SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 2000

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________to
______________.

Commission File Number 0-10593

CANDIE'S, INC.
(Exact Name of Registrant as Specified in Its Charter)

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Delaware 11-2481903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2975 Westchester Avenue, Purchase, New York 10577
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (914) 694-8600

Securities registered under Section 12(b) of the Exchange Act:

Name of Each Exchange
Title of Each Class on which Registered
None Not Applicable

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.001 par value
Preferred Share Purchase Rights
(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __

Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on April 20, 2000, was approximately
$21,452,000.

As of April 20, 2000, 17,896,393 shares of Common Stock, par value $.001
per share were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive
proxy statement for its annual meeting of stockholders to be held in the year
2000 is incorporated by reference into Part III of this Form 10-K.

CANDIE'S, INC.-FORM 10-K

TABLE OF CONTENTS

Page
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PART I

Item 1. Business.................................................................................... 2
Item 2. Properties.................................................................................. 9
Item 3. Legal Proceedings........................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......................................... 11

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 11
Item 6. Selected Financial Data..................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................... 18
Item 8. Financial Statements and Supplementary Data................................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 19

PART III

Item 10. Directors and Executive Officers of the Registrant.......................................... 20
Item 11. Executive Compensation...................................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 20
Item 13. Certain Relationships and Related Transactions.............................................. 20

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 20

Signatures.................................................................................................... 21

Consolidated Financial Statements............................................................................. F-1

PART I

Item 1. Business

Introduction

The history of the "CANDIE'S" brand spans over 22 years and has become
synonymous with young, fun and fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc., which was incorporated
in Delaware in 1978, and its subsidiaries (collectively, the "Company") is
currently engaged primarily in the design, marketing, and distribution of
moderately-priced women's casual and fashion footwear under the CANDIE'S(R)and
BONGO(R)trademarks for distribution within the United States to department,
specialty, chain and seven company-owned retail stores and to specialty stores
internationally. The Company markets and distributes children's footwear under
the CANDIE'S and BONGO trademarks, as well as a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels and the ASPEN(R) brand, which is licensed by the Company from a
third party through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary. In 1998, the Company began licensing its CANDIE'S
trademark for the purpose of building CANDIE'S into a lifestyle brand serving
generation "Y" women and girls, and it currently holds licenses for fragrance,
eyewear, leg wear and handbags. Through Unzipped Apparel, LLC ("Unzipped"), the
Company's joint venture with Sweet Sportswear LLC ("Sweet"), the Company
marketed and distributed jeanswear and apparel under the CANDIE'S and BONGO
label to department, specialty, and chain stores in the United States.

The Company believes that it has developed CANDIE'S into a strong footwear
brand appealing to women and girls in the generation "Y" demographic. As a
growth strategy, the Company plans to continue to focus on building market share
in the junior footwear area of better department and specialty stores, pursuing
licensing opportunities, and expanding its consumer direct business through the
opening of retail stores and e-commerce.

The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information during its fiscal year ended January 31, 1999
("Fiscal 1999"). The adoption of SFAS No. 131 did not affect the Company's
consolidated financial position or results of operations because the Company
operates in one segment. See Note 14 of the Segment Information of the Financial
Statements.

Background of the Company and Acquisitions

The Company began to license the use of the CANDIE'S trademark from New
Retail Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased
ownership of the CANDIE'S trademark from NRC together with certain pre-existing
licenses of NRC, a then publicly traded company engaged primarily in the
licensing and sublicensing of fashion trademarks and a significant stockholder
of the Company. NRC's principal stockholder was also the Company's President and
Chief Executive Officer.

Effective August 18, 1998 (the "Effective Date"), the Company completed a
merger with NRC (the "Merger"). Each issued and outstanding share of NRC common
stock $.01 par value (the "NRC Common Stock"), and each issued and outstanding
option to purchase one share of NRC Common Stock, prior to the Effective Date,
was converted, respectively, into 0.405 shares of common stock, $.001 par value
of the Company (the "Candie's Common Stock"), and into options to purchase 0.405
shares of Candie's Common Stock, respectively.

At the Effective Date, there were 5,743,639 outstanding shares of NRC
Common Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of Candie's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of Candie's Common Stock. NRC also owned 1,227,696 shares of
Candie's Common Stock and had options and warrants to purchase an additional
800,000 shares of Candie's Common Stock. These options and warrants were
extinguished upon consummation of the Merger.

The transaction was accounted for using the purchase method of accounting.
The results of operations of NRC are included in the accompanying consolidated
financial statements from the date of the Merger.

The cost of the acquisition, including acquisition expenses of $700,000,
after netting the value of the reacquired Company shares, warrants and options
totaled approximately $5.6 million. This resulted principally in purchase price
allocation to the licenses acquired of $340,000 and a trademark value of $5.2
million. Deferred tax liabilities resulting from this transaction totaled
approximately $2.1 million which amount was recorded as goodwill.

Acquisition of Michael Caruso & Co., Inc.

On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso").
As a result of the transaction, the Company acquired the BONGO trademark as well
as certain other related trademarks and two license agreements for use of the
BONGO trademark, one for children's and one for large size jeanswear. Prior to
the closing of the acquisition, Caruso was the licensor of the BONGO trademark
for use on footwear products sold by the Company, which license was terminated
as of the closing.

The purchase price for the shares acquired was approximately $15.4 million
and was paid at the closing in 1,967,742 shares of Candie's Common Stock (each
share being valued at $7.75), plus $100,000 in cash. On March 24, 1999, 547,722
additional shares of Candie's Common Stock were delivered to the sellers upon
the six month anniversary of the closing based on a contingency clause in the
agreement requiring an upward adjustment in the number of shares delivered at
closing. The issuance of the contingent consideration had no effect on the
purchase price.

This transaction was accounted for using the purchase method of accounting.
The results of operations of Caruso are included in the accompanying financial
statements from the date of acquisition. The total purchase price of
approximately $15.6 million, including acquisition expenses of approximately
$250,000, but excluding the contingency shares described above, resulted
principally in a purchase price allocation to the licenses acquired of $2.7
million and a trademark value of $11.8 million.

Formation of Unzipped Apparel LLC

On October 7, 1998, the Company formed Unzipped with its joint venture
partner Sweet, the purpose of which was to market and distribute apparel under
the BONGO and CANDIE'S labels. Candie's and Sweet each have a 50% interest in
Unzipped. Pursuant to the terms of the joint venture, the Company licensed the
CANDIE'S and BONGO trademarks to Unzipped for use in the design, manufacture and
sale of certain designated apparel products. Currently, the Company believes
that Unzipped is in breach of certain provisions of the agreements among the
parties, and has notified Unzipped that the Company does not intend to
contribute any additional capital toward the joint venture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation and Note
2 of the Notes to the Financial Statements."

Stockholders Rights Plan

In January 2000, the Company's Board of Directors adopted a stockholder
rights plan. Under the plan, each stockholder of Candie's Common Stock received
a dividend of one right for each share of the Company's outstanding common
stock, entitling the holder to purchase one thousandth of a share of Series A
Junior Participating Preferred Stock, par value, $0.01 per share of the Company,
at an initial exercise price of $6.00. The rights become exercisable and will
trade separately from Candie's Common Stock ten business days after any person
or group acquires 15% or more of Candie's Common Stock, or ten business days
after any person or group announces a tender offer for 15% or more of the
outstanding Candie's Common Stock.

Products

CANDIE'S Footwear Products. The CANDIE'S brand, consisting of fashion and
casual footwear, is designed primarily for women and girls aged 4-25. The
footwear features a variety of styles. The retail price of CANDIE'S footwear
generally ranges from $30 - $60 for women's styles and $25 - $45 for girl's
styles. Four major and two interim times per year, as part of its Spring and
Fall collections, the Company designs and markets 30 to 40 different styles.
Approximately one-third of CANDIE'S women's styles are "updates" of the
Company's most popular styles from prior periods, which the Company considers
its "core" products. Approximately three-quarters of the girl's styles are
versions of the best selling women's styles and the remaining one quarter are
designed specifically for the girls' line.

The Company's designers analyze and interpret fashion trends and translate
such trends into shoe styles consistent with the CANDIE'S image and price
points. Fashion trend information is compiled by the Company's design team
through various methods, including travel to Europe and throughout the world to
identify and confirm seasonal trends, utilization of outside fashion forecasting
services and attendance at trade shows and seminars. Each season, subsequent to
the final determination of that season's line by the design team and management
(including colors, trim, fabrics, constructions and decorations), the design
team travels to the Company's manufacturers to oversee the production of the
initial sample lines.

CANDIE'S Handbag Products. In the Fall of 1998, the Company began to
design, market, and distribute women's handbags to department and specialty
stores in the United States. The retail prices range from $28 - $36. In April
2000, the Company entered into a licensing agreement with Trebbianno LLC
("Trebbianno"), to license the handbag business to Trebbianno for a three year
term with a three year renewal conditioned on achieving certain minimum sales.
See "Trademarks and Licensing".

BONGO Footwear, Jeanswear and Handbag Products. The Company designs,
markets, and distributes fashion and casual footwear and handbags at value price
points under the BONGO name for women and girls aged 4-25. In addition, the
Company through its joint venture, Unzipped designs, markets and distributes
jeanswear and apparel to the same targeted markets. The BONGO product lines are
marketed to department, specialty, and chain stores in the United States. The
retail prices range from $20-$45 for footwear, $20-$50 for jeanswear and $15-$25
for handbags. The BONGO handbag business was licensed to Trebbianno in April
2000.

Private Label Products. In addition to sales under the CANDIE'S and BONGO
trademarks, the Company arranges for the manufacture of women's footwear, acting
as agent for mass market and discount retailers, primarily under the retailer's
private label brand. Most of the private label footwear is presold against
purchase orders and is backed by letters of credit opened by the applicable
retailers. In certain instances the Company receives a commission based upon the
purchase price of the products purchased from the manufacturer for providing
design expertise, arranging for the manufacturing of the footwear, overseeing
production, inspecting the finished goods and arranging for the sale of the
finished goods by the manufacturer to the retailer.

Bright Star Footwear. Bright Star, acting principally as agent for its
customers, designs, markets and distributes a wide variety of men's branded and
unbranded workboots, hiking boots, winter boots and leisure footwear. Branded
products are marketed under the private label brand names of Bright Star's
customers or under the Company's licensed brand, ASPEN. Bright Star's customer
base includes discount and specialty retailers. Bright Star's products are
generally directed toward the mid-priced market. The retail prices of Bright
Star's footwear generally range from $25 to $75. The majority of Bright Star's
products are sold on a commission basis.

Retail Operations

The Company operates seven retail stores, consisting of four outlets and
three specialty stores. The Company anticipates opening between three and five
additional retail stores during the next year as opportunities make themselves
available. Retail revenues for the fiscal year ended January 31, 2000 ("Fiscal
2000") were $2.8 million or three percent of net revenues.

The Company operates its retail stores, which complement its wholesale
business, primarily to establish a direct relationship with the consumer, to
build the brand image and to test products for the wholesale business. The
Company also believes that retail stores will provide an opportunity for the
Company to showcase its increasing range of goods, which currently includes
apparel, handbags, fragrance, socks and sunglasses.

The success of the Company's new and existing retail stores will depend on
various factors, including general economic and business conditions affecting
consumer spending, the acceptance by consumers of the Company's retail concept,
the ability of the Company to manage its retail operations and the availability
of desirable locations and favorable lease terms.

Advertising, Marketing and Website

The Company believes that advertising to promote and enhance the CANDIE'S
and BONGO brands is an important part of its long-term growth strategy. The
Company believes that its innovative and edgy advertising campaigns featuring
celebrities, which have brought it national recognition, have resulted in
increased sales and consumer awareness of its branded products. The Company's
advertising appears in fashion magazines such as Marie Claire, Cosmopolitan and
Glamour, and teenage lifestyle magazines such as Teen, Teen People and
Seventeen, as well as in television commercials, newspapers, and outdoor and
electronic advertising media.

The Company maintains a product website, www.candies.com, which it launched
in October 1999. In April 2000, the Company launched its first e-commerce
initiative, a co-branded store to sell the Candie's footwear collection in
partnership with leading teen retailer "Journeys".

The Company also maintains a corporate website that provides financial and
background information about the Company located at www.candiesinc.com

Manufacturing and Suppliers

The Company does not own or operate any manufacturing facilities. The
Company's footwear products are manufactured to its specifications by a number
of independent suppliers currently located in Brazil, China, Spain, Italy, and
Taiwan. The Company believes that such diversification permits it to respond to
customer needs and helps reduce the risks associated with foreign manufacturing.
The Company has developed, and seeks to develop, long-term relationships with
manufacturers that can produce a high volume of quality products at competitive
prices.

The Company negotiates the prices of finished products with its suppliers.
Such suppliers manufacture the products themselves or subcontract with other
manufacturers or suppliers. Finished goods are purchased primarily on an open
account basis, generally payable within 7 to 45 days after shipment.

Most raw materials necessary for the manufacture of the Company's footwear
are purchased by the Company's suppliers. Although the Company believes that the
raw materials required (which include leather, nylon, canvas, polyurethane and
rubber) are available from a variety of sources, there can be no assurance that
any such materials will continue to be available on a timely or cost-effective
basis.

Once the design of a new shoe is completed (including the production of
samples), which generally requires approximately three months, the shoe is
offered for sale to wholesale purchasers. After orders are received by the
Company, the acquisition of raw materials, the manufacture of the shoes and
shipment to the customer each take approximately one additional month.

