SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 2000
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)
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Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2975 Westchester Avenue, Purchase, New York 10577
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 694-8600
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on April 20, 2000, was approximately
$21,452,000.
As of April 20, 2000, 17,896,393 shares of Common Stock, par value $.001
per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive
proxy statement for its annual meeting of stockholders to be held in the year
2000 is incorporated by reference into Part III of this Form 10-K.
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CANDIE'S, INC.-FORM 10-K
TABLE OF CONTENTS
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PART I
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Item 1. Business.................................................................................... 2
Item 2. Properties.................................................................................. 9
Item 3. Legal Proceedings........................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 11
Item 6. Selected Financial Data..................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................... 18
Item 8. Financial Statements and Supplementary Data................................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 19
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 20
Item 11. Executive Compensation...................................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 20
Item 13. Certain Relationships and Related Transactions.............................................. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 20
Signatures.................................................................................................... 21
Consolidated Financial Statements............................................................................. F-1
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PART I
Item 1. Business
Introduction
The history of the "CANDIE'S" brand spans over 22 years and has become
synonymous with young, fun and fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc., which was incorporated
in Delaware in 1978, and its subsidiaries (collectively, the "Company") is
currently engaged primarily in the design, marketing, and distribution of
moderately-priced women's casual and fashion footwear under the CANDIE'S(R)and
BONGO(R)trademarks for distribution within the United States to department,
specialty, chain and seven company-owned retail stores and to specialty stores
internationally. The Company markets and distributes children's footwear under
the CANDIE'S and BONGO trademarks, as well as a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels and the ASPEN(R) brand, which is licensed by the Company from a
third party through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary. In 1998, the Company began licensing its CANDIE'S
trademark for the purpose of building CANDIE'S into a lifestyle brand serving
generation "Y" women and girls, and it currently holds licenses for fragrance,
eyewear, leg wear and handbags. Through Unzipped Apparel, LLC ("Unzipped"), the
Company's joint venture with Sweet Sportswear LLC ("Sweet"), the Company
marketed and distributed jeanswear and apparel under the CANDIE'S and BONGO
label to department, specialty, and chain stores in the United States.
The Company believes that it has developed CANDIE'S into a strong footwear
brand appealing to women and girls in the generation "Y" demographic. As a
growth strategy, the Company plans to continue to focus on building market share
in the junior footwear area of better department and specialty stores, pursuing
licensing opportunities, and expanding its consumer direct business through the
opening of retail stores and e-commerce.
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information during its fiscal year ended January 31, 1999
("Fiscal 1999"). The adoption of SFAS No. 131 did not affect the Company's
consolidated financial position or results of operations because the Company
operates in one segment. See Note 14 of the Segment Information of the Financial
Statements.
Background of the Company and Acquisitions
The Company began to license the use of the CANDIE'S trademark from New
Retail Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased
ownership of the CANDIE'S trademark from NRC together with certain pre-existing
licenses of NRC, a then publicly traded company engaged primarily in the
licensing and sublicensing of fashion trademarks and a significant stockholder
of the Company. NRC's principal stockholder was also the Company's President and
Chief Executive Officer.
Effective August 18, 1998 (the "Effective Date"), the Company completed a
merger with NRC (the "Merger"). Each issued and outstanding share of NRC common
stock $.01 par value (the "NRC Common Stock"), and each issued and outstanding
option to purchase one share of NRC Common Stock, prior to the Effective Date,
was converted, respectively, into 0.405 shares of common stock, $.001 par value
of the Company (the "Candie's Common Stock"), and into options to purchase 0.405
shares of Candie's Common Stock, respectively.
At the Effective Date, there were 5,743,639 outstanding shares of NRC
Common Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of Candie's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of Candie's Common Stock. NRC also owned 1,227,696 shares of
Candie's Common Stock and had options and warrants to purchase an additional
800,000 shares of Candie's Common Stock. These options and warrants were
extinguished upon consummation of the Merger.
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The transaction was accounted for using the purchase method of accounting.
The results of operations of NRC are included in the accompanying consolidated
financial statements from the date of the Merger.
The cost of the acquisition, including acquisition expenses of $700,000,
after netting the value of the reacquired Company shares, warrants and options
totaled approximately $5.6 million. This resulted principally in purchase price
allocation to the licenses acquired of $340,000 and a trademark value of $5.2
million. Deferred tax liabilities resulting from this transaction totaled
approximately $2.1 million which amount was recorded as goodwill.
Acquisition of Michael Caruso & Co., Inc.
On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso").
As a result of the transaction, the Company acquired the BONGO trademark as well
as certain other related trademarks and two license agreements for use of the
BONGO trademark, one for children's and one for large size jeanswear. Prior to
the closing of the acquisition, Caruso was the licensor of the BONGO trademark
for use on footwear products sold by the Company, which license was terminated
as of the closing.
The purchase price for the shares acquired was approximately $15.4 million
and was paid at the closing in 1,967,742 shares of Candie's Common Stock (each
share being valued at $7.75), plus $100,000 in cash. On March 24, 1999, 547,722
additional shares of Candie's Common Stock were delivered to the sellers upon
the six month anniversary of the closing based on a contingency clause in the
agreement requiring an upward adjustment in the number of shares delivered at
closing. The issuance of the contingent consideration had no effect on the
purchase price.
This transaction was accounted for using the purchase method of accounting.
The results of operations of Caruso are included in the accompanying financial
statements from the date of acquisition. The total purchase price of
approximately $15.6 million, including acquisition expenses of approximately
$250,000, but excluding the contingency shares described above, resulted
principally in a purchase price allocation to the licenses acquired of $2.7
million and a trademark value of $11.8 million.
Formation of Unzipped Apparel LLC
On October 7, 1998, the Company formed Unzipped with its joint venture
partner Sweet, the purpose of which was to market and distribute apparel under
the BONGO and CANDIE'S labels. Candie's and Sweet each have a 50% interest in
Unzipped. Pursuant to the terms of the joint venture, the Company licensed the
CANDIE'S and BONGO trademarks to Unzipped for use in the design, manufacture and
sale of certain designated apparel products. Currently, the Company believes
that Unzipped is in breach of certain provisions of the agreements among the
parties, and has notified Unzipped that the Company does not intend to
contribute any additional capital toward the joint venture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation and Note
2 of the Notes to the Financial Statements."
Stockholders Rights Plan
In January 2000, the Company's Board of Directors adopted a stockholder
rights plan. Under the plan, each stockholder of Candie's Common Stock received
a dividend of one right for each share of the Company's outstanding common
stock, entitling the holder to purchase one thousandth of a share of Series A
Junior Participating Preferred Stock, par value, $0.01 per share of the Company,
at an initial exercise price of $6.00. The rights become exercisable and will
trade separately from Candie's Common Stock ten business days after any person
or group acquires 15% or more of Candie's Common Stock, or ten business days
after any person or group announces a tender offer for 15% or more of the
outstanding Candie's Common Stock.
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Products
CANDIE'S Footwear Products. The CANDIE'S brand, consisting of fashion and
casual footwear, is designed primarily for women and girls aged 4-25. The
footwear features a variety of styles. The retail price of CANDIE'S footwear
generally ranges from $30 - $60 for women's styles and $25 - $45 for girl's
styles. Four major and two interim times per year, as part of its Spring and
Fall collections, the Company designs and markets 30 to 40 different styles.
Approximately one-third of CANDIE'S women's styles are "updates" of the
Company's most popular styles from prior periods, which the Company considers
its "core" products. Approximately three-quarters of the girl's styles are
versions of the best selling women's styles and the remaining one quarter are
designed specifically for the girls' line.
The Company's designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S image and price
points. Fashion trend information is compiled by the Company's design team
through various methods, including travel to Europe and throughout the world to
identify and confirm seasonal trends, utilization of outside fashion forecasting
services and attendance at trade shows and seminars. Each season, subsequent to
the final determination of that season's line by the design team and management
(including colors, trim, fabrics, constructions and decorations), the design
team travels to the Company's manufacturers to oversee the production of the
initial sample lines.
CANDIE'S Handbag Products. In the Fall of 1998, the Company began to
design, market, and distribute women's handbags to department and specialty
stores in the United States. The retail prices range from $28 - $36. In April
2000, the Company entered into a licensing agreement with Trebbianno LLC
("Trebbianno"), to license the handbag business to Trebbianno for a three year
term with a three year renewal conditioned on achieving certain minimum sales.
See "Trademarks and Licensing".
BONGO Footwear, Jeanswear and Handbag Products. The Company designs,
markets, and distributes fashion and casual footwear and handbags at value price
points under the BONGO name for women and girls aged 4-25. In addition, the
Company through its joint venture, Unzipped designs, markets and distributes
jeanswear and apparel to the same targeted markets. The BONGO product lines are
marketed to department, specialty, and chain stores in the United States. The
retail prices range from $20-$45 for footwear, $20-$50 for jeanswear and $15-$25
for handbags. The BONGO handbag business was licensed to Trebbianno in April
2000.
Private Label Products. In addition to sales under the CANDIE'S and BONGO
trademarks, the Company arranges for the manufacture of women's footwear, acting
as agent for mass market and discount retailers, primarily under the retailer's
private label brand. Most of the private label footwear is presold against
purchase orders and is backed by letters of credit opened by the applicable
retailers. In certain instances the Company receives a commission based upon the
purchase price of the products purchased from the manufacturer for providing
design expertise, arranging for the manufacturing of the footwear, overseeing
production, inspecting the finished goods and arranging for the sale of the
finished goods by the manufacturer to the retailer.
Bright Star Footwear. Bright Star, acting principally as agent for its
customers, designs, markets and distributes a wide variety of men's branded and
unbranded workboots, hiking boots, winter boots and leisure footwear. Branded
products are marketed under the private label brand names of Bright Star's
customers or under the Company's licensed brand, ASPEN. Bright Star's customer
base includes discount and specialty retailers. Bright Star's products are
generally directed toward the mid-priced market. The retail prices of Bright
Star's footwear generally range from $25 to $75. The majority of Bright Star's
products are sold on a commission basis.
Retail Operations
The Company operates seven retail stores, consisting of four outlets and
three specialty stores. The Company anticipates opening between three and five
additional retail stores during the next year as opportunities make themselves
available. Retail revenues for the fiscal year ended January 31, 2000 ("Fiscal
2000") were $2.8 million or three percent of net revenues.
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The Company operates its retail stores, which complement its wholesale
business, primarily to establish a direct relationship with the consumer, to
build the brand image and to test products for the wholesale business. The
Company also believes that retail stores will provide an opportunity for the
Company to showcase its increasing range of goods, which currently includes
apparel, handbags, fragrance, socks and sunglasses.
The success of the Company's new and existing retail stores will depend on
various factors, including general economic and business conditions affecting
consumer spending, the acceptance by consumers of the Company's retail concept,
the ability of the Company to manage its retail operations and the availability
of desirable locations and favorable lease terms.
Advertising, Marketing and Website
The Company believes that advertising to promote and enhance the CANDIE'S
and BONGO brands is an important part of its long-term growth strategy. The
Company believes that its innovative and edgy advertising campaigns featuring
celebrities, which have brought it national recognition, have resulted in
increased sales and consumer awareness of its branded products. The Company's
advertising appears in fashion magazines such as Marie Claire, Cosmopolitan and
Glamour, and teenage lifestyle magazines such as Teen, Teen People and
Seventeen, as well as in television commercials, newspapers, and outdoor and
electronic advertising media.
The Company maintains a product website, www.candies.com, which it launched
in October 1999. In April 2000, the Company launched its first e-commerce
initiative, a co-branded store to sell the Candie's footwear collection in
partnership with leading teen retailer "Journeys".
The Company also maintains a corporate website that provides financial and
background information about the Company located at www.candiesinc.com
Manufacturing and Suppliers
The Company does not own or operate any manufacturing facilities. The
Company's footwear products are manufactured to its specifications by a number
of independent suppliers currently located in Brazil, China, Spain, Italy, and
Taiwan. The Company believes that such diversification permits it to respond to
customer needs and helps reduce the risks associated with foreign manufacturing.
The Company has developed, and seeks to develop, long-term relationships with
manufacturers that can produce a high volume of quality products at competitive
prices.
The Company negotiates the prices of finished products with its suppliers.
Such suppliers manufacture the products themselves or subcontract with other
manufacturers or suppliers. Finished goods are purchased primarily on an open
account basis, generally payable within 7 to 45 days after shipment.
Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers. Although the Company believes that the
raw materials required (which include leather, nylon, canvas, polyurethane and
rubber) are available from a variety of sources, there can be no assurance that
any such materials will continue to be available on a timely or cost-effective
basis.
Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately three months, the shoe is
offered for sale to wholesale purchasers. After orders are received by the
Company, the acquisition of raw materials, the manufacture of the shoes and
shipment to the customer each take approximately one additional month.
For Fiscal 2000 and Fiscal 1999, Redwood Shoe Corp. ("Redwood"), a related
party buying agent for the Company, initiated the manufacture of approximately
74% and 60%, respectively, of the Company's total footwear purchases. At January
31, 2000, the Company had $13,775,920 of open purchase commitments with Redwood,
representing 48% of the
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Company's total purchase commitments. At January 31, 1999, the Company had
$28,117,820 of open purchase commitments with Redwood, representing 87% of the
Company's total purchase commitments.
There can be no assurance that, in the future, the capacity or availability
of manufacturers or suppliers will be adequate to meet the Company's product
needs.
Tariffs, Import Duties and Quotas
All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule,
the Company pays import duties on its footwear products manufactured outside of
the United States rates ranging from approximately 3.2% to 48%, depending on
whether the principal component of the product, which varies from product to
product is leather or some other material. Accordingly, the import duties vary
with each shipment of footwear products. Since 1981, there have not been any
quotas or restrictions, other than the duties mentioned above, imposed on
footwear imported by the Company into the United States.
The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company.
In addition, other restrictions on the importation of footwear and apparel
are periodically considered by the United States Congress and no assurance can
be given that tariffs or duties on the Company's goods may not be raised,
resulting in higher costs to the Company, or that import quotas respecting such
goods may not be lowered, which could restrict or delay shipment of products
from the Company's existing foreign suppliers.
Backlog
On March 31, 2000, the Company had an estimated backlog of orders of its
products of approximately $33,827,000, as compared to a backlog of approximately
$36,375,000 at March 31, 1999. The backlog at March 31, 2000 is expected to be
filled during Fiscal 2001. The backlog at any particular time is affected by a
number of factors, including seasonality, the buying policies of retailers,
scheduling, and the manufacture and shipment of products.
Seasonality
In previous years, demand for the Company's footwear peaked during the
months of June through August (the Fall/back-to-school selling season). As a
result, shipment of the Company's products in previous years were heavily
concentrated in its second and third fiscal quarters. Accordingly, historically,
operating results have fluctuated significantly from quarter to quarter.
Customers and Sales
During Fiscal 2000, the Company sold its footwear products to more than
1,100 retail accounts consisting of department stores, including Federated
Stores (which include Macy's and Bloomingdale's), Nordstrom's and May Company,
mass merchandisers, Wal-Mart, specialty stores and other outlets in the United
States. Wal-Mart, a customer of BrightStar, accounted for 10.2% of the Company's
total Fiscal 2000 net revenues. No other individual customer accounted for more
than 10% of the Company's net revenues during Fiscal 2000, however May Company
accounted for approximately 9.5% of total Fiscal 2000 net revenues. In Fiscal
1999, no individual customer accounted for more than 10% of the Company's
revenues.
The Company has international distribution agreements with United
Authentics, GmbH for exclusive distribution of footwear in Germany and Austria
through January 31, 2002, Bata Shoe Pte. Ltd. of Singapore for exclusive
distribution of footwear in Singapore through April 2000, Sports Odyssey of
Canada for exclusive distribution of footwear in Canada through January 31,
2002, Dafna-Hulate Shoe Distribution Ltd.
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for exclusive distribution of footwear in Israel through January 31, 2002, and
Calego International, Inc. for exclusive distribution of handbags in Canada,
which agreement was terminated on or about April 1, 2000. Pursuant to the terms
of such distribution agreements, the distributor purchases certain minimum
volumes of products from the Company for distribution in specialty stores
throughout the applicable territories and pays the Company royalties on such
purchases. During Fiscal 2000 and Fiscal 1999, the Company generated
approximately $249,000, and $208,000 respectively in sales to the international
markets mentioned above and sales to international markets in the fiscal year
ended January 31, 1998 ("Fiscal 1998") were deminimus. The Company will continue
to evaluate existing and potential international agreements.
The Company generally requires payment for goods by its customers either by
letter of credit or by check, subject to collection, within 30 to 60 days after
delivery of the goods. In certain instances, the Company offers its customers a
discount from the purchase price in lieu of returned goods; otherwise, goods may
be returned solely for defects in quality, in which event the Company returns
the goods to the manufacturer for a credit to the Company's account.
As of January 31, 2000, the Company utilized the services of 14 full time
sales persons, seven of whom are independent contractors, who are compensated on
a commission basis. The Company emphasizes customer service in the conduct of
its operations and maintains a customer service department. The Company's
customer service department processes customer purchase orders and supports the
sales representatives by coordinating orders and shipments with customers.
Trademarks and Licensing
The Company owns federal registrations or has pending federal registrations
in the United States Patent and Trademark Office for CANDIE'S and BONGO in both
block letter and logo format for use on footwear, apparel, fragrance, handbags
and various other goods and services. In addition, from time to time the Company
registers certain of its trademarks in other countries and regions including
Canada, Europe and South and Central America.
The Company regards the trademarks and other intellectual property rights
that it owns and uses as valuable assets and intends to defend them vigorously
against infringement. There can be no assurance, however, that the CANDIE'S or
BONGO trademarks, or any other trademark which the Company owns or uses, does
not, and will not, violate the proprietary rights of others, that any such
trademark would be upheld if challenged, or that the Company would, in such an
event, not be prevented from using such trademarks, which event could have a
material adverse effect on the Company. In addition, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend an infringement action.
The Company also owns other registered and unregistered trademarks which it
does not consider to be material to its current operations.
The Company has pursued and intends to pursue licensing opportunities for
its trademarks as an important means for reaching the targeted consumer base,
increasing brand awareness in the marketplace and generating additional income.
