SAM & LIBBY INC, 10-K/A, 1996-07-17

SAM & LIBBY INC
10-K/A, 1996-07-17
FOOTWEAR, (NO RUBBER)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K/A
AMENDMENT NO. 1

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<S> <C> <C>
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
( X ) OF THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(No Fee Requirement)
</TABLE>

<TABLE>
<S> <C>
For the Fiscal Year Ended Commission file number
December 30, 1995 0-19616
</TABLE>

SAM & LIBBY, INC.
(Registrant)

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<S> <C>
CALIFORNIA 94-3060101
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

58 WEST 40TH STREET
NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number: (212) 944-4830

Securities Registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value

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 _____ No _X_

Indicate by check mark 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 From 10-K or any amendment to this
Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the average of the closing price of the Common Stock on
March 20, 1996, as reported on the NASDAQ National Market System, was
approximately $6,874,542. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded from this computation in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of March 31, 1996, the registrant had 11,027,499 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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PART I

ITEM 1. BUSINESS

Sam & Libby, Inc. (the "Company") designs, develops and markets women's and
children's footwear, and other products primarily under its SAM & LIBBY brand
name. The Company markets its products to consumers who desire contemporary,
fashionable products at affordable prices. These products are offered primarily
through better department and specialty retail stores across the United States.

COMPANY STRATEGY

The Company's strategy is to design and market products under the SAM &
LIBBY brand name that provide high fashion content at affordable prices. The
Company's products, which are offered in a broad range of styles and colors, are
designed to appeal to fashion-conscious customers who seek more affordable,
contemporary and comfortable products. The Company believes that its pricing
strategy encourages both impulse and multiple purchases.

The Company has developed its brand name and image through a concerted
national advertising campaign and by distributing its SAM & LIBBY brand products
through major department and specialty retail stores. The Company interprets
worldwide lifestyle and fashion trends to create products that are intended to
have broad consumer appeal. Historically, the Company has been able to keep its
products reasonably priced because of its longstanding low-cost sourcing
relationships with offshore independent contractors, as well as its emphasis on
designing affordable products.

PRODUCTS

SAM & LIBBY WOMEN'S FOOTWEAR. The Company currently offers more than 100
different styles of women's casual shoes, dress shoes, boots, sandals and
espadrilles in a broad range of colorful and creative designs. SAM & LIBBY brand
women's footwear is sold at retail prices ranging from $15 to $60 per pair. The
Company introduces new shoes in each of the four footwear selling seasons --
spring, summer, fall and holiday/resort.

SAM & LIBBY CHILDREN'S FOOTWEAR. The children's line primarily consists of
infants and girls footwear. The children's line includes both adaptations from
the women's line and stand alone fashion developed exclusively for the
children's line. The line encompasses all aspects of girls and infants footwear
from dress to casual.

The Company has recently introduced a new line of girls fashion athletic
shoes for Fall 1996 delivery.

JUST LIBBY FOOTWEAR. JUST LIBBY is an upscale women's footwear line with
higher price points than the SAM & LIBBY line and targets a more sophisticated
fashion-conscious customer. JUST LIBBY brand women's footwear is sold at retail
prices ranging from $60 to $100 per pair.

HANDBAGS. In March 1994, the Company initiated its handbag division. The
product line was directed at two different customer bases. The higher priced
line was marketed under the JUST LIBBY brand, whereas the lower price points
were marketed under the SAM & LIBBY brand. In 1995, the Company discontinued the
division. Revenue for 1995 and 1994 was not significant.

PRIVATE LABEL PRODUCTS. In connection with its private label business, the
Company arranges for the manufacture of women's and children's footwear for
selected retailers primarily under the retailer's private label. Under this
arrangement, the Company receives a fee for providing design expertise, acting
as a sourcing agent for the retailer, managing the manufacturing process,
inspecting the finished goods and arranging the sale of the finished goods by
the manufacturer to the retailer. The retailer pays the manufacturer directly
for the products.

The private label business provides the Company with several competitive
advantages, including the retention of revenues that might otherwise be lost due
to copying, increased manufacturing volume (which reduces manufacturing costs of
the Company's other footwear products and the

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strengthening of business relationships between the Company and its contract
manufacturers. The private label business provides revenue to the Company
without the inventory risk, warehousing and other carrying costs involved in the
sale of its branded products.

APPAREL. In the first quarter of 1993, the Company signed an agreement,
effective May 1, 1993, to transfer its apparel division to AMG Apparel Ltd.
("AMG Apparel"), an apparel and licensing company located in Los Angeles. The
Company received no royalty revenue in 1994 and a minimal amount of royalty
revenue in 1993. During 1993, AMG Apparel stopped paying its royalty
obligations. The Company has commenced legal action to regain the rights to its
apparel merchandise.

DESIGN AND DEVELOPMENT

The design process typically begins about nine months before the start of a
season. The major influences upon the process include the design team's
impression of current worldwide lifestyle and clothing trends and shoe fashions,
as well as the history of a particular shoe or fashion style in the United
States. Other factors include the availability of raw materials, the
capabilities of the factories that will manufacture the products and the target
retail cost of the product. The design team travels extensively in Europe to
discover and confirm the latest fashion trends and subscribes to various fashion
and color information services to keep abreast of trends emerging in the fashion
industry. Senior management is actively involved in the analysis of fashion
trends and the design process for the Company's products.

After the design team arrives at a consensus regarding the fashion themes
for the coming season, the group manufactures designs that translate these
themes into SAM & LIBBY or JUST LIBBY products. These interpretations include
variations in product color, material, structure and decoration. Drawings and
prototypes of the products are sent to the Company's foreign manufacturing
agents, where samples are created. The Company attempts to minimize the risks
relating to changing fashion trends and product acceptance by producing a large
number of styles before each selling season, evaluating trade acceptance before
volume manufacture, and closely monitoring retail sales trends after retail
introduction.

MARKETING AND PROMOTION

The Company advertises, markets and promotes the SAM & LIBBY brand name
through a variety of means, including nationwide print media, product packaging,
in-store visual support and other point-of-sale materials. The Company's
in-house advertising department oversees the conception, development and
implementation of most aspects of the packaging, advertising, marketing and
sales promotion for the Company's products. Senior management is directly
involved in shaping the Company's image and its advertising and promotional
activities.

The Company markets its products in approximately 2,000 retail locations in
the United States through a broad network of department and specialty retail
stores. Certain of the Company's high volume accounts feature "shop-in-shop"
formats in which floor space is dedicated exclusively to SAM & LIBBY products.
The Company estimates that department stores accounted for approximately 45% of
gross sales of SAM & LIBBY brand products during 1995. The Company's ten largest
customers represented approximately 49% and 47% of gross sales in 1995 and 1994,
respectively. In 1995 Kinney Corporation (a division of Woolworth) accounted for
approximately 11% of gross sales. In 1994, Marshall's (a division of The
Melville Corporation) accounted for approximately 10% of gross sales. In
addition, certain of the Company's customers are under common ownership. During
1995 and 1994, the department store groups owned by the Federated Department
Stores Company ("Federated"), as a group, accounted for approximately 11% and
14% of the Company's gross revenues. No single department store unit of either
group accounted for more than 3% and 6% of gross sales in 1995 and 1994,
respectively. While the Company believes that purchasing decisions are made
independently by each department store unit (including stores that are part of
the May and Federated groups), in some cases the trend may be towards more
centralized purchasing decisions.

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During 1993, the Company changed from a sales force primarily composed of
Company employees to a sales force primarily composed of independent sales
representatives whose compensation is based upon commissions earned. Senior
management is actively involved in selling to major accounts. Sales to foreign
customers have been nominal.

The Company has operated one outlet store in Vacaville, California since
September 1991. This store is located in a factory outlet shopping mall to avoid
substantial competition with the Company's major retailing customers and sells
factory seconds as well as excess stock merchandise.

In July 1992, the Company opened one retail footwear store in the Beverly
Center mall in Beverly Hills, California. This store enables the Company to
display substantially all of its footwear offerings in one retail location as
well as test market new footwear styles.

MANUFACTURING

Since inception, the Company's footwear products have been manufactured to
its specifications by independent contractors located in Brazil, Taiwan, the
People's Republic of China ("China"), Spain and Italy. In 1995, most of the
Company's leather footwear was manufactured in Brazil and most of its canvas and
synthetic footwear was manufactured in Taiwan and China. The percentage of
footwear products manufactured in each country varies from time to time
depending on the particular material emphasized in the Company's product lines
from season to season. The 1994 change in the Brazilian currency, which is no
longer considered inflationary and has lost some of its competitive pricing, has
created additional opportunities in the Far East which in 1995 was the primary
source for the Company's footwear.

The Company seeks to develop long-term relationships with factories that
meet the Company's requirements for quality, volume and price. In most cases,
the Company attempts to have one line within each factory dedicated solely to
the manufacture of the Company's products in order to improve productivity on
the line and simplify quality control procedures.

Sanders-Importacao E Exportacao Ltd. ("Sam & Libby Brazil"), the Company's
wholly-owned subsidiary and exclusive agent in Brazil, produced prototypes of
new footwear styles, placed orders with Brazilian factories, monitored
manufacturing quality on a daily basis, inspected finished goods and coordinated
shipment of finished goods to the United States. In the last quarter of 1995,
the Company sold the building and closed its Brazilian office operation. Sam &
Libby currently uses independent agents in the Far East to perform similar
services for the Company.

IMPORTS AND IMPORT RESTRICTIONS

In 1995, substantially all of the Company's products were manufactured in
Brazil, Taiwan, China, Italy and Hong Kong. Although the Company has no
long-term manufacturing agreements with its producers and competes with other
companies for production facilities (including companies that are much larger
than the Company), management believes that the Company's relationships with its
footwear producers are currently satisfactory and that it has the ability to
develop, over time, alternative sources in various countries for the footwear
obtained from its current producers. The Company's operations, however, could be
materially and adversely affected if a substantial delay occurred in locating
and obtaining alternative producers.

The Company's arrangements with its manufacturers and suppliers are subject
to the usual risks of doing business abroad, including revaluation of
currencies, export duties, import controls and trade barriers, tariffs, quotas,
restrictions on the transfer of funds and, in certain parts of the world,
political instability. Although the Company has not to date, been materially
affected by any such risk, it cannot predict the likelihood that such
developments will not occur. The Company's products are also subject to United
States customs duties. United States customs duties currently are 10% of factory
cost on footwear made principally of leather, 6% of factory cost on synthetic
footwear and up to 48% of factory cost on canvas and fabric shoes. The Company
is unable to predict whether additional

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United States customs duties, quotas or restrictions could result in increases
in the costs of such products generally and might adversely affect the sales or
profitability of the Company and the footwear industry as a whole.

DISTRIBUTION

The Company has a contract (the "RML Agreement") with RML Limited ("RML"),
an independent warehouse facility located in Harrisburg, Pennsylvania pursuant
to which RML provides the Company with warehouse, distribution, inspection and
other services for a fee based upon gross shipping dollars, which is calculated
on a declining percentage as various sales plateaus are achieved. The agreement
expired by its term in April 1995 but is automatically renewable from year to
year unless either party gives notice of non-renewal. Neither party has given
such notice and the agreement remains in effect.

BACKLOG

At the end of 1995, the Company had unfilled customer orders of
approximately $15.1 million compared with $14.6 million at the end of 1994. The
backlog at a particular time is affected by a number of factors, including
seasonality and the scheduling of the manufacture and shipment of products.
Accordingly, a comparison of backlog from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments.

