UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------------
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, 1999

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from _______________to ______________.

Commission File Number 0-10593

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

----------------------

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

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

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

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

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

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

Common Stock, $.001 par value
(Title of Class)

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant (based upon the last available closing sale price of $3.0625 on
May 12, 1999 prior to trading being halted on May 13, 1999) was approximately
$39,734,000.

As of August 31, 1999, 17,897,166 shares of Common Stock, par value $.001
per share were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None

CANDIE'S, INC.-FORM 10-K

TABLE OF CONTENTS

Page
----
PART I

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

PART II

Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................ 11
Item 6. Selected Financial Data.................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.. 19
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......... 21
Item 11. Executive Compensation..................................... 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 27
Item 13. Certain Relationships and Related Transactions............. 29

PART IV

Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 30

Signatures................................................................... 31

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

PART I

Item 1. Business

Introduction

The history of the "CANDIE'S" brand spans over 21 years and has become
synonymous with young, casual, but 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 four company-owned stores and to specialty stores
internationally. The Company also markets and distributes, children's footwear
under the CANDIE'S and BONGO trademarks, and arranges for the manufacture of
footwear products for mass market and discount retailers under the private label
brand of the retailer or other trademarks owned or licensed by the Company. In
addition, the Company distributes a variety of men's workboots, hiking boots,
winter boots, and outdoor casual shoes designed and marketed by the Company's
wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright Star"), under
private labels and the ASPEN(R) brand name, which is licensed by the Company
from a third party.

The Company also markets and distributes moderately-priced handbags under
the CANDIE'S and BONGO trademarks to department, specialty, and chain stores in
the United States and internationally to specialty stores. Unzipped Apparel, LLC
("Unzipped"), the Company's joint venture with Sweet Sportswear LLC ("Sweet"),
markets and distributes jeanswear and apparel under the Candie's and BONGO label
to department, specialty, and chain stores in the United States.

During the fiscal year ended January 31, 1999 ("Fiscal 1999"), the Company
adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. 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 Notes to the Financial Statements.

Recent 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 the Company's fiscal year ended January
31, 1998 ("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 June 10, 1999, Frank Marcinowski, the Company's controller assumed the
position of the Company's interim Chief Financial Officer, a position formerly
held by David Golden ("Golden"). 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 have been restated from
amounts previously reported. The effects of the restatements are presented in
Notes 16 and 17 of the Notes to the Financial Statements and have been reflected
herein.

In addition to the restatements reflected herein, the Company plans to
restate 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 for the three quarters ended April 30, 1998,
July 31, 1998 and October 31, 1998, respectively.

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
action currently pending in the United States District Court for the Southern
District of New York. The staff of the Securities and Exchange Commission 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".

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 shareholder
of the Company. NRC's principal shareholder 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
$5,214,000. Deferred tax liabilities resulting from this transaction totaled
approximately $2,110,000, 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 is to market and distribute apparel under
the BONGO and CANDIE'S labels. Candie's and Sweet each have a fifty percent
interest in Unzipped. Pursuant to the terms of the joint venture, Candie's
licenses the CANDIE'S and BONGO trademarks to Unzipped for use in the design,
manufacture and sale of certain designated apparel products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation and Note
2 to Financial Statements."

Products

CANDIE'S Footwear Products. The CANDIE'S brand, consisting of fashion and
casual footwear, is designed primarily for women aged 12-34 and girls aged 4-11.
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 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 children's styles are versions of the best
selling women's styles and the remaining one quarter are designed specifically
for the children's 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. The Company began to design, market, and
distribute women's handbags in the Fall of 1998 to department and specialty
stores in the United States. The retail prices range from $28 - $36.

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 aged 12-34 and girls aged 4-11. 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, $35-40 for
jeanswear and $15 - $25 for handbags.

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 four retail stores, two outlets and two specialty stores,
and has entered into a lease for fifth store (an outlet). The Company
anticipates opening additional retail stores as opportunities make themselves
available. Retail revenues in Fiscal 1999 were 1.5% of net revenues.

The Company operates its retail stores primarily to reach customers who prefer a
specialty retail environment and to increase brand awareness. 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,
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.

Website

The Company maintains a product website to provide information about the
Company's products (www.candies. com), and a corporate website to provide
information about the Company (www.candiesinc.com). The Company has plans to
expand its product website to present an attractive interactive site through
which the Company's products will eventually be offered through e-commerce.

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 1999, and Fiscal 1998, Redwood Shoe Corp. ("Redwood"), a related
party buying agent for the Company, initiated the manufacture of approximately
60% and 80%, respectively, of the Company's total footwear purchases. At August
31, 1999, the Company had $6,429,000 of open purchase commitments with Redwood.

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

Tariffs, Import Duties and Quotas

All products manufactured overseas are subject to United States tariffs,
customs duties and quotas. In accordance with the Harmonized Tariff Schedule,
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 September 16, 1999, the Company had an estimated backlog of orders of
its products of approximately $30,191,000, as compared to a backlog of
approximately $44,135,000 at September 16, 1998. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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 1999, the Company sold its footwear products to more than
1,540 retail accounts consisting of department stores, including Federated
Stores (which include Macy's and Bloomingdale's), Nordstrom's and May Company,
mass merchandisers, shoe stores and other outlets in the United States. No
individual customer accounted for more than 10% of the Company's revenues during
Fiscal 1999, although the Company has five customers that each accounted for
between approximately 5.2% and 6.1% of the Company's net revenues in Fiscal
1999, and between 5.7% and 8.8% in Fiscal 1998.

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 through March 31, 2003. 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 these territories and pays the Company royalties on such purchases.
There can be no assurance that such customers will continue to purchase products
from the Company or utilize its services in the future in the United States or
abroad.

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

The Company utilizes the services of nine full time sales persons, all 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,
any of which events could have a material adverse effect on the Company. In
addition, there can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend an infringement action.

The Company 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 licenses for use of the
CANDIE'S trademark on fragrance, hosiery and eyewear. 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 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 licensee to renew for
a term of three years if licensee, among other things, achieves threshold
minimum sales during the initial term.

Also during Fiscal 1999, the Company entered into a licensing arrangement
with Unzipped, pursuant to which Unzipped has 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 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.

During the fiscal year ended January 31, 1997 ("Fiscal 1997"), the Company
licensed the CANDIE'S trademark for use in connection with the manufacture and
distribution of women's intimate apparel and children's footwear. The Company
terminated both of these licenses during Fiscal 1998. The children's footwear
license was terminated because the Company commenced distributing its own line
of children's footwear under the CANDIE'S

trademark. The women's intimate apparel license was terminated because the
Company perceived a conflict between the licensee's level of retail distribution
and the current retail market for the company's footwear.

The Company 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. Although the Company will seek to renew the
ASPEN license, there can be no assurance that the Company can successfully
negotiate a renewal of such license on terms acceptable to it. 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
others, Skechers, 9 & Co. 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

At August 31, 1999, the Company employed 129 persons, 91 full-time and 38
part-time, of whom three 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 nine independent
contractors who are engaged in sales. The Company considers its relations with
its employees to be good.

Item 2. Properties

The Company currently occupies 19,653 square feet of office and showroom
space at 2975 Westchester Avenue, Purchase, New York pursuant to a lease which
expires on April 1, 2000 subject to the Company's right to renew the lease for
an additional five year term under certain cirumstances. The monthly rental
expense pursuant to the lease is $32,755 through the expiration date of the
lease. The Company also maintains four domestic retail stores of which three are
located in suburban shopping malls in various locations in the New York
Metropolitan area and one is located in a mall in New Jersey. 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 will be 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 once the Company fully occupies both floors, and a lease expiration of
March 31, 2003. The Company currently occupies only the fifth floor at 215 West
40th Street, New York, NY, which has a monthly rental of $9,780. 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 is used as a handbag showroom for both
brands, has a monthly rental of $2,472 and expires on February 28, 2002.

Item 3. Legal Proceedings

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

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

On August 4, 1999, the staff of the Securities and Exchange Commission
advised the Company that it had commenced a formal investigation into the
actions of the Company and others in connection with, among other things, 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 Company's 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. During suspension
of the Company's stock the stock is listed under the symbol "CANDE". The
following table sets forth, for the indicated periods, the high and low sales
prices for the Common Stock as reported by NASDAQ:

High Low
---- ---

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

Fiscal Year Ended January 31, 1998
Fourth Quarter...................... $7.25 $4.63
Third Quarter....................... 7.88 4.13
Second Quarter...................... 5.69 3.63
First Quarter....................... 6.88 4.25

As of August 31, 1999, there were approximately 1,450 holders of record of
the Company's Common Stock. The Company believes that, in addition, there are in
excess of 1,000 beneficial owners of its Common Stock, which shares are held in
"street name."

The Company has not paid cash dividends on its Common Stock since its
inception. The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for use in the business or for other corporate purposes,
and it is not anticipated that any cash dividends will be paid by the Company in
the foreseeable future.

During the fiscal quarter ended January 31, 1999, the Company issued
ten-year options to its employees to purchase an aggregate of 195,000 shares of
its common stock at exercise prices of (i) $2.875 for 75,000 shares, (ii) $3.25
for 30,000 shares (iii) $3.50 for 70,000 shares and (iv) $3.875 for 20,000
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 (the "Act").

Item 6. Selected Financial Data

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

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

Operations" and the Company's consolidated financial statements, including the
notes thereto, included elsewhere herein.