Potential licensees are subject to a selective process performed by the
Company's management. The Company will enter into licensing agreements with
additional parties in addition to those described below only if there is a
compatibility of quality standards, brand perception, distribution capabilities,
experience in a respective business, financial stability, and marketability of a
proposed product.
During Fiscal 1999, the Company entered into three licenses for use of the
CANDIE'S trademark on fragrance, leg wear and eyewear, respectively. Pursuant to
the first license, the Company granted Liz Claiborne Cosmetics, Inc. the
exclusive right to license the CANDIE'S name and other trademarks for a variety
of fragrance and fragrance-related products throughout the world for a term of
approximately 15 years ending December 31, 2012. The licensee has a renewal
option for a term of five to ten years ending December 31, 2017 or December 31,
2022, as applicable, depending upon the licensee's sales performance during the
initial term. Pursuant to the second license, the Company granted Ben Berger
LLC,
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the exclusive right to license the CANDIE'S brand for socks and tights
throughout the United States and Canada for a term of three years ending January
31, 2002. The licensee has a renewal option for a term of two years ending
January 31, 2004, if it, among other things, achieves threshold minimum sales
during the initial term. Pursuant to the third license, the Company granted Viva
Optique, Inc. the exclusive right to license the CANDIE'S brand for sunglasses
and eyewear throughout the world for a term of three years ending January 31,
2002. The licensee has renewal options for consecutive terms of three years each
ending January 31, 2005 and January 31, 2008, respectively, if, among other
things, it achieves threshold minimum sales during the initial term.
The Company also assumed, as a result of the Caruso acquisition, two
licensing agreements for the BONGO trademark, one for the exclusive right to
license the BONGO trademark throughout the United States and its territories and
possessions for junior denim/sportswear with Jenna Lane Licensing I, Inc., for a
term of approximately three and a half years ending March 31, 2002, with an
option to renew if the licensee, among other things, achieves threshold minimum
sales during the initial term, and one for the exclusive right to license the
BONGO trademark throughout the United States and its territories and possessions
for junior plus size denim/sportswear with M. Fine & Sons Company, Inc., for a
term of four years ending May 31, 2002, with an option for the licensee to renew
for a term of three years if licensee, among other things, achieves threshold
minimum sales during the initial term. In connection with the Merger, the
Company assumed a license agreement with Wal-Mart which expires in July 2002,
with respect to the NO EXCUSES trademark.
Also during Fiscal 1999, the Company entered into licensing arrangements
with Unzipped, granting Unzipped the exclusive license to use the CANDIE'S and
BONGO trademarks for the purpose of manufacturing, distributing and marketing
apparel and jeanswear through January 31, 2003, throughout the United States and
its territories and possessions.
In addition, on or about March 3, 2000, the Company granted the exclusive
right to use the CANDIE'S and BONGO name on handbags and small leather goods to
Trebbianno throughout the United States, Canada, the United Kingdom and Japan
for a term of three and a half years ending December 31, 2003. The licensee has
a renewal option for a term of three years ending December 31, 2006, if, among
other things, it achieves threshold minimum sales during the initial term.
The Company also sells footwear under the ASPEN trademark pursuant to a
license from Aspen Licensing International, Inc. The ASPEN license agreement,
which was amended on September 22, 1998, grants Bright Star the exclusive right
to market and distribute certain categories of footwear under the ASPEN
trademark in the United States, its territories and possessions, for a term
expiring on September 30, 2000. The ASPEN licenses require the Company to pay
minimum royalties based on percentages of sales exceeding certain minimum
amounts.
Competition
The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines from, among
other brands, Skechers, Steve Madden and Esprit. In general, competitive factors
include quality, price, style, name recognition and service. In addition, the
presence in the marketplace of various fashion trends and the limited
availability of shelf space can affect competition. Many of the Company's
competitors have substantially greater financial, distribution, marketing and
other resources than the Company and have achieved significant name recognition
for their brand names. There can be no assurance that the Company will be able
to compete successfully with the other companies marketing these types of
products.
Employees
As of March 31, 2000, the Company employed 141 persons, 97 full-time and 44
part-time. Three of the Company's employees are executives and the remainder are
management, sales, marketing, product development, administrative, customer
service representatives and retail store personnel. None of the Company's
employees are represented by a labor union. The Company also utilizes the
services of seven
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independent contractors who are engaged in sales. The Company considers its
relations with its employees to be satisfactory.
Other Material Developments
During the course of its uncompleted audit of the Company's financial
statements for Fiscal 1999, Ernst & Young, LLP ("E & Y"), the Company's auditors
until June 17, 1999, informed the Company that it had been unable to obtain
sufficient evidentiary support to determine the appropriateness of the
accounting that the Company had applied to certain transactions that could
affect the Company's financial results for the first three quarters of Fiscal
1999 and Fiscal 1999 as a whole and for Fiscal 1998.
In response to these issues, on May 14, 1999, the Company's Audit Committee
of the Board of Directors (the "Board") appointed a Special Committee to conduct
an independent investigation of such transactions, and any other transactions or
matters that it might discover during the course of the investigation. To assist
the Special Committee in its investigation and the accounting analysis, the
Special Committee retained the law firm of Squadron Ellenoff Plesent & Sheinfeld
LLP, which, in turn, retained the accounting firm of PricewaterhouseCoopers LLP.
On or about June 17, 1999, the Company terminated the services of E & Y.
See Item 9 "Changes in and Disagreements with Accountants". On June 22, 1999,
the Company retained the accounting firm of BDO Seidman, LLP ("BDO") to replace
E & Y as its independent auditors to audit its financial statements with respect
to Fiscal 1998 and Fiscal 1999.
On or about August 26, 1999, the Special Committee completed its
investigation and reported to the Board as to its findings and recommendations.
The Special Committee recommended, among other things, that the Company
implement certain remedial procedures and systems.
In September 1999, BDO completed its audits of Fiscal 1998 and Fiscal 1999.
As a result of the audit, the financial statements of the Company for Fiscal
1998 and for the first three quarters of Fiscal 1999 were restated from amounts
previously reported. In addition, the Company restated its previously issued
financial statements for the three quarters ended April 30, 1998, July 31, 1998
and October 31, 1998, by filing the Company's Quarterly Reports on Form 10-Q/A.
Since May 1999, several lawsuits have been filed against the Company and
certain of its current and former officers and directors alleging violations of
the federal securities laws. These lawsuits have been consolidated into a single
class action currently pending in the United States District Court for the
Southern District of New York. On or about January 31, 2000, the Company entered
into a Settlement Agreement with the class, which has been preliminarily
approved by the Court. It is anticipated that the Court will conduct a hearing
on the final approval of the Settlement Agreement in or about July 2000. See
Item 3, "Legal Proceedings".
The staff of the Securities and Exchange Commission ("SEC") have also
commenced a formal investigation into the Company's actions in connection with
the accounting issues that have been raised and were the subject of the
investigation by the Special Committee. See Item 3 "Legal Proceedings".
Item 2. Properties
The Company currently occupies 19,653 square feet of office and showroom
space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease, which
expired on March 31, 2000, subject to the Company's right to renew the lease for
an additional five year term under certain circumstances. The monthly rental
expense pursuant to the lease was approximately $33,000 per month depending on
use of electricity through the expiration date of the lease. The Company has
been considering other properties, and has commenced lease negotiations for
approximately 13,500 square feet located at 400 Columbus Avenue, Valhalla, New
York. Pending a final executed lease of the Valhalla premises, the Company
remains in occupation of its current space on a month to month basis.
9
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The Company also maintains seven domestic retail stores of which four are
outlets located in suburban shopping malls in various locations in and around
the New York Metropolitan area, two are specialty stores located in malls in New
Jersey and one is a specialty store located in a Mall in Pennsylvania. The
leases for the retail stores expire at various times between October 2002 and
October 2009. In addition to specified monthly rental payments, additional rent
at all shopping mall locations is based on percentages of annual gross sales of
the retail store exceeding certain and proportionate amounts of monthly real
estate taxes, utilities and other expenses relating to the shopping mall.
The Company also occupies showrooms at : (i) the fifth and sixth floors at
215 W. 40th Street, New York; (ii) the fourteenth floor at 215 West 40th Street,
New York, NY; and the (iii) the fifth floor at 320 Fifth Avenue, New York, NY.
The lease for the fifth and sixth floors at 215 West 40th Street, New York, NY,
which space is used both as a showroom for the CANDIE'S brand and as office
space, is held jointly in the name of Showroom Holding Co., Inc. (a wholly-owned
subsidiary of the Company) and Unzipped and provides for monthly rental of
$19,280 for both floors, and a lease expiration of March 31, 2003. The monthly
rental for the fourteenth floor at 215 West 40th Street, New York, NY, which is
used as showroom space for the BONGO brand, is $7,500, with that lease expiring
on July 31, 2001. The lease for the fifth floor at 320 Fifth Avenue, New York,
NY, which was assigned in the acquisition of Caruso and is in the name of
Michael Caruso & Co., Inc., which space has been used as a handbag showroom for
both brands, has a monthly rental of $2,472, which increased to $2,600 per month
on March 1, 2000 and expires on February 28, 2002.
Item 3. Legal Proceedings
Several lawsuits are pending against the Company and certain of its current
and former officers and directors in the United States District Court for the
Southern District of New York. There can be no assurance that the Company will
successfully defend these lawsuits.
On May 17, 1999, a purported 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 sections 11, 12 and 15 of the Securities Act of 1933 and sections
10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. 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.
On or about January 31, 2000, the Company entered into a settlement
agreement with plaintiffs (the "Settlement Agreement") to settle the class
action for total consideration of $10 million, payable in a combination of cash,
Candie's Common Stock and convertible preferred stock (the "Preferred Stock").
The Settlement Agreement provides that on or about May 1, 2000, the Company will
pay to plaintiffs $3 million in cash, and issue Candie's Common Stock with a
value of $2 million. The Company will pay the Class an additional $1 million on
or before October 1, 2000. The remaining $4 million owed to plaintiffs will be
in the form of Preferred Stock, which will convert to Candie's Common Stock at a
rate of ten to one based on the price of the Candie's Common Stock on the first
and second anniversary of the date of the approval of the Settlement Agreement
by the Court. The Court has preliminarily approved the settlement and directed
the mailing and publication of a notice of the settlement. It is anticipated
that the Court will conduct a hearing on the final approval of the Settlement
Agreement in or about July 2000.
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, the accounting issues that have been raised
and that were the subject of the investigation of the Special Committee.
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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.
Except as set forth in this Item 3, the Company knows of no material legal
proceedings, pending or threatened, or judgments entered, against any director
or officer of the Company in his capacity as such.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of result of its public announcements that the Company may have to
restate its financial results for Fiscal 1998 and the first three quarters of
Fiscal 1999, on May 13, 1999, the Candie's Common Stock, which has been traded
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ") since January 22, 1990 (under the symbol "CAND") was halted from
trading. During suspension of the Candie's Common Stock, which lasted until
October 13, 1999, the stock was listed under the symbol "CANDE". On October 14,
1999 the Candie's Common Stock resumed trading on NASDAQ under the symbol
"CAND". The following table sets forth, for the indicated periods, the high and
low sales prices for the Candie's Common Stock as reported by NASDAQ:
High Low
Fiscal Year Ended January 31, 2000
Fourth Quarter ................................ $1.75 $0.63
Third Quarter ................................. 1.75 0.56
Second Quarter ................................ 3.13 2.81
First Quarter ................................. 4.00 2.63
Fiscal Year Ended January 31, 1999
Fourth Quarter ................................ $6.25 $2.62
Third Quarter ................................. 7.37 3.81
Second Quarter ................................ 8.25 5.87
First Quarter ................................. 8.62 4.75
As of April 26, 2000, there were approximately 1,350 holders of record of
Candie's Common Stock.
The Company has not paid cash dividends on its common stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future. Cash dividends are subject to approval by Rosenthal &
Rosenthal, Inc., ("Rosenthal") the Company's lender.
During the fiscal quarter ended January 31, 2000, the Company issued
ten-year options to its employees to purchase an aggregate of 1,457,250 shares
of Candie's Common Stock at exercise prices of: (i) $1.9375 for 25,000 shares,
(ii) $0.4938 for 10,125 shares, (iii) $0.5432 for 10,125 shares, (iv) $1.5625
for 253,000 shares, (v) $1.50 for 400,000 shares, (vii) $1.25 for 10,000 shares,
(vii) $0.8125 for 75,000 shares, (viii) $1.1562 for 2,500 shares and (ix)
$1.1875 for 671,500 shares. The foregoing options were acquired by the holders
for investment in private transactions exempt from registration by virtue of
either Sections 2(a) (3) or 4(2) of the Securities Act of 1933.
Item 6. Selected Financial Data
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Selected Historical Financial Data
(in thousands, except earnings per share amounts)
The following table presents selected historical financial data of the
Company for the periods indicated. The selected historical financial information
is derived from the audited consolidated financial statements of the Company
referred to under item 8 of this Annual Report on Form 10-K, and previously
published historical financial statements not included in this Annual Report on
Form 10-K. The following selected financial data should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.
Year Ended January 31,
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operating Data:
- --------------
<S> <C> <C> <C> <C> <C>
Net revenues........................ $90,796 $114,696 $89,297 $45,005 $37,914
Operating income (loss)............. (22,862) 786 4,889 891 2,057
Net (loss) income .................. (25,176) (641) 3,405 1,145 1,054
(Loss) earnings per share:
Basic............................ $(1.41) $(.04) $.30 $.13 $.12
Diluted.......................... (1.41) (.04) .25 .11 .11
Weighted average number of
common shares outstanding:
Basic............................ 17,798 15,250 11,375 9,143 8,726
Diluted.......................... 17,798 15,250 13,788 10,152 9,427
</TABLE>
12
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At January 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
- ------------------
Current Assets ............... $32,799 $45,216 $21,459 $ 9,039 $ 5,969
Total assets ................. 64,058 74,600 29,912 14,709 11,746
Long-Term debt ............... 1,848 271 -- -- --
Total stockholders' equity ... 32,948 51,849 23,550 8,608 5,586
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements that are not historical facts contained in Item 7 and
elsewhere in this Annual Report on Form 10-K are forward looking statements that
involve a number of known and unknown risks, uncertainties and other factors,
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 risks of litigation and regulatory proceedings,
the risks of uncertainty of trademark protection, the uncertainty of marketing
and licensing acquired trademarks and other risks detailed below and in the
Company's other SEC filings, and uncertainty associated with the impact on the
Company in relation to recent events discussed in this report and under "Item 1.
The words "believe", "expect", "anticipate", "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.
Seasonal And Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of holidays, weather, the timing of
footwear shipments, market acceptance of Company products, the mix, pricing and
presentation of the products offered and sold, the hiring and training of
additional personnel, the timing of inventory write downs, fluctuations in the
cost of materials, the mix between wholesale and licensing businesses, the
incurrence of other operating costs and factors beyond the Company's control,
such as general economic conditions and the action of competitors. Accordingly,
the results of operations in any quarter will not necessarily be indicative of
the results that may be achieved for a full fiscal year or any future quarter.
In addition, the timing of the receipt of future revenues could be impacted
by the recent trend among retailers in the Company's industry to order goods
closer to a particular selling season than they have historically done so. The
Company continues to seek to expand and diversify its product lines to help
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reduce the dependence on any particular product line and lessen the impact of
the seasonal nature of its business. However, the success of the Company will
still largely remain dependent on its ability to accurately predict upcoming
fashion trends among its customer base, build and maintain brand awareness and
to fulfill the product requirements of its retail channel within the shortened
timeframe required. Unanticipated changes in consumer fashion preferences,
slowdowns in the United States economy, changes in the prices of supplies,
consolidation of retail establishments, among other factors noted herein, could
adversely affect the Company's future operating results.
General Introduction
Of the Company's net loss of $25.2 million for Fiscal 2000, $11.9 million
was attributable primarily to losses on recurring operations, $8.0 million, for
litigation settlement costs, $3.0 million in special legal and administrative
costs, and $2.0 million on joint venture losses. Losses on recurring operations
were the result of a 4.8% decline in gross profit rate attributable to
promotional pricing discounts as well as an 11.9% increase of general and
administrative expenses primarily due to the impact of the Company's prior
expansion outside of its core footwear business. These declines were partially
offset by a 2.6 million increase in licensing revenue.
Non recurring litigation and legal and administrative costs of $8.0 million
and $3.0 million, respectively, were incurred to investigate and to respond to
certain issues relating to the restatement of certain Fiscal 1999 results and
Fiscal 1998 results and to defend related lawsuits. See Item 3 "Legal
Proceedings."
The Unzipped joint venture recorded a loss of $ 4.0 million primarily due
to the discontinuance of the Candies jeans line. The Company's share of the loss
was $2.0 million or 2.2% of net revenues.
As part of its plan to improve its operating results, the Company is
focusing its efforts on its core footwear business while continuing to expand
its licensing agreements that it believes will enhance the Candies brand. The
core business initiatives include improving inventory turn and consolidating
east coast distribution facilities. These initiatives have been implemented
during the fourth quarter of Fiscal 2000 and the first quarter of the fiscal
year ended January 31, 2001 ("Fiscal 2001"), the benefits of which are to be
realized in Fiscal 2001. In addition, the Company has already developed its
candies.com website as both a Y generation destination, and e-commerce site by
partnering with MTV for content and with Journey for product fulfillment.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Revenues. Net revenues decreased by $23.9 million or 20.8% to $90.8
million, during Fiscal 2000, due primarily to decreased sales of Candies brand
footwear of $15.1 million, decreased private label sales of $5.3 million,
decreased sales of girls footwear of $2.4 million and the absence of the Fiscal
1999, one time revenues of $2.1 million generated in connection with certain
customers. These decreases in Fiscal 2000 net revenues were partially offset by
sales increases in handbags of $1.2 million and retail sales increases of $1.1
million. The decline in footwear revenue is due to decreased consumer acceptance
of the Company's Fiscal 2000 footwear styles.