TRADEMARKS

SAM & LIBBY-Registered Trademark-, LIBBY-Registered Trademark-, JEFF &
KRISTI-Registered Trademark- and NEW NINETIES-Registered Trademark- are
registered trademarks of the Company and JUST LIBBY-TM- is a trademark of the
Company. In an effort to protect possible future overseas licensing activities,
the Company registers its trademarks in various foreign countries. The Company
regards its trademarks and other proprietary rights as valuable assets and
intends to vigorously defend them against infringement.

COMPETITION

There is intense competition in the sectors of the footwear market in which
the Company competes. The Company's competitors include numerous manufacturers,
importers and distributors, many of which have significantly greater financial,
distribution, advertising and marketing resources and have better known brand
names than the Company. The Company competes with distributors that import
footwear products from abroad, domestic companies that have established foreign
manufacturing relationships and companies that produce footwear products
domestically. The principal elements of competition in the footwear market
include product style and color selection, price, value, comfort, quality (both
in material and production), brand awareness, brand positioning, advertising,
marketing and distribution. The Company believes that retailer and consumer
recognition of the SAM & LIBBY brand name and image has been a significant
factor in the Company's business. The Company also believes that its ability to
identify, evaluate and respond to changing fashion trends and consumer demands
has been a significant factor in its business. The Company's ability to deliver
quality merchandise in a timely manner is also a critical competitive factor,
particularly in connection with the introduction of new product lines. The
Company's ability to maintain existing relationships and develop new
relationships with foreign manufacturers is another important element in its
ability to compete.

The Company also faces competitive challenges in connection with its outlet
store and retail store. These stores encounter competition from other outlet
stores as well as other retail footwear stores, department stores and specialty
retail stores. The principal competitive factors with respect to store
operations include location, environment and service. While the Company believes
that it will be able to compete effectively for site locations and lease terms
for future stores, if any, competition will be intense for prime locations
within the most desirable malls. Competition will include large national chains
that have substantially greater financial and other resources than the Company.

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EMPLOYEES

As of March 29, 1996, the Company had 39 full-time employees in the United
States, including 5 in executive or managerial positions, 10 in design,
production, advertising or public relations positions, 14 in retail store
operations, and the balance in sales, clerical and other office positions.

ITEM 2. PROPERTIES

The Company's design, sales, marketing and executive offices and its
showroom are located in the same building in New York City. The lease for the
fourth floor of the executive offices covers approximately 6,500 square feet and
expires in April 1998. The lease for the showroom space covers approximately
6,500 square feet and expires in April 1997. In January of 1996, the Company
sublet the fourth floor and gave a concession for seven months free rent. All
employees are now situated on one floor. The Company also leases approximately
1,200 square feet in a showroom in Dallas pursuant to a lease that expires in
May 1998. As of the end of fiscal 1995, the Company had two lease agreements for
terms not exceeding five years for an outlet store in Vacaville, California
(approximately 2,200 square feet) and a full price retail footwear store located
in Beverly Hills, California (approximately 1,000 square feet). The Company
believes that its existing facilities are adequate to meet current and
foreseeable requirements and that suitable additional or alternative space will
be available as needed on commercially reasonable terms. Sam & Libby Brazil sold
the office building in Novo Hamburgo, Brazil during the fourth quarter of 1995.

ITEM 3. LEGAL PROCEEDINGS

On April 27, 1992, a class action lawsuit was filed against the Company and
certain of its directors and officers and the managing underwriters of the
Company's initial public offering for alleged violations of federal securities
laws and state common law. The complaint sought unspecified actual and punitive
damages, costs and attorney's fees on behalf of purchasers of the Company's
Common Stock during the period from December 4, 1991 through April 24, 1992.
Similar follow-on suits, containing virtually identical allegations, were filed
by six other plaintiffs. The district court ordered consolidation of all of the
complaints into one class action.

On August 1, 1994, the district court entered final judgment approving the
settlement and dismissing the lawsuit. Under the terms of the settlement, the
claims against the Company and other defendants were dismissed without any
admission or presumption of liability or wrongdoing. A settlement fund
consisting of $6.25 million in cash and 595,000 shares of the Company's Common
Stock was established. The Company contributed $2.15 million in cash into the
fund in March 1994 and the Company's director's and officer's liability
insurance carrier contributed $4.1 million into the fund in August 1994. In
October 1995 the Company contributed the 595,000 shares of Common Stock into the
fund and the escrow agent is distributed the shares to the claimants.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

The Company's Common Stock was traded on the Nasdaq National Market under
the symbol "SAML" from December 4, 1991, the date of the Company's initial
public offering, until June 27, 1996. Effective June 27, 1996, the Company's
Common Stock was removed from trading on the Nasdaq National Market for failure
to meet certain listing requirements. As of June 27, 1996, the Company's Common
Stock was traded in the over-the-counter market and was not included for
quotation on NASDAQ or any other independent quotation service.

The following table sets forth the high and low closing sales prices of the
Company's Common Stock for the years ended December 30, 1995 ("1995") and
December 31, 1994 ("1994"), as reported by the Nasdaq National Market:

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<CAPTION>
HIGH LOW
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1994
First Quarter....................................................................... 3 1/8 1 1/2
Second Quarter...................................................................... 2 1/2 1 1/2
Third Quarter....................................................................... 1 11/16 15/16
Fourth Quarter...................................................................... 1 1/2 11/16

1995
First Quarter....................................................................... 2 1/2 7/8
Second Quarter...................................................................... 3 1/4 1 3/4
Third Quarter....................................................................... 2 15/16 1 7/16
Fourth Quarter...................................................................... 1 15/16 13/16
</TABLE>

As of March 22, 1996, the Company had 1,096 shareholders of record. The
Company has no shares of any other class of capital stock outstanding other than
its Common Stock. The Company has not paid any cash dividends on its Common
Stock since its inception, other than distributions to Samuel L. Edelman, Louise
B. Edelman and Stuart L. Kreisler (the "Principal Shareholders") during the
period that the Company was an S Corporation and in connection with the
termination of the Company's status as an S Corporation. The Company currently
anticipates that any future earnings will be retained for development of its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below for the years ended December 31,
1991, 1992, January 1, 1994, December 31, 1994 and December 30, 1995 has been
derived from the Company's Consolidated Financial Statements, and should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations. See Notes 1 and 12 of Notes to Consolidated Financial
Statements regarding change in fiscal year and discontinued operations,
respectively.

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<CAPTION>
YEAR ENDED
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DECEMBER 30, DECEMBER 31, JANUARY 1, DECEMBER 31, DECEMBER 31,
1995 1994 1994 1992 1991
------------ ------------ ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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INCOME STATEMENT DATA:
Net revenue............................... $ 38,755 $ 36,540 $ 33,217 $ 63,583 $ 85,047
Gross profit.............................. 9,269 7,654 3,132 18,716 33,738
Net income (loss) from continuing
operations............................... (3,773) (3,789) (16,174) (1,925) 11,532
Net (loss) from discontinued operations
including applicable tax effect.......... -- -- (648) (915) --
Net income (loss)......................... $ (3,773) $ (3,789) $ (16,822) $ (2,840) $ 11,532
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
Net income (loss) per share from
continuing operations.................... $ (0.35) $ (0.35) $ (1.60) $ (0.19) $ 1.28
Net income (loss) per share from
discontinued operations.................. -- (0.06) (0.09) --
Net income (loss) per share............... $ (0.35) $ (0.35) $ (1.66) $ (0.28) $ 1.28
------------ ------------ ----------- ------------ ------------
Pro forma net income...................... $ -- $ -- $ -- $ -- $ 8,577(1)
Pro forma net income per share............ $ -- $ -- $ -- $ -- $ 0.95(1)
------------ ------------ ----------- ------------ ------------
Weighted average shares outstanding....... 10,878 10,800 10,163 10,075 9,005
------------ ------------ ----------- ------------ ------------
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................... $ 989 $ 3,391 $ 6,558 $ 21,065 $ 24,327
Total assets.............................. 9,475 7,849 14,836 29,087 38,157
Long-term obligations..................... 91 99 195 227 267
Shareholders' equity...................... 1,746 5,019 8,454 23,844 26,797
Shareholders' equity per share............ .16 0.46 0.78 2.37 2.98
</TABLE>

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(1) Includes adjustments related to executive compensation and income taxes
related to the Company's status as an S Corporation.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The following discussion of the Company's consolidated results of operations
for the years ended December 30, 1995, December 31, 1994 and January 1, 1994
("1993") includes the results of operations of Sam & Libby Brazil, Sam & Libby
Hong Kong and Sam & Libby Outlets, Inc., a wholly-owned subsidiary of the
Company ("Sam & Libby Outlets").

RESULTS OF OPERATIONS

NET REVENUE

Net revenue for 1995 increased approximately 6% from 1994. Before returns
and allowances, sales actually were higher by approximately 9% but significant
returns and allowances especially in the fourth quarter of 1995 negatively
impacted the net sales line for 1995. One of the reasons for the excessive
returns in the fourth quarter of 1995 was related to quality problems for
certain styles of Fall 1995 shoes.

In an attempt to remedy the traditional low sales volume in the fourth
quarter, the Company planned a fourth quarter business based on a suede sneaker
program which would be a natural evolution of its strong canvas sneaker program
during the preceding nine months. The very soft retail market for back-to-school
reduced the department stores' ability to buy fourth quarter merchandise which
resulted in a poor selling fourth quarter and a higher than anticipated
inventory level (see gross profit discussion). Further adversely impacting net
revenue were additional markdowns in the fourth quarter given to customers
because of the weak sales at retail during for the fall selling season.

Net revenue for 1994 increased 10.0% from 1993. Sales of branded footwear
increased 14.7% while private label commission revenue decreased 82.6%. The
increase in sales of branded footwear is principally attributable to increased
sales of units closer to the list price of SAM & LIBBY brand women's and
children's footwear due to better end customer acceptance of the Company's
products and decreased returns and customer allowances. The reduction in private
label revenue was a result of management's decision to focus its energies
towards the branded label business.

Despite the improved performance of 1994 compared to 1993, fourth quarter
1994 revenue was negatively affected by the Company's decision to not design and
produce a holiday/resort line of shoes, additional customer allowances given in
the fourth quarter of 1994 as well as the decision by the Company to curtail
buying inventory without significant customer orders. In addition, the loss of
fourth quarter revenue reflected the continued weak economic and retailing
environment and competitive pressures.

GROSS PROFIT

Gross profit as a percentage of net revenue ("Profit Margin") improved to
23.9% in 1995 from 20.9% in 1994. Profit margin before customer allowances and
markdowns improved approximately 6% from 1994 since the Company was able to sell
more of its merchandise closer to the list price. Negatively impacting the
Profit Margin were additional allowances given to customers as well as higher
inventory markdowns necessitated by the excessive level of Fall 1995 inventory
as stated above. The effect of customer allowances as well as inventory markdown
was especially affected in the fourth quarter of 1995 which resulted in a
negative gross margin for the reasons stated.

The Profit Margin improved to 20.9% in 1994 from 9.4% in 1993. The increase
is principally a result of the factors mentioned above (reduced allowances and a
greater proportion of units sold closer to the list price) combined with lower
1994 inventory reserves which are a function of a reduced level of prior season
inventory. In addition, during the third quarter of 1994, the Company recovered
approximately $500,000 of chargebacks (net of expenses) fully reserved in prior
periods. The negative profit margin in the fourth quarter of 1994 is a function
of the items mentioned above. The decline in private label revenue negatively
affected the Profit Margin in 1994 when compared to 1993.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses ("SG&A") as a percentage of net
revenue slightly increased from $10,978 (30.0% of net revenues) in 1994 to
$11,539 (29.8% of net revenues) in 1995. The increases is principally a result
of additional advertising expenses in 1995.