Year Ended January 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Restated)

Operating Data:

Net revenues ................................ $ 114,696 $ 89,297 $ 45,005 $ 37,914 $ 24,192

Operating income (loss) ..................... 786 4,889 891 2,057 (1,391)

Net income (loss) ........................... (641) 3,405 1,145 1,054 27

(Loss) earnings per share:
Basic .................................... $ (.04) $ .30 $ .13 $ .12 $ .00

Diluted .................................. (.04) .25 .11 .11 .00

Weighted average number of
common shares outstanding:
Basic .................................... 15,250 11,375 9,143 8,726 6,398

Diluted .................................. 15,250 13,788 10,152 9,427 6,461

At January 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Restated)

Balance Sheet Data:

Current Assets .............................. $ 45,216 $ 21,459 $ 9,039 $ 5,969 $ 4,104

Total assets ................................ 74,600 29,912 14,709 11,746 10,290

Long-Term debt .............................. 219 -- -- -- --

Total stockholders' equity .................. 51,849 23,550 8,608 5,586 4,392

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,
the risks of uncertainty of trademark protection, Year 2000 compliance the
uncertainty of marketing and licensing the trademarks acquired during Fiscal
1999 and other risks detailed below and in the Company's Securities and Exchange
Commission filings, and uncertainty associated with the impact on the Company in
relation to recent events discussed herein under "Item 1. Business-Recent
Developments".

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.

General Introduction

Although the Company's net revenues increased by approximately 28% in
Fiscal 1999, as noted below, the net loss reflects the significant increase in
general and administrative expenses primarily due to the impact of the Company's
expansion outside of its core footwear products to include, handbags,
international distribution channels and the growth of licensing as well as the
equity loss in Unzipped, the Company's joint venture project. Although the
financial results for the fiscal year ending January 31, 2000 are expected to
reflect the benefits of the continued development and growth of the new business
initiatives described above, the overall financial results are expected to be
adversely affected, among other things, by a slight downturn in the core
business which is not expected to recover in Fiscal 2000, additional
professional expenses related to the completion of the Fiscal 1999 audit,
defense of on-going litigation and the non-recurring costs associated with the
Special Committee. The Company anticipates reporting operating and net losses
for the fiscal quarters ended April 30, 1999 and July 31, 1999. See Item 3
"Legal Proceedings".

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.

Results of Operations

Fiscal 1999 Compared with Fiscal 1998

Revenues. Net revenues increased by $25,399,000, or 28.4% to $114,696,000,
primarily due to 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
restated prior year. The decrease is 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 $8,678,000 to $25,856,000 for Fiscal 1999 compared to
$17,178,000 for the prior 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 year. These increases reflect costs which are
directly associated with the increase in net revenues, including increased
advertising expenditures ($2,368,000), increased amortization expenses related
to the Company's acquisitions and fixed asset additions ($850,000), coupled with
the costs incurred in implementing the Company's strategic plan to strengthen
its management team and infrastructure ($2,970,000), which the Company believed
was necessary for future growth.

Operating Income. As a result of the foregoing, operating income decreased
$4,103,000 to $786,000, or 0.7% of net revenues for Fiscal 1999, compared to
$4,889,000, or 5.5% of net revenues for the prior year.

Interest Expense. Interest expense decreased by $124,000, 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 is 16% and 9%,
respectively. The current year effective rate is low because of the state tax
rates and nondeductible amortization expense. The 1998 rate is low due to the
reversal of the valuation allowance.

Net Income. As a result of the foregoing, the Company sustained a net
(loss) of ($641,000) or (.6%) of net revenues for Fiscal 1999, compared to net
income of $3,405,000 or 3.8% of net revenues for the prior year.

Fiscal 1998 (Restated) Compared with Fiscal 1997

Revenues. Net revenues increased by $44,292,000, or 98.4% to $89,297,000,
primarily due to increased brand awareness and consumer acceptance due to the
Company's increased sales and marketing efforts coupled with increased sales in
all product categories, the successful introduction of children's footwear
products and increased selling prices.

Gross Profit. Gross Profit margins increased to 24.6% from 21.9% in the
prior year. The increase was primarily attributable to changes in product mix
and the ability to source product at lower prices coupled with increases in
units sold and selling prices.

Operating Expenses. Selling, general and administrative expenses increased
by approximately $8,213,000 to $17,178,000 for Fiscal 1998 compared to
$8,965,000 for the prior year. The increase was primarily due to increased
selling, shipping and administrative expenses which were directly associated
with the increase in net revenues and an increase in marketing and advertising
expenses. As a percentage of net revenues, selling, general and administrative
expenses decreased 0.7% to 19.2% for Fiscal 1998 from 19.9% for the prior year.

Operating Income. As a result of the foregoing, operating income increased
to $4,889,000, or 5.5% of net revenues for Fiscal 1998, compared to $891,000, or
2.0% of net revenues for the prior year.

Interest Expense. Interest expense increased by $373,000, or 49.3%,
primarily as a result of increased levels of borrowings under the Company's
revolving credit facility with its factor for seasonal working capital
requirements to fund the Company's growth.

Income Tax Expense. The relationship of the income tax provision in Fiscal
1998 and the benefit in Fiscal 1997, respectively, to income before income taxes
was significantly affected by the reduction in valuation allowances in both
years.

Net Income. As a result of the foregoing, net income increased threefold to
$3,405,000 or 3.8% of net revenues for Fiscal 1998, compared to $1,145,000 or
2.5% of net revenues for the prior year.

Liquidity and Capital Resources

The Company has relied in the past primarily upon revenues generated from
operations, borrowings from its factor and sales of securities to finance its
liquidity and capital needs. Net cash used in operating activities totaled
$22,024,000 in Fiscal 1999, as compared to $8,831,000 for Fiscal 1998. The
increased use in cash primarily reflects the change in the Company's agreements
with its factor in Fiscal 1999. This resulted in the grossing up of advances
from the factor and amounts borrowed under the factoring and financing
agreements compared to Fiscal 1998 when these amounts were netted. See Note 5 to
the Financial Statements.

The ratio of current assets to current liabilities decreased to 2.0:1 at
January 31, 1999 from 3.4:1 at January 31, 1998 due primarily to the current
year presentation of factor receivables and notes payable as explained above.
Working capital increased by approximately $7,728,000 to $22,886,000 at January
31, 1999 compared to working capital of $15,158,000 at January 31, 1998.

Other than short-term borrowings for working capital requirements and a
small capital lease obligation, the Company is virtually debt-free.

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 such Warrants. The proceeds
were used to repay short-term borrowings. Each Warrant entitled the holder
thereof to purchase one share of Common Stock at an exercise price of $5.00. In
addition, subsequent to January 31, 1999, the Company received proceeds of
$1,171,000, in connection with the issuance of common stock relating to the
exercise of outstanding stock options.

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,
were 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. 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 $15,400,000
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. 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.

The Company is obligated on or prior to October 31, 1999 to make a $500,000
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 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.

On May 27, 1998, the Company entered into a three year $35 million
revolving credit facility (the "Facility") with Bank of America (formerly
Nationsbanc Commercial Corporation) ("BofA"). Under certain conditions,
including the addition of a second lender, the Facility could increase to a
maximum of $50 million. On August 4, 1998, BankBoston, N.A. entered into a
co-lending arrangement and became a participant in the revolving credit Facility
with BofA.

Prior to January 31, 1999, borrowings under the Facility bore interest at
1.50% below the prime rate (7.75% at January 31, 1999) and the Company also had
the option to borrow at either LIBOR plus 1.25% or the banker's acceptance rate
plus 1%. These rates are fixed and subject to an increase or decrease based on
certain conditions beginning in November 1998. Effective January 31, 1999, the
Facility was amended and borrowings under the Facility bear interest at .25%
below the prime rate. The Company pays a commitment fee of 1/4% on the unused
portion of the Facility.

Borrowings under the Facility are formula based and available up to the
maximum amount of the Facility. The Facility also contains certain financial
covenants including, minimum tangible net worth, certain specified ratios and
other limitations, as defined therein. The Company has granted the lenders a
security interest in substantially all of its assets.

Simultaneously with the above, the Company entered into a new factoring
agreement with BofA whereby, the Company has the option to sell any or all of
its accounts receivable, principally without recourse, subject to maximum credit
limits established by the lender for individual accounts. Receivables assigned
but not sold to the lender or in excess of such maximum credit limits are
subject to recourse. The factoring commission on accounts receivable approved by
the factor are at a rate of 0.40% and for receivables that are not approved the
rate is 0.15%, with a minimum commission of $100,000 for the contract year.

The Company is in default of certain covenants of its Facility and the
lenders have indicated their desire to terminate the Facility arrangement with
the Company. The lenders have been extending the due date of the Facility by
issuing periodic forbearance agreements to the Company. The current forbearance
agreement is through October 30, 1999. The Company has received a commitment
from a new institution to refinance the Facility and expects to consummate the
new financing shortly.

In May 1999, the Company entered into a $3.5 million master lease agreement
with OneSource Financial Corp. The agreement requires the Company to
collateralize property and equipment of $2,400,000, of which $1.4 million had
been collateralized as of May 1999 with the remaining agreement balance
considered to be an unsecured loan. The term of the agreement is four years.

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 requirements for its
expansion, certain commitments related to Unzipped, primarily with cash flow
from operations, supplemented by borrowings under a new financing agreement.

On September 15, 1998, the Board of Directors of the Company authorized
management to repurchase up to two million shares of Candie's Common Stock. As
of October 31, 1998, 85,200 shares were repurchased in the open market, at an
aggregate cost of approximately $371,000. 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.

The Company intends to retain its earnings to finance the development,
expansion and growth of its existing business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the financial condition of the Company and
general business conditions.

Seasonality

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

Effects of Inflation

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

Year 2000 Issues

In preparation for the Year 2000, the Company has completed an inventory
and assessment of its information systems, including its computer software and
hardware. The Company determined over a year ago that its existing systems would
be adversely affected by the Year 2000 and that its operational needs would be
best served by upgrading its entire system. Accordingly, the Company is
currently in the process of implementing throughout all operating areas of the
Company, JBA's ERP Software Solution (the "JBA Solution"), which has been
certified "Year 2000 Compliant" by the ITAA (Information Technology Association
of America). The implementation has progressed to the testing phase.