Gross Profit. Gross profit decreased by $9.9 million or 38% to $16.4
million from $26.3 million in the prior year. As a percentage of net revenues,
gross profit decreased from 22.9% in Fiscal 1999 to 18.1% in Fiscal 2000. This
decline in gross profit rate was primarily attributable to promotional pricing
discounts. The decreased gross profit was comprised as follows: $2.9 million for
girls footwear, $4.9 million for Candies brand footwear, $1.2 for Bongo, $0.3
for handbags and $1.1 for private label; partially offset by the retail store
increased profits of $0.5 million.
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<PAGE>
Licensing Income. Licensing Income increased $2.6 million to $3.0 million
for Fiscal 2000. This increase was attributable to the acquired Bongo license
and newly granted fragrance and eyewear licensing arrangements.
Operating Expenses. Selling, general and administrative expenses increased
by approximately $5.4 million to $31.3 million during Fiscal 2000. As a
percentage of net revenues, selling, general and administrative expenses
increased to 34.4% for Fiscal 2000 from 22.5% for the prior year. These
increases reflect costs attributable to increased amortization expenses related
to the Company's acquisitions and fixed asset additions ($1.6 million),
increased advertising and website expenditures ($1.8 million), coupled with
increased salary expenses incurred as a result of management changes ($0.9
million) as well as increased freight, rent, legal, other and finance fee
expenses ($1.1 million).
In addition, the Company incurred significant non recurring litigation and
legal and administrative costs to investigate and respond to certain issues
relating to the restatement of its Fiscal 1999 quarterly results and Fiscal 1998
results. These one-time charges include, a litigation settlement of $8 million
and $ 3 million in legal and administrative and certain litigation costs. See
Item 3 "Legal Proceedings."
Operating Income (Loss.) As a result of the foregoing, the Company
sustained an operating loss of $22.9 million for Fiscal 2000, compared to
operating income of $0.8 million for the prior fiscal year.
Interest Expense. Interest expense increased by $0.4 million to $1.4
million, or 1.6% of net revenues, primarily as a result of higher average
borrowings and higher interest rates under the Company's revolving credit
facility.
Equity Losses in Joint Venture. The Unzipped joint venture recorded a loss
of $4.0 million for Fiscal 2000 primarily due to the discontinuance of the
Candies jeans line. The Company's share of this loss was $2.0 million or 2.2% of
net revenues, as compared to the prior fiscal year loss of $1.1 million with the
Company's portion being $0.5 million.
Income Tax Benefit. The income tax benefit was limited to $1.1 million or
4% of pre tax losses due to the establishment of a valuation provision of $9.3
million in Fiscal 2000. The Company has a net deferred tax asset of
approximately $3.6 million which management believes will be recoverable from
profits to be generated over the next few years. The valuation allowance of $
9.3 million represents amounts that can not be assured of recoverability. See
Note 13 of the Notes to Financial Statements.
Net Loss. As a result of the foregoing, the Company sustained a net loss of
$25.2 million for Fiscal 2000, compared to a net loss of $0.6 million, for the
prior fiscal year.
Fiscal 1999 Compared to Fiscal 1998
Revenues. Net revenues increased by $25.4 million, or 28.4% to $114.7
million, primarily as a result of increased brand awareness and consumer
acceptance due to the Company's increased sales and marketing efforts, the
continued growth of children's footwear products, the launch of handbags and
increased international distribution of products.
Gross Profit. Gross Profit margins decreased to 22.9% from 24.6% in the
prior fiscal year. The decrease was primarily attributable to increased customer
returns and allowances coupled with increased revenues obtained from footwear
products on a private label basis that typically generate lower margins.
Operating Expenses. Selling, general and administrative expenses increased
by approximately $8.7 million to $25.9 million for Fiscal 1999 compared to $17.2
million for the prior fiscal year. As a percentage of net revenues, selling,
general and administrative expenses increased 3.3% to 22.5% for Fiscal 1999 from
19.2% for the prior fiscal year. These increases reflect costs which are
directly associated with the increase in net revenues, including increased
advertising expenditures ($2.4 million), increased amortization expenses related
to the Company's acquisitions and fixed asset additions ($0.9 million),
15
<PAGE>
coupled with the costs incurred in implementing the Company's strategic plan to
strengthen its management team and infrastructure ($3.0 million), which the
Company believed was necessary for future growth.
Operating Income. As a result of the foregoing, operating income decreased
$4.1 million to $0.8 million for Fiscal 1999, compared to $4.9 million for the
prior year.
Interest Expense. Interest expense decreased by $0.1 million, or 11.0%,
primarily as a result of lower average borrowings and, to a lesser extent, lower
interest rates under the Company's revolving credit facility.
Income Tax Expense. The relationship of the income tax provision in Fiscal
1999 and Fiscal 1998, respectively, to income before income taxes was 16% and
9%, respectively. The Fiscal 1999 year effective rate was low because of the
state tax rates and nondeductible amortization expense. The Fiscal 1998 rate was
low due to the reversal of the valuation allowance.
Net Income. As a result of the foregoing, the Company sustained a net loss
of $.6 million for Fiscal 1999, compared to net income of $3.4 million for the
prior year.
Liquidity and Capital Resources
Working Capital. Working capital decreased $19.4 million to approximately
$3.5 million at January 31, 2000 from approximately $22.9 million at January 31,
1999. The decrease is due primarily to current year losses. At January 31, 2000,
the current ratio of assets to liabilities was 1.12 to 1 as compared to 2.02 to
1 for the prior fiscal year.
The Company continues to rely upon trade credit, revenues generated from
operations, especially private label and licensing activity, as well as
borrowings from its factor to finance its operations. Net cash provided from
operating activities totaled $3.3 million in Fiscal 2000, as compared to net
cash used in operating activities of $22.0 million in Fiscal 1999. The changes
in net cash of $25.3 million were realized primarily as follows: Non cash
settlement expense of $8.0 million, additional losses on the joint venture of
$1.5 million for Fiscal 2000, and the prior fiscal year's recharacterzation of
$16.0 million from a change in operaing asset to financing activity.
Capital expenditures. Capital expenditures were $2.8 million for Fiscal
2000 as compared to $1.9 million for the prior year. The current year capital
expenditures include: retail store additions $1.1 million, data processing
software and equipment $0.6 million, and the remainder showroom and office
additions. The Company's 2001 capital expenditure plans of $2.2 million include
$1.0 million for website development costs and $0.9 million for up to five
additional retail store. The Company believes that it will be able to fund these
anticipated expenditures primarily with cash flow from operations supplemented
by borrowings under its existing revolving credit facility.
Financing Activities. During Fiscal 1999, 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 the Warrants. The proceeds were used to repay short-term borrowings.
Each Warrant entitled the holder thereof to purchase one share of Common Stock
at an exercise price of $5.00. In addition, in Fiscal 1999, the Company received
proceeds of $1.17 million, in connection with the issuance of Common Stock
relating to the exercise of outstanding stock options.
On the Effective Date, the Company completed the Merger with NRC. Each
issued and outstanding share of NRC Common Stock and each issued and outstanding
option to purchase one share of NRC Common Stock, prior to the Effective Date,
were converted, respectively, into 0.405 shares of Candies Common Stock, and
into options to purchase 0.405 shares of Candie's Common Stock, respectively.
The Merger was accounted for using the purchase method of accounting.
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At the Effective Date, there were 5,743,639 outstanding shares of NRC
Common Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of Candie's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of Candie's Common Stock. NRC also owned 1,227,696 shares of
Candie's Common Stock and had options and warrants to purchase an additional
800,000 shares of Candie's Common Stock. These options and warrants were
extinguished upon consummation of the Merger.
On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Caruso. Pursuant to the agreement, the
Company acquired the BONGO trademark as well as certain other related trademarks
and two license agreements, one for children's and one for large size jeans
wear. Prior to the acquisition, Caruso licensed certain trademarks relating to
footwear to the Company, which license was terminated as of the closing date.
The purchase price for the shares acquired was approximately $15.4 million
and was paid at the closing in 1,967,742 shares of Candie's Common Stock (each
share being valued at $7.75), plus $0.1 million in cash. In March 1999, an
additional 547,722 shares of Candie's Common Stock were delivered to the sellers
based on a clause in the agreement requiring an upward adjustment in the number
of shares delivered at Closing.
Capital Contribution to Unzipped. On or about October 31, 1999, the Company
made a $0.5 million capital contribution to Unzipped. In addition, pursuant to
the terms of the Operating Agreement of Unzipped, on January 31, 2003, the
Company must purchase from Sweet, Sweet's entire interest in Unzipped at the
aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for the
fiscal year commencing on February 1, 2002 and ending January 31, 2003. The
Company has the right, in its sole discretion, to pay for such interest in cash
or shares of Candie's Common Stock. In the event the Company elects to issue
shares of Candie's Common Stock to Sweet, Sweet shall receive registered shares
of Candie's Common Stock and the right to designate a member to the Board of
Directors for the Company until the earlier to occur of (i) the sale of any of
such shares or (ii) two years from the date of closing of such purchase.
Unzipped reported an operating loss of $4.0 million for Fiscal 2000, as compared
to the prior year's loss of $1.1 million; the Company's share of the losses was
$2.0 million and $0.5 million respectively. The Company believes that Unzipped
is currently in breach of certain provisions of the agreements among the
parties, and has notified Unzipped that the Company does not intend to
contribute any additional capital toward the joint venture.
Current Revolving Credit Facility. 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. ("Rosenthal") and terminated its former credit
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 bear
interest at 0.5% above the prime rate. Certain borrowings in excess of an
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 minimum factoring commission fee for the initial term is $0.5
million. As of January 31, 2000, the outstanding borrowing under the facility
was $14.0 million, including outstanding letters of credit. Borrowings under the
Line of Credit were secured against factored receivables of $9.9 million and
inventory. Interest paid to Rosenthal for Fiscal 2000 was $0.3 million.
The Line of Credit contains two financial covenants for tangible net worth
and working capital. The Company was not in compliance with these financial
covenants as of January 31, 2000 and received an interim waiver from Rosenthal
as of April 27, 2000. This waiver exempts the financial covenants unless there
is a deterioration of the financial condition of the Company. In addition, the
waiver establishes that Rosenthal and the Company will establish mutually
agreeable financial covenants within a reasonable timeframe.
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining balance
considered to be an unsecured loan. The term of the agreement is four years at
an effective annual interest rate of 10.48%. The outstanding loan balance as of
January 31, 2000 was $2.8 million. The interest paid for Fiscal 2000 was $0.3
million. The quarterly payment on the loan is $260,000, including interest.
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The Company's 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 for the proposed expansion of
its retail operations during Fiscal 2001, primarily with cash flow from
operations, supplemented by borrowings under its existing revolving credit
facility. However, if the Company's plans change or its assumptions prove to be
incorrect it could be required to obtain additional capital which may not be
available to it on acceptable terms.
Prior Revolving Credit Facility. In May 1998, the Company entered into a
three year $35 million revolving credit facility (the "Facility"). During Fiscal
2000 the Company failed to comply with certain covenants of the Facility and the
Facility was repaid in full with proceeds from the Line of Credit in October
1999.
Seasonality
The Company's quarterly results may fluctuate quarter to quarter as a
result of holidays, weather, the timing of footwear shipments, market acceptance
of Company products, the mix, pricing and presentation of the products offered
and sold, the hiring and training of additional personnel, the timing of
inventory write downs, fluctuations in the cost of materials, the mix between
wholesale and licensing businesses, the incurrence of other operating costs and
factors beyond the Company's control, such as general economic conditions and
the action of competitors. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that may be achieved for a
full fiscal year or any future quarter.
The Company's products are marketed primarily for Fall and Spring seasons,
with slightly higher volumes of products sold during the second and fourth
quarters.
Effects of Inflation
The Company does not believe that the relatively moderate rates of
inflation experienced over the past few years in the United States, where it
primarily competes, have had a significant effect on revenues or profitability.
Net Operating Loss Carry Forwards
At January 31, 2000, the Company had net operating losses of approximately
$19.8 million for income tax purposes, which expire in the years 2007 through
2020. Due to the issuance of Candie's Common Stock on February 23, 1993, an
"ownership change," as defined in Section 382 of the Internal Revenue Code,
occurred. Section 382 restricts the use of the Company's net operating loss
carryforwards incurred prior to the ownership change to $275,000 per year.
Approximately $2.5 million of the operating loss carryforwards are subject to
this restriction and accordingly, no accounting recognition has been given to
approximately $1.8 million of operating losses since present restrictions
preclude their utilization. During Fiscal 1999, the Company merged with NRC and
was entitled to another $2.4 million of operating losses incurred by NRC. These
operating losses are also subject to restriction and only $327,000 can be
carried forward each year. See Note 13 of the Notes to Financial Statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company enters into forward exchange contracts to hedge foreign
currency transactions and not to engage in currency speculation. The Company's
forward exchange contracts do not subject the
18
<PAGE>
Company to risk from exchange rate movements because gains and losses on such
contracts offset losses and gains, respectively, on the assets, liabilities or
transactions being hedged. The forward exchange contracts generally require the
Company to exchange U.S. dollars for foreign currencies. If the counterparties
to the exchange contracts do not fulfill their obligations to deliver the
contracted currencies, the Company could be at risk for any currency related
fluctuations. The Company limits exposure to foreign currency fluctuations in
most of its purchase commitments through provisions that require vendor payments
in U.S. dollars. As of January 31, 2000, there were no forward exchange
contracts outstanding. Unrealized gains and losses are deferred and included in
the measurement of the related foreign currency transaction. Gains or losses on
these contracts during Fiscal 2000, 1999, and 1998 were immaterial.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be submitted in response to this Item
8 are set forth in Part IV, Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 17, 1999, the Company dismissed Ernst & Young LLP ("E&Y") as its
independent auditors. The reports of E&Y on the financial statements of the
Company for Fiscal 1998 and the fiscal year ended January 31, 1997 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. However, in a
May 12, 1999 press release the Company indicated that its financial statements
for Fiscal 1998 should not be relied upon.
The decision to change auditors was approved by the Board and the Audit
Committee of the Board. During the time that the audits of the Company's
financial statements for each of the two fiscal years in the period ended
January 31, 1998 were conducted, there were no disagreements with E&Y on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of E&Y
would have caused it to make reference to the matter in its report.
During the course of its uncompleted audit of the Company's financial
statements for Fiscal 1999, E&Y informed the Company that it had been unable to
obtain sufficient evidentiary support to determine the appropriateness of the
accounting the Company had applied to (i) certain barter transactions, (ii)
transactions with a related party and principal supplier and (iii) certain other
transactions which may have affected the Company's interim quarterly financial
results during Fiscal 1999. E&Y also requested the Company to appoint the
Special Committee to conduct an independent investigation of such transactions.
E&Y also informed the Company that, in its opinion, the resolution of such
matters might require the Company to restate its financial statement for Fiscal
1998 and each of the first three quarters of Fiscal 1999, and could result in
the Company reporting a loss for Fiscal 1999.
In response to the issues raised by E&Y the Special Committee commenced an
investigation. The Special Committee completed that investigation, and on August
26, 1999 reported its findings to the Board. On June 22, 1999, the Company
engaged BDO Seidman, LLP ("BDO") as its independent auditors to audit its
financial statements with respect to Fiscal 1998 and 1999 and, if necessary,
other prior fiscal years. The Company has authorized E&Y to respond fully to any
inquiries BDO made. The Company did not seek the advice of BDO regarding the
subject matter of the foregoing reportable events with E&Y. However, members of
the Company's Board and management did fully disclose to BDO what the Company
believed to be the subject matter of the issues raised by E&Y as part of the
process of determining whether BDO would accept the Company's engagement and, if
so, the time frame in which BDO believed it could complete the necessary audit
of the Company's Financial Statements. The information with respect to the
Company's change in auditors was previously reported in the Company's Form 8-K
for the event dated June 17, 1999.
19
<PAGE>
PART III
The information required by Items 10 (Directors and Executive Officers of
the Registrant), 11 (Executive Compensation), 12 (Security Ownership of Certain
Beneficial Owners and Management), and 13 (Certain Relationships and Related
Transactions) of Part III of this Form 10-K is omitted from this report and is
incorporated by reference from the definitive proxy statement for the Company's
annual meeting of stockholders to be held in the year 2000 that will be filed
with the SEC on or before May 30, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedule
See the accompanying Financial Statements and Financial Statement Schedule
filed herewith submitted as a separate section of this report - See F-1
(b) Reports on Form 8-K
None
(c) See the attached Index to Exhibits
20
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANDIE'S, INC.
By: /s/ Neil Cole
-----------------------
Neil Cole
Chief Executive Officer
Dated: May 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature and Name Capacity in Which Signed Date
- ------------------ ------------------------ ----
<S> <C> <C>
/s/ Neil Cole Chairman of the Board, President and Chief May 1, 2000
- -------------- Executive Officer
Neil Cole
/s/John M. Needham Vice President of Finance May 1, 2000
- ------------------ (Principal Financial and Accounting Officer)
John M. Needham
/s/ Barry Emanuel Director May 1, 2000
- -------------------
Barry Emanuel
/s/ Mark Tucker Director May 1, 2000
- -----------------
Mark Tucker
Director May 1, 2000
- -------------------
Steven Mendelow
/s/ Peter Siris Director May 1, 2000
- ---------------
Peter Siris
</TABLE>
21
<PAGE>
Index to Exhibits
Exhibit
Numbers Description
2.1 Agreement and Plan of Merger between the Company and New Retail
Concepts, Inc.(8)
2.2 Stock Purchase Agreement dated September 24, 1998 by and among the
Company, Licensing Acquisition Corp., Michael Caruso & Co., Inc.