For Fiscal 2000 and Fiscal 1999, Redwood Shoe Corp. ("Redwood"), a related
party buying agent for the Company, initiated the manufacture of approximately
74% and 60%, respectively, of the Company's total footwear purchases. At January
31, 2000, the Company had $13,775,920 of open purchase commitments with Redwood,
representing 48% of the

Company's total purchase commitments. At January 31, 1999, the Company had
$28,117,820 of open purchase commitments with Redwood, representing 87% of the
Company's total purchase commitments.

There can be no assurance that, in the future, the capacity or availability
of manufacturers or suppliers will be adequate to meet the Company's product
needs.

Tariffs, Import Duties and Quotas

All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule,
the Company pays import duties on its footwear products manufactured outside of
the United States rates ranging from approximately 3.2% to 48%, depending on
whether the principal component of the product, which varies from product to
product is leather or some other material. Accordingly, the import duties vary
with each shipment of footwear products. Since 1981, there have not been any
quotas or restrictions, other than the duties mentioned above, imposed on
footwear imported by the Company into the United States.

The Company is unable to predict whether, or in what form, quotas or other
restrictions on the importation of its footwear products may be imposed in the
future. Any imposition of quotas or other import restrictions could have a
material adverse effect on the Company.

In addition, other restrictions on the importation of footwear and apparel
are periodically considered by the United States Congress and no assurance can
be given that tariffs or duties on the Company's goods may not be raised,
resulting in higher costs to the Company, or that import quotas respecting such
goods may not be lowered, which could restrict or delay shipment of products
from the Company's existing foreign suppliers.

Backlog

On March 31, 2000, the Company had an estimated backlog of orders of its
products of approximately $33,827,000, as compared to a backlog of approximately
$36,375,000 at March 31, 1999. The backlog at March 31, 2000 is expected to be
filled during Fiscal 2001. The backlog at any particular time is affected by a
number of factors, including seasonality, the buying policies of retailers,
scheduling, and the manufacture and shipment of products.

Seasonality

In previous years, demand for the Company's footwear peaked during the
months of June through August (the Fall/back-to-school selling season). As a
result, shipment of the Company's products in previous years were heavily
concentrated in its second and third fiscal quarters. Accordingly, historically,
operating results have fluctuated significantly from quarter to quarter.

Customers and Sales

During Fiscal 2000, the Company sold its footwear products to more than
1,100 retail accounts consisting of department stores, including Federated
Stores (which include Macy's and Bloomingdale's), Nordstrom's and May Company,
mass merchandisers, Wal-Mart, specialty stores and other outlets in the United
States. Wal-Mart, a customer of BrightStar, accounted for 10.2% of the Company's
total Fiscal 2000 net revenues. No other individual customer accounted for more
than 10% of the Company's net revenues during Fiscal 2000, however May Company
accounted for approximately 9.5% of total Fiscal 2000 net revenues. In Fiscal
1999, no individual customer accounted for more than 10% of the Company's
revenues.

The Company has international distribution agreements with United
Authentics, GmbH for exclusive distribution of footwear in Germany and Austria
through January 31, 2002, Bata Shoe Pte. Ltd. of Singapore for exclusive
distribution of footwear in Singapore through April 2000, Sports Odyssey of
Canada for exclusive distribution of footwear in Canada through January 31,
2002, Dafna-Hulate Shoe Distribution Ltd.

for exclusive distribution of footwear in Israel through January 31, 2002, and
Calego International, Inc. for exclusive distribution of handbags in Canada,
which agreement was terminated on or about April 1, 2000. Pursuant to the terms
of such distribution agreements, the distributor purchases certain minimum
volumes of products from the Company for distribution in specialty stores
throughout the applicable territories and pays the Company royalties on such
purchases. During Fiscal 2000 and Fiscal 1999, the Company generated
approximately $249,000, and $208,000 respectively in sales to the international
markets mentioned above and sales to international markets in the fiscal year
ended January 31, 1998 ("Fiscal 1998") were deminimus. The Company will continue
to evaluate existing and potential international agreements.

The Company generally requires payment for goods by its customers either by
letter of credit or by check, subject to collection, within 30 to 60 days after
delivery of the goods. In certain instances, the Company offers its customers a
discount from the purchase price in lieu of returned goods; otherwise, goods may
be returned solely for defects in quality, in which event the Company returns
the goods to the manufacturer for a credit to the Company's account.

As of January 31, 2000, the Company utilized the services of 14 full time
sales persons, seven of whom are independent contractors, who are compensated on
a commission basis. The Company emphasizes customer service in the conduct of
its operations and maintains a customer service department. The Company's
customer service department processes customer purchase orders and supports the
sales representatives by coordinating orders and shipments with customers.

Trademarks and Licensing

The Company owns federal registrations or has pending federal registrations
in the United States Patent and Trademark Office for CANDIE'S and BONGO in both
block letter and logo format for use on footwear, apparel, fragrance, handbags
and various other goods and services. In addition, from time to time the Company
registers certain of its trademarks in other countries and regions including
Canada, Europe and South and Central America.

The Company regards the trademarks and other intellectual property rights
that it owns and uses as valuable assets and intends to defend them vigorously
against infringement. There can be no assurance, however, that the CANDIE'S or
BONGO trademarks, or any other trademark which the Company owns or uses, does
not, and will not, violate the proprietary rights of others, that any such
trademark would be upheld if challenged, or that the Company would, in such an
event, not be prevented from using such trademarks, which event could have a
material adverse effect on the Company. In addition, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend an infringement action.

The Company also owns other registered and unregistered trademarks which it
does not consider to be material to its current operations.

The Company has pursued and intends to pursue licensing opportunities for
its trademarks as an important means for reaching the targeted consumer base,
increasing brand awareness in the marketplace and generating additional income.
Potential licensees are subject to a selective process performed by the
Company's management. The Company will enter into licensing agreements with
additional parties in addition to those described below only if there is a
compatibility of quality standards, brand perception, distribution capabilities,
experience in a respective business, financial stability, and marketability of a
proposed product.

During Fiscal 1999, the Company entered into three licenses for use of the
CANDIE'S trademark on fragrance, leg wear and eyewear, respectively. Pursuant to
the first license, the Company granted Liz Claiborne Cosmetics, Inc. the
exclusive right to license the CANDIE'S name and other trademarks for a variety
of fragrance and fragrance-related products throughout the world for a term of
approximately 15 years ending December 31, 2012. The licensee has a renewal
option for a term of five to ten years ending December 31, 2017 or December 31,
2022, as applicable, depending upon the licensee's sales performance during the
initial term. Pursuant to the second license, the Company granted Ben Berger
LLC,

the exclusive right to license the CANDIE'S brand for socks and tights
throughout the United States and Canada for a term of three years ending January
31, 2002. The licensee has a renewal option for a term of two years ending
January 31, 2004, if it, among other things, achieves threshold minimum sales
during the initial term. Pursuant to the third license, the Company granted Viva
Optique, Inc. the exclusive right to license the CANDIE'S brand for sunglasses
and eyewear throughout the world for a term of three years ending January 31,
2002. The licensee has renewal options for consecutive terms of three years each
ending January 31, 2005 and January 31, 2008, respectively, if, among other
things, it achieves threshold minimum sales during the initial term.

The Company also assumed, as a result of the Caruso acquisition, two
licensing agreements for the BONGO trademark, one for the exclusive right to
license the BONGO trademark throughout the United States and its territories and
possessions for junior denim/sportswear with Jenna Lane Licensing I, Inc., for a
term of approximately three and a half years ending March 31, 2002, with an
option to renew if the licensee, among other things, achieves threshold minimum
sales during the initial term, and one for the exclusive right to license the
BONGO trademark throughout the United States and its territories and possessions
for junior plus size denim/sportswear with M. Fine & Sons Company, Inc., for a
term of four years ending May 31, 2002, with an option for the licensee to renew
for a term of three years if licensee, among other things, achieves threshold
minimum sales during the initial term. In connection with the Merger, the
Company assumed a license agreement with Wal-Mart which expires in July 2002,
with respect to the NO EXCUSES trademark.

Also during Fiscal 1999, the Company entered into licensing arrangements
with Unzipped, granting Unzipped the exclusive license to use the CANDIE'S and
BONGO trademarks for the purpose of manufacturing, distributing and marketing
apparel and jeanswear through January 31, 2003, throughout the United States and
its territories and possessions.

In addition, on or about March 3, 2000, the Company granted the exclusive
right to use the CANDIE'S and BONGO name on handbags and small leather goods to
Trebbianno throughout the United States, Canada, the United Kingdom and Japan
for a term of three and a half years ending December 31, 2003. The licensee has
a renewal option for a term of three years ending December 31, 2006, if, among
other things, it achieves threshold minimum sales during the initial term.

The Company also sells footwear under the ASPEN trademark pursuant to a
license from Aspen Licensing International, Inc. The ASPEN license agreement,
which was amended on September 22, 1998, grants Bright Star the exclusive right
to market and distribute certain categories of footwear under the ASPEN
trademark in the United States, its territories and possessions, for a term
expiring on September 30, 2000. The ASPEN licenses require the Company to pay
minimum royalties based on percentages of sales exceeding certain minimum
amounts.

Competition

The footwear industry is extremely competitive in the United States and the
Company faces substantial competition in each of its product lines from, among
other brands, Skechers, Steve Madden and Esprit. In general, competitive factors
include quality, price, style, name recognition and service. In addition, the
presence in the marketplace of various fashion trends and the limited
availability of shelf space can affect competition. Many of the Company's
competitors have substantially greater financial, distribution, marketing and
other resources than the Company and have achieved significant name recognition
for their brand names. There can be no assurance that the Company will be able
to compete successfully with the other companies marketing these types of
products.

Employees

As of March 31, 2000, the Company employed 141 persons, 97 full-time and 44
part-time. Three of the Company's employees are executives and the remainder are
management, sales, marketing, product development, administrative, customer
service representatives and retail store personnel. None of the Company's
employees are represented by a labor union. The Company also utilizes the
services of seven

independent contractors who are engaged in sales. The Company considers its
relations with its employees to be satisfactory.

Other Material Developments

During the course of its uncompleted audit of the Company's financial
statements for Fiscal 1999, Ernst & Young, LLP ("E & Y"), the Company's auditors
until June 17, 1999, informed the Company that it had been unable to obtain
sufficient evidentiary support to determine the appropriateness of the
accounting that the Company had applied to certain transactions that could
affect the Company's financial results for the first three quarters of Fiscal
1999 and Fiscal 1999 as a whole and for Fiscal 1998.

In response to these issues, on May 14, 1999, the Company's Audit Committee
of the Board of Directors (the "Board") appointed a Special Committee to conduct
an independent investigation of such transactions, and any other transactions or
matters that it might discover during the course of the investigation. To assist
the Special Committee in its investigation and the accounting analysis, the
Special Committee retained the law firm of Squadron Ellenoff Plesent & Sheinfeld
LLP, which, in turn, retained the accounting firm of PricewaterhouseCoopers LLP.

On or about June 17, 1999, the Company terminated the services of E & Y.
See Item 9 "Changes in and Disagreements with Accountants". On June 22, 1999,
the Company retained the accounting firm of BDO Seidman, LLP ("BDO") to replace
E & Y as its independent auditors to audit its financial statements with respect
to Fiscal 1998 and Fiscal 1999.

On or about August 26, 1999, the Special Committee completed its
investigation and reported to the Board as to its findings and recommendations.
The Special Committee recommended, among other things, that the Company
implement certain remedial procedures and systems.

In September 1999, BDO completed its audits of Fiscal 1998 and Fiscal 1999.
As a result of the audit, the financial statements of the Company for Fiscal
1998 and for the first three quarters of Fiscal 1999 were restated from amounts
previously reported. In addition, the Company restated its previously issued
financial statements for the three quarters ended April 30, 1998, July 31, 1998
and October 31, 1998, by filing the Company's Quarterly Reports on Form 10-Q/A.

Since May 1999, several lawsuits have been filed against the Company and
certain of its current and former officers and directors alleging violations of
the federal securities laws. These lawsuits have been consolidated into a single
class action currently pending in the United States District Court for the
Southern District of New York. On or about January 31, 2000, the Company entered
into a Settlement Agreement with the class, which has been preliminarily
approved by the Court. It is anticipated that the Court will conduct a hearing
on the final approval of the Settlement Agreement in or about July 2000. See
Item 3, "Legal Proceedings".

The staff of the Securities and Exchange Commission ("SEC") have also
commenced a formal investigation into the Company's actions in connection with
the accounting issues that have been raised and were the subject of the
investigation by the Special Committee. See Item 3 "Legal Proceedings".

Item 2. Properties

The Company currently occupies 19,653 square feet of office and showroom
space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease, which
expired on March 31, 2000, subject to the Company's right to renew the lease for
an additional five year term under certain circumstances. The monthly rental
expense pursuant to the lease was approximately $33,000 per month depending on
use of electricity through the expiration date of the lease. The Company has
been considering other properties, and has commenced lease negotiations for
approximately 13,500 square feet located at 400 Columbus Avenue, Valhalla, New
York. Pending a final executed lease of the Valhalla premises, the Company
remains in occupation of its current space on a month to month basis.

The Company also maintains seven domestic retail stores of which four are
outlets located in suburban shopping malls in various locations in and around
the New York Metropolitan area, two are specialty stores located in malls in New
Jersey and one is a specialty store located in a Mall in Pennsylvania. The
leases for the retail stores expire at various times between October 2002 and
October 2009. In addition to specified monthly rental payments, additional rent
at all shopping mall locations is based on percentages of annual gross sales of
the retail store exceeding certain and proportionate amounts of monthly real
estate taxes, utilities and other expenses relating to the shopping mall.