The testing and implementation of the JBA Solution includes assessment of
all internal software that will integrate with the JBA Solution and an upgrade
of the IBM AS/400 operating system on which the JBA Solution will run. In
addition, the Local Area Network and networked PC's have been or will be
upgraded. The goal is to complete all testing and achieve full system
implementation during the fourth quarter of Fiscal 2000.

Since the implementation of the JBA Solution will not complete prior to
December 31, 1999, the Company has contracted with Millennium Solutions 400 Ltd.
to license software and to implement a remedial system, MS4, that will permit
the Company to bring its current system into compliance. The MS4 system uses an
encapsulation process that will make the Company's existing system Year 2000
compliant. The algorithm that will be used by this system will ensure that the
Company's existing system is Year 2000 compliant will work until the year 2027.

Additionally, the Company has inventoried and analyzed substantially all of
its embedded information systems throughout its operations, including,
telephones, voice mail, alarms and personal computers. The results of this
analysis did not indicate that embedded systems would not present a material
Year 2000 risk to the Company. The Company will continue to test selected
embedded systems and remediate and certify systems that exhibit Year 2000
issues. The Company intends to complete the testing and remediation of these
systems by the fourth quarter of Fiscal 2000.

The Company's Year 2000 strategy addresses its relationships with critical
third parties, including suppliers, customers and service providers. The
Company's evaluation of these business partners includes written inquiry of such
third parties' Year 2000 readiness and evaluation of responses. The Company has
or intends to follow up with those third parties that indicate material problems
with continued operation particularly as the Company's products are sourced from
third parties abroad into the Year 2000. The Company is working jointly with
customers, strategic vendors and business partners to identify and resolve any
Year 2000 issues that may impact the Company. The Company anticipates that this
evaluation will be on-going through the third quarter of Fiscal 2000. An
assessment of the capability of electronic data interface trading partners to
operate with respect to Year 2000 has been completed.

The Company expects its total costs to address the Year 2000 issue to be
approximately $1,000,000 in connection with the implementation of the JBA
Solution and $100,000 for the purchase of the MS4 remedial system. Approximately
$750,000 of these costs have been incurred through August 31, 1999, and the
Company expects to incur the balance of such costs to complete the compliance
plan in Fiscal 2000. The balance of such costs is expected to be funded through
operating cash flows. The Company's cost estimates do not include costs
associated with addressing and resolving issues as a result of the failure of
third parties to become Year 2000 compliant.

The Company does not expect the Year 2000 issue to pose significant
operational or financial problems for the Company. The Company bases this
expectation on the progress it has made in upgrading and remediating its
internal information systems and the assurances it has received so far from its
suppliers. Nevertheless, the Year 2000 issue could have a material impact on the
Company's operations and financial condition in the future in the event that the
Company or its key suppliers, such as off-shore manufacturers of shoes for the
Company or the shipping companies that carry those shoes to the Company, are
unable to resolve Year 2000 issues on a timely manner or if the Company becomes
the subject of litigation or other proceedings regarding any Year 2000-related
events. The amount of potential loss cannot be reasonably estimated at this
time.

A contingency plan in the event of a problem with the MS4 system is being
developed and will be updated and implemented as necessary to address risks
identified. In the event of a worst case scenario in which the JBA Solution is
not fully implemented and the MS4 does not fully remediate the system, the
Company will modify its existing systems so as to permit business operations to
continue pending the implementation of the JBA Solution. No contingency plans
are being developed for the availability of key public services and utilities in
the United States or abroad or to deal with a failure by any of the Company's
key suppliers. A failure to develop a contingency plan in the future could have
a material adverse effect on the Company.

Net Operating Loss Carry Forwards

At January 31, 1999, the Company had net operating losses of approximately
$4.3 million for income tax purposes, which expire in the years 2007 through
2010. Due to the issuance of Common Stock on February 23, 1993, an "ownership
change," as defined in Section 382 of the Internal Revenue Code, occurred.
Section 382 restricts the use of the Company's net operating loss carry forwards
incurred prior to the ownership change to $275,000 per year. Approximately $2.5
million of the operating loss carry forwards are subject to this restriction and
accordingly, no accounting recognition had 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.

After the date of the pre-quasi reorganization the tax benefits of net
operating loss carry forwards 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 thousand of
pre-quasi reorganization net operating loss carry forwards. The related tax
benefit $56,000, 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. The Company believes it is
more likely than not that the operations will generate future taxable income to
realize such tax assets.

Recently Issued Accounting Pronouncements

The information as to recently issued accounting pronouncements is
contained at page F-10.

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, 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 1999, 1998 and 1997 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 E&Y as its independent auditors.
The reports of E&Y on the financial statements of the Company for Fiscal 1998
and Fiscal 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 their 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 has 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 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 may make. 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

Item 10. Directors and Executive Officers of the Registrant.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Set forth below is a list of the directors, executive officers and key
employees of the Company and their respective ages and positions are as follows:

Name Age Position
- ---- --- --------

Neil Cole 42 Chairman of the Board, President and
Chief Executive Officer

Lawrence O'Shaughnessy 50 Director, Executive Vice President and
Chief Operating Officer

Frank Marcinowski 53 Vice President, Chief Financial Officer

Deborah K. Sorell 37 Vice President, Secretary and
General Counsel

Barry Emanuel 57 Director

Mark Tucker 52 Director

Neil Cole has been Chairman of the Board, President and Chief Executive
Officer of the Company since February 23, 1993. From February through April
1992, Mr. Cole served as director and as acting President of the Company. Mr.
Cole has also served as Chairman of the Board, President, Treasurer and a
director of NRC since its inception in 1986.

Lawrence O'Shaughnessy has been a director and Chief Operating Officer of
the Company since March 1993 and Executive Vice President of the Company since
April 1995. He also served as a director of the Company from April to June 1992.
Mr. O'Shaughnessy has served as President of O'Shaughnessy & Company, a
management consulting firm, since March 1991.

Barry Emanuel has been a director of the Company since May 1993. For more
than the past five years, Mr. Emanuel has served as President of Copen
Associates, Inc., a textile manufacturer located in New York, New York.

Mark Tucker has been a director of the Company since May 1996. From August
1993 to the present, Mr. Tucker has been a principal of Mark Tucker, Inc., a
family owned business engaged in the design and import of shoes. Mr. Tucker has
also been affiliated with Redwood, a manufacturer and distributor of footwear
since June 1993. From December 1992 to August 1993, he was an independent
consultant to the shoe industry. From July 1992 to December 1992, Mr. Tucker was
employed as Director of Far East Shoe Wholesale Operations for United States
Shoe Far East Limited, a subsidiary of U.S. Shoe Corp. For more than five years
prior to July 1992, Mr. Tucker was a principal of Mocambo Ltd., a family owned
shoe design and import company.

Frank Marcinowski has been the Vice President and Chief Financial Officer
of the Company since June 1999 and Vice President and Controller of the Company
since September 1998. From 1995 to 1998, Mr. Marcinowski was Vice President and
Chief Financial Officer at Triad Capital Management, Inc., a private investment
company. From 1994 to 1995, Mr. Marcinowski was Vice President and Controller
for Ameridata Technologies, Inc., a public computer products company.

Deborah K. Sorell has been the Vice President and General Counsel of the
Company since December 1998. From September 1996 to December 1998, Ms. Sorell
was Associate General Counsel with Nine West Group Inc. ("Nine West"), a
women's' footwear corporation with sales approximating $2.0 billion, where Ms.
Sorell was primarily responsible for the overseeing legal affairs relating to
domestic and international contracts, intellectual property, licensing, general
corporate matters, litigation and claims. Prior to joining Nine West, Ms. Sorell
practiced law for nine years at private law firms in New York City and Chicago
in the areas of corporate law and commercial litigation. From May 1991 to
September 1996, Ms. Sorell worked at the firm of Kronish Lieb Weiner and Hellman
LLP, in New York, and from 1989 to 1991, at the firm of O'Sullivan Graev &
Karabell in New York.

Directors are elected by the Company's stockholders. Officers are elected
by the Company's Board of Directors and serve at the discretion of the Company's
Board of Directors.

In April 1996, the Company entered into an agreement (the "Redwood
Agreement") with Redwood under which, in consideration for the satisfaction in
full of certain accounts payable to Redwood aggregating $1,680,000, the Company
(i) issued to Redwood 1,050,000 shares of the Company's Common Stock and an
option to purchase 75,000 shares of the Company's Common Stock; (ii) paid
$50,000 to Redwood; and (iii) agreed, for the three year period ending April 3,
1999, to cause Mark Tucker (or if he is not available, another partner of
Redwood designated by it) to be elected as director of the Company; and (iv)
agreed to register the shares and the option shares for sale under the Act.
Pursuant to the Redwood Agreement, in May 1996, Mr. Tucker was elected as a
director of the Company and in October 1996, a registration statement covering
the shares and the option shares was declared effective under the Act. Mr.
Tucker continues to serve currently as a director of the Company. If Mr. Tucker
is not available to serve, Redwood has the right to designate one of its other
partners as a nominee for election as a director. Each of Messrs. Cole and
O'Shaughnessy have agreed to vote their shares of the Company's Common Stock to
elect and continue Redwood's nominee in office for such three year period.

Compliance with Section 16(a) of Securities Exchange Act of 1934

Section 16(a) of Securities Exchange Act of 1934 requires the Company
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than 10 percent owners are required by certain SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.

Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during Fiscal 1999, filing requirements
applicable to its officers, directors and 10% stockholders of the Common Stock
were complied with, except that Mr. Golden, former Chief Financial Officer,
failed to timely file a Form 3 report in March 1998 with respect to options to
purchase 125,000 shares of the Company stock, and Ms. Sorell, Vice President and
General Counsel of the Company, failed to timely file a Form 3 report with
respect to options to purchase 30,000 shares of Common Stock in December 1998.

