under the terms of any such note,
bond, mortgage, indenture, license, agreement or other instrument;
(c) violate, result in a breach of or conflict with any order, writ,
injunction, decree, law, statute, rule or regulation of any court or
governmental authority applicable to NRC, or to which NRC's operations,
businesses, properties or assets, including but not limited to the NRC
Intellectual Property Rights (as defined in Section 3.11), are subject in
any manner which would adversely affect the ability of NRC to consummate
the
-14-
<PAGE>
transactions provided for in this Agreement in accordance with the terms of
this Agreement;
(d) result in the creation or imposition of any lien, claim,
restriction, charge or encumbrance upon any of the NRC Common Stock; or
(e) to the best of the knowledge of NRC, materially and adversely
interfere with or otherwise materially and adversely affect the ability of
the Surviving Corporation to carry on NRC's business on substantially the
same basis as it is now conducted by NRC, including (in any manner that
will materially and adversely affect the Surviving Corporation) violate,
result in a breach of, give rise to a default, or otherwise be in conflict
with or result in a loss of material contractual benefits to the Surviving
Corporation under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement or other instrument or
obligation to which NRC is currently a party or by which NRC, or any of its
operations, business, properties or assets currently may be bound or is a
beneficiary.
3.6 SEC Filings; Financial Statements. (a) Since April 1, 1995, NRC has
filed, and will continue to file, all forms, reports and documents required to
be filed by NRC with Securities and Exchange Commission (the "SEC")
(collectively, the "NRC SEC Reports"). Except as disclosed in Section 3.6 of the
NRC Disclosure Statement, the NRC SEC Reports (i) at the time filed, complied in
all material respects with the applicable requirements of the Securities Act of
1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934,
as amended (the "Exchange
-15-
<PAGE>
Act"), as the case may be, and (ii) did not at the time they were filed (or if
amended or superseded by a subsequent filing, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such NRC SEC Reports or necessary in order to make the
statements in such NRC SEC Reports, in the light of the circumstances under
which they were made, not misleading.
(b) Each of the financial statements (including, in each case, any related
notes) contained in the NRC SEC Reports, including any NRC SEC Reports filed
after the date of this Agreement until the Closing (the "NRC Financial
Statements"), complied or will comply as to form in all material respects with
the applicable published rules and regulations of the SEC with respect thereto,
was or will be prepared in accordance with U.S. generally accepted accounting
principles applied on a consistent basis throughout the periods involved (except
as may be indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted by Form 10-QSB or 8-K promulgated by the
SEC), and fairly presented or will fairly present the financial position of NRC
as and at the respective dates and the results of its operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount. The unaudited
balance sheet of NRC as of December 31, 1997 is referred to herein as the "NRC
Balance Sheet."
-16-
<PAGE>
3.7 Absence of Undisclosed Liabilities. Except as disclosed in Section 3.7
of the NRC Disclosure Statement or as otherwise disclosed in the NRC SEC
Reports, NRC does not have any liabilities, either accrued or contingent
(whether or not required to be reflected in financial statements in accordance
with U.S. generally accepted accounting principles), and whether due or to
become due, which individually or in the aggregate could reasonably be expected
to have a material adverse effect, other than (i) liabilities reflected in the
NRC Balance Sheet, (ii) liabilities specifically described in this Agreement or
in the NRC Disclosure Statement, (iii) normal or recurring liabilities incurred
since December 31, 1997 in the ordinary course of business consistent with past
practices, and (iv) liabilities permitted by Section 5.2 hereof.
3.8 Absence of Certain Changes or Events. Except as set forth in Section
4.7 of the NRC Disclosure Statement, since the date of the NRC Balance Sheet,
NRC has conducted its business only in the ordinary course in a manner
consistent with past practice (except as disclosed in the NRC SEC Reports), and
since such date there has not been: (a) any NRC material adverse effect or any
facts or circumstances that could reasonably be expected to result in a material
adverse effect: (b) any damage, destruction or loss (whether or not covered by
insurance) with respect to NRC having a material adverse effect; (c) any
material change by NRC in its accounting methods, principles or practices to
which Candie's has not previously consented in writing; (d) any revaluation by
NRC of any of its assets having a material adverse effect, unless Candie's
-17-
<PAGE>
has previously consented in writing; or (e) except as disclosed in the NRC
Disclosure Statement, any other action or event that would have required the
consent of Candie's pursuant to Section 5.2 of this Agreement had such action or
event occurred after the date of this Agreement and that could reasonably be
expected to result in a material adverse effect.
3.9 Taxes.
(a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes" means
any and all material federal, state, local and foreign taxes, assessments and
other governmental charges, duties, impositions and liabilities, including taxes
based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, franchise, withholding,
payroll, recapture, employment, excise and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(b) NRC has accurately prepared and timely filed (or will so file) all
material federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") required to be filed at or before the
Effective Time relating to any and all Taxes concerning or attributable to NRC
or to its operations, and such Returns are true and correct in all material
respects and have been completed in all material respects in accordance with
applicable law.
-18-
<PAGE>
(c) NRC as of the Effective Time: (i) will have paid all Taxes it is
required to pay prior to the Effective Time and (ii) will have withheld with
respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld, except in each case for Taxes contested in
good faith by appropriate proceedings for which adequate reserves have been
taken and except where the failure (if any) to pay or withhold such Taxes could
not reasonably be expected to have a material adverse effect.
(d) There is no Tax deficiency outstanding, proposed or assessed against
NRC that is not reflected as a liability on the NRC Balance Sheet nor has NRC
executed any waiver of any statute of limitations on or extending the period for
the assessment or collection of any Tax.
(e) NRC has no material liability for unpaid federal, state, local or
foreign Taxes that has not been accrued for or reserved on the NRC Balance
Sheet, whether asserted or unasserted, contingent or otherwise.
3.10 Properties. Except as set forth in Section 3.10 of the NRC Disclosure
Statement, NRC owns or has valid leasehold interests in all real property
necessary for the conduct of its business as presently conducted. All material
leases to which NRC is a party are in good standing, valid and effective in
accordance with their respective terms, and NRC is not in default under any of
such leases, except where the lack of such good standing, validity and
effectiveness or the existence of such default could not reasonably be expected
to have a material adverse effect.
-19-
<PAGE>
3.11 Intellectual Property.
(a) Except as disclosed in Section 3.11 of the NRC Disclosure Statement,
NRC owns, or licenses or otherwise possess, legally enforceable rights to use,
all patents, trademarks, trade names, service marks and copyrights, any
applications for and registrations of such patent, trademarks, trade names,
service marks and copyrights, and all processes, formulae, methods, schematics,
technology, know how, and tangible or intangible proprietary information or
material that are necessary to conduct the business of NRC as currently
conducted or planned to be conducted by NRC, the absence of which would be
reasonably likely to have a material adverse effect (the "NRC Intellectual
Property Rights").
(b) Except as disclosed in Schedule 3.11 of the NRC Disclosure Statement,
(i) the NRC Intellectual Property Rights which are material to the business of
NRC are valid and subsisting; (ii) NRC has not been sued in any suit, action or
proceeding which involves a claim of infringement of any of the NRC Intellectual
Property Rights or any other proprietary right of any third party; and (iii) to
the knowledge of NRC, the manufacturing, marketing, licensing or sale of NRC's
products does not infringe any patent, trademark, service mark, copyright, trade
secret or other proprietary right of any third party, which infringement, either
individually or in the aggregate, could reasonably be expected to have a
material adverse effect.
3.12 Litigation. Except as disclosed in Section 3.12 of the NRC Disclosure
Statement, there is no action, suit or
-20-
<PAGE>
proceeding, claim, arbitration or, to the knowledge of NRC, investigation
against NRC, pending or, to the knowledge of NRC, threatened, or as to which NRC
has received any written notice of assertion, which, if decided adversely to
NRC, could reasonably be expected to have a material adverse effect or a
material adverse effect on the ability of NRC to consummate the transactions
contemplated by this Agreement.
3.13 Employee Benefit Plans.
(a) Except for the NRC stock option plan, a copy of which has been made
available to Candie's, NRC has no employee benefit plans (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and no bonus, other stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance or other similar employee
benefit plans, and no unexpired severance agreements, written or otherwise, for
the benefit of, or relating to, any current or former employee of NRC or any
trade or business (whether or not incorporated) which is a member or which is
under common control with NRC within the meaning of Section 414 of the Code. NRC
does not maintain and has never maintained or contributed to any employee
benefit plan subject to Title IV of ERISA (including a multiemployer plan as
defined in Section 3(37) of ERISA).
(b) Except as set forth in Schedule 3.13 of the NRC Disclosure Statement,
and except as provided for in this Agreement, NRC is not a party to any oral or
written (i) union or collective bargaining agreement, (ii) agreement with any
officer or other key employee of NRC, the benefits of which are contingent, or
the terms
-21-
<PAGE>
of which are materially altered, upon the occurrence of a transaction involving
NRC of the nature contemplated by this Agreement, (iii) agreement with any
officer of NRC providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof or for the
payment of compensation in excess of $10,000 per annum, or (iv) agreement or
plan, including the NRC stock option plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
3.14 Accounts Receivable; Inventory. Subject to any reserves set forth in
the NRC Balance Sheet, the accounts receivable shown in the NRC Balance Sheet
arose in the ordinary course of business; were not, as of the date of the NRC
Balance Sheet, subject to any material discount, contingency, claim of offset or
recoupment or counter claim; and represented, as of the date of the NRC Balance
Sheet, bona fide claims against debtors for sales, leases, licenses and other
charges. Other than those accounts receivable due from Candie's set forth on the
NRC Balance Sheet, all accounts receivable of NRC arising after the date of the
NRC Balance Sheet through the date of this Agreement arose in the ordinary
course of business and, as of the date of this Agreement, are not subject to any
material discount, contingency, claim of off-set or recoupment or counterclaim,
except for normal reserves consistent with past practice. The amount carried for
doubtful
-22-
<PAGE>
accounts and allowances disclosed in the NRC Balance Sheet is believed by NRC as
of the date of this Agreement to be sufficient to provide for any losses which
may be sustained on realization of the accounts receivable shown in the NRC
Balance Sheet. NRC has no inventory.
3.15 Board Recommendation. The Board of Directors of NRC has unanimously
approved and adopted this Agreement, which vote included the affirmative vote of
a majority of the disinterested directors and has recommended that the
stockholders of NRC approve and adopt the Plan of Merger.
3.16 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by NRC pursuant to this Agreement or
any other document, agreement or instrument referred to herein contains or will
contain any untrue statement of fact of material fact or omits or will omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.17 Financial Advisor Opinion. The financial advisor to NRC, CoView
Capital, Inc., has delivered to NRC an opinion, as of, or immediately prior to
the date of this Agreement to the effect that the Exchange Ratio is fair from a
financial point of view to the holders of NRC Common Stock (the "NRC Fairness
Opinion").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CANDIE'S Candie's represents and warrants
to NRC as follows:
-23-
<PAGE>
4.1 Organization and Related Matters. Candie's is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Candie's has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
4.2 Authority Relative to this Agreement. Candie's has full corporate power
and authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The Board of Directors of Candie's, has duly authorized the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby, and, except for the Shareholder meeting contemplated in
Article II hereof, no other corporate proceedings on the part of Candie's are
necessary to authorize this Agreement or the transactions contemplated hereby.
This Agreement constitutes the valid and binding agreement of Candie's
enforceable against it in accordance with its terms, except (a) such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium, or similar laws
affecting the enforcement of creditors rights generally and (b) the availability
of the equitable remedy of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding may be brought.
4.3 Capitalization of Candie's. The authorized capital stock of Candie's
consists of (i) 30,000,000 shares of Candie's Common Stock of which 14,146,990
shares are issued and outstanding, and (ii) 5,000,000 shares of Candie's
Preferred Stock, none of which are issued and outstanding. Candie's has reserved
for
-24-
<PAGE>
issuance (i) 4,723,800 shares of Candie's Common Stock upon the exercise of
outstanding stock options pursuant to the Candie's employee 1989 and 1997 stock
option plans and other options and outstanding warrants (the "Prior Reserved
Shares") and (ii) up to approximately 2,306,000 shares of Candie's Common Stock
to be issued to the NRC Stockholders at the Effective Time of the Merger as
contemplated by this Agreement (the "Reserved Shares") and 662,175 shares of
Candie's Common stock to be issued upon exercise of the NRC options to be issued
to the holders of NRC stock options as contemplated by this Agreement (the
"Reserved Option Shares" and together with the Reserved Shares the "Reserved
Securities"). All issued and outstanding shares of Candie's Common Stock are
duly authorized, validly issued and are fully paid, nonassessable and free from
preemptive rights. All of the Prior Reserved Shares, the Reserved Shares and the
Reserved Option Shares when issued, will be duly authorized, validly issued and
outstanding fully paid, nonassessable and free from preemptive rights.