The Company also occupies showrooms at : (i) the fifth and sixth floors at
215 W. 40th Street, New York; (ii) the fourteenth floor at 215 West 40th Street,
New York, NY; and the (iii) the fifth floor at 320 Fifth Avenue, New York, NY.
The lease for the fifth and sixth floors at 215 West 40th Street, New York, NY,
which space is used both as a showroom for the CANDIE'S brand and as office
space, is held jointly in the name of Showroom Holding Co., Inc. (a wholly-owned
subsidiary of the Company) and Unzipped and provides for monthly rental of
$19,280 for both floors, and a lease expiration of March 31, 2003. The monthly
rental for the fourteenth floor at 215 West 40th Street, New York, NY, which is
used as showroom space for the BONGO brand, is $7,500, with that lease expiring
on July 31, 2001. The lease for the fifth floor at 320 Fifth Avenue, New York,
NY, which was assigned in the acquisition of Caruso and is in the name of
Michael Caruso & Co., Inc., which space has been used as a handbag showroom for
both brands, has a monthly rental of $2,472, which increased to $2,600 per month
on March 1, 2000 and expires on February 28, 2002.

Item 3. Legal Proceedings

Several lawsuits are pending against the Company and certain of its current
and former officers and directors in the United States District Court for the
Southern District of New York. There can be no assurance that the Company will
successfully defend these lawsuits.

On May 17, 1999, a purported stockholder class action complaint was filed
in the United States District Court for the Southern District of New York,
against the Company and certain of its current and former officers and directors
which together with certain other complaints subsequently filed in the same
court alleging similar violations were consolidated in one lawsuit, Willow Creek
Capital Partners, L.P., v. Candie's, Inc. A consolidated complaint was served on
the Company on or about August 24, 1999. The consolidated complaint includes
claims under sections 11, 12 and 15 of the Securities Act of 1933 and sections
10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The
consolidated complaint is brought on behalf of all persons who acquired
securities of the Company between May 28, 1997 and May 12, 1999, and alleges
that the plaintiffs were damaged by reason of the Company's having issued
materially false and misleading financial statements for Fiscal 1998 and the
first three quarters of Fiscal 1999, which caused the Company's securities to
trade at artificially inflated prices.

On August 4, 1999, the staff of the SEC advised the Company that it had
commenced a formal investigation into the actions of the Company and others in
connection with, among other things, the accounting issues that have been raised
and that were the subject of the investigation of the Special Committee.

The Company is also a party to certain litigation incurred in the normal
course of business. While any litigation has an element of uncertainty, the
Company believes that the final outcome of any of these routine matters will not
have a material effect on the Company's financial position or future liquidity.
Except as set forth in this Item 3, the Company knows of no material legal
proceedings, pending or threatened, or judgments entered, against any director
or officer of the Company in his capacity as such.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

As of result of its public announcements that the Company may have to
restate its financial results for Fiscal 1998 and the first three quarters of
Fiscal 1999, on May 13, 1999, the Candie's Common Stock, which has been traded
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ") since January 22, 1990 (under the symbol "CAND") was halted from
trading. During suspension of the Candie's Common Stock, which lasted until
October 13, 1999, the stock was listed under the symbol "CANDE". On October 14,
1999 the Candie's Common Stock resumed trading on NASDAQ under the symbol
"CAND". The following table sets forth, for the indicated periods, the high and
low sales prices for the Candie's Common Stock as reported by NASDAQ:

High Low

Fiscal Year Ended January 31, 2000
Fourth Quarter ................................ $1.75 $0.63
Third Quarter ................................. 1.75 0.56
Second Quarter ................................ 3.13 2.81
First Quarter ................................. 4.00 2.63

Fiscal Year Ended January 31, 1999
Fourth Quarter ................................ $6.25 $2.62
Third Quarter ................................. 7.37 3.81
Second Quarter ................................ 8.25 5.87
First Quarter ................................. 8.62 4.75

As of April 26, 2000, there were approximately 1,350 holders of record of
Candie's Common Stock.

The Company has not paid cash dividends on its common stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future. Cash dividends are subject to approval by Rosenthal &
Rosenthal, Inc., ("Rosenthal") the Company's lender.

During the fiscal quarter ended January 31, 2000, the Company issued
ten-year options to its employees to purchase an aggregate of 1,457,250 shares
of Candie's Common Stock at exercise prices of: (i) $1.9375 for 25,000 shares,
(ii) $0.4938 for 10,125 shares, (iii) $0.5432 for 10,125 shares, (iv) $1.5625
for 253,000 shares, (v) $1.50 for 400,000 shares, (vii) $1.25 for 10,000 shares,
(vii) $0.8125 for 75,000 shares, (viii) $1.1562 for 2,500 shares and (ix)
$1.1875 for 671,500 shares. The foregoing options were acquired by the holders
for investment in private transactions exempt from registration by virtue of
either Sections 2(a) (3) or 4(2) of the Securities Act of 1933.

Item 6. Selected Financial Data

Selected Historical Financial Data
(in thousands, except earnings per share amounts)

The following table presents selected historical financial data of the
Company for the periods indicated. The selected historical financial information
is derived from the audited consolidated financial statements of the Company
referred to under item 8 of this Annual Report on Form 10-K, and previously
published historical financial statements not included in this Annual Report on
Form 10-K. The following selected financial data should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, included elsewhere herein.

Year Ended January 31,

2000 1999 1998 1997 1996
---- ---- ---- ---- ----

Operating Data:
- --------------

Net revenues........................ $90,796 $114,696 $89,297 $45,005 $37,914
Operating income (loss)............. (22,862) 786 4,889 891 2,057
Net (loss) income .................. (25,176) (641) 3,405 1,145 1,054
(Loss) earnings per share:
Basic............................ $(1.41) $(.04) $.30 $.13 $.12
Diluted.......................... (1.41) (.04) .25 .11 .11
Weighted average number of
common shares outstanding:
Basic............................ 17,798 15,250 11,375 9,143 8,726
Diluted.......................... 17,798 15,250 13,788 10,152 9,427

At January 31,

2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
- ------------------

Current Assets ............... $32,799 $45,216 $21,459 $ 9,039 $ 5,969

Total assets ................. 64,058 74,600 29,912 14,709 11,746

Long-Term debt ............... 1,848 271 -- -- --

Total stockholders' equity ... 32,948 51,849 23,550 8,608 5,586

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements that are not historical facts contained in Item 7 and
elsewhere in this Annual Report on Form 10-K are forward looking statements that
involve a number of known and unknown risks, uncertainties and other factors,
all of which are difficult or impossible to predict and many of which are beyond
the control of the Company, which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward looking
statements.

Such factors include, but are not limited to, uncertainty regarding
continued market acceptance of current products and the ability to successfully
develop and market new products particularly in light of rapidly changing
fashion trends, the impact of supply and manufacturing constraints or
difficulties relating to the Company's dependence on foreign manufacturers,
uncertainties relating to customer plans and commitments, competition,
uncertainties relating to economic conditions in the markets in which the
Company operates, the ability to hire and retain key personnel, the ability to
obtain capital if required, the risks of litigation and regulatory proceedings,
the risks of uncertainty of trademark protection, the uncertainty of marketing
and licensing acquired trademarks and other risks detailed below and in the
Company's other SEC filings, and uncertainty associated with the impact on the
Company in relation to recent events discussed in this report and under "Item 1.

The words "believe", "expect", "anticipate", "seek" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
the statement, was made.

Seasonal And Quarterly Fluctuations. The Company's quarterly results may
fluctuate quarter to quarter as a result of holidays, weather, the timing of
footwear shipments, market acceptance of Company products, the mix, pricing and
presentation of the products offered and sold, the hiring and training of
additional personnel, the timing of inventory write downs, fluctuations in the
cost of materials, the mix between wholesale and licensing businesses, the
incurrence of other operating costs and factors beyond the Company's control,
such as general economic conditions and the action of competitors. Accordingly,
the results of operations in any quarter will not necessarily be indicative of
the results that may be achieved for a full fiscal year or any future quarter.

In addition, the timing of the receipt of future revenues could be impacted
by the recent trend among retailers in the Company's industry to order goods
closer to a particular selling season than they have historically done so. The
Company continues to seek to expand and diversify its product lines to help

reduce the dependence on any particular product line and lessen the impact of
the seasonal nature of its business. However, the success of the Company will
still largely remain dependent on its ability to accurately predict upcoming
fashion trends among its customer base, build and maintain brand awareness and
to fulfill the product requirements of its retail channel within the shortened
timeframe required. Unanticipated changes in consumer fashion preferences,
slowdowns in the United States economy, changes in the prices of supplies,
consolidation of retail establishments, among other factors noted herein, could
adversely affect the Company's future operating results.

General Introduction

Of the Company's net loss of $25.2 million for Fiscal 2000, $11.9 million
was attributable primarily to losses on recurring operations, $8.0 million, for
litigation settlement costs, $3.0 million in special legal and administrative
costs, and $2.0 million on joint venture losses. Losses on recurring operations
were the result of a 4.8% decline in gross profit rate attributable to
promotional pricing discounts as well as an 11.9% increase of general and
administrative expenses primarily due to the impact of the Company's prior
expansion outside of its core footwear business. These declines were partially
offset by a 2.6 million increase in licensing revenue.

Non recurring litigation and legal and administrative costs of $8.0 million
and $3.0 million, respectively, were incurred to investigate and to respond to
certain issues relating to the restatement of certain Fiscal 1999 results and
Fiscal 1998 results and to defend related lawsuits. See Item 3 "Legal
Proceedings."

The Unzipped joint venture recorded a loss of $ 4.0 million primarily due
to the discontinuance of the Candies jeans line. The Company's share of the loss
was $2.0 million or 2.2% of net revenues.

As part of its plan to improve its operating results, the Company is
focusing its efforts on its core footwear business while continuing to expand
its licensing agreements that it believes will enhance the Candies brand. The
core business initiatives include improving inventory turn and consolidating
east coast distribution facilities. These initiatives have been implemented
during the fourth quarter of Fiscal 2000 and the first quarter of the fiscal
year ended January 31, 2001 ("Fiscal 2001"), the benefits of which are to be
realized in Fiscal 2001. In addition, the Company has already developed its
candies.com website as both a Y generation destination, and e-commerce site by
partnering with MTV for content and with Journey for product fulfillment.

Results of Operations

Fiscal 2000 Compared to Fiscal 1999

Revenues. Net revenues decreased by $23.9 million or 20.8% to $90.8
million, during Fiscal 2000, due primarily to decreased sales of Candies brand
footwear of $15.1 million, decreased private label sales of $5.3 million,
decreased sales of girls footwear of $2.4 million and the absence of the Fiscal
1999, one time revenues of $2.1 million generated in connection with certain
customers. These decreases in Fiscal 2000 net revenues were partially offset by
sales increases in handbags of $1.2 million and retail sales increases of $1.1
million. The decline in footwear revenue is due to decreased consumer acceptance
of the Company's Fiscal 2000 footwear styles.

Gross Profit. Gross profit decreased by $9.9 million or 38% to $16.4
million from $26.3 million in the prior year. As a percentage of net revenues,
gross profit decreased from 22.9% in Fiscal 1999 to 18.1% in Fiscal 2000. This
decline in gross profit rate was primarily attributable to promotional pricing
discounts. The decreased gross profit was comprised as follows: $2.9 million for
girls footwear, $4.9 million for Candies brand footwear, $1.2 for Bongo, $0.3
for handbags and $1.1 for private label; partially offset by the retail store
increased profits of $0.5 million.

Licensing Income. Licensing Income increased $2.6 million to $3.0 million
for Fiscal 2000. This increase was attributable to the acquired Bongo license
and newly granted fragrance and eyewear licensing arrangements.

Operating Expenses. Selling, general and administrative expenses increased
by approximately $5.4 million to $31.3 million during Fiscal 2000. As a
percentage of net revenues, selling, general and administrative expenses
increased to 34.4% for Fiscal 2000 from 22.5% for the prior year. These
increases reflect costs attributable to increased amortization expenses related
to the Company's acquisitions and fixed asset additions ($1.6 million),
increased advertising and website expenditures ($1.8 million), coupled with
increased salary expenses incurred as a result of management changes ($0.9
million) as well as increased freight, rent, legal, other and finance fee
expenses ($1.1 million).

In addition, the Company incurred significant non recurring litigation and
legal and administrative costs to investigate and respond to certain issues
relating to the restatement of its Fiscal 1999 quarterly results and Fiscal 1998
results. These one-time charges include, a litigation settlement of $8 million
and $ 3 million in legal and administrative and certain litigation costs. See
Item 3 "Legal Proceedings."

Operating Income (Loss.) As a result of the foregoing, the Company
sustained an operating loss of $22.9 million for Fiscal 2000, compared to
operating income of $0.8 million for the prior fiscal year.

Interest Expense. Interest expense increased by $0.4 million to $1.4
million, or 1.6% of net revenues, primarily as a result of higher average
borrowings and higher interest rates under the Company's revolving credit
facility.

Equity Losses in Joint Venture. The Unzipped joint venture recorded a loss
of $4.0 million for Fiscal 2000 primarily due to the discontinuance of the
Candies jeans line. The Company's share of this loss was $2.0 million or 2.2% of
net revenues, as compared to the prior fiscal year loss of $1.1 million with the
Company's portion being $0.5 million.

Income Tax Benefit. The income tax benefit was limited to $1.1 million or
4% of pre tax losses due to the establishment of a valuation provision of $9.3
million in Fiscal 2000. The Company has a net deferred tax asset of
approximately $3.6 million which management believes will be recoverable from
profits to be generated over the next few years. The valuation allowance of $
9.3 million represents amounts that can not be assured of recoverability. See
Note 13 of the Notes to Financial Statements.