("Caruso") and the stockholders of Caruso (11)
3.1 Certificate of Incorporation, as amended through October 1994 (1)(3)
3.2 Amendment to Certificate of Incorporation filed November 1994 (2)
3.3 Amendments to Certificate of Incorporation filed in August 1998, and
February 2000 (16)
3.4 Restated and Amended By-Laws (16)
10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (3)
10.2 1989 Stock Option Plan of the Company (1)
10.3 1997 Stock Option Plan of the Company (7)
10.4 Employment Agreement between Neil Cole and the Company (4)
10.5 Amendment to Employment Agreement between Neil Cole and the Company
(6)
10.6 Lease with respect to the Company's executive offices (2)
10.7 Agreement dated as of April 3, 1996 between the Company and Redwood
Shoe Corp. (5)
10.8 Amendment dated as of September 30, 1996 to agreement dated as of
April 3, 1996 between the Company and Redwood Shoe Corp. (6)
10.9 Employment Agreement between Lawrence O' Shaughnessy and the Company.
(5)
10.10 Amendment to Employment Agreement between Lawrence O'Shaughnessy and
the Company. (6)
10.11 Employment Agreement between David Golden and the Company. (8)
10.12 Employment Agreement between Deborah Sorell Stehr and the Company (13)
10.13 Employment Agreement between Frank Marcinowski and the Company (13)
10.14 Limited Liability Company Operating Agreement of Unzipped Apparel LLC
(12)
10.15 Escrow Agreement by and among the Company, the stockholders of Caruso
and Tenzer Greenblatt LLP(11)
10.16 Registration Rights Agreement between the Company and the stockholders
of Caruso (11)
10.17 Amendment to Lease Agreement with respect to the Company's executive
offices. (13)
22
<PAGE>
10.18 Amendment dated January 27, 2000 to Employment Agreement between Neil
Cole and the Company (16)
10.19 Amendment dated January 27, 2000 to Employment Agreement between
Deborah Sorell Stehr and the Company (16)
10.20 Employment Agreement between John M. Needham and the Company (16)
10.21 Rights Agreement dated January 26, 2000 between the Company and
Continental Stock Transfer and Trust Company (15)
10.22 Factoring Agreement between Rosenthal & Rosenthal, Inc. and the
Company (14)
10.23 Inventory Security Agreement between Rosenthal & Rosenthal, Inc. and
the Company (14)
10.24 Factoring Agreement between Rosenthal & Rosenthal, Inc. and Bright
Star Footwear, Inc. (14)
10.25 Inventory Security Agreement between Rosenthal & Rosenthal, Inc. and
Bright Star Footwear, Inc. (14)
21 Subsidiaries of the Company. (16)
23 Consent of BDO Seidman LLP (16)
27 Financial Data Schedules. (for SEC use only) (16)
- ----------
(1) Filed with the Registrant's Registration Statement on Form S-18 (File
33-32277-NY) and incorporated by reference herein.
(2) Filed with the Registrant's Annual Report on Form 10-KSB for the year ended
January 31, 1995, and incorporated by reference herein.
(3) Filed with the Registrant's Registration Statement on Form S-1 (File
33-53878) and incorporated by reference herein.
(4) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1994 and incorporated by reference herein.
(5) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1996, and incorporated by reference herein.
(6) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1997, and incorporated by reference herein.
(7) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1997, and incorporated by reference herein.
(8) Filed with the Company's Annual Report on form 10-K for the year ended
January 31, 1998
(9) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1998 and incorporated by reference herein.
(10) Filed with the Company's Joint proxy Statement/Prospectus dated July 2,
1998 constituting a part of the Company's Registration Statement on Form
S-4 333-52779
(11) Filed with the Company's Current Report on Form 8-K dated September 24,
1998 and incorporated by reference herein.
(12) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1998 and incorporated by reference herein.
(13) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1999
(14) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1999
(15) Filed with the Company's Current Report on Form 8-K dated January 26, 2000
(16) Filed herewith
23
<PAGE>
Annual Report on Form 10-K
Item 8, 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedule
Year Ended January 31, 2000
Candie's, Inc. and Subsidiaries
F-1
<PAGE>
Candie's, Inc. and Subsidiaries
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
The following consolidated financial statements of Candie's Inc. and
subsidiaries are included in Item 8:
<S> <C>
Report of Independent Certified Public Accountants on Financial Statements
as of and for the Years Ended January 31, 2000, 1999 and 1998............................ F-3
Consolidated Balance Sheets - January 31, 2000 and 1999...................................... F-4
Consolidated Statements of Operations for the Years ended
January 31, 2000, 1999 and 1998.......................................................... F-5
Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 2000, 1999 and 1998...................................... F-6
Consolidated Statements of Cash Flows for the Years ended
January 31, 2000, 1999 and 1998.......................................................... F-7
Notes to Consolidated Financial Statements................................................... F-8
<CAPTION>
The following consolidated financial statement schedule of Candie's, Inc. and
subsidiaries is included in Item 14(d):
<S> <C>
Report of Independent Certified Public Accountants on Financial Statement
Schedule for the Years Ended January 31, 2000, 1999 and 1998............................. S-1
Schedule II Valuation and qualifying accounts .............................................. S-2
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
<PAGE>
Report of Independent Certified Public Accountants
The Stockholders and Directors of
Candie's, Inc.
We have audited the accompanying consolidated balance sheets of Candie's, Inc.
and subsidiaries as of January 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Candie's, Inc. and
subsidiaries at January 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
2000, in conformity with generally accepted accounting principles.
/s/: BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP
New York, New York
April 20, 2000
F-3
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)
<TABLE>
<CAPTION>
January 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Assets
Current Assets:
Cash ........................................................ $ 643 $ 598
Restricted cash ............................................. 2,000 --
Accounts receivable, net of allowances of
$2,992 in 2000 and $950 in 1999 ........................ 2,711 2,774
Due from factor and accounts receivable, net of allowances of
$1,830 in 2000 and $2,579 in 1999 ...................... 8,034 15,138
Due from affiliates ......................................... 636 796
Inventories ................................................. 14,770 19,031
Refundable and prepaid income taxes ......................... 631 2,623
Deferred income taxes ....................................... 1,448 2,598
Prepaid advertising and other ............................... 1,622 1,182
Other current assets ........................................ 304 476
-------- --------
Total Current Assets ................................................ 32,799 45,216
-------- --------
Property and equipment, at cost:
Furniture, fixtures and equipment ........................... 6,679 3,860
Less: Accumulated depreciation and amortization ............. 2,124 1,258
-------- --------
4,555 2,602
-------- --------
Other Assets:
Goodwill, net of accumulated amortization of
$509 in 2000 and $367 in 1999 ......................... 2,152 2,294
Other intangibles, net ...................................... 22,047 23,885
Deferred income taxes ....................................... 2,174 --
Investment and equity in joint venture - net ................ -- 51
Other ....................................................... 331 552
-------- --------
26,704 26,782
-------- --------
Total Assets ........................................................ $ 64,058 $ 74,600
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Revolving notes payable - banks ................................. $ 13,764 $ 16,874
Litigation settlement ........................................... 4,000 --
Accounts payable and accrued expenses ........................... 7,618 4,416
Accounts payable - Redwood Shoe ................................. 1,286 943
Current portion of long-term debt and capital lease obligation .. 1,143 97
Losses in excess of joint venture investment .................... 1,451 --
-------- --------
Total current liabilities ........................................... 29,262 22,330
-------- --------
Long-term liabilities and capital lease obligation .................. 1,848 271
Deferred income taxes ............................................... -- 150
Stockholders' Equity:
Preferred and common stock to be issued ......................... 6,000 --
Preferred stock, $.01 par value - shares authorized 5,000;
none issued or outstanding ............................. -- --
Common stock, $.001 par value - shares authorized 30,000;
shares issued 19,209 in 2000 and 18,525 in 1999 ........ 19 18
Additional paid-in capital ...................................... 59,094 58,819
Retained earnings (deficit) ..................................... (25,732) (556)
Less: Treasury stock - at cost - 1,313 shares .................. (6,433) (6,432)
-------- --------
Total Stockholders' Equity .......................................... 32,948 51,849
-------- --------
Total Liabilities and Stockholders' Equity .......................... $ 64,058 $ 74,600
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except earnings per share data)
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net revenues ........................................ $ 90,796 $ 114,696 $ 89,297
Cost of goods sold .................................. 74,347 88,427 67,314
--------- --------- ---------
Gross profit ........................................ 16,449 26,269 21,983
Licensing income .................................... 2,951 373 84
--------- --------- ---------
19,400 26,642 22,067
Selling, general and administrative expenses ........ 31,260 25,856 17,178
Special charges ..................................... 3,002 -- --
Litigation settlement, net .......................... 8,000 -- --
--------- --------- ---------
Operating (loss) income ............................. (22,862) 786 4,889
Other expenses:
Interest expense - net ...................... 1,415 1,005 1,129
Equity loss in joint venture ................ 2,002 545 --
--------- --------- ---------
3,417 1,550 1,129
--------- --------- ---------
(Loss) income before income taxes ................... (26,279) (764) 3,760
Provision (benefit) for income taxes ................ (1,103) (123) 355
--------- --------- ---------
Net (loss) income ................................... $ (25,176) $ (641) $ 3,405
========= ========= =========
(Loss) earnings per share:
Basic ................. $ (1.41) $ (.04) $ .30
========= ========= =========
Diluted ............... $ (1.41) $ (.04) $ .25
========= ========= =========
Weighted average number of common shares outstanding:
Basic ................. 17,798 15,250 11,375
========= ========= =========
Diluted ............... 17,798 15,250 13,788
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Preferred
& Common Additional Retained
Common Stock Stock to be Paid - In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1997 ...................... 9,634 $ 9 $ -- $ 11,919 $ (3,320) $ -- $ 8,608
Exercise of stock options and
warrants .................................... 2,800 3 -- 9,510 -- -- 9,513
Retirement of escrow shares ................... (20) -- -- -- -- -- --
Issuance of common stock to
benefit plan ................................ 11 -- -- 56 -- -- 56
Tax benefit from pre-quasi
reorganization carryforward
losses ...................................... -- -- -- 1,102 -- -- 1,102
Stock option compensation ..................... -- -- -- 36 -- -- 36
Tax benefit from exercise of stock
options ..................................... -- -- -- 830 -- -- 830
Net income .................................... -- -- -- -- 3,405 -- 3,405
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 1998 ...................... 12,425 12 -- 23,453 85 -- 23,550
Exercise of stock options and
warrants .................................... 1,790 2 -- 8,329 -- -- 8,331
Net effect of merger with New
Retail Concepts, Inc. ....................... 2,326 2 -- 11,314 -- (6,061) 5,255
Stock acquisition of Michael
Caruso & Co., Inc. .......................... 1,968 2 -- 15,248 -- -- 15,250
Issuance of common stock to
benefit plan ................................ 16 -- -- 78 -- -- 78
Purchase of treasury shares ................... -- -- -- -- -- (371) (371)
Stock option compensation ..................... -- -- -- 102 -- -- 102
Tax benefit from exercise of stock
options ..................................... -- -- -- 295 -- -- 295
Net loss ...................................... -- -- -- -- (641) -- (641)
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 1999 ...................... 18,525 18 -- 58,819 (556) (6,432) 51,849
Exercise of stock options and
warrants .................................... 99 -- -- 148 -- -- 148
Issuance of common stock to
benefit plan ................................ 37 -- -- 128 -- -- 128
Preferred and common stock to be
issued for litigation settlement ............ -- -- 6,000 -- -- -- 6,000
Additional contingent shares
issued for the Acquisition of
Michael Caruso & Co., Inc. .................. 548 1 -- (1) -- -- --
Other ......................................... -- -- -- -- -- (1) (1)
Net loss ...................................... -- -- -- -- (25,176) -- (25,176)
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 2000 ...................... 19,209 $ 19 $ 6,000 $ 59,094 $(25,732) $ (6,433) $ 32,948
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended January 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows (used in) provided by operating activities:
Net (loss) income ............................................................ $(25,176) $ (641) $ 3,405
Items in net income not affecting cash:
Depreciation of property and equipment ................................. 877 547 244
Amortization of intangibles ............................................ 2,145 1,023 360
Stock option compensation .............................................. -- 102 36
Equity loss in Joint Venture ........................................... 2,002 545 --
Litigation settlement .................................................. 8,000 -- --
Deferred income taxes .................................................. (1,174) (811) (598)
Changes in operating assets and liabilities:
Accounts receivable ............................................ 63 (1,488) (68)
Factoring receivables and payable, net ......................... 7,104 (16,038) 319
Inventories .................................................... 4,261 (1,367) (12,413)
Prepaid advertising and other .................................. (139) (418) (305)
Refundable and prepaid taxes ................................... 1,992 (2,480) (65)
Other assets ................................................... 221 (154) 262
Accounts payable and accrued expenses .......................... 3,205 (835) 39
Long-term liabilities .......................................... (52) (9) (47)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities .......................... 3,329 (22,024) (8,831)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Purchases of property and equipment ................................... (2,832) (1,923) (705)
Investment in joint venture ........................................... -- (500) --
Other ................................................................. (165) (156) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ........................................ (2,997) (2,579) (705)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) financing activities:
Revolving notes payable bank .......................................... (3,110) 16,874 --
Proceeds from loans ................................................... 3,471 -- --
Proceeds from exercise of stock options and warrants .................. 148 8,331 9,513
Proceeds from long-term debt and capital lease obligation ............. (796) -- --
Purchase of treasury stock ............................................ -- (371) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities .......................... (287) 24,834 9,513
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ......................... 45 231 (23)
Cash and cash equivalents, beginning of year .......................... 598 367 390
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year ................................ $ 643 $ 598 $ 367
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest .............................................................. $ 1,452 $ 1,013 $ 1,131
============================================
Income taxes .......................................................... $ 163 $ 2,859 $ 89
============================================
Supplemental disclosures of non-cash investing and financing
activities:
============================================
Tax benefit from pre-quasi reorganization
carryforward losses .............................................. $ -- $ -- $ 1,102
============================================
Preferred and common stock to be issued .............................. $ 6,000 $ -- $ --
============================================
Issuance of common stock to benefit plan ............................. $ 128 $ 78 $ 56
============================================
Capital contribution - Unzipped ...................................... $ 500 $ -- $ --
============================================
Tax benefit from exercise of stock options ........................... $ -- $ 295 $ 830
============================================
Capital lease for property and equipment ............................. $ -- $ 316 $ --
============================================
Merger and acquisition of businesses ................................. $ -- $ 15,250 $ --
============================================
Common stock issued for merger & acquisition - net
of treasury stock acquired ........................................... $ -- $ 5,255 $ --
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Information as of and for the Years Ended January 31,
2000 and 1999 (dollars are in thousands, except per share data)
The Company
The history of the "CANDIE'S" brand spans over 22 years and has become
synonymous with young, fun and fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc., which was incorporated
in Delaware in 1978, and its subsidiaries (collectively, the "Company") is
currently engaged primarily in the design, marketing, and distribution of
moderately-priced women's casual and fashion footwear under the CANDIE'S(R) and
BONGO(R) trademarks for distribution within the United States to department,
specialty, chain and seven company-owned retail stores and to specialty stores
internationally. The Company markets and distributes, children's footwear under
the CANDIE'S and BONGO trademarks, as well as a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels and the ASPEN(R) brand, which is licensed by the Company from a
third party through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary. In 1998, the Company began licensing its CANDIE'S
trademark for the purpose of building CANDIE'S into a lifestyle brand serving
generation "Y" women and girls, and it currently holds licenses for fragrance,
eyewear, leg wear and handbags. Through Unzipped Apparel, LLC ("Unzipped"), the
Company's joint venture with Sweet Sportswear LLC ("Sweet"), the Company
marketed and distributed jeanswear and apparel under the CANDIE'S and BONGO
label to department, specialty, and chain stores in the United States.
The Company believes that it has developed CANDIE'S into a strong footwear brand
appealing to women and girls in the generation "Y" demographic. As a growth
strategy, the Company plans to continue to focus on building market share in the
junior footwear area of better department and specialty stores, pursuing
licensing opportunities, and expanding its consumer direct business through the
opening of retail stores and e-commerce.
1. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Candie's, Inc. and
its wholly owned subsidiaries. All significant intercompany transactions and
items have been eliminated in consolidation. The Company's 50% equity interest
in Unzipped is accounted for under the equity method.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
Concentration of Credit Risk
Concentration of credit risk is limited due to the large number of customers to
which the Company sells its products and the use of a factor to assign invoices
for sales to its customers. For the fiscal year ended January 31, 2000, one
customer accounted for 10.2% of the Company's total net revenues. No other
customer in any of the years presented exceeded 10% of total revenues.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments purchased with
a maturity date of three months or less. Cash equivalents are stated at cost,
which approximate market value.
Inventories
Inventories, which consist entirely of finished goods, are stated at the lower
of cost or net realizable value. Cost is determined by the first-in, first-out
("FIFO") method.
F-8
<PAGE>
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization are
determined by the straight line and accelerated methods over the estimated
useful lives of the respective assets ranging from three to seven years.
Leasehold improvements are amortized by the straight-line method over the term
of the related lease or estimated useful life, whichever is less.
Impairment of Long-Lived Assets
When circumstances mandate, the Company evaluates the recoverability of its
long-lived assets by comparing estimated future undiscounted cash flows with the
assets' carrying value to determine whether a write-down to market value, based
on discounted cash flow, is necessary. No impaired losses have been recorded
through January 31, 2000.
Goodwill and Other Intangibles
The net assets of businesses purchased are recorded at their fair value at the
acquisition date. Any excess of acquisition costs over the fair value of
identifiable net assets acquired is included in goodwill and amortized on a
straight-line basis over 20 years. Trademarks and other intangible assets are
recorded at cost and amortized using the straight-line method over the estimated
lives of the assets, 4 to 20 years.
The CANDIE'S trademark is stated at cost in the amount of $5,952 and $5,830, net
of accumulated amortization of $1,963 and $1,662, at January 31, 2000 and 1999,
respectively, as determined primarily by its fair value relative to other assets
and liabilities at February 28, 1993, the date of the quasi reorganization. In
connection with the quasi reorganization, the Company's assets, liabilities and
capital accounts were adjusted to eliminate the stockholders' deficiency.
Revenue Recognition
Revenue is recognized upon shipment with related risk and title passing to the
customers. Estimates of losses for bad debts, returns and other allowances are
recorded at the time of the sale.
Taxes on Income
The Company uses the asset and liability approach of accounting for income taxes
under Statement of Financial Accounting Standards ("SFAS ") No. 109 "Accounting
for Income Taxes". The Company provides deferred income taxes for temporary
differences that will result in taxable or deductible amounts in future years
based on the reporting of certain costs in different periods for financial
statement and income tax purposes. Valuation allowances are recorded when
recoverability of the asset is not assured.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock options
granted when the exercise price of the option is the same as the market value of
the Company's common stock. As prescribed under SFAS No. 123, "Accounting for
Stock Based Compensation," the Company has disclosed the pro-forma effects on
net income and earnings per share of recording compensation expense for the fair
value of the options granted.