There are no shares held in the treasury and except for the Prior Reserved
Shares and the Reserved Shares there are no outstanding options, warrants or
other rights to subscribe for or purchase or acquire from Candie's or any plans,
contracts or commitments providing for the issuance of or the granting of rights
to acquire any capital stock of Candie's or securities convertible into or
exchangeable for Candie's Common Stock.
4.4 Compliance. Neither the execution and delivery by Candie's of this
Agreement or of any agreement to be executed and delivered by it pursuant
hereto, nor the consummation of any of the
-25-
<PAGE>
transactions contemplated hereby or thereby, nor the performance by it of any of
its obligations hereunder or thereunder, will (nor with the giving of notice or
the lapse of time or both would):
(a) conflict with or result in a breach of any provision of the
Certificate of Incorporation or Bylaws of Candie's;
(b) in any manner which would adversely affect the ability of Candie's
to consummate the transactions provided for in this Agreement in accordance
with the terms of this Agreement; (i) violate, result in a breach of, give
rise to a default, or any right of termination, cancellation or
acceleration, or otherwise be in conflict with or result in a loss of
contractual benefits to Candie's under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation to which it is a party or by which it, or
any of its operations, businesses, properties or assets may be bound, or of
which it, any of its securities, or its operations, business, property or
assets is a beneficiary, or (ii) require any consent, approval or notice
under the terms of any such note, bond, mortgage, indenture' license,
agreement or other instrument;
(c) violate, result in a breach of or conflict with any order, writ,
injunction, decree, law, statute, rule or regulation of any court or
governmental authority applicable to Candie's or to which its operations,
businesses, properties or assets, including but not limited, to the
Candie's Intellectual Property (as defined in Section 4.10), are subject in
any manner which would adversely affect the ability of Candie's to
consummate
-26-
<PAGE>
the transactions provided for in this Agreement in accordance with the
terms of this Agreement;
(d) result in the creation or imposition of any lien, claim,
restriction, charge or encumbrance upon any of the Candie's Common Stock,
options or warrants issued or reserved for issuance pursuant to this
Agreement; or
(e) the best of the knowledge of Candie's, interfere with or otherwise
materially and adversely affect the ability of Candie's, after the
Effective Time, to carry on its business on substantially the same basis as
it is now conducted by it.
4.5 SEC Filings; Financial Statements.
(a) Since February 1, 1995, Candie's has filed, and will continue to file,
all forms, reports and documents required to be filed by Candie's with the SEC
(collectively, the "Candie's SEC Reports"). Except as disclosed in section 4.5
of the Candie's disclosure statement attached hereto and made a part hereof (the
"Candie's Disclosure Statement"), the Candie's SEC Reports (i) at the time
filed, complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did not at the
time they were filed (or if amended or superseded by a subsequent filing, then
on the date of such filing) contain any untrue statement of a material fact or
omit to state a material fact required to be stated in such Candie's SEC Reports
or necessary in order to make the statements in such Candie's SEC Reports, in
the light of the circumstances under which they were made, not misleading. None
of Candie's
-27-
<PAGE>
subsidiaries is required to file any forms, reports or other documents with the
SEC. For purposes of this Agreement, all references to "Candie's" shall include
all of Candie's subsidiaries unless the context otherwise indicates.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Candie's SEC Reports, including any Candie's
SEC Reports filed after the date of this Agreement until the Closing (the
"Candie's Financial Statements"), complied or will comply as to form in all
material respects with the applicable published rules and regulations of the SEC
with respect thereto, was or will be prepared in accordance with U.S. generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited statements, as permitted by Form 10-Q or
8-K promulgated by the SEC), and fairly presented or will fairly present the
consolidated financial position of Candie's as at the respective dates and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount. The audited consolidated balance sheet of Candie's as of
January 31, 1997 is referred to herein as the "Candie's Balance Sheet."
4.6 Absence of Undisclosed Liabilities. Except as disclosed in the Candie's
SEC Reports, Candie's does not have any liabilities, either accrued or
contingent (whether or not required
-28-
<PAGE>
to be reflected in financial statements in accordance with U.S. generally
accepted accounting principles), and whether due or to become due, which
individually or in the aggregate could reasonably be expected to have an
material adverse effect, other than (i) liabilities reflected in the Candie's
Balance Sheet, (ii) liabilities specifically described in this Agreement or in
the Candie's Disclosure Statement, (iii) normal or recurring liabilities
incurred since January 31, 1997 in the ordinary course of business consistent
with past practices, and (iv) any liabilities permitted by Section 6.2 hereof.
4.7 Absence of Certain Changes or Events. Except as set forth in Section
4.7 of the Candie's Disclosure Statement, since the date of the Candie's Balance
Sheet, Candie's has conducted its businesses only in the ordinary course in a
manner consistent with past practice (except as disclosed in the Candie's SEC
Reports), and since such date there has not been: (a) any material adverse
effect or any facts or circumstances that could reasonably be expected to result
in an material adverse effect; (b) any damage, destruction or loss (whether or
not covered by insurance) with respect to Candie's having an material adverse
effect; (c) any material change by Candie's in its accounting methods,
principles or practices to which NRC has not previously consented in writing;
(d) any revaluation by Candie's of any of its assets having an material adverse
effect, unless NRC has previously consented in writing; or (e) except as
disclosed in the Candie's Disclosure Statement, any other action or event that
would have required the consent of NRC pursuant to Section 6.2 of this Agreement
had such
-29-
<PAGE>
action or event occurred after the date of this Agreement and that could
reasonably be expected to result in an material adverse effect.
4.8 Taxes.
(a) Candie's has accurately prepared and timely filed (or will so file) all
Returns required to be filed at or before the Effective Time relating to any and
all Taxes concerning or attributable to Candie's or to its operations, and such
Returns are true and correct in all material respects and have been completed in
all material respects in accordance with applicable law.
(b) As of the Effective Time Candie's: (i) will have paid all Taxes it is
required to pay prior to the Effective Time and (ii) will have withheld with
respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld, except in each case for Taxes contested in
good faith by appropriate proceedings for which adequate reserves have been
taken and except where the failure (if any) to pay or withhold such Taxes could
not reasonably be expected to have an material adverse effect.
(c) There is no Tax deficiency outstanding, proposed or assessed against
Candie's that is not reflected as a liability on the Candie's Balance Sheet nor
has Candies executed any waiver of any statute of limitations on or extending
the period for the assessment or collection of any Tax.
(d) Candie's does not have any material liability for unpaid federal,
state, local or foreign Taxes that has not been
-30-
<PAGE>
accrued for or reserved on the Candie's Balance Sheet, whether asserted or
unasserted, contingent or otherwise.
4.9 Properties. Candie's owns or has valid leasehold interests in all real
property necessary for the conduct of its business as presently conducted. All
material leases to which Candie's is a party are in good standing, valid and
effective in accordance with their respective terms, and Candie's is not in
default under any of such leases, except where the lack of such good standing,
validity and effectiveness or the existence of such default could not reasonably
be expected to have a material adverse effect.
4.10 Intellectual Property.
(a) Candies owns, or is licensed or otherwise possesses, legally
enforceable rights to use, all patents, trademarks, trade names, service marks
and copyrights, any applications for and registrations of such patents,
trademarks, trade names, service marks and copyrights, and all processes,
formulae, methods, schematics, technology, know how, and tangible or intangible
proprietary information or material that are necessary to conduct the business
of Candie's as currently conducted or planned to be conducted by Candie's, the
absence of which would be reasonably likely to have a material adverse effect
(the "Candie's Intellectual Property Rights").
(b) The Candie's Intellectual Property Rights which are material to the
business of Candie's, are valid and subsisting; (ii) Candie's has not been sued
in any suit, action or proceeding which involves a claim of infringement of any
of the Candie's
-31-
<PAGE>
Intellectual Property Rights or other proprietary right of any third party; and
(iii) the manufacturing, marketing, licensing or sale of Candie's products does
not infringe any patent, trademark, service mark, copyright, trade secret or
other proprietary right of any third party, which infringement could, either
individually or in the aggregate, be reasonably likely to have an material
adverse effect.
4.11 Litigation. Except as set forth in Section 4.11 of the Candie's
Disclosure Schedule, there is no action, suit or proceeding, claim, arbitration
or, to the knowledge of Candie's, investigation against Candie's pending or, to
the knowledge of Candie's, threatened, or as to which Candie's has received any
written notice of assertion, which, if decided adversely to Candie's, could
reasonably be expected to have an material adverse effect or a material adverse
effect on the ability of Candie's to consummate the transactions contemplated by
this Agreement.
4.12 Employee Benefit Plans.
(a) Candie's has made available to NRC all employee benefit plans (as
defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase,
incentive, deferred compensation, supplemental retirement, severance and other
similar employee benefit plans, and all unexpired severance agreements, written
or otherwise, for the benefit of, or relating to, any current or former employee
of Candie's or any trade or business (whether or not incorporated) which is a
member or which is under common control with Candie's within the meaning of
Section 414 of the Code (together, the "Candie's Employee Plans"). Candie's does
not
-32-
<PAGE>
maintain and has never maintained or contributed to an employee benefit plan
subject to Title IV of ERISA (including a multiemployer plan as defined in
Section 3(37) of ERISA).
(b) With respect to each Candie's Employee Plan, Candie's has made
available to NRC, a true and correct copy of (i) the most recent annual report
(Form 5500) filed with the IRS with respect to a Candie's Employee Plan subject
to such filing requirement, (ii) such Candie's Employee Plan, (iii) each trust
agreement and group annuity contract, if any, relating to such Candie's Employee
Plan, and (iv) the most recent determination letter issued with respect to any
plan which is intended to be qualified under section 401(a) of the Internal
Revenue Code.
(c) With respect to the Candie's Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Candie's there exists
no condition or set of circumstances, in connection with which Candie's could be
subject to any material liability under ERISA, the Code or any other applicable
law.
(d) With respect to the Candie's Employee Plans, individually and in the
aggregate, there are no material funded benefit obligations for which
contributions have not been made or properly accrued and there are no material
unfunded benefit obligations which have not been accounted for by reserves, or
otherwise properly footnoted in accordance with U.S. generally accepted
accounting principles, on the Candie's Financial Statements.
-33-
<PAGE>
(e) Except as set forth in Section 4.12 of the Candie's Disclosure
Statement, and except as provided for in this Agreement, Candie's is not a party
to any oral or written (i) union or collective bargaining agreement, (ii)
agreement with any officer or other key employee of Candie's the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving Candie's of the nature contemplated by
this Agreement, (iii) agreement with any corporate officer of Candie's providing
any term of employment or compensation guarantee extending for a period longer
than one year from the date hereof or for the payment of compensation in excess
of $50,000 per annum, or (iv) agreement or plan, including any stock option
plan, stock appreciation rights plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of the
benefits to which will be accelerate, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement.
4.13 Accounts Receivable; Inventory. Subject to any reserves set forth in
the Candie's Balance Sheet, the accounts receivable shown in the Candie's
Balance Sheet arose in the ordinary course of business; were not, as of the date
of Candie's Balance Sheet, subject to any material discount, contingency, claim
of offset or recoupment or counterclaim: and represented, as of the date of the
Candie's Balance Sheet, bona fide claims against debtors or sales, leases,
licenses and other charges. All accounts
-34-
<PAGE>
receivable of Candie's arising after the date of the Candie's Balance Sheet
through the date of this Agreement arose in the ordinary course of business and,
as of the date of this Agreement, are not subject to any material discount,
contingency, claim of offset or recoupment or counterclaim, except for normal
reserves consistent with past practice. The amount carried for doubtful accounts
and allowances disclosed in the Candie's Balance Sheet is believed by Candie's
as of the date of this Agreement to be sufficient to provide for any losses
which may be sustained on realization of the accounts receivable shown in the
Candie's Balance Sheet. As of the date of the Candie's Balance Sheet, the
inventories shown on the Candie's Balance Sheet consisted in all material
respects of items of a quantity and quality usable or saleable in the ordinary
course of business. All of such inventories were acquired in the ordinary course
of business and, as of the date of this Agreement, have been replenished in all
material respects in the ordinary course of business consistent with past
practices. All such inventories are valued on the Candie's Balance Sheet in
accordance with U.S. generally accepted accounting principles applied on a basis
consistent with Candie's past practices, and provision has been made or reserves
have been established on the Candie's Balance Sheet, in each case in an amount
believed by Candie's as of the date of the Candie's Balance Sheet to be
adequate, for all slow-moving, obsolete or unusable inventories.
4.14 Board Recommendations. The Board of Directors of Candie's has
unanimously approved and adopted this Agreement, which
-35-
<PAGE>
vote included the affirmative vote of a majority of the disinterested directors
and has recommended that the stockholders of Candie's approve and adopt the Plan
of Merger.