SG&A as a percentage of net revenue decreased from $13,946 (42.0% of net
revenues) in 1993 to $10,978 (30.0% of net revenues) in 1994. The reduction in
both percentage and absolute dollars is principally due to reductions in
advertising, staffing, commissions and overall administrative expense control.

SETTLEMENT OF SHAREHOLDER LAWSUIT

On April 27, 1992, a class action lawsuit was filed against the Company and
certain of its directors and officers and the managing underwriters of the
Company's initial public offering for alleged violations of federal securities
laws and state common law. The complaint sought unspecified actual and punitive
damages, costs and attorney's fees on behalf of purchasers of the Company's
Common Stock during the period from December 4, 1991 to April 24, 1992. Similar
follow-on suits, containing virtually identical allegations, were filed by six
other plaintiffs. The district court ordered consolidation of the complaints
into one class action lawsuit.

During the second quarter of 1993, the Company recorded a charge to earnings
of $4.1 million for the Company's estimated share of the expenses associated
with the settlement of the lawsuit. During the fourth quarter of 1993, the
Company reduced its previous estimate of the settlement by $750,000. See Note 11
of Notes to Consolidated Financial Statements.

CORPORATE OFFICE RELOCATION

In April 1993, the Company announced the relocation of its corporate
headquarters from San Carlos, California to New York City, and recorded a charge
to earnings of $1.5 million for expenses associated with the relocation,
including certain personnel costs, write-offs of leasehold improvements and
equipment and certain other expenses. The Company closed its San Carlos office
on June 30, 1993.

DISCONTINUED OPERATIONS

In the first quarter of 1993, the Company signed an agreement, effective May
1, 1993, to transfer its apparel division to AMG Apparel Ltd. ("AMG"), an
apparel and licensing company located in Los Angeles. In exchange for the use of
the SAM & LIBBY trademark, the Company was to receive a royalty based on AMG's
sales of SAM & LIBBY apparel. The Company received no royalty revenue in 1994.
During 1994, AMG stopped paying its royalty obligations. The Company has
commenced legal action to regain the rights to its merchandise apparel. In
connection with the transfer of the apparel

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business to AMG, the Company has completed the liquidation of its Hong Kong
subsidiary in the fourth quarter of fiscal 1995. Costs associated with the
liquidation were $30,000 and are included as part of other expenses in the 1995
financial statements. In 1993, the Company's net revenue from the apparel
business was $3.6 million, cost of goods sold and operating expenses from the
apparel business were $4.0 million and the loss from discontinued operations
includes a tax provision of $300,000. See Note 12 of Notes to Consolidated
Financial Statements.

INTEREST EXPENSE

The increase in interest expense to $1,045,000 in 1995 from $500,000 in 1994
and $300,000 in 1993 was a result of the Company's increasing need for the three
consecutive years for cash advances from its factor against unmatured factored
accounts receivable. In addition, the need for cash advances in 1994 was also a
result of the payment in March 1994 of $2.15 million for the settlement of the
shareholder lawsuit and the payment of the Company's note payable. See Note 11
of Notes to Consolidated Financial Statements.

INTEREST AND OTHER INCOME/(EXPENSE)

In the fourth quarter of 1995, management made the determination to close
the Company's operations in Brazil, as the Company's buying strategy shifted
from Brazil to China. As a result, the Company took a charge of $427,000 for
closing the operations.

Other expense in 1995 includes the loss in the sale of the building in
Brazil and certain expenses related to the closing of the Hong Kong office, as
discussed earlier. Interest and other income decreased in 1994 compared to 1993
because of the decrease in matured funds caused by the items mentioned above in
interest expense.

PROVISION FOR INCOME TAXES

In 1992, the Company prospectively adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The cumulative
effect of the change in accounting for income taxes on the Company's financial
position through December 31, 1991 was not significant. In 1992, the Company's
effective tax benefit of 19.0% was the result of financial statement recognition
of tax loss carrybacks and carryforwards. In the first quarter of 1993 the
Company increased the deferred tax benefit based on the loss for the first
quarter at an effective tax rate of 38.0%. As a result of the significant losses
incurred in the second quarter of 1993, the Company made a determination to
eliminate the deferred tax asset and took a charge of $700,000 for the year. See
Notes 1 and 6 of Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company assigns all of its trade receivables to its factor and lender in
accordance with a factoring and financing arrangement (the "Agreement"), as
discussed in Note 2 in the notes to the financial statements. Approximately 85%
of trade receivables are sold on a nonrecourse basis. For those amounts assigned
on a recourse basis, the Company either obtains credit insurance, requires cash
deposits, or receives letters of credit payable to the Company.

The Company is experiencing continuing losses from operations. During 1995,
the Company was able to fund its operating losses and cash used in operations
through advances from its factor based on the collateral borrowing formula as
well as an overadvance line. In order for the Company to avail itself of this
overadvance line, a principal shareholder and executive offices of the Company,
executed a personal guarantee up to $500,000 of the overadvance facility in the
form of collateral assigned to the factor. In addition to the above, the Company
is negotiating deferring approximately $4,500,000 of payments due to the
Company's two major suppliers. The Company is currently negotiating a conversion
of trade debt to equity with these two suppliers for a part or all of the
outstanding indebtedness.

11
<PAGE>
The Company also has a letter of credit agreement from its factor. Letter of
credit financing, which reduces the advance availability under the borrowing
base formula, was insignificant in 1995 and in 1994. Outstanding letters of
credit in the amount of $30,000 on December 30, 1995 are secured by the
Company's merchandise inventories.

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The Company is in default of its
factoring and financing agreement (Note 2), is experiencing continuing losses
from operations and difficulty in generating sufficient cash flows to meet its
obligations and sustain its operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern.

The Company's continued existence is dependent upon its ability to improve
its operating results during 1996. Management's plans to improve its operations
and liquidity include i) reducing inventory levels by liquidating existing
inventory levels and by purchasing goods closer to sale commitments, ii)
increasing market penetration of the Company's Kid's line of shoes which are
expected to generate higher margins, iii) instituting an extensive cost
reduction program that is expected to reduce general and administrative expenses
through a reduction in certain payroll costs, consolidation of office space, as
well as a close monitoring of other expenses, iv) negotiating a new financing
agreement, with an overadvance provision from the Company's factor and lender
(including obtaining a waiver for the current default position), and vi)
obtaining financing from two existing agents.

The Company believes it can improve its operating results based on the above
plans. Management believes execution of those steps will provide sufficient
liquidity for it to continue as a going concern in its present form.
Accordingly, the consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other adjustments
that might be necessary should the Company be unable to continue as a going
concern in its present form. However, there can be no assurance that all of
these steps, if successfully completed, can improve the Company's operating
results.

The Company is currently operating with a discretionary overadvance facility
provided by the factor.

The Company's business does not require significant capital expenditures.
Capital expenditures for 1995 totaled $182,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements as of December 30, 1995 and
December 31, 1994 and for each of the three years in the period ended December
30, 1995 are included in this report as listed on the Index to Financial
Statements appearing in Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

12
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers and directors of the Company, who are elected by and
serve at the discretion of the Board of Directors, and their ages as of May 10,
1996, are as follows:

<TABLE>
<CAPTION>
OFFICER/
DIRECTOR
NAME AGE POSITION SINCE
- - ------------------------ --- ----------------------------------------------------------------- -----------
<S> <C> <C> <C>
Samuel L. Edelman 44 Chairman of the Board, President and Chief Executive Officer 1987
Louise B. Edelman 42 Executive Vice President, Corporate Development and Director 1987
Kenneth M. Sitomer 49 Chief Operating Officer and Chief Financial Officer 1993
Stuart L. Kreisler 49 Vice Chairman of the Board 1991
I. Jay Goldfarb 62 Director 1992
Howard Platt 69 Director 1996
</TABLE>

Samuel L. (Sam) Edelman co-founded the Company with his wife, Louise B.
Edelman, in October 1987. Since the Company's inception, Mr. Edelman has served
as the Chairman of the Board, President and Chief Executive Officer. From April
1983 to July 1987, Mr. Edelman served as the President of the Esprit Footwear
Division of Esprit De Corp., an apparel and footwear company ("Esprit"). Prior
to April 1983, Mr. Edelman occupied various executive positions, including
Executive Vice President of Kenneth Cole Productions, a footwear company.

Louise B. (Libby) Edelman, a co-founder of the Company, served as Senior
Vice President -- Image from the Company's founding until the second quarter of
1992. At the time, Ms. Edelman was promoted to Executive Vice President --
Corporate Development. Prior to October 1987, Ms. Edelman held various
positions, including National Sales Manager for Esprit Kids Shoes, Director of
Public Relations for Calvin Klein Ltd., a fashion company, and Senior Fashion
Editor of SEVENTEEN, MADEMOISELLE and HARPER'S BAZAAR magazines. Ms. Edelman has
served as a Director of the Company since its founding.

Kenneth M. Sitomer has been the Chief Operating Officer and Chief Financial
Officer of the Company since May 1993. Prior to May 1993, Mr. Sitomer served as
President and Chief Executive Officer of Russ Togs, a publicly-held women's
apparel company ("Russ Togs"), from September 1989 to January 1992. Mr. Sitomer
was employed as President and Chief Executive Officer of Bidermann Industries
USA, Inc., ("Bidermann") from 1986 to 1989, as Executive Vice President and
Chief Operating Officer from 1977 to 1986 and as Executive Vice President and
Chief Financial Officer from 1974 to 1977.

Stuart L. Kreisler has been the Vice Chairman of the Board since May 1991.
Since September 1988, Mr. Kreisler has been a private investor in, consultant to
and a director of the Company. Mr. Kreisler was owner of Ralph Lauren
Womenswear, a fashion company, from October 1973 until its acquisition by
Bidermann Industries, Inc. in August 1980, following which he served as its
President and Chief Executive Officer until August 1988.

I. Jay Goldfarb is the Managing Partner of Goldfarb, Whitman & Cohen, an
accounting firm. Mr. Goldfarb has been a partner of Goldfarb, Whitman & Cohen
since 1978.

Howard Platt has been an independent consultant to several shoe importing,
manufacturing and wholesaling businesses since 1990. Mr. Platt has been a
Director of the Company since April, 1996.

With the exception of Sam Edelman and Libby Edelman, who are married to each
other, there is no family relationship among directors or executive officers of
the Company.

13
<PAGE>
Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who own more than ten percent of a registered class of the
Company's equity securities to file certain reports of ownership with the
Securities and Exchange Commission (the "SEC") and with the National Association
of Securities Dealers, Inc. Such officers, directors and shareholders are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms that they file.

Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that, between January 1, 1995 and December 30, 1995, all Section 16(a) filing
requirements applicable to its officers, directors and 10% Shareholders were
complied with.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

The following table sets forth the compensation paid to the Company's Chief
Executive Officer and the four other most highly paid executive officers
(determined as of December 30, 1995) for the fiscal years ended December 30,
1995 (FY1995), December 31, 1994 (FY1994) and January 1, 1994 (FY1993).

