U.S. Securities and Exchange Commission
Washington, D.C. 20549
------------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended October 31, 1999
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ________ to ________
Commission file number 0-10593
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, NY 10577
(Address of principal executive offices) (Zip Code)
(914) 694-8600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.001 Par Value -- 17,897,166 shares as of December 14, 1999
<PAGE>
INDEX
FORM 10-Q
CANDIE'S, INC. and SUBSIDIARIES
<TABLE>
<CAPTION>
Page No.
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets - October 31, 1999 and January 31, 1999...................... 3
Condensed Consolidated Statements of Operations - Three and Nine Months
Ended October 31, 1999 and 1998.................................................................... 4
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended
October 31, 1999................................................................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31,
1999 and 1998...................................................................................... 6
Notes to Condensed Consolidated Financial Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 14
Part II. Other Information
Item 1. Legal Proceedings............................................................................... 14
Item 6. Exhibits and Reports on Form 8-K................................................................ 14
Signatures ........................................................................................... 15
Index to Exhibits....................................................................................... 16
</TABLE>
2
<PAGE>
Part I. Financial Information
Candie's, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
-------- --------
(Unaudited)
(000's omitted)
<S> <C> <C>
Assets
Current Assets
Cash ...................................................... $ 468 $ 598
Accounts receivable, net .................................. 3,689 2,774
Due from affiliate ........................................ 696 796
Due from factors and trade receivables, net ............... 10,186 15,138
Inventories, net .......................................... 13,786 19,031
Refundable and prepaid income taxes ....................... 600 2,623
Deferred income taxes ..................................... 2,589 2,598
Prepaid advertising and other ............................. 1,016 1,182
Other current assets ...................................... 397 476
-------- --------
Total Current Assets ............................................ 33,427 45,216
Property and equipment, at cost:
Furniture, fixtures and equipment ......................... 5,666 3,860
Less: Accumulated depreciation and amortization ........... (1,851) (1,258)
-------- --------
3,815 2,602
Other assets:
Intangibles, net .......................................... 24,723 26,179
Deferred income taxes ..................................... 979 --
Investment and equity in joint venture - net .............. 97 51
Other ..................................................... 405 552
-------- --------
26,204 26,782
-------- --------
Total Assets .................................................... $ 63,446 $ 74,600
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving notes payable ................................... $ 11,602 $ 16,874
Accounts payable and accrued expenses ..................... 4,681 4,416
Accounts payable - Redwood Shoe ........................... 1,876 943
Current portion of long-term liabilities
and capital lease obligations .......................... 912 97
-------- --------
Total Current Liabilities ....................................... 19,071 22,330
Long-term liabilities and deferred taxes ........................ 2,300 421
Stockholders' Equity
Preferred stock, $.01 par value
-- authorized 5,000 shares; none issued and outstanding
Common stock, $.001 par value
-- authorized 30,000 shares; issued 19,209 shares at
October 31, 1999 and 18,525 shares issued
at January 31, 1999 ................................. 19 18
Additional paid-in capital ................................ 59,059 58,819
Retained earnings (deficit) ............................... (10,570) (556)
Treasury stock - at cost - 1,313 shares .................. (6,433) (6,432)
-------- --------
Total Stockholders' Equity ...................................... 42,075 51,849
-------- --------
Total Liabilities and Stockholders' Equity ...................... $ 63,446 $ 74,600
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net revenues ........................................ $ 22,175 $ 28,919 $ 76,483 $ 90,627
Cost of goods sold .................................. 18,877 23,330 61,516 69,042
-------- -------- -------- --------
Gross profit ........................................ 3,298 5,589 14,967 21,585
Licensing income .................................... 1,151 100 2,009 100
-------- -------- -------- --------
4,449 5,689 16,976 21,685
Operating expenses:
Special charges ..................................... 1,144 -- 2,310 --
Selling, general and administrative expenses ........ 8,281 6,208 24,359 18,728
-------- -------- -------- --------
9,425 6,208 26,669 18,728
Operating (loss) income ............................. (4,976) (519) (9,693) 2,957
Other expenses:
Interest expense - net .............................. 307 289 958 786
Equity loss in joint venture ........................ 116 -- 453 --
-------- -------- -------- --------
423 289 1,411 786
-------- -------- -------- --------
(Loss) income before income taxes ................... (5,399) (808) (11,104) 2,171
(Benefit) provision for income taxes ................ 346 (306) (1,090) 862
-------- -------- -------- --------
Net (loss) income ................................... $ (5,745) $ (502) $(10,014) $ 1,309
======== ======== ======== ========
(Loss) earnings per common share:
Basic ............................. $ (.32) $ (0.03) $ (.56) $ 0.09
======== ======== ======== ========
Diluted ........................... $ (.32) $ (0.03) $ (.56) $ 0.08
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic ............................. 17,896 15,841 17,742 14,577
======== ======== ======== ========
Diluted ........................... 17,896 15,841 17,742 16,723
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Nine Months Ended October 31, 1999
(000's omitted)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1999 ................................. 18,525 $ 18 $ 58,819 $ (556) $ (6,432) $ 51,849
-------- -------- -------- -------- -------- --------
Exercise of stock options ................................ 99 -- 98 -- -- 98
Issuance of common stock to retirement plan .............. 37 -- 129 -- -- 129
Additional contingent shares issued for the
Acquisition of Michael Caruso & Co., Inc. .......... 548 1 (1) -- -- 0
Tax benefit from exercise of stock options ............... -- -- 14 -- -- 14
Other .................................................... -- -- -- -- (1) (1)
Net (loss) ............................................... -- -- -- (10,014) -- (10,014)
-------- -------- -------- -------- -------- --------
Balances at October 31, 1999 ................................. 19,209 $ 19 $ 59,059 $(10,570) $ (6,433) $ 42,075
======== ======== ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Candie's, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
October 31, October 31,
1999 1998
---------------------------
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities ................................. $ 3,965 $(18,496)
---------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (1,819) (521)
Investment in joint venture .................................................... -- (500)
---------------------------
Net cash used in investing activities ............................................... (1,819) (1,021)
---------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ........................... 98 8,382
Capital lease and unsecured loan ............................................... 3,471 --
Capital lease reduction ........................................................ (574) --
Bankers acceptance - net ....................................................... -- 4,959
Revolving notes payable ..................................................... (5,271) 6,287
Purchase of common stock for treasury .......................................... -- (371)
---------------------------
Net cash (used in) provided by financing activities ................................. (2,276) 19,257
---------------------------
DECREASE IN CASH .................................................................... (130) (260)
Cash at beginning of period ......................................................... 598 367
---------------------------
Cash at end of period ............................................................... $ 468 $ 107
===========================
Supplemental disclosures of non-cash investing and financing activities:
Merger and acquisition of businesses ........................................... -- $ 15,250
===========================
Common stock issued for merger & acquisition - net of treasury stock acquired .. -- $ 5,255
===========================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(dollars are in thousands)
October 31, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended October 31,
1999 are not necessarily indicative of the results that may be expected for a
full fiscal year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended January 31, 1999.
NOTE B -- FINANCING AGREEMENTS
In May 1999, the Company entered into a $3.5 million master lease agreement with
a financial organization. The agreement requires the Company to collateralize
property and equipment of $2.4 million, of which $1.4 million had been
collateralized as of October 31, 1999, with the remaining agreement balance
considered to be an unsecured loan. The agreement's term is for a period of four
years.
At October 31, 1999 and January 31, 1999, the Company had $118 and $1.2 million,
respectively, of outstanding letters of credit. The Company's letters of credit
availability are formula based which takes into account borrowings under the
Facility and Line of Credit, as described below.
On May 27, 1998, the Company entered into a three year $35 million revolving
credit facility (the "Facility"). On August 4, 1998, BankBoston, N.A. entered
into a co-lending arrangement and became a participant in the Facility with Bank
of America Commercial Corporation.
Prior to January 31, 1999, borrowings under the Facility, which totaled $16,874
at January 31, 1999, bore interest at 1.50% below the prime rate (7.75% at
January 31, 1999). Effective January 31, 1999 the Facility was amended and
borrowings under the Facility bore interest at .25% below the prime rate. The
Company also paid a commitment fee of 1/4% on the unused portion of the
Facility. Borrowings under the Facility were formula based and available up to
the maximum amount of the Facility. During the period ended October 31, 1999,
the Company was not in compliance of certain financial covenants contained in
the Facility. Prior to the termination of the Facility, the lenders issued
periodic forbearance agreements to the Company.
On October 28, 1999, the Company entered into a new two year $35 million
revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc.
and terminated the former Facility. On November 23, 1999, First Union National
Bank entered into a co-lending arrangement and became a participant in the Line
of Credit.
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit will
bear interest at .50% above the prime rate. Borrowings in excess of certain
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of .25% of the maximum Line of
Credit.
7
<PAGE>
NOTE B -- FINANCING AGREEMENTS (Continued)
The Line of Credit also contains two financial covenants including minimum
tangible net worth and working capital. The Company has granted the lenders a
security interest in substantially all of its assets.
NOTE C -- EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing net
(loss) income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants.
The following is a reconciliation of the shares used in calculating basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- -------------------------
1999 1998 1999 1998
------------------------- -------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Basic share.............................. 17,896 15,841 17,742 14,577
Effect of assumed conversion
of employee stock options............ -- -- -- 2,146
------------------------- -------------------------
Diluted share............................ 17,896 15,841 17,742 16,723
========================= =========================
</TABLE>
NOTE D -- COMMITMENTS AND CONTINGENCIES
On May 17, 1999, a stockholder class action complaint was filed in the United
States District Court for the Southern District of New York, against the Company
and certain of its current and former officers and directors, which together
with certain other complaints subsequently filed in the same court alleging
similar violations, were consolidated in one lawsuit, Willow Creek Capital
Partners L.P., v. Candie's, Inc. A consolidated complaint was served on the
Company on or about August 24, 1999. The consolidated complaint includes claims
under section 11, 12 and 15 of the Securities Act of 1933 and sections 10(b) and
20(a)of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The consolidated complaint is brought on behalf of all persons who
acquired securities of the Company between May 28, 1997 and May 12, 1999, and
alleges that the plaintiffs were damaged by reason of the Company's having
issued materially false and misleading financial statements for fiscal 1998 and
the first three quarters of fiscal 1999, which caused the Company's securities
to trade at artificially inflated prices. An unfavorable resolution of this
action could have a material adverse effect on the business, results of
operations, financial condition or cash flows of the Company. There can be no
assurance that the Company will successfully defend these lawsuits. The Company
is continuing to negotiate a possible settlement with plantiffs.
On August 4, 1999, the staff of the Securities and Exchange Commission advised
the Company that it had commenced a formal investigation into the actions of the
Company and others in connection with, among other things, certain accounting
issues and transactions.
The Company is also a party to certain litigation incurred in the normal course
of business. While any litigation has an element of uncertainty, the Company
believes that the final outcome of any of these routine matters will not have a
material effect on the Company's financial position or future liquidity.