Net Loss. As a result of the foregoing, the Company sustained a net loss of
$25.2 million for Fiscal 2000, compared to a net loss of $0.6 million, for the
prior fiscal year.

Fiscal 1999 Compared to Fiscal 1998

Revenues. Net revenues increased by $25.4 million, or 28.4% to $114.7
million, primarily as a result of increased brand awareness and consumer
acceptance due to the Company's increased sales and marketing efforts, the
continued growth of children's footwear products, the launch of handbags and
increased international distribution of products.

Gross Profit. Gross Profit margins decreased to 22.9% from 24.6% in the
prior fiscal year. The decrease was primarily attributable to increased customer
returns and allowances coupled with increased revenues obtained from footwear
products on a private label basis that typically generate lower margins.

Operating Expenses. Selling, general and administrative expenses increased
by approximately $8.7 million to $25.9 million for Fiscal 1999 compared to $17.2
million for the prior fiscal year. As a percentage of net revenues, selling,
general and administrative expenses increased 3.3% to 22.5% for Fiscal 1999 from
19.2% for the prior fiscal year. These increases reflect costs which are
directly associated with the increase in net revenues, including increased
advertising expenditures ($2.4 million), increased amortization expenses related
to the Company's acquisitions and fixed asset additions ($0.9 million),

coupled with the costs incurred in implementing the Company's strategic plan to
strengthen its management team and infrastructure ($3.0 million), which the
Company believed was necessary for future growth.

Operating Income. As a result of the foregoing, operating income decreased
$4.1 million to $0.8 million for Fiscal 1999, compared to $4.9 million for the
prior year.

Interest Expense. Interest expense decreased by $0.1 million, or 11.0%,
primarily as a result of lower average borrowings and, to a lesser extent, lower
interest rates under the Company's revolving credit facility.

Income Tax Expense. The relationship of the income tax provision in Fiscal
1999 and Fiscal 1998, respectively, to income before income taxes was 16% and
9%, respectively. The Fiscal 1999 year effective rate was low because of the
state tax rates and nondeductible amortization expense. The Fiscal 1998 rate was
low due to the reversal of the valuation allowance.

Net Income. As a result of the foregoing, the Company sustained a net loss
of $.6 million for Fiscal 1999, compared to net income of $3.4 million for the
prior year.

Liquidity and Capital Resources

Working Capital. Working capital decreased $19.4 million to approximately
$3.5 million at January 31, 2000 from approximately $22.9 million at January 31,
1999. The decrease is due primarily to current year losses. At January 31, 2000,
the current ratio of assets to liabilities was 1.12 to 1 as compared to 2.02 to
1 for the prior fiscal year.

The Company continues to rely upon trade credit, revenues generated from
operations, especially private label and licensing activity, as well as
borrowings from its factor to finance its operations. Net cash provided from
operating activities totaled $3.3 million in Fiscal 2000, as compared to net
cash used in operating activities of $22.0 million in Fiscal 1999. The changes
in net cash of $25.3 million were realized primarily as follows: Non cash
settlement expense of $8.0 million, additional losses on the joint venture of
$1.5 million for Fiscal 2000, and the prior fiscal year's recharacterzation of
$16.0 million from a change in operaing asset to financing activity.

Capital expenditures. Capital expenditures were $2.8 million for Fiscal
2000 as compared to $1.9 million for the prior year. The current year capital
expenditures include: retail store additions $1.1 million, data processing
software and equipment $0.6 million, and the remainder showroom and office
additions. The Company's 2001 capital expenditure plans of $2.2 million include
$1.0 million for website development costs and $0.9 million for up to five
additional retail store. The Company believes that it will be able to fund these
anticipated expenditures primarily with cash flow from operations supplemented
by borrowings under its existing revolving credit facility.

Financing Activities. During Fiscal 1999, substantially all of the
Company's outstanding Class C warrants ("Warrants") were exercised and the
Company received aggregate proceeds of approximately $7.16 million from the
exercise of the Warrants. The proceeds were used to repay short-term borrowings.
Each Warrant entitled the holder thereof to purchase one share of Common Stock
at an exercise price of $5.00. In addition, in Fiscal 1999, the Company received
proceeds of $1.17 million, in connection with the issuance of Common Stock
relating to the exercise of outstanding stock options.

On the Effective Date, the Company completed the Merger with NRC. Each
issued and outstanding share of NRC Common Stock and each issued and outstanding
option to purchase one share of NRC Common Stock, prior to the Effective Date,
were converted, respectively, into 0.405 shares of Candies Common Stock, and
into options to purchase 0.405 shares of Candie's Common Stock, respectively.
The Merger was accounted for using the purchase method of accounting.

On September 24, 1998, the Company, through a wholly owned subsidiary,
acquired all of the outstanding shares of Caruso. Pursuant to the agreement, the
Company acquired the BONGO trademark as well as certain other related trademarks
and two license agreements, one for children's and one for large size jeans
wear. Prior to the acquisition, Caruso licensed certain trademarks relating to
footwear to the Company, which license was terminated as of the closing date.

The purchase price for the shares acquired was approximately $15.4 million
and was paid at the closing in 1,967,742 shares of Candie's Common Stock (each
share being valued at $7.75), plus $0.1 million in cash. In March 1999, an
additional 547,722 shares of Candie's Common Stock were delivered to the sellers
based on a clause in the agreement requiring an upward adjustment in the number
of shares delivered at Closing.

Capital Contribution to Unzipped. On or about October 31, 1999, the Company
made a $0.5 million capital contribution to Unzipped. In addition, pursuant to
the terms of the Operating Agreement of Unzipped, on January 31, 2003, the
Company must purchase from Sweet, Sweet's entire interest in Unzipped at the
aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for the
fiscal year commencing on February 1, 2002 and ending January 31, 2003. The
Company has the right, in its sole discretion, to pay for such interest in cash
or shares of Candie's Common Stock. In the event the Company elects to issue
shares of Candie's Common Stock to Sweet, Sweet shall receive registered shares
of Candie's Common Stock and the right to designate a member to the Board of
Directors for the Company until the earlier to occur of (i) the sale of any of
such shares or (ii) two years from the date of closing of such purchase.
Unzipped reported an operating loss of $4.0 million for Fiscal 2000, as compared
to the prior year's loss of $1.1 million; the Company's share of the losses was
$2.0 million and $0.5 million respectively. The Company believes that Unzipped
is currently in breach of certain provisions of the agreements among the
parties, and has notified Unzipped that the Company does not intend to
contribute any additional capital toward the joint venture.

Current Revolving Credit Facility. On October 28, 1999, the Company entered
into a new two-year $35 million revolving line of credit (the "Line of Credit")
with Rosenthal & Rosenthal, Inc. ("Rosenthal") and terminated its former credit
facility. On November 23, 1999, First Union National Bank entered into a
co-lending arrangement and became a participant in the Line of Credit.
Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit bear
interest at 0.5% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of .25% of the maximum Line of
Credit. The minimum factoring commission fee for the initial term is $0.5
million. As of January 31, 2000, the outstanding borrowing under the facility
was $14.0 million, including outstanding letters of credit. Borrowings under the
Line of Credit were secured against factored receivables of $9.9 million and
inventory. Interest paid to Rosenthal for Fiscal 2000 was $0.3 million.

The Line of Credit contains two financial covenants for tangible net worth
and working capital. The Company was not in compliance with these financial
covenants as of January 31, 2000 and received an interim waiver from Rosenthal
as of April 27, 2000. This waiver exempts the financial covenants unless there
is a deterioration of the financial condition of the Company. In addition, the
waiver establishes that Rosenthal and the Company will establish mutually
agreeable financial covenants within a reasonable timeframe.

In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining balance
considered to be an unsecured loan. The term of the agreement is four years at
an effective annual interest rate of 10.48%. The outstanding loan balance as of
January 31, 2000 was $2.8 million. The interest paid for Fiscal 2000 was $0.3
million. The quarterly payment on the loan is $260,000, including interest.

The Company's cash requirements fluctuate from time to time due to seasonal
requirements, including the timing of receipt of merchandise and various other
factors. The Company believes that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, including for the proposed expansion of
its retail operations during Fiscal 2001, primarily with cash flow from
operations, supplemented by borrowings under its existing revolving credit
facility. However, if the Company's plans change or its assumptions prove to be
incorrect it could be required to obtain additional capital which may not be
available to it on acceptable terms.

Prior Revolving Credit Facility. In May 1998, the Company entered into a
three year $35 million revolving credit facility (the "Facility"). During Fiscal
2000 the Company failed to comply with certain covenants of the Facility and the
Facility was repaid in full with proceeds from the Line of Credit in October
1999.

Seasonality

The Company's quarterly results may fluctuate quarter to quarter as a
result of holidays, weather, the timing of footwear shipments, market acceptance
of Company products, the mix, pricing and presentation of the products offered
and sold, the hiring and training of additional personnel, the timing of
inventory write downs, fluctuations in the cost of materials, the mix between
wholesale and licensing businesses, the incurrence of other operating costs and
factors beyond the Company's control, such as general economic conditions and
the action of competitors. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that may be achieved for a
full fiscal year or any future quarter.

The Company's products are marketed primarily for Fall and Spring seasons,
with slightly higher volumes of products sold during the second and fourth
quarters.

Effects of Inflation

The Company does not believe that the relatively moderate rates of
inflation experienced over the past few years in the United States, where it
primarily competes, have had a significant effect on revenues or profitability.

Net Operating Loss Carry Forwards

At January 31, 2000, the Company had net operating losses of approximately
$19.8 million for income tax purposes, which expire in the years 2007 through
2020. Due to the issuance of Candie's Common Stock on February 23, 1993, an
"ownership change," as defined in Section 382 of the Internal Revenue Code,
occurred. Section 382 restricts the use of the Company's net operating loss
carryforwards incurred prior to the ownership change to $275,000 per year.
Approximately $2.5 million of the operating loss carryforwards are subject to
this restriction and accordingly, no accounting recognition has been given to
approximately $1.8 million of operating losses since present restrictions
preclude their utilization. During Fiscal 1999, the Company merged with NRC and
was entitled to another $2.4 million of operating losses incurred by NRC. These
operating losses are also subject to restriction and only $327,000 can be
carried forward each year. See Note 13 of the Notes to Financial Statements.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The Company enters into forward exchange contracts to hedge foreign
currency transactions and not to engage in currency speculation. The Company's
forward exchange contracts do not subject the

Company to risk from exchange rate movements because gains and losses on such
contracts offset losses and gains, respectively, on the assets, liabilities or
transactions being hedged. The forward exchange contracts generally require the
Company to exchange U.S. dollars for foreign currencies. If the counterparties
to the exchange contracts do not fulfill their obligations to deliver the
contracted currencies, the Company could be at risk for any currency related
fluctuations. The Company limits exposure to foreign currency fluctuations in
most of its purchase commitments through provisions that require vendor payments
in U.S. dollars. As of January 31, 2000, there were no forward exchange
contracts outstanding. Unrealized gains and losses are deferred and included in
the measurement of the related foreign currency transaction. Gains or losses on
these contracts during Fiscal 2000, 1999, and 1998 were immaterial.

Item 8. Financial Statements and Supplementary Data

The financial statements required to be submitted in response to this Item
8 are set forth in Part IV, Item 14 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

On June 17, 1999, the Company dismissed Ernst & Young LLP ("E&Y") as its
independent auditors. The reports of E&Y on the financial statements of the
Company for Fiscal 1998 and the fiscal year ended January 31, 1997 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. However, in a
May 12, 1999 press release the Company indicated that its financial statements
for Fiscal 1998 should not be relied upon.

The decision to change auditors was approved by the Board and the Audit
Committee of the Board. During the time that the audits of the Company's
financial statements for each of the two fiscal years in the period ended
January 31, 1998 were conducted, there were no disagreements with E&Y on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of E&Y
would have caused it to make reference to the matter in its report.

During the course of its uncompleted audit of the Company's financial
statements for Fiscal 1999, E&Y informed the Company that it had been unable to
obtain sufficient evidentiary support to determine the appropriateness of the
accounting the Company had applied to (i) certain barter transactions, (ii)
transactions with a related party and principal supplier and (iii) certain other
transactions which may have affected the Company's interim quarterly financial
results during Fiscal 1999. E&Y also requested the Company to appoint the
Special Committee to conduct an independent investigation of such transactions.
E&Y also informed the Company that, in its opinion, the resolution of such
matters might require the Company to restate its financial statement for Fiscal
1998 and each of the first three quarters of Fiscal 1999, and could result in
the Company reporting a loss for Fiscal 1999.

In response to the issues raised by E&Y the Special Committee commenced an
investigation. The Special Committee completed that investigation, and on August
26, 1999 reported its findings to the Board. On June 22, 1999, the Company
engaged BDO Seidman, LLP ("BDO") as its independent auditors to audit its
financial statements with respect to Fiscal 1998 and 1999 and, if necessary,
other prior fiscal years. The Company has authorized E&Y to respond fully to any
inquiries BDO made. The Company did not seek the advice of BDO regarding the
subject matter of the foregoing reportable events with E&Y. However, members of
the Company's Board and management did fully disclose to BDO what the Company
believed to be the subject matter of the issues raised by E&Y as part of the
process of determining whether BDO would accept the Company's engagement and, if
so, the time frame in which BDO believed it could complete the necessary audit
of the Company's Financial Statements. The information with respect to the
Company's change in auditors was previously reported in the Company's Form 8-K
for the event dated June 17, 1999.