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPENSATION STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($) AWARDS($) OPTIONS(#) ($)(2)
- - -------------------------------- --------- --------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Samuel L. Edelman 1995 $ 250,000 -- -- -- -- --
Chairman of the Board, 1994 250,000 -- -- -- -- --
President and Chief Executive 1993 275,828 -- -- -- -- --
Officer
Louise B. Edelman 1995 $ 100,000 -- -- -- -- $ 9,000
Senior Vice President, 1994 100,000 -- -- -- -- --
Corporate Development 1993 112,288 -- -- -- -- $ 8,250
Stuart L. Kreisler 1995 -- -- -- -- -- --
Vice Chairman of the Board 1994 -- -- -- -- -- --
1993 -- -- $ 100,000(3) -- -- --
Kenneth M. Sitomer 1995 $ 316,755 -- -- $ 91,666 -- $ 18,000
Chief Operating Officer and 1994 313,755 -- -- -- -- --
Chief Financial Officer 1993 203,423 -- -- $ 299,900(4) 500,000 $ 18,000
Michael H. Wasserman(5) 1995 $ 138,654 $ 20,000 -- -- -- --
Vice President of Finance 1994 103,462 -- -- -- -- --
1993 80,000 -- -- 50,000 --
</TABLE>

- - ------------------------------
(1) The Company pays bonuses to executive officers based on the officer's base
salary, other compensation and an evaluation of the Company's financial
performance and the individual's performance during the fiscal year.

(2) Includes the allocated amount of personal use of company automobiles,
relocation allowances pursuant to the move of the Company's corporate
offices from San Bruno, California to New York, New York in the 1993 fiscal
year and premium payments paid by the Company for life insurance for the
named executive officer and health insurance for dependants of the named
executive officer.

(3) Represents consulting fees paid to Mr. Kreisler.

(4) Pursuant to the terms of his Employment Agreement, Mr. Sitomer purchased
100,000 shares of Common Stock (the "Restricted Shares") for an aggregate
purchase price of $100 in May 1993. The market value of the Restricted
Shares on the date of grant was $3.00 per share. The restrictions on the
Restricted Shares lapse as follows: 33,333 shares on April 30, 1994, 33,333
shares on April 30, 1995, and 33,334 shares on April 30, 1996.

(5) Mr. Wasserman resigned as Vice President of Finance and left the Company in
March 1996.

14
<PAGE>
OPTION GRANTS IN FISCAL 1995

There were no stock options granted during the fiscal year ended December
30, 1995, to the named executive officers.

OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS

There were no option exercises in fiscal 1995 by any named executive
officer. The following table sets forth information concerning stock options
held by each of the named executive officers on December 30, 1995.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUE TABLE

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISABLE
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END (1)
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Samuel L. Edelman......................................... -- -- -- --
Louise B. Edelman......................................... -- -- -- --
Stuart L. Kreisler........................................ -- -- -- --
Kenneth M. Sitomer........................................ 200,000 300,000 $ 150,000 $ 225,000
Michael H. Wasserman...................................... 33,333 16,667 -- --
</TABLE>

- - ------------------------
(1) Value of unexercised options is based on the last reported sale price of the
Company's Common Stock on the Nasdaq National Market of $1.00 per share on
December 29, 1995 (the last trading day for the fiscal year ended December
30, 1995) minus the exercise price.

COMPENSATION OF DIRECTORS

Each director who is not an employee of or a consultant to the Company (an
"Outside Director") receives $10,000 per year, in addition to $500 for each
meeting of the Board of Directors attended. All directors receive reimbursement
of reasonable out- of-pocket expenses incurred in connection with meetings of
the Board of Directors.

Outside Directors also participate in the Company's 1991 Stock Option Plan.
The 1991 Stock Option Plan was originally approved by the Board of Directors and
shareholders of the Company in September 1991. An amendment to the 1991 Stock
Option Plan to increase the total number of shares reserved for issuance
thereunder from 500,000 to 1,500,000 was approved by the Board of Directors in
February 1993 and by the shareholders in May 1993. The 1991 Stock Option Plan
provides that each Outside Director automatically is granted an option to
purchase 5,000 shares of Common Stock upon first becoming a director and is
granted another option to purchase 5,000 shares of Common stock annually
thereafter so long as he or she remains an Outside Director. The options granted
to Outside Directors are for five year terms and vest at the rate of 25% per
year. The exercise price of options granted to Outside Directors must equal 100%
of the fair market value of the Company's Common Stock on the date of grant.
Outside Directors may not be granted any option pursuant to the 1991 Stock
Option Plan other than those options granted automatically as described herein.

EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS

In May 1993, the Company entered into an Employment Agreement (the
"Employment Agreement") with Mr. Sitomer pursuant to which Mr. Sitomer will
serve as the Company's Chief Operating Officer through April 30, 1997. Pursuant
to the Employment Agreement, Mr. Sitomer's base salary is $300,000 per year,
subject to certain cost of living adjustments. Incentive compensation is both
cash-based and equity-based. Upon execution of the Employment Agreement, Mr.
Sitomer purchased 100,000 Restricted Shares for an aggregate purchase price of
$100. The market value of the Restricted Shares on the date of grant was $3.00
per share. The restrictions on such shares have lapsed as to all of the
Restricted Shares. In addition, under the terms of the Employment Agreement, Mr.
Sitomer was granted a non-statutory stock option (the "Old Option") to purchase
500,000 shares at an exercise

15
<PAGE>
price based on a formula set forth in the Employment Agreement. The option had a
term of ten years and vested 20% on each of April 30, 1994, April 30, 1995, and
April 30, 1996, and 40% on April 30, 1997, as long as Mr. Sitomer remained an
employee. On November 9, 1994, the Board approved an amendment to the Employment
Agreement, including the grant of a new non-statutory stock option (the "New
Option") for 500,000 shares at an exercise price of $0.25 per share upon
cancellation of the Old Option. The New Option has the same term as the Old
Option and vests 40% on May 9, 1995, 20% on April 30, 1996 and 40% on April 30,
1997, as long as Mr. Sitomer remains an employee.

Under the Employment Agreement, Mr. Sitomer may earn a bonus for the 1995,
1996 and 1997 fiscal years based on the performance of the Common Stock and the
Company's operating performance according to the following formulas. For the
1995 fiscal year, if the average of the last sale prices of the Company's Common
Stock (the "Post Announcement Average Stock Price") for the five trading days
commencing on the date that is the seventh calendar day after the date that the
Company first releases to the public its earnings for the fiscal year ending
December 30, 1995, is not at least $2.00 higher than the Post Announcement
Average Stock Price for the 1994 fiscal year (which was $2.925 per share), then
Mr. Sitomer will earn a bonus for fiscal 1995 equal to 5.0% of pre-tax profits
of the Company and its subsidiaries for fiscal 1995, provided that Mr. Sitomer
remains in the employ of the Company throughout fiscal 1995. For the 1996 fiscal
year, if the Post Announcement Average Stock Price following the Company's
earnings release for the 1996 fiscal year is not at least $2.00 higher than the
Post Announcement Average Stock Price for the 1995 fiscal year, then Mr. Sitomer
will earn a bonus for fiscal 1996 equal to 4.5% of pre-tax profits of the
Company and its subsidiaries for fiscal 1996, provided that Mr. Sitomer remains
in the employ of the Company throughout fiscal 1996. For the 1997 fiscal year,
if the Post Announcement Average Stock Price following the Company's earnings
release for the 1997 fiscal year is not at least $2.00 higher than the Post
Announcement Average Stock Price for the 1996 fiscal year, then Mr. Sitomer will
earn a bonus for fiscal 1997 equal to 4.5% of pre-tax profits of the Company and
its subsidiaries for fiscal 1997 multiplied by a fraction, the numerator of
which is the number of days from January 1, 1997, to the date Mr. Sitomer's
employment terminates and the denominator of which is 365.

The Employment Agreement also contains certain provisions regarding
compensation to be paid to Mr. Sitomer in the event that his employment is
terminated, a Change of Control (as defined) occurs or a merger or sale of the
Company takes place. In the event that prior to April 30, 1997, Mr. Sitomer's
employment is terminated either (i) by the Company other than for Cause (as
defined) or (ii) by Mr. Sitomer for Good Reason (as defined), then Mr. Sitomer
shall be entitled to (a) receive bi-weekly payments of his salary at $300,000
per annum through April 30, 1997, subject to 50% mitigation, (b) the immediate
100% vesting and exercisability of the 500,000 non-statutory stock options
(pursuant to the New Option) that have not previously vested or become
exercisable and (c) the immediate vesting of the 100,000 Restricted Shares and
the removal of all restrictions pertaining thereto. In addition, Mr. Sitomer
will receive that portion of any cash bonus earned, if any, attributable to any
completed fiscal year which has accrued but has not yet been paid.

In the event that a Change of Control of the Company occurs while Mr.
Sitomer remains employed by the Company, Mr. Sitomer will be entitled to (i)
receive bi-weekly payments of his salary at $300,000 per annum through April 30,
1997, subject to 50% mitigation, (ii) the immediate 100% vesting and
exercisability of the 500,000 non-statutory stock options (pursuant to the New
Option) that have not previously vested and become exercisable and (iii) the
immediate vesting of the 100,000 Restricted Shares and the removal of all
restrictions pertaining thereto. In addition, if Mr. Sitomer would have been
entitled to a cash bonus for the fiscal year in which such Change of Control
occurs, had his employment continued through the end of such fiscal year, then
Mr. Sitomer will receive a bonus for such fiscal year equal to the amount due
for the fiscal year multiplied by a fraction, the numerator of which is the
number of days from the beginning of that fiscal year to the date on which the
Change of Control occurred, and the denominator of which is 365. In addition,
Mr. Sitomer will receive that portion of any bonus, if any, attributable to any
completed fiscal year which has accrued but has not yet been paid.

16
<PAGE>
Under the Employment Agreement, a "Change of Control" occurs when (i) (a)
any person or group of persons (as defined in Rule 13d-5 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), together with its
affiliates, becomes the beneficial owner, directly or indirectly, of 20% or more
of the voting power of the then outstanding securities of the Company entitled
to vote for the election of directors (excluding any person or group of persons
(as defined in Rule 13d-5 under the Exchange Act) that was the beneficial owner
of 20% or more of the voting power of the outstanding securities of the Company
entitled to vote for the election of directors on May 3, 1993) and (b) Samuel L.
Edelman shall no longer be the Chief Executive Officer of the Company; (ii) (a)
the approval by the Company's shareholders of the merger or consolidation of the
Company with any other corporation, the sale of substantially all of the assets
of the Company or the liquidation or dissolution of the Company, unless, in the
case of a merger, consolidation or sale of substantially all assets, the
incumbent directors in office immediately prior to such merger, consolidation or
sale of assets will constitute at least two-thirds of the board of directors of
the surviving corporation of such merger or consolidation or the corporation
acquiring such assets and any parent (as such term is defined in Rule 12b-2
under the Exchange Act) of such corporation and (b) Samuel L. Edelman shall no
longer be the Chief Executive Officer of either the entity or the division of
the entity that continues the business of the Company and is employing Mr.
Sitomer as its Chief Operating Officer; or (iii) (a) at least two-thirds of the
incumbent directors in office immediately prior to any other action proposed to
be taken by the Company's shareholders determine that such proposed action, if
taken, would constitute a Change of Control of the Company and such action is
taken and (b) Samuel L. Edelman shall no longer be the Chief Executive Officer
of either the entity or the division of the entity that continues the business
of the Company and is employing Mr. Sitomer as its Chief Operating Officer.