4.15 Financial Advisor Opinion. The financial advisor of Candie's,
Ladenburg Thalmann & Co. Inc., has delivered to Candie's an opinion, as of, or
immediately prior to the date of this Agreement to the effect that the Exchange
Ratio is fair from a financial point of view to the holders of the Candie's
Common Stock (the "Candie's Fairness Opinion").
4.16 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by NRC pursuant to this Agreement or
any other document, agreement or instrument referred to herein contains or will
contain any untrue statement of fact of material fact or omits or will omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE V
COVENANTS OF NRC
5.1 Shareholder Meeting. The Board of Directors of NRC shall take all
actions necessary to convene and cause the shareholders of NRC to hold a special
shareholders meeting to consider and vote upon the approval of the Plan of
Merger by July 31, 1998.
5.2 Conduct of the Business; Prohibited Activities. During the period from
the date of this Agreement and continuing until the earlier of the termination
of this Agreement or the
-36-
<PAGE>
Effective Time, and except as otherwise contemplated by or set forth in this
Agreement, NRC (except to the extent that Candie's shall otherwise consent in
writing, which consent shall not be unreasonably withheld), shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted, pay its debts and taxes when due subject to good
faith disputes over such debts or taxes, pay or perform its other obligations
when due, and, to the extent consistent with such business, use reasonable
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and key employees, and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees and others having business
dealings with it, except where the failure to do so could not reasonably be
expected to have a material adverse effect. NRC shall notify Candie's promptly
after becoming aware of any event or occurrence not in the ordinary course of
business of NRC that would result in a breach of any covenant or agreement of
NRC set forth in this Agreement or cause any representation or warranty of NRC
set forth in this Agreement to be untrue as of the date of such event or
occurrence. Except as expressly contemplated by this Agreement, or as set forth
in Section 5.2 of the NRC Disclosure Statement, NRC shall not, without the prior
written consent of Candie's, which shall not be unreasonably withheld:
(a) accelerate, amend or change the period of exerciseability of
options or restricted stock granted under any of the NRC stock option plans
or authorize cash payments
-37-
<PAGE>
in exchange for any options granted under any of such plans except as
required by the terms of such plans or any related agreements in effect as
of the date of this Agreement;
(b) transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the NRC Intellectual Property Rights other
than in the ordinary course of business consistent with past practices or
on a non-exclusive basis not materially different from past practices;
(c) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service by such party;
(d) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, other than (i) the issuance of NRC Common Stock or
-38-
<PAGE>
the grant of options or rights to acquire NRC Common Stock pursuant to the
NRC stock option plans in the ordinary course of business substantially
consistent as to amount, exercise price, vesting and other terms with past
practice, and (ii) the issuance of shares of NRC Common Stock as and to the
extent required under the NRC stock option plans;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other means, any business or any corporation,
partnership or other business organization or division, or otherwise
acquire or agree to acquire any material amount of assets;
(f) sell, lease, license or otherwise dispose of any of its properties
or assets which are material, individually or in the aggregate, to the
business of NRC, except for sales, leases or licenses of products, services
and software in the ordinary course of business;
(g) take any action to: (i) increase or agree to increase the
compensation payable or to become payable to its officers or employees,
except for increases in salary or wages of officers or employees in
accordance with past practices, (ii) grant any additional severance or
termination pay to, or enter into any employment or severance agreements
with, directors or officers, (iii) grant any severance or termination pay
to, or enter into any employment or severance agreement with, any employee,
except in accordance with past practices or in settlement of disputes with
present or former
-39-
<PAGE>
employees, not material in amount, either individually or in the aggregate,
(iv) enter into any collective bargaining agreement, or (v) establish,
adopt, enter into or amend in any material respect any bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or
other plan, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees;
(h) revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable, other than in the
ordinary course of business or pursuant to arm's length transactions on
commercially reasonable terms or where such action will not have a material
adverse effect;
(i) incur or maintain any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities or guarantee any debt securities of
others in excess of a maximum aggregate amount outstanding at any time of
$25,000 inclusive of indebtedness outstanding as of the date of this
Agreement;
(j) amend or propose to amend its Certificate of Incorporation or
Bylaws;
(k) incur or commit to incur capital expenditures in excess of $25,000
in the aggregate;
(l) enter into or amend any agreements pursuant to which any third
party is granted exclusive marketing,
-40-
<PAGE>
manufacturing or other rights with respect to any NRC product, process or
technology;
(m) amend or terminate any material contract, agreement or license to
which it is a party except in the ordinary course of business;
(n) waive or release any material right claim, except in the ordinary
course to business;
(o) initiate any litigation or arbitration proceeding; or
(p) take, or agree in writing or otherwise to take, any of the actions
described in the foregoing clauses (a) through (o), or any action which (i)
would make any of NRC's representations or warranties in this Agreement, if
made on and as of the date of such action or agreement, untrue or incorrect
in any material respect, or (ii) could prevent it from performing, or cause
it not to perform, its obligations under this Agreement.
5.3 Commission Filings. NRC shall cooperate fully with Candie's in
providing the information required for the Joint Proxy Statement and the
Registration Statement (each as defined in Section 6.3). The information
supplied by NRC for inclusion in the Joint Proxy Statement and Registration
Statement shall not contain, any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement in light
of the circumstances under which they were made not misleading, (i) at the time
the Registration Statement is
-41-
<PAGE>
declared effective by the SEC, (ii) on the date the Joint Proxy Statement is
first mailed to NRC shareholders and the Candie's shareholders and (iii) on the
dates of the meetings of NRC shareholders and the Candie's shareholders referred
to in Article II hereof, insofar as they relate to NRC. NRC shall correct any
information provided by it for use in the Joint Proxy Statement or Registration
Statement which shall have become untrue or misleading.
ARTICLE VI
COVENANTS OF CANDIE'S
6.1 Shareholder Meeting. The Board of Directors of Candie's shall take all
actions necessary to convene and cause the shareholders of Candie's to hold a
special or annual shareholders meeting to consider and vote upon the approval of
the Plan of Merger and the issuance of the Candie's securities in connection
with the Merger.
6.2 Conduct of Business Pending Merger. During the period from the date of
this Agreement and continuing until the earlier of the termination of the
Agreement or the Effective Time, and except as otherwise set forth in Section
6.2 of the Candie's Disclosure Statement, Candie's (except to the extent that
NRC shall otherwise consent in writing), shall carry on its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform its other obligations when
due, and, to the extent consistent with such business, to use all reasonable
efforts
-42-
<PAGE>
consistent with past practices and policies to (i) preserve intact its present
business organization, (ii) keep available the services of its present officers
and key employees, and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees and others having business
dealings with it, except where the failure to do so could not reasonably be
expected to have an material adverse effect.
6.3 Commission Filings. Promptly after the date hereof, Candie's shall file
with the SEC a registration statement on Form S-4 or other appropriate form
under the Securities Act, and the rules and regulations thereunder, relating to
the shares of Candie's Common Stock and to the extent the form is available for
such purpose the Reserved Securities to be issued with respect to the Merger
(the "Registration Statement"). The Registration Statement shall contain a proxy
statement, together with a form of proxy with respect to each of the meeting of
NRC's shareholders, at which the shareholders of NRC will vote upon the Plan of
Merger and the meeting of the Candie's shareholders, at which the shareholders
will vote upon the Plan of Merger and the issuance of the Candie's securities
(the "Joint Proxy Statement"). Candie's shall use all reasonable efforts to have
the Registration Statement declared effective under the Securities Act and the
Joint Proxy Statement cleared by the Commission as promptly as practicable, and
shall cooperate with NRC to promptly thereafter mail the Joint Proxy Statement
to the respective shareholders of NRC and Candie's. Candie's shall take any
action required to be taken under state blue sky or securities laws.
-43-
<PAGE>
6.4 The term "Registration Statement" shall mean such Registration
Statement at the time it becomes effective and all amendments thereto duly filed
and similarly mailed. The term "Joint Proxy Statement" shall mean such proxy or
information statement at the time it is initially mailed to Candie's
shareholders and NRC's shareholders and all amendments or supplements thereto,
if any, similarly filed and mailed. The information set forth in the
Registration Statement and the Joint Proxy Statement shall be true and correct
in all material respects and shall not omit to state any material fact necessary
in order to make such information not misleading, (i) at the time the
Registration Statement is declared effective by the SEC, (ii) at the time the
Joint Proxy Statement is first mailed to the shareholders of Candie's and NRC
and (iii) on the dates of the meetings of the NRC shareholders and Candie's
shareholders referred to in Article II. Candie's shall correct any information
provided by it for use in the Registration Statement or the Joint Proxy
Statement which shall have become untrue or misleading.
ARTICLE VII
CONDITIONS TO OBLIGATIONS
7.1 Conditions to Obligations of NRC to Effect the Merger. The obligations
of NRC to effect the Merger are subject to the satisfaction or waiver at or
prior to the Effective Time of the following conditions, of which, subsections
(g) and (h) of this Section 7.1 may be waived in writing by NRC:
(a) This Agreement and the Merger shall have been approved and adopted
by the requisite vote or consent of the
-44-
<PAGE>
shareholders of NRC and Candie's required by the Delaware Corporate Law;
(b) The Registration Statement shall have become effective and no stop
order suspending such effectiveness or qualification shall have been issued
or proceedings for such purpose shall have been instituted or threatened;
(c) No preliminary or permanent injunction or other order, decree,
action or proceeding shall have been instituted, issued or threatened
against any of the parties hereto or their directors or officers, before
any court or governmental department, regulatory or administrative agency
or commission to restrain or prohibit, or to obtain substantial damages in
respect of, this Agreement or the consummation of the transactions
contemplated hereby and which in the opinion of NRC or Candie's would make
it inadvisable to consummate such transactions; provided, however, that NRC
and Candie's shall have used all best efforts to prevent such event;
(d) the waiting period, if any, applicable to the consummation of the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR" Act) shall have expired or have been terminated;
(e) NRC shall have received a letter, dated as of a date not more than
five (5) days prior to the Effective Date, from CoView Capital, Inc.
stating that the NRC Fairness Opinion is still in full force and effect as
of such date;
(f) The shares of Candie's Common Stock to be issued in the Merger
shall have been approved for listing on the
-45-
<PAGE>
Nasdaq National Market, or if not available, on the Nasdaq Small Cap
Market;
(g) The representations and warranties of Candie's set forth in this
Agreement shall be true and correct in all material respects as of the date
this Agreement and as of the Effective Date (except that representations
and warranties which are confined to a specific date shall be true and
correct as of such date);
(h) NRC shall have received an opinion of Tenzer Greenblatt LLP,
counsel to Candie's, in form reasonably acceptable to NRC and its counsel.
7.2 Conditions to Obligations of Candie's to Effect the Merger. The
obligations of Candie's to effect the Merger shall be subject to the
satisfaction or waiver at or prior to the Effective Time of the following
conditions, of which subsections (g), (h), (i), and (j) of this section 7.2 may
be waived in writing by Candie's:
(a) This Agreement and the Merger shall have been approved and adopted
by the requisite vote or consent of the shareholders of Candie's and NRC
required by the Delaware Corporate Law;
(b) The Registration Statement shall have become effective and no stop
order suspending such effectiveness or qualification shall have been issued
or proceedings for such purpose shall have been instituted or threatened;
(c) No preliminary or permanent injunction or other order, decree,
action or proceeding shall have been instituted,
-46-
<PAGE>
issued or threatened against any of the parties hereto or their directors
or officers, before any court or governmental department, regulatory or
administrative agency or commission to restrain or prohibit, or to obtain
substantial damages in respect of, this Agreement or the consummation of
the transactions contemplated hereby and which in the opinion of Candie's
or NRC would make it inadvisable to consummate such transactions; provided,
however, that Candie's shall have used all best efforts to prevent such
event;
(d) the waiting period, if any, applicable to the consummation of the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR" Act) shall have expired or have been terminated;
(e) Candie's shall have received a letter, dated as of a date not more
than five (5) days prior to the Effective Date, from Ladenburg & Thalmann &
Co. Inc. stating that the Candie's Fairness Opinion is still in full force
and effect as of such date;
(f) The shares of Candie's Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq National Market, or if
not available, on the Nasdaq Small Cap Market;
(g) The representations and warranties of NRC set forth in this
Agreement shall be true and correct in all material respects as of the date
of this Agreement and as of the Effective Date (except that representations
and warranties which are confined to a specific date shall be true and
correct as of such date);
-47-
<PAGE>
(h) NRC shall have terminated any and all employment agreements with
any of its officers, directors and employees and shall have executed and
delivered all documentation in connection with such termination to
Candie's;
(i) Candies shall have received an opinion of Littman Krooks Roth &
Ball P.C., counsel to NRC, in form reasonably acceptable to Candie's and
its counsel; and
(j) NRC shall have obtained and delivered to Candie's copies of all
consents or approvals of all persons needed for the consummation of the
transactions contemplated hereby and all such consents and approvals shall
be in full force and effect, unless the failure to obtain such consent or
approval is not reasonably likely to have a material adverse effect on
Candie's taken as a whole giving effect to the transactions contemplated
hereby.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification by NRC of Candie's. NRC shall indemnify and hold
Candie's harmless from any and all damages or deficiencies resulting from any
misrepresentation, breach of any representation or warranty, or nonfulfillment
of any covenant or agreement on the part of NRC, whether contained in the
Agreement, the NRC Disclosure Statement or in any Exhibit hereto or in any
statement, or certificate furnished by NRC in connection with the consummation
of the transactions contemplated by this Agreement; and any and all actions,
suits, proceedings, demands, assessments, judgments, costs and expenses incident
to any of the foregoing,
-48-
<PAGE>
including but not limited to reasonable attorneys' fees and expenses.