PART III

The information required by Items 10 (Directors and Executive Officers of
the Registrant), 11 (Executive Compensation), 12 (Security Ownership of Certain
Beneficial Owners and Management), and 13 (Certain Relationships and Related
Transactions) of Part III of this Form 10-K is omitted from this report and is
incorporated by reference from the definitive proxy statement for the Company's
annual meeting of stockholders to be held in the year 2000 that will be filed
with the SEC on or before May 30, 2000.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Financial Statements and Financial Statement Schedule

See the accompanying Financial Statements and Financial Statement Schedule
filed herewith submitted as a separate section of this report - See F-1

(b) Reports on Form 8-K

None

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CANDIE'S, INC.

By: /s/ Neil Cole
-----------------------
Neil Cole
Chief Executive Officer

Dated: May 1, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

Signature and Name Capacity in Which Signed Date
- ------------------ ------------------------ ----

/s/ Neil Cole Chairman of the Board, President and Chief May 1, 2000
- -------------- Executive Officer
Neil Cole

/s/John M. Needham Vice President of Finance May 1, 2000
- ------------------ (Principal Financial and Accounting Officer)
John M. Needham

/s/ Barry Emanuel Director May 1, 2000
- -------------------
Barry Emanuel

/s/ Mark Tucker Director May 1, 2000
- -----------------
Mark Tucker

Director May 1, 2000
- -------------------
Steven Mendelow

/s/ Peter Siris Director May 1, 2000
- ---------------
Peter Siris

Index to Exhibits

Exhibit
Numbers Description

2.1 Agreement and Plan of Merger between the Company and New Retail
Concepts, Inc.(8)

2.2 Stock Purchase Agreement dated September 24, 1998 by and among the
Company, Licensing Acquisition Corp., Michael Caruso & Co., Inc.
("Caruso") and the stockholders of Caruso (11)

3.1 Certificate of Incorporation, as amended through October 1994 (1)(3)

3.2 Amendment to Certificate of Incorporation filed November 1994 (2)

3.3 Amendments to Certificate of Incorporation filed in August 1998, and
February 2000 (16)

3.4 Restated and Amended By-Laws (16)

10.1 Trademark Purchase Agreement between the Company and New Retail
Concepts, Inc. (3)

10.2 1989 Stock Option Plan of the Company (1)

10.3 1997 Stock Option Plan of the Company (7)

10.4 Employment Agreement between Neil Cole and the Company (4)

10.5 Amendment to Employment Agreement between Neil Cole and the Company
(6)

10.6 Lease with respect to the Company's executive offices (2)

10.7 Agreement dated as of April 3, 1996 between the Company and Redwood
Shoe Corp. (5)

10.8 Amendment dated as of September 30, 1996 to agreement dated as of
April 3, 1996 between the Company and Redwood Shoe Corp. (6)

10.9 Employment Agreement between Lawrence O' Shaughnessy and the Company.
(5)

10.10 Amendment to Employment Agreement between Lawrence O'Shaughnessy and
the Company. (6)

10.11 Employment Agreement between David Golden and the Company. (8)

10.12 Employment Agreement between Deborah Sorell Stehr and the Company (13)

10.13 Employment Agreement between Frank Marcinowski and the Company (13)

10.14 Limited Liability Company Operating Agreement of Unzipped Apparel LLC
(12)

10.15 Escrow Agreement by and among the Company, the stockholders of Caruso
and Tenzer Greenblatt LLP(11)

10.16 Registration Rights Agreement between the Company and the stockholders
of Caruso (11)

10.17 Amendment to Lease Agreement with respect to the Company's executive
offices. (13)

10.18 Amendment dated January 27, 2000 to Employment Agreement between Neil
Cole and the Company (16)

10.19 Amendment dated January 27, 2000 to Employment Agreement between
Deborah Sorell Stehr and the Company (16)

10.20 Employment Agreement between John M. Needham and the Company (16)

10.21 Rights Agreement dated January 26, 2000 between the Company and
Continental Stock Transfer and Trust Company (15)

10.22 Factoring Agreement between Rosenthal & Rosenthal, Inc. and the
Company (14)

10.23 Inventory Security Agreement between Rosenthal & Rosenthal, Inc. and
the Company (14)

10.24 Factoring Agreement between Rosenthal & Rosenthal, Inc. and Bright
Star Footwear, Inc. (14)

10.25 Inventory Security Agreement between Rosenthal & Rosenthal, Inc. and
Bright Star Footwear, Inc. (14)

21 Subsidiaries of the Company. (16)

23 Consent of BDO Seidman LLP (16)

27 Financial Data Schedules. (for SEC use only) (16)

- ----------
(1) Filed with the Registrant's Registration Statement on Form S-18 (File
33-32277-NY) and incorporated by reference herein.
(2) Filed with the Registrant's Annual Report on Form 10-KSB for the year ended
January 31, 1995, and incorporated by reference herein.
(3) Filed with the Registrant's Registration Statement on Form S-1 (File
33-53878) and incorporated by reference herein.
(4) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1994 and incorporated by reference herein.
(5) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1996, and incorporated by reference herein.
(6) Filed with the Company's Annual Report on Form 10-KSB for the year ended
January 31, 1997, and incorporated by reference herein.
(7) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1997, and incorporated by reference herein.
(8) Filed with the Company's Annual Report on form 10-K for the year ended
January 31, 1998
(9) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1998 and incorporated by reference herein.
(10) Filed with the Company's Joint proxy Statement/Prospectus dated July 2,
1998 constituting a part of the Company's Registration Statement on Form
S-4 333-52779
(11) Filed with the Company's Current Report on Form 8-K dated September 24,
1998 and incorporated by reference herein.
(12) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1998 and incorporated by reference herein.
(13) Filed with the Company's Annual Report on Form 10-K for the year ended
January 31, 1999
(14) Filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1999
(15) Filed with the Company's Current Report on Form 8-K dated January 26, 2000
(16) Filed herewith

Annual Report on Form 10-K

Item 8, 14(a)(1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedule

Year Ended January 31, 2000

Candie's, Inc. and Subsidiaries

F-1

Candie's, Inc. and Subsidiaries

Form 10-K

Index to Consolidated Financial Statements and Financial Statement Schedule

The following consolidated financial statements of Candie's Inc. and
subsidiaries are included in Item 8:

Report of Independent Certified Public Accountants on Financial Statements
as of and for the Years Ended January 31, 2000, 1999 and 1998............................ F-3

Consolidated Balance Sheets - January 31, 2000 and 1999...................................... F-4

Consolidated Statements of Operations for the Years ended
January 31, 2000, 1999 and 1998.......................................................... F-5

Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 2000, 1999 and 1998...................................... F-6

Consolidated Statements of Cash Flows for the Years ended
January 31, 2000, 1999 and 1998.......................................................... F-7

Notes to Consolidated Financial Statements................................................... F-8

The following consolidated financial statement schedule of Candie's, Inc. and
subsidiaries is included in Item 14(d):

Report of Independent Certified Public Accountants on Financial Statement
Schedule for the Years Ended January 31, 2000, 1999 and 1998............................. S-1

Schedule II Valuation and qualifying accounts .............................................. S-2

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.

F-2

Report of Independent Certified Public Accountants

The Stockholders and Directors of
Candie's, Inc.

We have audited the accompanying consolidated balance sheets of Candie's, Inc.
and subsidiaries as of January 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Candie's, Inc. and
subsidiaries at January 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
2000, in conformity with generally accepted accounting principles.

/s/: BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP

New York, New York
April 20, 2000

F-3

Candie's, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except par value)

January 31,
--------------------
2000 1999
-------- --------

Assets
Current Assets:
Cash ........................................................ $ 643 $ 598
Restricted cash ............................................. 2,000 --
Accounts receivable, net of allowances of
$2,992 in 2000 and $950 in 1999 ........................ 2,711 2,774
Due from factor and accounts receivable, net of allowances of
$1,830 in 2000 and $2,579 in 1999 ...................... 8,034 15,138
Due from affiliates ......................................... 636 796
Inventories ................................................. 14,770 19,031
Refundable and prepaid income taxes ......................... 631 2,623
Deferred income taxes ....................................... 1,448 2,598
Prepaid advertising and other ............................... 1,622 1,182
Other current assets ........................................ 304 476
-------- --------
Total Current Assets ................................................ 32,799 45,216
-------- --------

Property and equipment, at cost:
Furniture, fixtures and equipment ........................... 6,679 3,860
Less: Accumulated depreciation and amortization ............. 2,124 1,258
-------- --------
4,555 2,602
-------- --------

Other Assets:
Goodwill, net of accumulated amortization of
$509 in 2000 and $367 in 1999 ......................... 2,152 2,294
Other intangibles, net ...................................... 22,047 23,885
Deferred income taxes ....................................... 2,174 --
Investment and equity in joint venture - net ................ -- 51
Other ....................................................... 331 552
-------- --------
26,704 26,782
-------- --------
Total Assets ........................................................ $ 64,058 $ 74,600
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Revolving notes payable - banks ................................. $ 13,764 $ 16,874
Litigation settlement ........................................... 4,000 --
Accounts payable and accrued expenses ........................... 7,618 4,416
Accounts payable - Redwood Shoe ................................. 1,286 943
Current portion of long-term debt and capital lease obligation .. 1,143 97
Losses in excess of joint venture investment .................... 1,451 --
-------- --------
Total current liabilities ........................................... 29,262 22,330
-------- --------

Long-term liabilities and capital lease obligation .................. 1,848 271
Deferred income taxes ............................................... -- 150

Stockholders' Equity:
Preferred and common stock to be issued ......................... 6,000 --
Preferred stock, $.01 par value - shares authorized 5,000;
none issued or outstanding ............................. -- --
Common stock, $.001 par value - shares authorized 30,000;
shares issued 19,209 in 2000 and 18,525 in 1999 ........ 19 18
Additional paid-in capital ...................................... 59,094 58,819
Retained earnings (deficit) ..................................... (25,732) (556)
Less: Treasury stock - at cost - 1,313 shares .................. (6,433) (6,432)
-------- --------
Total Stockholders' Equity .......................................... 32,948 51,849
-------- --------
Total Liabilities and Stockholders' Equity .......................... $ 64,058 $ 74,600
======== ========

See accompanying notes to consolidated financial statements.

F-4

Candie's, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except earnings per share data)

Year ended January 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------

Net revenues ........................................ $ 90,796 $ 114,696 $ 89,297
Cost of goods sold .................................. 74,347 88,427 67,314
--------- --------- ---------
Gross profit ........................................ 16,449 26,269 21,983
Licensing income .................................... 2,951 373 84
--------- --------- ---------
19,400 26,642 22,067

Selling, general and administrative expenses ........ 31,260 25,856 17,178
Special charges ..................................... 3,002 -- --
Litigation settlement, net .......................... 8,000 -- --
--------- --------- ---------

Operating (loss) income ............................. (22,862) 786 4,889

Other expenses:
Interest expense - net ...................... 1,415 1,005 1,129
Equity loss in joint venture ................ 2,002 545 --
--------- --------- ---------
3,417 1,550 1,129
--------- --------- ---------

(Loss) income before income taxes ................... (26,279) (764) 3,760

Provision (benefit) for income taxes ................ (1,103) (123) 355
--------- --------- ---------

Net (loss) income ................................... $ (25,176) $ (641) $ 3,405
========= ========= =========
(Loss) earnings per share:
Basic ................. $ (1.41) $ (.04) $ .30
========= ========= =========
Diluted ............... $ (1.41) $ (.04) $ .25
========= ========= =========

Weighted average number of common shares outstanding:

Basic ................. 17,798 15,250 11,375
========= ========= =========
Diluted ............... 17,798 15,250 13,788
========= ========= =========

See accompanying notes to consolidated financial statements.

F-5

Candie's, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)

Preferred
& Common Additional Retained
Common Stock Stock to be Paid - In Earnings Treasury
Shares Amount Issued Capital (Deficit) Stock Total
-------- -------- -------- -------- -------- -------- --------

Balance at February 1, 1997 ...................... 9,634 $ 9 $ -- $ 11,919 $ (3,320) $ -- $ 8,608
Exercise of stock options and
warrants .................................... 2,800 3 -- 9,510 -- -- 9,513
Retirement of escrow shares ................... (20) -- -- -- -- -- --
Issuance of common stock to
benefit plan ................................ 11 -- -- 56 -- -- 56
Tax benefit from pre-quasi
reorganization carryforward
losses ...................................... -- -- -- 1,102 -- -- 1,102
Stock option compensation ..................... -- -- -- 36 -- -- 36
Tax benefit from exercise of stock
options ..................................... -- -- -- 830 -- -- 830
Net income .................................... -- -- -- -- 3,405 -- 3,405
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 1998 ...................... 12,425 12 -- 23,453 85 -- 23,550
Exercise of stock options and
warrants .................................... 1,790 2 -- 8,329 -- -- 8,331
Net effect of merger with New
Retail Concepts, Inc. ....................... 2,326 2 -- 11,314 -- (6,061) 5,255
Stock acquisition of Michael
Caruso & Co., Inc. .......................... 1,968 2 -- 15,248 -- -- 15,250
Issuance of common stock to
benefit plan ................................ 16 -- -- 78 -- -- 78
Purchase of treasury shares ................... -- -- -- -- -- (371) (371)
Stock option compensation ..................... -- -- -- 102 -- -- 102
Tax benefit from exercise of stock
options ..................................... -- -- -- 295 -- -- 295
Net loss ...................................... -- -- -- -- (641) -- (641)
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 1999 ...................... 18,525 18 -- 58,819 (556) (6,432) 51,849
Exercise of stock options and
warrants .................................... 99 -- -- 148 -- -- 148
Issuance of common stock to
benefit plan ................................ 37 -- -- 128 -- -- 128
Preferred and common stock to be
issued for litigation settlement ............ -- -- 6,000 -- -- -- 6,000
Additional contingent shares
issued for the Acquisition of
Michael Caruso & Co., Inc. .................. 548 1 -- (1) -- -- --
Other ......................................... -- -- -- -- -- (1) (1)
Net loss ...................................... -- -- -- -- (25,176) -- (25,176)
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 2000 ...................... 19,209 $ 19 $ 6,000 $ 59,094 $(25,732) $ (6,433) $ 32,948
======== ======== ======== ======== ======== ======== ========

See accompanying notes to consolidated financial statements.