8
<PAGE>
NOTE E -- SPECIAL CHARGES
As referred to in Notes B and D, the Company has incurred substantial additional
costs in evaluating various new potential borrowing arrangements, the
restatement of its fiscal 1998 and the first three quarters of fiscal 1999
financial statements, the investigation conducted by the Special Committee of
the Board and the costs of defending the class action lawsuit and the SEC
investigation. During the period ended October 31, 1999, the Company has
incurred approximately $2.3 million in special charges for professional fees and
payments to financial institutions for the above matters. The Company
anticipates additional charges for future quarters.
NOTE F -- INCOME TAXES
The Company has a net deferred tax asset of $6.0 million, before a valuation
allowance of $2.4 million, at October 31, 1999, consisting of future tax
benefits of net operating loss carryforwards and various other temporary
differences. The Company has forecasted profitable operations for at least the
next few years and, therefore, has recorded a net deferred tax asset of
approximately $3.6 million. The benefits of these net operating loss
carryforwards and other temporary differences that are estimated to take more
than a few years to realize cannot be reasonably determined at this time.
Accordingly, a valuation allowance totaling $2.4 million was recorded in the
October 31, 1999 period to provide for this uncertainty.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors, all of which are
difficult or impossible to predict and many of which are beyond the control of
the Company, which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements.
Such factors include, but are not limited to, uncertainty regarding
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 relating to 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 capital if required, the risk of litigation, the risks of uncertainty of
trademark protection, year 2000 compliance, the uncertainty of marketing and
licensing the trademarks acquired during fiscal 1999 and other risks detailed
below and in the Company's Securities and Exchange Commission filings.
The words "believe", "expect", "anticipate", and "seek" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
Results of Operations
Revenues. Net revenues decreased by $ 6.7 million or 23.3% to $ 22.2
million in the three months ended October 31, 1999, from $ 28.9 million in the
comparable restated period of the prior year. Net revenues decreased by $ 14.1
million or 15.6% to $ 76.5 million in the nine months ended October 31, 1999,
from $ 90.6 million in the comparable period of the prior year. The decreases
were due to lower wholesale sales of women's footwear and private label
business.
Gross Profit. Gross profit margins decreased to 14.8% in the three months
ended October 31, 1999 from 19.3% in the comparable period of the prior year.
Gross profit margins decreased to 19.6% in the nine months ended October 31,
1999 from 23.8% in the comparable period of the prior year. The decreases were
primarily attributable to lower wholesale sales of women's footwear and
increased markdowns taken to reduce excess inventory.
Operating Expenses. Selling, general and administrative expenses increased
by $ 2.1 million to $ 8.3 million in the three months ended October 31, 1999
from $ 6.2 million in the comparable period of the prior year. As a percentage
of net revenues, selling, general and administrative expenses increased 15.8% to
37.3% for the three months ended October 31, 1999 from 21.5% for the comparable
period of the prior year. Selling, general and administrative expenses increased
by $ 5.6 million to $ 24.3 million in the nine months ended October 31, 1999
from $ 18.7 million in the comparable period of the prior year. As a percentage
of net revenues, selling, general and administrative expenses increased 11.1% to
31.8% for the nine months ended October 31, 1999 from 20.7% for the comparable
period of the prior year. These increases reflect costs which are directly
associated with implementation of the Company's strategic plan to strengthen its
management team and infrastructure, the expansion outside of its core footwear
products to include, handbags, international distribution channels and the
growth of licensing as well as increased advertising expenditures and intangible
amortization relating to the Company's fiscal 1999 acquisitions. The Company has
incurred $1.1 million and $2.3 million in special charges, for the three and
nine months ended October 31, 1999, relating to professional fees and payments
to financial institutions in connection with the restatement of its financial
statements, evaluating various potential borrowing arrangements, the
investigation by the Special Committee, the SEC investigation and the class
action lawsuit.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Results of Operations - Continued
Interest Expense. Interest expense for the three months ended October 31,
1999 was $ 307,000, compared to $ 289,000 for the comparable period in the
previous year. Interest expense for the nine months ended October 31, 1999 was
$958,000, compared to $ 786,000 for the comparable period in the previous year.
The increase was caused by higher interest rates charged for the periods
compared to the prior year.
Income Taxes. The Company has a net deferred tax asset of $6.0 million, before a
valuation allowance of $2.4 million, at October 31, 1999, consisting of future
tax benefits of net operating loss carryforwards and various other temporary
differences. The Company has forecasted profitable operations for at least the
next few years and, therefore, has recorded a net deferred tax asset of
approximately $3.6 million. The benefits of these net operating loss
carryforwards and other temporary differences that are estimated to take more
than a few years to realize cannot be reasonably determined at this time.
Accordingly, a valuation allowance of $2.4 million was recorded in the October
31, 1999 period to provide for this uncertainty. The valuation allowance will
continue to be evaluated in future periods.
Net (loss) Income. As a result of the foregoing, the Company sustained a
net loss of $ 5.7 million in the three months ended October 31, 1999, compared
to a net loss of $.5 million in the corresponding period a year ago. The net
loss increased to $ 10.0 million for the nine months ended October 31, 1999
compared to a net income of $1.3 million for the same period in fiscal 1999.
(Loss) Earnings Per Share. The loss per share in the three months ended
October 31, 1999 was $(.32) on a basic and diluted basis, which reflects
additional 2 million weighted shares outstanding, compared to a net loss of
$(.03) per basic and diluted share in the comparable quarter of the prior year.
The loss per share for the nine months ended October 31, 1999 was $(.56) on a
basic and diluted basis, which also reflects additional 3.2 million weighted
shares outstanding, compared to net income of $.08 per diluted share in the same
period in fiscal 1999. The increase in the weighted average shares outstanding
for the three and nine month periods ended October 31, 1999 is primarily the
result of the shares issued in connection with the Company's Fiscal 1999
acquisitions.
Liquidity and Capital Resources
Working capital decreased $ 8.5 million to approximately $ 14.4 million at
October 31, 1999 from approximately $22.9 million at January 31, 1999. This
decrease was due primarily to the loss incurred during the period ended October
31, 1999. At October 31, 1999, the current ratio was 1.8 to 1.
The Company has relied in the past primarily upon revenues generated from
operations, borrowings from its factor and sales of securities to finance its
liquidity and capital needs. Net cash provided from operating activities totaled
$ 4.0 million for the nine months ended October 31, 1999, compared to cash used
of $ 18.5 million for the nine months ended October 31, 1998. The change in
operating activities primarily reflects last year's change in the Company's
agreements with its factor. This resulted in the grossing up of advances from
the factor and amounts borrowed under the factoring and financing agreements
causing a higher use of operating activities for the period ending October 31,
1998. In addition, current year receivables have declined reflecting the lower
sales.
Capital expenditures were $ 1.8 million for the nine months ended October
31, 1999, compared to $521,000 for the nine months ended October 31, 1998. This
increase primarily reflects amounts expended on the development of the JBA ERP
Software Solution and the remedial software implementation of Millennium
Solutions, the expansion of new Retail stores and the construction of a new
showroom. The Company expects minimal capital expenditures for the remainder of
the fiscal year.
11
<PAGE>
Liquidity and Capital Resources - Continued
During the nine month period ended October 31, 1998, substantially all of
the Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of approximately $7.16 million from the
exercise of such Warrants. The proceeds were used to repay short-term
borrowings. In addition, the Company received proceeds of approximately $1.12
million in connection with the issuance of common stock relating to the exercise
of outstanding stock options and certain underwriters' warrants.
In October 1999, the Company made a non-cash $500,000 capital contribution
to Unzipped Apparel LLC ("Unzipped") by foregoing affiliate receivables to
satisfy its obligation. Unzipped, the Company's joint venture with Sweet
Sportswear LLC, markets and distributes jeanswear and apparel under the Candie's
and BONGO label.
On May 27, 1998, the Company entered into a three year $35 million
revolving credit facility (the "Facility"). On August 4, 1998, BankBoston, N.A.
entered into a co-lending arrangement and became a participant in the Facility
with Bank of America Commercial Corporation.
Prior to January 31, 1999, borrowings under the Facility, which totaled
$16,874 at January 31, 1999, bore interest at 1.50% below the prime rate (7.75%
at January 31, 1999). Effective January 31, 1999 the Facility was amended and
borrowings under the Facility bore interest at .25% below the prime rate. The
Company also paid a commitment fee of 1/4% on the unused portion of the
Facility. Borrowings under the Facility were formula based and available up to
the maximum amount of the Facility. During the period ended October 31, 1999,
the Company was not in compliance of certain financial covenants contained in
the Facility. Prior to the termination of the Facility, the lenders issued
periodic forbearance agreements to the Company.
On October 28, 1999, the Company entered into a new two-year $35 million
revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc.
and terminated the former Facility. On November 23, 1999, First Union National
Bank entered into a co-lending arrangement and became a participant in the Line
of Credit. On October 31, 1999, borrowings under the Line of Credit were $11.6
million.
Borrowings under the Line of Credit are formula based and available up to
the maximum amount of the Line of Credit. Borrowings under the Line of Credit
will bear interest at .50% above the prime rate. Borrowings in excess of certain
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of .25% of the maximum Line of
Credit.
The Line of Credit also contains two financial covenants including minimum
tangible net worth and working capital. The Company has granted the lenders a
security interest in substantially all of its assets.
In May 1999, the Company entered into a $3.5 million master lease agreement
with a financial organization. The agreement requires the Company to
collateralize property and equipment of $2.4 million, of which $ 1.4 million had
been collateralized as of October 1999, with the remaining agreement balance
considered to be an unsecured loan. The agreement's term is for a period of four
years.
Cash requirements fluctuate from time to time due to seasonal requirements,
including the timing of receipt of merchandise and various other factors. The
Company believes that it will be able to satisfy its ongoing cash requirements
for the foreseeable future, including requirements for any expansion, primarily
with cash flow from operations, supplemented by borrowings under the new
financing agreement.
Year 2000
In preparation for the Year 2000, the Company has completed an inventory
and assessment of its information systems, including its computer software and
hardware. The Company determined over a year ago that its existing systems would
be adversely affected by the Year 2000 and that its operational needs would be
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Year 2000 - Continued
best served by upgrading its entire system. Accordingly, the Company is
currently in the process of implementing throughout all operating areas of the
Company, JBA's ERP Software Solution (the "JBA Solution"), which has been
certified "Year 2000 Compliant" by the ITAA (Information Technology Association
of America).
Since the implementation of the JBA Solution will not be complete prior to
December 31, 1999, the Company has contracted with Millennium Solutions 400 Ltd.
to license software and to implement a remedial system, MS4, that will permit
the Company to bring its current system into compliance. The MS4 system uses an
encapsulation process that will make the Company's existing system Year 2000
compliant. The algorithm that will be used by this system is expected to insure
that the Company's existing system is Year 2000 compliant and will work until
the year 2027.
Additionally, the Company has inventoried and analyzed substantially all of
its embedded information systems throughout its operations, including,
telephones, voice mail, alarms and personal computers. The results of this
analysis did not indicate that embedded systems would not present a material
Year 2000 risk to the Company. The Company will continue to test selected
embedded systems and remediate and certify systems that exhibit Year 2000
issues. The Company intends to complete the testing and remediation of these
systems by the fourth quarter of Fiscal 2000.
