<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996
REGISTRATION NO. 333-4440
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
EMPIRE OF CAROLINA, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 3944 13-2999480
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
(407) 498-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
STEVEN GELLER
CHIEF EXECUTIVE OFFICER
EMPIRE OF CAROLINA, INC.
5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
(407) 498-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
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<S> <C> <C>
MICHAEL M. FROY KENNETH G. KOLMIN ALAN G. BERKSHIRE
SONNENSCHEIN NATH & ROSENTHAL SCHWARTZ & FREEMAN KIRKLAND & ELLIS
8000 SEARS TOWER 401 N. MICHIGAN AVENUE 200 E. RANDOLPH DRIVE
CHICAGO, IL 60606 CHICAGO, IL 60611 CHICAGO, IL 60601
(312) 876-8000 (312) 222-0800 (312) 861-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is to be a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
registration statement of the earlier effective registration statement for the
same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2)(3) FEE(3)
<S> <C> <C> <C> <C>
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Common Stock, $.10 par value..... 4,186,734 shares $12.00 $53,938,441 $18,600
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</TABLE>
(1) Includes 546,095 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) and (c) under the Securities Act of 1933, as
amended.
(3) Based on a maximum offering price per share of $13.00 (as set forth in the
initial filing of this Registration Statement) with respect to 3,697,633
shares and $12.00 (the average of the high and low prices reported for the
Common Stock on the American Stock Exchange on May 23, 1996) with respect to
489,101 shares. Of the $18,600 registration fee, $16,576 was paid upon the
initial filing of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EMPIRE OF CAROLINA, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
3. Summary Information; Risk Factors; Ratio
of Earnings to Fixed Charges.............. Outside Front Cover Page; Prospectus
Summary; Risk Factors
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Not applicable
6. Dilution.................................. Not applicable
7. Selling Security Holders.................. Principal and Selling Stockholders
8. Plan of Distribution...................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interest of Named Experts and Counsel..... Not applicable
11. Information with Respect to the
Registrant................................ Prospectus Summary; Risk Factors; Recent
Events; Common Stock Price Range and
Dividend Policy; Use of Proceeds;
Capitalization; Selected Consolidated
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal and Selling
Stockholders; Description of Capital
Stock; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 29, 1996
PROSPECTUS
3,640,639 SHARES
[EMPIRE LOGO]
COMMON STOCK
Of the 3,640,639 shares of Common Stock offered hereby, 1,500,000 shares
are being sold by Empire of Carolina, Inc. and 2,140,639 shares are being sold
by the Selling Stockholders. See "Principal and Selling Stockholders." The
Company will not receive any proceeds from the sale of shares by the Selling
Stockholders.
The Common Stock is traded on the American Stock Exchange under the symbol
"EMP." On May 28, 1996, the closing sale price for the Common Stock on the
American Stock Exchange was $12.13 per share. See "Common Stock Price Range and
Dividend Policy."
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(3)................ $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company and a Selling Stockholder
estimated at $650,000.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an additional 546,095 shares
of Common Stock in the aggregate solely to cover over-allotments, if any.
See "Underwriting." If all such shares are purchased, the total Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ , and $ ,
respectively.
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by them and subject to their right to reject
orders in whole or in part. It is expected that delivery of the certificates for
the shares of Common Stock will be made on or about , 1996.
WILLIAM BLAIR & COMPANY GERARD KLAUER MATTISON & CO., LLC
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
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GRAPHIC APPENDIX
The inside front cover of the Prospectus is comprised of a three-page
gatefold containing a series of multi-colored pictures of certain toys and
decorative holiday products manufactured by the Company. The pictures depict: a
Grand Champions(R) collectible horse, a Buddy L(R) truck, a Big Wheel(R) ride-
on, Power Drivers(R) battery-powered ride-on and plastic decorative holiday
products. The pictures on the two inside gatefold pages depict a Power
Drivers(R) battery-powered ride-on, a Snow Works(TM) plastic sled, a Grand
Champions(R) collectible horse, Buddy L(R) vehicles, plastic games and holiday
products. Across the top of the inside front cover page are the words
"EMPIRE(R)...POWER DRIVERS(TM)..." and across the top of the two inside gatefold
pages are the words "EMPIRE(R)...POWER DRIVERS(R)...SNOW WORKS(TM)...GRAND
CHAMPIONS(R)... BIG WHEEL(R)...BUDDY L(R)..."
Across the bottom of the inside front cover page are the following legends:
The Company intends to furnish its stockholders with annual reports
containing audited financial statements with a report thereon by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The inside back cover of the Prospectus contains a series of multi-colored
pictures of the Company's Tarboro, North Carolina manufacturing and warehouse
facility. An aerial overview of the Tarboro facility is depicted, with four
pictures of certain equipment and the control panels of certain machines used in
the Company's operations overlaying portions of the aerial overview picture of
the Tarboro facility. Across the top of the inside back cover are the words
"CROCODILE MILE(R)...HOLIDAY...MANUFACTURING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."
THE COMPANY
Empire of Carolina, Inc. designs, manufactures and markets a broad variety
of toys and plastic decorative holiday products. The Company manages its
business through four strategic business units ("SBUs") which are accountable
for specific product categories: (i) ride-on products including Big Wheel(R) and
Power Driver(R) brands; (ii) outdoor activities and games such as Snow Works(TM)
winter sleds and Water Works(TM) water slides and pools (including Crocodile
Mile(R) water slides); (iii) girls and boys toys featuring Buddy L(R) cars,
trucks and other vehicles and Grand Champions(R) collectible horses; and (iv)
holiday products featuring plastic decorative holiday display items, including
the recently introduced Light Toppers(TM) outdoor lighting add-ons. The Company
believes that it is the market share leader in non-powered ride-ons and in
plastic water slides, winter sleds, collectible horses and outdoor decorative
holiday products.
Empire has been a toy manufacturer for approximately 40 years. The
Company's business experienced significant change in 1993 when substantial
non-toy operations were sold, and since mid-1994 the Company has undergone a
change of control and management, established a new business strategy, and
effected two acquisitions which added established core toy product lines to the
Company's business. Following the divestitures of non-toy businesses, Empire's
operations were focused on its toy business, including the Big Wheel(R)
non-powered ride-on product line which has been sold throughout the United
States since 1970, and its plastic decorative holiday products business. In the
third quarter of 1994, current principal stockholders of the Company, led by
Steven Geller, the current Chairman and Chief Executive Officer of the Company,
acquired control of Empire as a base from which to build a diversified toy and
plastic products manufacturing company. In October 1994, Empire acquired
Marchon, Inc., a toy designer, marketer and manufacturer founded and managed by
Marvin Smollar, the current President and Chief Operating Officer of the
Company. Marchon's core toy products included Grand Champions(R) collectible
horses and Crocodile Mile(R) water slides. In July 1995, Empire acquired the toy
business and certain related liabilities of Buddy L Inc., one of the oldest toy
brands in the United States whose core toy products included plastic and metal
toy cars, trucks and other vehicles and battery-operated ride-ons. As a result
of these recent transactions, the Company believes it is well-positioned to
become a leading U.S. toy manufacturer. The Company's net sales were $41.4
million, $58.0 million and $153.7 million, respectively, for the years ended
December 31, 1993, 1994 and 1995, and net sales from toy products contributed
51%, 57% and 79%, respectively, of the Company's consolidated net sales.
The Company's goal is to become a leading supplier of toy and plastic
decorative holiday products to retailers throughout the world. The Company
believes it has distinct competitive advantages including: (i) a team of
managers that, with one exception, has joined the Company since July 1994, and
has extensive experience in the toy industry; (ii) a balanced line of stable
core products with long histories of consumer appeal; (iii) manufacturing and
sourcing flexibility through use of the Company's 1.2 million square foot
facility in Tarboro, North Carolina and foreign sourcing expertise; and (iv) its
decorative holiday product line, which has broad consumer appeal, has provided
the Company with a consistent source of revenue while reducing the Company's
dependence on major toy retailers and can be manufactured during off-peak
periods throughout the year in anticipation of seasonal demand.
According to the Toy Manufacturers' Association, total domestic shipments
of toys, excluding video games, were approximately $13.4 billion in 1995.