Item 11. Executive Compensation

The following table sets forth all compensation paid or accrued by the
Company for the Fiscal 1999, 1998 and 1997, to or for the Chief Executive
Officer and for the other persons that served as executive officers of the
Company during Fiscal 1999 whose salaries exceeded $100,000 (collectively, the
"Named Executives"):

Summary Compensation Table

Long-Term
Annual Compensation Compensation Awards
------------------------------------------------------------------------------------
Securities
Name and Principal Fiscal Other Annual Underlying
Position Year Salary Bonus(1) Compensation(2) Options (3)
-------- ---- ------ -------- --------------- -----------

Neil Cole, Chairman, President 1999 $ 445,833 -- -- 1,506,124(4)
and Chief Executive Officer 1998 395,833 $ 308,909(5) $ 5,000 400,000
1997 346,000 6,800 2,500 10,000

Lawrence O'Shaughnessy, 1999 308,333 -- -- 370,125(6)
Executive Vice President and 1998 291,667 92,672(5) $ 5,000 100,000
Chief Operating Officer 1997 246,000 2,000 2,500 10,000

Frank Marcinowski, Vice 1999 62,500 -- -- 30,000
President and Chief Financial
Officer

Deborah K. Sorell, Vice 1999 24,167 -- -- 30,000
President and General Counsel

David Golden, Former Vice 1999 206,250 -- -- 125,000
President and Chief Financial
Officer(7)

- ----------
(1) Represents bonuses accrued under employment agreements.

(2) Represents amounts earned as director's fees.

(3) On December 11, 1998, certain options were repriced to $3.50. See the
Option Grants in Fiscal 1999 year on the following page and Note 7 to the
Financial Statements.

(4) 446,124 options of Candie's Common Stock were granted to the named
executive for compensation for services provided to New Retail Concepts,
Inc. prior to the merger with the Company. Also includes 10,000 options to
purchase shares earned as directors fees.

(5) Based on the restatement of Fiscal 1998 results of operations $105,500 of
Mr. Cole's bonus and $31,660 of Mr. O'Shaughnessy's bonus reflected above
will be repaid.

(6) 40,125 options of Candie's Common Stock were granted to the named executive
for compensation for services provided to New Retail Concepts, Inc. prior
to the merger with the Company. Also includes 10,000 options to purchase
shares earned as directors fees.

(7) Mr. Golden's employment with the Company was terminated on June 10, 1999.

Option Grants in Fiscal 1999 Year

The following table provides information with respect to individual stock
options granted during Fiscal 1999 to each of the Named Executives and Mr.
Golden:

Individual Grants

Potential Realizable
Shares % of Total Value at Assumed
Underlying Options Granted Annual Rates of Stock
Options To Employees in Exercise Price Expiration Price Appreciation for
Name Granted(1) Fiscal Year (per share) Date Option Term
---- ---------- ----------- ----------- ---- ----------------------------
5% 10%
---------- ----------

Neil Cole 400,000 15.9% $ 3.50(2) 9/11/08 $ 880,460 $2,236,220
650,000 25.8 3.50(2) 10/14/08 1,430,748 3,633,858
10,125 0.4 0.4938 1/13/00 3,144 7,986
10,125 0.4 0.5432 6/20/00 3,459 8,785
10,125 0.4 2.3148 6/30/02 6,475 14,309
162,000 6.4 0.8642 7/07/00 38,680 85,472
253,749 10.1 3.50(2) 3/09/08 558,533 1,415,383
10,000 0.4 3.50 12/11/08 22,012 55,906

Lawrence 100,000 4.0 3.50(2) 9/11/08 220,115 559,055
O'Shaughnessy 200,000 7.9 3.50(2) 10/14/08 440,230 1,118,110
10,125 0.4 2.3148 6/30/02 6,475 14,309
30,000 1.2 3.50(2) 3/09/08 66,036 167,718
10,000 0.4 3.50 12/11/08 22,012 55,906

David Golden 125,000 5.0 3.50(2) 2/5/03 120,873 267,098

Frank 30,000 1.2 3.50(2) 12/7/08 66,036 167,718
Marcinowski

Deborah K. 30,000 1.2 3.50(2) 12/8/08 66,036 167,718
Sorell

- ----------
(1) The stock options above were granted under the Company's 1997 Stock Option
Plan (the "97 Plan").

(2) The exercise prices reflect the Company's repricing of options to $3.50 on
December 11, 1998. See Note 7 to the Financial Statements.

The following table sets forth information as of January 31, 1999 with
respect to exercised and unexercised stock options held by the Named Executives.
No options were exercised by any of the Named Executives during Fiscal 1999. On
November 10, 1998, 200,000 options owned by Neil Cole expired.

Aggregated Fiscal Year End Option Values

Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at January 31, 1999 Options at January 31, 1999(1)
--------------------------------------- ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------

Neil Cole 2,482,375 253,750 $2,222,102 $ -0-

Lawrence 550,091 163,334 530,186 -0-
O'Shaughnessy

David Golden 75,000 50,000 -0- -0-

Frank Marcinowski -0- 30,000 -0- -0-

Deborah K. Sorell 10,000 20,000 -0- -0-

- ----------
(1) An option is "in-the-money" if the year end closing market price per share
of the Company's Common Stock exceeds the exercise price of such options.
The closing market price on January 29, 1999 was $3.4375.

Employment Contracts and Termination and Change-in-Control Arrangements

The Company has entered into an employment agreement with Neil Cole for a
term expiring on February 28, 2000 at an annual base salary of $400,000 for the
12 months ended February 28, 1998, $450,000 for the 12 months ending February
28, 1999 and $500,000 for the 12 months ending February 28, 2000, subject to
annual increases at the discretion of the Company's Board of Directors. Pursuant
to the amended employment agreement, Mr. Cole serves as President and Chief
Executive Officer of the Company devoting a majority of his business time to the
Company and the remainder of his business time to other business activities.
Under the agreement, Mr. Cole (i) is entitled to receive a portion of an annual
bonus pool equal to 5% of the Company's annual pre-tax profits, if any, as
determined by the Company's Board of Directors; and (ii)_is entitled to
customary benefits, including participation in management incentive and benefit
plans, reimbursement for automobile expenses, reasonable travel and
entertainment expenses and a life insurance policy in the amount of $1,000,000.
Mr. Cole is also entitled to receive any additional bonuses as the Board of
Directors may determine. If Mr. Cole terminates his employment with the Company
for "good reason" (as defined in the amended agreement) or the Company
terminates Mr. Cole's employment without "cause" (as defined in the amended
agreement), including by reason of a "change-in-control" of the Company (as
defined in the employment agreement), the Company is obligated to pay Mr. Cole
his full salary (at the annual base salary rate then in effect) through the date
of termination plus full base salary for one year or the balance of the term of
the agreement, whichever is greater.

The Company has entered into an amended employment agreement with Mr.
O'Shaughnessy for a term expiring on March 31, 2000 at an annual base salary of
$300,000 for the 12 months ended March 31, 1998 and $350,000 thereafter, subject
to annual increases at the discretion of the Company's Board of Directors.
Pursuant

to the agreement, Mr. O'Shaughnessy serves as Executive Vice-President of the
Company, devoting a majority of his business time to the Company and the
remainder of his business time to other business activities. Under the amended
agreement, Mr. O'Shaughnessy (i) is entitled to receive an annual bonus equal to
1.5% of the Company's annual pre-tax profits, if any; and (ii)_is entitled to
customary benefits, including participation in management incentive and benefit
plans, reimbursement for automobile expenses, reasonable travel and
entertainment expenses and a life insurance policy in an amount equal to his
annual base salary.

The Company had entered into an employment agreement, effective March 1,
1998 with David Golden which provides for his employment as Senior Vice
President-Chief Financial Officer at an annual salary of $225,000 for the twelve
months ending March 1, 1999 and $250,000 for the twelve months ending March 1,
2000. Under the agreement, Mr. Golden is entitled to receive an annual bonus
equal to 0.5% of the Company's annual pre-tax profits, if any, and is entitled
to customary benefits including participation in management incentive and
benefit plans, and reimbursement for automobile expenses, and reasonable travel
and entertainment expenses. In addition, Mr. Golden was granted options to
purchase an aggregate of 125,000 shares of the Company's Common Stock at $5.00,
which options vested with respect to one-fifth of the aggregate number on the
date of grant and thereafter will vest with respect to an additional two fifths
of the aggregate number on the first anniversary of the date of grant and an
additional one fifth of the aggregate number upon each anniversary of the date
of grant until March 1, 2001. Under the agreement, if Mr. Golden terminated his
employment with the Company for "good reason" (as defined in the agreement) or
the Company terminated Mr. Golden's employment without "cause" (as defined in
the agreement) the Company is obligated to pay Mr. Golden (i) his full salary
(at the annual base salary rate then in effect) through the date of termination
and the share of his bonus for such year pro rated for that year through the
date of termination; (ii) any accrued vacation amounts through the date of
termination and (iii) a severance payment (based upon the annual base salary
rate then in effect) for the unexpired portion of the two year term, but in no
event less than six months, and all unvested options shall be accelerated and
shall vest upon the date of termination. In the event that Mr. Golden terminated
his employment with the Company by reason of a change of control of the Company,
Mr. Golden was entitled to receive the payments specified in items (i) and (ii)
in the preceding sentence and an amount equal to twelve months of Mr. Golden's
base salary (at the annual base salary rate in effect) and all unvested options
shall be accelerated and shall vest upon the date of termination. Mr. Golden's
employment with the Company was terminated on June 10, 1999.

The Company has entered into an employment arrangement with Frank
Marcinowski at an annual base salary of $140,000. Mr. Marcinowski is entitled to
receive a bonus at the discretion of the Board. Mr. Marcinowski is also entitled
to customary benefits, including participation in management incentive and
benefit plans, reimbursement for automobile expenses and a life insurance policy
in an amount equal to his annual base salary.