Fair Value of Financial Instruments
The Company's financial instruments approximate fair value at January 31, 2000
and 1999.
Foreign Currency Transactions
The Company enters into forward exchange contracts to hedge foreign currency
transactions and not to engage in currency speculation. The Company's forward
exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains,
respectively, on the assets, liabilities or transactions being hedged. The
forward exchange contracts generally require the Company to exchange U.S.
dollars for foreign currencies. If the counterparties to the exchange contracts
do not fulfill their obligations to deliver the contracted currencies, the
Company could be at risk for any currency related fluctuations. The Company
limits exposure to foreign currency fluctuations in most of its purchase
commitments through provisions that require vendor payments in U.S. dollars. As
of January 31, 2000 and 1999, there were no forward exchange contracts
outstanding. Unrealized gains and losses are deferred and included in the
measurement of the related foreign currency transaction. Gains or losses on
these contracts during Fiscal 2000, 1999 and 1998 were immaterial.
F-9
<PAGE>
Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) 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.
Computer Software costs
Internal and external direct and incremental costs incurred in obtaining and
developing computer software for internal use are capitalized in property and
equipment and amortized, under the straight-line method, over the estimated
useful life of the software, over three years.
Website costs
External costs, totaling approximately $400, incurred in obtaining and
developing the Company's website in fiscal 2000 were capitalized in property and
equipment and amortized, under the straight-line method, over the estimated
useful life of the costs incurred, over three years.
Advertising Campaign Costs
The Company records national advertising campaign costs as an expense concurrent
with the first showing of the related advertising and other advertising costs
when incurred. Advertising expenses for the years ended January 31, 2000, 1999
and 1998 amounted to $7,091, $6,423, and $3,461, respectively.
Licensing Revenue
The Company has entered into various trade name license agreements that provide
revenues based on minimum royalties and additional revenues based on percentage
of defined sales. Minimum royalty revenue is recognized on a straight-line basis
over each period, as defined, in each license agreement. Royalties exceeding the
defined minimum amounts are recognized as income during the period corresponding
to the licensee's sales.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years
beginning after June 15, 2000. The Company is currently reviewing SFAS No. 133
and is not yet able to fully evaluate the impact, if any, it may have on future
operating results or financial statement disclosures.
On December 3, 1999 the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101. SAB No. 101 provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. The SAB should not have any
material impact on the Company's revenue recognition policies in the future.
2. Investment in Joint Venture
On October 7, 1998, the Company formed Unzipped with its joint venture partner
Sweet, the purpose of which was to market and distribute apparel under the BONGO
and CANDIE'S labels. Candie's and Sweet each have a 50% interest in Unzipped.
Pursuant to the terms of the joint venture, the Company licensed the CANDIE'S
and BONGO trademarks to Unzipped for use in the design, manufacture and sale of
certain designated apparel products. The Company believes that Unzipped is
currently in breach of certain provisions of the agreements among the parties,
and has notified Unzipped that the Company does not intend to contribute any
additional capital toward the joint venture. The Company believes that its
exposure related to Unzipped, should the joint venture dissolve, is adequately
provided for.
F-10
<PAGE>
As of January 31, 2000 and 1999, approximately $2,547 and $545, respectively, of
the Company's retained deficit represented the Company's proportionate share of
the Unzipped loss. Condensed financial information for Unzipped is as follows:
<TABLE>
<CAPTION>
Unzipped LLC January 31, 2000 January 31, 1999
------------ ---------------- ----------------
<S> <C> <C>
Current assets, primarily inventory $ 11,307 $ 3,464
Total assets 11,556 3,568
Liabilities 14,458 3,466
Equity
Candie's (1,451) 51
Sweet (1,451) 51
<CAPTION>
For the year ended For the year ended
January 31, 2000 January 31, 1999
---------------- ----------------
<S> <C> <C>
Net sales $ 32,235 $ 2,590
Operating loss (3,973) (1,080)
Net loss (4,003) (1,090)
</TABLE>
Pursuant to the terms of the Operating Agreement of Unzipped, on January 31,
2003, the Company must purchase from Sweet, Sweet's entire interest in Unzipped
at the aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for
the fiscal year commencing on February 1, 2002 and ending January 31, 2003. The
Company has the right, in its sole discretion, to pay for such interest in cash
or shares of common stock. In the event the Company elects to issue shares of
common stock to Sweet, Sweet shall receive registered shares of common stock and
the right to designate a member to the Board of Directors for the Company until
the earlier to occur of (i) the sale of any of such shares or (ii) two years
from the date of closing of such purchase.
In October 1999, the Company made a non-cash $500 capital contribution to
Unzipped by foregoing affiliate receivables to satisfy its obligation. At
January 31, 2000 the affiliate receivable balance from Unzipped was $636.
3. Other Intangibles, net
Intangibles, net consist of the following:
(In thousands, except for estimated lives which are stated in years)
<TABLE>
<CAPTION>
January 31,
------------------------
Estimated lives 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Trademarks 20 $ 23,019 $ 22,854
Non-compete agreement 15 2,275 2,275
Licenses 4 3,047 3,047
-------------------------------------------------------------------------------
28,341 28,176
Less accumulated amortization (6,294) (4,291)
-------------------------------------------------------------------------------
$ 22,047 $ 23,885
===============================================================================
</TABLE>
4. Acquisitions
Caruso
On September 24, 1998, the Company, through a wholly owned subsidiary, acquired
all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso"). As a
result of the transaction, the Company acquired the BONGO trademark as well as
certain other related trademarks and two license agreements for use of the BONGO
trademark, one for children's and one for large size jeanswear. Prior to the
closing of the acquisition, Caruso was the licensor of the BONGO trademark for
use on footwear products sold by the Company, which license was terminated as of
the closing.
F-11
<PAGE>
The purchase price for the shares acquired was approximately $15.4 million and
was paid at the closing in 1,967,742 shares of Candie's Common Stock (each share
being valued at $7.75), plus $100 in cash. On March 24, 1999, 547,722 additional
shares of Candie's Common Stock were delivered to the sellers upon the six month
anniversary of the closing based on a contingency clause in the agreement
requiring an upward adjustment in the number of shares delivered at closing. The
issuance of the contingent consideration had no effect on the purchase price.
This transaction was accounted for using the purchase method of accounting. The
results of operations of Caruso are included in the accompanying financial
statements from the date of acquisition. The total purchase price of
approximately $15.6 million, including acquisition expenses of approximately
$250, but excluding the contingency shares described above, resulted principally
in a purchase price allocation to the licenses acquired of $2.7 million and a
trademark value of $11.8 million.
NRC
The Company began to license the use of the CANDIE'S trademark from New Retail
Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased ownership of
the CANDIE'S trademark from NRC together with certain pre-existing licenses of
NRC, a then publicly traded company engaged primarily in the licensing and
sublicensing of fashion trademarks and a significant stockholder of the Company.
NRC's principal stockholder was also the Company's President and Chief Executive
Officer.
Effective August 18, 1998 (the "Effective Date"), the Company completed a merger
with NRC (the "Merger"). Each issued and outstanding share of NRC common stock
$.01 par value (the "NRC Common Stock"), and each issued and outstanding option
to purchase one share of NRC Common Stock, prior to the Effective Date, was
converted, respectively, into 0.405 shares of common stock, $.001 par value of
the Company (the "Candie's Common Stock"), and into options to purchase 0.405
shares of Candie's Common Stock, respectively.
At the Effective Date, there were 5,743,639 outstanding shares of NRC Common
Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of Candie's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of Candie's Common Stock. NRC also owned 1,227,696 shares of
Candie's Common Stock and had options and warrants to purchase an additional
800,000 shares of Candie's Common Stock. These options and warrants were
extinguished upon consummation of the Merger.
This transaction was accounted for using the purchase method of accounting. The
results of operations of NRC are included in the accompanying financial
statements from the date of the Merger.
The cost of the acquisition, including acquisition expenses of $700, after
netting the value of the reacquired Company shares, warrants and options,
totaled approximately $5.6 million. This resulted principally in purchase price
allocation to the licenses acquired of $340 and a trademark value of $5.2
million. Deferred tax liabilities resulting from this transaction totaled
approximately $2.1 million, which amount was recorded as goodwill.
The following summarized pro-forma condensed consolidated financial information
are based on the assumption that the merger of NRC and the acquisition of Caruso
had been consummated as of February 1, 1997 as follows:
Pro-Forma Financial Information (unaudited)
- -------------------------------------------
1999 1998
--------- -------
(in thousands, except per-share data)
Net revenues $ 114,696 $89,297
========= =======
Licensing income $ 831 $ 798
========= =======
Net income (loss) $ (682) $ 2,736
========= =======
(Loss) earnings per share:
Basic $ ( .04) $ .19
========= =======
Diluted $ ( .04) $ .16
========= =======
The unaudited pro-forma financial information has been provided for
comparative purposes only and is not necessarily indicative of the results
of operations that would have been achieved had the merger and acquisition
been consummated at the beginning of the periods presented, nor is it
necessarily indicative of future operations or the financial results of the
combined companies.
F-12
<PAGE>
5. Special Charges
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 of Directors and the costs of
defending the class action lawsuit and the SEC investigation. During the period
ended January 31, 2000, the Company has incurred approximately $3 million in
special charges for professional fees and payments to financial institutions for
the above matters.
6. Financing Agreement and Related Loan
Current Revolving Credit Facility
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.
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 0.50% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of 0.25% of the maximum Line of
Credit. The Line of Credit also contains certain financial covenants including,
minimum tangible net worth, certain specified ratios and other limitations. The
Company has granted the lenders a security interest in substantially all of its
assets. The Company was in default of certain covenants of its Line of Credit
and has obtained a waiver that exempts the financial covenants unless there is a
further deterioration of the Company's financial condition. In addition, the
waiver establishes the commitment that Rosenthal and the Company will establish
mutually agreeable financial covenants within a reasonable timeframe.
At January 31, 2000, borrowings under the Line of Credit totaled $13.8 million
which was secured against factored receivables of $9.9 million and inventory.
Interest paid to Rosenthal during Fiscal 2000 was $0.3 million. The borrowing
bore interest at 8.75%, which rate is subject to an increase or decrease based
on the conditions of the agreement as stated above.
At January 31, 2000, the Company had $208 of outstanding letters of credit. The
Company's letters of credit availability are formula based which takes into
account borrowings under the Line of Credit, as described above.
Other Borrowing Arrangements
In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp.. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining
agreement balance considered to be an unsecured loan. The agreement's term is
for a period of four years at an effective annual interest rate of 10.48%. The
outstanding loan balance as of January 31, 2000 was $2.8 million. The interest
paid for Fiscal 2000 was $0.3 million. The quarterly payment on the loan is
$260 including interest.
Prior Revolving Credit Facility
In May 1998, the Company entered into a three year $35 million revolving credit
facility (the "Facility"). During Fiscal 2000, the Company failed to comply with
certain covenants of the Facility and the Facility was repaid in full with
proceeds from the Line of Credit in October 1999.
F-13
<PAGE>
7. Stockholders' Equity
Warrants
The following schedule represents warrants activities during the three years
ended January 31, 2000:
<TABLE>
<CAPTION>
Underwriter's Class (A) Class (B) Class (C) NRC Other
Warran4ts(1) Warrants Warrants(2) Warrants(2) Warrants(3) Warrants
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding at January 31, 1997 ........ 857,532 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) .......................... (650,461) -- (1,431,100) (21,000) -- (50,000)
Warrants expired or cancelled ................... -- (54,397) (43,900) -- -- (25,000)
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1998 ........ 207,071 -- -- 1,454,000 700,000 --
Warrants exercised (1) .......................... (207,071) -- -- (1,431,405) -- --
Warrants expired or cancelled ................... -- -- -- (22,595) (700,000) --
------------------------------------------------------------------------------
Warrants outstanding at January 31, 2000 and 1999 -- -- -- -- -- --
==============================================================================
</TABLE>
(1) Underwriter's warrants consist of 69,024 units at an exercise price of
$3.19 per unit entitling the holder to one share of common stock, one Class
B warrant and one Class C warrant. The shares reserved represent the number
of shares issuable upon the exercise of the underwriter warrants and the
attached Class B and C warrants. During the year ended January 31, 1999,
all 69,024 units (representing a total of 207,071 shares of common stock)
were exercised aggregating $844. In connection with an October 1994 private
placement, the Company issued additional warrants to purchase 370,175
shares at an exercise price of $1.15 per share, of which 163,557 were
exercised during the year ended January 31, 1998.
(2) In connection with a secondary offering, the Company issued 1,475,000
shares of common stock, 1,475,000 Class B redeemable warrants and 1,475,000
Class C redeemable warrants to each registered holder. Each Class B warrant
entitled the holder thereof to purchase one share of common stock at a
price of $4.00 and each Class C warrant entitled the holder thereof to
purchase one share of common stock at a price of $5.00. These warrants
expired on February 23, 1998. The Company realized $5,687 net of expenses
during the fiscal year ended January 31, 1998, related to the exercise of
these warrants. The remaining 43,900 warrants were not exercised and were
canceled. During the year ended January 31, 1998, 21,000 Class C Warrants
were exercised aggregating $105. During the fiscal year ended January 31,
1999, 1,431,405 Class C warrants were exercised aggregating $7,157. The
remaining 22,595 warrants expired.
(3) On February 1, 1995, in consideration of loans extended to the Company, NRC
was granted warrants to acquire up to 700,000 shares of the Company's
common stock at an exercise price of $1.24 per share. The warrants expire
five years from their date of grant. Upon the merger of NRC with the
Company these warrants were extinguished.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Effects of applying SFAS 123 for providing
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.
Pro forma information regarding net (loss) income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
January 31,
-------------------------------------------------
2000 1999 1998
-------------------------------------------------
<S> <C> <C> <C>
Expected Volatility .................................... .468 .618-.940 .759-.812
Expected Dividend Yield ................................ 0% 0% 0%
Expected Life (Term) ................................... 3-7 years 3-7 years 1-3 years
Risk-Free Interest Rate ................................ 4.91-6.21% 3.60-9.56% 5.25-6.61%
</TABLE>
F-14
<PAGE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the option is
expensed when the option's are vested. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
January 31,
-------------------------------------
2000 1999 1998
-------------------------------------
<S> <C> <C> <C>
Pro forma net (loss) income ............. $ (25,773) $ (3,410) $ 2,471
Pro forma (loss) earnings per share:
Basic .............................. $ (1.45) $ (.22) $ .22
Diluted ............................ $ (1.45) $ (.22) $ .18
</TABLE>
The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 2000, 1999 and 1998 was $0.46, $1.91 and $2.20,
respectively.
In 1989, the Company's Board of Directors adopted, and its stockholders
approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan,
as amended in 1990, provides for the granting of incentive stock options
("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up
to 222,222 shares of common stock. The 1989 Plan terminated on August 1, 1999.
Under the 1989 Plan, ISO's were to be granted at not less than the market price
of the Company's common stock on the date of the grant. Stock options not
covered by the ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options"
or "NQSO's") were granted at prices determined by the Board of Directors. Under
the 1989 Plan 85,800, 120,300 and 126,800 of ISO's as of January 31, 2000, 1999
and 1998, respectively, were outstanding.
On September 4, 1997, the Company's stockholders approved the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of
common stock options to purchase up to 3,500,000 shares of Company common stock.
All employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007.
Additionally, at January 31, 2000, 1999 and 1998, NQSO's covering 2,907,500,
2,763,000, and 3,298,500 shares of common stock, respectively, were outstanding,
which are not part of either the 1989 or 1997 Plans.
The options that were granted under the 1989 and 1997 Plans expire between five
and ten years from the date of grant.
On November 4, 1999, the Company granted 400,000 NQSO's at an exercise price of
$1.50 per share, to its Chief Executive Officer to replace 400,000 NQSO's with
an exercise price of $1.50 that expired August 1, 1999 and granted 10,000 NQSO's
at an exercise price of $1.25 and simultaneously cancelled 10,000 NQSO's with an
exercise price of $1.25 that were to expire on December 20, 1999. These options
were at or above the stocks fair value at the date of the grant and, therefore,
did not result in any compensation expense. On January 15, 1998, the Company
granted 400,000 NQSO's at an exercise price of $5.00 per share, to its Chief
Executive Officer and simultaneously cancelled 400,000 NQSO's with an exercise
price of $5.00 that were to expire February 23, 1998.
On September 4, 1997, the Company granted its Executive Vice President, Chief
Operating Officer 100,000 ISO's at an exercise price of $5.50 per share and
simultaneously cancelled 41,700 NQSO's at an exercise price of $3.00 that were
to expire April 15, 1998.
F-15
<PAGE>
A summary of the Company's stock option activity, and related information for
the years ended 2000, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
--------------------------------------
<S> <C> <C>
Outstanding January 31, 1997........................... 4,215,611 $ 2.23
Granted................................................ 1,002,500 $ 5.48
Canceled............................................... (517,922) $ 4.55
Exercised.............................................. (647,889) $ 2.33
------------
Outstanding January 31, 1998........................... 4,052,300 $ 2.72
Granted................................................ 2,519,925 $ 3.24
Canceled............................................... (175,000) $ 2.60
Exercised.............................................. (162,000) $ 2.34
Expired................................................ (220,000) $ 2.68
------------
Outstanding January 31, 1999........................... 6,015,225 $ 2.78
Granted................................................ 1,567,250 $ 1.54
Canceled............................................... (363,250) $ 3.52
Exercised.............................................. (99,675) $ 0.99
Expired................................................ (771,125) $ 1.70
------------
Outstanding January 31, 2000........................... 6,348,425 $ 2.59
============
</TABLE>
At January 31, 2000, 1999 and 1998, exercisable stock options totaled 5,356,257,
4,877,475 and 3,456,967 and had weighted average exercise prices of $2.58, $2.53
and $2.43, respectively.
On December 11, 1998, the Company's Board of Directors authorized the repricing
of 2,626,750 options at $3.50. These options, which had original exercise prices
ranging from $3.88 to $7.44, retained all of the original terms and vesting
rights from their respective grant date.