Management believes changing industry dynamics favor larger toy companies that
can offer a broad selection of popular toy products, supported by consistent,
high quality marketing programs to an increasingly concentrated distribution
channel. Management also believes that there is significant potential for the
Company to leverage its existing relationships with major retailers because many
of such retailers are seeking to expand their relationships with suppliers like
the Company in order to avoid becoming overly dependent on products from the
largest domestic toy companies and to help
3
<PAGE> 6
assure that reliable supplies of quality products may be obtained at competitive
prices. The following are the major elements of the Company's growth strategy:
- Focus on core brands with long histories of broad consumer appeal, such as
the Big Wheel(R) and Buddy L(R) product lines, which provide the Company
with a base from which to build a diversified toy and plastic products
manufacturing company.
- Leverage existing manufacturing capabilities by upgrading the equipment,
increasing the capacity and integrating all of the domestic manufacturing
operations of the Buddy L product line at its manufacturing facility in
Tarboro, North Carolina.
- Offer value to toy retailers and consumers by utilizing the Company's
diverse manufacturing capabilities and stable core product lines to offer
high quality products and customer support at prices which enable the
retailer to realize attractive gross margins.
- Expand international presence, especially in Western Europe and Japan, which
present significant growth opportunities for the Company.
- Acquire new product lines and deepen and expand its core product lines with
new licensing arrangements.
- Extend core product lines through product innovation resulting from
increased investment in research and development.
- Develop additional countercyclical product lines to, in part, counterbalance
the seasonality generally present in the toy industry and take advantage of
additional manufacturing capacity available during off-peak production
periods.
THE OFFERING
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<S> <C>
Common Stock Offered by the Company................. 1,500,000 shares
Common Stock Offered by the Selling Stockholders
(1)............................................... 2,140,639 shares
Common Stock to be Outstanding Immediately After the
Offering (2)...................................... 7,149,200 shares
Use of Proceeds to the Company...................... To prepay senior subordinated
notes, repay bank debt and for
general corporate purposes.
See "Use of Proceeds."
American Stock Exchange Symbol...................... EMP
</TABLE>
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(1) See "Principal and Selling Stockholders."
(2) Includes 444,000 shares of Common Stock to be issued upon the exercise by
certain Selling Stockholders of stock options and warrants concurrently with
this Offering, but does not include (i) 1,397,500 shares issuable upon the
exercise of stock options outstanding on the date of this Prospectus, (ii)
1,875,000 shares issuable upon the exercise of warrants outstanding on the
date of this Prospectus, of which warrants for the purchase of 758,000
shares will lapse upon the application of the net proceeds to the Company
from this Offering as described in "Use of Proceeds," (iii) 442,264 shares
issuable upon the conversion of the Series A cumulative convertible
preferred stock upon the affirmative vote of a majority of the shares
represented at the Company's 1996 Annual Meeting of Stockholders, (iv)
2,000,000 shares issuable upon the conversion of the convertible
subordinated debentures, (v) up to 454,000 shares which may be issuable as a
contingent payment obligation in connection with the Buddy L acquisition in
certain circumstances and (vi) 592,560 shares available for future grants
under the Company's 1994 Employee Stock Option Plan. See "Use of Proceeds"
and "Certain Transactions."
Empire of Carolina, Inc. was incorporated in Delaware in 1979. Unless the
context indicates otherwise, all references to "Empire" or the "Company" refer
to Empire of Carolina, Inc. and its subsidiaries. The Company's principal
executive offices are located at 5150 Linton Boulevard, Delray Beach, Florida
33484, and its telephone number is (407) 498-4000.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ------------------
1991(1)(2) 1992(1)(2) 1993(2) 1994(3) 1995(4) 1995 1996
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STATEMENT OF OPERATIONS DATA:
Net sales...................... $ 41,253 $ 42,882 $41,354 $57,964 $153,744 $19,088 $22,186
Gross profit................... 13,936 13,439 11,621 17,407 41,839 6,151 5,969
Nonrecurring restructuring and
relocation charges........... -- -- -- -- 8,673 150 --
Operating income (loss)........ 983 1,267 (3,465) 965 (1,894) (803) (1,329)
Interest expense............... 13,549 10,314 2,937 1,407 5,996 667 2,132
After-tax income (loss) from
continuing operations before
extraordinary items and
cumulative effect of an
accounting change............ (6,318) (2,696) (1,516) 589 (4,501) (1,006) (2,156)
Net income (loss).............. 8,756 11,098 24,327 589 (4,501) (1,006) (2,156)
Weighted average shares
outstanding -- primary(5).... 10,536 10,537 14,670 12,159 4,681 4,191 5,201
Income (loss) per common share
from continuing operations --
primary(5)................... $ (.60) $ (.26) $ (.10) $ .05 $ (.96) $ (.24) $ (.41)
</TABLE>
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<CAPTION>
MARCH 31, 1996
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ACTUAL AS ADJUSTED(6)
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BALANCE SHEET DATA:
Working capital............................................................ $ 5,978 $ 25,244
Total assets............................................................... 127,467 129,167
Total debt................................................................. 68,581 50,447
Stockholders' equity....................................................... 28,371 48,205
</TABLE>
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(1) Prior to 1992, the Company owned a minority interest in The Deltona
Corporation, a real estate development corporation based in Florida. Income
from continuing operations includes equity loss of The Deltona Corporation
for 1991 of $1,613. Income from continuing operations for 1992 includes the
gain on sale of common stock of, and notes receivable from, The Deltona
Corporation of $2,000.
(2) On October 6, 1992, the Company sold all of the stock of Wilbur Chocolate
Co., Inc. In February 1993, the Company sold the assets used in the
businesses of The Isaly Klondike Company and Popsicle Industries, Inc. These
businesses had been acquired in 1989. As a result of the sale of these
businesses, the results of operations and gains on sale from Wilbur, Isaly
Klondike, and Popsicle have been included in income from discontinued
operations. See Note 15 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) The results of operations for 1994 reflect the results of operations of
Marchon Inc. since its acquisition by the Company on October 13, 1994. See
Note 3 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) The results of operations for 1995 reflect the results of operations of
substantially all of the toy business of Buddy L Inc. and its Hong Kong
subsidiary since its acquisition by the Company on July 7, 1995. See Notes 3
and 14 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Fully diluted income (loss) per common share from continuing operations was
$(.28), $(.06), $(.07), $.05 and $(.96), respectively, during the five years
ending December 31, 1995 based on weighted average shares outstanding of
16,296, 16,297, 16,295, 12,159 and 4,681, respectively. Fully diluted loss
per common share from continuing operations was $(.24) and $(.41) for the
three month period ended March 31, 1995 and 1996, respectively, based on
weighted average shares outstanding of 4,191 and 5,201, respectively. During
September 1994, the Company repurchased approximately 11,800 shares in a
treasury stock transaction. Weighted average shares outstanding in 1995
reflects 454 shares which may become issuable as a contingent payment
obligation with respect to the acquisition of Buddy L in July 1995. See
Notes 2, 3 and 11 of Notes to Consolidated Financial Statements.
(6) Adjusted to give effect to (i) the sale by the Company of 1,500 shares of
Common Stock offered (at an assumed public offering price per share of
$12.13) and the application of the net proceeds therefrom and (ii) the
exercise by certain Selling Stockholders of stock options and warrants
concurrently with this Offering to purchase an aggregate of 444 shares of
Common Stock. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 8
RISK FACTORS
The Shares offered hereby involve a high degree of risk. In addition to the
other information in this Prospectus, prospective investors should carefully
consider the following factors in evaluating an investment in the shares of
Common Stock offered hereby.
Management of Growth; Integration of Acquisitions. Since the acquisition of
the Company by current management in 1994, the Company has experienced rapid
growth, due in large part to the acquisition of Marchon, Inc. ("Marchon") in
October 1994 and the acquisition of substantially all of the toy business assets
and the assumption of certain liabilities of Buddy L Inc. and its Hong Kong
subsidiary in July 1995 (such assets and liabilities collectively, "Buddy L").