F-6

Candie's, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)

Year ended January 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------

Cash flows (used in) provided by operating activities:
Net (loss) income ............................................................ $(25,176) $ (641) $ 3,405
Items in net income not affecting cash:
Depreciation of property and equipment ................................. 877 547 244
Amortization of intangibles ............................................ 2,145 1,023 360
Stock option compensation .............................................. -- 102 36
Equity loss in Joint Venture ........................................... 2,002 545 --
Litigation settlement .................................................. 8,000 -- --
Deferred income taxes .................................................. (1,174) (811) (598)
Changes in operating assets and liabilities:
Accounts receivable ............................................ 63 (1,488) (68)
Factoring receivables and payable, net ......................... 7,104 (16,038) 319
Inventories .................................................... 4,261 (1,367) (12,413)
Prepaid advertising and other .................................. (139) (418) (305)
Refundable and prepaid taxes ................................... 1,992 (2,480) (65)
Other assets ................................................... 221 (154) 262
Accounts payable and accrued expenses .......................... 3,205 (835) 39
Long-term liabilities .......................................... (52) (9) (47)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities .......................... 3,329 (22,024) (8,831)
- -----------------------------------------------------------------------------------------------------------------------------------

Cash flows used in investing activities:
Purchases of property and equipment ................................... (2,832) (1,923) (705)
Investment in joint venture ........................................... -- (500) --
Other ................................................................. (165) (156) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ........................................ (2,997) (2,579) (705)
- -----------------------------------------------------------------------------------------------------------------------------------

Cash flows provided by (used in) financing activities:
Revolving notes payable bank .......................................... (3,110) 16,874 --
Proceeds from loans ................................................... 3,471 -- --
Proceeds from exercise of stock options and warrants .................. 148 8,331 9,513
Proceeds from long-term debt and capital lease obligation ............. (796) -- --
Purchase of treasury stock ............................................ -- (371) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities .......................... (287) 24,834 9,513
- -----------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents ......................... 45 231 (23)

Cash and cash equivalents, beginning of year .......................... 598 367 390
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year ................................ $ 643 $ 598 $ 367
===================================================================================================================================

Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest .............................................................. $ 1,452 $ 1,013 $ 1,131
============================================
Income taxes .......................................................... $ 163 $ 2,859 $ 89
============================================

Supplemental disclosures of non-cash investing and financing
activities:
============================================
Tax benefit from pre-quasi reorganization
carryforward losses .............................................. $ -- $ -- $ 1,102
============================================
Preferred and common stock to be issued .............................. $ 6,000 $ -- $ --
============================================
Issuance of common stock to benefit plan ............................. $ 128 $ 78 $ 56
============================================
Capital contribution - Unzipped ...................................... $ 500 $ -- $ --
============================================
Tax benefit from exercise of stock options ........................... $ -- $ 295 $ 830
============================================
Capital lease for property and equipment ............................. $ -- $ 316 $ --
============================================
Merger and acquisition of businesses ................................. $ -- $ 15,250 $ --
============================================
Common stock issued for merger & acquisition - net
of treasury stock acquired ........................................... $ -- $ 5,255 $ --
============================================

See accompanying notes to consolidated financial statements.

F-7

Candie's, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Information as of and for the Years Ended January 31,
2000 and 1999 (dollars are in thousands, except per share data)

The Company

The history of the "CANDIE'S" brand spans over 22 years and has become
synonymous with young, fun and fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc., which was incorporated
in Delaware in 1978, and its subsidiaries (collectively, the "Company") is
currently engaged primarily in the design, marketing, and distribution of
moderately-priced women's casual and fashion footwear under the CANDIE'S(R) and
BONGO(R) trademarks for distribution within the United States to department,
specialty, chain and seven company-owned retail stores and to specialty stores
internationally. The Company markets and distributes, children's footwear under
the CANDIE'S and BONGO trademarks, as well as a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed under
private labels and the ASPEN(R) brand, which is licensed by the Company from a
third party through Bright Star Footwear, Inc. ("Bright Star"), the Company's
wholly-owned subsidiary. In 1998, the Company began licensing its CANDIE'S
trademark for the purpose of building CANDIE'S into a lifestyle brand serving
generation "Y" women and girls, and it currently holds licenses for fragrance,
eyewear, leg wear and handbags. Through Unzipped Apparel, LLC ("Unzipped"), the
Company's joint venture with Sweet Sportswear LLC ("Sweet"), the Company
marketed and distributed jeanswear and apparel under the CANDIE'S and BONGO
label to department, specialty, and chain stores in the United States.

The Company believes that it has developed CANDIE'S into a strong footwear brand
appealing to women and girls in the generation "Y" demographic. As a growth
strategy, the Company plans to continue to focus on building market share in the
junior footwear area of better department and specialty stores, pursuing
licensing opportunities, and expanding its consumer direct business through the
opening of retail stores and e-commerce.

1. Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of Candie's, Inc. and
its wholly owned subsidiaries. All significant intercompany transactions and
items have been eliminated in consolidation. The Company's 50% equity interest
in Unzipped is accounted for under the equity method.

Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.

Concentration of Credit Risk

Concentration of credit risk is limited due to the large number of customers to
which the Company sells its products and the use of a factor to assign invoices
for sales to its customers. For the fiscal year ended January 31, 2000, one
customer accounted for 10.2% of the Company's total net revenues. No other
customer in any of the years presented exceeded 10% of total revenues.

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments purchased with
a maturity date of three months or less. Cash equivalents are stated at cost,
which approximate market value.

Inventories

Inventories, which consist entirely of finished goods, are stated at the lower
of cost or net realizable value. Cost is determined by the first-in, first-out
("FIFO") method.

F-8

Property, Equipment and Depreciation

Property and equipment are stated at cost. Depreciation and amortization are
determined by the straight line and accelerated methods over the estimated
useful lives of the respective assets ranging from three to seven years.
Leasehold improvements are amortized by the straight-line method over the term
of the related lease or estimated useful life, whichever is less.

Impairment of Long-Lived Assets

When circumstances mandate, the Company evaluates the recoverability of its
long-lived assets by comparing estimated future undiscounted cash flows with the
assets' carrying value to determine whether a write-down to market value, based
on discounted cash flow, is necessary. No impaired losses have been recorded
through January 31, 2000.

Goodwill and Other Intangibles

The net assets of businesses purchased are recorded at their fair value at the
acquisition date. Any excess of acquisition costs over the fair value of
identifiable net assets acquired is included in goodwill and amortized on a
straight-line basis over 20 years. Trademarks and other intangible assets are
recorded at cost and amortized using the straight-line method over the estimated
lives of the assets, 4 to 20 years.

The CANDIE'S trademark is stated at cost in the amount of $5,952 and $5,830, net
of accumulated amortization of $1,963 and $1,662, at January 31, 2000 and 1999,
respectively, as determined primarily by its fair value relative to other assets
and liabilities at February 28, 1993, the date of the quasi reorganization. In
connection with the quasi reorganization, the Company's assets, liabilities and
capital accounts were adjusted to eliminate the stockholders' deficiency.

Revenue Recognition

Revenue is recognized upon shipment with related risk and title passing to the
customers. Estimates of losses for bad debts, returns and other allowances are
recorded at the time of the sale.

Taxes on Income

The Company uses the asset and liability approach of accounting for income taxes
under Statement of Financial Accounting Standards ("SFAS ") No. 109 "Accounting
for Income Taxes". The Company provides deferred income taxes for temporary
differences that will result in taxable or deductible amounts in future years
based on the reporting of certain costs in different periods for financial
statement and income tax purposes. Valuation allowances are recorded when
recoverability of the asset is not assured.

Stock-Based Compensation

The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock options
granted when the exercise price of the option is the same as the market value of
the Company's common stock. As prescribed under SFAS No. 123, "Accounting for
Stock Based Compensation," the Company has disclosed the pro-forma effects on
net income and earnings per share of recording compensation expense for the fair
value of the options granted.

Fair Value of Financial Instruments

The Company's financial instruments approximate fair value at January 31, 2000
and 1999.

Foreign Currency Transactions

The Company enters into forward exchange contracts to hedge foreign currency
transactions and not to engage in currency speculation. The Company's forward
exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains,
respectively, on the assets, liabilities or transactions being hedged. The
forward exchange contracts generally require the Company to exchange U.S.
dollars for foreign currencies. If the counterparties to the exchange contracts
do not fulfill their obligations to deliver the contracted currencies, the
Company could be at risk for any currency related fluctuations. The Company
limits exposure to foreign currency fluctuations in most of its purchase
commitments through provisions that require vendor payments in U.S. dollars. As
of January 31, 2000 and 1999, there were no forward exchange contracts
outstanding. Unrealized gains and losses are deferred and included in the
measurement of the related foreign currency transaction. Gains or losses on
these contracts during Fiscal 2000, 1999 and 1998 were immaterial.

F-9

Earnings (Loss) Per Share

Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) per share
reflect, in periods in which they have a dilutive effect, the effect of common
shares issuable upon exercise of stock options and warrants.

Computer Software costs

Internal and external direct and incremental costs incurred in obtaining and
developing computer software for internal use are capitalized in property and
equipment and amortized, under the straight-line method, over the estimated
useful life of the software, over three years.

Website costs

External costs, totaling approximately $400, incurred in obtaining and
developing the Company's website in fiscal 2000 were capitalized in property and
equipment and amortized, under the straight-line method, over the estimated
useful life of the costs incurred, over three years.

Advertising Campaign Costs

The Company records national advertising campaign costs as an expense concurrent
with the first showing of the related advertising and other advertising costs
when incurred. Advertising expenses for the years ended January 31, 2000, 1999
and 1998 amounted to $7,091, $6,423, and $3,461, respectively.

Licensing Revenue

The Company has entered into various trade name license agreements that provide
revenues based on minimum royalties and additional revenues based on percentage
of defined sales. Minimum royalty revenue is recognized on a straight-line basis
over each period, as defined, in each license agreement. Royalties exceeding the
defined minimum amounts are recognized as income during the period corresponding
to the licensee's sales.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years
beginning after June 15, 2000. The Company is currently reviewing SFAS No. 133
and is not yet able to fully evaluate the impact, if any, it may have on future
operating results or financial statement disclosures.

On December 3, 1999 the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101. SAB No. 101 provides guidance on applying generally accepted accounting
principles to selected revenue recognition issues. The SAB should not have any
material impact on the Company's revenue recognition policies in the future.

2. Investment in Joint Venture

On October 7, 1998, the Company formed Unzipped with its joint venture partner
Sweet, the purpose of which was to market and distribute apparel under the BONGO
and CANDIE'S labels. Candie's and Sweet each have a 50% interest in Unzipped.
Pursuant to the terms of the joint venture, the Company licensed the CANDIE'S
and BONGO trademarks to Unzipped for use in the design, manufacture and sale of
certain designated apparel products. The Company believes that Unzipped is
currently in breach of certain provisions of the agreements among the parties,
and has notified Unzipped that the Company does not intend to contribute any
additional capital toward the joint venture. The Company believes that its
exposure related to Unzipped, should the joint venture dissolve, is adequately
provided for.

F-10

As of January 31, 2000 and 1999, approximately $2,547 and $545, respectively, of
the Company's retained deficit represented the Company's proportionate share of
the Unzipped loss. Condensed financial information for Unzipped is as follows:

Unzipped LLC January 31, 2000 January 31, 1999
------------ ---------------- ----------------

Current assets, primarily inventory $ 11,307 $ 3,464
Total assets 11,556 3,568
Liabilities 14,458 3,466
Equity
Candie's (1,451) 51
Sweet (1,451) 51

For the year ended For the year ended
January 31, 2000 January 31, 1999
---------------- ----------------

Net sales $ 32,235 $ 2,590
Operating loss (3,973) (1,080)
Net loss (4,003) (1,090)

Pursuant to the terms of the Operating Agreement of Unzipped, on January 31,
2003, the Company must purchase from Sweet, Sweet's entire interest in Unzipped
at the aggregate purchase price equal to 50% of 7.5 times EBITDA of Unzipped for
the fiscal year commencing on February 1, 2002 and ending January 31, 2003. The
Company has the right, in its sole discretion, to pay for such interest in cash
or shares of common stock. In the event the Company elects to issue shares of
common stock to Sweet, Sweet shall receive registered shares of common stock and
the right to designate a member to the Board of Directors for the Company until
the earlier to occur of (i) the sale of any of such shares or (ii) two years
from the date of closing of such purchase.

In October 1999, the Company made a non-cash $500 capital contribution to
Unzipped by foregoing affiliate receivables to satisfy its obligation. At
January 31, 2000 the affiliate receivable balance from Unzipped was $636.