The Company's Year 2000 strategy addresses its relationships with critical
third parties, including suppliers, customers and service providers. The
Company's evaluation of these business partners includes written inquiry of such
third parties' Year 2000 readiness and evaluation of responses. The Company has
or intends to follow up with those third parties that indicate material problems
with continued operation as the Company's products are sourced through third
parties abroad into the Year 2000. The Company will continue to work jointly
with customers, strategic vendors and business partners to identify and resolve
any Year 2000 issues that may impact the Company through the end of December
1999. An assessment of the capability of electronic data interface trading
partners to operate with respect to Year 2000 has been completed.
The Company expects its total costs to address the Year 2000 issue to be
approximately $1 million in connection with the implementation of the JBA
Solution and $100,000 for the purchase of the MS4 remedial system. Approximately
$862,000 of these costs have been incurred through October 31, 1999, and the
Company expects to incur the balance of such costs to complete the compliance
plan in fiscal 2000. The balance of such costs is expected to be funded through
operating cash flows. The Company's cost estimates do not include costs
associated with addressing and resolving issues as a result of the failure of
third parties to become Year 2000 compliant.
The Company does not expect the Year 2000 issue to pose significant
operational or financial problems for the Company. The Company bases this
expectation on the progress it has made in upgrading and remediating its
internal information systems and the assurances it has received so far from its
suppliers. Nevertheless, the Year 2000 issue could have a material impact on the
Company's operations and financial condition in the future in the event that the
Company or its key suppliers, such as off-shore manufacturers of shoes for the
Company or the shipping companies that carry those shoes to the Company, are
unable to resolve Year 2000 issues on a timely manner or if the Company becomes
the subject of litigation or other proceedings regarding any Year 2000-related
events. The amount of potential loss cannot be reasonably estimated at this
time.
In the event of a worst case scenario in which the MS4 System misfunctions,
it could delay or prevent business operations, including entering orders,
shipping or invoicing products. No contingency plans are being developed for the
availability of key public services and utilities in the United States or abroad
or to deal with a failure by any of the Company's key suppliers. A failure to
develop a contingency plan with respect to these parties could have a material
adverse effect on the Company.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II. Other Information
Item 1. Legal Proceedings
On May 17, 1999, a stockholder class action complaint was filed in the
United States District Court for the Southern District of New York
against the Company and certain of its current and former officers and
directors, which together with certain other complaints subsequently
filed in the same court alleging similar violations, were consolidated
in one lawsuit, Willow Creek Capital Partners L.P., v. Candie's, Inc.
A consolidated complaint was served on the Company on or about August
24, 1999. The consolidated complaint includes claims under section 11,
12 and 15 of the Securities Act of 1933 and sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The consolidated complaint is brought on behalf of all
persons who acquired securities of the Company between May 28, 1997
and May 12, 1999, and alleges that the plaintiffs were damaged by
reason of the Company's having issued materially false and misleading
financial statements for fiscal 1998 and the first three quarters of
fiscal 1999, which caused the Company's securities to trade at
artificially inflated prices. An unfavorable resolution of this action
could have a material adverse effect on the business, results of
operations, financial condition or cash flows of the Company. There
can be no assurance that the Company will successfully defend these
lawsuits. The Company is continuing to negotiate a possible settlement
with plantiffs.
On August 4, 1999, the staff of the Securities and Exchange Commission
advised the Company that it had commenced a formal investigation into
the actions of the Company and others in connection with, among other
things, certain accounting issues and transactions.
The Company is also a party to certain litigation incurred in the
normal course of business. While any litigation has an element of
uncertainty, the Company believes that the final outcome of any of
these routine matters will not have a material effect on the Company's
financial position or future liquidity.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Rosenthal & Rosenthal, Inc. Factoring Agreement -
Candie's, Inc.
Exhibit 10.2 - Rosenthal & Rosenthal, Inc. Inventory Security
Agreement - Candie's, Inc.
Exhibit 10.3 - Rosenthal & Rosenthal, Inc. Factoring Agreement -
Bright Star Footwear, Inc.
Exhibit 10.4 - Rosenthal & Rosenthal, Inc. Inventory Security
Agreement - Bright Star Footwear, Inc.
Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
None.
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANDIE'S, INC.
----------------------------
(Registrant)
Date December 15, 1999 /s/ Neil Cole
--------------------------- ----------------------------
Neil Cole
Chief Executive Officer
(on Behalf of the Registrant)
Date December 15, 1999 /s/ Frank Marcinowski
--------------------------- ----------------------------
Frank Marcinowski
Vice President and
Chief Financial Officer
15
<PAGE>
Index to Exhibits
Exhibit
Numbers Description
- ------- -----------
10.1 Rosenthal & Rosenthal, Inc. Factoring Agreements - Candie's, Inc.
10.2 Rosenthal & Rosenthal, Inc. Inventory Security Agreement -
Candie's, Inc.
10.3 Rosenthal & Rosenthal, Inc. Factoring Agreement -
Bright Star Footwear, Inc.
10.4 Rosenthal & Rosenthal, Inc. Inventory Security Agreement -
Bright Star Footwear, Inc.
27 Financial Data Schedule
16
FACTORING AGREEMENT
ROSENTHAL & ROSENTHAL, INC.
1370 BROADWAY
NEW YORK, N.Y. 10018
New York, New York October 19, 1999
CANDIE'S, INC.
2975 Westchester Avenue
Purchase, NY 10577
THE FOLLOWING IS THE AGREEMENT UNDER WHICH WE ARE TO ACT AS YOUR SOLE FACTOR:
1. You hereby sell and assign to us, making us absolute owner thereof, all
of your accounts, contract rights, and all other obligations to you, now
existing or hereafter arising, for the payment of money arising out of the sale
of goods or rendition of services ("receivables"), together with all proceeds
thereof, all security and guarantees therefor, and all of your rights to any
goods and property represented thereby. We shall have all the rights of an
unpaid seller of any goods, the sale of which gives rise to each receivable,
including the right of stoppage in transit, reclamation and replevin. Upon each
sale of goods or rendition of services, you shall execute and deliver to us such
further and confirmatory assignments of your receivables as we require, in form
and manner satisfactory to us, together with copies of invoices and all shipping
or delivery receipts and such other proof of sale and delivery or performance as
we from time to time may require. You will make appropriate notations upon your
books and ledgers indicating the sale and assignment of your receivables to us.
All invoices or other statements to customers evidencing receivables shall be
mailed at your expense whether mailed by you or at our option by us and shall
clearly state in a manner satisfactory to us that each such receivable has been
assigned to us and is payable to us only.
2. Before accepting or filling any order from any customer, the amount and
terms of sale are to be submitted to us for our credit approval, which approval
must be in writing and shall be limited to the specific terms and amounts
described therein. We reserve the right to withdraw such credit approval at any
time before delivery or performance and, in any event, a credit approval shall
be deemed to be withdrawn if full delivery or performance is not made within 30
days after the delivery or shipment date specified in the terms of sale
submitted for such approval, or, if no such delivery or shipment date is
specified, within 30 days of the date of such credit approval, or as may be
otherwise stated in such credit approval. On sales approved and accepted by us,
we shall assume the credit risk, being responsible only for the financial
inability of your customers to pay at maturity, such assumption of credit risk
going into effect upon delivery or performance, and acceptance of the goods or
services by such customer, without dispute. We shall not be responsible for any
nonpayment of a receivable because of the assertion of any claim or dispute by a
customer or the exercise of any counterclaim or offset (whether or not such
claim, dispute, counterclaim or offset relates to the specific receivable) or
where nonpayment is a consequence of enemy attack, civil commotion, the acts or
restraint of public authorities, acts of God or force majeure, or if any
warranty made by you to us in respect of such receivable has been breached, or
if you fail to provide us, upon our request, with copies of invoices and
shipping or delivery receipts or such other proof of sale and delivery or
performance as we may from time to time require. We shall have no liability of
any kind for refusing to give or for withdrawing credit approval pursuant to the
terms of this Agreement, or for exercising or refusing to exercise any rights or
remedies we have under this Agreement or otherwise. Any sale of goods or
rendition of services made by you which is not approved in writing by us as to
credit shall be known as a C.R. (Client's risk) receivable (each a "CR
Receivable" and collectively the "CR Receivables"). All CR Receivables are
assigned to and purchased by us are with full recourse to you and at your credit
risk, but are otherwise subject to the covenants, terms and conditions provided
herein in respect of approved receivables on which we have assumed the credit
risk. We shall have the right to charge back to your account the amount of CR
Receivables after their maturity and you agree to pay us upon demand the amount
thereof, together with all expenses including collection charges and other
collection and attorneys' fees incurred by us
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up to the date of such payment in attempting to collect or enforce any such
payment and in attempting to collect or enforce any such receivable. In
addition, if we, at your request, in our discretion, file a proof of claim in
any insolvency proceeding with respect to a CR Receivable and/or forward such CR
Receivable to an attorney or agency for collection, we shall charge your account
with an amount equal to ten percent of the CR Receivable at the time such CR
Receivable or claim is so filed or forwarded and, in addition, any other charges
incurred by us thereafter shall be charged to your account.
3. Any goods rejected or returned by any customer shall be our property
held by you in trust for us separate and apart from any other goods, and upon
demand shall forthwith be delivered to us or disposed of by you at our direction
and without charge to us. You shall report to us in writing all disputes and
claims made by your customers, and the return of or offer to return any goods,
and you will promptly settle all such claims and disputes at your expense. As
absolute owner of each receivable, we may in our sole discretion enforce, upon
no less than three days notice to you effect any compromise, settle and adjust
any receivable, in our name or yours, without affecting or limiting your
obligation to us under this Agreement, and whether or not any such receivable
shall have been charged back. We reserve the right at any time to charge back to
your account the full amount of the receivable involved in any claim, dispute or
return asserted by your customer, and you agree to pay us upon demand the full
amount thereof. The charge back to your account of the amount of any receivable
shall not be deemed a reassignment thereof to you and title thereto, to the
proceeds thereof, to all security and guarantees therefor and to your interest
in the goods represented thereby, shall remain in us. You shall indemnify us
for, and hold us harmless against, any loss, liability, claim or expense of any
kind arising from any claims of, or disputes with, your customers as to terms,
price, quality, or otherwise, with respect to receivables, including, without
limitation, any claim for a return of any payments thereunder and any and all
expenses and attorney's (whether in-house or outside) fees incurred by us in
collecting or attempting to collect any receivables charged back to you.
4. If any checks, drafts, notes, acceptances, cash collections or payments
in any form shall be received by you on receivables, you will immediately
transmit and deliver them to us in the identical form received. You agree that
we and any such person or entity as we may from time to time designate, shall
have the right to sign and/or endorse your name on all remittances and all
papers, bills of lading, receipts, instruments and documents relating to the
receivables and the transactions between us. We shall have the right to deposit
any checks or other remittances received on receivables regardless of notations
or conditions placed thereon by your customers or deductions reflected thereby
and to charge the amount of any such deductions to your account.