Options outstanding and exercisable at January 31, 2000 were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
$0.24-0.87................. 267,375 5.38 $ 0.81 217,375 $ 0.81
$1.15-1.50................. 1,708,500 8.91 $ 1.25 1,263,000 $ 1.28
$1.51-2.50................. 1,466,500 1.86 $ 2.04 1,466,500 $ 2.04
$2.51-3.50................. 2,656,050 6.72 $ 3.46 2,216,882 $ 3.47
$3.51-5.00................. 40,000 2.30 $ 4.49 40,000 $ 4.49
$5.01-12.00................ 210,000 3.95 $ 8.09 152,500 $ 7.66
- ---------------------------------------------------------------------------- ----------------------------
6,348,425 5.48 $ 2.59 5,356,257 $ 2.58
============================================================================ ============================
</TABLE>
At January 31, 2000, 3,413,000 common shares were reserved for issuance on
exercise of stock options under the 1997 Stock Option Plan.
Stockholder Rights Plan
In January 2000, the Company's Board of Directors adopted a stockholder rights
plan. Under the plan, each stockholder of Candies Common Stock received a
dividend of one right for each share of the Company's outstanding common stock,
entitling the holder to purchase one thousandth of a share of Series A Junior
Participating Preferred Stock, par value, $0.01 per share of the Company, at an
initial exercise price of $6.00. The rights become exercisable and will trade
separately from the Candies Common Stock ten business days after any person or
group acquires 15% or more of the Candies Common Stock, or ten business days
after any person or group announces a tender offer for 15% or more of the
outstanding Candies Common Stock.
Stock Repurchase Program
On September 15, 1998, the Company's Board of Directors authorized the
repurchase of up to two million shares of the Company's common stock. As of
October 31, 1998, 85,200 shares were repurchased in the open market, at an
aggregate cost of approximately $371. No additional shares have been repurchased
since October 31, 1998. The Company intends, subject to certain conditions, to
buy shares on the open market from time-to-time, depending on market conditions.
F-16
<PAGE>
Preferred and Common Stock to be Issued
See Note 9 for the related terms of the preferred stock to be issued in
connection with the Litigation settlement.
8. Earnings (Loss) Per Share
The following is a reconciliation of the shares used in calculating basic and
diluted earnings (loss) per share (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------------------------------
2000 1999 1998
--------------------------------------
<S> <C> <C> <C>
Basic 17,798 15,250 11,375
Effect of assumed conversions of employee stock options
and warrants -- -- 2,413
--------------------------------------
Denominator for diluted earnings per share 17,798 15,250 13,788
======================================
</TABLE>
Included in the calculation of the number of shares is the equivalent number of
common shares to be issued in connection with the Litigation Settlement (see
Note 9). The diluted weighted average number of shares does not include any
outstanding options because they were antidilutive.
The Company has granted 75,000 stock options to a related party, which vest
based upon the achievement of certain targeted criteria. These shares have not
been included in the computation of diluted earnings per share as the targeted
criteria has not been met and the exercise price exceeded the market price and,
therefore, the effect would have been antidilutive.
9. Commitments and Contingencies
Several lawsuits have recently been filed against the Company and certain
of its current and former officers and directors in the United States District
Court for the Southern District of New York. There can be no assurance that the
Company will successfully defend these lawsuits.
On May 17, 1999, a purported 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 sections 11, 12 and 15 of the Securities Act of 1933 and sections
10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. 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.
On or about January 31, 2000, the Company entered into a settlement
agreement with plaintiffs (the "Settlement Agreement") to settle the class
action for total consideration of $10 million, payable in a combination of cash,
Candies Common Stock and convertible preferred stock (the "Preferred Stock").
The Settlement Agreement provides that on or about May 1, 2000, the Company will
pay to plaintiffs $3 million in cash, and issue Candies Common Stock with a
value of $2 million. The Company will pay the Class an additional $1 million on
or before October 1, 2000. The remaining $4 million owed to plaintiffs will be
in the form of Preferred Stock, which will convert to Candies Common Stock at a
rate of ten to one based on the price of the Candies Common Stock on the first
and second anniversary of the date of the approval of the Settlement Agreement
by the Court. The Court has preliminarily approved the settlement and directed
the mailing and publication of a notice of the settlement. It is anticipated
that the Court will conduct a hearing on the final approval of the Settlement
Agreement in or about July 2000. It is highly unlikely that the Court will not
approve the Settlement; accordingly, the settlement terms, including the shares
of Common and Preferred Stock to be issued, have been recorded as of January 31,
2000. The Company received $2 million from its insurance company for this
matter, which proceeds have been placed in escrow and can only be used to pay
the cash portion of the settlement. The cash received from the insurance company
has been classified as Restricted cash in the accompanying balance sheet.
On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, the accounting issues that have been raised
and that were the subject of the investigation of the Special Committee.
F-17
<PAGE>
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.
Except as set forth above, the Company knows of no material legal proceedings,
pending or threatened, or judgments entered, against any director or officer of
the Company in his capacity as such.
10. Related Party Transactions
On April 3, 1996, the Company entered into an agreement with Redwood Shoe
("Redwood"), a principal buying agent of footwear products, to satisfy in full
certain trade payables (the "Payables") amounting to $1,680. Under the terms of
the agreement, the Company (i) issued 1,050,000 shares of the Company's Common
Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $1.75 which was immediately exercisable and has a
five year life; and (iii) made a cash payment of $50. The Company purchased
approximately $38 million, $68 million, and $48 million in 2000, 1999, and 1998,
respectively, of footwear products through Redwood. At January 31, 2000, the
Company had approximately $13.8 million of open purchase commitments with
Redwood. At January 31, 2000 and 1999, the payable to Redwood totaled
approximately $1,286 and $943, respectively.
11. Operating Leases
Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 2000 are as follows:
2001................. $ 1,039
2002................. 1,022
2003................. 978
2004................. 814
2005................. 748
Thereafter........... 1,332
--------
Totals............... $ 5,933
========
Rent expense was approximately $946, $691 and $337 for the years ended January
31, 2000, 1999 and 1998, respectively.
12. Benefit and Incentive Compensation Plans and Other
The Company sponsors a 401(k) Savings Plan (the "Savings Plan") which covers all
eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company may
contribute additional amounts to the Savings Plan. The Company made
contributions of $112, $134 and $80 to the Savings Plan for the years ended
January 31, 2000, 1999 and 1998, respectively.
The Company has certain incentive compensation arrangements with its Chief
Executive Officer pursuant to his employment agreement. The incentive
compensation aggregates 5% of pre-tax earnings, as defined.
13. Income Taxes
At January 31, 2000, the Company had net operating losses of approximately $19.8
million for income tax purposes, which expire in the years 2007 through 2020.
Due to the issuance of common stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275 per year. Approximately $2.5 million of
the operating loss carryforwards are subject to this restriction and
accordingly, no accounting recognition has been given to approximately $1.8
million of operating losses since present restrictions preclude their
utilization. During Fiscal 1999, the Company merged with NRC and was entitled to
another $2.4 million of operating losses incurred by NRC. These operating losses
are also subject to restriction and only $327 can be carried forward each year.
After the date of the pre-quasi reorganization the tax benefits of net operating
loss carryforwards incurred prior to the reorganization, has been treated for
financial statement purposes as direct additions to additional paid-in capital.
For Fiscal 1998, the Company utilized $149 of pre-quasi reorganization net
operating loss carryforwards. The related tax benefit $56, at January 31, 1998,
had been recognized as an increase to additional paid-in capital. Additionally,
as of January 31, 1998, the Company eliminated its valuation allowance for
deferred tax assets by approximately $2.4 million, increasing paid-in capital by
approximately $1 million and benefiting the income tax provision by
approximately $1.4 million. In the year ended January 31, 2000, the Company
recorded a valuation allowance for deferred
F-18
<PAGE>
tax assets of $9.3 million representing that portion of the deferred tax assets
that can not be reasonably determined to be recoverable from estimated earnings
over the next few years.
The income tax provision (benefit) for Federal and state income taxes in the
consolidated statements of income consists of the following:
<TABLE>
<CAPTION>
January 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ................................................................ $ (48) $ 406 $ 747
State .................................................................. 119 282 206
------------------------------------------------
Total current .......................................................... 71 688 953
------------------------------------------------
Deferred:
Federal ................................................................ (838) (675) (728)
State .................................................................. (336) (136) 130
------------------------------------------------
Total deferred ......................................................... (1,174) (811) (598)
------------------------------------------------
Total provision (benefit) .............................................. $ (1,103) $ (123) $ 355
================================================
<CAPTION>
The following summary reconciles income tax provision at the Federal statutory
rate with the actual provision (benefit):
January 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------
<S> <C> <C> <C>
Income taxes (benefit) at statutory rate ............................... $ (8,935) $ (260) $ 1,278
Non-deductible amortization ............................................ 193 153 122
Change in valuation allowance of deferred tax assets ................... 9,257 -- (1,347)
State provision, net of federal income tax benefit ..................... (1,906) 99 213
Adjustment for estimate of prior year taxes ............................ 235 (138) 70
Other .................................................................. 53 23 19
------------------------------------------------
Total income tax provision (benefit) ................................... $ (1,103) $ (123) $ 355
================================================
<CAPTION>
The significant components of net deferred tax assets of the Company consist of
the following:
January 31,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Compensation expense ................................................... $ 96 $ 96
Alternative minimum taxes .............................................. 96 126
Inventory valuation .................................................... 964 643
Litigation settlement .................................................. 3,344 --
Net operating loss carryforwards ....................................... 8,294 2,158
Accounts and factoring receivable valuation ............................ 2,016 1,475
Depreciation ........................................................... 112 96
Other .................................................................. 74 288
-----------------------------
Total net deferred tax assets .......................................... 14,996 4,882
Valuation allowance .................................................... (9,257) --
-----------------------------
Total deferred tax assets .............................................. 5,739 4,882
Trademarks and licenses ................................................ (1,952) (2,269)
Other deferred tax liabilities ......................................... (165) (165)
-----------------------------
Total deferred tax liabilities ......................................... (2,117) (2,434)
-----------------------------
Total net deferred tax assets .......................................... $ 3,622 $ 2,448
=============================
</TABLE>
F-19
<PAGE>
14. Segment Information
Effective February 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position.
The Company has one reportable segment that is engaged in the manufacture and
marketing of branded footwear, including casual shoes and boots to the retail
sector. Revenues of this segment are derived from the sale of branded footwear
products to external customers and the Company's retail division as well as
royalty income from the licensing of the Company's trademarks and brand names to
licensees. The business units comprising the branded footwear segment
manufacture or source, market and distribute products in a similar manner.
Branded footwear is distributed through wholesale channels and under licensing
and distributor arrangements.
F-20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Candies, Inc.
Purchase, New York
The audits referred to in our report dated April 20, 2000, relating to the
consolidated financial statements of Candie's, Inc. and Subsidiaries, which is
contained in Item 8 of the Form 10-K included the audits of the financial
statement schedule listed in the accompanying index for each of the three years
in the period ended January 31, 2000. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/: BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP
April 20, 2000
New York, New York
S-1
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Candie's, Inc. and Subsidiaries
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D (a) Column E
- --------------------------------------------------------- --------------- ------------ ------------- -------------
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- --------------------------------------------------------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Reserves and allowances deducted from asset accounts:
Year ended January 31, 2000:
Allowance for uncollectible accounts $ 950 $ 2,042 $ -- $ 2,992
======= ======= ======== =======
Allowance for chargebacks $ 2,579 $ 8,294 $ 9,043 $ 1,830
======= ======= ======== =======
Year ended January 31, 1999:
Allowance for uncollectible accounts $ 27 $ 993 $ 70 $ 950
======= ======= ======== =======
Allowance for chargebacks $ 1,731 $14,104 $ 13,256 $ 2,579
======= ======= ======== =======
Year ended January 31, 1998:
Allowance for uncollectible accounts $ 34 $ 183 $ 190 $ 27
======= ======= ======== =======
Allowance for chargebacks $ 350 $ 8,049 $ 6,668 $ 1,731
======= ======= ======== =======
</TABLE>
(a) Uncollectible receivables charged against the allowance provided.
S-2
Exhibit 3.3
CERTIFICATE OF MERGER
OF
NEW RETAIL CONCEPTS, INC.
(a Delaware corporation)
INTO
CANDIE'S INC.
(a Delaware corporation)
New Retail Concepts, Inc., a corporation formed under the laws of the State
of Delaware, desiring to merge with and into Candie's, Inc. pursuant to the
provisions of Section 251(c) of the Delaware General Corporation law, DOES
HEREBY CERTIFY as follows:
FIRST: That the names and states of incorporation of each Constituent
Corporations are:
NAME STATE OF INCORPORATION
Candie's, Inc. Delaware
New Retail Concepts, Inc. Delaware
SECOND: That the Agreement and Plan of Merger has been approved, adopted,
certified, executed and acknowledged by each of the Constituent Corporations in
accordance with Section 251(c) of the Delaware General Corporation Law.
THIRD: That the name of the surviving corporation is Candie's, Inc.
FOURTH: The Certificate of Incorporation of Candie's shall be the
Certificate of Incorporation of the surviving corporation.
FIFTH: That an executed Agreement and Plan of Merger is on file at the
principal place of business of Candie's, Inc. 2975 Westchester Avenue, Purchase,
New York 10577 and that a copy of the Agreement and Plan of Merger will be
furnished by the Surviving Corporation, on request and without cost, to any
stockholder of any Constituent Corporation.
<PAGE>
IN WITNESS WHEREOF, Candie's, Inc. has caused this Certificate of Merger to
be executed by its president thereunto duly authorized this 18th day of August,
1998.
ATTEST: CANDIE'S, INC.
(a Delaware corporation)
By:/s/ Neil Cole
------------------------
Neil Cole, President
<PAGE>
CERTIFICATE OF ELIMINATION
OF
CANDIE'S, INC.
CANDIE'S, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
That the following resolutions were adopted by the Board of Directors of
CANDIE'S, INC. on January 25, 2000:
"RESOLVED, that this Corporation will not in the future issue any
shares of its Series A Cumulative Convertible Preferred Stock, par value
$.01 per share, no shares of which are currently outstanding, pursuant to
the Certificate of Designation for the Series A Convertible Preferred Stock
that was filed on September 13, 1994 with the office of the Secretary of
State of the State of Delaware; and further
RESOLVED, that the Chief Executive Officer of this Corporation be, and
hereby is, authorized and directed to file a certificate setting forth
these resolutions pursuant to Section 151(g) of the General Corporation Law
of the State of Delaware so that, pursuant to such Section 151(g), the
Certificate of Designation shall be eliminated from this Corporation's
Certificate of Incorporation and the shares previously designated by the
Certificate of Designation shall revert to the status of authorized and
unissued shares of Preferred Stock of this Corporation for which powers,
designations, preferences and relative, participating, optional or other
rights, if any, or the qualifications, limitations or restrictions thereof,
if any, shall not have been set forth in the Certificate of Incorporation
of this Corporation or any amendment thereto; and further
<PAGE>
RESOLVED, that the Chief Executive Officer of this Corporation be, and
hereby is, authorized, for and on behalf of this Corporation, to execute
and deliver any and all agreements, instruments and documents, and to do
any and all other acts and things as they or any of them may deem necessary
or appropriate to carry out fully the intent and purpose of the foregoing
resolutions."
Dated: February 2, 2000.
CANDIE'S, INC.
By: /s/ Deborah Sorell Stehr
------------------------
Deborah Sorell Stehr,
Senior Vice President
2
<PAGE>
CANDIE'S, INC.
CERTIFICATE OF DESIGNATION
OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS, AND OF THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS, OF SERIES A
JUNIOR PARTICIPATING PREFERRED STOCK
($.01 Par Value Per Share)
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------
The undersigned hereby certifies that the following resolution was duly
adopted by the Board of Directors of Candie's, Inc. (the "Corporation"), a
corporation organized and existing by virtue of the General Corporation Law of
the State of Delaware (the "DGCL"), on January 25, 2000:
RESOLVED, that pursuant to authority conferred upon the Board of Directors
of the Corporation by its Certificate of Incorporation, a Series A Junior
Participating Preferred Stock of the Corporation is hereby created, and the
designation and amount thereof and the voting powers, preferences and relative,
participating, optional or other special rights of the shares of such series,
and the qualifications, limitations or restrictions thereof, are as follows:
Section 1. Designation and Number of Shares. The shares of such series
shall be designated as "Series A Junior Participating Cumulative Preferred
Stock" ("Series A Preferred Stock"). The number of shares initially constituting
the Series A Stock shall be 18,000; provided, however, that, if more than a
total of 18,000 shares of Series A Preferred Stock shall be at any time issuable
upon the exercise of Rights (the "Rights") issued pursuant to the Rights
Agreement, dated as of January 26, 2000, between the Corporation and Continental
Stock Transfer and Trust Company, as Rights Agent, as amended from time to time
(the "Rights Agreement"), the Board of Directors, pursuant to Section 151(g) of
<PAGE>
the DGCL, shall direct by resolution or resolutions that a certificate be
properly executed, acknowledged, filed and recorded, in accordance with the
provisions of Section 103 thereof, providing for the total number of shares of
Series A Preferred Stock authorized to be issued to be increased (to the extent
that the Certificate of Incorporation then permits) to the largest number of
whole shares (rounded up to the nearest whole number) then issuable upon
exercise of such Rights.
Section 2. Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set
forth, 1,000 times the aggregate per share amount of all cash dividends, and
1,000 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be adjusted by
multiplying such
2
<PAGE>
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(b) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (a) of this Section 2 immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle
3
<PAGE>
the holder thereof to 1,000 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the number of votes per share
to which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) Except as otherwise provided in this Certificate of Incorporation, in
any Preferred Stock Designation or in any certificate of designations creating
any similar stock, or by law, the holders of shares of Series A Preferred Stock
and the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders of
Series A Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
4
<PAGE>
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired promptly after the acquisition thereof. All such shares shall
upon their retirement become authorized but unissued shares of Series A
Preferred Stock and may be reissued as part of a new series of Series A
Preferred Stock subject to the conditions and restrictions on issuance set forth
herein or in any Certificate of Designations creating a series of Preferred
Stock or any similar stock or as otherwise required by law.