8.2 Indemnification by Candie's of the Shareholders, Directors and Officers
of NRC. (a) Candie's shall indemnify and hold the shareholders of NRC harmless
from any and all damages or deficiencies resulting from any misrepresentation,
breach of any representation or warranty, or nonfulfillment of any covenant or
agreement on the part of Candie's whether contained in this Agreement or any
Exhibit hereto or in the Candie's Disclosure Statement or any certificate
furnished by Candie's in connection with the consummation of the transactions
contemplated by the Agreement; and any and all actions, suits, proceedings,
demands, assessments, judgments, costs, and expenses incident to any of the
foregoing, including but not limited to reasonable attorneys' fees and expenses.
(b) For a period of three (3) years after the Effective Time, Candie's
shall indemnify and hold harmless the current officers and directors of NRC to
the fullest extent permitted by Section 145 of the Delaware Corporate Law, as
the same may be amended and supplemented, for damages arising out of or
resulting from actions in their capacity as an officer or director of NRC.
8.3 Termination of Indemnification Obligations Upon Closing. Except for the
indemnification obligations set forth in Section 8.2(b), the respective
indemnification obligations of NRC and Candies set forth in this Article VIII
shall expire with, and be terminated and extinguished upon, consummation of the
Merger,
-49-
<PAGE>
and thereafter neither NRC nor Candie's shall have any liability whatsoever with
respect to any such indemnification obligation.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether prior to or after approval by the shareholders of NRC:
(a) By mutual written consent of the Boards of Directors of Candie's
and NRC; or
(b) By NRC:
(i) If the Effective Time shall not have occurred on or before
July 31, 1998 after the date hereof; or
(ii) If Candie's fails to perform in any material respect any of
its material obligations under this Agreement; or
(c) By Candie's:
(i) If the Effective Time shall not have occurred on or before
July 31, 1998 after the date hereof;
(ii) If NRC fails to perform in any material respect any of its
material obligations under the Agreement.
9.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 9.1, this Agreement shall forthwith become
void, and there shall be no liability on the part of Candie's or NRC.
9.3 Amendment. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties
-50-
<PAGE>
hereto; provided, however, after approval by the shareholders of NRC, such
amendment shall not:
(i) alter or change the amount or kind of shares, securities, cash,
property and/or rights to be received in exchange for or on conversion of
all or any of the shares of any class or series thereof of such Constituent
Corporation; and
(ii) Alter or change any of the terms or conditions of this Agreement
if such alteration or change would adversely affect the holder of any class
or series thereof of any Constituent Corporation.
9.4 Waiver. At any time prior to the Effective Time, whether before or
after the meetings of the NRC shareholders or the Candie's shareholders referred
to in Article II, any party hereto, by action taken by its Board of Directors,
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto or, (ii) excepting the provisions contained in
Section 9.3, waive compliance with any of the agreements of any other party or
with any conditions to its own obligations. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party by a duly authorized
officer.
ARTICLE X
NO SOLICITATION
From and after the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement in accordance with Section
9.1, neither Candie's nor NRC shall, nor shall its stockholders directly or
indirectly, through any officer,
-51-
<PAGE>
director, employee, representative, agent or affiliate, (i) solicit, initiate,
or encourage any inquiries or proposals that constitute, or could reasonably be
expected to lead to, a proposal or offer for a merger, consolidation, sale or
purchase of substantial assets or stock, tender or exchange offer, or other
business combination or change in control or similar transaction involving such
party, other than the transactions contemplated or permitted by this Agreement
(any of the foregoing inquiries or proposals being referred to in this Agreement
as a "Competing Offer"), (ii) engage in negotiations or discussions concerning,
or provide any non-public information to any person or entity relating to, any
Competing Offer, or (iii) agree to, approve or recommend any Competing Offer.
ARTICLE XI
MISCELLANEOUS
11.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
11.2 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Inclusion of information in any Disclosure
Statement does not constitute an admission or acknowledgment of the materiality
of such information.
11.3 Representations and Warranties. The respective representations and
warranties of NRC and Candie's contained herein, and the covenants, obligations,
agreements and liabilities of each of them shall expire with, and be terminated
and extinguished upon, consummation of the Merger, and thereafter
-52-
<PAGE>
neither NRC nor Candie's nor any officer, director or principal thereof shall be
under any liability whatsoever with respect to any such representation or
warranty. This Section shall have no effect upon any other obligation of the
parties hereto, whether to be performed before or after the consummation of the
Merger.
11.4 Brokers and Agents. Candie's and NRC each represents and warrants to
the other that it has not employed any broker or agent in connection with the
transactions contemplated by this Agreement.
11.5 Expenses. Except as otherwise specifically provided in this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
or expenses, whether or not the transactions contemplated hereby are
consummated.
11.6 Mutual Drafting. This Agreement is the mutual product of the parties
hereto, and each provision hereof has been subject to mutual consultation,
negotiation and agreement of each of the parties, and shall not be construed for
or against any party hereto.
11.7 Entire Agreement. This Agreement (together with the other agreements,
instruments and documents delivered pursuant hereto) including the
Non-Disclosure Agreement dated February 19, 1998 executed by the parties hereto,
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
-53-
<PAGE>
between the parties hereto, oral and written with respect to the subject matter
hereof.
11.8 Public Statements. NRC and Candie's shall consult with each other
prior to issuing any press release or otherwise making any public statement with
respect to the contents of this document or the transactions contemplated
hereby, and none of the parties hereto shall issue any press release or make any
such public statement prior to such consultation, except as may be required by
law or NASDAQ regulations.
11.9 Due Diligence Investigation. Upon reasonable notice and subject to
applicable law and other legal obligation, Candie's and NRC shall each afford to
the officers, employees, accountants, financial advisors, counsel and other
representatives of the other, access during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records, concerning its business, properties and personal as
such other party may reasonably request. Unless otherwise required by law, the
parties shall hold all such information confidential and treat such information
as "Evaluation Material" in accordance with the Non-Disclosure Agreement dated
February 19, 1998 between the parties hereto.
11.10 Cooperation. Each of the parties hereto shall cooperate and take any
and all actions, and execute and acknowledge, deliver, file and/or record any
and all documents and instruments as the other party hereto reasonably requests
from time to time in order to have fully protect and perfect the rights intended
to be granted hereunder.
-54-
<PAGE>
11.11 Notices. All notices or other communications required or permitted
hereunder shall be sufficiently given: (i) on the date of delivery, if delivered
by hand or by courier; (ii) upon receipt of confirmation of transmission if
transmitted by telecopier, and (iii) on the third business day after mailing if
mailed by registered or certified mail, postage prepaid, return receipt
requested, as set forth below:
If to Candie's to:
Candie's Inc.
2975 Westchester Avenue
Purchase, New York 10577
Attn: Neil Cole, President
Fax: (914) 694-8606
Copy to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attn: Michael S. Mullman, Esq.
Fax: (212) 885-5001
If to NRC:
New Retail Concepts, Inc.
2975 Westchester Avenue
Purchase, New York 10577
Attn: Gary Klein, Vice President-Finance
Fax: (914) 694-8606
Copy to:
Littman Krooks Roth & Ball P.C.
655 Third Avenue
New York, New York 10017
Attn: Mitchell Littman, Esq.
Fax: (212) 490-2990
or such other address that shall be furnished in writing by either
party.
11.12 No Assignment. This Agreement and the rights, interests and
obligations hereunder may not be assigned by any
-55-
<PAGE>
party hereto, by operation of law or otherwise without the prior written consent
of the other party hereto, and any such purported assignment without such
consent shall be null and void.
11.13 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto and each of
which shall be deemed an original.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
hereof.
CANDIE'S INC.
a Delaware corporation
By: /s/ David Golden
-----------------------------
Name: David Golden
Title: Senior Vice President-
Chief Financial Officer
NEW RETAIL CONCEPTS, INC.
a Delaware corporation
By:/s/ Neil Cole
-----------------------------
Name: Neil Cole
Title: President - Chief
Executive Officer
-56-
<PAGE>
DISCLOSURE STATEMENT
TO
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
CANDIES, INC.
AND
NEW RETAIL CONCEPTS, INC.
DATED APRIL 6, 1998
-57-
<PAGE>
Section 3.5
Compliance
Consummation of the transactions will violate the following agreements
without the prior consent of the other party thereto:
1. Purchase and Sale Agreement dated as of December 31, 1992 between
NRC and Stantrob Associates, Ltd.
2. Settlement Agreement dated as of November 3, 1995 between NRC and
Stantrob Associates, Ltd.
3. License Agreement as of April 1, 1997 between NRC and Montgomery
Ward & Co., Incorporated.
4. Agreement dated as of April 1, 1992, as extended, between NRC and
Wal-Mart Stores, Inc.
5. Affiliate Transactions Agreement between NRC and Candie's dated
March 3, 1993, as amended January 30, 1995.
-58-
<PAGE>
Section 3.6
SEC Filings, Financial Statements
Certain Form 5 filings with respect to deferred reporting of options grants
and gift transactions have not been timely filed.
The Company failed to timely file its Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1997.
-59-
<PAGE>
Section 3.7
Absence of Undisclosed Liabilities
As an inducement to join Candie's and in consideration of foregoing certain
future bonus opportunities pursuant to their respective employment agreements
with NRC, each of Messrs Neil Cole, Lawrence O'Shaughnessy and Gary Klein
received the following option grants and upon termination will receive the
following bonuses:
Options Bonus
------- -----
Neil Cole 626,543 @ $1.75 $525,000
Lawrence O'Shaughnessy 74,074 @ $1.75 $ 50,000
Gary Klein 49,383 @ $1.75 $ 25,000
-60-
<PAGE>
Section 3.10
Properties
NRC has a use of premises agreement with Candie's with respect to its executive
offices pursuant to a Services Allocation Agreement dated as of March 3, 1993.
-61-
<PAGE>
Section 3.11
Intellectual Property
NRC rights to the No ExcusesR name are subject to its license agreements with
Stantrob Associates, Ltd.
-62-
<PAGE>
Section 3.12
Litigation
Carlos Cu, et al v. El Greco, et al, Index No. 22716/91, Queens Supreme Court.
Eric Knipe and Eyk International v. New Retail Concepts, Inc. and Neil Cole,
individually. Los Angeles Supreme Court, Case Number
-63-
<PAGE>
Section 3.13
Employee Benefit Plans
Employment Agreement dated January 1, 1989 between NRC and Neil Cole, as
amended:
Employment Agreement dated November 15, 1994 between NRC and Gary Klein.
Letter dated May 18, 1995 from NRC to Lawrence O'Shaughnessy with respect
to the retention of Mr. O'Shaughnessy by NRC as business advisor until
March 31, 1997.
See items listed in Section 3.7 of this NRC Disclosure Statement.
-64-
<PAGE>
Section 4.5
SEC Filings
Certain Form 5 Filings with respect to deferred reporting of option grants
and gift transactions have not been timely filed.
-65-
<PAGE>
Section 4.7
Certain Changes
Candie's has served written notice of termination of its factoring arrangements
to Congress Talcott Corporation, effective April 27, 1998, and is in the process
of obtaining new financing arrangements with Nations Bank pursuant to the
commitment letter attached hereto.
-66-
<PAGE>
Section 4.11
Litigation
Petition for Order Compelling Arbitration by Lucky Brand Dungarees of
America; Inc. v. Candies, Inc., U.S. District Court, Central District of
California.
-67-
<PAGE>
Section 4.12
Employee Benefit Plans
1. Employment Agreement dated February 23, 1993 between Neil Cole and
Candie's, as amended March 6, 1995 and February 28, 1997.
2. Employment Agreement dated April 1, 1995 between Lawrence
O'Shaughnessy and Candie's as amended on March 17, 1997.
3. Employment Agreement dated November 15, 1994 between Gary Klein and
Candie's.
4. Employment Agreement dated March 1, 1998 between David Golden and
Candie's.
5. Employment Agreement dated November 30, 1994 between Lynn Miller and
Candie's, as amended on July 8, 1997.