The Company's ability to manage its growth effectively will require it to
attract and retain management personnel to manage its operational, financial and
management information systems, to accurately forecast sales demand and
calibrate manufacturing to such demand, to accurately forecast retail sales, to
control its overhead, to manage its advertising and marketing programs in
conjunction with actual demand, and to attract, train, motivate and manage its
employees effectively. If the Company is unable to manage growth effectively,
the Company's business, financial condition and results of operations could be
materially and adversely affected.
The future success of the Company depends in large measure on the Company's
ability to integrate the operations and financial and management information
systems of the businesses it acquires. In addition to the acquisitions of
Marchon and Buddy L, the Company may pursue the purchase of other toy and
related businesses as part of its growth strategy. The process of integrating
acquired businesses often involves unforeseen difficulties and may require a
disproportionate amount of the Company's financial and other resources,
including management time. The Company also intends to seek increased sales in
markets outside of the United States as part of its growth strategy. Considering
the Company's significant recent growth, the Company's historical financial
results may not be indicative of its future performance. There can be no
assurance that the Company will continue to grow, be successful in identifying
or consummating favorable acquisition opportunities, be effective in integrating
recent or future acquisitions, be successful in increasing its sales in
international markets, or that the Company will be effective in managing its
future growth, expanding its facilities and operations or in attracting and
retaining qualified personnel. Any failure to effectively achieve or manage
growth, manage its facilities and operations, or attract and retain qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company's operations and prospects are
dependent in a large part on the performance of its senior management team,
including Steven Geller, the Chairman and Chief Executive Officer, and Marvin
Smollar, the President and Chief Operating Officer. No assurance can be given
that the Company would be able to find qualified replacements for any of these
individuals if their services were no longer available. The loss of the services
of one or more members of this senior management team could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, substantially all of the senior management team has been
hired by the Company since the change of control in July 1994. The Company has
entered into employment contracts with each of Messrs. Geller and Smollar. The
Company's future success and plans for growth also depend on its ability to
attract, train and retain skilled personnel in all areas of its business. There
is strong competition for skilled personnel in the toy and decorative holiday
product businesses. See "Management."
Dependence on Major Customers. Like other major toy companies, the Company
is dependent upon toy retailers and mass merchandisers to distribute its
products. The retail toy industry is highly concentrated, with the top five
retailers accounting for approximately 53% of United States retail toy sales in
1994. For the year ended December 31, 1995, approximately 60% of the Company's
net sales were to five customers and the Company's two largest customers each
accounted for approximately 18% of net sales. The Company does not have
long-term contracts with its customers. An adverse change in, or termination of,
the Company's relationship with or the financial viability of one or more of its
major customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In recent years, the retail toy
industry has undergone significant consolidation. To the extent this
consolidation continues, the Company's distribution base could shrink, thereby
concentrating an even greater percentage of the Company's sales in a
6
<PAGE> 9
smaller number of retailers and enhancing the remaining toy retailers' ability
to negotiate more favorable terms and prices from the Company.
Consumer Preferences and New Product Introductions. Consumer preferences in
the toy industry are continuously changing and are difficult to predict.
Relatively few products achieve market acceptance, and even when they do achieve
commercial success, products often have short life cycles. There can be no
assurance that (i) new products introduced by the Company will achieve any
significant degree of market acceptance, (ii) acceptance, if achieved, will be
sustained for any significant amount of time or (iii) such products' life cycles
will be sufficient to permit the Company to recover development, manufacturing,
marketing and other costs associated therewith. Failure of new product lines or
product innovations to achieve or sustain market acceptance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. The Company operates in a highly competitive environment. The
Company competes with several larger toy companies, such as Mattel, Inc.
("Mattel"), Hasbro, Inc. ("Hasbro") and Tyco Toys, Inc. ("Tyco"), and many
smaller companies in the design and development of new toys, the procurement of
licenses, the improvement and expansion of previously introduced products and
product lines and the marketing and distribution of its products. Some of these
companies have longer operating histories, broader product lines and
substantially greater resources and advertising budgets than the Company. In
addition, it is common in the toy industry for companies to market products
which are similar to products being successfully marketed by competitors.
Further, the introduction of new products and product lines by the Company makes
its operations susceptible to the risks associated with new products, such as
production, distribution and quality control problems and the need to gain
customer acceptance. See "Business -- Competition."
Raw Material Prices. The principal raw materials in most of the Company's
products are petrochemical resin derivatives such as polyethylene and high
impact polystyrene. The prices for such raw materials are influenced by numerous
factors beyond the control of the Company, including general economic
conditions, competition, labor costs, import duties and other trade restrictions
and currency exchange rates. Changing prices for such raw materials may cause
the Company's results of operations to fluctuate significantly. A large, rapid
increase in the price of raw materials could have a material adverse effect on
the Company's operating margins unless and until the increased cost can be
passed along to customers.
Inventory Management. Each of the Company's top five customers uses, to
some extent, inventory management systems which track sales of particular
products and rely on reorders being rapidly filled by suppliers rather than on
large inventories being maintained by retailers to meet consumer demand.
Although these systems reduce a retailer's investment in inventory, they
increase pressure on suppliers like the Company to fill orders promptly and
shift a portion of the retailer's inventory risk onto the supplier. Production
of excess products by the Company to meet anticipated retailer demand could
result in markdowns and increased inventory carrying costs for the Company on
even its most popular items. In addition, if the Company fails to anticipate the
demand for products, it may be unable to provide adequate supplies of popular
toys to retailers in a timely fashion, particularly during the Christmas season,
and may consequently lose sales.
Foreign Sourcing. Approximately 35% of the Company's sales in the year
ending December 31, 1995 were attributable to products manufactured for the
Company by unaffiliated parties in the Far East, substantially all of whom are
located in China. The Company has not entered into long-term contracts with any
of these manufacturers. Accordingly, the Company expects to continue to be
dependent upon these sources for timely production and quality workmanship.
Given the seasonal nature of the Company's business, any delay or quality
control problems of such manufacturers, delay in product deliveries, delay in
locating or providing new tooling to acceptable substitutes, or delay in
increasing the production of alternative manufacturers could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, foreign operations are subject to a number of risks,
including transportation delays and interruptions, political and economic
disruptions, labor strikes, the imposition of tariffs and import and export
controls, changes in governmental policies, and fluctuations in currency
exchange rates, the occurrence of any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Recent changes in Chinese labor market conditions have made it more difficult
for Hong Kong
7
<PAGE> 10
based manufacturers, and in particular toy manufacturers, to obtain the
workforce necessary to meet aggressive seasonal production schedules. The
Company is working with its manufacturers to ensure timely delivery of the
Company's product. However, there can be no assurance that such manufacturers
will be able to meet the Company's production schedules.
China currently enjoys "most favored nation" ("MFN") status under United
States tariff laws, which provides the most favorable category of United States
import duties. There has been, and continues to be, opposition to the extension
or continuation of MFN status for China. The loss of MFN status for China would
result in a substantial increase in the import duty of toy products (which vary
depending on product category, and currently include duties of up to 70% for
non-MFN countries) manufactured in China which would result in increased costs
for the Company. Although the Company would attempt to mitigate this increased
cost by shifting its productions to other countries, there can be no assurance
that the Company would be able to do so or be successful in doing so in a timely
manner.
Price Protection; Timing of Payments. Many companies in the toy industry
discount prices of existing products, provide for certain advertising allowances
and credits or give other sales incentives to customers. In addition, many toy
companies lower the prices of their products to provide price adjustments
(referred to as price protection) for retail inventories on hand at the time the
price change occurs. There can be no assurance that the Company will not, as a
result of competitive practices or otherwise, make such accommodations to a
significant degree in the future. Any such accommodations by the Company in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, like other toy manufacturers, a
substantial portion of the Company's shipments of products are made on terms
that permit payment more than 90 days after shipment of merchandise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Product Liability and Regulation. Due to the nature of its business, the
Company, at any particular time, is subject to a number of product liability
claims for personal injuries allegedly relating to the Company's products. The
Company has to date not incurred any material uninsured losses in defending or
settling such claims. The Company's products are designed to meet applicable
guidelines currently prescribed by the American Society of Testing and Materials
and Underwriters Laboratory, voluntary regulatory associations, as well as
requirements prescribed by the Consumer Product Safety Commission (the "CPSC").