The Company has entered into an employment arrangement with Deborah K.
Sorell for a term expiring on January 31, 2000 at an annual base salary of
$145,000 for the period ended January 31, 2000, and $160,000 for the period
ended January 31, 2001. Ms. Sorell is entitled to receive a bonus in the amount
of $25,000 for each of the two years that she is employed. Ms. Sorell is also
entitled to customary benefits, including participation in management incentive
and benefit plans, reimbursement for automobile expenses, reasonable travel and
entertainment expenses and a life insurance policy in an amount equal to her
annual base salary. If Ms. Sorell terminates her employment with the Company for
"good reason" (as defined in the agreement) or the Company terminates Ms.
Sorell's employment without "cause" (as defined in the agreement), the Company
is obligated to pay Ms. Sorell through the term, but in no event for a period
less than six months. In the event of a "change in control" (as defined in the
agreement), the Company shall pay Ms. Sorell through the term, plus an amount to
one year base salary in effect at the time of the change.

Compensation of Directors

Each of Messrs. Cole, O'Shaughnessy, Emanuel and Tucker are entitled to
receive $2,500 in cash for each board meeting, and they each received options to
purchase 10,000 shares of Common Stock. Under the Company 1989 Stock Option Plan
(the "1989 Plan"), non-employee directors (other than non-employee directors who
are members of any Stock Option Committee that may be appointed by the Company's
Board of Directors to administer the 1989 Plan) are eligible to be granted
non-qualified stock options and limited stock appreciation rights. No stock
appreciation rights have been granted under the 1989 Plan. Under the Company's
1997 Plan non-employee directors are eligible to be granted non-qualified stock
options.

The Company's Board of Directors or the Stock Option Committee of the 1989
Plan or the 1997 Plan, if one is appointed, has discretion to determine the
number of shares subject to each nonqualified option (subject to the number of
shares available for grant under the 1989 Plan or the 1997 Plan, as applicable),
the exercise price thereof (provided such price is not less than the par value
of the underlying shares of the Company's Common Stock), the term thereof (but
not in excess of 10 years from the date of grant, subject to earlier termination
in certain circumstances), and the manner in which the option becomes
exercisable (amounts, intervals and other conditions). No non-qualified options
were granted to non-employee directors under the 1989 Plan and 20,000
non-qualified options were granted to non- employee directors under the 1997
Plan during Fiscal 1999.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of August 31, 1999,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock; (ii) each of the Named
Executives; (iii) each of the Company's directors; and (iv) all executive
officers and directors as a group:

Amount and
Nature Percentage
Name and Address of of Beneficial of Beneficial
Beneficial Owner(1) Ownership(2) Ownership
- ------------------- ------------ ---------
Neil Cole 3,362,020(3) 16.4%

Claudio Trust dated February 2, 1990 1,886,597 10.5
2925 Mountain Maple Lane
Jackson, WY 83001
1,886,597(4) 10.5
Michael Caruso
1,268,000 7.1
Kennedy Capital Management Inc.
10829 Olive Blvd.
St. Louis, MO 63141

Redwood Shoe Corp. 825,000(5) 4.6
8F, 137 Hua Mei West Street
SEC.1, Taichung, Taiwan, R.O.C.

Mark Tucker 835,000(6) 4.7

Amount and
Nature Percentage
Name and Address of of Beneficial of Beneficial
Beneficial Owner(1) Ownership(2) Ownership
- ------------------- ------------ ---------
Lawrence O'Shaughnessy 769,908(7) 4.2%

David Golden 75,000(8) *

Barry Emanuel 40,000(9) *

Frank Marcinowski 20,000(10) *

Deborah Sorell 10,000(11) *

All executive officers and directors as a 5,036,928(3) 23.8
group (six persons) (6)(7)(9)(10)(11)

- ----------
* Less than 1%

(1) Unless otherwise indicated, each beneficial owner has an address at 2975
Westchester Avenue, Purchase, New York 10577.

(2) A person is deemed to have beneficial ownership of securities that can be
acquired by such person within 60 days of August 31, 1999 upon exercise of
warrants or options. Consequently, each beneficial owner's percentage
ownership is determined by assuming that warrants or options held by such
person (but not those held by any other person) and which are exercisable
within 60 days from August 31, 1999 have been exercised. Unless otherwise
noted, the Company believes that all persons referred to in the table have
sole voting and investment power with respect to all shares of Common Stock
reflected as beneficially owned by them.

(3) Includes 2,566,958 shares of Common Stock issuable upon exercise of options
owned by Neil Cole. Also includes 72,978 shares held by a charitable
foundation, of which Mr. Cole and his wife are co-trustees. Mr. Cole
disclaims beneficial ownership of the shares held by such charitable
foundation.

(4) Represents shares held by Claudio Trust dated February 2, 1990 of which Mr.
Caruso is the trustee.

(5) Represents shares of Common Stock, which shares were issued pursuant to an
agreement between the Company and Redwood pertaining to the settlement of
certain indebtedness of the Company to Redwood. Mr. Tucker is affiliated
with Redwood.

(6) Includes 10,000 shares of Common Stock issuable upon exercise of options,
and 825,000 shares held by Redwood Shoe Corp. with which Mr. Tucker is
affiliated.

(7) Includes 626,758 shares of Common Stock issuable upon exercise of options.
Also includes 51,566 shares of Common Stock owned by Mr. O'Shaughnessy's
minor children.

(8) Represents shares of Common Stock issuable upon exercise of options. Mr.
Golden's employment with the Company terminated on June 10, 1999.

(9) Includes 35,000 shares of Common Stock issuable upon exercise of options.

(10) Represents shares of Common Stock issuable upon exercise of options.

(11) Represents shares of Common Stock issuable upon exercise of options.

Item 13. Certain Relationships and Related Transactions

In 1996, the Company entered into an agreement with Redwood to satisfy in
full certain trade payables amounting to $1,680,000. Under the terms of the
agreement, the Company issued Redwood 1,050,000 shares of Common Stock and an
option to purchase 75,000 shares of Common Stock at an exercise price of $1.75
and made a cash payment to Redwood of $50,000. For Fiscal 1999, Redwood, as
buying agent for the Company, initiated the manufacture of approximately 80.1%,
of the Company's total footwear purchases. At August 31, 1999, the Company had
placed $6,429,000 of open purchase commitments with Redwood. In Fiscal 1999 and
Fiscal 1998, the Company purchased approximately $68 million and $48 million,
respectively of footwear products through Redwood. At January 31, 1999 and 1998,
the payable to Redwood totaled approximately $943,000 and $868,000,
respectively.

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 Amendment No 1 dated December 4, 1998 to Current
Report on Form 8-K dated September 24, 1998 with respect to item 7 -
Financial Statements of Michael Caruso & Co., Inc.

Amendment No 1 dated January 12, 1999 to Current Report on Form 8-K
dated August 18, 1998 with respect to Item 7 - Exhibits (Consent of
Grant Thornton LLP).

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: September 21, 1999

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
- ------------------ ------------------------ ----

Chairman of the Board, President and September 21, 1999
/s/ Neil Cole Chief Executive Officer
- ----------------------------------
Neil Cole

Executive Vice President, Chief September 21, 1999
/s/ Lawrence O'Shaughnessy Operating Officer and Director
- ----------------------------------
Lawrence O'Shaughnessy

September 21, 1999
/s/ Barry Emanuel Director
- ----------------------------------
Barry Emanuel

September 21, 1999

/s/ Mark Tucker Director
- ----------------------------------
Mark Tucker

/s/ Frank Marcinowski Chief Financial Officer September 21, 1999
- ----------------------------------
Frank Marcinowski

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 By-Laws (1)

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

10.2 1989 Stock Option Plan of the Company (1)

10.3 1997 Stock Option Plan of the Company (7)

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

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

10.6 Revolving Credit and Security Agreement between the Company and
Nationsbanc Commercial Corporation as lender and as agent (9)

10.8 Factoring Agreement by and among the Company, Bright Star
Footwear, Inc. and Nationsbanc Commercial Corporation

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

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

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

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

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

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

10.15 Employment Agreement between Deborah K. Sorell and the Company

10.16 Employment Agreement between Frank Marcinowski and the Company

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

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

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

10.20 Amendment to lease with respect to the Company's executive
offices

21 Subsidiaries of the Company.

23 Consent of BDO Seidman LLP

27 Financial Data Schedules. (for SEC use only)

- ----------
(1) Filed with the Registrant's Registration Statement on Form S-18 (File
33-32277-NY) and incorporated by reference herein.

(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.

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, 1999

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, 1999 and 1998..................F-3

Consolidated Balance Sheets - January 31, 1999 and 1998......................F-4

Consolidated Statements of Operations for the Years ended
January 31, 1999, 1998 and 1997..........................................F-5

Consolidated Statements of Stockholders' Equity
for the Years ended January 31, 1999, 1998 and 1997......................F-6

Consolidated Statements of Cash Flows for the Years ended
January 31, 1999, 1998 and 1997..........................................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, 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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. 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 did not audit the financial statements of
Unzipped Apparel, LLC ("Unzipped"), a fifty percent equity investment. The
condensed financial information of Unzipped is presented in Note 2, to the
financial statements and the Company's equity share of the losses of Unzipped
totaled $545,000 for the year ended January 31, 1999. Unzipped's financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts from Unzipped, is based
solely on the report of the other auditors.

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 and the report of other auditors provide a reasonable
basis for our opinion.

As further described in Note 9 to the financial statements, subsequent to
January 31, 1999, the Company has been named in a consolidated class action
lawsuit. In addition, the Company became the subject of a formal investigation
by the Enforcement Division of the Securities and Exchange Commission.
Management is unable to estimate the effect these matters may have on the
financial statements.

In our opinion, based on our audits and the report of other auditors, 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, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles. The financial statements as of, and for the year ended January 31,
1998, which were previously audited and reported on by another auditor have been
restated herein, as described in Note 16 to the financial statements.

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

New York, New York
September 3, 1999
except for Note 6, which
is September 21, 1999.