-68-
Exhibit 10.21
LICENSE AGREEMENT
THIS LICENSE AGREEMENT is entered into this 16th day of June 1997, by
Michael Caruso & Co., lnc., a California corporation, ("Licensor"), whose
address is 4560 Loma Vista Avenue, Vernon, California 90058 and Candie's, Inc.
("Licensee"), a Delaware corporation, whose address is 2975 Westchester Avenue,
Purchase, New York 10577, with reference to the following:
A. Licensor is the owner of Trademarks and Trade Names which include
"BONGO" and "B BONGO" (collectively, the "Trademarks");
B. Licensee wishes to manufacture and market mens', womens' and childrens'
footwear (collectively "Footwear") and handbags, backpacks and sport bags
(collectively "Handbags") under and in connection with the Trademarks (the
"Licensed Items");
C. The parties entered into a License Agreement on January 13, 1995 whereby
Licensor granted Licensee the license to manufacture and market footwear under
and in connection with the Trademarks (the "1995 License Agreement").
D. The parties desire to provide for the early termination of the 1995
License Agreement and to replace the 1995 License Agreement with this Agreement.
THE AGREEMENT:
1. 1995 LICENSE AGREEMENT
1
<PAGE>
1.1 Ratification and Validity. Licensor and Licensee each expressly
acknowledge that the 1995 License Agreement is valid and binding and,
subject to the provisions of paragraph 1.2, in addition to the rights and
obligations created hereunder, that the mutual waiver and release of each
party's respective obligations owing to the other under the 1995 License
Agreement is good and valuable consideration supporting the parties'
agreement to terminate the 1995 License Agreement as hereinafter provided.
1.2 Early Termination of the 1995 License Agreement. The parties agree
to terminate the 1995 License Agreement as of 11:59 p.m. PST January 31,
1998; provided, however, that Licensee shall not thereby be relieved of its
obligations under Paragraphs 6 and/or 7 of the 1995 License Agreement to
render to Licensor its report(s) of sales of the Licensed Items or to remit
to Licensor any and all royalties due Licensor for sales of the Licensed
Items made through January 31, 1998.
2. LICENSE
2
<PAGE>
2.1 Grant of License and Designation of Licensed Items. Effective
February 1, 1998, Licensor grants to Licensee the exclusive license to use
the Trademarks within the geographic area described in Paragraph 5 hereof,
in the manufacture and marketing of the Licensed Items. Questions regarding
the definition of the Licensed Items shall be decided by the Licensor. The
rights granted to Licensee are limited to use in connection with the
Licensed Items. Licensee agrees not to use the Trademarks or give consent
to their use except as allowed in this Agreement, without written consent
of Licensor.
2.2 Right to Sublicense. Licensee shall have the right, exercisable in
its sole discretion, to sublicense its rights and obligations under this
Agreement to its wholly owned subsidiary, to wit, INTERNATIONAL TRADING
GROUP, INC., a New York corporation; provided, however, that a grant of
such sublicense shall not in any way relieve Licensee of any obligations
owing to Licensor hereunder.
3. TERM
3.1 Initial Term. The initial term of this Agreement (the "Initial
Term") shall commence on February 1, 1998, and shall end on January 31,
2002, unless sooner terminated in accordance with the terms of this
Agreement. The period beginning February 1, 1998 and ending January 31,
1999, and each subsequent twelve (12) month period ending on January 31
during the Initial Term and the First Extended Term (as hereinafter
defined) is herein referred to as a "Contract Year."
3.2 First Extended Term. Provided that the aggregate Minimum Net
3
<PAGE>
Sales (as hereinafter defined) required to be achieved for the first three
(3) Contract Years of the Initial Term ending January 31, 2001 are met, and
as of the last day of the Initial Term, Licensee is not in default under
this Agreement nor has there occurred any event that, with the passage of
time or the giving of notice, or both, would constitute a default under
this Agreement by Licensee, the term of this Agreement may be extended by
Licensee for the period (the "First Extended Term") beginning on February
1, 2002 and ending on January 31, 2006, unless sooner terminated in
accordance with this Agreement, provided notice of such extension is given
in writing to Licensor at least six (6) months prior to the end of the
Initial Term. The amount of Minimum Net Sales (as hereinafter defined) to
be achieved by Licensee during the First Extended Term is set forth in
Paragraph 4.2.
4. PAYMENTS.
4.1 Net Sales. For purposes of this Agreement the term "Net Sales"
shall mean and refer to the aggregate gross invoice price for all Licensed
Items sold by Licensee in any Contract Year, less any refunds, allowances,
deductions and credits for returns actually made by Licensee's retail
customers. For purposes of this Agreement, Licensed Items shall be
considered sold upon the date of invoicing, shipment or payment, whichever
event first occurs.
4.2 Minimum Net Sales. During each contract year, Licensee shall
achieve the following minimum Net Sales ("Minimum Net Sales") of the
Licensed Items within the Territory:
4
<PAGE>
First Contract Year:
Footwear: $ 8,000,000; and
Handbags: $ 1,000,000.
Second Contract Year:
Footwear: $11,000,000; and
Handbags: $ 2,000,000.
Third Contract Year:
Footwear: $12,000,000; and
Handbags: $ 3,000,000.
Fourth Contract Year:
Footwear: $13,000,000; and
Handbags: $ 4,000,000.
First Extended Term (each contract year):
Footwear: $15,000,000; and
Handbags: $ 5,000,000.
4.2.1 Option to Exclude Handbags. If in any Contract Year,
whether during the Initial Term or Extended Term of this Agreement,
Licensee fails to achieve the Minimum Net Sales of handbags required
to be achieved for such Contract Year, Licensor at its sole option may
elect to terminate Licensee's license hereunder with respect to
handbags. Licensor shall notify Licensee of its election to exercise
the option in writing within thirty (30) days of Licensor's receipt
from Licensee of the annual report required under Paragraph 8, in
which event Licensee shall be entitled to dispose of its remaining
inventory of handbags in accordance with the provisions of Paragraph
19.
4.3 Royalty. During the term of this Agreement, Licensee shall pay to
Licensor a royalty (the "Royalty") equal to (i) five percent (5%) of the
Minimum Net Sales
5
<PAGE>
for the Contract Year (the "Minimum Guaranteed Royalty"), or (ii) five
percent (5%) of the actual net sales for the Contract Year, whichever is
greater.
4.4 Advertising Royalty. In addition to the Royalty to be paid under
Paragraph 4.3 hereof, for purposes of Licensor advertising the Licensed
Items and the Trademarks in the Territory, Licensee shall pay to Licensor a
royalty (the "Advertising Royalty") for each Contract Year during the term
of such Contract Year an amount equal to the greater of (i) two percent
(2%) of the combined Minimum Net Sales for such Contract Year, or (ii) two
percent (2%) of the actual combined Net Sales of Licensed Items for such
Contract Year. The Advertising Royalty shall be applied by Licensor to the
production and placement of print, radio and television advertising for the
Licensed Items, utilizing creative, graphics and other material of
Licensor. Licensor shall use its best efforts to utilize Licensee's
products in all Licensor advertising.
5. GEOGRAPHIC AREA. The rights granted to Licensee hereunder shall be
exclusively exercised by Licensee within the United States and its territories,
and all foreign countries and jurisdictions worldwide in which Licensor owns the
Trademarks or the rights to use the Trademarks (the "Territory").
6. LICENSEE'S RECORDS. Licensee shall maintain at its regular place of
business complete records of all business transacted by Licensee in connection
with the Licensed Items. Such records shall be maintained in accordance with
generally accepted accounting procedures. Licensor or its duly authorized agents
or representatives shall have the right to inspect said records at Licensee's
premises during Licensee's regular
6
<PAGE>
business hours. Licensor shall give Licensee at least ten (10) days' advance
written notice of Licensor's intention to do so.
7. LICENSEE'S REPORTS OF SALES AND PAYMENT OF ROYALTIES.
7.1 Monthly Reports. On or before the 15th day of each month during
the term of this Agreement, Licensee shall deliver to Licensor a written
statement, certified to be true by the Chief Financial Officer of Licensee,
setting forth the gross and Net Sales of Licensed Items by Licensee for the
preceding month.
7.2 Royalty Payments. Licensee shall remit to Licensor with the
Monthly Reports rendered in the months of November, February, May and
August an amount equal to the sum of one-fourth (1/4) of the Minimum
Guaranteed Royalty plus one-fourth (1/4) of the Advertising Royalty for the
three (3) month period just ended.
8. LICENSEE'S ANNUAL REPORTS. On or before April 30 following the end of
each Contract Year, Licensee shall deliver to Licensor an annual statement,
audited and certified by the certified public accountant employed by Licensee,
showing gross and Net Sales of Licensed Items, and royalties (including the
Advertising Royalty) due and royalties paid by Licensee during the just ended
Contract Year. If said annual statement discloses that the amount of royalties
paid to Licensor during the Contract Year to which said statement relates is
less than the amounts required to be paid to Licensor pursuant to Paragraph 4
above, Licensee shall pay said deficiency to Licensor concurrently with the
delivery of such annual statement. If said annual statement discloses that
Licensee has paid to Licensor royalties in excess of the amounts required to be
paid by Licensee
7
<PAGE>
pursuant to Paragraph 4 above, Licensee shall be entitled to a credit equal to
such royalties against the royalties next accruing under this Agreement. In the
event the foregoing occurs during the final Contract Year of this Agreement,
adjustments shall be made in cash rather than in the form of a credit. Licensee
shall also provide with each annual statement an estimated projection of net
shipments of the Licensed Items for the succeeding Contract Year.
9. AUDIT BY LICENSOR. Should an audit, pursuant to Paragraph 6, disclose
that Licensee has understated sales or underpaid royalties to Licensor, Licensee
shall upon written demand pay to Licensor the amount by which the actual
royalties owing exceed royalties paid. If Licensee has understated either gross
or net sales or royalties by an amount in excess of five percent (5%) of actual
sales or the amount due for any Contract Year, Licensee shall forthwith and upon
written demand also pay to Licensor all expenses incurred by Licensor in
conducting such audit. Should such audit disclose that the royalties paid exceed
the actual royalties due, Licensee shall be entitled to a credit equal to such
excess royalties against the royalties next accruing under this Agreement,
except that when such audit is conducted at the expiration of the Agreement, any
excess royalties paid will be remitted by check to the Licensee within thirty
(30) days.
10. BEST EFFORTS OF LICENSEE. Licensee shall use it best efforts to
manufacture and market the Licensed Items. A cessation of best efforts for a
continuous period of one hundred eighty (180) days shall be grounds for
termination of this Agreement. Licensor shall have the right to inspect
Licensee's facilities during regular
8
<PAGE>
business hours, on twenty-four (24) hours prior written notice. Licensor shall
use its best efforts to make such inspection in the presence of an officer of
Licensee.
11. LICENSED ITEMS TO BE KEPT DISTINCTIVE. Licensee shall consistently
distinguish the Licensed Items from other products manufactured and sold by
Licensee and shall maintain distinct lines in all merchandising efforts.
Licensor agrees to render reasonable assistance and advice to Licensee
concerning styles and trends. In the event Licensor shall create any design or
style and submit the same for use by Licensee, Licensee shall not be required to
use the same, but if Licensee elects not to do so, Licensee shall have no right
thereto and shall not use the same in connection with any product or service of
Licensee.
12. ADDITIONAL OBLIGATIONS OF LICENSEE AS TO QUALITY, MERCHANDISING AND
OTHER ASPECTS OF LICENSED ITEMS. Licensee shall furnish to Licensor, without
request, photographs of samples and finished production models of Licensed Items
for Licensor's approval. Approval shall be based on styling, materials and
manufacturing quality. Licensee shall also furnish to Licensor, without request,
samples of each proposed new model and material of a Licensed Item. Failure of
Licensor to notify Licensee of disapproval within fourteen (14) days after
receipt of a sample shall constitute Licensor's approval. Prior to submission of
samples to Licensor, Licensee shall conduct its usual tests on each such sample
to assure that quality of the Licensed Item is at least equal to the quality of
similar non-licensed items manufactured by Licensee, sold at retail, at
comparable prices. Each Licensed Item shall contain at
9
<PAGE>
least one representation of one of the Trademarks. Licensor reserves the right
to withhold approval of any Trademark representation which does not conform to
Licensor's standard as to such representation.
13. RESTRICTIONS UPON SUBCONTRACTS. Licensee shall have the right to enter
into subcontracts for the manufacture of Licensed Items. Licensee shall not
permit any subcontractor to further subcontract the work contracted for.
14. PROHIBITION OF ASSIGNMENTS AND TRANSFERS. Without written consent of
Licensor, Licensee shall not voluntarily, involuntarily or by operation of law
assign or transfer this Agreement or any of Licensee's rights, interests, or
duties hereunder (except as specifically provided herein). The consent of
Licensor to one assignment, transfer or sublicense shall not be deemed to be
consent to any subsequent assignment, transfer or sublicense. Any assignment,
transfer or sublicense without Licensor's written consent shall be void and at
the option of the Licensor shall constitute a default hereunder.