5. As to each receivable assigned to us, you hereby warrant that: (i) it is
a bona fide existing obligation created by the sale and actual delivery of goods
or the rendition of services to customers in the ordinary course of business,
which you then own free of liens and encumbrances, and which is then
unconditionally owing to you without defense, offset or counterclaim; and (ii)
the customers have received and will accept the goods or services, and the
invoices therefor, without dispute or claim of any kind. You hereby warrant that
you are solvent, that you have full right and authority to sell and assign to us
and to grant to us a security interest in your receivables, that you have not
granted a security interest therein or in any of your inventory to any other
party and that you will not hereafter grant any security interest therein or in
any of your inventory, other than to us, at any time during the term of this
Agreement and until the security interests granted hereunder have been
terminated. You further represent and warrant that your name, place of business,
chief executive office and location of your books and records relating to your
receivables is as you are addressed above and you agree to notify us promptly of
any change in such or in your corporate or business structure. You also warrant
to us that (and at our request, you shall provide assurances acceptable to us
that) your computer based systems are Year 2000 Compliant. "Year 2000 Compliant"
shall mean that neither performance nor functionality of any computer hardware
or software is affected by dates prior to, during or after the Year 2000. In
particular: (a) no value for current date will cause any interruption in
operation; (b) date based functionality must behave consistently for dates prior
to, during and after the Year 2000; (c) in all interfacing and data storage, the
century in any date must be specified either explicitly or by unambiguous
algorithms or inferencing rules; and (d) Year 2000 must be recognized as a leap
year. You warrant that (i) you have identified to us all tradenames, tradestyles
or other assumed or fictitious business names (sometimes referred to as "DBA" or
"doing business as" names) that you use; (ii) you will advise us in writing if
you commence using any other such names in the future; and (iii) upon our
request therefor, you will provide to us evidence of your registration of all
such names in all jurisdictions in which such registration is required by law.
You warrant that at all times you shall have (i) Tangible Net Worth in an amount
not less than $15,000,000 and (ii) Working Capital of not less than $12,000,000.
For the purpose hereof the following terms shall have the following
definitions:
"Current Assets" at a particular date shall mean your cash accounts and
inventory providing however, that such
Page 2, Dail. Cash., 1/99
<PAGE>
amounts shall not include any amounts for any indebtedness owing by any of your
affiliate.
"Current Liabilities" at a particular date shall mean all amounts which
would, in conformity with GAAP, be included under current liabilities or
duplications, the amounts of (a) all indebtedness payable on demand, or at the
option of the person or entity to whom such indebtedness is owed, not more than
twelve (12) months after such date, (b) any payments in respect of any
indebtedness (whether installment, serial maturity, sinking fund payment or
otherwise) required to be made not more than twelve (12) months after such date,
(c) all reserves in respect of liabilities or indebtedness payable on demand or,
at the option of the person or entity to whom such indebtedness is owed, not
more than twelve (12) months after such date, the validity which is not
contested to such date, (d) all accruals for federal or other taxes measured by
income payable within twelve (12) months of such date and (e) all outstanding
indebtedness to us.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect on the date hereof.
"Tangible Net Worth" shall mean, at a particular date (a) the aggregate
amount of all of your assets as may be properly classified as such in accordance
with GAAP consistently applied excluding such other assets as are properly
classified as intangible assets under GAAP, less (b) the aggregate amount of all
of your liabilities (excluding subordinated liabilities to us) determined in
accordance with GAAP.
"Working Capital" shall mean the excess, if any, of Current Assets less
Current Liabilities.
6. (a) For our services hereunder, we shall receive a factoring commission
equal to 0.5% of the gross invoice amount of each receivable, which commission
shall be due and payable by you as at the date a receivable arises, and shall
then be chargeable to your account with us except for those receivables due from
a customer (or any affiliates or subsidiaries thereof) listed on the Special
Accounts Schedule submitted herewith and/or from time to time hereafter, for
which the commission on such receivables shall be increased by an amount equal
to the surcharge set forth on the said Special Accounts Schedule to the extent
of the amount credit approved, which commission shall be due and payable and
chargeable to your account with us as at the date a receivable arises. On sales
assigned as C.R. Receivables our commission shall be 0.25%. The minimum
factoring commission on each invoice in respect of any receivable shall be
$2.00.
(b) Our charge specified in paragraph 6(a) hereof is based upon maximum
selling terms of sixty (60) days, and no more extended terms or additional
dating shall be granted by you to any customer without our prior written
approval (which approval is hereby granted for maximum selling terms of ninety
(90) days for sales to (i) SHOEBOX and (ii) S & J SHOES). If such approval is
given by us, then for each additional thirty days or part thereof of such
extended terms or additional dating, our charge with respect to the receivables
covered thereby shall be increased by an amount equal to the greater of (i) one
quarter of one percent (.25%) of the invoice amount of such receivable; or (ii)
twenty-five percent (25%) of the charge specified in paragraph 6(a) hereof.
(c) The minimum aggregate factoring commissions payable under this
Agreement shall be $480,000 the Initial Term and $240,000 for each contract year
thereafter, which to the extent of any deficiency (after giving effect to
commissions payable and other charges under the foregoing subparagraphs), shall
be chargeable to your account with us on an annual basis.
(d) Should we open letters of credit or issue guarantees for your account,
we shall receive a commission equal to 0.25% of the face amount of such letters
of credit or guarantees plus an additional 0.125% for each 30 days or portion
thereof that the letter of credit (or any resulting acceptance) or guarantee
remains undrawn and/or outstanding and/or unpaid plus preparation fees and bank
charges. We shall establish a reserve equal to 40% of the face amount of any
undrawn and/or outstanding and/or unpaid letters of credit or guarantees.
(e) You shall pay to us an annual facility fee equal to 1/4 of 1% of the
Maximum Credit Facility (which shall be fully earned on the date hereof and each
anniversary of the date hereof (each an "Anniversary Date")) which amount shall
be payable for each year as follows: (a) fifty (50%) percent on, respectively,
the date hereof and on the first day of each Anniversary Date and (b) the
balance, for each respective year, in six equal successive monthly installments
commencing on the first day of the seventh month following, respectively: (i)
the date hereof and (ii) each Anniversary Date.
7. (a) The purchase price for each receivable shall be the invoice amount
of the receivable, less returns (whenever
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<PAGE>
made), less all selling discounts (at our option, calculated on shortest terms)
and credits or deductions of any kind allowed or granted to or taken by the
customer at any time, except in the ordinary course of business, and less our
commission provided for herein. No discount, credit or allowance with respect to
the receivables shall be granted by you to any customer, and no return of goods
shall be accepted by you without our prior written consent. A discount, credit
or allowance may be claimed only by the customer. All amounts collected against
the receivables shall be credited to your account adding three (3) banking days
for collection and clearance of remittances.
(b) If you require funds from time to time, we will advance to you, at our
discretion, up to (i) eighty-two and one half percent (82.5%) of the net amount
of receivables purchased by us and (ii) up to sixty (60%) of the amount of
Eligible Inventory (determined at the lower of cost or market). "Eligible
Inventory" shall mean inventory of finished goods on premises (or in warehouses
within the continental United States), in which we have a first and only
perfected security interest, and at all times shall be acceptable in all
respects to us in our sole discretion. Standards of eligibility of inventory may
be fixed and revised from time to time solely by us in our exclusive and sole
discretion. In no event, however, shall all advances made by us to you
hereunder, plus all letter of credit or guaranty accommodations made by us to
you plus all advances made by us to Bright Star Footwear, Inc. ("Bright")
pursuant to the Factoring Agreement between us and Bright dated of even date
herewith plus all letter of credit or guaranty accommodations made by us to
Bright exceed $35,000,000 at any one time outstanding (the "Maximum Credit
Facility"). You will be charged with interest on all sums paid, advanced or
charged to you at a rate equal to eight and three fourths percent (8.75%) per
annum upon the average daily debt cash balance in your account. That portion of
advances made by us to you which is in excess of the above stated percentage of
your receivables shall bear interest at a per annum rate which is 2.5% in excess
of such interest rate. The rates of interest and discount provided for in this
paragraph 7 shall be increased or decreased by one eighth of one percent (1/8 of
1%) per annum for each increase or decrease respectively of one eighth of one
percent (1/8 of 1%) per annum that is hereafter made in the prime rate of The
Chase Manhattan Bank (the "Bank") as announced by the Bank from time to time
("Prime Rate"), such change to become effective when and as the Prime Rate shall
change. The Prime Rate may not be the lowest or best rate charged by the Bank.
Notwithstanding the foregoing, in no event shall the rate of interest agreed to
by or charged to you hereunder exceed the maximum rate of interest permitted to
be so agreed or charged under the law of the jurisdiction whose laws are
applicable to such rate of interest. We shall have the privilege of remitting to
you at any time any amount standing to your credit on our books. The present
Prime Rate is 8.25% per annum.
(c) About fifteen (15) days after the end of each month, we will render to
you a statement with respect to the receivables purchased by us during the
previous month, together with advances and charges made to your account under
this Agreement. In addition to any other amounts chargeable to your account,
your account shall be charged with our expenses consisting of postage on
invoices, bank wire and similar charges and in addition all expenses and costs
from time to time hereafter incurred by us during the course of periodic
examinations of your books and records, and operations, plus a per diem charge
at our then standard rate per person, per day, for our examiners in the field
and office. Our current standard rate is $500.00 per person, per day. We may, at
our discretion, charge your account with a fee for all trial balances and sales
summaries we prepare at your request. All statements, reports or accountings
rendered or issued by us to you, including such trial balances and sales
summaries, shall be deemed accepted and be finally conclusive and binding upon
you unless you notify us to the contrary by registered or certified mail within
sixty (60) days after the date such statement, report or accounting is sent to
you.
(d) If any payment or recovery is received from or on behalf of a customer
which is an account debtor on both approved and CR Receivables, any such payment
or recovery may be first applied to the approved receivables notwithstanding (i)
any notation to the contrary on or with respect thereto, (ii) the payment terms
thereof, (iii) the due date thereof, or (iv) whether such payments were made in
the ordinary course of business or otherwise.
8. As collateral security for any and all of your (and your subsidiaries
and affiliates) indebtedness and obligations to us and to each of our
subsidiaries and affiliates, whether matured or unmatured, absolute or
contingent, now existing or that may hereafter arise (including under indemnity
or reimbursement agreements or by subrogation), and howsoever acquired by us,
whether arising directly between us or acquired by us by assignment, whether
relating to this Agreement or independent hereof, including all obligations
incurred by you to any other concern factored or financed by us (collectively,
the "Obligations"), you grant to us a security interest in all of your accounts,
contract rights and general intangibles (whether or not specifically assigned to
us), now existing and hereafter arising, and in the proceeds thereof, any
security and guarantees therefor, in the goods and property represented thereby,
in all of your books and records relating to the foregoing, in all sums of money
at any time to your credit with us, all your present and future claims against
us under or in connection with this Agreement and any of your property at any
time in our possession. All Obligations shall be due and payable on demand, and
you hereby irrevocably authorize and direct us to charge at any time to your
account any Obligations, and to pay any Obligations owing to any of our
subsidiaries or affiliates by so charging your
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<PAGE>
account. You agree to execute financing statements and any and all other
instruments and documents that may now or hereafter be provided for by the
Uniform Commercial Code or other law applicable thereto reflecting the security
interests granted to us hereunder ("Financing Statements"). You authorize us to
file the Financing Statements without your signature, signed only by us as a
secured party, to reflect the security interests granted to us hereunder. You
shall be liable for, and we may charge your account with, all costs and expenses
of any public record filings including Financing Statements (including any
filing or recording taxes), the making of lien searches, and any attorney's
(whether in-house or outside) fees which may be incurred by us in administering
this Agreement and protecting, preserving and enforcing our security interests
and rights hereunder.