In the event that (i) the Company merges or consolidates with another entity
or sells all or substantially all of its assets to another entity within two
years after the date of termination of Mr. Sitomer's employment (for any reason
other than for Cause or the expiration of the employment term) and (ii) such
merger, consolidation or sale of assets is made with or to an entity with which
Mr. Sitomer was involved in negotiations pertaining to a merger, consolidation
or sale of substantially all the assets of the Company during the period he was
employed by the Company, then Mr. Sitomer will be entitled to the immediate 100%
vesting and exercisability of the 500,000 non-statutory stock options (pursuant
to the New Option) that have not previously vested or become exercisable,
effective immediately before the consummation of such merger, consolidation or
sale of assets.

There are no other employment contracts between the Company and any of the
named executive officers.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors presently consists of
Directors I. Jay Goldfarb and Stuart L. Kreisler. Former Director Phillip White
was a member of the Compensation Committee during the fiscal year ended December
30, 1995. No executive officer of the Company served on the Compensation
Committee of another entity or on any other committee of the board of directors
of another entity performing similar functions during the last fiscal year.

17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 31, 1996, as to (a) each current director; (b) each
executive officer named in the Summary Compensation Table; (c) all directors and
executive officers as a group; and (d) each person known to the Company who
beneficially owns more than 5% of the outstanding shares of its Common Stock:

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OWNED (1) TOTAL
- - ------------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Samuel L. Edelman (2) .................................................. 6,260,822 56.8%
58 West 40th Street
New York, New York 10018
Louise B. Edelman (3) .................................................. 5,102,822 46.3%
58 West 40th Street
New York, New York 10018
Stuart L. Kreisler (4) ................................................. 1,158,000 10.5%
58 West 40th Street
New York, New York 10018
I. Jay Goldfarb (5) .................................................... 12,500 *
Howard Platt ........................................................... -- --
Kenneth M. Sitomer (6) ................................................. 400,000 3.5%
Michael H. Wasserman (7) ............................................... 50,000 *
All directors and officers as a group (7 persons) (8) .................. 6,723,322 59.0%
</TABLE>

- - ------------------------
* Less than 1.0%.

(1) The table is based upon information supplied by directors, executive
officers and principal shareholders. Unless otherwise indicated, each of the
shareholders named in the table has sole voting and investment power with
respect to all securities shown as beneficially owned, subject to community
property laws where applicable and to the information contained in the
footnotes to the table.

(2) Includes 5,102,822 shares owned directly by Mr. and Ms. Edelman as community
property and 1,158,000 shares owned by Mr. Kreisler, which Mr. Edelman may
be deemed to beneficially own as a result of his voting rights pursuant to a
shareholders agreement among the Company, Mr. Edelman, Ms. Edelman and Mr.
Kreisler (the "Shareholders Agreement"). See "Certain Relationships and
Related Transactions Shareholders Agreement."

(3) Includes 5,102,822 shares owned directly by Mr. and Ms. Edelman as community
property.

(4) Includes 1,158,000 shares owned by Mr. Kreisler with respect to which Mr.
Edelman has certain voting rights pursuant to the Shareholders Agreement.

(5) Includes 12,500 shares subject to outstanding options that are exercisable
within sixty days of March 31, 1996.

(6) Includes 300,000 shares subject to outstanding options that are exercisable
within sixty days of March 31, 1996.

(7) Includes 50,000 shares subject to outstanding options that are exercisable
within 60 days after March 31, 1996.

(8) Includes 362,500 shares subject to outstanding options that are exercisable
within sixty days of March 31, 1996.

18
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

S CORPORATION TERMINATION, TAX ALLOCATION AND INDEMNIFICATION
AGREEMENT. The Company and Mr. Edelman, Ms. Edelman and Mr. Kreisler
(collectively, the "Principal Shareholders") are parties to an S Corporation
Termination, Tax Allocation and Indemnification Agreement (the "Tax Agreement")
relating to their respective income tax liabilities. Because the Company has
been fully subject to corporate income taxation since the date of the
termination of its status as an S Corporation on December 3, 1991 (the
"Termination Date"), the reallocation of income and deductions between the
period during which the Company was treated as an S Corporation and the period
during which the Company is subject to corporate income taxation may increase
the taxable income of one party while decreasing that of another party.
Accordingly, the Tax Agreement is intended to assure that taxes are born by the
Company on the one hand and the Principal Shareholders on the other only to the
extent that such parties received the related income. Subject to certain
limitations, the Tax Agreement generally provides that the Principal
Shareholders will be indemnified by the Company with respect to federal and
state income taxes (plus interest and penalties) shifted from a Company taxable
year subsequent to the Termination Date to a taxable year in which the Company
was an S Corporation, and the Company will be indemnified by the Principal
Shareholders with respect to federal and state income taxes (plus interest and
penalties) shifted from an S Corporation taxable year to a Company taxable year
subsequent to the Termination Date. The Tax Agreement also provides that the
Principal Shareholders will indemnify the Company against any claims arising out
of or based upon any material liabilities of the Company that were not reflected
(or subject to adequate reserves) in the Company's financial statements as of
December 4, 1991. Any payment made by the Company to the Principal Shareholders
pursuant to the Tax Agreement may be considered by the Internal Revenue Service
or state taxing authorities to be non-deductible by the Company for income tax
purposes.

SHAREHOLDERS AGREEMENT. The Company and the Principal Shareholders are
parties to the Shareholders Agreement, which contains standstill provisions,
transfer restrictions and voting restrictions applicable to Mr. Kreisler and Ms.
Edelman and transfer restrictions applicable to Mr. Edelman.

The Shareholders Agreement provides that Mr. Kreisler may not, subject to
certain exceptions, acquire additional shares of the Company's voting stock
without Mr. Edelman's prior consent, if after such acquisition Mr. Kreisler
would own more than 20% of the outstanding voting stock of the Company. Mr.
Edelman has a right of first refusal on all proposed transfers of shares by Mr.
Kreisler, except transfers made directly to the Company, sales pursuant to a
registered underwritten public offering, sales pursuant to Rule 144 ("Rule 144")
under the Securities Act of 1933, as amended (the "Securities Act"), sales made
in response to a tender offer which is not opposed by the Board of Directors of
the Company, inter vivos gifts, including charitable donations, and transfers to
and from Mr. Kreisler's estate in the event of his death. Mr. Kreisler has a
parallel right of first refusal on all proposed transfers of shares by Mr.
Edelman. Pursuant to the Shareholders Agreement, Mr. Kreisler must vote his
shares on matters submitted to the Company's shareholders in the same proportion
that Mr. Edelman votes his shares; provided, however, that with respect to the
election of directors only, Mr. Kreisler is allowed to vote for himself as
director any shares owned by him, except that if he owns more shares than
necessary to ensure his own election, he is allowed to vote for himself as
director only the minimum number of shares necessary to ensure his own election.
The Shareholders Agreement provides that Mr. Kreisler will not solicit proxies
or actively participate in any contested election without the prior consent of
Mr. Edelman. Mr. Kreisler and, in the event of Mr. Kreisler's death, Mr.
Kreisler's estate, have certain demand and piggyback registration rights. Mr.
Kreisler's restrictions expire upon the earliest to occur of (i) such time as
Mr. Edelman is no longer an officer or director of the Company, (ii) such time
as Mr. Edelman no longer owns at least 20% of the Company's voting stock and
(iii) December 11, 1996. Mr. Kreisler's right of first refusal on proposed
transfers by Mr. Edelman expires upon the earliest to occur of (i) such time as
Mr. Kreisler is no longer a director of the Company, (ii) such time as Mr.
Kreisler owns less than 10% of the Company's voting stock and (iii) December 11,
1996.

19
<PAGE>
The Shareholders Agreement addresses the voting control and ownership of Ms.
Edelman's shares in the event that the Edelmans are divorced, as follows. First,
Ms. Edelman will be prohibited, subject to certain exceptions, from acquiring
additional shares of the Company's voting stock without Mr. Edelman's prior
consent, if after such acquisition Ms. Edelman would own more than 20% of the
outstanding voting stock of the Company. Second, Mr. Edelman, initially, and
then Mr. Kreisler will have a right of first refusal on all proposed transfers
by Ms. Edelman, subject to the same exceptions as Mr. Kreisler's and Mr.
Edelman's transfer restrictions. Third, Ms. Edelman will have the right during
the two year period after the date the divorce becomes final to require Mr.
Edelman to purchase her shares at the then prevailing market value. Fourth, Ms.
Edelman will agree to vote her shares on all matters submitted to the Company's
shareholders (including the election of directors) in the same proportion that
Mr. Edelman votes his shares. Ms. Edelman's standstill, transfer and voting
restrictions terminate, whether or not the Edelmans are divorced, upon the
earliest to occur of (i) such time as Mr. Edelman is no longer an officer or
director of the Company, (ii) such time as Mr. Edelman owns less that 20% of the
Company's voting stock and (iii) December 11, 1996. Ms. Edelman and her estate
will have registration rights similar to those of Mr. Kreisler.

20
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements
of the Company and Independent Auditors' Report are filed as a part of this
Report:

<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Independent Auditors' Report............................................................. F-1
Consolidated Balance Sheets -- December 30, 1995 and December 31, 1994................... F-2
Consolidated Statements of Operations -- Years Ended December 30, 1995, December 31, 1994
and January 1, 1994..................................................................... F-3
Consolidated Statements of Shareholders' Equity -- Years Ended December 30, 1995,
December 31, 1994 and January 1, 1994................................................... F-4
Consolidated Statements of Cash Flows -- Years Ended December 30, 1995, December 31, 1994
and January 1, 1994..................................................................... F-5
Notes to Consolidated Financial Statements............................................... F-6 to F-15
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules of the Company for the years ended December 30, 1995, December 31,
1994 and January 1, 1994 are filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of the Company and Notes
thereto:

<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts......................................... S-1
</TABLE>

Schedules other than those listed above have been omitted because they are
not applicable, not required, or the required information has been given in the
Consolidated Financial Statements of the Company and Notes thereto.

3. EXHIBITS. The following Exhibits are filed as part of, or incorporated
by reference into, this Report:

<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation. (1)
3.2 Restated Bylaws. (1)
4.1 Article III of Restated Articles of Incorporation (see Exhibit 3.1). (1)
4.2 Form of Common Stock Certificate. (1)
10.1 1991 Stock Plan and forms of Incentive Stock Option agreement and Nonstatutory
Stock Option Agreement. (1)
10.2 1991 Employee Stock Purchase Plan. (1)
10.3 Shareholders Agreement, as amended and restated. (1)
10.4 Factoring Agreement between Registrant and Republic Factors Corp. (1)
10.5 Form of Indemnification Agreement. (1)
10.6 S Corporation Termination, Tax Allocation and Indemnification Agreement. (1)
10.7 Merchandise License Agreement between Sam & Libby, Inc. and AMG Apparel Ltd.
dated as of May 1, 1993. (4)
10.8 Facilities and Service Contract dated April 22, 1993 between Sam & Libby, Inc.
and RML Limited. (2)
10.9 Employment Agreement dated as of May 3, 1993 between Kenneth Sitomer and Sam &
Libby, Inc. (3)
10.10 Agreement, dated as of August 12, 1993, between Lane International Trading,
Inc., Sam & Libby Taiwan and Sam & Libby, Inc. (4)
</TABLE>

21
<PAGE>
<TABLE>
<C> <S>
10.11 Promissory Note dated August 12, 1993 from Sam & Libby, Inc. to Sam & Libby
Taiwan. (4)
11.1 Calculation of Earnings Per Share. (4)
21.1 List of Subsidiaries. (4)
23.1 Independent Auditors' Consent and Report on Schedules.
24.0 Power of Attorney. (4)
27.1 Financial Data Schedule.
</TABLE>

- - ------------------------
(1) Exhibits 3.1, 3.2, 4.1, 4.2, 10.1, 10.2, 10.3, 10.4, 10.5 and 10.6 are
incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-1 (No. 33-43424) filed October 18, 1991, Amendment No. 1
thereto filed November 7, 1991, Amendment No. 2 thereto filed November 25,
1991 and Amendment No. 3 thereto filed December 4, 1991, which Registration
Statement became effective December 4, 1991.