15. NO DILUTION OF TRADEMARKS; NO ATTACK UPON TRADEMARKS. Licensee shall
not use the Trademarks or any material utilizing either of them in such manner
as will adversely affect any rights of ownership of Licensor in and to the
Trademarks, or any of them.
Licensee shall cause to appear on all Licensed Items and on all materials
on which the Trademarks are used, such indications as may be required by any
applicable law so as to give appropriate notice of any trademark, trade names or
other rights therein.
10
<PAGE>
Licensee shall not contest the validity of the Trademarks or any of the
rights of Licensor under which this license is granted, nor will Licensee
willingly become an adverse party to litigation in which others contest the
Trademarks or Licensor's said rights. Licensee shall not seek to avoid its
obligations hereunder because of the assertion or allegation by any person(s)
that the Trademarks, or any of them, are invalid.
16. INFRINGEMENT AND OTHER TRADEMARK LITIGATION. Licensee shall notify
Licensor as soon as practicable of any infringement of the Trademarks, or any of
them, which comes to Licensee's attention. Licensor at its sole expense, and in
its own name, shall prosecute and defend any action or proceeding which Licensor
deems necessary or desirable to protect the Trademarks. Licensee may, and upon
written request by Licensor shall, join Licensor at Licensor's sole cost in any
such action or proceeding. Licensee shall not commence any action or proceeding
to protect the Trademarks without the written consent of Licensor and shall not
defend any such action without Licensor's written consent. Any damages recovered
in any action or proceeding commenced by Licensor shall belong solely and
exclusively to Licensor. Licensor shall have no liability to Licensee for any
damages awarded or recovered against Licensee, nor shall Licensor have any
liability to any other person for any damages awarded to or recovered by such
other person, including but not limited to any action or proceeding alleging any
violation of any antitrust, trade regulation, unfair competition, or similar
statute. If Licensor is made a party to any such action or proceeding, Licensee
shall indemnify and hold Licensor harmless from any and all attorneys' fees,
costs, damages,
11
<PAGE>
liabilities and awards as may be incurred, assessed, imposed or adjudicated by
reason thereof; provided, however, that such action or proceeding results from
the manufacture or marketing by Licensee of the Licensed Items. Licensor shall
indemnify and hold Licensee harmless from any liability arising solely from
Licensee's use of the Trademarks licensed hereunder. Licensee may, at its
option, choose to be represented in any threatened or actual action or
proceeding to which this Paragraph pertains by Licensor's counsel at no cost to
Licensee, in which event Licensor shall control such representation. If
Licensor's counsel cannot thereafter represent both Licensor and Licensee,
Licensor's counsel shall continue to represent Licensor only.
17. ADDITIONAL RESTRICTIONS UPON USE OF TRADEMARKS. Licensee shall not use
or permit the use of any of the Licensed Items, or on any packaging which is
received by the general public (as opposed to retailers), any identification
which includes with the name "BONGO," the name of Licensee or of any other
person or entity (e.g. "BONGO by Candies") nor shall Licensee include or permit
the inclusion, with the name BONGO or any of the Trademarks, in any advertising
or promotional material featuring any of the Licensed Items which is
disseminated to the general public (as opposed to trade advertising) the name of
Licensee or of any other person or entity. In addition to the foregoing,
Licensee shall not use or permit the use of any of the Trademarks, including the
name BONGO on or in connection with any product or service, other than the
Licensed Items, which is manufactured or sold by Licensee, or which is licensed
by Licensee to others for manufacture or sale (e.g. "CANDIES by the makers of
BONGO").
12
<PAGE>
18. DEFAULTS BY LICENSEE. Except as provided, in the event Licensee
materially defaults in the performance of any of the terms and conditions
hereunder, and if such default involves the payment of money not cured within
ten (10) days after receipt of written notice or if such default involves
performance other than the payment of money, and Licensee shall not have
commenced curing the same within thirty (30) days after receipt of written
notice, or if a Receiver is appointed to, or one or more creditors take
possession of all or substantially all of Licensee's assets, or if Licensee
shall make a general assignment for the benefit of creditors, of if any action
is taken or suffered by Licensee under any insolvency or bankruptcy act, then in
such event Licensor may cancel and terminate this Agreement. Such cancellation
and termination will not relieve Licensee of any of its obligations as may by
then have accrued hereunder. If Licensee commits three or more material defaults
and corrections thereof during the term or extension of this Agreement, Licensor
may terminate this Agreement with written notice to Licensee. The time for
performance of any act required of either party shall be extended by a period
equal to the period during which a party was reasonably prevented from
performance, by fire, flood, storm, or like casualty.
19. LICENSOR'S RIGHTS TO DESIGNS, ETC., UPON TERMINATION. In the event this
Agreement is cancelled or terminated for any reason, Licensee shall assign and
transfer to Licensor any and all rights in the Trademarks, and in the designs of
the Licensed Items, and the goodwill associated therewith, and shall not
thereafter manufacture or market any of said designs. Licensee may, however,
dispose of its on-
13
<PAGE>
hand stock of Licensed Items for a period not to exceed six (6) months after the
date of cancellation or termination of this Agreement, provided all Royalties
then due Licensor have been paid and provided further that Licensee provides a
schedule of all inventory of Licensed Items in Licensee's possession (actual or
otherwise). Neither Licensee nor any other person or entity may, other than in
the regular course of Licensee's business, sell or transfer any Licensed Item
unless all sums due Licensor from Licensee have been paid. All Royalties due
Licensor by reason of the sell-off of such on-hand inventory of Licensed Items
shall be paid to Licensor within fifteen (15) days of the end of the month
during which the sell-off is completed or terminates, but in no event beyond six
(6) months from the date this Agreement is cancelled and terminated. Upon
termination or cancellation of this Agreement, all packaging, advertising, and
other items bearing representation of Trademarks shall, without cost to
Licensor, become the property of Licensor and be delivered to Licensor's place
of business. The reasonable cost of such delivery shall be paid by the Licensor.
20. ADDITIONAL RIGHTS UPON TERMINATION. During the last six (6) months of
the final Contract Year of this Agreement, Licensor shall have the right to
design and manufacture merchandise of the types covered by this Agreement and to
negotiate agreements which grant a license to a party of any of the rights
herein mentioned. No merchandise identified as Licensed Items shall be shipped
by Licensor or any third party other than Licensee prior to the expiration or
termination of this Agreement (exclusive of the additional six (6) month period
for the disposition of the Licensed Items).
14
<PAGE>
However, any successor Licensee may solicit orders during the last six (6)
months of the final Contract Year.
21. GOOD WILL. Licensee acknowledges that the Trademarks have acquired a
valuable secondary meaning and good will. Accordingly, Licensee agrees not to
use the Trademarks, or any of them, so as to detract from their repute.
22. INSURANCE. Licensee and its sublicensees, if any, agree to carry
product liability insurance on the Licensed Items, with a limit of liability of
$5,000,000. Licensor shall be named as an additional insured on each such
insurance policy. Such insurance may be obtained in conjunction with a policy of
product liability insurance which covers products other than the Licensed Items.
The policy shall provide for at least ten (10) days prior written notice to
Licensor of the cancellation or substantial modification of the policy. The
Licensee shall deliver to Licensor a certificate evidencing the existence of
such insurance policies after their issuance.
23. RESERVED RIGHTS. Rights not specifically granted to Licensee are
reserved by Licensor and may be used by Licensor without limitation. Any use by
Licensor of such reserved rights, including but not limited to the use or
authorization of the use of the Trademarks, or any of them, shall not be deemed
unfair competition, interference with or infringement of any of Licensee's
rights under.
24. ATTORNEY'S FEES; CHOICE OF FORUM; APPLICABLE LAW. In the event either
party shall commence any action or proceeding against the other by reason of any
breach or claimed breach in the performance of this Agreement, or seeks a
judicial
15
<PAGE>
declaration of rights hereunder, the prevailing party in such action or
proceeding shall be entitled to reasonable attorney's fees fixed by the trial
court. Any legal action or proceeding against Licensor by or on behalf of
Licensee shall be brought in the County of Los Angeles. The law applicable
thereto shall be the law of the State of California.
25. NON-AGENCY OF PARTIES. This Agreement does not make Licensee an agent
of Licensor, or Licensor an agent of Licensee. Licensee is not granted any
authority to create any obligation on behalf of Licensor and Licensor is not
granted any right to create any obligation on behalf of Licensee. No joint
venture or partnership between the parties is intended or shall be inferred.
26. ADDRESSES FOR NOTICE. All notices required under this Agreement shall
be in writing, by certified mail addressed to Licensee at 2975 Westchester
Avenue, Purchase, New York 10577 and to Licensor at 4560 Loma Vista Avenue,
Vernon, California 90058, and shall be deemed given seventy-two (72) hours after
being deposited in the mail.
27. WAIVER BY LICENSOR. In the event Licensor shall waive any of its rights
under this Agreement, or the performance by Licensee of any of its obligations,
such waiver shall not be a continuing waiver or a waiver of any other rights or
obligations.
28. INTEGRATED AGREEMENT. This Agreement constitutes the entire agreement
between the parties as to the Licensed Items. No modifications of this Agreement
shall be of any force unless it be in writing and executed by the parties
hereto.
29. SEPARABILITY OF PROVISIONS. Any provision of this Agreement found
16
<PAGE>
invalid shall not invalidate the remaining provisions. Titles to the paragraphs
shall have no substantive effect.
30. BINDING UPON SUCCESSORS. This Agreement shall be binding upon the
parties hereto, and their successors and assigns; provided, however, this
Paragraph shall not modify the Agreement's prohibition against assignment or
transfer.
31. INTERPRETATION. No provision in the Agreement is to be interpreted for
or against either party because that party or that party's legal representative
drafted such provision.
Dated this 30th day of May, 1997.
MICHAEL CARUSO & CO., INC., CANDIE'S, INC.,
a California Corporation a Delaware Corporation
By /s/ Brian Kail, President By /s/ Neil Cole, CEO
---------------------------- ----------------------------
(Name and Title) (Name and Title)
17
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of March 1, 1998, by and between Candie's
Inc., a Delaware corporation with an address at 2975 Westchester Avenue,
Purchase, New York (the "Company"), and David Golden, an individual residing at
25 Woodmont Road, Melville, NY 11747 (the "Executive").
W I T N E S S E T H:
WHEREAS, the parties desire to enter into this agreement to reflect their
mutual agreements with respect to the employment of the Executive by the
Company.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereby mutually agree as
follows:
Section 1. Employment. The Company hereby employs Executive, and the
Executive hereby accepts such employment, as the Company's Senior Vice
President and Chief Financial Officer, pursuant to the terms and conditions
set forth in this Agreement.
Section 2. Duties. The Executive shall serve as the Company's Senior
Vice President and Chief Financial Officer and shall be responsible for and
perform all tasks, activities and duties normally inherent in such capacity
and which are customary for such position, including without limitation,
(i) assisting in the day-to-day business operations of the Company and such
executive and administrative duties as may be reasonably assigned by the
Chief Executive Officer or the Chief Operating Officer in furtherance of
the Company's business, (ii) the hiring, supervising and terminating of
personnel involved in the finance department of the Company, (iii)
communicating with the investors and the financial community, (iv) managing
the financial activities of the Company, and (v) overseeing the Company's
independent auditors. Throughout the Term (as hereinafter defined),the
Executive shall devote his best efforts and full business time to the
business and affairs of the Company and its affiliates; provided however,
that the Executive may serve on certain advisory boards and boards of
directors of charitable organizations in the sole discretion of the Chief
Executive Officer of the Company. The Executive shall report directly to
the Chief Executive Officer of the Company and receive direction and
supervision from the Chief Operating Officer.
<PAGE>
Section 3. Term of Employment; Vacation.
3.1 Term. The initial term of the Executive's employment shall be for
a period of two years commencing March 1, 1998 ( the "Start Date" and
"Anniversary Date") and, continue, unless earlier terminated by either
party in accordance with the terms herewith (such term of employment is
referred to hereinafter as the "Term"). Upon expiration of the initial
Term, this Agreement shall be automatically renewed for successive renewal
terms of two years at compensation levels and conditions mutually
acceptable to the parties, unless not less than 120 days prior to the
expiration of the initial or any renewal Term either the Company or the
Executive notifies the other of its or his election not to renew this
Agreement. In the event that the Company elects not to renew this
Agreement, the Company shall pay Executive, as severance, for two (2)
months of Base Salary following the end of the Term.
3.2 Vacation. The Executive shall be entitled to four (4) weeks paid
vacation during each year falling within the Term. Vacations shall be taken
at such times as the Executive and the Company determine is consistent with
the proper performance of his duties and responsibilities hereunder. For
purposes hereof, the term "year" shall mean each twelve month period
commencing on the Start Date.
Section 4. Compensation of Executive.