3. Other Intangibles, net

Intangibles, net consist of the following:
(In thousands, except for estimated lives which are stated in years)

January 31,
------------------------
Estimated lives 2000 1999
-------------------------------------------------------------------------------

Trademarks 20 $ 23,019 $ 22,854
Non-compete agreement 15 2,275 2,275
Licenses 4 3,047 3,047
-------------------------------------------------------------------------------
28,341 28,176

Less accumulated amortization (6,294) (4,291)
-------------------------------------------------------------------------------
$ 22,047 $ 23,885
===============================================================================

4. Acquisitions

Caruso

On September 24, 1998, the Company, through a wholly owned subsidiary, acquired
all of the outstanding shares of Michael Caruso & Co., Inc. ("Caruso"). As a
result of the transaction, the Company acquired the BONGO trademark as well as
certain other related trademarks and two license agreements for use of the BONGO
trademark, one for children's and one for large size jeanswear. Prior to the
closing of the acquisition, Caruso was the licensor of the BONGO trademark for
use on footwear products sold by the Company, which license was terminated as of
the closing.

F-11

The purchase price for the shares acquired was approximately $15.4 million and
was paid at the closing in 1,967,742 shares of Candie's Common Stock (each share
being valued at $7.75), plus $100 in cash. On March 24, 1999, 547,722 additional
shares of Candie's Common Stock were delivered to the sellers upon the six month
anniversary of the closing based on a contingency clause in the agreement
requiring an upward adjustment in the number of shares delivered at closing. The
issuance of the contingent consideration had no effect on the purchase price.

This transaction was accounted for using the purchase method of accounting. The
results of operations of Caruso are included in the accompanying financial
statements from the date of acquisition. The total purchase price of
approximately $15.6 million, including acquisition expenses of approximately
$250, but excluding the contingency shares described above, resulted principally
in a purchase price allocation to the licenses acquired of $2.7 million and a
trademark value of $11.8 million.

NRC

The Company began to license the use of the CANDIE'S trademark from New Retail
Concepts, Inc. ("NRC") in June 1991, and in March 1993, purchased ownership of
the CANDIE'S trademark from NRC together with certain pre-existing licenses of
NRC, a then publicly traded company engaged primarily in the licensing and
sublicensing of fashion trademarks and a significant stockholder of the Company.
NRC's principal stockholder was also the Company's President and Chief Executive
Officer.

Effective August 18, 1998 (the "Effective Date"), the Company completed a merger
with NRC (the "Merger"). Each issued and outstanding share of NRC common stock
$.01 par value (the "NRC Common Stock"), and each issued and outstanding option
to purchase one share of NRC Common Stock, prior to the Effective Date, was
converted, respectively, into 0.405 shares of common stock, $.001 par value of
the Company (the "Candie's Common Stock"), and into options to purchase 0.405
shares of Candie's Common Stock, respectively.

At the Effective Date, there were 5,743,639 outstanding shares of NRC Common
Stock and options to purchase 1,585,000 shares of NRC Common Stock. The
5,743,639 outstanding shares were converted to 2,326,174 shares of Candie's
Common Stock and the 1,585,000 options were converted into options to purchase
641,925 shares of Candie's Common Stock. NRC also owned 1,227,696 shares of
Candie's Common Stock and had options and warrants to purchase an additional
800,000 shares of Candie's Common Stock. These options and warrants were
extinguished upon consummation of the Merger.

This transaction was accounted for using the purchase method of accounting. The
results of operations of NRC are included in the accompanying financial
statements from the date of the Merger.

The cost of the acquisition, including acquisition expenses of $700, after
netting the value of the reacquired Company shares, warrants and options,
totaled approximately $5.6 million. This resulted principally in purchase price
allocation to the licenses acquired of $340 and a trademark value of $5.2
million. Deferred tax liabilities resulting from this transaction totaled
approximately $2.1 million, which amount was recorded as goodwill.

The following summarized pro-forma condensed consolidated financial information
are based on the assumption that the merger of NRC and the acquisition of Caruso
had been consummated as of February 1, 1997 as follows:

Pro-Forma Financial Information (unaudited)
- -------------------------------------------
1999 1998
--------- -------
(in thousands, except per-share data)

Net revenues $ 114,696 $89,297
========= =======
Licensing income $ 831 $ 798
========= =======
Net income (loss) $ (682) $ 2,736
========= =======
(Loss) earnings per share:
Basic $ ( .04) $ .19
========= =======
Diluted $ ( .04) $ .16
========= =======

The unaudited pro-forma financial information has been provided for
comparative purposes only and is not necessarily indicative of the results
of operations that would have been achieved had the merger and acquisition
been consummated at the beginning of the periods presented, nor is it
necessarily indicative of future operations or the financial results of the
combined companies.

F-12

5. Special Charges

The Company has incurred substantial additional costs in evaluating various new
potential borrowing arrangements, the restatement of its fiscal 1998 and the
first three quarters of fiscal 1999 financial statements, the investigation
conducted by the Special Committee of the Board of Directors and the costs of
defending the class action lawsuit and the SEC investigation. During the period
ended January 31, 2000, the Company has incurred approximately $3 million in
special charges for professional fees and payments to financial institutions for
the above matters.

6. Financing Agreement and Related Loan

Current Revolving Credit Facility

On October 28, 1999, the Company entered into a new two year $35 million
revolving line of credit (the "Line of Credit") with Rosenthal & Rosenthal, Inc.
On November 23, 1999, First Union National Bank entered into a co-lending
arrangement and became a participant in the Line of Credit.

Borrowings under the Line of Credit are formula based and available up to the
maximum amount of the Line of Credit. Borrowings under the Line of Credit will
bear interest at 0.50% above the prime rate. Certain borrowings in excess of an
availability formula will bear interest at 2.5% above the prime rate. The
Company will also pay an annual facility fee of 0.25% of the maximum Line of
Credit. The Line of Credit also contains certain financial covenants including,
minimum tangible net worth, certain specified ratios and other limitations. The
Company has granted the lenders a security interest in substantially all of its
assets. The Company was in default of certain covenants of its Line of Credit
and has obtained a waiver that exempts the financial covenants unless there is a
further deterioration of the Company's financial condition. In addition, the
waiver establishes the commitment that Rosenthal and the Company will establish
mutually agreeable financial covenants within a reasonable timeframe.

At January 31, 2000, borrowings under the Line of Credit totaled $13.8 million
which was secured against factored receivables of $9.9 million and inventory.
Interest paid to Rosenthal during Fiscal 2000 was $0.3 million. The borrowing
bore interest at 8.75%, which rate is subject to an increase or decrease based
on the conditions of the agreement as stated above.

At January 31, 2000, the Company had $208 of outstanding letters of credit. The
Company's letters of credit availability are formula based which takes into
account borrowings under the Line of Credit, as described above.

Other Borrowing Arrangements

In May 1999, the Company entered into a $3.5 million master lease and loan
agreement with OneSource Financial Corp.. The agreement requires the Company to
collateralize property and equipment of $1.9 million, with the remaining
agreement balance considered to be an unsecured loan. The agreement's term is
for a period of four years at an effective annual interest rate of 10.48%. The
outstanding loan balance as of January 31, 2000 was $2.8 million. The interest
paid for Fiscal 2000 was $0.3 million. The quarterly payment on the loan is
$260 including interest.

Prior Revolving Credit Facility

In May 1998, the Company entered into a three year $35 million revolving credit
facility (the "Facility"). During Fiscal 2000, the Company failed to comply with
certain covenants of the Facility and the Facility was repaid in full with
proceeds from the Line of Credit in October 1999.

F-13

7. Stockholders' Equity

Warrants

The following schedule represents warrants activities during the three years
ended January 31, 2000:

Underwriter's Class (A) Class (B) Class (C) NRC Other
Warran4ts(1) Warrants Warrants(2) Warrants(2) Warrants(3) Warrants
------------------------------------------------------------------------------

Warrants outstanding at January 31, 1997 ........ 857,532 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) .......................... (650,461) -- (1,431,100) (21,000) -- (50,000)
Warrants expired or cancelled ................... -- (54,397) (43,900) -- -- (25,000)
------------------------------------------------------------------------------
Warrants outstanding at January 31, 1998 ........ 207,071 -- -- 1,454,000 700,000 --
Warrants exercised (1) .......................... (207,071) -- -- (1,431,405) -- --
Warrants expired or cancelled ................... -- -- -- (22,595) (700,000) --
------------------------------------------------------------------------------
Warrants outstanding at January 31, 2000 and 1999 -- -- -- -- -- --
==============================================================================

(1) Underwriter's warrants consist of 69,024 units at an exercise price of
$3.19 per unit entitling the holder to one share of common stock, one Class
B warrant and one Class C warrant. The shares reserved represent the number
of shares issuable upon the exercise of the underwriter warrants and the
attached Class B and C warrants. During the year ended January 31, 1999,
all 69,024 units (representing a total of 207,071 shares of common stock)
were exercised aggregating $844. In connection with an October 1994 private
placement, the Company issued additional warrants to purchase 370,175
shares at an exercise price of $1.15 per share, of which 163,557 were
exercised during the year ended January 31, 1998.

(2) In connection with a secondary offering, the Company issued 1,475,000
shares of common stock, 1,475,000 Class B redeemable warrants and 1,475,000
Class C redeemable warrants to each registered holder. Each Class B warrant
entitled the holder thereof to purchase one share of common stock at a
price of $4.00 and each Class C warrant entitled the holder thereof to
purchase one share of common stock at a price of $5.00. These warrants
expired on February 23, 1998. The Company realized $5,687 net of expenses
during the fiscal year ended January 31, 1998, related to the exercise of
these warrants. The remaining 43,900 warrants were not exercised and were
canceled. During the year ended January 31, 1998, 21,000 Class C Warrants
were exercised aggregating $105. During the fiscal year ended January 31,
1999, 1,431,405 Class C warrants were exercised aggregating $7,157. The
remaining 22,595 warrants expired.

(3) On February 1, 1995, in consideration of loans extended to the Company, NRC
was granted warrants to acquire up to 700,000 shares of the Company's
common stock at an exercise price of $1.24 per share. The warrants expire
five years from their date of grant. Upon the merger of NRC with the
Company these warrants were extinguished.

Stock Options

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Effects of applying SFAS 123 for providing
pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.

Pro forma information regarding net (loss) income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions:

January 31,
-------------------------------------------------
2000 1999 1998
-------------------------------------------------

Expected Volatility .................................... .468 .618-.940 .759-.812
Expected Dividend Yield ................................ 0% 0% 0%
Expected Life (Term) ................................... 3-7 years 3-7 years 1-3 years
Risk-Free Interest Rate ................................ 4.91-6.21% 3.60-9.56% 5.25-6.61%

F-14

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the option is
expensed when the option's are vested. The Company's pro forma information
follows:

January 31,
-------------------------------------
2000 1999 1998
-------------------------------------

Pro forma net (loss) income ............. $ (25,773) $ (3,410) $ 2,471

Pro forma (loss) earnings per share:
Basic .............................. $ (1.45) $ (.22) $ .22

Diluted ............................ $ (1.45) $ (.22) $ .18

The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 2000, 1999 and 1998 was $0.46, $1.91 and $2.20,
respectively.

In 1989, the Company's Board of Directors adopted, and its stockholders
approved, the Company's 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan,
as amended in 1990, provides for the granting of incentive stock options
("ISO's") and limited stock appreciation rights ("Limited Rights"), covering up
to 222,222 shares of common stock. The 1989 Plan terminated on August 1, 1999.

Under the 1989 Plan, ISO's were to be granted at not less than the market price
of the Company's common stock on the date of the grant. Stock options not
covered by the ISO provisions of the 1989 Plan ("Non-Qualifying Stock Options"
or "NQSO's") were granted at prices determined by the Board of Directors. Under
the 1989 Plan 85,800, 120,300 and 126,800 of ISO's as of January 31, 2000, 1999
and 1998, respectively, were outstanding.

On September 4, 1997, the Company's stockholders approved the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of
common stock options to purchase up to 3,500,000 shares of Company common stock.
All employees, directors, independent agents, consultants and attorneys of the
Company, including those of the Company's subsidiaries, are eligible to be
granted NQSO's under the 1997 Plan. ISO's may be granted only to employees of
the Company or any subsidiary of the Company. The 1997 Plan terminates in 2007.

Additionally, at January 31, 2000, 1999 and 1998, NQSO's covering 2,907,500,
2,763,000, and 3,298,500 shares of common stock, respectively, were outstanding,
which are not part of either the 1989 or 1997 Plans.

The options that were granted under the 1989 and 1997 Plans expire between five
and ten years from the date of grant.

On November 4, 1999, the Company granted 400,000 NQSO's at an exercise price of
$1.50 per share, to its Chief Executive Officer to replace 400,000 NQSO's with
an exercise price of $1.50 that expired August 1, 1999 and granted 10,000 NQSO's
at an exercise price of $1.25 and simultaneously cancelled 10,000 NQSO's with an
exercise price of $1.25 that were to expire on December 20, 1999. These options
were at or above the stocks fair value at the date of the grant and, therefore,
did not result in any compensation expense. On January 15, 1998, the Company
granted 400,000 NQSO's at an exercise price of $5.00 per share, to its Chief
Executive Officer and simultaneously cancelled 400,000 NQSO's with an exercise
price of $5.00 that were to expire February 23, 1998.

On September 4, 1997, the Company granted its Executive Vice President, Chief
Operating Officer 100,000 ISO's at an exercise price of $5.50 per share and
simultaneously cancelled 41,700 NQSO's at an exercise price of $3.00 that were
to expire April 15, 1998.