9. You shall maintain your books, records and accounts in accordance with
sound accounting practice. You agree to furnish us with balance sheets,
statements of profit and loss, interim financial statements and such other
information regarding your business affairs and financial condition as we may
from time to time reasonably request, including audited statements within 90
days after the end of each of your fiscal years, in such detail and scope as we
may require, prepared and certified by independent Certified Public Accountants
acceptable to us. All such statements and information shall fairly present your
financial condition as of the dates, and the results of your operations for the
periods, for which the same are furnished.
10. (a) This Agreement shall commence on the date hereof, and shall
continue until October 31, 2001 (the period from the date hereof is herein
referred to as the Initial Term), and automatically from year to year
thereafter, unless you give us notice in writing, by registered or certified
mail, not less than sixty days prior to the expiration of the original term of
this Agreement (or any renewal term thereof), of your intention to terminate
this Agreement as at the end of such term, with the understanding that we may
terminate this Agreement at any time upon not less than ninety days notice to
you by registered or certified mail. If you or any guarantor, endorser or other
person liable on the Obligations (each a "Guarantor") becomes insolvent or
unable to meet your or its debts as they mature, or fail, suspend or go out of
business (or, in the case of a Guarantor which is an individual, die) or apply
for, consent to, or suffer the appointment of a receiver, trustee or custodian
(or similar person) for you or any Guarantor or any of your or any Guarantor's
property, make an assignment for the benefit of creditors, or commence or become
the subject of a case or proceeding under any federal bankruptcy law, or if any
Guarantor terminates or sends notice of termination of its guaranty of the
Obligations, or if you shall be in default under this Agreement or under any
other agreement with us or any Obligations to us, or if Neil Cole ceases to
function as your Chief Executive Officer, then notwithstanding the foregoing, we
shall have the right to terminate this Agreement at any time without notice. Our
rights and your Obligations arising out of transactions having their inception
prior to the termination date shall not be affected by any termination or notice
thereof. Termination of this Agreement shall not become effective in respect of
the liens and security interests granted to us hereunder until you have fully
paid and discharged any and all of your Obligations to us, and you shall
continue to furnish confirmatory assignments and schedules of receivables
assigned to us and all proceeds in respect thereof. After the giving of any
notice of termination hereunder and until the full liquidation of your account
and the payment in full of all Obligations, you shall not be entitled to receive
any equities or payments from us, to the extent we are obligated to make
payments to you under this Agreement. From and after the effective date of
termination, all amounts charged or chargeable to your account hereunder, and
all your Obligations to us, shall become immediately due and payable without
further notice or demand.
(b) Should you desire to terminate this Agreement other than as
specifically provided herein, as a condition to such termination, you shall pay
to us, in addition to any other fees payable pursuant to this Agreement,
additional liquidated damages as follows:
i) during the period commencing on the first day of this Agreement
through and including the last day of the third month of this Agreement, an
amount equal to three (3%) percent of the average outstanding daily balance
of advances in your account with us, during the period from the date of
this Agreement through and including the date of such termination;
ii) during the period commencing on the first day of the third month
through and including the last day of the twelfth month of this Agreement,
an amount equal to three (3%) percent of the average outstanding daily
balance of advances in your account with us, during the three month period
immediately preceding the date of such termination;
iii) during the period commencing on the first day of the thirteenth
month through and including, the last day of the eighteenth month of this
Agreement, an amount equal to two (2%) percent of the average outstanding
daily balance of advances in your account with us, during the three month
period immediately preceding the date of such termination;
Page 5, Dail. Cash., 1/99
<PAGE>
iv)during the period commencing on the first day of the nineteenth
month through and including the last day of the twenty-forth month of this
Agreement, an amount equal to one and one half (1 1/2%) percent of the
average outstanding daily balance of advances in your account with us,
during the three month period immediately preceding the date of such
termination.
11. This Agreement is deemed made in the State of New York and shall be
governed, interpreted and construed in accordance with the laws of the State of
New York. No modification, waiver or discharge of this Agreement shall be
binding upon us unless in writing and signed by us. If at any time we should
fail to exercise any right or remedy hereunder, it shall not constitute a waiver
on our part of exercising the same or any other right or remedy at any
subsequent time. If any taxes are imposed upon, or if we shall be required to
withhold or pay any tax or penalty because of or in connection with any
transactions between us under this Agreement, you agree to indemnify us and hold
us harmless in respect thereof. This Agreement embodies our entire agreement as
to the subject matter and supersedes all prior agreements (whether oral or
written) as to the subject matter. Trial by jury is hereby waived by each of us
in any action, proceeding or counterclaim brought by either of us against the
other on any matters whatsoever arising out of or in any way connected with this
Agreement or the relationship created hereby, and you hereby consent to the
jurisdiction of the Supreme Court of the State of New York (or the Civil Court
of the City of New York if such matters be within its jurisdiction), and of any
Federal Court in such State, for a determination of any dispute as to any such
matters. In connection therewith, you hereby waive personal service of any
summons, complaint or other process and agree that service thereof may be made
by registered or certified mail directed to you at your address set forth above,
or such other address as shall have previously been communicated to us by
registered or certified mail. Within thirty days after such mailing, you shall
appear or answer to such summons, complaint or other process. In the event we
shall retain counsel for the purpose of enforcing the performance, payment or
collection of any of the Obligations, then and in that event you agree to pay
the reasonable fees of our counsel, plus any and all reasonable expenses and
disbursements incurred in connection therewith and/or incidental thereto. Our
books and records shall be admissible as prima facie evidence of the status of
the account between us. This Agreement shall be binding upon and inure to the
benefit of each of us and our respective heirs, executors, administrators,
successors and assigns.
ROSENTHAL & ROSENTHAL, INC.
By: /s/ JERRY SANDAK
-----------------------------------------------
Name and Title: Jerry Sandak, Sr. Exec. Vice Pres.
The foregoing is acknowledged,
accepted and agreed to:
CANDIE'S, INC.
By: /s/ NEIL COLE, CEO
-----------------------------
Page 6, Dail. Cash., 1/99
INVENTORY SECURITY AGREEMENT
New York, New York October 19, 1999
Rosenthal & Rosenthal, Inc.
1370 Broadway
New York, N. Y. 10018
Gentlemen:
We do hereby agree that the Factoring Agreement between us dated October 19,
1999, be and the same hereby is amended and supplemented by adding thereto the
following clauses:
We hereby pledge, assign, consign, transfer and set over to you, and you
shall at all times have a continuing general lien upon, and we hereby grant you
a continuing security interest in, all of our Inventory and the proceeds
thereof. "Inventory" shall include but not be limited to raw materials, work in
process, finished merchandise and all wrapping, packing and shipping materials,
wheresoever located, now owned or hereafter acquired, presently existing or
hereafter arising, and all additions and accessions thereto, the resulting
product or mass and any documents representing all or any part thereof. Upon
your request, we will at any time and from time to time, at our expense, deliver
such Inventory to you or such person as you may designate, cause the same to be
stored in your name at such place as you may designate, deliver to you documents
of title representing the same or otherwise evidence your security interest in
such manner as you may require.
The aforementioned pledge, assignment, consignment, transfer, lien and
security interest shall secure any and all of the Obligations.
We agree, at our expense, to keep all Inventory insured to the full value
thereof against such risks and by policies of insurance issued by such companies
as you may designate or approve, and the policies evidencing such insurance
shall be duly endorsed in your favor with a long form lender's loss payable
rider or such other document as you may designate and said policies shall be
delivered to you. Should we fail for any reason to furnish you with such
insurance, you shall have the right to effect the same and charge any costs in
connection therewith to us. You shall have no risk, liability or responsibility
in connection with payment or nonpayment of any loss, your sole obligation being
to credit our account with the net proceeds of any such insurance payments
received on account of any loss. Any and all assessments, taxes or other charges
that may be assessed upon or payable with respect to the Inventory or any part
thereof shall forthwith be paid by us, and we agree that you, in your
discretion, may effect such payment and charge the amount thereof to us. We
further agree that except for the pledge, assignment, consignment, transfer,
lien and security interest granted to you hereby and except for existing liens
to be released, we shall not permit said Inventory to otherwise become liened or
encumbered nor shall we grant any security interest therein to any other party.
We shall not, without your written consent first obtained, remove or dispose of
any of such Inventory except to bona fide purchasers thereof in the ordinary
course of our business on orders first approved in writing by you. All such
sales shall be reported to you promptly and the accounts or other proceeds
thereof shall be subject to the security interests in your favor. Following a
default in any of the Obligations as and when the same become due and during the
continuance thereof you shall have the right at all times to the immediate
possession of all Inventory and its products and proceeds. We shall make such
Inventory and all our records pertaining thereto available to you for inspection
at any reasonable business hours requested by you. You shall have the right, in
your discretion, to pay any liens or claims upon said Inventory, including, but
not limited to, warehouse charges, dyeing, finishing and processing charges,
landlords' claims, etc. and the amount of any such payment shall be charged to
our account and secured hereby. You shall not be liable for the safekeeping of
any of the Inventory or for any loss, damage or diminution in the value thereof
or for any act or default of any warehouseman, carrier or other person dealing
in and with said Inventory, whether as your agent or otherwise, or for the
collection of any proceeds thereof but the same shall at all times be at our
sole risk.
Prior to its sale to a bona fide purchaser in the ordinary course of
business, Inventory shall at all times remain at our address specified below or
at c/o Performance Team, 2550 Dominguez Dr., Dominguez Hills, CA 90220; c/o Loma
Cargo, 29 Mack Drive, Edison, NJ 08817, c/o Gilbert West, 11821 E. Florence
Ave., Santa Fe Springs, CA 90670; c/o Perfect Fit, 397 East 54th Street, Elmwood
Park, NJ 07407; c/o Bonded Warehouse, 19400 S. Western Ave., Los Angeles, CA
90502; 2450 Palisades Center Dr., West Nyack, NY 10994; 1770 West Main St.,
Riverhead, NY 11901; 630 Old Country Road, Roosevelt Field Mall , garden City,
NY 11530; 537 Monmouth Rd., Jackson, NJ 08527; Jersey garden Metro Mall, 651
Kapkowski Rd., Elizabeth, NJ 07201; Galleria mall, 100 Main St., White Plains,
NY 10601 and shall not be removed therefrom without your prior written consent.