5
<PAGE>
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, plus an amount
equal to the greater of $1.00 per share or an aggregate amount per share equal
to 1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock, or (2) to the holders of shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up; provided, however, that in the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any
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dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
junior to all other series of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
Dated: February 2, 2000
CANDIE'S, INC.
By: /s/ Deborah Sorell Stehr
-------------------------
Deborah Sorell Stehr,
Senior Vice President
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Exhibit 3.4
RESTATED AND AMENDED
BY-LAWS
OF
CANDIE'S, INC.
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the
corporation shall be signed by, or in the name of, the corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the President
or a Vice-President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged to have
been lost, stolen, or destroyed, and the Board of Directors may require the
owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General
Corporation Law, the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
the stock of the corporation shall be uncertificated shares. Within a reasonable
time after the issuance or transfer of any
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uncertificated shares, the corporation shall send to the registered owner
thereof the written notice prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be
required to, issue fractions of a share. If the corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the corporation shall be made
only on the stock ledger of the corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or the allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion, or exchange of stock or for the purpose of
any other lawful action, the directors may fix, in advance, a record date, which
shall not be more than sixty days nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. If no record date
is fixed, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held; the record date for determining stockholders entitled to express consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first written
consent is expressed; and the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
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6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" or "shares of
stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation except as any provision of law
may otherwise require.
7. STOCKHOLDER MEETINGS.
TIME. The annual meeting shall be held on the date and at the time fixed,
from time to time, by the directors, provided, that the first annual meeting
shall be held on a date within thirteen months after the organization of the
corporation and each successive annual meeting shall be held on a date within
thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date and at the time fixed by the directors.
PLACE. Annual meetings and special meetings shall be held at such place,
within or without the State of Delaware, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
CALL. Annual meetings and special meetings may be called by directors or by
any officer instructed by the directors to call the meeting.
NOTICE OF WAIVER OF NOTICE. Written notice of all meetings shall be given
stating the place, date, and hour of the meeting and stating the place within
the city or other municipality or community at which the list of stockholders of
the corporation may be examined. The notice of an annual meeting shall state
that the meeting is called for the election of directors and for the transaction
of other business which may properly come before the meeting, and shall, (if any
other action which could be taken at a special meeting is to be taken at such
annual meeting) state the purpose or purposes. The notice of a special meeting
shall in all instances state the purpose or purposes for which the meeting is
called. The notice of any meeting shall also include, or be accompanied by, any
additional statements, information, or documents prescribed by the General
Corporation Law. Except as otherwise provided by the General Corporation Law, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten days nor more than sixty days before the date of the meeting,
unless the lapse of the prescribed period of time shall have been waived, and
directed to each stockholder at his record address or at such other address
which he may have furnished by request in writing to
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the Secretary of the corporation. Notice by mail shall be deemed to be given
when deposited, with postage thereon prepaid, in the United States Mail. If a
meeting is adjourned to another time, not more than thirty days hence, and/or to
another place, and if an announcement of the adjourned time and/or place is made
at the meeting, it shall not be necessary to give notice of the adjourned
meeting unless the directors, after adjournment, fix a new record date for the
adjourned meeting. Notice need not be given to any stockholder who submits a
written waiver of notice signed by him before or after the time stated therein.
Attendance of a stockholder at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice.
At any meeting, only such business shall be conducted as shall have been
brought before the meeting (i) pursuant to the corporation's notice of meeting,
(ii) by or at the direction of the Board of Directors, or (iii) by any
stockholder who complies with the procedures set forth in this Section 7.
The only business which shall be conducted at any meeting of the
stockholders shall (i) have been specified in the written notice of the meeting
(or any supplement thereto) given as provided in the preceding Section, (ii) be
brought before the meeting at the direction of the Board of Directors or the
chairman of the meeting or (iii) have specified in a written notice (a
"Stockholder Meeting Notice") given to the corporation, in accordance with all
of the following requirements, by or on behalf of any stockholder who shall have
been a stockholder of record on the record date for such meeting and who shall
continue to be entitled to vote there at. Each Stockholder Meeting Notice must
be delivered personally to, or be mailed to and received by, the Secretary of
the corporation, at the principal executive offices of the corporation, not less
than 50 days nor more than 75 days prior to the meeting; provided, however, that
in the event that less than 65 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be received not later than the close of business on the tenth
day following the day on which such notice of the date of the meeting was mailed
or such public nondisclosure was made. Each Stockholder Meeting Notice to the
Secretary shall set forth as to each matter the Stockholder proposes to bring
before the meeting: (i) a description of each item of business proposed to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing to bring such item of business before the meeting;
(iii) the class and number of shares of stock held of record, owned beneficially
and represented by proxy by such stockholder as of the record date for the
meeting (if such date then shall have been made publicly available( and as of
the date of such Stockholder Meeting Notice); and (iv) all other information
which would be required to be included in a proxy statement filed with the
Securities and Exchange Commission (the "Commission") if, with respect to any
such item of business, such stockholder were a participant in a solicitation
subject to Section 14 of the Securities Exchange Act of 1934.
Notwithstanding anything in these By-laws to the contrary, no business
shall be conducted at any meeting of the stockholders except in accordance with
the procedures set forth in these By-laws. The Chairman of the meeting shall, if
the facts warrant, determine and declare
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to the meeting that business was not properly brought before the meeting and in
accordance with the procedures prescribed by these By-laws, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
STOCKHOLDER LIST. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote at any meeting of
stockholders.
CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by
one of the following officers in the order of seniority and if present and
acting - the Chairman of the Board, if any, the Vice Chairman of the Board, if
any, the President, a Vice-President or, if none of the foregoing is in office
and present and acting, by a chairman to be chosen by the stockholders. The
Secretary of the corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the Chairman of the meeting shall appoint a secretary of
the meeting.
PROXY REPRESENTATION. Every stockholder may authorize another person or
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and, if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A proxy may
be made irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the corporation generally.
INSPECTORS. The directors, in advance of any meeting, shall appoint one or
more inspectors of election to act at the meeting or any adjournment thereof. If
an inspector or inspectors are not appointed, the person presiding at the
meeting shall appoint one or more inspectors. In case any person who may be
appointed as an inspector fails to appear or act, the vacancy shall be filled by
appointment made by the directors in advance of the meeting or at the meeting by
the person presiding thereat. Each inspector, before entering upon the discharge
of his duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability. The inspectors, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock
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represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the person presiding at the meeting, the inspector or inspectors,
shall make a report in writing of any challenge, question or matter determined
by him or them and execute a certificate of any fact found by him or them.
QUORUM. The holders of one-third of the outstanding shares of stock present
at a meeting of stockholders shall constitute a quorum at a meeting of
stockholders for the transaction of any business. The stockholders present may
adjourn the meeting despite the absence of a quorum.
VOTING. Each share of stock shall entitle the holder thereof to one vote.
The election of directors and any other action, shall be authorized by a
majority of the votes cast except where the General Corporation Law prescribes a
different percentage of votes and/or a different exercise of voting power, and
except as may be otherwise prescribed by the provisions of the certificate of
incorporation and these By-Laws. In the election of directors, and for any other
action, voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General
Corporation Law to be taken at any annual or special meeting of stockholders, or
any action which may be taken at any annual or special meeting of stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing
and who, if the action had been taken at a meeting, would have been entitled to
notice of the meeting if the record date for such meeting had been the date that
written consents signed by a sufficient number of holders to take the action
were delivered to the corporation.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors of the
corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The
initial Board of Directors shall consist of three persons. Thereafter the number
of directors constituting
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the whole board shall be at least one. Subject to the foregoing limitation and
except for the first Board of Directors, such number may be fixed from time to
time by action of the stockholders or of the directors, or, if the number is not
fixed, the number shall be three. The number of directors may be increased or
decreased by action of the stockholders or of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless the members
thereof shall have been named in the certificate of incorporation, shall be
elected by the incorporator or incorporators and shall hold office until the
first annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. Any director may resign
at any time upon written notice to the corporation. Thereafter, directors who
are elected at an annual meeting of stockholders, and directors who are elected
in the interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal. In the
interim between annual meetings of stockholders or of special meetings of
stockholders called for the election of directors and/or for the removal of one
or more directors and for the filling of any vacancy in that connection, newly
created directorships and any vacancies in the Board of Directors, including
unfilled vacancies resulting from the removal of directors for cause or without
cause, may be filled by the vote of a majority of the remaining directors then
in office, although less than a quorum, or by the sole remaining director.
4. MEETINGS.
TIME. Meetings shall be held at such time as the Board shall fix, except
that the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.
PLACE. Meetings shall be held at such place within or without the State of
Delaware as shall be fixed by the Board.
CALL. No call shall be required for regular meetings for which the time and
place have been fixed. Special meetings may be called by or at the direction of
the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of
the President, or of a majority of the directors in office.
NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for
regular meetings for which the time and place have been fixed. Written, oral, or
any other mode of notice of the time and place shall be given for special
meetings in sufficient time for the convenient assembly of the directors
thereat. Notice need not be given to any director or to any member of a
committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
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QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum
except when a vacancy or vacancies prevents such majority, whereupon a majority
of the directors in office shall constitute a quorum, provided, that such
majority shall constitute at least one-third of the whole Board. A majority of
the directors present, whether or not a quorum is present, may adjourn a meeting
to another time and place. Except as herein otherwise provided, and except as
otherwise provided by the General Corporation Law, the vote of the majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board. The quorum and voting provisions herein stated shall not be
construed as conflicting with any provisions of the General Corporation Law and
these By-Laws which govern a meeting of directors held to fill vacancies and
newly created directorships in the Board or action of disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present
and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the
Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General
Corporation Law, any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the corporation to be
affixed to all papers which may require it.
7. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
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ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President and a
Secretary, and, if deemed necessary, expedient, or desirable by the Board of
Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive
Vice-President, one or more other Vice-Presidents, one or more Assistant
Secretaries, a Treasurer, one or more Assistant Treasurers, and such other
officers with such titles as the resolution of the Board of Directors choosing
them shall designate. Except as may otherwise be provided in the resolution of
the Board of Directors choosing him, no officer other than the Chairman or
Vice-Chairman of the Board, if any, need be a director. Any number of offices
may be held by the same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and perform such
duties in the management and operation of the corporation as shall be prescribed
in the resolutions of the Board of Directors designating and choosing such
officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign to his. Any officer may be removed,
with or without cause, by the Board of Directors. Any vacancy in any office may
be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors shall
prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
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ARTICLE VI
CONTROL OVER BY-LAWS
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter or repeal
these By-Laws and to adopt new By-Laws may be exercised by the Board of
Directors or by the stockholders.
ARTICLE VII
INDEMNIFICATION
1. INDEMNIFICATION OF EMPLOYEES. Employees of the corporation may, if so
provided by the Board, be entitled to indemnification to the same extent as are
directors and officers of the corporation under Section 2 of this Article VII.
The corporation shall not be required to provide any such indemnification to any
employee in any action or proceeding, or appeal therein, arising out of services
rendered by any such person to any person, firm or association, or any
corporation other than the corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, whether profit or non-profit (any
such entity, other than the corporation, being hereinafter referred to as an
"Enterprise"), unless such services were rendered at the request of the Board.
2. INDEMNIFICATION OF OFFICERS AND DIRECTORS. (a) The corporation shall
indemnify to the fullest extent now or hereafter provided for or permitted by
law each officer and/or director of the corporation involved in, or made or
threatened to be made a party to, any action, suit, claim or proceeding,
arbitration, alternative dispute resolution mechanism, investigation,
administrative or legislative hearing or any other actual, threatened, pending
or completed proceeding, whether civil or criminal, or whether formal or
informal, and including an action by or in the right of the corporation or any
Enterprise, and including appeals therein (any such process being hereinafter
referred to as a "Proceeding") by reason of the fact that such officer and/or
director or such person's testator or intestate (any such person being
hereinafter referred to as an "Indemnity") (i) is or was a director or officer
of the corporation, or (ii) while serving as a director or officer of the
corporation, is or was serving, at the request of the corporation, as a
director, officer, or in any other capacity, of any other Enterprise, against
any and all judgments, fines, penalties, amounts paid in settlement, and
expenses, including attorneys' fees, actually and reasonably incurred as a
result of or in connection with any Proceeding, except as provided in Section
2(b) of this Article VII.
(b) No indemnification shall be made to or on behalf of any Indemnitee if a
judgment or other final adjudication adverse to him or her establishes that such
Indemnitee's acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action so adjudicated,
or that such Indemnitee personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled. In addition, no
indemnification shall be made with respect to any Proceeding initiated by any
Indemnitee against the corporation, or a director or officer of the corporation,
other than to enforce the terms of this Article VII, unless such Proceeding was
authorized by the Board. Further, no indemnification
10
<PAGE>
shall be made with respect to any settlement or compromise of any Proceeding
unless and until the corporation has consented to such settlement or compromise.
(c) Written notice of any Proceeding for which indemnification may be
sought by any Indemnitee shall be given to the corporation as soon as
practicable. The corporation shall then be permitted to participate in the
defense of any such proceeding or, unless conflicts of interest or position
exist between such Indemnitee and the corporation in the conduct of such
defense, to assume such defense. In the event that the corporation assumes the
defense of any such Proceeding, legal counsel selected by the corporation shall
be acceptable to the Indemnitee. After such an assumption, the corporation shall
not be liable to such Indemnitee for any legal or other expenses subsequently
incurred unless such expenses have been expressly authorized by the corporation.
In the event that the corporation participates in the defense of any such
Proceeding, the Indemnitee may select counsel to represent him or her in regard
to such a Proceeding; however such Indemnitee shall cooperate in good faith with
any request that common counsel be utilized by the parties to any Proceeding who
are similarly situated, unless to do so would be inappropriate due to actual or
potential differing interests between or among such parties.
(d) In making any determination regarding any Indemnitee's entitlement to
indemnification hereunder, it shall be presumed that such Indemnitee is entitled
to indemnification, and the corporation shall have the burden of proving the
contrary.
3. RIGHTS NOT EXCLUSIVE. The rights to indemnification and advancement of
expenses granted by or pursuant to this Article VII: (i) shall not limit or
exclude, but shall be in addition to, any other rights which may be granted by
or pursuant to any statute, corporate charter, by-law, resolution or
shareholders or directors or agreement; (ii) shall be deemed to constitute
contractual obligations of the corporation to any director or officer who serves
in a capacity referred to in Section 2(a) of this Article VII at any time while
this Article VII is in effect; (iii) shall continue to exist after the repeal or
modification of this Article VII with respect to events occurring prior thereto;
and (iv) shall continue as to any Indemnitee who has ceased to be a director or
officer and shall inure to the benefit of the estate, spouse, heirs, executors,
administrators or assigns of such Indemnitee. It is the intent of this Article
VII to require the corporation to indemnify the persons referred to herein for
the aforementioned judgments, fines, penalties, amounts paid in settlement, and
expenses, including attorney's fees, in each and every circumstance in which
such indemnification could lawfully be permitted by express provisions of
By-laws, and the indemnification required by this Article VII shall not be
limited by the absence of an express recital of such circumstances.
4. AUTHORIZATION OF CONTRACTS. The corporation may, with the approval of
the Board, enter into an agreement with any person who is, or is about to become
a director, officer, employee or agent of the corporation, or who is serving, or
is about to serve, at the request of the corporation, as director, officer, or
in any other capacity, any other Enterprise; which agreement may provide for
indemnification of such person and advancement of expenses to such person upon
terms, and the extent, not prohibited by law. The failure to enter into any such
agreement shall not affect or limit the rights of any such person under this
Article VII.
11
<PAGE>
I HEREBY CERTIFY that the foregoing is a full, true and correct copy of the
By-Laws of Candie's, Inc., a Delaware corporation, as in effect on the date
hereof.
WITNESS my hand and the seal of the corporation.
Dated: January 21, 2000
/s/ Neil Cole
-------------------------
Candie's, Inc.
(SEAL)
12
Exhibit 10.18
Amendment to Employment Agreement
AMENDMENT effective as of the date hereof, to Employment Agreement, dated
as of February 23, 1993, as amended March 6, 1995 and February 28, 1997 by and
between Candie's, Inc., a Delaware corporation (the "Company" or "Employer") and
Neil Cole (the "Executive").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Executive is currently the Company's Chairman of the Board,
Chief Executive Officer and President; and
WHEREAS, the Company and Employee entered into an Employment Agreement
dated as of February 23, 1993 as amended March 6, 1995 and February 28, 1997
(the "Agreement"); and
WHEREAS, the Company wishes, among other things, to extend the term of the
Executive's employment with the Company pursuant to the Agreement beyond the
term currently provided by the Agreement; and
WHEREAS, the Company and Executive desire to amend the terms of the
Agreement as provided herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Employer and
Executive hereby agree as follows:
1. Section 1 of the Agreement is hereby amended to provide that the Company
agrees to employ the Executive as its President and Chief Executive Officer for
a term expiring on February 28, 2003.
2. Section 10 of the Agreement is hereby amended by deleting the Section in
its entirety and replacing it with the following:
10. Change in Control.
"Change in Control" shall mean any of the following:
(1) any consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of
the Company's common stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of
the
13
<PAGE>
Company common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger;
(2) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of the Company;
(3) any approval by the stockholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(4) the cessation of control (by virtue of their not constituting a
majority of directors) of the Company's Board of Directors by the
individuals (the "Continuing Directors") who (x) at the date of this
Agreement were directors or (y) become directors after the date of this
Agreement and whose election or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds of the
directors then in office who were directors at the date of this Agreement
or whose election or nomination for election was previously so approved);
or
(5) (A) the acquisition of beneficial ownership ("Beneficial
Ownership"), within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), of an aggregate of 15% or
more of the voting power of the Company's outstanding voting securities by
any person or group (as such term is used in Rule 13d-5 under the Exchange
Act) who beneficially owned less than 10% of the voting power of the
Company's outstanding voting securities on the effective date of this
Agreement, (B) the acquisition of Beneficial Ownership of an additional 5%
of the voting power of the Company's outstanding voting securities by any
person or group who beneficially owned at least 10% of the voting power of
the Company's outstanding voting securities on the effective date of this
agreement, or (C) the execution by the Company and a stockholder of a
contract that by its terms grants such stockholder (in its, hers or his
capacity as a stockholder) or such stockholder's Affiliate (as defined in
Rule 405 promulgated under the Securities Ac of 1933 (an "Affiliate"))
including, without limitation, such stockholder's nominee to the Company's
Board of Directors (in its, hers or his capacity as an Affiliate of such
stockholders), the right to veto or block decisions or actions of the
Company's Board of Directors' provided however, that notwithstanding the
foregoing, the events described in items (A), (B) or (C) above shall not
constitute a Change in Control hereunder if the acquiror is (aa) a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company
2
<PAGE>
or one of its affiliated entities and acting in such capacity, (bb) a
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of voting
securities of the Company (cc) a person or group meeting the requirements
of clauses (ii) and (ii) of Rule 13d-1(b)(1) under the Exchange Act or (dd)
in the case of an acquisition described in items (A) or (B) above (but not
in the case of an acquisition described in item (C) above), any other
person whose acquisition of shares of voting securities is approved in
advance by a majority of the Continuing Directors;
(6) subject to applicable law, in a Chapter 11 bankruptcy proceeding,
the appointment of a trustee or the conversion of a case involving the
Company to a case under Chapter 7.