F-15

A summary of the Company's stock option activity, and related information for
the years ended 2000, 1999 and 1998 follows:

Weighted-Average
Shares Exercise Price
--------------------------------------

Outstanding January 31, 1997........................... 4,215,611 $ 2.23
Granted................................................ 1,002,500 $ 5.48
Canceled............................................... (517,922) $ 4.55
Exercised.............................................. (647,889) $ 2.33
------------
Outstanding January 31, 1998........................... 4,052,300 $ 2.72
Granted................................................ 2,519,925 $ 3.24
Canceled............................................... (175,000) $ 2.60
Exercised.............................................. (162,000) $ 2.34
Expired................................................ (220,000) $ 2.68
------------
Outstanding January 31, 1999........................... 6,015,225 $ 2.78
Granted................................................ 1,567,250 $ 1.54
Canceled............................................... (363,250) $ 3.52
Exercised.............................................. (99,675) $ 0.99
Expired................................................ (771,125) $ 1.70
------------
Outstanding January 31, 2000........................... 6,348,425 $ 2.59
============

At January 31, 2000, 1999 and 1998, exercisable stock options totaled 5,356,257,
4,877,475 and 3,456,967 and had weighted average exercise prices of $2.58, $2.53
and $2.43, respectively.

On December 11, 1998, the Company's Board of Directors authorized the repricing
of 2,626,750 options at $3.50. These options, which had original exercise prices
ranging from $3.88 to $7.44, retained all of the original terms and vesting
rights from their respective grant date.

Options outstanding and exercisable at January 31, 2000 were as follows:

Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------ ----------------------------

$0.24-0.87................. 267,375 5.38 $ 0.81 217,375 $ 0.81
$1.15-1.50................. 1,708,500 8.91 $ 1.25 1,263,000 $ 1.28
$1.51-2.50................. 1,466,500 1.86 $ 2.04 1,466,500 $ 2.04
$2.51-3.50................. 2,656,050 6.72 $ 3.46 2,216,882 $ 3.47
$3.51-5.00................. 40,000 2.30 $ 4.49 40,000 $ 4.49
$5.01-12.00................ 210,000 3.95 $ 8.09 152,500 $ 7.66
- ---------------------------------------------------------------------------- ----------------------------
6,348,425 5.48 $ 2.59 5,356,257 $ 2.58
============================================================================ ============================

At January 31, 2000, 3,413,000 common shares were reserved for issuance on
exercise of stock options under the 1997 Stock Option Plan.

Stockholder Rights Plan

In January 2000, the Company's Board of Directors adopted a stockholder rights
plan. Under the plan, each stockholder of Candies Common Stock received a
dividend of one right for each share of the Company's outstanding common stock,
entitling the holder to purchase one thousandth of a share of Series A Junior
Participating Preferred Stock, par value, $0.01 per share of the Company, at an
initial exercise price of $6.00. The rights become exercisable and will trade
separately from the Candies Common Stock ten business days after any person or
group acquires 15% or more of the Candies Common Stock, or ten business days
after any person or group announces a tender offer for 15% or more of the
outstanding Candies Common Stock.

Stock Repurchase Program

On September 15, 1998, the Company's Board of Directors authorized the
repurchase of up to two million shares of the Company's common stock. As of
October 31, 1998, 85,200 shares were repurchased in the open market, at an
aggregate cost of approximately $371. No additional shares have been repurchased
since October 31, 1998. The Company intends, subject to certain conditions, to
buy shares on the open market from time-to-time, depending on market conditions.

F-16

Preferred and Common Stock to be Issued

See Note 9 for the related terms of the preferred stock to be issued in
connection with the Litigation settlement.

8. Earnings (Loss) Per Share

The following is a reconciliation of the shares used in calculating basic and
diluted earnings (loss) per share (in thousands):

January 31,
--------------------------------------
2000 1999 1998
--------------------------------------

Basic 17,798 15,250 11,375

Effect of assumed conversions of employee stock options
and warrants -- -- 2,413
--------------------------------------

Denominator for diluted earnings per share 17,798 15,250 13,788
======================================

Included in the calculation of the number of shares is the equivalent number of
common shares to be issued in connection with the Litigation Settlement (see
Note 9). The diluted weighted average number of shares does not include any
outstanding options because they were antidilutive.

The Company has granted 75,000 stock options to a related party, which vest
based upon the achievement of certain targeted criteria. These shares have not
been included in the computation of diluted earnings per share as the targeted
criteria has not been met and the exercise price exceeded the market price and,
therefore, the effect would have been antidilutive.

9. Commitments and Contingencies

Several lawsuits have recently been filed against the Company and certain
of its current and former officers and directors in the United States District
Court for the Southern District of New York. There can be no assurance that the
Company will successfully defend these lawsuits.

On or about January 31, 2000, the Company entered into a settlement
agreement with plaintiffs (the "Settlement Agreement") to settle the class
action for total consideration of $10 million, payable in a combination of cash,
Candies Common Stock and convertible preferred stock (the "Preferred Stock").
The Settlement Agreement provides that on or about May 1, 2000, the Company will
pay to plaintiffs $3 million in cash, and issue Candies Common Stock with a
value of $2 million. The Company will pay the Class an additional $1 million on
or before October 1, 2000. The remaining $4 million owed to plaintiffs will be
in the form of Preferred Stock, which will convert to Candies Common Stock at a
rate of ten to one based on the price of the Candies Common Stock on the first
and second anniversary of the date of the approval of the Settlement Agreement
by the Court. The Court has preliminarily approved the settlement and directed
the mailing and publication of a notice of the settlement. It is anticipated
that the Court will conduct a hearing on the final approval of the Settlement
Agreement in or about July 2000. It is highly unlikely that the Court will not
approve the Settlement; accordingly, the settlement terms, including the shares
of Common and Preferred Stock to be issued, have been recorded as of January 31,
2000. The Company received $2 million from its insurance company for this
matter, which proceeds have been placed in escrow and can only be used to pay
the cash portion of the settlement. The cash received from the insurance company
has been classified as Restricted cash in the accompanying balance sheet.

F-17

The Company is also a party to certain litigation incurred in the normal
course of business. While any litigation has an element of uncertainty, the
Company believes that the final outcome of any of these routine matters will not
have a material effect on the Company's financial position or future liquidity.
Except as set forth above, the Company knows of no material legal proceedings,
pending or threatened, or judgments entered, against any director or officer of
the Company in his capacity as such.

10. Related Party Transactions

On April 3, 1996, the Company entered into an agreement with Redwood Shoe
("Redwood"), a principal buying agent of footwear products, to satisfy in full
certain trade payables (the "Payables") amounting to $1,680. Under the terms of
the agreement, the Company (i) issued 1,050,000 shares of the Company's Common
Stock; (ii) issued an option to purchase 75,000 shares of the Company's Common
Stock at an exercise price of $1.75 which was immediately exercisable and has a
five year life; and (iii) made a cash payment of $50. The Company purchased
approximately $38 million, $68 million, and $48 million in 2000, 1999, and 1998,
respectively, of footwear products through Redwood. At January 31, 2000, the
Company had approximately $13.8 million of open purchase commitments with
Redwood. At January 31, 2000 and 1999, the payable to Redwood totaled
approximately $1,286 and $943, respectively.

11. Operating Leases

Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 2000 are as follows:

2001................. $ 1,039
2002................. 1,022
2003................. 978
2004................. 814
2005................. 748
Thereafter........... 1,332
--------
Totals............... $ 5,933
========

Rent expense was approximately $946, $691 and $337 for the years ended January
31, 2000, 1999 and 1998, respectively.

12. Benefit and Incentive Compensation Plans and Other

The Company sponsors a 401(k) Savings Plan (the "Savings Plan") which covers all
eligible full-time employees. Participants may elect to make pretax
contributions subject to applicable limits. At its discretion, the Company may
contribute additional amounts to the Savings Plan. The Company made
contributions of $112, $134 and $80 to the Savings Plan for the years ended
January 31, 2000, 1999 and 1998, respectively.

The Company has certain incentive compensation arrangements with its Chief
Executive Officer pursuant to his employment agreement. The incentive
compensation aggregates 5% of pre-tax earnings, as defined.

13. Income Taxes

At January 31, 2000, the Company had net operating losses of approximately $19.8
million for income tax purposes, which expire in the years 2007 through 2020.
Due to the issuance of common stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275 per year. Approximately $2.5 million of
the operating loss carryforwards are subject to this restriction and
accordingly, no accounting recognition has been given to approximately $1.8
million of operating losses since present restrictions preclude their
utilization. During Fiscal 1999, the Company merged with NRC and was entitled to
another $2.4 million of operating losses incurred by NRC. These operating losses
are also subject to restriction and only $327 can be carried forward each year.

After the date of the pre-quasi reorganization the tax benefits of net operating
loss carryforwards incurred prior to the reorganization, has been treated for
financial statement purposes as direct additions to additional paid-in capital.
For Fiscal 1998, the Company utilized $149 of pre-quasi reorganization net
operating loss carryforwards. The related tax benefit $56, at January 31, 1998,
had been recognized as an increase to additional paid-in capital. Additionally,
as of January 31, 1998, the Company eliminated its valuation allowance for
deferred tax assets by approximately $2.4 million, increasing paid-in capital by
approximately $1 million and benefiting the income tax provision by
approximately $1.4 million. In the year ended January 31, 2000, the Company
recorded a valuation allowance for deferred

F-18

tax assets of $9.3 million representing that portion of the deferred tax assets
that can not be reasonably determined to be recoverable from estimated earnings
over the next few years.

The income tax provision (benefit) for Federal and state income taxes in the
consolidated statements of income consists of the following:

January 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------

Current:
Federal ................................................................ $ (48) $ 406 $ 747
State .................................................................. 119 282 206
------------------------------------------------
Total current .......................................................... 71 688 953
------------------------------------------------

Deferred:
Federal ................................................................ (838) (675) (728)
State .................................................................. (336) (136) 130
------------------------------------------------
Total deferred ......................................................... (1,174) (811) (598)
------------------------------------------------

Total provision (benefit) .............................................. $ (1,103) $ (123) $ 355
================================================

The following summary reconciles income tax provision at the Federal statutory
rate with the actual provision (benefit):
January 31,
------------------------------------------------
2000 1999 1998
------------------------------------------------

Income taxes (benefit) at statutory rate ............................... $ (8,935) $ (260) $ 1,278
Non-deductible amortization ............................................ 193 153 122
Change in valuation allowance of deferred tax assets ................... 9,257 -- (1,347)
State provision, net of federal income tax benefit ..................... (1,906) 99 213
Adjustment for estimate of prior year taxes ............................ 235 (138) 70
Other .................................................................. 53 23 19
------------------------------------------------
Total income tax provision (benefit) ................................... $ (1,103) $ (123) $ 355
================================================

The significant components of net deferred tax assets of the Company consist of
the following:
January 31,
-----------------------------
2000 1999
-----------------------------

Compensation expense ................................................... $ 96 $ 96
Alternative minimum taxes .............................................. 96 126
Inventory valuation .................................................... 964 643
Litigation settlement .................................................. 3,344 --
Net operating loss carryforwards ....................................... 8,294 2,158
Accounts and factoring receivable valuation ............................ 2,016 1,475
Depreciation ........................................................... 112 96
Other .................................................................. 74 288
-----------------------------
Total net deferred tax assets .......................................... 14,996 4,882
Valuation allowance .................................................... (9,257) --
-----------------------------
Total deferred tax assets .............................................. 5,739 4,882

Trademarks and licenses ................................................ (1,952) (2,269)
Other deferred tax liabilities ......................................... (165) (165)
-----------------------------
Total deferred tax liabilities ......................................... (2,117) (2,434)
-----------------------------
Total net deferred tax assets .......................................... $ 3,622 $ 2,448
=============================

F-19

14. Segment Information

Effective February 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position.

The Company has one reportable segment that is engaged in the manufacture and
marketing of branded footwear, including casual shoes and boots to the retail
sector. Revenues of this segment are derived from the sale of branded footwear
products to external customers and the Company's retail division as well as
royalty income from the licensing of the Company's trademarks and brand names to
licensees. The business units comprising the branded footwear segment
manufacture or source, market and distribute products in a similar manner.
Branded footwear is distributed through wholesale channels and under licensing
and distributor arrangements.

F-20

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Candies, Inc.
Purchase, New York

The audits referred to in our report dated April 20, 2000, relating to the
consolidated financial statements of Candie's, Inc. and Subsidiaries, which is
contained in Item 8 of the Form 10-K included the audits of the financial
statement schedule listed in the accompanying index for each of the three years
in the period ended January 31, 2000. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.

In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.

/s/: BDO Seidman, LLP
- ---------------------
BDO Seidman, LLP

April 20, 2000
New York, New York

S-1

Schedule II - Valuation and Qualifying Accounts
Candie's, Inc. and Subsidiaries
(In thousands)

Column A Column B Column C Column D (a) Column E
- --------------------------------------------------------- --------------- ------------ ------------- -------------
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- --------------------------------------------------------- --------------- ------------ ------------- -------------

Reserves and allowances deducted from asset accounts:

Year ended January 31, 2000:
Allowance for uncollectible accounts $ 950 $ 2,042 $ -- $ 2,992

======= ======= ======== =======
Allowance for chargebacks $ 2,579 $ 8,294 $ 9,043 $ 1,830
======= ======= ======== =======

Year ended January 31, 1999:
Allowance for uncollectible accounts $ 27 $ 993 $ 70 $ 950
======= ======= ======== =======
Allowance for chargebacks $ 1,731 $14,104 $ 13,256 $ 2,579
======= ======= ======== =======

Year ended January 31, 1998:
Allowance for uncollectible accounts $ 34 $ 183 $ 190 $ 27
======= ======= ======== =======
Allowance for chargebacks $ 350 $ 8,049 $ 6,668 $ 1,731
======= ======= ======== =======

(a) Uncollectible receivables charged against the allowance provided.

S-2