Upon our default in the payment, performance or discharge of any of the
Obligations as and when the same become
Page 8, Dail. Cash., 1/99
<PAGE>
due, or in the event of our insolvency, or if a receiver or trustee is appointed
for our assets or affairs, or if we discontinue doing business, or if a petition
in bankruptcy or for arrangement or reorganization is filed by or against us, or
if we make an assignment for the benefit of our creditors, or suspend the
operation of our business or commence the liquidation thereof, or make any offer
of settlement, extension or composition with our creditors, or upon the
appointment of a committee of our creditors or a liquidating agent for us, or
the issuance of any attachment or execution against us, or the filing of a
judgment or other lien against us, or upon our any default hereunder or under
any other agreement between us, you shall have the right, upon reasonable notice
to us, to sell all or any part of our Inventory, at public or private sale, or
make other disposition thereof, at which sale or disposition you may be a
purchaser. We agree that written notice sent to us by postpaid mail, at least
ten days before the date of any intended public sale or the date after which any
private sale or other intended disposition of the Inventory is to be made, shall
be deemed to be reasonable notice thereof. We do hereby waive all notice of any
such sale or other intended disposition if said Inventory is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market. Upon the occurrence of any of the events referred to in the
first sentence of this paragraph, you may require us to assemble all or any part
of the Inventory and make it available to you at a place to be designated by
you, which is reasonably convenient to both parties. In addition, you may
peaceably, by your own means or with judicial assistance, enter our or any other
premises and take possession of the Inventory and remove or dispose of it on our
premises and we agree that we will not resist or interfere with any such action.
We hereby expressly waive demand, notice of sale (except as herein provided),
advertisement of sale and redemption before sale. The net proceeds of any such
public or private sale or other disposition as far as needed shall be applied
toward the payment and discharge of any and all of the Obligations to you,
together with all interest thereon and all reasonable costs, charges, expenses
and disbursements in connection therewith, including the reasonable fees of your
attorneys, rendering any surplus remaining to us, we, of course, to continue
liable should there be any deficiency.
This agreement is deemed made in the State of New York and is to be
governed, interpreted and construed in accordance with the laws of the State of
New York. No modification, waiver or discharge of this agreement shall be
binding upon you unless in writing, signed and subscribed by you. If you should
at any time fail to exercise any right or privilege hereunder, the same shall
not constitute a waiver on your part of exercising any right or privilege at any
subsequent time. If any taxes are imposed or if you shall be required to
withhold or pay any tax because of any transactions between us, we agree to
indemnify you and hold you harmless in respect thereto. It is agreed between us
that trial by jury is hereby waived in any action, proceeding or counterclaim
brought by either of us against the other on any matters whatsoever arising out
of or in any way connected with this agreement or our relationship created
hereby and we hereby consent to the jurisdiction of the Supreme Court of the
State of New York for a determination of any dispute as to any such matters and
authorize the service of process on us by registered mail sent to us at our
address hereinbelow set forth.
This agreement shall constitute a security agreement pursuant to the
Uniform Commercial Code and, in addition to any and all of your other rights
hereunder, you shall have all of the rights of a secured party pursuant to the
provisions of the Uniform Commercial Code. We agree to execute a financing
statement and any and all other instruments and documents that may now or
hereafter be provided for by the Uniform Commercial Code or other law applicable
thereto, reflecting the security interests granted to you hereunder. We do
hereby authorize you to file a financing statement without our signature, signed
only by you as secured party, to reflect the security interests granted to you
hereunder.
Very Truly Yours,
CANDIE'S, INC.
By: /s/ NEIL COLE, CEO
-----------------------------
2975 Westchester Avenue, Purchase, NY 10577
Page 8, Dail. Cash., 1/99
FACTORING AGREEMENT
ROSENTHAL & ROSENTHAL, INC.
1370 BROADWAY
NEW YORK, N.Y. 10018
New York, New York October 19, 1999
BRIGHT STAR FOOTWEAR, INC.
2975 Westchester Avenue
Purchase, NY 10577
THE FOLLOWING IS THE AGREEMENT UNDER WHICH WE ARE TO ACT AS YOUR SOLE FACTOR:
1. You hereby sell and assign to us, making us absolute owner thereof, all
of your accounts, contract rights, and all other obligations to you, now
existing or hereafter arising, for the payment of money arising out of the sale
of goods or rendition of services ("receivables"), together with all proceeds
thereof, all security and guarantees therefor, and all of your rights to any
goods and property represented thereby. We shall have all the rights of an
unpaid seller of any goods, the sale of which gives rise to each receivable,
including the right of stoppage in transit, reclamation and replevin. Upon each
sale of goods or rendition of services, you shall execute and deliver to us such
further and confirmatory assignments of your receivables as we require, in form
and manner satisfactory to us, together with copies of invoices and all shipping
or delivery receipts and such other proof of sale and delivery or performance as
we from time to time may require. You will make appropriate notations upon your
books and ledgers indicating the sale and assignment of your receivables to us.
All invoices or other statements to customers evidencing receivables shall be
mailed at your expense whether mailed by you or at our option by us and shall
clearly state in a manner satisfactory to us that each such receivable has been
assigned to us and is payable to us only.
2. Before accepting or filling any order from any customer, the amount and
terms of sale are to be submitted to us for our credit approval, which approval
must be in writing and shall be limited to the specific terms and amounts
described therein. We reserve the right to withdraw such credit approval at any
time before delivery or performance and, in any event, a credit approval shall
be deemed to be withdrawn if full delivery or performance is not made within 30
days after the delivery or shipment date specified in the terms of sale
submitted for such approval, or, if no such delivery or shipment date is
specified, within 30 days of the date of such credit approval, or as may be
otherwise stated in such credit approval. On sales approved and accepted by us,
we shall assume the credit risk, being responsible only for the financial
inability of your customers to pay at maturity, such assumption of credit risk
going into effect upon delivery or performance, and acceptance of the goods or
services by such customer, without dispute. We shall not be responsible for any
nonpayment of a receivable because of the assertion of any claim or dispute by a
customer or the exercise of any counterclaim or offset (whether or not such
claim, dispute, counterclaim or offset relates to the specific receivable) or
where nonpayment is a consequence of enemy attack, civil commotion, the acts or
restraint of public authorities, acts of God or force majeure, or if any
warranty made by you to us in respect of such receivable has been breached, or
if you fail to provide us, upon our request, with copies of invoices and
shipping or delivery receipts or such other proof of sale and delivery or
performance as we may from time to time require. We shall have no liability of
any kind for refusing to give or for withdrawing credit approval pursuant to the
terms of this Agreement, or for exercising or refusing to exercise any rights or
remedies we have under this Agreement or otherwise. Any sale of goods or
rendition of services made by you which is not approved in writing by us as to
credit shall be known as a C.R. (Client's risk) receivable (each a "CR
Receivable" and collectively the "CR Receivables"). All CR Receivables are
assigned to and purchased by us are with full recourse to you and at your credit
risk, but are otherwise subject to the covenants, terms and conditions provided
herein in respect of approved receivables on which we have assumed the credit
risk. We shall have the right to charge
Page 1, Dail. Cash., 1/99
<PAGE>
back to your account the amount of CR Receivables after their maturity and you
agree to pay us upon demand the amount thereof, together with all expenses
including collection charges and other collection and attorneys' fees incurred
by us up to the date of such payment in attempting to collect or enforce any
such payment and in attempting to collect or enforce any such receivable. In
addition, if we, at your request, in our discretion, file a proof of claim in
any insolvency proceeding with respect to a CR Receivable and/or forward such CR
Receivable to an attorney or agency for collection, we shall charge your account
with an amount equal to ten percent of the CR Receivable at the time such CR
Receivable or claim is so filed or forwarded and, in addition, any other charges
incurred by us thereafter shall be charged to your account.
3. Any goods rejected or returned by any customer shall be our property
held by you in trust for us separate and apart from any other goods, and upon
demand shall forthwith be delivered to us or disposed of by you at our direction
and without charge to us. You shall report to us in writing all disputes and
claims made by your customers, and the return of or offer to return any goods,
and you will promptly settle all such claims and disputes at your expense. As
absolute owner of each receivable, we may in our sole discretion enforce, upon
no less than three days notice to you effect any compromise, settle and adjust
any receivable, in our name or yours, without affecting or limiting your
obligation to us under this Agreement, and whether or not any such receivable
shall have been charged back. We reserve the right at any time to charge back to
your account the full amount of the receivable involved in any claim, dispute or
return asserted by your customer, and you agree to pay us upon demand the full
amount thereof. The charge back to your account of the amount of any receivable
shall not be deemed a reassignment thereof to you and title thereto, to the
proceeds thereof, to all security and guarantees therefor and to your interest
in the goods represented thereby, shall remain in us. You shall indemnify us
for, and hold us harmless against, any loss, liability, claim or expense of any
kind arising from any claims of, or disputes with, your customers as to terms,
price, quality, or otherwise, with respect to receivables, including, without
limitation, any claim for a return of any payments thereunder and any and all
expenses and attorney's (whether in-house or outside) fees incurred by us in
collecting or attempting to collect any receivables charged back to you.
4. If any checks, drafts, notes, acceptances, cash collections or payments
in any form shall be received by you on receivables, you will immediately
transmit and deliver them to us in the identical form received. You agree that
we and any such person or entity as we may from time to time designate, shall
have the right to sign and/or endorse your name on all remittances and all
papers, bills of lading, receipts, instruments and documents relating to the
receivables and the transactions between us. We shall have the right to deposit
any checks or other remittances received on receivables regardless of notations
or conditions placed thereon by your customers or deductions reflected thereby
and to charge the amount of any such deductions to your account.
5. As to each receivable assigned to us, you hereby warrant that: (i) it is
a bona fide existing obligation created by the sale and actual delivery of goods
or the rendition of services to customers in the ordinary course of business,
which you then own free of liens and encumbrances, and which is then
unconditionally owing to you without defense, offset or counterclaim; and (ii)
the customers have received and will accept the goods or services, and the
invoices therefor, without dispute or claim of any kind. You hereby warrant that
you are solvent, that you have full right and authority to sell and assign to us
and to grant to us a security interest in your receivables, that you have not
granted a security interest therein or in any of your inventory to any other
party and that you will not hereafter grant any security interest therein or in
any of your inventory, other than to us, at any time during the term of this
Agreement and until the security interests granted hereunder have been
terminated. You further represent and warrant that your name, place of business,
chief executive office and location of your books and records relating to your
receivables is as you are addressed above and you agree to notify us promptly of
any change in such or in your corporate or business structure. You also warrant
to us that (and at our request, you shall provide assurances acceptable to us
that) your computer based systems are Year 2000 Compliant. "Year 2000 Compliant"
shall mean that neither performance nor functionality of any computer hardware
or software is affected by dates prior to, during or after the Year 2000. In
particular: (a) no value for current date will cause any interruption in
operation; (b) date based functionality must behave consistently for dates prior
to, during and after the Year 2000; (c) in all interfacing and data storage, the
century in any date must be specified either explicitly or by unambiguous
algorithms or inferencing rules; and (d) Year 2000 must be recognized as a leap
year. You warrant that (i) you have identified to us all tradenames, tradestyles
or other assumed or fictitious business names (sometimes referred to as "DBA" or
"doing business as" names) that you use; (ii) you will advise us in writing if
you commence using any other such names in the future; and (iii) upon our
request therefor, you will provide to us evidence of your registration of all
such names in all jurisdictions in which such registration is required by law.