3. Subsection 12(d) of the Agreement is hereby amended by deleting the
entire subsection and replacing it with the following:
(d) Notwithstanding anything to the contrary set forth in Subsection
12(c), if the Company terminates Executive's employment without Cause or
the Executive terminates his employment for Good Reason within 12 months
after a Change in Control, then the Company shall pay to the Executive in
complete satisfaction of its obligations under this Agreement, as severance
pay and as liquidated damages (because actual damages are difficult to
ascertain), in a lump sum, in cash, within 15 days after the Date of
Termination, an amount equal to $100 less than three times the Executive's
"annualized includable compensation for the base period" (as defined in
Section 280G of the Internal Revenue Code of 1986); provided, however, that
if such lump sum severance payment, either alone or together with other
payments or benefits, either cash or non-cash, that the Executive has the
right to receive from the Company, including, but not limited to,
accelerated vesting or payment of any deferred compensation, options, stock
appreciation rights or any benefits payable to the Executive under any plan
for the benefit of employees, which would constitute an "excess parachute
payment" (as defined in Section 280G of the Internal Revenue Code of 1986),
then such lump sum severance payment or other benefit shall be reduced to
the largest amount that will not result in receipt by the Executive of a
parachute payment. The determination of the amount of the payment described
in this subsection shall be made by [the Company's independent auditors] at
the sole expense of the Company. For purposes of clarification the value of
any options described above will be determined by the Company's independent
auditors using a Black-Scholes valuation methodology.
3
<PAGE>
4. New subsections 12(e) and 12(f) are hereby added to the Agreement as
follows:
(e) If within 12 months after the occurrence of a Change of Control,
the Company shall terminate the Executive's employment without Cause or the
Executive terminates his employment for Good Reason, then notwithstanding
the vesting and exercisability schedule in any stock option agreement
between the Company and the Executive, all unvested stock options granted
by the Company to the Executive pursuant to such agreement shall
immediately vest and become exercisable and shall remain exercisable for
not less than 180 days thereafter.
(f) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section
12 be reduced by any compensation earned by the Executive as the result of
employment by another employer or business or by profits earned by the
Executive from any other source at any time before and after the Date of
Termination.
5. All capitalized terms used in this Amendment and not otherwise defined
shall have the meanings ascribed to them in the Agreement. All of the other
provisions of the Agreement shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this amendment as of
the 27th day of January, 2000.
CANDIE'S, INC.
By: /s/ Deborah Sorrell Stehr
-------------------------
/s/ Neil Cole
-------------------------
Neil Cole
4
Exhibit 10.19
Amendment to Employment Agreement
AMENDMENT effective as of the date hereof, to Employment Agreement, dated
October 13, 1998, by and between Candie's, Inc., a Delaware corporation (the
"Company" or "Employer") and Deborah Sorell Stehr (the "Executive").
W I T N E S S E T H
WHEREAS, the Executive is currently the Company's Senior Vice President and
General Counsel; and
WHEREAS, the Company and Employee entered into an Employment Agreement
dated October 13, 1998 (the "Agreement"); and
WHEREAS, the Executive has assumed additional responsibilities on behalf of
the Company and the Company wishes, among other things, to extend the term of
the Executive's employment with the Company pursuant to the Agreement beyond the
term currently provided by the Agreement; and
WHEREAS, the Company and Executive desire to amend the terms of the
Agreement as provided herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Employer and
Executive hereby agree as follows:
1. Section 1 of the Agreement is hereby amended to provide that the Company
agrees to employ the Executive as its Senior Vice President and General Counsel
for a term expiring on January 31, 2002.
2. Subsection 6(b) of the Agreement is hereby amended by deleting 6(b)(v)
and the last sentence of subsection 6(b) in its entirety:
3. Subsections 7(b) And 7(c) of the Agreement are hereby amended by
deleting the entire subsections and replacing them with the following:
(b) If the Company terminates your employment without Cause or you
terminate your employment for Good Reason within 12 months after a Change
in Control (as defined in Subsection 7(d)), then the Company shall pay to
you in complete satisfaction of its obligations under this Agreement, as
severance pay and as liquidated damages (because actual damages are
difficult to ascertain), in a lump sum, in cash, within 15 days after
<PAGE>
the date of your termination, an amount equal to $100 less than three times
your "annualized includable compensation for the base period" (as defined
in Section 280G of the Internal Revenue Code of 1986); provided, however,
that if such lump sum severance payment, either alone or together with
other payments or benefits, either cash or non-cash, that you have the
right to receive from the Company, including, but not limited to,
accelerated vesting or payment of any deferred compensation, options, stock
appreciation rights or any benefits payable to you under any plan for the
benefit of employees, which would constitute an "excess parachute payment"
(as defined in Section 280G of the Internal Revenue Code of 1986), then
such lump sum severance payment or other benefit shall be reduced to the
largest amount that will not result in receipt by you of a parachute
payment. The determination of the amount of the payment described in this
subsection shall be made by [the Company's independent auditors] at the
sole expense of the Company. For purposes of clarification the value of any
options described above will be determined by the Company's independent
auditors using a Black-Scholes valuation methodology.
4. New subsections 7(c), 7(d) and 7(e) are hereby added to the Agreement as
follows:
(c) If within 12 months after the occurrence of a Change of Control,
the Company shall terminate your employment without Cause or you terminate
your employment for Good Reason, then notwithstanding the vesting and
exercisability schedule in any stock option agreement between the Company
and you, all unvested stock options granted by the Company to you pursuant
to such agreement shall immediately vest and become exercisable and shall
remain exercisable for not less than 180 days thereafter.
(d) A "Change in Control" shall mean any of the following:
(1) any consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of
the Company's common stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of
the Company common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger;
2
<PAGE>
(2) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of the Company;
(3) any approval by the stockholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(4) the cessation of control (by virtue of their not constituting a
majority of directors) of the Company's Board of Directors by the
individuals (the "Continuing Directors") who (x) at the date of this
Agreement were directors or (y) become directors after the date of this
Agreement and whose election or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds of the
directors then in office who were directors at the date of this Agreement
or whose election or nomination for election was previously so approved);
or
(5) (A) the acquisition of beneficial ownership ("Beneficial
Ownership"), within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), of an aggregate of 15% or
more of the voting power of the Company's outstanding voting securities by
any person or group (as such term is used in Rule 13d-5 under the Exchange
Act) who beneficially owned less than 10% of the voting power of the
Company's outstanding voting securities on the effective date of this
Agreement, (B) the acquisition of Beneficial Ownership of an additional 5%
of the voting power of the Company's outstanding voting securities by any
person or group who beneficially owned at least 10% of the voting power of
the Company's outstanding voting securities on the effective date of this
agreement, or (C) the execution by the Company and a stockholder of a
contract that by its terms grants such stockholder (in its, hers or his
capacity as a stockholder) or such stockholder's Affiliate (as defined in
Rule 405 promulgated under the Securities Ac of 1933 (an "Affiliate"))
including, without limitation, such stockholder's nominee to the Company's
Board of Directors (in its, hers or his capacity as an Affiliate of such
stockholders), the right to veto or block decisions or actions of the
Company's Board of Directors' provided however, that notwithstanding the
foregoing, the events described in items (A), (B) or (C) above shall not
constitute a Change in Control hereunder if the acquiror is (aa) a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or one of its affiliated entities and acting in such capacity, (bb)
a corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of voting
securities of the Company (cc) a person or
3
<PAGE>
group meeting the requirements of clauses (ii) and (ii) of Rule 13d-1(b)(1)
under the Exchange Act or (dd) in the case of an acquisition described in
items (A) or (B) above (but not in the case of an acquisition described in
item (C) above), any other person whose acquisition of shares of voting
securities is approved in advance by a majority of the Continuing
Directors;
(6) subject to applicable law, in a Chapter 11 bankruptcy proceeding,
the appointment of a trustee or the conversion of a case involving the
Company to a case under Chapter 7.
(e) You shall not be required to mitigate the amount of any payment
provided for in this Section 7 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 7 be
reduced by any compensation earned by you as the result of your employment
by another employer or business or by profits earned by you from any other
source at any time before and after you date of termination.
5. All capitalized terms used in this Amendment and not otherwise defined
shall have the meanings ascribed to them in the Agreement. All of the other
provisions of the Agreement shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this amendment as of
the 27th day of January, 2000.
CANDIE'S, INC.
By: /s/ Neil Cole
-------------------------
/s/ Deborah Sorell Stehr
Deborah Sorell Stehr
4
Exhibit 10.20
As of January 24, 2000
Mr. John M. Needham
43 Fairwood Road
Madison, New Jersey 07940
Dear Jack:
This will confirm the terms and conditions of employment (the "Agreement")
between you and Candie's, Inc. (the "Company") (each a "Party" and together, the
"Parties"). It is agreed as follows:
1. Term.
The Company will employ you for an initial period commencing on January 24,
2000 and ending on January 26, 2001 (the "Initial Term"). This agreement will
automatically renew for 3 month intervals (the " Additional Term"), unless
written notice is provided on the 3 month anniversary of the agreement starting
June 24, 2000. This notice is to act as a minimum severance of three months.
2. Title; Duties.
You shall render services to the Company on a full-time basis as the Vice
President of Finance. Your duties and responsibilities shall be consistent with
the duties customarily undertaken by the senior financial management officer of
a public ally traded corporation.
3. Compensation.
(a) Base Salary. Your base salary for the initial term will be at a rate of
not less than $170,000 per annum paid in accordance with the Company's payroll
practices and policies.
(b) Bonus. You are entitled to a signing bonus of $ 10,000 payable January
24, 2000. Your cash bonus for the initial term and each following fiscal years
will be discretionary, based upon annually established company and personal
objectives. This bonus will be payable upon filing the annual 10-k.
(c) Stock Options. On January 24, 2000, you shall receive a grant of
qualified stock options pursuant to the Company's most recently adopted option
plan for 75,000 shares of the Company's common stock, exercisable on the latest
date possible under such plan, at a price equal to the closing price of the
stock on January 24,2000. The options shall vest and become exercisable as
follows: 25,000 on January 24, 2001, 25,000 on January 24, 2002 and 25,000 on
January 24, 2003. If the Company terminates you prior to the expiration of the
Term for a reason other than "Cause" (as defined herein), or you resign for
"Good Reason" (as defined herein), all options shall vest upon the date such
termination is effective.
(d) The Company shall lease a car for you with monthly lease payments not
to exceed $725. The Company shall, in addition, reimburse you for all parking,
maintenance, repairs, insurance, gas, tolls and other related expenses promptly
upon your submission of appropriate documentation.
<PAGE>
4. Benefits and Expenses.
(a) You shall be permitted during the Term to participate (without any
waiting periods) in any and all benefit plans, hospitalization, medical, health,
disability, officer/director or employee liability insurance plans, pension and
401K plans or other benefit plans (including any to-be-established bonus plans)
on the same terms and conditions as extended to other executive officers of the
Company.
(b) The Company shall promptly reimburse you for all reasonable and
necessary travel and entertainment expenses and other disbursements or costs you
may incur in connection with promoting the business of the Company.
(c) You shall be entitled to three weeks paid vacation per year. If, in any
year, you do not take some or all of your vacation, such unused days may only be
banked with written consent and carried over into the next year, as may be
applicable.
(d) You shall be permitted to attend such professional conferences, receive
such professional publications, acquire such professional books and materials to
build a library, and receive such other facilities and support as are reasonable
and necessary to and perform your duties and maintain active status in
accounting and legal professions.
5. Termination.
(a) Your employment may be terminated by the Company prior to the
expiration of the Term of this agreement only for "Cause" by giving you prior
written notice of the basis for the proposed termination and a reasonable chance
to cure. As used in this agreement, the term "Cause" shall mean: (a) your
willful and continuing malfeasance and failure to perform having a material
adverse effect on the Company; (b) your willful engagement in fraud or
dishonesty against the Company having a material adverse effect on the Company;
or (c) your conviction of a felony involving moral turpitude.
(b) You may terminate this Agreement at any time for "Good Reason" by
giving the Company prior written notice of the basis for the proposed
termination and a reasonable chance to cure. "Good Reason" shall mean any of the
following: (i) a breach by the Company of any of its payment obligations to you
hereunder; (ii) relocation of the Company outside a 50-mile radius of New York
City unless the Company shall provide you with a suitable location from which to
work within such radius; (iii) a proposed material modification or reduction of
your duties or position as a senior financial executive; (iv) the bankruptcy,
reorganization or liquidation of the Company; or (v) a "Change of Control". A
"Change of Control" shall mean: (1) an occurrence resulting in any person or
entity other than an existing subsidiary or affiliate of the Company acquiring
or being the beneficial owner of 20% of more of the combined voting power of the
Company's outstanding securities resulting in Neil Cole no longer being Chairman
of the Board; (2) Neil Cole no longer occupying a position as a senior executive
of the Company; or (3) the acquisition of the Company by, or the merger of the
Company into or with, an entity other than an existing subsidiary or affiliate
of the Company.
2
<PAGE>
6. Effect of Termination.
(a) Upon termination of your employment for Cause (or upon your death or
disability, rendering you unable to perform), you (or your heirs or
representatives) shall receive any accrued salary, pro-rated bonus and vacation
due through the date of termination and be reimbursed for any outstanding
business expenses (including those relating to your car) incurred prior to the
date of termination. Upon your death or disability, you or your heirs shall also
be entitled to continuation of health and medical benefits for 6 months from the
date of termination.
(b) Upon termination of your employment not for Cause, or if you terminate
for Good Reason, you shall receive your full compensation (salary, bonus, car
allowance, vacation and the continuance of all other benefits) through the
unexpired portion of the Term, but in no event for a period less than 6 months,
payable in equal monthly installments following the date of termination. In
addition, all unvested options shall vest on the date of termination.
(c) Upon termination of your employment upon the occurrence of a Change of
Control, you shall receive all the amounts set forth in 6(b) above, plus an
amount equal to one full year of your base salary at the rate in effect at the
time that the Change of Control occurs.
7. Confidentiality
You acknowledge that, during the course of your employment by the Company, you
will have access to valuable confidential information, including but not limited
to: customers and prospects lists, cost lists, merchandising data, inventions,
designs, manufacturing methods and techniques and other information which
relating to the activities and business of the Company and its affiliates
("Confidential Material"). You agree that such Confidential Material shall be
and remain the Company's property, free of any rights on your part with respect
thereto, and that you shall keep it confidential at all times during, and
following the cessation of your employment with the Company. You agree to
deliver to the Company all computer files and tapes, books record and documents
(whether maintained in paper, electronic or other medium) relating to or bearing
upon any such Confidential Material, upon the cessation of your employment, and
you agree not to retain any copies or extracts.
8. Miscellaneous
(a) This agreement shall be governed by the laws of New York and each Party
agrees that in the event of a dispute relating to the terms hereof the other
will submit to the exclusive jurisdiction of the state or federal courts sitting
within the City of New York.
(b) If not terminated in accordance with its terms, this Agreement shall be
binding upon, and inure to the benefit of, the Parties, their heirs, legal
representatives, successors and permitted assigns.
(c) The invalidity or unenforceability of any provision hereof shall not in
any way affect the validity or enforceability of any other provision. This
Agreement reflects the entire understanding between the Parties.
3
<PAGE>
Please sign where indicated below, whereupon this letter will constitute a
binding agreement between the Parties as of the date first above written.
Candies, Inc.
By: /s/ Neil Cole /s/ John Needham
----------------------- -------------------------
Neil Cole John M. Needham
Chief Executive Officer
Exhibit 21
SUBSIDIARIES OF CANDIE'S INC.
Bright Star Footwear, Inc. wholly owned
a New Jersey corporation
Intercontinental Trading Group majority owned
a New York corporation
Ponca, Ltd. wholly owned
a Hong Kong corporation
Yulong Co., Ltd. wholly owned
a British Virgin Islands corporation
Candie's Galleria, Inc. wholly owned
a New York corporation
Michael Caruso & Co., Inc. wholly owned
a California corporation
Unzipped Apparel, LLC 50% owned
a Delaware limited liability corporation
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-62697 and Form S-3 No. 333-7659) of Candie's, Inc. and in the
related prospectuses and the Registration Statement (Form S-8 No. 333-27655) of
our report dated April 20, 2000 relating to the consolidated financial
statements and schedule of Candie's, Inc. and its subsidiaries included in its
Form 10-K for the year ended January 31, 2000.
/s/ BDO Seidman, LLP
-------------------------
New York, April 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K AT JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 643
<SECURITIES> 0
<RECEIVABLES> 15,567
<ALLOWANCES> 4,822
<INVENTORY> 14,770
<CURRENT-ASSETS> 32,799
<PP&E> 6,679
<DEPRECIATION> 2,124
<TOTAL-ASSETS> 64,058
<CURRENT-LIABILITIES> 29,262
<BONDS> 0
0
4,000
<COMMON> 2,019
<OTHER-SE> 26,929
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<TOTAL-REVENUES> 90,796
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<INCOME-PRETAX> (26,279)
<INCOME-TAX> (1,103)
<INCOME-CONTINUING> (25,176)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,176)
<EPS-BASIC> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