However, sales of the Company's products have significantly increased since the
1994 change in control and several of the Company's products are new and,
therefore, the claims experience with such products is difficult to predict. For
the foregoing reasons, there can be no assurance that the Company will not be
subject to material liabilities on account of product liability claims in the
future.
The Company assumes a self-insured retention limit and, to date, the
Company has disposed of substantially all of its product liability claims on
this basis. The Company does maintain insurance on an occurrence basis to
provide excess coverage above the self-insured retention limit for each claim.
There can be no assurance that the limits provided by the excess insurance will
be sufficient to satisfy an adverse judgment in one or more large product
liability suits or to satisfy all claims in the aggregate within a single policy
period. Further, there can be no assurance that an insurer will be solvent at
the time of settlement of an insured claim that exceeds the amount of any state
guaranty fund, or that the Company will be able to obtain excess insurance at
acceptable levels and costs in the future. Successful assertion against the
Company of one or a series of claims that materially exceed the limits of any
insurance coverage could have a material adverse effect on the Company's
business, financial condition or results of operation.
The Company's toys are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act (including the Federal Child
Protection and Toy Safety Act of 1969) and the Flammable Fabrics Act, and the
regulations promulgated thereunder. The Consumer Product Safety Act and the
Federal Hazardous Substances Act enable the CPSC to exclude from the market
consumer products that fail to comply with applicable product safety regulations
or otherwise create a substantial risk of injury and articles that contain
excessive amounts of a banned hazardous substance. The Flammable Fabrics Act
enables the CPSC to regulate and enforce flammability standards for fabrics used
in consumer products. In addition, the Company may be required to give public
notice of any hazardous or defective products and to repair,
8
<PAGE> 11
replace or repurchase any such products previously sold. The Company is also
subject to various state, local and foreign laws designed to protect children
from hazardous or potentially hazardous products. If any of the Company's
products materially contributing to its dollar volume of sales was found to be
hazardous to the public health and safety or to contain a defect which created a
risk of injury to the public, the Company's business, financial condition and
results of operations could be materially adversely affected. See "Business --
Regulation."
Seasonality; Quarterly Fluctuations. The Company, like the toy and seasonal
holiday industries in general, experiences a significant seasonal pattern in
sales and net income due to the heavy demand for toys and holiday products
during the Christmas season. During 1993, 1994 and 1995, 72%, 80% and 75%,
respectively, of the Company's net sales were realized during the months of July
through December. The Company expects that its business will continue to
experience a significant seasonal pattern for the foreseeable future.
Consequently, the last six months of the year have tended to generate greater
sales and an even greater proportion of the Company's profits than the rest of
the year, which has been generally characterized by reduced production levels.
The timing of large, initial orders from customers, fluctuations in demand from
retailers during the peak selling season and weather patterns have also
contributed to quarterly fluctuations. The seasonality of the Company's business
requires funding of its working capital requirements to provide for increased
inventory levels and trade accounts receivable prior to the Christmas season. To
build its inventory in anticipation of the Christmas season, the Company
manufactures products and pays its suppliers throughout the year, although a
majority of the Company's shipments occur in the last five months of the year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results."
Control by Existing Stockholders. Certain stockholders of the Company,
including Messrs. Geller and Smollar and certain affiliates of Weiss, Peck &
Greer, L.L.C. ("WPG") are parties to a shareholders' agreement (the
"Shareholders' Agreement") pursuant to which the parties thereto and their
permitted transferees have agreed, among other things, to vote their shares of
Common Stock to effect the composition of the Board of Directors and certain
committees of the Board of Directors specified in the Shareholders' Agreement
and to carry out certain corporate governance provisions specified in the
Shareholders' Agreement. Upon completion of the Offering, persons subject to the
Shareholders' Agreement will beneficially own approximately 29.9% (25.3% if the
over-allotment option is exercised in full) of the issued and outstanding shares
of Common Stock and approximately 52.6% of the issued and outstanding Common
Stock on a fully diluted basis. As a result of such ownership and the provisions
of the Shareholders' Agreement, these stockholders will have the ability to
elect the Board of Directors and thereby control the affairs and management of
the Company and have the power to approve most actions requiring stockholder
approval. Such a high level of ownership may have the effect of delaying,
deferring or preventing a change in the control of the Company and may adversely
affect the voting and other rights of the holders of Common Stock. The parties
to the Shareholders' Agreement have agreed that, in certain circumstances, WPG
and its affiliates can designate nominees for the entire Board of Directors and
the parties thereto will vote their shares of Common Stock for such nominees. In
addition, in connection with the acquisition of Marchon, Messrs. Geller and
Smollar and Neil B. Saul entered into a stockholders' agreement (the "Marchon
Stockholders' Agreement") which, among other things, includes a voting agreement
among the parties thereto. However, so long as the Shareholders' Agreement
remains in effect, the Shareholders' Agreement takes precedence over the Marchon
Stockholders' Agreement. See "Principal and Selling Stockholders" and "Certain
Transactions -- The Marchon Transaction" and "-- Shareholders' Agreement."
License and Royalty Obligations. Certain of the Company's product lines
employ concepts or technologies created by outside designers. In addition,
certain of the Company's products incorporate other intellectual property
rights, such as characters or brand names, that are proprietary to third
parties. In each instance, the Company typically enters into a license agreement
to acquire the rights to the concepts, technologies or other rights for use with
the Company's products. These license agreements typically provide for the
retention of ownership of the technology, concepts or other intellectual
property by the licensor and the payment of a royalty to the licensor. Such
royalty payments generally are based on the net sales of the licensed product
for the duration of the license and, depending on the revenues generated from
the sale of the licensed
9
<PAGE> 12
product, may be substantial. In addition, such agreements often provide for an
advance payment of royalties and may require the Company to guarantee payment of
a minimum level of royalties that may exceed the actual royalties generated from
net sales of the licensed product. Some of these agreements have fixed terms and
may need to be renewed or renegotiated prior to their expiration in order for
the Company to continue to sell the licensed product. While management does not
believe that the loss of any of its existing licenses would have a material
adverse effect on the Company's business, financial condition or results of
operations, there can be no assurance that there would not be such an effect.
The Company intends to continue to obtain third party licenses on a selective
basis to deepen and expand its existing product lines and, to a lesser extent,
to enter new product categories.
Limited Prior Public Market; Possible Volatility of Price. Prior to the
Offering, the substantial majority of the outstanding Common Stock has been
controlled by affiliates of the Company and, accordingly, there has not been a
robust public market for the Common Stock. There can be no assurance as to the
liquidity of any markets that may develop for the Common Stock, the ability of
holders of Common Stock to sell their securities, or at what price holders would
be able to sell their securities. Prices for the Common Stock will be determined
by the marketplace and may be influenced by many factors, including the depth
and liquidity of any market which develops, investor perception of the Company
and general economic and market conditions. In addition, factors such as
quarterly variations in the Company's financial results, announcements by the
Company or others and developments affecting the Company could cause the market
price of the Common Stock to fluctuate significantly. The stock market has, on
occasion, experienced extreme price and volume fluctuations which have often
been unrelated to the operating performance of the affected companies.
Effect of Certain Charter, By-law and Statutory Provisions. Certain
provisions of the Company's Amended and Restated Certificate of Incorporation
(the "Charter") and Amended and Restated By-laws (the "By-laws") could delay or
frustrate the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such events
could be beneficial, in the short term, to the interests of the stockholders.
For example, the Charter provides that certain significant corporate actions
must be approved by more than 80% of the members of the Company's Board of
Directors and for certain limitations on the calling of a special meeting of
stockholders, and the Bylaws require advance notice of stockholder proposals and
nominations of directors. The Company also is subject to provisions of Delaware
corporation law that prohibit a publicly-held Delaware corporation from engaging
in a broad range of business combinations with a person who, together with
affiliates and associates, owns 15% or more of the corporation's common stock
(an "interested stockholder") for three years after the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Those provisions could discourage or make more difficult a
merger, tender offer or similar transaction, even if favorable to the Company's
stockholders. See "Description of Capital Stock."