(2) Exhibit 10.8 is incorporated by reference to Exhibit 10.9 of the Company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1993.

(3) Exhibit 10.9 is incorporated by reference to Exhibit 10.10 of the Company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1993.

(4) Exhibit previously filed.

(b) REPORTS ON FORM 8-K. There were no Reports on Form 8-K during the
quarter ended December 30, 1995.

For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933 (the "Act"),
the Company hereby undertakes as follows, which undertaking shall be
incorporated by reference into the Company's Registration Statement on Form S-8
No. 33-45671.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

22
<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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

SAM & LIBBY, INC.

By: /s/ KENNETH M. SITOMER

-----------------------------------
Kenneth M. Sitomer
CHIEF OPERATING OFFICER AND
FINANCIAL OFFICER
July 16, 1996

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report of Form 10-K has been signed by the following persons in the capacities
and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------------------------ --------------------------------------------- ----------------

<C> <S> <C>
/s/ SAMUEL L. EDELMAN* President and Chief Executive Officer
-------------------------------------- (Principal Executive Officer), and Chairman July 16, 1996
(Samuel L. Edelman) of the Board

/s/ KENNETH M. SITOMER
-------------------------------------- Chief Operating Officer and Chief Financial July 16, 1996
(Kenneth M. Sitomer) Officer (Principal Financial Officer)

/s/ LOUISE B. EDELMAN*
-------------------------------------- Executive Vice President -- Corporate July 16, 1996
(Louise B. Edelman) Development and Director

/s/ STUART L. KREISLER*
-------------------------------------- Vice Chairman of the Board July 16, 1996
(Stuart L. Kreisler)

/s/ I. JAY GOLDFARB*
-------------------------------------- Director July 16, 1996
(I. Jay Goldfarb)

-------------------------------------- Director July , 1996
(Howard Platt)

* By: KENNETH M. SITOMER
---------------------------------
Kenneth M. Sitomer July 16, 1996
ATTORNEY-IN-FACT
</TABLE>

23
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Sam & Libby, Inc.:

We have audited the accompanying consolidated balance sheets of Sam & Libby,
Inc. and its subsidiaries (the "Company") as of December 30, 1995 and December
31, 1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
30, 1995. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence to support
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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 30,
1995 and December 31, 1994, and the results of its operations and its cash flows
of each of the three years in the period ended December 30, 1995 in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in default of its factoring and financing
agreement (Note 2), is experiencing continuing losses from operations and is
having difficulty in generating sufficient cash flow to meet its obligations and
sustain its operations, which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

New York, New York
March 22, 1996
(April 26, 1996 as to Note 2)

F-1
<PAGE>
SAM & LIBBY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(IN THOUSANDS EXCEPT SHARE
DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 128 $ 683
Accounts receivable, less allowances of $157 and $150............................ 2,427 1,687
Due from shareholders............................................................ 168 168
Merchandise inventories.......................................................... 5,692 3,147
Prepaid expenses................................................................. 212 437
------------ ------------
Total current assets........................................................... 8,627 6,122
Property and equipment, net........................................................ 581 1,452
Other assets....................................................................... 267 275
------------ ------------
Total assets................................................................. $ 9,475 $ 7,849
------------ ------------
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Due to factor.................................................................... $ 1,684 $ 516
Accounts payable................................................................. 4,985 1,020
Accrued expenses................................................................. 967 1,128
Current portion of long-term obligations......................................... 2 67
------------ ------------
Total current liabilities...................................................... 7,638 2,731
------------ ------------
Long-term obligations.............................................................. 91 99
------------ ------------
Shareholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized, none issued....... -- --
Common stock, $.001 par value; 45,000,000 shares authorized, 10,936,429 and
10,814,775 shares outstanding (including 595,000 shares committed but not yet
issued at December 31, 1994).................................................... 11 11
Additional paid-in capital....................................................... 30,780 30,742
Accumulated deficit.............................................................. (28,390) (24,617)
Deferred compensation............................................................ (655) (1,117)
Total shareholders' equity..................................................... 1,746 5,019
------------ ------------
Total liabilities and shareholders' equity................................... $ 9,475 $ 7,849
------------ ------------
------------ ------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-2
<PAGE>
SAM & LIBBY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenue............................................................. $ 38,755 $ 36,540 $ 33,217
Cost of sales........................................................... 29,486 28,886 30,085
------------ ------------ -----------
Gross profit.......................................................... 9,269 7,654 3,132
Selling, general and administrative expenses............................ 11,539 10,978 13,946
Settlement of shareholder lawsuit....................................... -- -- 3,350
Corporate office relocation expense..................................... -- -- 1,500
------------ ------------ -----------
Operating (loss)...................................................... (2,270) (3,324) (15,664)
Other (expense)......................................................... (1,503) (465) (72)
------------ ------------ -----------
(Loss) from continuing operations before income taxes (benefit)....... (3,773) (3,789) (15,736)
Income taxes provision.................................................. -- -- 438
------------ ------------ -----------
Net (loss) from continuing operations................................. (3,773) (3,789) (16,174)
Net (loss) from discontinued operations, including tax provision of
$275................................................................... -- -- (648)
------------ ------------ -----------
Net (loss)............................................................ $ (3,773) $ (3,789) $ (16,822)
------------ ------------ -----------
------------ ------------ -----------
Net (loss) per share from continuing operations......................... $ (0.35) $ (0.35) $ (1.60)
Net (loss) per share form discontinued operations -- -- (0.06)
------------ ------------ -----------
Net (loss) per share.................................................. $ (0.35) $ (0.35) $ (1.66)
------------ ------------ -----------
------------ ------------ -----------
Weighted average shares outstanding................................... 10,878 10,800 10,163
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

See Notes to Consolidated Financial Statements

F-3
<PAGE>
SAM & LIBBY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
---------------------- PAID-IN (ACCUMULATED DEFERRED
SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION TOTAL
--------- ----------- ----------- ------------ ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................... 10,081 $ 10 $ 27,840 $ (4,006) $ -- $ 23,844
Common stock issued under stock plans........... 18 -- 65 -- -- 65
Common stock committed in connection with
settlement of shareholder lawsuit.............. 595 1 1,199 -- -- 1,200
Common stock issued for restricted stock award
and grant of compensatory stock options........ 100 -- 1,050 -- (1,050) --
Amortization of deferred compensation........... -- -- -- -- 167 167
Net loss........................................ -- -- -- (16,822) -- (16,822)
--------- --- ----------- ------------ ------------- ----------
Balance at January 1, 1994...................... 10,794 11 30,154 (20,828) (883) 8,454
Common stock issued under stock plans........... 8 -- 12 -- -- 12
Grants of compensatory stock options............ -- -- 576 -- (563) 13
Amortization of deferred compensation........... -- -- -- -- 329 329
Net loss........................................ -- -- -- (3,789) -- (3,789)
--------- --- ----------- ------------ ------------- ----------
Balance at December 31, 1994.................... 10,802 11 30,742 (24,617) (1,117) 5,019
Common stock issued under stock plans........... 34 -- 13 -- -- 13
Exercise of employee stock options.............. 100 -- 25 -- -- 25
Amortization of deferred compensation........... -- -- -- -- 462 462
Net loss........................................ -- -- -- (3,773) -- (3,773)
--------- --- ----------- ------------ ------------- ----------
Balance at December 30, 1995.................... 10,936 $ 11 $ 30,780 $ (28,390) $ (655) $ 1,746
--------- --- ----------- ------------ ------------- ----------
--------- --- ----------- ------------ ------------- ----------
</TABLE>

See Notes to Consolidated Financial Statements

F-4
<PAGE>
SAM & LIBBY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ (3,773) $ (3,789) $ (16,822)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 461 457 489
Deferred income taxes............................................... -- -- 713
Deferred compensation expense....................................... 462 342 167
Write-offs of property and equipment................................ -- -- 572
(Gain) loss on sale of assets....................................... 246 -- (12)
Gain on settlement of note payable.................................. -- (190) --
Provision for allowances against accounts receivable................ 7 (328) (545)
Settlement of shareholder lawsuit................................... -- (2,150) 3,350
Changes in operating assets and liabilities:
Accounts receivable............................................... (747) 202 4,835
Due from shareholders............................................. -- (168) --
Merchandise inventories........................................... (2,545) 2,779 3,620
Refundable income taxes........................................... -- 275 2,671
Prepaid expenses and other assets................................. 217 (389) 219
Notes payable..................................................... -- (999) 1,189
Due to factor..................................................... 1,168 16 500
Accounts payable, accrued expenses and other current
liabilities...................................................... 3,739 (133) (2,623)
------------ ------------ ------------
Net cash (used in) operating activities............................... (765) (4,075) (1,677)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................. (182) (20) (244)
Proceeds from sale of property and equipment........................ 362 -- 87
------------ ------------ ------------
Net cash provided by (used in) investing activities................... 180 (20) (157)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases obligations.................... (8) (96) (32)
Proceeds from issuance of common stock, net......................... 38 12 65
------------ ------------ ------------
Net cash (used in) provided by financing activities................... 30 (84) 33
------------ ------------ ------------
Net (decrease) in cash and cash equivalents........................... (555) (4,179) (1,801)
Cash and cash equivalents:
Beginning of period................................................. 683 4,862 6,663
------------ ------------ ------------
End of period....................................................... $ 128 $ 683 $ 4,862
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

See Notes to Consolidated Financial Statements

F-5
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS. The Company designs, develops and markets women's and children's
footwear and other products and acts as a private label footwear sales agent. In
June 1993, the Company relocated its corporate office from San Carlos,
California to New York, New York. In connection with the relocation, the Company
recorded a charge to earnings of $1.5 million for expenses associated with the
relocation, including certain personnel costs, write-offs of leasehold
improvements and equipment and certain other expenses.

The Company has a contract (the "RML Agreement") with RML Limited ("RML"),
an independent warehouse facility located in Harrisburg, Pennsylvania pursuant
to which RML provides the Company with warehouse, distribution, inspection and
other services for a fee based upon gross shipping dollars, which is calculated
on a declining percentage as various sales plateaus are achieved. The agreement
expires by its term in April 1995 but is automatically renewable from year to
year unless either party gives notice of non-renewal. Neither party has given
such notice and the agreement remains in effect.

GOING CONCERN -- The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles. The Company is in
default of its factoring and financing agreement (Note 2), is experiencing
continuing losses from operations and difficulty in generating sufficient cash
flows to meet its obligations and sustain its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.

The Company's continued existence is dependent upon its ability to improve
its operating results during 1996. Management's plans to improve its operations
and liquidity include i) reducing inventory levels by liquidating existing
inventory levels and by primarily purchasing goods with sale commitments, ii)
increasing market penetration of the Company's Kid's line of shoes which are
expected to generate higher margins, iii) instituting an extensive cost
reduction program that is expected to reduce general and administrative expenses
through a reduction in certain payroll costs, consolidation of office space, as
well as a close monitoring of other expenses, iv) negotiating a new financing
agreement with an overadvance provision from the Company's factor and lender
(including obtaining a waiver for the current default position), and vi)
obtaining financing from two existing vendors.