4.1 Salary. The Company shall remunerate the Executive at an annual
base salary (the "base salary") of Two Hundred Twenty Five Thousand Dollars
($225,000) during the first year of the initial Term. The Base Salary shall
be increased to Two Hundred Fifty Thousand Dollars ($250,000) on the first
Anniversary Date. Any further increase shall be in the sole discretion of
the Chief Executive Officer and/or the Compensation Committee of the Board
of Directors (the "Compensation Committee"). All salaries payable to
Executive shall be paid at such regular weekly, biweekly or semi-monthly
time or times as the Company makes payment of its regular payroll in the
regular course of business.
4.2 Bonuses; Options.
(a) Each year during the Term, the Company shall pay to the Executive
a bonus (the "Bonus") of not less than 1/2% (.5%) of the Company's annual
pre-tax income, as
-3-
<PAGE>
reported by the Company in filings made with the Securities and Exchange
Commission or, if the Company is no longer subject to the reporting
requirements of the Federal Securities Laws, as would have been required by
the Securities and Exchange Commission. The Bonus shall be payable within
120 days from the end of the Company's fiscal year. Additional Bonuses, if
any, may be determined by the Compensation Committee based upon established
targets for financial and qualitative performance criteria established by
it. The Bonus shall be pro rated during any period where the Executive has
not worked for the Company for the entire fiscal year to which the Bonus
relates. The Compensation Committee may determine that such Additional
Bonuses, if any, be paid in cash or options, or any combination thereof.
(b) Upon the execution of this Agreement, the Executive shall receive
stock options (the "Options") exercisable for 125,000 shares of the
Company's common stock, per .001 per share, exercisable for a period of
five (5) years at the closing sales price on February 5, 1998 (i.e., $ ).
The Options shall vest and first become exercisable as follows; 25,000
shares on the Start Date, 50,000 shares on the first Anniversary Date and
25,000 shares on each of the second and third Anniversary Dates. The
Options shall be subject to the approval of the Board of Directors of the
Company. The Options will be substantially in the form of Exhibit A
attached hereto and the shares of Common Stock issuable upon the exercise
thereof shall be reserved for issuance pursuant to the Company's 1989 Stock
Option Plan, as amended. To the extent the options are available under the
Company's 1997 Stock Option Plan, the Options shall be issued under such
plan.
(c) The Company shall lease a car for the Executive for his exclusive
use provided, however, that the monthly lease payments shall not exceed
$700 per month. In addition, the Company shall reimburse the Executive for
all, maintenance, repairs, insurance, gas and tolls, and other reasonable
upkeep and related expenses on such car. The Company shall reimburse the
Executive for all such expenses promptly after presentation by the
Executive, from time to time, of an itemized and documented accounting of
such expenditures.
4.3 Expenses. During the Term, the Company shall promptly reimburse
the
-4-
<PAGE>
Executive for all reasonable and necessary travel expenses and other
disbursements for promoting the business of the Company and those incurred
by the Executive in the performance of the Executive's duties hereunder.
4.4 Benefits. The Executive shall be permitted during the Term
(without the imposition of any waiting periods but only to the extent that
the Company can cause such waiting periods to be waived) to participate in
any and all benefit plans, hospitalization, major medical or disability
insurance plans, health or other insurance programs, pension and 401K
plans, bonus plans or similar benefits that may be available or in effect
from time to time during the Term hereof for the benefit of its executive
officers on the same terms and conditions as other senior executives of the
Company (including coverage under any officers and directors liability
insurance policy), subject to such eligibility rules as are applied to
senior executives generally. The various employee benefits specified herein
shall be extended also to the member of the Executives immediate family in
the same manner as the member of the immediate families of other employees
of the Company are extended such benefits. In addition, the Company shall
reimburse the Executive for expenses incurred in connection with a platinum
health sports club membership at the Doral Arrowwood in an amount not to
exceed $2,000 per annum.
Section 5. Disability of the Executive.
5.1 During the Term, the Executive shall receive a disability
insurance policy comparable to that of the other senior executives of the
Company.
5.2 If the Executive is disabled or unable to perform his duties by
reason of disability, illness or other incapacity for a period of more than
one hundred eighty (180) consecutive days, or more than one hundred eighty
(180) days, whether or not consecutive, in any 365 day period, the Company,
at its option, may terminate this Agreement at once upon 30 days prior
notice to the Executive. The terms "disability" and "illness" or other
"incapacity" shall mean the inability of the Executive to engage in the
performance of his duties as provided in Section 2 hereof of this
Agreement. Any question regarding the Executive's "disability" and
"illness" or other "incapacity" shall be finally determined by a physician
jointly selected by the Company and the Executive.
-5-
<PAGE>
Section 6. Death of the Executive. During the Term, Executive shall
receive, at the Company's expense, a life insurance policy in amount equal
to his Base Salary. The amount of such policy shall be adjusted in
accordance with any changes in the Base Salary. Executive shall cooperate
in the Company's efforts to obtain such a policy including submission to a
physical examination.
Section 7. Termination. If the Executive's employment is terminated by
the Company during the Employment Term of this Agreement, except in
connection with the termination of the Executive for Cause, as defined in
Section 1(a), the Executive will have the option to voluntarily resign from
the employ of the Company and publicly announce such resignation, if
Executive so desires. The Company and its current or future management will
support such resignation in any disclosures to third parties or inquiries
from third parties.
7.1 Cause. The Company may terminate the employment of the Executive
and all of the Company's obligations under this Agreement at any time for
Cause (as hereinafter defined) by giving the Executive prior notice of such
termination, with reasonable specificity of the details thereof. As use
herein, the term "Cause" shall be limited to and mean (a) an action by the
Executive involving willful malfeasance having a material adverse effect on
the Company, (b) the failure to act by Executive involving material
nonfeasance having a material adverse effect on the Company, or (c) the
Executive being convicted of a felony, or of any economic, business or
commercial crime; provided, however, that any action or failure to act by
Executive shall not be constitute "Cause" if, in good faith, Executive
reasonably believed such action or failure to act to be in or not opposed
to the best interests of the Company or was pursuant to the instructions,
directions or with the consent of either the Chief Executive Officer or
Chief Operating Officer, or the Executive believes in good faith that the
action or failure to act would be inconsistent with law, professional
ethics, accepted or accredited standards or business behavior. A
termination pursuant to Section 7.1(a), or (b), (other than as a result of
a conviction) shall take effect 15 days after the giving of the notice
contemplated hereby unless the Executive shall, during such 15 day period,
remedy to the reasonable satisfaction of the Chief Executive Officer and/or
the Board of Directors of the Company the breach specified in such notice;
provided,
-6-
<PAGE>
however, that such termination shall take effect immediately upon the
giving of such prior notice if the Chief Executive Officer and/or Board of
Directors of the Company shall, in its reasonable discretion, have
determined that such breach is not remediable (which determination shall be
stated in such notice). A termination pursuant to Section 7.1(c) (as a
result of a conviction of a crime) shall take effect immediately upon the
giving of the notice contemplated hereby. For purposes of this Agreement, a
"Notice of Termination" shall mean delivery of notice specifying
particulars thereof in detail. For purposes of this Agreement, no such
purported termination of Executive's employment shall be effective without
such Notice of Termination.
7.2 Without Cause. The Company may terminate the employment of the
Executive and all of the Company's obligations under this Agreement (except
as hereinafter provided) at any time during the Term without Cause by
giving the Executive written notice of such termination, to be effective 30
days following the giving of such written notice. For convenience of
reference, the date upon which any termination of the employment of the
Executive pursuant to Sections 5, 6 or 7 shall be effective shall be
hereinafter referred to as the "Termination Date".
7.3 Termination For Good Reason. Executive may terminate his
employment hereunder for Good Reason at any time during the Employment
Term, in which event Executive shall resign from all of his positions with
Company. For purposes of this Agreement, "Good Reason" shall mean any of
the following (without the Executive's express prior consent ):
(a) The assignment to Executive by the Company of duties
inconsistent with Executive's position as Senior Vice President and
Chief Financial Officer of the Company, or any reduction or
significant change in either the position, stature, job function,
(including the person to whom you shall report), except in connection
with the termination of Executives employment for Cause;
(b) A reduction by the Company in the initial Base Salary and/or
benefits as defined in Section 4 in effect on the Start Date or the
Company's failure to increase the Executive's salary on the first
anniversary date pursuant to Section 4;
(c) A failure by the Company to discharge its obligations under
any bonus
-7-
<PAGE>
arrangement described in Section 4.2 (a) or (b) hereof; or
(d) an event having a substantial change in the nature of the
business of the Company or its affiliates or the way in which such
business is presently conducted. A termination pursuant to this
Section 7.3 shall take effect 15 days after the giving of the notice
contemplated hereby unless the Company shall, during such 15 day
period, remedy to the reasonable satisfaction of the Executive the
breach specified in such notice; provided, however, that such
termination shall take effect immediately upon the giving of such
notice if the Executive, in his reasonable discretion, shall have
determined that such breach is not remediable (which determination
shall be stated in such notice).
7.4 Change of Control. If a Change of Control (as hereinafter defined)
occurs, the Executive shall have the right to terminate this Agreement upon
180 days prior notice to the Company; provided, however, the Company shall
have the option to shorten such period. At least ten (10) days prior to any
such proposed Change of Control, the Company shall notify the Executive of
its intention to effect such Change of Control, and the Executive shall
thereupon have thirty (30) days from the actual receipt of such notice to
give notice of his intention to terminate this Agreement. As used herein,
the term "Change of Control" shall mean: (i) when any "person" as defined
in Section 3(a)(9) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act, but
excluding the Company or any subsidiary or any affiliate of the Company or
any employee benefit plan sponsored or maintained by the Company or any
subsidiary of the Company (including any trustee of such plan acting as
trustee), becomes the "beneficial owner" (as defined in Rule 13(d)(3) under
the Exchange Act) of securities of the Company representing 20% or more of
the combined voting power of the Company's then outstanding securities; or
(ii) when, during any period of twelve (12) consecutive months, the
individuals who, at the beginning of such period, constitute the Board of
Directors (the "Incumbent Directors") cease for any reason other than death
to constitute at least a majority thereof; provided, however, that a
director who was not a director at the beginning of such 12 month period
shall be deemed to have satisfied such 12 month requirement (and be an
Incumbent Director) if such director was elected by, or on
-8-
<PAGE>
the recommendation of or with the approval of, at least two thirds of the
directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 12 month period) or
through the operation of this proviso; or (iii) the occurrence of a
transaction requiring stockholder approval for the acquisition of the
Company by an entity other than the Company or a subsidiary or an
affiliated company of the Company through purchase of assets, or by merger,
or otherwise; provided, however, in the event a Change of Control occurs
and neither Neil Cole nor Lawrence O'Shaughnessy remains with the Company
or its successor in a substantial decision making capacity for twelve
months (12) subsequent to any event described above; then the Executive may
terminate the Agreement within thirty (30) days after such period and
receive the payments described in Section 8.5(a)(iv).
Section 8. Effect of Termination of Employment.
8.1 Disability or Death. Upon the termination of the Executive's
employment for disability or death, neither the Executive nor the
Executive's beneficiaries or estate shall have any further right to
compensation under this Agreement or any claims against the Company arising
out of this Agreement except as provided in Sections 5 or 6 and the right
to receive (i) the unpaid portion of the Base Salary provided for in
Section 4.1, earned through the Termination Date and the share of the Bonus
and other benefits for such year pro-rated for that portion of the year up
to the Termination Date (the "Unpaid Salary Amount") (ii) reimbursement for
any expenses for which the Executive shall not have theretofore been
reimbursed as provided in Section 4.3 (the "Expense Reimbursement Amount"),
and (iii) payment for any vacation days accrued but not taken (the "Accrued
Vacation Amount") and (iv) all unvested Options shall vest as of the
Termination Date.
8.2 Cause. Upon the termination of the Executive's employment for
Cause, the Executive shall be entitled to the right to receive (i) the
Unpaid Salary Amount, (ii) the Expense Reimbursement Amount, and (iii) the
Accrued Vacation Amount.
8.3 Without Cause or For Good Reason. Upon the termination of the
Executive's employment for other than Cause, Disability or Death, neither
the Executive nor the Executive's
-9-
<PAGE>
beneficiaries or estate shall have any further rights to compensation under
this Agreement or any claims against the Company arising out of this
Agreement, except the Executive shall have the right to receive (i) the
Unpaid Salary Amount, (ii) the Expense Reimbursement Amount, (iii) the
Accrued Vacation Amount, and (iv) severance compensation (based upon the
then existing compensation level) equal to the Base Salary for the
(including medical benefits) unexpired portion of the Term but in no event
less than 6 months, payable in equal monthly installments during the period
commencing thirty (30) days following the Termination Date and continuing
until paid. In addition, (i) thirty 30 days following the Termination Date,
the Company shall pay to the Executive the Bonus for the current fiscal
year pro-rated through the Termination Date (the "Pro Rated Bonus Amount"),
in accordance with Section 4.2 and (ii) all unvested Options shall vest as
of the Termination Date.