Authorized Preferred and Common Stock. Pursuant to the Charter, shares of
preferred stock and Common Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate transactions, could have the effect of
making it more difficult for a third party to acquire, or effectively preventing
a third party from acquiring, a majority of the outstanding voting stock of the
Company. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-law Provisions."
Shares Eligible for Future Sale; Registration Rights. Upon the completion
of this Offering, there will be 7,149,200 shares of Common Stock outstanding. In
addition, up to 4,956,764 shares of Common Stock will be immediately issuable
upon the exercise of outstanding options or warrants and the conversion of
outstanding preferred stock and debt securities. The Company, the Company's
directors and executive officers and certain stockholders of the Company have
agreed, subject to certain exceptions, not to sell any shares of Common Stock or
securities convertible into Common Stock for a period of 180 days following the
date of the final Prospectus without the prior written consent of the
Representatives of the Underwriters. Certain of the Selling Stockholders have
agreed, subject to certain exceptions, not to sell any shares of Common Stock or
securities
10
<PAGE> 13
convertible into Common Stock for a period of 90 days following the date of the
final Prospectus without the prior written consent of the Representatives of the
Underwriters. Approximately 14.6% of the outstanding shares upon the completion
of this Offering will be subject to the 90-day lock-up provisions (14.0% if the
over-allotment option is exercised in full) and 20.6% of the outstanding shares
upon the completion of this Offering will be subject to the 180-day lock-up
provisions (16.4% if the over-allotment option is exercised in full). Sales, or
the possibility of sales, of Common Stock by the Company's existing
stockholders, whether in connection with the exercise of registration rights or
otherwise, could adversely affect the market price of the Company's Common
Stock. The Shareholders' Agreement grants the parties thereto rights of first
refusal and co-sale rights upon certain transfers of shares of Common Stock. See
"Certain Transactions -- Shareholders' Agreement."
Restrictions on the Payment of Dividends. The Company currently intends to
retain its earnings to finance the growth and development of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future dividend payments will depend upon the financial condition,
funding requirements and earnings of the Company as well as other factors that
the Board of Directors may deem relevant, including any contractual or statutory
restrictions on the Company's ability to pay dividends. See "Common Stock Price
Range and Dividend Policy."
Forward-Looking Information May Prove Inaccurate. This Prospectus contains
various forward-looking statements and information that are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used in this document, the words "expect,"
"anticipate," "estimate," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions including those identified above. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. In addition to the other risk factors set
forth above, among the key factors that may have a direct bearing on the
Company's results are competitive practices in the toy and decorative holiday
products industries generally and particularly in the Company's principal
markets, the ability of the Company to meet existing financial obligations in
the event of adverse industry or economic conditions or to obtain additional
capital to fund future commitments and expansion, the Company's relationship
with employees and the impact of current and future laws and governmental
regulations affecting the toy industry and the Company's operations.
11
<PAGE> 14
RECENT EVENTS
The Company has been a toy manufacturer for approximately 40 years. Until
the 1980s, the Company's primary line of business was the design and manufacture
of toys. In the 1980s, the Company diversified into other non-related industries
such as food products. During this period, Maurice Halperin and certain members
of his family owned over 90% of Empire and acted as executive management of the
Company. In 1993, Empire sold its food businesses, and since mid-1994, the
Company has undergone a change of control and management, established a new
business strategy, and effected two acquisitions which have added established
core toy product lines to the Company's business.
In the third quarter of 1994, current principal stockholders led by Steven
Geller, the Company's current Chairman and Chief Executive Officer, obtained a
controlling interest in Empire (the "Change of Control") as a base from which to
build a diversified toy and plastic products manufacturing company. Empire's
core products included non-powered ride-ons such as the Big Wheel(R) and plastic
decorative holiday products. The Change of Control was effected through (i) the
redemption by the Company of approximately 11.8 million shares of Common Stock
from Maurice A. Halperin, the former Chairman of the Board of the Company, Barry
S. Halperin, the former President of the Company, Carol A. Minkin, a former
director of the Company, Halco Industries, Inc. ("Halco") and certain other
members of the Halperin family (collectively, the "Halperin Group") at a price
of $6.50 per share, (ii) the purchase by Steven Geller of 500,000 shares of
Common Stock from the Halperin Group for $6.50 per share, (iii) the acquisition
by Steven Geller of an option to purchase up to 500,000 shares of Common Stock
from Halco at prices between $6.50 and $7.78 per share over a three-year period,
and (iv) the acquisition by Steven Geller of the right to vote Halco's remaining
shares of Common Stock. This transaction was principally financed with excess
cash generated by the Company's 1993 sale of its food businesses and a $15
million loan from Maurice Halperin to the Company (the "Halperin Loan"). The
Halperin Loan was repaid upon the issuance by the Company of $15 million of 9%
convertible subordinated debentures to affiliates of WPG. Empire had generated
net sales of approximately $41 million in 1993. See "Certain Transactions --
Geller Transaction and Related Matters" and "-- WPG Group Investment."
In October 1994, in connection with the Change of Control, Empire acquired
Marchon, a toy designer, marketer and manufacturer founded and managed by Marvin
Smollar, the current President and Chief Operating Officer of the Company for a
total consideration of approximately $13.7 million in Common Stock, cash and
notes. Marchon's principal products included Grand Champions(R) horses and
Crocodile Mile(R) water slides and it had net sales of approximately $33 million
in 1993. Marchon also had substantial experience at sourcing toy products
manufactured in the Far East. See "Certain Transactions -- The Marchon
Transaction."
In July 1995, Empire purchased the toy assets and assumed certain
liabilities of Buddy L Inc., debtor-in-possession and wholly-owned subsidiary of
SLM International, Inc., and its Hong Kong subsidiary for total consideration of
approximately $32 million in Common Stock, cash and notes plus a five year
earnout. Buddy L's line of toy vehicles is one of the oldest toy brands in
America. Prior to its acquisition by the Company, the Buddy L business generated
net sales of approximately $119 million in 1994. See "Certain Transactions --
The Buddy L Transaction."
12
<PAGE> 15
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol EMP. The following table sets forth, for the fiscal quarters
indicated, the high and low sale prices for the Common Stock on the American
Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994:
First Quarter............................................................. $ 6.88 $ 6.00
Second Quarter............................................................ 6.50 5.63
Third Quarter............................................................. 6.88 5.38
Fourth Quarter............................................................ 6.75 5.75
1995:
First Quarter............................................................. $12.88 $ 6.50
Second Quarter............................................................ 12.13 8.50
Third Quarter............................................................. 11.50 7.88
Fourth Quarter............................................................ 9.75 6.00
1996:
First Quarter............................................................. $12.25 $ 6.88
Second Quarter (through May 28, 1996)..................................... 13.75 11.88
</TABLE>
On May 28, 1996, the closing sale price for the Common Stock on the
American Stock Exchange was $12.13 per share. As of May 28, 1996, the Company
had 5,205,200 shares of Common Stock outstanding held by approximately 2,000
stockholders of record.
The Company has not paid any cash dividends since 1990 and does not
anticipate paying cash dividends in the foreseeable future. The Company's
current policy is to retain earnings to provide funds for the operation and
expansion of its business and for the repayment of indebtedness. Any
determination in the future to pay dividends will depend upon the Company's
financial condition, capital requirements, results of operations and other
factors deemed relevant by the Company's Board of Directors, including any
contractual or statutory restrictions on the Company's ability to pay dividends.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be approximately $16.3 million after
deducting the underwriting discount and estimated offering expenses payable by
the Company, based upon an assumed public offering price of $12.13 per share.
The Company intends to use the net proceeds to prepay in full certain senior
subordinated notes bearing interest at a rate of 12% per annum which were issued
in connection with the acquisition of Buddy L. The Company estimates that
approximately $8.3 million will be required to prepay such notes at 110% of
their original principal amount. The remaining net proceeds will be used to
repay short-term bank debt under two bank facilities, currently bearing interest
at rates of 9.3% and 8.7%% per annum, respectively, and the balance, if any,
will be used for general corporate purposes. The Company will not receive any of
the proceeds from the sale of Common Stock by the Selling Stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions -- The
Buddy L Transaction."