F-3

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

January 31,
---------------------------
1999 1998
------- -------
(Restated)

Assets
Current Assets:
Cash .............................................................. $ 598 $ 367
Accounts receivable, net of allowances of
$950 in 1999 and $27 in 1998 ................................. 2,774 1,397
Due from factor and accounts receivable, net of allowances of
$2,579 in 1999 ............................................... 15,138 --
Due from affiliates ............................................... 796 --
Inventories ....................................................... 19,031 17,664
Refundable and prepaid income taxes ............................... 2,623 143
Deferred income taxes ............................................. 2,598 520
Prepaid advertising and other ..................................... 1,182 764
Other current assets .............................................. 476 604
-------- --------
Total Current Assets ...................................................... 45,216 21,459
-------- --------

Property and equipment, at cost:
Furniture, fixtures and equipment ................................. 3,860 1,810
Less: Accumulated depreciation and amortization ................... 1,258 959
-------- --------
2,602 851
-------- --------

Other Assets:
Goodwill, net of accumulated amortization $367 .................... 2,294 269
Other intangibles, net ............................................ 23,885 4,591
Deferred income taxes ............................................. -- 2,423
Investment and equity in joint venture - net ...................... 51 --
Other ............................................................. 552 319
-------- --------
26,782 7,602
-------- --------
Total Assets .............................................................. $ 74,600 $ 29,912
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Revolving notes payable - banks ....................................... $ 16,874 $ --
Due to factor, net .................................................... -- 900
Accounts payable and accrued expenses ................................. 4,416 4,533
Accounts payable - Redwood Shoe ....................................... 943 868
Current portion of long-term liabilities and capital lease obligation . 97 --
-------- --------
Total current liabilities ................................................. 22,330 6,301
-------- --------

Long-term liabilities and capital lease obligation ........................ 271 61
Deferred income taxes ..................................................... 150 --

Stockholders' Equity:
Preferred stock, $.01 par value - shares authorized 5,000;
none issued or outstanding
Common stock, $.001 par value - shares authorized 30,000;
shares issued 18,525 in 1999 and issued and
outstanding 12,425 in 1998 ................................... 18 12
Additional paid-in capital ............................................ 58,819 23,453
Retained earnings (deficit) ........................................... (556) 85
Less:Treasury stock - at cost - 1,313 shares .......................... (6,432) --
-------- --------
Total Stockholders' Equity ................................................ 51,849 23,550
-------- --------
Total Liabilities and Stockholders' Equity ................................ $ 74,600 $ 29,912
======== ========

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,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
(Restated) (Unaudited)

Net revenues ................................................ $ 114,696 $ 89,297 $ 45,005
Cost of goods sold .......................................... 88,427 67,314 35,149
------------------------------------------------
Gross profit ................................................ 26,269 21,983 9,856

Licensing income ............................................ 373 84 --

Selling, general and administrative expenses ................ 25,856 17,178 8,965
------------------------------------------------

Operating income ............................................ 786 4,889 891

Other expenses:
Interest expense - net .............................. 1,005 1,129 756
Equity loss in joint venture ........................ 545 -- --
------------------------------------------------
1,550 1,129 756
------------------------------------------------

(Loss) income before income taxes ........................... (764) 3,760 135

Provision (benefit) for income taxes ........................ (123) 355 (1,010)
------------------------------------------------
Net (loss) income ........................................... $ (641) $ 3,405 $ 1,145
================================================

(Loss) earnings per share:
Basic ......................... $ (.04) $ .30 $ .13
================================================
Diluted ....................... $ (.04) $ .25 $ .11
================================================

Weighted average number of common shares outstanding:
Basic ......................... 15,250 11,375 9,143
================================================
Diluted ....................... 15,250 13,788 10,152
================================================

See accompanying notes to consolidated financial statements.

F-5

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

Additional Retained
Common Stock Paid - In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
-------------------------------------------------------------------------

Balance at January 31, 1996 (unaudited) ............... 8,746 $ 8 $ 10,043 $ (4,465) $ -- $ 5,586
Purchase and retirement of treasury shares ........ (180) -- (310) -- -- (310)
Conversion of trade payables to
common stock, net of expenses .................... 1,050 1 1,563 -- -- 1,564
Exercise of warrants ............................... 174 -- 200 -- -- 200
Issuance of common stock to benefit plan........... 22 -- 50 -- -- 50
Shares reserved in settlement of
litigation and never issued ...................... (178) -- -- -- -- --
Tax benefit from pre-quasi
reorganization carryforward losses ............... -- -- 260 -- -- 260
Stock option compensation .......................... -- -- 113 -- -- 113
Net income ......................................... -- -- -- 1,145 -- 1,145
-------- -------- -------- -------- -------- --------
Balance at January 31, 1997 (unaudited) ............... 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 (restated) ................ 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
======== ======== ======== ======== ======== ========

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,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
(Restated) (Unaudited)

Cash flows (used in) provided by operating activities:
Net (loss) income ................................................ $ (641) $ 3,405 $ 1,145
Items in net (loss) income not affecting cash:
Depreciation and amortization .............................. 1,570 604 459
Stock option compensation .................................. 102 36 113
Equity loss in Joint Venture ............................... 545 -- --
Deferred income taxes ...................................... (811) (598) (1,040)
Changes in operating assets and liabilities:
Accounts receivable ................................ (1,488) (68) (100)
Factoring receivables and payable, net ............. (16,038) 319 (719)
Inventories ........................................ (1,367) (12,413) (1,251)
Prepaid advertising and other ...................... (418) (305) (235)
Refundable and prepaid taxes ....................... (2,480) (65) --
Other assets ....................................... (154) 262 (60)
Accounts payable and accrued expenses .............. (835) 39 2,365
Long-term liabilities .............................. (9) (47) (14)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities .............. (22,024) (8,831) 663
- ---------------------------------------------------------------------------------------------------------------

Cash flows used in investing activities:
Purchases of property and equipment ....................... (1,923) (705) (301)
Investment in joint venture ............................... (500) -- --
Other ..................................................... (156) -- --
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ............................ (2,579) (705) (301)
- ---------------------------------------------------------------------------------------------------------------

Cash flows provided by (used in) financing activities:
Revolving notes payable bank .............................. 16,874 -- --
Proceeds from exercise of stock options and warrants ...... 8,331 9,513 133
Purchase of treasury stock ................................ (371) -- --
Purchase and retirement of treasury stock ................. -- -- (310)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities .............. 24,834 9,513 (177)
- ---------------------------------------------------------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents ............. 231 (23) 185

Cash and cash equivalents, beginning of year .............. 367 390 205
- ---------------------------------------------------------------------------------------------------------------

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

Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest....................................... $ 1,013 $ 1,131 $ 756
========================================
Income taxes................................... $ 2,859 $ 89 $ 28
========================================

Supplemental disclosures of non-cash investing and
financing activities:
Common stock issued to a related party........ $ -- $ -- $ 1,680
=======================================
Tax benefit from pre-quasi reorganization
carryforward losses....................... $ -- $ 1,102 $ 260
========================================
Issuance of common stock to benefit plan...... $ 78 $ 56 $ 50
========================================
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, 1999
and 1998 are Audited (dollars are in thousands,
except per share data)

The Company

The history of the "CANDIE'S" brand spans over 21 years and has become
synonymous with young, casual, but fashionable, footwear marketed by innovative
advertising and celebrity spokespersons. Candie's, Inc. and its subsidiaries
(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 and BONGO trademarks for distribution within the United States to
department, specialty, chain and four company-owned stores and to specialty
stores internationally. The Company also markets and distributes, children's
footwear under the CANDIE'S and BONGO trademarks, and arranges for the
manufacture of footwear products for mass market and discount retailers under
the private label brand of the retailer or other trademarks owned or licensed by
the Company. In addition, the Company distributes a variety of men's workboots,
hiking boots, winter boots, and outdoor casual shoes designed and marketed by
the Company's wholly-owned subsidiary, Bright Star Footwear, Inc. ("Bright
Star"), under private labels and the ASPEN brand name, which is licensed by the
Company from a third party.

The Company also markets and distributes moderately-priced handbags under the
CANDIE'S and BONGO trademarks to department, specialty, and chain stores in the
United States and internationally to specialty stores. Through Unzipped Apparel,
LLC ("Unzipped"), the Company's joint venture with Sweet Sportswear LLC
("Sweet"), the Company also markets and distributes jeans wear and apparel under
the BONGO label to department, specialty, and chain stores in the United States.

The Company has capitalized on the strength of its footwear and jeanswear brands
by entering into licensing agreements under both the CANDIE'S and BONGO
trademarks.

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.

Certain amounts in the financial statements for prior years have been
reclassified to conform with the current year's presentation.

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.

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.

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, which are not material, are amortized by the
straight-line method over the term of the related lease or estimated useful
life, whichever is less.

F-8

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, 1999.

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 $5,830 and $5,668, net
of accumulated amortization of $1,662 and $1,372, at January 31, 1999 and 1998,
respectively, as determined by its fair value relative to other assets and
liabilities at February 28, 1993, the date of the quasi reorganization. In
connection with the quasi reorganization, the Company's assets, liabilities and
capital accounts were adjusted to eliminate the stockholders' deficiency.

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.

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, 1999
and 1998.

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, 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 1999, 1998 and 1997 were immaterial.

Earnings Per Share

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

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,

F-9

generally three to five 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, 1999, 1998
and 1997 amounted to $6,423, $3,461, and $664, 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.

Impact of Recently Issued Accounting Pronouncements

The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" ("Statement 130") in Fiscal 1999. Statement 130
established standards for the reporting and display of comprehensive income and
its components in a full set of comparative general-purpose financial
statements. However, the adoption of this Statement had no impact on the
Company's financial statements. The statement became effective for the Company
as of December 31, 1998. Statement 130 requires foreign currency translation
adjustments to be included in other comprehensive income.