The Company believes it can improve its operating results based on the above
plans. Management believes execution of these steps will provide sufficient
liquidity for it to continue as a going concern in its present form.
Accordingly, the consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other adjustments
that might be necessary should the Company be unable to continue as a going
concern in its present form. However, there can be no assurance that all of
these steps, if successfully completed, can improve the Company's operating
results.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries,
Sanders-Importacao E Exportacao Ltd. ("Sam & Libby Brazil"), Sam & Libby (HK)
Limited ("Sam & Libby Hong Kong") and Sam & Libby Outlets, Inc. ("Sam & Libby
Outlets"). All material intercompany transactions and balances have been
eliminated.

In the fourth quarter of 1995, the Company closed the operations in Brazil.
As a result, the Company took a charge of $427,000 for the closing of those
operations.

F-6
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FISCAL YEAR. During 1993, the Company adopted a 52/53-week fiscal year
ending on the Saturday closest to December 31. The fiscal years ended December
30, 1995, December 31, 1994 and January 1, 1994 ("1993") contained 52 weeks.

CASH EQUIVALENTS. Cash equivalents are highly liquid investments with an
original maturity of three months or less.

MERCHANDISE INVENTORIES. Merchandise inventories are stated at the lower of
cost (first-in, first-out method) or market. Inventory cost includes applicable
design and development costs.

PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation is calculated using the straight line method over the estimated
useful life of the respective assets, which range from five to seven years. The
cost of leasehold improvements is amortized over the estimated useful life of
the asset or the applicable lease term, whichever is less.

REVENUE RECOGNITION. Revenue from the sale of merchandise and private label
commissions is recognized upon shipment to the customer, sales are recognized
net of returns and allowances.

INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires the use of the liability method of
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the difference between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes. In addition, the
current or deferred tax consequences of a transaction are measured by applying
the provisions of enacted tax laws to determine the amount of taxes payable
currently or in future years.

NET INCOME (LOSS) PER SHARE. Net income (loss) per share is based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year as calculated under the treasury stock method.

FOREIGN CURRENCY TRANSLATION. In accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," foreign currency
financial statements of foreign subsidiaries are translated into U.S. dollars at
year-end exchange rates except for nonmonetary assets and liabilities, which are
translated at rates in effect when acquired or incurred. Results of operations
are translated at average rates for the year. The effects of exchange rate
changes in translating foreign currency financial statements of the Company's
Brazilian subsidiary, Sanders-Importacao E Exportacao Ltd. ("Sam & Libby
Brazil"), that operates in a hyperinflationary economy are included in the
consolidated statements of operations. During 1994, the economy of Brazil was no
longer considered hyperinflationary. All transactions in Brazil were denominated
in U.S. dollars.

FINANCIAL INSTRUMENTS. The fair value of the Company's financial
instruments approximates their carrying values.

RECLASSIFICATIONS. Certain 1993 financial statement amounts have been
reclassified to conform with the 1995 presentation.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

F-7
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LONG-LIVED ASSETS -- In March 1995, the Financial Accounting Standards Board
issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This statement is effective for
fiscal years beginning after December 15, 1995. The Company has determined the
effect on its financial statements from the adoption of this statement will not
be material.

STOCK-BASED COMPENSATION -- In October 1995, the Financial Accounting
Standards Board issued Statement of capitalized financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." The new standard defines a
fair value method of accounting for stock options and other equity with the
standard to recognize or disclose such compensation in its financial statements
for fiscal years beginning after December 15, 1995. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. The company is also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but will be required to disclose in a note to the
financial statements pro forma net income and earnings per share as if the
Company had adopted the new fair value method of accounting. The Company
determined the effect of the adoption of the new standard would not be material.

NOTE 2 -- FACTORING AGREEMENT
In March 1994, the Company entered into a new factoring and financing
arrangement (the "Agreement") with a bank (the "factor") which provides
factoring services, advances and letters of credit to support on-going
operations. Under the terms of the Agreement, the Company can borrow up to the
lesser of $10 million or the sum of (i) up to 80% of eligible credit approved
receivables plus (ii) the lesser of (a) the sum of (1) up to 30% of eligible
inventory in the United States plus (2) 30% of the first cost of eligible
finished goods being imported under letters of credit and eligible in transit
finished goods inventory imported on open account and consigned to the financial
corporation or (b) $9.5 million, less certain reserves. Subsequent to December
31, 1994, the percentage of eligible credit approved receivables against which
the Company can borrow was reduced from 80% to 75% subject to a monthly
valuation of a three month moving average computation whereby the percentage
could be increased to 80%. In addition, eligible recourse receivables added to
the borrowing base formula. The Company assigns all of its trade receivables
under the Agreement. Approximately 85% of trade receivables are sold on a
non-recourse basis. For those receivables sold on recourse basis, the Company
either obtains credit insurance, requires cash deposits or receives letters of
credit payable to the Company. The borrowing rate is prime plus 1.25% unless the
Company is in an overadvance position, when the borrowing rate is prime plus
2.25% (prime rate at December 31, 1995 was 8.5%. The factor commission rate is
0.75%. Overadvances under the Agreement are available at the sole discretion of
the factor. In order to enable the Company to use such overadvance availability,
a principal shareholder and executive officer executed a personal guaranty for
up to $500,000 of the overadvance facility in the form of collateral assigned to
the factor. If the Company is not in an overadvance position for 90 consecutive
days commencing March 13, 1995, the factor will cancel and return the guaranty
and collateral at the request of such principal shareholder and executive
officer. As of December 31, 1995, the factor holds the guaranty and collateral.
The factor has a security interest in substantially all of the Company's
tangible and intangible assets. The Agreement which is payable on demand expires
March 7, 1997.

F-8
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 2 -- FACTORING AGREEMENT (CONTINUED)
On April 26, 1996, the Company received notification from the factor
indicating the Company was in default of certain provisions of the Agreement.
The Company is currently operating with a discretionary overadvance facility
provided by the factor, and is in the process of negotiating a new financing
agreement.

NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Furniture, fixtures and equipment.......................................... $ 926 $ 1,080
Leasehold improvements..................................................... 1,172 1,243
Building and improvements.................................................. -- 530
------------ ------------
Total.................................................................. 2,098 2,853
Accumulated depreciation and amortization.................................. (1,517) (1,401)
------------ ------------
Property and equipment, net............................................ $ 581 $ 1,452
------------ ------------
------------ ------------
</TABLE>

NOTE 4 -- LONG-TERM OBLIGATIONS AND COMMITMENTS
The Company is committed under long-term noncancelable operating leases for
the use of its office, showroom, retail locations and equipment. Certain leases
require payment of various expenses incidental to the use of the property and
contain escalation clauses and/or provisions for additional rent based on
percentages of sales. Rent expense under these operating leases was $435,000,
$452,000 and $668,000 for 1995, 1994 and 1993, respectively. In addition, the
Company leases certain office equipment under capital lease arrangements.

The aggregate minimum annual payments under noncancelable leases in effect
at December 30, 1995 were as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
1996............................................................................... $ 2 $ 403
1997............................................................................... -- 285
1998............................................................................... -- 65
----- -----
Total minimum lease commitments.................................................... 2 $ 753
-----
-----
Less current portion............................................................... 2
-----
Capital lease obligations.......................................................... $ 0
-----
-----
</TABLE>

On May 3, 1993, the Company entered into an employment agreement with an
executive officer through April 30, 1997. Under the agreement, the Company
issued 100,000 shares of restricted stock which vest 33,333 shares on each of
April 30, 1994, 1995 and 1996. The restricted shares are included in the
calculation of weighted average shares outstanding for the years ended December
30, 1995, December 31, 1994 and January 1, 1994.

The employment agreement also granted the executive the option to purchase
500,000 shares of common stock under the Company's 1991 Stock Option Plan (Note
7) at $1.50 per share. The difference between the fair market value at the date
of the grant and the exercise price of $1.50 per

F-9
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 4 -- LONG-TERM OBLIGATIONS AND COMMITMENTS (CONTINUED)
share plus the fair market value of the restricted shares is recognized as
deferred compensation over the term of the employment agreement. On November 9,
1994, the Company canceled the option to purchase 500,000 shares of common stock
and granted a new option to purchase 500,000 shares of common stock under the
Company's 1991 Stock Option Plan at $.25 per share. The difference between the
fair market value at the date of the new grant and the exercise price of $.25
per share is also recognized as deferred compensation over the remaining term of
the employment agreement. The aggregate commitment for future salaries under the
employment agreement was $400,000 at December 30, 1995.

NOTE 5 -- OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:

<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Income................................................ $ -- $ 55 $ 127
Interest expense............................................... (1,045) (497) (270)
Other.......................................................... (458) (23) 71
------------ ------ -----------
Other income (expense)..................................... $ (1,503) $ (465) $ (72)
------------ ------ -----------
------------ ------ -----------
</TABLE>

NOTE 6 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
JANUARY 1, 1994
---------------
(IN THOUSANDS)
<S> <C>
Current................................................................................. $ --
-----
Federal............................................................................... --
-----
Deferred
Federal............................................................................... 649
State................................................................................. 64
-----
713
-----
Provision (benefit) for income taxes.................................................. $ 713
-----
-----
</TABLE>

The provision for income taxes, allocated between continuing and
discontinued operations, was included in the financial statements as follows:

<TABLE>
<CAPTION>
JANUARY 1,
1994
---------------
(IN THOUSANDS)
<S> <C>
Continuing operations................................................................... $ 438
Discontinued operations................................................................. 275
-----
Provision (benefit) for income taxes.................................................... $ 713
-----
-----
</TABLE>

F-10
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 6 -- INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes for financial reporting purposes
differs from the tax provision (benefit) computed by applying the statutory
Federal income tax rate of 34% as follows:

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax (benefit) at the statutory rate............. $ (1,283) $ (1,288) $ (5,477)
State income taxes, net of federal benefit..................... (302) (227) (504)
Foreign subsidiary activity.................................... 117 (1,062) 1,020
Settlement of shareholder lawsuit not subject to tax benefit... 1,440 --
Deferred tax assets not utilized............................... 1,468 1,137 5,674
------------ ------------ -----------
Provision (benefit) for income taxes........................... $ -- $ -- $ 713
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

The components of the net deferred tax benefit are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Inventory...................................................... $ 658 $ 257 $ 929
Allowance for doubtful accounts................................ 401 180 1,001
Net operating loss carryforwards............................... 7,442 5,763 2,707
Accrued expenses............................................... 10 -- 1,238
Other.......................................................... 729 481 104
------------ ------------ -----------
9,240 6,681 5,979
Valuation allowance............................................ (9,240) (6,681) (5,979)
------------ ------------ -----------
Net deferred tax benefit....................................... $ -- $ -- $ --
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

The Company has net operating loss carryforwards of approximately $18.7
million for Federal income tax purposes expiring between 2007 and 2010.

As a result of an examination by the Internal Revenue Service (the
"Service"), the Company was assessed an additional federal income tax liability
for the 1989 fiscal year relating to the reclassification of certain executive
compensation as a non-deductible dividend. In accordance with Statement of
Financial Accounting Standards No. 5, the Company had recorded an estimate of
$168,000 for the liability that was anticipated to be assessed for federal and
state income taxes plus interest and penalties.