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
March 31, 1996 and as adjusted to reflect (i) the sale by the Company of
1,500,000 shares of Common Stock offered hereby (at an assumed public offering
price of $12.13 per share) and the application of the estimated net proceeds
therefrom to repay certain indebtedness as described in "Use of Proceeds," (ii)
the exercise by certain Selling Stockholders of stock options and warrants to
purchase an aggregate of 444,000 shares of Common Stock concurrently with this
Offering and (iii) the establishment of the Company's new bank credit facility
in May 1996 and the application of initial borrowings thereunder to repay
short-term bank indebtedness existing at March 31, 1996. See "Use of Proceeds"
and "Principal and Selling Stockholders."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt......................................................... $46,510 $27,244
======= =======
Long-term debt:
Convertible subordinated debentures................................... 13,923 13,923
Senior subordinated notes............................................. 8,148 --
Bank facility......................................................... -- 9,280
------- -------
Total long-term debt............................................... 22,071 23,203
------- -------
Stockholders' equity:
Common stock, par value $.10 per share; 30,000,000 shares authorized;
5,205,200 shares issued and outstanding, actual; 7,149,200 shares
issued and outstanding, as adjusted(1)............................. 521 715
Preferred stock, par value $.01 per share; 5,000,000 shares
authorized; 442,264 shares of Series A cumulative convertible
preferred stock authorized, issued and outstanding, actual and as
adjusted........................................................... 4 4
Additional paid-in capital............................................ 33,256 52,896
Retained earnings (deficit)........................................... (4,815) (4,815)
Stockholders' loans................................................... (595) (595)
------- -------
Total stockholders' equity......................................... 28,371 48,205
------- -------
Total capitalization............................................. $50,442 $71,408
======= =======
</TABLE>
- ------------------------------
(1) Includes an aggregate of 444,000 shares of Common Stock to be issued upon
the exercise by certain Selling Stockholders of stock options and warrants
concurrently with this Offering, but does not include (i) 1,397,500 shares
issuable upon the exercise of stock options outstanding on the date of this
Prospectus, (ii) 1,875,000 shares issuable upon the exercise of warrants
outstanding on the date of this Prospectus, of which warrants for the
purchase of 758,000 shares will lapse upon the application of the net
proceeds to the Company from this Offering as described in "Use of
Proceeds," (iii) 442,264 shares issuable upon the conversion of the Series A
cumulative convertible preferred stock upon the affirmative vote of a
majority of the shares represented at the Company's 1996 Annual Meeting of
Stockholders, (iv) 2,000,000 shares issuable upon the conversion of the
convertible subordinated debentures, (v) up to 454,000 shares which may be
issuable as a contingent payment obligation in connection with the Buddy L
acquisition in certain circumstances and (vi) 592,560 shares available for
future grants under the Company's 1994 Employee Stock Option Plan. See "Use
of Proceeds" and "Certain Transactions."
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial information for the
Company for the periods and at the dates indicated. The selected statement of
operations and balance sheet data, at or for each of the full fiscal years
presented below was derived from the consolidated financial statements of the
Company, which were audited by Deloitte & Touche LLP, independent auditors. The
selected financial data for the three months ended March 31, 1995 and 1996 are
derived from consolidated financial statements that have not been audited. In
the opinion of management, the unaudited consolidated financial data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the consolidated financial position and results of
operations for that period. The results of operations for the three months ended
March 31, 1995 and 1996 are not necessarily indicative of the results of
operations for a full fiscal year. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the audited consolidated financial statements, including
the notes thereto, and other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------- -------------------
1991(1)(2) 1992(1)(2) 1993(2) 1994(3) 1995(4) 1995 1996
---------- ---------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 41,253 $ 42,882 $ 41,354 $57,964 $153,744 $19,088 $ 22,186
Cost of sales...................... 27,317 29,443 29,733 40,557 111,905 12,937 16,217
-------- -------- -------- ------- -------- ------- --------
Gross profit....................... 13,936 13,439 11,621 17,407 41,839 6,151 5,969
Selling and administrative......... 12,953 12,172 15,086 16,442 35,060 6,804 7,298
Nonrecurring restructuring and
relocation charges............... -- -- -- -- 8,673 150 --
-------- -------- -------- ------- -------- ------- --------
Operating income (loss)............ 983 1,267 (3,465) 965 (1,894) (803) (1,329)
Interest expense................... 13,549 10,314 2,937 1,407 5,996 667 2,132
Other income (expense)............. 3,147 2,713 5,952 1,839 514 54 13
-------- -------- -------- ------- -------- ------- --------
Income (loss) from continuing
operations before income taxes,
extraordinary items and
cumulative effect of an
accounting change................ (9,419) (6,334) (450) 1,397 (7,376) (1,416) (3,448)
Income tax expense (benefit)....... (3,101) (3,638) 1,066 808 (2,875) (410) (1,292)
-------- -------- -------- ------- -------- ------- --------
After-tax income (loss) from
continuing operations before
extraordinary items and
cumulative effect of an
accounting change................ (6,318) (2,696) (1,516) 589 (4,501) (1,006) (2,156)
Income from discontinued
operations, net of tax........... 13,497 15,340 25,729 -- -- -- --
Extraordinary items................ 1,577 (1,546) -- -- -- -- --
-------- -------- -------- ------- -------- ------- --------
Net income (loss).................. $ 8,756 $ 11,098 $ 24,327 $ 589 $ (4,501) $(1,006) $ (2,156)
======== ======== ======== ======= ======== ======= ========
Weighted average common shares
outstanding -- primary(5)........ 10,536 10,537 14,670 12,159 4,681 4,191 5,201
Income (loss) per common share from
continuing operations --
primary(5)....................... $ (.60) $ (.26) $ (.10) $ .05 $ (.96) $ (.24) $ (.41)
======== ======== ======== ======= ======== ======= ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................... $113,406 $ 84,377 $ 92,871 $ 8,915 $ 6,837 $ 8,712 5,978
Total assets....................... 142,217 104,583 123,240 67,956 140,153 72,503 127,467
Total debt......................... 77,361 34,842 9,001 22,249 71,016 26,574 68,581
Stockholders' equity............... 45,127 54,532 98,419 20,577 30,462 19,740 28,371
</TABLE>
- ------------------------------
(1) Prior to 1992, the Company owned a minority interest in The Deltona
Corporation, a real estate development corporation based in Florida. Income
from continuing operations includes equity loss of The Deltona Corporation
for 1991 of $1,613. Income from continuing operations for 1992 includes the
gain on sale of common stock of, and notes receivable from, The Deltona
Corporation of $2,000.
(2) On October 6, 1992, the Company sold all of the stock of Wilbur Chocolate
Co., Inc. In February 1993, the Company sold the assets used in the
businesses of The Isaly Klondike Company and Popsicle Industries, Inc. These
businesses had been acquired in 1989. As a result of the sale of these
businesses, the results of operations and gains on sale from Wilbur, Isaly
Klondike, and Popsicle have been included in income from discontinued
operations. See Note 15 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) The results of operations for 1994 reflect the results of operations of
Marchon since its acquisition by the Company on October 13, 1994. See Note 3
of Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) The results of operations for 1995 reflect the results of operations of
Buddy L since its acquisition by the Company on July 7, 1995. See Notes 3
and 14 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Fully diluted income (loss) per common share from continuing operations was
$(.28), $(.06), $(.07), $.05 and $(.96), respectively, during the five years
ending December 31, 1995 based on weighted average shares outstanding of
16,296, 16,297, 16,295, 12,159 and 4,681 respectively. Fully diluted loss
per common share from continuing operations was $(.24) and $(.41) for the
three month period ended March 31,1995 and 1996, respectively, based on
weighted average shares outstanding of 4,191 and 5,201, respectively. During
September 1994, the Company repurchased approximately 11,800 shares in a
treasury stock transaction. Weighted average shares outstanding in 1995
reflects 454 shares which may be issuable as a contingent payment obligation
with respect to the acquisition of Buddy L in July 1995. See Notes 2, 3 and
11 of Notes to Consolidated Financial Statements.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated results
of operations and consolidated financial position should be read in conjunction
with the Selected Consolidated Financial Data and the Company's consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus.