8.4 Mitigation. Any severance amount payable under the Agreement shall
be reduced by the amount of any compensation earned from comparable
employment during the term of the Agreement. The Executive shall use his
best efforts to secure comparable employment.
8.5 Change of Control.
(a) In the event that a Change of Control occurs and the Executive
elects to terminate this Agreement, the Executive shall be entitled to
receive in cash, within ten (10) days of termination of this Agreement, (i)
the Expense Reimbursement Amount, (ii) the Unpaid Salary Amount, (iii) the
Accrued Vacation Amount, (iv) an amount equal to the twelve months of
Executive's Base Salary, and (v) all unvested Options shall vest as of the
Termination Date.
(b) In the event that any payment (or portion thereof) to Executive
under this Section 8.5 is determined to constitute an "excess parachute
payment," under Sections 280G and 4999 of the Internal Revenue Code of
1986, as amended, the following calculations shall be made:
(i) the after-tax value to Executive of the payments under this
Section 8.5 without any reduction; and
(ii) the after-tax value to Executive of the payments under this
-10-
<PAGE>
Section 8.5 as reduced to the maximum amount (the "Maximum Amount")
which may be paid to Executive without any portion of the payments
constituting an "excess parachute payment".
If, after applying the agreed upon calculations set forth above, it is
determined that the after-tax value to the Executive determined under
clause (ii) above is greater that the after-tax value determined under
clause (i) above, the payments to Executive under this Section 8 shall be
reduced to the Maximum Amount.
Section 9. Disclosure of Confidential Information. Executive
recognizes that he has had and will continue to have access to secret and
confidential information regarding the Company, including but not limited
to its customer list, products, know-how, and business plans. Executive
acknowledges that such information is of great value to the Company, is the
sole property of the Company, and has been and will be acquired by him in
confidence. In consideration of the obligations undertaken by the Company
herein, Executive will not, at any time, during or after his employment
hereunder, reveal, divulge or make known to any person, any information
acquired by Executive during the course of his employment, which is treated
as confidential by the Company and not otherwise in the public domain,
other than in the ordinary course of business during his employment
hereunder. The Executive shall not be deemed to have breached this Section
9 if the Executive shall be specifically compelled by lawful order of any
judicial, legislative, or administrative authority or body to disclose any
confidential material or else face civil or criminal penalty or sanction.
The provisions of this Section 9 shall survive Executive's employment
hereunder.
Section 10. Covenant Not To Compete.
10.1 Executive recognizes that the services to be performed by him
hereunder are special, unique and extraordinary. The parties confirm that
it is reasonably necessary for the protection of Company that Executive
shall not, directly or indirectly, at any time during the term of the
Agreement and the "Restricted Period" (as defined in Section 10.4 below).
(a) employ or engage, or cause or authorize, directly or
indirectly, to be employed or engaged, for or on behalf of himself or
any third party, any employee or agent of Company
-11-
<PAGE>
or any affiliate thereof.
(b) for or on behalf of himself or any third party, at any time
during the Term and during the Restricted Period solicit any customers
of the Company or any affiliate thereof in a manner which directly or
indirectly competes with the business the Company is engaged in at the
Termination Date.
10.2 If any of the restrictions contained in this Section 10 shall be
deemed to be unenforceable by reason of the extent, duration or
geographical scope thereof, or otherwise, then the court making such
determination shall have the right to reduce such extent, duration,
geographical scope, or other provisions hereof, and in its reduced form
this Section shall then be enforceable in the manner contemplated hereby.
10.3 The term "Restricted Period," as used in this Section 10, shall
mean the period of Executive's actual employment hereunder plus in the
event the Executive's employment is terminated with Cause for a period of
twelve (12) months thereafter.
10.4 The provisions of this Section 10 shall survive the end of the
Term as provided in Section 10.3 hereof.
Section 11. Miscellaneous.
11.1 Injunctive Relief. Executive acknowledges that the services to be
rendered under the provisions of this Agreement are of a special. unique
and extraordinary character and that it would be difficult or impossible to
replace such services. Accordingly, any breach or threatened breach by
Executive of this Agreement shall entitle the Company, in addition to all
other legal remedies available to it, to apply to any court of competent
jurisdiction to seek to enjoin such breach or threatened breach. The
parties understand and intend that each restriction agreed to by Executive
herein above shall be construed as separable and divisible from every other
restriction, that the unenforceability of any restriction shall not limit
the enforceability, in whole or in part, of any other restriction, and that
one or more or all of such restrictions may be enforced in whole or in part
as the circumstances warrant. In the event that any restriction in this
Agreement
-12-
<PAGE>
is more restrictive than permitted by law in the jurisdiction in which
Company seeks enforcement thereof, such restriction shall be limited to the
extent permitted by law.
11.2 Assignments. Except as provided in Section 7.4, neither the
Executive nor the Company may assign, hypothecate or delegate any of their
rights or duties under this Agreement without the express written consent
of the other party.
11.3 Entire Agreement. This Agreement constitutes and embodies the
full and complete understanding and agreement of the parties with respect
to Executive's employment by Company, supersedes all prior understandings
and agreements, whether oral or written, between Executive and Company, and
shall not be amended, modified or changed except by an instrument in
writing executed by the party to be charged. The invalidity or partial
invalidity of one or more provisions of this Agreement shall not invalidate
any other provision of this Agreement. No waiver by either party of any
provision or condition to be performed shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same time or any prior or
subsequent time.
11.4 Binding Effect. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their
respective successors, heirs, beneficiaries and permitted assigns.
11.5 Headings. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning
or interpretation of this Agreement.
11.6 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall
be deemed to have been duly given when personally delivered, sent by
registered or certified mail, return receipt requested, postage prepaid, or
by private overnight mail service (e.g. Federal Express) to the party at
the address set forth above or to such other address as either party may
hereafter give notice of in accordance with the provisions hereof. Notices
shall be deemed given on the sooner of the date actually received or the
third business day after sending.
11.7 Governing Law. This Agreement shall be governed by and construed
-13-
<PAGE>
in accordance with the laws of the State of New York without giving effect
to such State's conflicts of laws provisions and each of the parties hereto
irrevocably consents to the jurisdiction and venue of the Federal and State
courts located in the State of New York, County of New York.
11.8 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one of the same instrument.
11.9 Separability; Legal Fees. If any of the restrictions contained in
this Agreement shall be deemed to be unenforceable by reason of the extent,
duration or geographical scope thereof, or otherwise, then the court making
such determination shall have the right to reduce such extent, duration,
geographical scope, or other provisions hereof, and in its reduced form
this Agreement shall then be enforceable in the manner contemplated hereby.
If any provision of the Agreement shall be declared to be invalid or
unenforceable, in whole or in part, such invalidity or unenforceability
shall not effect the remaining provisions hereof which shall remain in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
an officer thereunto duly authorized and the Executive has hereunto set his hand
of the date set forth above.
CANDIE'S INC.
By: /s/ Larry O'Shaughnessy
---------------------------------
Name: Larry O'Shaughnessy
Title: Exec. VP, COO
/s/ David Golden
---------------------------------
David Golden
-14-
EXHIBIT 21
SUBSIDIARIES OF CANDIE'S, INC.
Bright Star Footwear, Inc. wholly-owned
a New Jersey corporation
Intercontinental Trading Group., Inc. majority-owned
a New York corporation
Ponca, Ltd. wholly-owned
a Hong Kong corporation
Yulong Co., Ltd. wholly-owned
a British Virgin Islands corporation
Candie's Galleria, Inc. wholly-owned
a New York corporation
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-62697 and Form S-3 No. 333-7659) of Candie's, Inc. and in the
related Prospectuses and the Registration Statement (Form S-8 No. 333-27655)
pertaining to the 1989 Stock Option Plan; Consultant's Stock Options of our
report dated April 16, 1998, with respect to the consolidated financial
statements and schedule of Candie's, Inc. and subsidiaries included in its
Annual Report (Form 10-K) for the year ended January 31, 1998.
/s/ ERNST & YOUNG LLP
White Plains, New York
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 367,068
<SECURITIES> 0
<RECEIVABLES> 2,831,503
<ALLOWANCES> 27,000
<INVENTORY> 16,179,175
<CURRENT-ASSETS> 23,407,660
<PP&E> 1,809,971
<DEPRECIATION> 958,716
<TOTAL-ASSETS> 30,880,940
<CURRENT-LIABILITIES> 6,139,206
<BONDS> 0
0
0
<COMMON> 12,425
<OTHER-SE> 24,668,093
<TOTAL-LIABILITY-AND-EQUITY> 30,880,940
<SALES> 92,976,416
<TOTAL-REVENUES> 92,976,416
<CGS> 68,799,226
<TOTAL-COSTS> 68,799,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 182,636
<INTEREST-EXPENSE> 1,129,552
<INCOME-PRETAX> 5,732,985
<INCOME-TAX> 1,197,059
<INCOME-CONTINUING> 4,535,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,535,926
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 389,517
<SECURITIES> 0
<RECEIVABLES> 1,362,814
<ALLOWANCES> 34,000
<INVENTORY> 5,251,091
<CURRENT-ASSETS> 9,039,203
<PP&E> 1,104,558
<DEPRECIATION> 727,413
<TOTAL-ASSETS> 14,709,345
<CURRENT-LIABILITIES> 5,993,434
<BONDS> 0
0
0
<COMMON> 9,634
<OTHER-SE> 8,598,277
<TOTAL-LIABILITY-AND-EQUITY> 8,607,911
<SALES> 45,005,416
<TOTAL-REVENUES> 45,005,416
<CGS> 35,149,271
<TOTAL-COSTS> 35,149,271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 68,355
<INTEREST-EXPENSE> 755,657
<INCOME-PRETAX> 135,315
<INCOME-TAX> (1,100,000)
<INCOME-CONTINUING> 1,145,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,145,315
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 204,996
<SECURITIES> 0
<RECEIVABLES> 1,292,212
<ALLOWANCES> 63,400
<INVENTORY> 3,999,946
<CURRENT-ASSETS> 5,968,663
<PP&E> 828,625
<DEPRECIATION> 707,557
<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> 5,586,354
<SALES> 37,914,127
<TOTAL-REVENUES> 37,914,127
<CGS> 27,427,508
<TOTAL-COSTS> 27,427,508
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 78,498
<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> 0.12
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> APR-30-1997
<CASH> 196,685
<SECURITIES> 0
<RECEIVABLES> 1,411,466
<ALLOWANCES> 0
<INVENTORY> 5,873,437
<CURRENT-ASSETS> 12,534,062
<PP&E> 1,107,967
<DEPRECIATION> 764,031
<TOTAL-ASSETS> 18,082,774
<CURRENT-LIABILITIES> 7,098,946
<BONDS> 0
0
0
<COMMON> 10,171
<OTHER-SE> 10,868,657
<TOTAL-LIABILITY-AND-EQUITY> 18,082,774
<SALES> 16,861,264
<TOTAL-REVENUES> 16,861,264
<CGS> 11,774,127
<TOTAL-COSTS> 11,774,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274,523
<INCOME-PRETAX> 1,328,338
<INCOME-TAX> 505,000
<INCOME-CONTINUING> 823,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 823,338
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 392,641
<SECURITIES> 0
<RECEIVABLES> 1,749,144
<ALLOWANCES> 0
<INVENTORY> 11,779,143
<CURRENT-ASSETS> 19,009,557
<PP&E> 344,874
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,452,554
<CURRENT-LIABILITIES> 5,358,621
<BONDS> 0
0
0
<COMMON> 11,680
<OTHER-SE> 18,972,253
<TOTAL-LIABILITY-AND-EQUITY> 24,452,554
<SALES> 46,587,253
<TOTAL-REVENUES> 46,587,253
<CGS> 34,862,079
<TOTAL-COSTS> 34,862,079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 528,035
<INCOME-PRETAX> 3,418,277
<INCOME-TAX> 400,000
<INCOME-CONTINUING> 3,018,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,018,277
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 800,886
<SECURITIES> 0
<RECEIVABLES> 2,362,747
<ALLOWANCES> 0
<INVENTORY> 10,850,133
<CURRENT-ASSETS> 19,034,535
<PP&E> 504,282
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,544,556
<CURRENT-LIABILITIES> 2,580,705
<BONDS> 0
0
0
<COMMON> 12,363
<OTHER-SE> 21,851,488
<TOTAL-LIABILITY-AND-EQUITY> 24,544,556
<SALES> 70,367,254
<TOTAL-REVENUES> 70,367,254
<CGS> 52,534,710
<TOTAL-COSTS> 52,534,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 833,277
<INCOME-PRETAX> 4,731,781
<INCOME-TAX> 905,000
<INCOME-CONTINUING> 3,826,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,826,781
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.28
</TABLE>