NOTE 7 -- SHAREHOLDERS' EQUITY

1991 STOCK OPTION PLAN. In September 1991, the Board of Directors approved
the 1991 Stock Option Plan (the "1991 Plan"), which allows for the grant of
incentive stock options (as defined in Section 422 of the Internal Revenue Code)
to employees and nonstatutory stock options to both employees and outside
Directors. The Board of Directors had reserved 500,000 shares of Common Stock
for issuance under the 1991 Plan. In May 1993, the Board of Directors reserved
an additional 1,000,000 for issuances of shares under the 1991 Plan. Stock
options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code are granted to employees at prices not less than the fair
market value of the common stock on the date of grant. As discussed in Note 4
above,

F-11
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 7 -- SHAREHOLDERS' EQUITY (CONTINUED)
the 1991 Plan permits and the Company has granted, from time to time,
non-statutory stock options at exercise prices less than the fair market value
of the common stock on the date of grant. The 1991 Plan specifies that the
Company's outside Directors are to receive a stock option grant of 5,000 shares
on the date first elected to the Board and an additional 5,000 shares each year
thereafter. Such options are granted at the fair market value of the common
stock on the date of grant, vest over four years, and are exercisable only while
the outside Director remains a Director. The 1991 Plan also permits the Company
to grant rights to purchase common stock at a price which is at least 50% of the
fair market value of the common stock on the date of grant. The offer of a right
must be accepted within six months of its grant by the execution of a restricted
stock purchase agreement between the Company and the offeree and the payment of
the purchase price of the shares. As of December 30, 1995, no rights have been
granted. On February 24, 1993, the Compensation Committee of the Board of
Directors (the "Committee") authorized a stock option exchange program covering
224,000 stock options with exercise prices of $5.25 to $9.375 per share. Under
the terms of the stock option exchange program, 224,000 new options were issued
at an exercise price of $3.25 per share, the fair market value of the Company's
shares on the date of the grant. On November 9, 1994, the Committee authorized a
stock option exchange program covering 215,000 stock options with exercise
prices of $2.63 per share. Under the terms of the stock option exchange program,
215,000 new stock options were issued at an exercise price of $1.00 per share,
the fair market value of the Company's shares on the date of the grant. Total
activity for the 1991 Stock Option Plan for the years ended December 30, 1995,
December 31, 1994 and January 1, 1994 was as follows:

<TABLE>
<CAPTION>
SHARES PRICES
----------- ---------------
<S> <C> <C>
Outstanding, December 31, 1992........................................... 322,700 $ 5.25 - 22.50
Options granted.......................................................... 1,318,180 $ 1.50 - 3.50
Options exercised........................................................ (2,200) $ 3.25
Options canceled......................................................... (798,680) $ 3.50 - 9.38
-----------
Outstanding, January 1, 1994............................................. 840,000 $ 1.50 - 22.50
Options granted.......................................................... 747,500 $ .25 - 2.65
Options canceled......................................................... (815,000) $ 1.50 - 2.63
-----------
Outstanding, December 31, 1994........................................... 772,500 $ .25 - 22.50
Options exercised........................................................ (100,000) $ .25 - 2.65
-----------
Outstanding, December 30, 1995........................................... 672,500 $ .25 - 22.25
----------- ---------------
----------- ---------------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN. In September 1991, the Board of Directors
approved the 1991 Employee Stock Purchase Plan and reserved 150,000 shares of
common stock for issuance under this plan. During 1995, 1994 and 1993, employees
purchased 34,654, 7,998 and 15,202 shares, respectively, of common stock through
payroll deductions. Through December 30, 1995, 71,229 shares had been issued
under this plan.

NOTE 8 -- MAJOR CUSTOMERS
One customer accounted for approximately 11% of gross sales during 1995 and
10% of gross sales during 1994 (a different customer than 1995). In addition,
certain of the Company's customers are under common ownership. During 1995 and
1994, one department store group accounted for approximately 11% and 10% of the
Company's net revenue. During 1993, two department store groups each accounted
for approximately 11% of the Company's net revenue, although no single
department store

F-12
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 8 -- MAJOR CUSTOMERS (CONTINUED)
unit of either group accounted for more than 3% of net revenue. While the
Company believes that purchasing decisions are made independently by each
department store unit, in some cases the trend may be towards more centralized
purchasing decisions.

NOTE 9 -- RELATED PARTY TRANSACTIONS
In August 1993, the Company signed a one-year promissory note to its former
joint venture partner in the amount of $1.8 million, plus interest at six
percent, for payment of such obligation. At January 1, 1994, the balance of the
note payable was $1.189 million. During 1994, the Company repaid $999,000 of the
note payable and recognized income related to forgiveness of the remaining of
$190,000.

At December 31, 1992, the Company had a note receivable from a former
officer for $125,000 secured by a second deed of trust on the former officer's
primary residence. The note plus accrued interest was originally due in April
1992 and was subsequently written off to compensation expense in May 1993.

During 1995, a principal shareholder and executive officer guaranteed a
portion of the Company's overadvance facility with its factor (Notes 1 and 2).

At December 30, 1995 and December 31, 1994, the Company has a receivable
from certain shareholders related to the reimbursement of a liability for
certain federal and state income taxes plus interest and penalties (Note 6).

NOTE 10 -- ADDITIONAL STATEMENTS OF CASH FLOWS INFORMATION
Total cash paid for interest and income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1,
1995 1994 1994
--------------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes......................................... $ -- $ -- $ --
----- ----- -----
----- ----- -----
Interest............................................. $ 945 $ 465 $ 174
----- ----- -----
----- ----- -----
</TABLE>

NOTE 11 -- SETTLEMENT OF SHAREHOLDER LAWSUIT
On April 27, 1992, a class action lawsuit was filed against the Company and
certain of its present directors and officers and the managing underwriters of
the Company's initial public offering for alleged violations of federal
securities laws and state common law. The complaint sought unspecified actual
and punitive damages, costs and attorney's fees on behalf of purchasers of the
Company's common stock during the period from December 4, 1991 through April 24,
1992. Similar follow-on suits, containing virtually identical allegations, were
filed by six other plaintiffs. The district court ordered consolidation of all
of the complaints into one class action.

On August 1, 1994, the district court entered final judgment approving the
settlement and dismissing the lawsuit. Under the terms of the settlement, the
claims against the Company and other defendants were dismissed without any
admission or presumption of liability or wrongdoing. A settlement fund
consisting of $6.25 million in cash and 595,000 shares of the Company's Common
Stock was established. The Company contributed $2.15 million in cash into the
fund in March 1994 and the Company's director's and officer's liability
insurance carrier contributed $4.1 million into the fund in August 1994. In
October 1995, the Company contributed 595,000 shares of Common Stock into the
fund and the escrow agent distributed the shares to the claimants.

F-13
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 12 -- DISCONTINUED OPERATIONS
In the first quarter of 1993, the Company signed an agreement, effective May
1, 1993, to transfer its apparel division to AMG Apparel Ltd. ("AMG"), an
apparel and licensing company located in Los Angeles. In exchange for the use of
the SAM & LIBBY name, the Company was to receive a royalty based on AMG's sales
of Sam & Libby apparel. The Company received no royalty revenue in 1994 and
minimal royalty revenue in 1993. During 1994, AMG stopped paying its royalty
obligations. The Company has commenced legal action to regain the rights to its
apparel merchandise. In connection with the transfer of the apparel division to
AMG, the Company closed its Hong Kong office in 1993. The Company has liquidated
Sam & Libby Hong Kong in 1996. The Company incurred certain personnel and other
expenses in connection with the discontinuance of the apparel business.

The following reflects the results of the Company's discontinued operations:

<TABLE>
<CAPTION>
JANUARY 1,
1994
--------------
(IN THOUSANDS)
<S> <C>
Net revenue............................................................................. $ 3,635
Cost of sales........................................................................... (3,368)
Operating expense....................................................................... (640)
-------
(Loss) from discontinued operations before income taxes................................. (373)
Income tax provision (benefit).......................................................... 275
-------
Net (loss) from discontinued operations................................................. $ (648)
-------
-------
</TABLE>

F-14
<PAGE>
SAM & LIBBY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994

NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 30,
1995 1995 1995 1995
--------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue...................................... $ 10,459 $ 11,772 $ 12,688 $ 3,836
Gross profit (loss).............................. 3,132 3,562 4,675 (2,100)(1)
Net income (loss) from continuing operations
before income taxes............................. 356 505 662 (5,296)(1)
Net income (loss)................................ $ 356 $ 505 $ 632 $ (4,966)
--------- --------- ------------- -------------
--------- --------- ------------- -------------
Net income (loss) per share...................... $ 0.03 $ 0.04 $ 0.06 $ (0.46)
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31,
1994 1994 1994 1994
--------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue........................................ $ 10,087 $ 9,514 $ 12,628(2) $ 4,312
Gross profit (loss)................................ 2,888 1,619 3,587(2) (440)(1)
Net income (loss) from continuing operations before
income taxes...................................... 303 (1,209) 304 (3,187)(1)
Net income (loss).................................. $ 303 $ (1,209) $ 304 $ (3,187)
--------- --------- ------------- -------------
--------- --------- ------------- -------------
Net income (loss) per share........................ $ 0.03 $ (0.11) $ 0.03 $ (0.30)
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>

- - ------------------------
(1) Negative gross profit and net loss in the fourth quarter was primarily due
to low sales volume, significant allowances that were granted to customers
and substantial inventory markdowns for unsold inventory.

(2) Included in sales and gross profit is approximately $500, or $.05 per share,
resulting from the recovery (net of expenses) of chargebacks fully reserved
in prior periods.

F-15
<PAGE>
SCHEDULE II
SAM & LIBBY, INC.
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
YEAR ENDED OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD
- - ----------------------------------------------------------- ----------- ----------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 1, 1994:
Provision for doubtful accounts.......................... $ 1,238 $ 348 $ 893 $ 693
YEAR ENDED DECEMBER 31, 1994:
Provision for doubtful accounts.......................... $ 693 $ 2,176 $ 2,088 $ 781
YEAR ENDED DECEMBER 30, 1995:
Provision for doubtful accounts.......................... $ 781 $ 2,825 $ 3,065 $ 541
</TABLE>

- - ------------------------
(1) Write-off of doubtful accounts against reserve.

S-1

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in Registration Statement No. 33-45671 of Sam & Libby,
Inc. (the "Company") on Form S-8 of our report dated March 22, 1996 (April 26 as
to Note 2) appearing in Amendment No. 1 to the Annual Report on Form 10-K/A of
Sam & Libby, Inc. for the year ended December 30, 1995.

Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Sam & Libby, Inc.,
listed in Item 14(a)2. This financial statement schedule is the responsibility
of the Corporation's management. Our responsibility is to express an opinion
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

New York, New York
July 15, 1996

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-30-1995
<CASH> 128
<SECURITIES> 0
<RECEIVABLES> 2584
<ALLOWANCES> 157
<INVENTORY> 5692
<CURRENT-ASSETS> 8627
<PP&E> 2098
<DEPRECIATION> 1517
<TOTAL-ASSETS> 9475
<CURRENT-LIABILITIES> 7638
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 1735
<TOTAL-LIABILITY-AND-EQUITY> 9475
<SALES> 38755
<TOTAL-REVENUES> 38755
<CGS> 29486
<TOTAL-COSTS> 11539
<OTHER-EXPENSES> 1503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3773)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3773)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)

</TABLE>