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.

In March 1998, AcSEC issued Statement of Position 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
requires capitalization of certain costs to develop or obtain internal use
software. SOP 98-1 is required to be adopted for years beginning after December
15, 1998. This statement is not expected to materially effect the Company.

In April 1998, the AcSEC issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"), which requires the costs of start-up
activities to be expensed as incurred. SOP 98-5 is required to be adopted for
years beginning after December 15, 1998. This statement s not expected to
materially effect the Company.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities" ("SFAS 133") which the Company expects to adopt in
fiscal 2001. The new Statement requires all derivatives to be recorded in the
balance sheet at fair value and establishes special accounting for three
different types of hedges. The Company, based on its current hedging activities,
does not expect the adoption of SFAS 133 to have a material effect on the
earnings and financial position of the Company.

Unaudited Financial Statements

The financial statements for the year ended January 31, 1997 were previously
audited by a prior accounting firm. Such financial statements have now been
presented on an unaudited basis and have been prepared in accordance with
generally accepted accounting principles. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.

2. Investment in Joint Venture

On October 7, 1998, the Company formed Unzipped with its joint venture partner
Sweet, the purpose of which is to market and distribute apparel under the
CANDIE'S and BONGO labels. Candie's and Sweet each have a fifty percent interest
in Unzipped. Pursuant to the terms of the joint venture, Candie's licenses the
CANDIE'S and BONGO trademarks to Unzipped for use in the design, manufacture and
sale of certain designated apparel products.

As of January 31, 1999, the Company's investment in the unconsolidated affiliate
equaled the Company's proportionate share of the underlying equity of this
affiliate. As of January 31, 1999, approximately $545 of the Company's retained
deficit represented the Company's proportionate share of the Unzipped loss.
Condensed financial information for Unzipped is as follows:

F-10

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

Current assets, primarily inventory $ 3,464
Total assets 3,568
Liabilities 3,466
Members' equity 102

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

Net sales $ 2,590
Operating loss (1,080)
Net loss (1,090)

In addition, the Company has guaranteed Unzipped's outstanding obligations to
its lender, Congress Financial Corporation, limited to the principal amount of
$500 plus interest and any related costs of collection.

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.

The Company has agreed with Sweet to each make a $500 capital contribution to
Unzipped by October 31, 1999.

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 1999 1998
--------------------------------------------------------------------------

Trademarks 20 $ 22,854 $ 5,668
Non-compete agreement 15 2,275 2,275
Licenses 4 3,047 --
--------------------------------------------------------------------------
28,176 7,943

Less accumulated amortization (4,291) (3,352)
--------------------------------------------------------------------------
$ 23,885 $ 4,591
==========================================================================

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"). Under
the terms of 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 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 the Company's common stock (each
share being valued at $7.75), plus $100 in cash. On March 21, 1999, 547,722
additional shares of the Company'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.

F-11

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 consideration 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 shareholder of the Company.
NRC's principal shareholder was also the Company's President and Chief Executive
Officer.

Effective August 18, 1998 ("Effective Date"), the Company completed its
previously announced merger with NRC. Each issued and outstanding share of NRC
common stock $.01 par value (the "NRC Common Stock"), and each issued and
outstanding option and warrant to purchase one share of NRC Common Stock, prior
to the Effective Date, were 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 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. The options and warrants owned by NRC 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 total 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 $5,214.
Deferred tax liabilities, resulting from this transaction, totaled approximately
$2,110, 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.

5. Due From/to Factor and Accounts Receivable

In fiscal 1999, the Company entered into a new factoring agreement whereby the
Company has the option to sell any or all of its accounts receivable,
principally without recourse, subject to maximum credit limits established by
the lender for individual accounts. Receivables assigned but not sold to the
lender or in excess of such maximum credit limits are subject to recourse.

Included in amounts Due from Factor at January 31, 1999 are accounts receivable
subject to recourse totaling $ 8,824.

F-12

Under a prior factoring agreement Due To Factor at January 31, 1998 is comprised
of assigned accounts receivable of $17,415, outstanding advances of $16,584, and
an allowance for chargebacks of $1,731.

The prior factoring agreement permitted the netting of advances from the amounts
due from factor and the amounts were netted for reporting purposes. In 1999, the
Company entered into both a factoring agreement and a financing agreement with
the same banks. These agreements do not permit the netting of the amounts due
from factor and debt payable to the banks.

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. No individual customer accounted for more than 10%
of the Company's total net revenues.

6. Financing Agreements

At January 31, 1999, the Company had $1,174 of outstanding letters of credit. At
January 31, 1999, the Company's letters of credit availability are formula based
which takes into account borrowings under the Facility, as described below.

On May 27, 1998, the Company entered into a three year $35 million revolving
credit facility (the "Facility"). Under certain conditions, including the
addition of a second lender, the Facility may increase to a maximum of $50
million. On August 4, 1998, BankBoston, N.A. entered into a co-lending
arrangement and became a participant in the Facility with Bank of America
Commercial Corporation.

Effective January 31, 1999 the Facility was amended and borrowings under the
Facility will bear interest at .25% below the prime rate (7.75% at January 31,
1999).

Prior to January 31, 1999, borrowings under the Facility, which totaled $16,874
at January 31, 1999, bore interest at 1.50% below the prime rate (7.75% at
January 31, 1999) and the Company also had the option to borrow at either LIBOR
plus 1.25% or the banker's acceptance rate plus 1%. These rates were fixed and
subject to an increase or decrease based on certain conditions beginning in
November 1998. The Company pays a commitment fee of 1/4% on the unused portion
of the Facility.

Borrowings under the Facility are formula based and available up to the maximum
amount of the Facility. The Facility also contains certain financial covenants
including, minimum tangible net worth, certain specified ratios and other
limitations, as defined therein. The Company has granted the lenders a security
interest in substantially all of its assets.

The Company is in default of certain covenants of its Facility and the lenders
have indicated their desire to terminate the Facility arrangement. The lenders
have been extending the due date of the Facility by issuing periodic forbearance
agreements to the Company. The current forbearance agreement is through October
30, 1999. The Company has received a commitment from a new institution to
refinance the Facility and expects to consummate the new financing shortly.

7. Stockholders' Equity

Warrants

The following schedule represents warrants outstanding at January 31, 1999, 1998
and 1997:

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

-------------------------------------------------------------------------------

Warrants outstanding at January 31, 1996 ...... 991,212 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) ......................... (174,009) -- -- -- -- --
Adjustment of underwriter's warrants ........... 40,329 -- -- -- -- --
-------------------------------------------------------------------------------
Warrants outstanding at January 31, 1997 ...... 857,532 54,397 1,475,000 1,475,000 700,000 75,000
Warrants exercised (1) ......................... (650,461) -- (1,431,100) (21,000) -- (50,000)
Warrants expired or cancelled .................. -- (54,397) (43,900) -- -- (25,000)
-------------------------------------------------------------------------------
Warrants outstanding at January 31, 1998 ...... 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, 1999 ...... -- -- -- -- -- --
===============================================================================

(1) Underwriter's warrants consist of 69,024 units at an exercise price of

F-13

$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 and
174,009 were exercised during the years ended January 31, 1998 and 1997,
respectively.

(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. (See Note 4)

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,
--------------------------------------------
1999 1998 1997
--------------------------------------------

Expected Volatility.......... .618-.940 .759-.812 .770-.904
Expected Dividend Yield...... 0% 0% 0%
Expected Life (Term)......... 3-7 years 1-3 years 2-5 years
Risk-Free Interest Rate...... 3.60-9.56% 5.25-6.61% 5.70%-6.25%

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,
---------------------------------
1999 1998 1997
---------------------------------
Pro forma net (loss) income..... (3,410) $ 2,471 $ 923

Pro forma (loss) earnings per share:
Basic....................... (.22) $ .22 $ .10

Diluted..................... (.22) $ .18 $ .10

The weighted-average fair value of options granted (at their grant date) during
the years ended January 31, 1999, 1998 and 1997 was $3.24, $2.20 and $.64,
respectively.

F-14

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 120,300, 126,800 and 149,300 of ISO's as of January 31, 1999, 1998
and 1997, respectively, were outstanding.

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

Additionally, at January 31, 1999, 1998 and 1997, NQSO's covering 2,763,000,
3,298,500, and 4,066,311 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.

In connection with the merger with NRC (see Note 4), options to purchase 641,925
shares of Candie's Common Stock were granted to certain executives at exercise
prices ranging from $0.25 to $4.32 per share and expire over periods up to ten
years. The fair values of these options were recorded as cost of the
consideration for the purchase price of NRC.

On January 15, 1998, the Company granted 400,000 NQSO's at an exercise price of
$5.00 per share, to its Chief Executive Officer and simultaneously cancelled
400,000 NQSO's with an exercise price of $5.00 that were to expire February 23,
1998. On March 15, 1995, the Company granted 400,000 NQSO's at an exercise price
of $1.16 per share, to its Chief Executive Officer, in connection with the
renewal of an employment agreement.

On September 4, 1997, the Company granted its Executive Vice President, Chief
Operating Officer 100,000 ISO's at an exercise price of $5.50 per share and
simultaneously cancelled 41,700 NQSO's at an exercise price of $3.00 that were
to expire April 15, 1998. On April 1, 1995, the Company granted 200,000 NQSO's
at an exercise price of $1.16 per share, to its Executive Vice President, Chief
Operating Officer, in connection with an employment agreement.

A summary of the Company's stock option activity, and related information for
the years ended 1999, 1998 and 1997 follows:

Weighted-Average
Shares Exercise Price
-----------------------------------
Outstanding January 31, 1996................ 3,045,611 $ 2.25
Granted..................................... 1,250,000 $ 2.17
Canceled.................................... (80,000) $ 2.63
------------
Outstanding January 31, 1997................ 4,215,611 $ 2.23
Granted..................................... 1,002,500 $ 5.48
Canceled.................................... (517,922) $ 4.55
Exercised................................... (647,889) $ 2.33
------------
Outstanding January 31, 1998................ 4,052,300 $ 2.72
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
------------

At January 31, 1999, 1998 and 1997, exercisable stock options totaled 4,877,475,
3,456,967 and 3,702,611 and had weighted average exercise prices of $2.53, $2.43
and $2.25, 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.