GENERAL
The Company designs, manufactures and markets a broad variety of toys and
plastic decorative holiday products. The Company has been involved in the toy
industry for approximately 40 years, and in the 1980s the Company diversified
into non-related industries such as food products. In 1993, the Company sold its
food businesses, and since mid-1994, the Company has undergone a change of
control and management, established a new business strategy, and effected two
significant acquisitions. See "Recent Events."
During the third quarter of 1994, current principal stockholders of the
Company, led by Steven Geller, the current Chairman and Chief Executive Officer
of the Company, acquired control of Empire. In October 1994, Empire acquired
Marchon, a toy designer, marketer and manufacturer founded and managed by Marvin
Smollar, the current President and Chief Operating Officer of the Company, for
total consideration of approximately $13.7 million in Common Stock, cash and
notes. Marchon had net sales in 1993 of approximately $33.3 million. In July
1995, Empire acquired substantially all of the toy assets and assumed certain
liabilities of Buddy L Inc., which was in bankruptcy, and its Hong Kong
subsidiary for total consideration of approximately $32 million in Common Stock,
cash and notes plus a five year earnout. The former Buddy L business generated
net sales of approximately $119 million in 1994. As a result of the 1993
divestitures and the 1994 and 1995 acquisitions of Marchon and Buddy L,
respectively, the Company's historical financial results are not comparable from
period to period and may not be indicative of its future performance. See
"Certain Transactions."
The Company's 1995 operating results were adversely affected by
approximately $8.7 million of nonrecurring restructuring and relocation charges
incurred in connection with its acquisitions of Buddy L and Marchon and for the
establishment of corporate headquarters in Delray Beach, Florida. While
additional nonrecurring restructuring and relocation charges will be incurred in
1996, they are expected to be significantly lower than in 1995 and the
integration of Buddy L's manufacturing operations into the Company's Tarboro,
North Carolina facility is expected to be substantially complete by the third
quarter of 1996. The acquisitions also resulted in increases in goodwill
amortization and interest expense. In addition, the Company's 1995 gross margins
were adversely affected by the Company's decision to honor lower-margin product
delivery commitments made by Buddy L prior to the Company's acquisition of its
assets. With respect to future periods, management expects to increase media
advertising expenditures from historical levels to levels it deems appropriate.
The Company also manufactures and sells plastic apparel buttons, buckles
and novelty items for use in the garment industry (representing approximately
1.5% of the Company's consolidated net sales in 1995). The Company is exploring
a possible sale of this business. However, the Company is not currently
negotiating with any other party, and has no commitments, understandings or
arrangements with respect to any specific sale transaction. The Company does not
anticipate that any such sale transaction, if consummated, would have a material
effect on its consolidated results of operations or financial condition. For
financial reporting purposes, sales of these plastic apparel buttons, buckles
and novelty items are included in toy sales.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
The results of operations for the three months ended March 31, 1996
reflects the impact of the Buddy L acquisition (which acquisition occurred on
July 7, 1995).
16
<PAGE> 19
Net sales for the three months ended March 31, 1996 increased by 16% to
$22.2 million from $19.1 million for the three months ended March 31, 1995. The
increase in sales was due primarily to the acquisition of the Buddy L(R) line of
products in July 1995, sales of new products, and an increase in holiday product
sales.
The net loss for the quarter ended March 31, 1996 increased to $2.2 million
from $1.0 million for the quarter ended March 31, 1995. The increase in the net
loss was due primarily to higher selling and administrative ("S&A") expenses and
higher interest expense.
Toy sales increased $1.8 million to $18.3 million for the three months
ended March 31, 1996 from $16.5 million for the three months ended March 31,
1995. The increase was primarily due to approximately $9.8 million of sales from
acquired Buddy L(R) toy lines, increased sales of new products such as Big
Wheelie(TM), and increased sales of ride-on products. This increase was
partially offset by decreased sales of other products, including the virtual
elimination of Power Ranger(TM) sales, which were approximately $7.1 million
during the first quarter of 1995, due to the Company's decision to de-emphasize
production of these products.
The Company's sales of holiday products increased 49% to $3.9 million for
the three months ended March 31, 1996 from $2.6 million for the three months
ended March 31, 1995 due to increased sales volume in the Easter product
category.
Gross profit margins were lower for the three months ended March 31, 1996
as compared to the three months ended March 31, 1995, due to loss of Power
Ranger(TM) sales, which products sold at higher margins than the Company's
existing lines. However, the impact of the loss of the Power Ranger(TM) sales on
operating income for the quarter ended March 31, 1996 was reduced by the
corresponding decrease in royalties on the sales of Power Ranger(TM) products.
For the quarter ended March 31, 1996, royalties which are included in selling
expenses, were approximately 1% of sales as compared to approximately 6% of
sales for the quarter ended March 31, 1995.
Despite lower royalty expense, S&A expenses were higher for the three
months ended March 31, 1996 as compared to the three months ended March 31, 1995
primarily due to the continuing integration of Buddy L, including certain
duplicate facilities costs, and the staffing of four strategic business units
("SBUs"). SBU's are accountable for the sales and marketing for specific product
categories: ride-ons, outdoor activities and games, girls and boys toys and
holiday products. S&A expenses for the three months ended March 31, 1996 reflect
the reversal of approximately $600,000 of certain indemnification reserves due
to the expiration of certain time limitations. Excluding the impact of the
reversal of the indemnification reserves, S&A expenses were approximately 36% of
sales for the three months ended March 31, 1996 as compared to 36% of sales for
the three months ended March 31, 1995.
In the toy segment, the operating loss was $1.2 million for the quarter
ended March 31, 1996 as compared to an operating loss of $484,000 for the
quarter ended March 31, 1995. The increase in operating loss was due primarily
to higher S&A expenses.
In the holiday product segment, operating loss was $122,000 for the quarter
ended March 31, 1996 as compared to an operating loss of $169,000 for the
quarter ended March 31, 1995. The decrease in operating loss was due to higher
sales and gross profit margins.
Nonrecurring restructuring and relocation charges were $150,000 for the
quarter ended March 31, 1995 and related primarily to establishment of corporate
headquarters in Delray Beach, Florida.
Interest expense was $2.1 million for the three months ended March 31, 1996
as compared to $667,000 for the three months ended March 31, 1995. Interest
expense was higher due to the issuance of $7.6 million of senior subordinated
notes during the third quarter of 1995 to finance the Buddy L acquisition, and
higher balances of the Company's revolving credit lines resulting from increased
sales, inventory, and accounts receivable levels.
The tax benefit for the three months ended March 31, 1996 and the three
months ended March 31, 1995 approximates the federal statutory rate net of
certain nondeductible expenses, primarily amortization of goodwill.
17
<PAGE> 20
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The results of operations for 1995 reflects the impact of the Marchon
acquisition for the full year of 1995 (which acquisition occurred on October 13,
1994) and the impact of the Buddy L acquisition for the second half of the year
(which acquisition occurred on July 7, 1995).
Net sales for the year ended December 31, 1995 increased to $153.7 million
from $58.0 million for the year ended December 31, 1994. Unaudited pro forma net
sales (assuming Buddy L had been acquired on January 1, 1995) for the full year
1995 would have been $187.2 million. The increase in sales was due primarily to
the acquisition of Marchon and Buddy L, sales of new products, and an increase
in holiday product sales. Approximately 17% and 15% of the Company's sales for
the years ended December 31, 1994 and 1995, respectively, were from products
licensed under the Power Rangers(TM) license, assuming the inclusion of
Marchon's net sales for the full year of 1994, on an unaudited pro forma basis.
The Company deemphasized production of these products in 1995 based on its
belief that the popularity level of these toys was not sustainable.
The net loss for the year ended December 31, 1995 was $4.5 million as
compared to net income of $589,000 for the year ended December 31, 1994. The net
loss for the year ended December 31, 1995 is due primarily to $8.7 million of
nonrecurring restructuring and relocation charges incurred, which were related
primarily to the acquisitions of Buddy L and Marchon and the establishment of
corporate headquarters in Delray Beach, Florida. These costs include $4.2
million for relocation of Buddy L's operations to North Carolina; $2.3 million
for the establishment of corporate headquarters in Delray Beach, Florida; $1.1
million for investment banking fees; $783,000 for employee severance; and
$300,000 for lease termination costs for duplicate facilities. As a result of
the Company's acquisitions, amortization of intangibles increased to $1.7
million for 1995 from $304,000 in 1994.