Page 2, Dail. Cash., 1/99
<PAGE>
6. (a) For our services hereunder, we shall receive a factoring commission
equal to 0.5% of the gross invoice amount of each receivable, which commission
shall be due and payable by you as at the date a receivable arises, and shall
then be chargeable to your account with us except for those receivables due from
a customer (or any affiliates or subsidiaries thereof) listed on the Special
Accounts Schedule submitted herewith and/or from time to time hereafter, for
which the commission on such receivables shall be increased by an amount equal
to the surcharge set forth on the said Special Accounts Schedule to the extent
of the amount credit approved, which commission shall be due and payable and
chargeable to your account with us as at the date a receivable arises. On sales
assigned as C.R. Receivables our commission shall be 0.25%. The minimum
factoring commission on each invoice in respect of any receivable shall be
$2.00.
(b) Our charge specified in paragraph 6(a) hereof is based upon maximum
selling terms of sixty (60) days, and no more extended terms or additional
dating shall be granted by you to any customer without our prior written
approval (which approval is hereby granted for maximum selling terms of ninety
(90) days for sales to (i) SHOEBOX and (ii) S & J SHOES). If such approval is
given by us, then for each additional thirty days or part thereof of such
extended terms or additional dating, our charge with respect to the receivables
covered thereby shall be increased by an amount equal to the greater of (i) one
quarter of one percent (.25%) of the invoice amount of such receivable; or (ii)
twenty-five percent (25%) of the charge specified in paragraph 6(a) hereof.
(c) The minimum aggregate factoring commissions payable under this
Agreement shall be $480,000 the Initial Term and $240,000 for each contract year
thereafter, which to the extent of any deficiency (after giving effect to
commissions payable and other charges under the foregoing subparagraphs), shall
be chargeable to your account with us on an annual basis.
(d) Should we open letters of credit or issue guarantees for your account,
we shall receive a commission equal to 0.25% of the face amount of such letters
of credit or guarantees plus an additional 0.125% for each 30 days or portion
thereof that the letter of credit (or any resulting acceptance) or guarantee
remains undrawn and/or outstanding and/or unpaid plus preparation fees and bank
charges. We shall establish a reserve equal to 40% of the face amount of any
undrawn and/or outstanding and/or unpaid letters of credit or guarantees.
(e) You shall pay to us an annual facility fee equal to 1/4 of 1% of the
Maximum Credit Facility (which shall be fully earned on the date hereof and each
anniversary of the date hereof (each an "Anniversary Date")) which amount shall
be payable for each year as follows: (a) fifty (50%) percent on, respectively,
the date hereof and on the first day of each Anniversary Date and (b) the
balance, for each respective year, in six equal successive monthly installments
commencing on the first day of the seventh month following, respectively: (i)
the date hereof and (ii) each Anniversary Date.
7. (a) The purchase price for each receivable shall be the invoice amount
of the receivable, less returns (whenever made), less all selling discounts (at
our option, calculated on shortest terms) and credits or deductions of any kind
allowed or granted to or taken by the customer at any time, except in the
ordinary course of business, and less our commission provided for herein. No
discount, credit or allowance with respect to the receivables shall be granted
by you to any customer, and no return of goods shall be accepted by you without
our prior written consent. A discount, credit or allowance may be claimed only
by the customer. All amounts collected against the receivables shall be credited
to your account adding three (3) banking days for collection and clearance of
remittances.
(b) If you require funds from time to time, we will advance to you, at our
discretion, up to (i) eighty-two and one half percent (82.5%) of the net amount
of receivables purchased by us and (ii) up to sixty (60%) of the amount of
Eligible Inventory (determined at the lower of cost or market). "Eligible
Inventory" shall mean inventory of finished goods on premises (or in warehouses
within the continental United States), in which we have a first and only
perfected security interest, and at all times shall be acceptable in all
respects to us in our sole discretion. Standards of eligibility of inventory may
be fixed and revised from time to time solely by us in our exclusive and sole
discretion. In no event, however, shall all advances made by us to you
hereunder, plus all letter of credit or guaranty accommodations made by us to
you plus all advances made by us to CANDIE'S INC ("Candie's") pursuant to the
Factoring Agreement between us and Candie's dated of even date herewith plus all
letter of credit or guaranty accommodations made by us to Candie's exceed
$35,000,000 at any one time outstanding (the "Maximum Credit Facility"). You
will be charged with interest on all sums paid, advanced or charged to you at a
rate equal to eight and three fourths percent (8.75%) per annum upon the average
daily debt cash balance in your account. That portion of advances made by us to
you which is in excess of the above stated percentage of your receivables shall
bear interest at a per annum rate which is 2.5% in excess of such interest rate.
The rates of interest and discount provided for in this paragraph 7 shall be
increased or decreased by one eighth of one percent (1/8 of 1%) per annum for
each increase or decrease respectively of one eighth of one percent (1/8 of 1%)
per annum that is hereafter made in the prime rate of The Chase Manhattan Bank
(the "Bank") as announced by the Bank from time to time ("Prime Rate"), such
change to become effective when and as the Prime Rate shall change. The Prime
Page 3, Dail. Cash., 1/99
<PAGE>
Rate may not be the lowest or best rate charged by the Bank. Notwithstanding the
foregoing, in no event shall the rate of interest agreed to by or charged to you
hereunder exceed the maximum rate of interest permitted to be so agreed or
charged under the law of the jurisdiction whose laws are applicable to such rate
of interest. We shall have the privilege of remitting to you at any time any
amount standing to your credit on our books. The present Prime Rate is 8.25% per
annum.
(c) About fifteen (15) days after the end of each month, we will render to
you a statement with respect to the receivables purchased by us during the
previous month, together with advances and charges made to your account under
this Agreement. In addition to any other amounts chargeable to your account,
your account shall be charged with our expenses consisting of postage on
invoices, bank wire and similar charges and in addition all expenses and costs
from time to time hereafter incurred by us during the course of periodic
examinations of your books and records, and operations, plus a per diem charge
at our then standard rate per person, per day, for our examiners in the field
and office. Our current standard rate is $500.00 per person, per day. We may, at
our discretion, charge your account with a fee for all trial balances and sales
summaries we prepare at your request. All statements, reports or accountings
rendered or issued by us to you, including such trial balances and sales
summaries, shall be deemed accepted and be finally conclusive and binding upon
you unless you notify us to the contrary by registered or certified mail within
sixty (60) days after the date such statement, report or accounting is sent to
you.
(d) If any payment or recovery is received from or on behalf of a customer
which is an account debtor on both approved and CR Receivables, any such payment
or recovery may be first applied to the approved receivables notwithstanding (i)
any notation to the contrary on or with respect thereto, (ii) the payment terms
thereof, (iii) the due date thereof, or (iv) whether such payments were made in
the ordinary course of business or otherwise.
8. As collateral security for any and all of your (and your subsidiaries
and affiliates) indebtedness and obligations to us and to each of our
subsidiaries and affiliates, whether matured or unmatured, absolute or
contingent, now existing or that may hereafter arise (including under indemnity
or reimbursement agreements or by subrogation), and howsoever acquired by us,
whether arising directly between us or acquired by us by assignment, whether
relating to this Agreement or independent hereof, including all obligations
incurred by you to any other concern factored or financed by us (collectively,
the "Obligations"), you grant to us a security interest in all of your accounts,
contract rights and general intangibles (whether or not specifically assigned to
us), now existing and hereafter arising, and in the proceeds thereof, any
security and guarantees therefor, in the goods and property represented thereby,
in all of your books and records relating to the foregoing, in all sums of money
at any time to your credit with us, all your present and future claims against
us under or in connection with this Agreement and any of your property at any
time in our possession. All Obligations shall be due and payable on demand, and
you hereby irrevocably authorize and direct us to charge at any time to your
account any Obligations, and to pay any Obligations owing to any of our
subsidiaries or affiliates by so charging your account. You agree to execute
financing statements and any and all other instruments and documents that may
now or hereafter be provided for by the Uniform Commercial Code or other law
applicable thereto reflecting the security interests granted to us hereunder
("Financing Statements"). You authorize us to file the Financing Statements
without your signature, signed only by us as a secured party, to reflect the
security interests granted to us hereunder. You shall be liable for, and we may
charge your account with, all costs and expenses of any public record filings
including Financing Statements (including any filing or recording taxes), the
making of lien searches, and any attorney's (whether in-house or outside) fees
which may be incurred by us in administering this Agreement and protecting,
preserving and enforcing our security interests and rights hereunder.
9. You shall maintain your books, records and accounts in accordance with
sound accounting practice. You agree to furnish us with balance sheets,
statements of profit and loss, interim financial statements and such other
information regarding your business affairs and financial condition as we may
from time to time reasonably request, including audited statements within 90
days after the end of each of your fiscal years, in such detail and scope as we
may require, prepared and certified by independent Certified Public Accountants
acceptable to us. All such statements and information shall fairly present your
financial condition as of the dates, and the results of your operations for the
periods, for which the same are furnished.
10. (a) This Agreement shall commence on the date hereof, and shall
continue until October 31, 2001 (the period from the date hereof is herein
referred to as the Initial Term), and automatically from year to year
thereafter, unless you give us notice in writing, by registered or certified
mail, not less than sixty days prior to the expiration of the original term of
this Agreement (or any renewal term thereof), of your intention to terminate
this Agreement as at the end of such term, with the understanding that we may
terminate this Agreement at any time upon not less than ninety days notice to
you
Page 4, Dail. Cash., 1/99
<PAGE>
by registered or certified mail. If you or any guarantor, endorser or other
person liable on the Obligations (each a "Guarantor") becomes insolvent or
unable to meet your or its debts as they mature, or fail, suspend or go out of
business (or, in the case of a Guarantor which is an individual, die) or apply
for, consent to, or suffer the appointment of a receiver, trustee or custodian
(or similar person) for you or any Guarantor or any of your or any Guarantor's
property, make an assignment for the benefit of creditors, or commence or become
the subject of a case or proceeding under any federal bankruptcy law, or if any
Guarantor terminates or sends notice of termination of its guaranty of the
Obligations, or if you shall be in default under this Agreement or under any
other agreement with us or any Obligations to us, or if Neil Cole ceases to
function as your Chief Executive Officer, then notwithstanding the foregoing, we
shall have the right to terminate this Agreement at any time without notice. Our
rights and your Obligations arising out of transactions having their inception
prior to the termination date shall not be affected by any termination or notice
thereof. Termination of this Agreement shall not become effective in respect of
the liens and security interests granted to us hereunder until you have fully
paid and discharged any and all of your Obligations to us, and you shall
continue to furnish confirmatory assignments and schedules of receivables
assigned to us and all proceeds in respect thereof. After the giving of any
notice of termination hereunder and until the full liquidation of your account
and the payment in full of all Obligations, you shall not be entitled to receive
any equities or payments from us, to the extent we are obligated to make
payments to you under this Agreement. From and after the effective date of
termination, all amounts charged or chargeable to your account hereunder, and
all your Obligations to us, shall become immediately due and payable without
further notice or demand.