F-15

Options outstanding and exercisable at January 31, 1999 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................. 257,175 1.2 $0.68 257,175 $0.68
$1.15-1.50................. 1,076,500 3.5 $1.29 1,076,500 $1.29
$1.51-2.50................. 1,501,500 2.6 $2.04 1,364,000 $2.04
$2.51-3.50................. 2,855,550 6.9 $3.46 2,011,800 $3.47
$3.51-5.00................. 110,000 6.5 $4.35 70,000 $4.50
$5.01-12.00................ 214,500 3.9 $7.98 98,000 $7.16
- -------------------------------------------------------------------------------- -----------------------------------

6,015,225 4.6 $2.78 4,877,475 $2.53
================================================================================ ===================================

At January 31, 1999, 3,468,000 common shares were reserved under issuance on
exercise of stock options for the 1997 Stock Option Plan.

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.

8. Earnings Per Share

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

January 31,
--------------------------------
1999 1998 1997
--------------------------------

Basic 15,250 11,375 9,143

Effect of assumed conversions of employee stock options
and warrants -- 2,413 1,009
--------------------------------

Denominator for diluted earnings per share 15,250 13,788 10,152
================================

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.

F-16

May 12, 1999, and alleges that the plaintiffs were damaged by reason of the
Company's having issued materially false and misleading financial statements for
Fiscal 1998 and the first three quarters of Fiscal 1999, which caused the
Company's securities to trade at artificially inflated prices. An unfavorable
resolution of this action could have a material adverse effect on the business,
results of operations, financial condition or cash flows of the Company.

On August 4, 1999, the staff of the Securities and Exchange Commission advised
the Company that it had commenced a formal investigation into the Company's
actions in connection with certain accounting issues and transactions.

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 $68 million, $48 million, and $24 million in 1999, 1998, and 1997,
respectively, of footwear products through Redwood. At January 31, 1999, the
Company had approximately $6.5 million of open purchase commitments with
Redwood. At January 31, 1999 and 1998, the payable to Redwood totaled
approximately $943 and $868, respectively.

11. Capital and Operating Leases

Included in property and equipment are assets held under capital lease with an
original cost of $316. At January 31, 1999, future minimum lease payments
consist of the following:

2000................................... $ 132
2001................................... 121
2002................................... 111
------

Total minimum lease payments 364
Less: Amount representing interest (48)
------
Present value of minimum lease payments 316
Less: Current maturities (97)
------
Capital lease obligation, less current maturities $ 219
======

Future net minimum lease payments under noncancelable operating lease agreements
as of January 31, 1999 are as follows:

2000................................... $ 725
2001................................... 534
2002................................... 490
2003................................... 449
2004................................... 300
Thereafter............................. 411
------
Totals................................. $2,909
======

Rent expense was approximately $691, $337 and $276 for the years ended January
31, 1999, 1998 and 1997, 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 $134, $80 and $62 to the Savings Plan for the years ended
January 31, 1999, 1998 and 1997, respectively.

The Company has certain incentive compensation arrangements with each of its
Chief Executive Officer and Chief Operating Officer pursuant to their employment
agreements. The incentive compensation aggregates 6.5% of pre-tax earnings, as
defined.

F-17

13. Income Taxes

At January 31, 1999, the Company had net operating losses of approximately $4.3
million for income tax purposes, which expire in the years 2007 through 2010.
Due to the issuance of common stock on February 23, 1993, an "ownership change,"
as defined in Section 382 of the Internal Revenue Code, occurred. Section 382
restricts the use of the Company's net operating loss carryforwards incurred
prior to the ownership change to $275 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. The Company believes it is more likely than not that
the operations will generate sufficient taxable income to realize such tax
assets.

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

January 31,
-------------------------------
1999 1998 1997
-------------------------------

Current:
Federal ................................................... $ 406 $ 747 $ --
State ..................................................... 282 206 30
------- ------- -------
Total current ............................................. 688 953 30
------- ------- -------

Deferred:
Federal ................................................... (675) (728) (876)
State ..................................................... (136) 130 (164)
------- ------- -------
Total deferred ............................................ (811) (598) (1,040)
------- ------- -------

Total provision (benefit) ................................. $ (123) $ 355 $(1,010)
======= ======= =======

The following summary reconciles income tax provision at the Federal statutory
rate with the actual provision (benefit):

January 31,
-------------------------------
1999 1998 1997
-------------------------------

Income taxes (benefit) at statutory rate .................. $ (260) $ 1,278 $ 46

Non-deductible amortization ............................... 153 122 97
Utilization of net operating losses ....................... -- -- (60)
Change in valuation allowance of deferred tax assets ...... -- (1,347) (1,100)
State provision, net of federal income tax benefit ........ 99 213 20
Adjustment for estimate of prior year taxes ............... (138) 70 --
Other ..................................................... 23 19 (13)
------- ------- -------
Total income tax provision (benefit) ...................... $ (123) $ 355 $(1,010)
======= ======= =======

F-18

The significant components of net deferred tax assets of the Company consist of
the following:

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

Accrued bonus ................................. $ -- $ 117
Compensation expense .......................... 96 57
Alternative minimum taxes ..................... 126 52
Inventory valuation ........................... 643 222
Net operating loss carryforwards .............. 2,158 2,380
Equity loss ................................... 227 --
Accounts and factoring receivable valuation .. 1,475 10
Depreciation .................................. 96 43
Other deferred tax assets ..................... 61 62
------- -------
Total net deferred tax assets ................. 4,882 2,943
Valuation allowance ........................... -- --
------- -------
Total deferred tax assets ..................... 4,882 2,943

Trademarks and licenses ....................... (2,269) --
Other deferred tax liabilities ................ (165) --
------- -------
Total deferred tax liabilities ................ (2,434) --
------- -------
Total net deferred tax assets ................. $ 2,448 $ 2,943
======= =======

14. Segment Information

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.

The Company measures segment profits as earnings before income taxes. The
accounting policies used to determine profitability and total assets of the
branded footwear segment are the same as disclosed in the summary of significant
accounting policies (see Note 1, Summary of Significant Accounting Policies).

15. Subsequent Events

In May 1999, the Company entered into a $3.5 million master lease agreement with
a financial organization. The agreement requires the Company to collateralize
property and equipment of $2.4 million, of which $1.4 million had been
collateralized as of May 1999, with the remaining agreement balance considered
to be an unsecured loan. The agreement's term is for a period of four years.

F-19

16. Restatement

During the course of the audit of the Company's financial statements for the
year ended January 31, 1999, and the re-audit of the financial statements for
the year ended January 31, 1998, the Company became aware of certain required
adjustments primarily in inventory and accounts receivable/due from factor
balances as of January 31, 1998. The financial statements for the year ended
January 31, 1998 have been restated to reflect these adjustments, as summarized
below:

Net income, as previously reported $ 4,536
-------
Adjustments - Increase (Decrease):
Inventory valuation (550)
Revenues (gross profit effect) (1,110)
Receivable reserves (450)
Other 137
Tax effect on these adjustments 842
-------
1,131
-------
Net income, as adjusted $ 3,405
=======

Per share amounts:
Basic:
As previously reported $ .40
Adjustments (.10)
-------
As adjusted $ .30
=======

Diluted:
As previously reported $ .33
Adjustments (.08)

-------
As adjusted $ .25
=======

17. Fourth Quarter Adjustments (Unaudited)

As of January 31, 1998, the Company recorded certain adjustments which reduced
net income by $1,131. These adjustments related to inventory and accounts
receivable/due from factor balance and are explained in Note 16. Most of these
adjustments related to earlier quarters in fiscal 1998.

As of January 31, 1999, the Company recorded certain adjustments which increased
fourth quarter net income by $2,550. These adjustments related to the following:

Increase
(Decrease)
----------
Inventory valuation $ (320)
Inventory reserve (530)
Receivable reserves (1,460)
Customer charge-backs 6,687
Revenues (gross profit effect) 1,245
Increase in royalty expense (650)
Increase in equity in loss of joint venture (263)
Other, net (479)
Tax effect of these adjustments (1,680)
-------
$ 2,550
=======

F-20

In addition to these adjustments, which primarily relate to prior quarters in
fiscal 1999, other adjustments were required to properly reflect certain
transactions in different quarters throughout fiscal 1999. The Company plans to
restate its Form 10-Q filings in the near future to reflect these adjustments.
The adjusted net income amounts, by quarter, are reflected below:

Fiscal 1999 As originally
Quarter reported Adjustments As Adjusted
- ----------- ------------- ----------- -----------

First $ 1,056 (674) $ 382
======= ======= =======

Second $ 3,361 (1,932) $ 1,429
======= ======= =======

Third $ 822 (1,324) $ (502)
======= ======= =======

F-21

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Candies, Inc.
Purchase, New York

The audits referred to in our report dated September 3, 1999 except for Note 6,
which is September 21, 1999, 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 the years ended January 31, 1999 and 1998. 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

September 3, 1999
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, 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 (restated):
Allowance for uncollectible accounts $ 34 $ 183 $ 190 $ 27
======== ======== ======== ======
Allowance for chargebacks $ 350 $ 8,049 $ 6,668 $1,731
======== ======== ======== ======

Year ended January 31, 1997 (unaudited):
Allowance for uncollectible accounts $ 63 $ 68 $ 97 $ 34
======== ======== ======== ======
Allowance for chargebacks $ 353 $ 2,923 $ 2,926 $ 350
======== ======== ======== ======

(a) Uncollectible receivables charged against the allowance provided.

S-2