(b) Should you desire to terminate this Agreement other than as
specifically provided herein, as a condition to such termination, you shall pay
to us, in addition to any other fees payable pursuant to this Agreement,
additional liquidated damages as follows:
i) during the period commencing on the first day of this Agreement
through and including the last day of the third month of this Agreement, an
amount equal to three (3%) percent of the average outstanding daily balance
of advances in your account with us, during the period from the date of
this Agreement through and including the date of such termination;
ii) during the period commencing on the first day of the third month
through and including the last day of the twelfth month of this Agreement,
an amount equal to three (3%) percent of the average outstanding daily
balance of advances in your account with us, during the three month period
immediately preceding the date of such termination;
iii) during the period commencing on the first day of the thirteenth
month through and including, the last day of the eighteenth month of this
Agreement, an amount equal to two (2%) percent of the average outstanding
daily balance of advances in your account with us, during the three month
period immediately preceding the date of such termination;
iv)during the period commencing on the first day of the nineteenth
month through and including the last day of the twenty-forth month of this
Agreement, an amount equal to one and one half (1 1/2%) percent of the
average outstanding daily balance of advances in your account with us,
during the three month period immediately preceding the date of such
termination.
11. This Agreement is deemed made in the State of New York and shall be
governed, interpreted and construed in accordance with the laws of the State of
New York. No modification, waiver or discharge of this Agreement shall be
binding upon us unless in writing and signed by us. If at any time we should
fail to exercise any right or remedy hereunder, it shall not constitute a waiver
on our part of exercising the same or any other right or remedy at any
subsequent time. If any taxes are imposed upon, or if we shall be required to
withhold or pay any tax or penalty because of or in connection with any
transactions between us under this Agreement, you agree to indemnify us and hold
us harmless in respect thereof. This Agreement embodies our entire agreement as
to the subject matter and supersedes all prior agreements (whether oral or
written) as to the subject matter. Trial by jury is hereby waived by each of us
in any action, proceeding or counterclaim brought by either of us against the
other on any matters whatsoever arising out of or in any way connected with this
Agreement or the relationship created hereby, and you hereby consent to the
jurisdiction of the Supreme Court of the State of New York (or the Civil Court
of the City of New York if such matters be within its jurisdiction), and of any
Federal Court in such State, for a determination of any dispute as to any such
matters. In connection therewith, you hereby waive personal service of any
summons, complaint or other process and agree that service thereof may be made
by registered or certified mail directed to you at your address set forth above,
or such other address as shall have previously been communicated to us by
registered or certified mail. Within thirty days after such mailing, you shall
appear or answer to such summons, complaint or other process. In the event we
shall retain counsel for the purpose of enforcing the performance, payment or
collection of any of the Obligations, then and in that event you agree to pay
the reasonable fees of our counsel, plus any and all reasonable expenses and
disbursements incurred in connection therewith and/or incidental thereto. Our
books and records shall be admissible as
Page 5, Dail. Cash., 1/99
<PAGE>
prima facie evidence of the status of the account between us. This Agreement
shall be binding upon and inure to the benefit of each of us and our respective
heirs, executors, administrators, successors and assigns.
ROSENTHAL & ROSENTHAL, INC.
By: /s/ JERRY SANDAK
----------------------------------------------
Name and Title: Jerry Sandak, Sr. Exec. Vice Pres.
The foregoing is acknowledged,
accepted and agreed to:
BRIGHT STAR FOOTWEAR, INC.
By: /s/ NEIL COLE, CEO
-----------------------------
Page 6, Dail. Cash., 1/99
INVENTORY SECURITY AGREEMENT
New York, New York October 19, 1999
Rosenthal & Rosenthal, Inc.
1370 Broadway
New York, N. Y. 10018
Gentlemen:
We do hereby agree that the Factoring Agreement between us dated October 19,
1999, be and the same hereby is amended and supplemented by adding thereto the
following clauses:
We hereby pledge, assign, consign, transfer and set over to you, and you
shall at all times have a continuing general lien upon, and we hereby grant you
a continuing security interest in, all of our Inventory and the proceeds
thereof. "Inventory" shall include but not be limited to raw materials, work in
process, finished merchandise and all wrapping, packing and shipping materials,
wheresoever located, now owned or hereafter acquired, presently existing or
hereafter arising, and all additions and accessions thereto, the resulting
product or mass and any documents representing all or any part thereof. Upon
your request, we will at any time and from time to time, at our expense, deliver
such Inventory to you or such person as you may designate, cause the same to be
stored in your name at such place as you may designate, deliver to you documents
of title representing the same or otherwise evidence your security interest in
such manner as you may require.
The aforementioned pledge, assignment, consignment, transfer, lien and
security interest shall secure any and all of the Obligations.
We agree, at our expense, to keep all Inventory insured to the full value
thereof against such risks and by policies of insurance issued by such companies
as you may designate or approve, and the policies evidencing such insurance
shall be duly endorsed in your favor with a long form lender's loss payable
rider or such other document as you may designate and said policies shall be
delivered to you. Should we fail for any reason to furnish you with such
insurance, you shall have the right to effect the same and charge any costs in
connection therewith to us. You shall have no risk, liability or responsibility
in connection with payment or nonpayment of any loss, your sole obligation being
to credit our account with the net proceeds of any such insurance payments
received on account of any loss. Any and all assessments, taxes or other charges
that may be assessed upon or payable with respect to the Inventory or any part
thereof shall forthwith be paid by us, and we agree that you, in your
discretion, may effect such payment and charge the amount thereof to us. We
further agree that except for the pledge, assignment, consignment, transfer,
lien and security interest granted to you hereby and except for existing liens
to be released, we shall not permit said Inventory to otherwise become liened or
encumbered nor shall we grant any security interest therein to any other party.
We shall not, without your written consent first obtained, remove or dispose of
any of such Inventory except to bona fide purchasers thereof in the ordinary
course of our business on orders first approved in writing by you. All such
sales shall be reported to you promptly and the accounts or other proceeds
thereof shall be subject to the security interests in your favor. Following a
default in any of the Obligations as and when the same become due and during the
continuance thereof you shall have the right at all times to the immediate
possession of all Inventory and its products and proceeds. We shall make such
Inventory and all our records pertaining thereto available to you for inspection
at any reasonable business hours requested by you. You shall have the right, in
your discretion, to pay any liens or claims upon said Inventory, including, but
not limited to, warehouse charges, dyeing, finishing and processing charges,
landlords' claims, etc. and the amount of any such payment shall be charged to
our account and secured hereby. You shall not be liable for the safekeeping of
any of the Inventory or for any loss, damage or diminution in the value thereof
or for any act or default of any warehouseman, carrier or other person dealing
in and with said Inventory, whether as your agent or otherwise, or for the
collection of any proceeds thereof but the same shall at all times be at our
sole risk.
Prior to its sale to a bona fide purchaser in the ordinary course of
business, Inventory shall at all times remain at our address specified below or
at 111 Howard Blvd., Arlington, NJ 07856; and shall not be removed therefrom
without your prior written consent.
Upon our default in the payment, performance or discharge of any of the
Obligations as and when the same become due, or in the event of our insolvency,
or if a receiver or trustee is appointed for our assets or affairs, or if we
discontinue doing business, or if a petition in bankruptcy or for arrangement or
reorganization is filed by or against us, or if we make an assignment for the
benefit of our creditors, or suspend the operation of our business or commence
the liquidation thereof, or make any offer of settlement, extension or
composition with our creditors, or upon the appointment of a committee of our
creditors or a liquidating agent for us, or the issuance of any attachment or
execution against us, or the
Page 7, Dail. Cash., 1/99
<PAGE>
filing of a judgment or other lien against us, or upon our any default hereunder
or under any other agreement between us, you shall have the right, upon
reasonable notice to us, to sell all or any part of our Inventory, at public or
private sale, or make other disposition thereof, at which sale or disposition
you may be a purchaser. We agree that written notice sent to us by postpaid
mail, at least ten days before the date of any intended public sale or the date
after which any private sale or other intended disposition of the Inventory is
to be made, shall be deemed to be reasonable notice thereof. We do hereby waive
all notice of any such sale or other intended disposition if said Inventory is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market. Upon the occurrence of any of the events referred
to in the first sentence of this paragraph, you may require us to assemble all
or any part of the Inventory and make it available to you at a place to be
designated by you, which is reasonably convenient to both parties. In addition,
you may peaceably, by your own means or with judicial assistance, enter our or
any other premises and take possession of the Inventory and remove or dispose of
it on our premises and we agree that we will not resist or interfere with any
such action. We hereby expressly waive demand, notice of sale (except as herein
provided), advertisement of sale and redemption before sale. The net proceeds of
any such public or private sale or other disposition as far as needed shall be
applied toward the payment and discharge of any and all of the Obligations to
you, together with all interest thereon and all reasonable costs, charges,
expenses and disbursements in connection therewith, including the reasonable
fees of your attorneys, rendering any surplus remaining to us, we, of course, to
continue liable should there be any deficiency.
This agreement is deemed made in the State of New York and is to be
governed, interpreted and construed in accordance with the laws of the State of
New York. No modification, waiver or discharge of this agreement shall be
binding upon you unless in writing, signed and subscribed by you. If you should
at any time fail to exercise any right or privilege hereunder, the same shall
not constitute a waiver on your part of exercising any right or privilege at any
subsequent time. If any taxes are imposed or if you shall be required to
withhold or pay any tax because of any transactions between us, we agree to
indemnify you and hold you harmless in respect thereto. It is agreed between us
that trial by jury is hereby waived in any action, proceeding or counterclaim
brought by either of us against the other on any matters whatsoever arising out
of or in any way connected with this agreement or our relationship created
hereby and we hereby consent to the jurisdiction of the Supreme Court of the
State of New York for a determination of any dispute as to any such matters and
authorize the service of process on us by registered mail sent to us at our
address hereinbelow set forth.
This agreement shall constitute a security agreement pursuant to the
Uniform Commercial Code and, in addition to any and all of your other rights
hereunder, you shall have all of the rights of a secured party pursuant to the
provisions of the Uniform Commercial Code. We agree to execute a financing
statement and any and all other instruments and documents that may now or
hereafter be provided for by the Uniform Commercial Code or other law applicable
thereto, reflecting the security interests granted to you hereunder. We do
hereby authorize you to file a financing statement without our signature, signed
only by you as secured party, to reflect the security interests granted to you
hereunder.
Very Truly Yours,
BRIGHT STAR FOOTWEAR, INC.
By: /s/ NEIL COLE
-----------------------------
2975 Westchester Avenue, Purchase, NY 10577
Page 8, Dail. Cash., 1/99
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AT
OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 468
<SECURITIES> 0
<RECEIVABLES> 14,571
<ALLOWANCES> 0
<INVENTORY> 13,786
<CURRENT-ASSETS> 33,427
<PP&E> 5,666
<DEPRECIATION> 1,851
<TOTAL-ASSETS> 63,446
<CURRENT-LIABILITIES> 19,071
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 42,056
<TOTAL-LIABILITY-AND-EQUITY> 63,446
<SALES> 76,483
<TOTAL-REVENUES> 78,492
<CGS> 61,516
<TOTAL-COSTS> 61,516
<OTHER-EXPENSES> 2,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 958
<INCOME-PRETAX> (11,104)
<INCOME-TAX> (1,090)
<INCOME-CONTINUING> (10,014)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,014)
<EPS-BASIC> (.56)
<EPS-DILUTED> (.56)
</TABLE>