Toy sales increased to $121.6 million for 1995 from $33.0 million for 1994.
The increase was due to sales from acquired toy lines, as well as sales of new
products such as Big Wheelie(TM), and increased sales of other ride-on products.
The Company's sales of holiday products increased from 1994 to 1995 by $7.2
million or approximately 29% due to increased sales volume in all three major
categories of its holiday products segment -- Christmas, Halloween and Easter.
Gross profit margins were lower for the year ended December 31, 1995 as
compared to the year ended December 31, 1994 due primarily to the sale of
products from the Buddy L product line, higher raw material prices in 1995 as
compared to 1994 (principally plastic and paperboard products) and to
unfavorable variances related to Buddy L products. The Buddy L product line
generally had lower margins than the Company's historical lines. 1995 gross
margins were also adversely affected by costs incurred in connection with the
Company's efforts to reduce manufacturing costs (particularly by integrating
domestic manufacturing at the Company's Tarboro, North Carolina manufacturing
facility) and as a result of its decision to honor low-margin product delivery
commitments made by Buddy L prior to the Company's acquisition of the assets.
S&A expenses are higher for the year ended December 31, 1995 as compared to
the year ended December 31, 1994 primarily due to the integration of Marchon and
Buddy L, an increase in media advertising expenditures, the establishment of a
marketing department and product design and development group, and an increase
in royalty expense resulting primarily from sales of Power Rangers(TM) licensed
products in the toy segment. Advertising expenses were 4.4% of toy sales for
1995 as compared to less than 1% for 1994. S&A expenses were 22.8% of sales for
1995 as compared to 28.4% for 1994, reflecting the allocation of such expenses
over a larger net sales base.
Operating income, excluding the effects of the nonrecurring charges for
both the toy and holiday product segments, increased for the year ended December
31, 1995 as compared to the year ended December 31, 1994 due primarily to higher
sales levels. In the toy segment, operating income was $1.9 million for the year
ended December 31, 1995 as compared to operating income of $127,000 for the year
ended December 31, 1994. In the holiday product segment, operating income was
$4.9 million for the year ended December 31, 1995 as compared to $3.3 million
for the year ended December 31, 1994. Operating income for 1994 also reflected
18
<PAGE> 21
expenses of approximately $275,000 resulting from charitable contributions made
at the direction of the former management group which are not directly
attributable to the Company's toy and holiday product segments.
Income from interest, dividends and realized gains declined for the year
ended December 31, 1995 as compared to the year ended December 31, 1994 due to
lower cash and marketable securities balances during the year ended December 31,
1995 as compared to the year ended December 31, 1994. Included in interest,
dividends and realized gains for 1995 is a gain of $330,000 on the sale of a
vacant office building.
Interest expense was $6.0 million for the year ended December 31, 1995 as
compared to $1.4 million for the year ended December 31, 1994. Interest expense
was higher due to the issuance of $15.0 million principal amount of convertible
debentures during the last quarter of 1994, the issuance of $7.6 million
principal amount of senior subordinated notes during the third quarter of 1995,
and higher balances of the Company's revolving credit lines resulting from
increased production, inventory and accounts receivable levels.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The results of operations for 1994 reflect the results of operations of
Marchon since its acquisition by the Company on October 13, 1994.
Net income was $589,000 for the year ended December 31, 1994 as compared to
net income of $24.3 million for the year ended December 31, 1993. Net income for
the year ended December 31, 1993 was primarily due to the gain recorded on the
sale of assets of The Isaly Klondike Company ("Isaly Klondike") and Popsicle
Industries Ltd. ("Popsicle Canada"), which was included as part of "income from
discontinued operations." See Note 15 of Notes to Consolidated Financial
Statements.
Income (loss) from continuing operations before income taxes was $1.4
million for 1994 and $(450,000) for 1993. The increase for 1994 was due to
improved operating income resulting principally from lower corporate expenses.
The improvement in operating income was partially offset by substantial
increases in the cost of certain raw materials, expenses incurred for the
establishment of an in-house sales force for toys and a new management
infrastructure, higher research and development cost, a one-time charge relating
to the 1994 management changes, and a charge for charitable contributions to the
Empire Foundation. The loss from continuing operations before income tax for
1993 was principally due to expenses for two executive retirement pay packages,
charges for charitable contributions, and a charge for indemnification
obligations. This loss for 1993 was partially offset by the gain on the
settlement of a Connecticut tax assessment.
Sales from continuing operations increased to $58.0 million for the year
ended December 31, 1994 as compared to $41.4 million for the year ended December
31, 1993. For 1994, sales for the toy segment increased 56% due to the
acquisition of Marchon during the fourth quarter of 1994. This increase is
partially offset by a 2% decline in the Company's historical toy business.
Approximately 27% of Marchon full year 1994 sales were from products which
incorporated the Power Ranger(TM) license.
The Company's sales of holiday products increased from 1993 to 1994 by $4.8
million or approximately 24% because of increased sales volume in all major
categories of its holiday products segment -- Christmas, Halloween and Easter.
The toy segment had lower operating income for the year ended December 31,
1994 as compared to the year ended December 31, 1993 due primarily to higher raw
material prices, higher research and development cost, and expenses incurred in
the establishment of a new management infrastructure. The increase in the
Company's consolidated operating income was primarily due to reduced S&A
expenses as a percent of sales. Historically, the Company and Marchon sold its
toys primarily through its independent commissioned sales representatives.
During 1994, the Company incurred $417,000 to establish an in-house sales force
for the sale of domestic toys while continuing to incur the cost of commissioned
sales representatives through December 31, 1994. Operating income for 1993
included a $485,000 gain from the sale of equipment.
19
<PAGE> 22
Despite higher sales, operating income from the holiday products segment
for 1994 declined from 1993 primarily due to higher raw material prices and a
more competitive pricing environment for the segment's products.
Corporate expenses decreased to $2.5 million in 1994 from $7.8 million in
1993 despite charges during 1994 of $189,000 for expenses related to the
management changes and $275,000 for charitable contributions to the Empire
Foundation. Corporate expenses for 1993 included $3.6 million for retirement pay
packages for two executives of the Company, $2.0 million for charitable
contributions to the Empire Foundation and $500,000 for certain indemnification
obligations related to a sale of a subsidiary in a prior year.
Income from interest, dividends and realized gains decreased for 1994 as
compared to 1993, principally due to the use of the Company's cash and
investments to fund the September 30, 1994 redemption of Company stock. During
1994, the Company expensed $773,000 for unrealized losses on marketable
securities to reflect a permanent impairment in the value of the Company's
marketable securities.
Interest expense decreased to $1.4 million for the year ended December 31,
1994 from $2.9 million for the year ended December 31, 1993. Interest expense
for 1993 included $1.5 million of interest cost related to the settlement of an
income tax audit.
For 1994, income tax expense is higher than the federal statutory rate
primarily due to certain nondeductible expenses. For 1993, income tax expense
was increased by $1.2 million as a result of the settlement of an income tax
audit. Income from discontinued operations is reported net of related tax
expense for 1993.
SEASONALITY AND QUARTERLY RESULTS
Sales of many toy products are seasonal in nature. Purchase orders for the
Christmas selling season are typically secured in the months of April, May and
June so that by the end of June, the Company has historically received orders or
order indications for a substantial majority of its full year's toy business.
The Company also offers products sold primarily in the spring and summer months
including Water Works(TM) pools, Crocodile Mile(R) water slides and other items,
which are shipped principally in the first and second quarters of the year and
counter some of this seasonality. In addition, Big Wheel(R) and Power Driver(R)
ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles ship year-round. The
Company's production generally is heaviest in the period from June through
September. Typically over 60% of toy product revenues are generated in the
second half of the year with September and October being the largest shipping
months. As a result, a disproportionate amount of receivables are collected and
trade credits are negotiated in the first calendar quarter of the following
year. The Company expects that its quarterly operating results will vary
significantly throughout the year.
Sales of holiday products, which are also seasonal in nature, are heavily
concentrated in the Christmas and Halloween shopping season. Therefore,
substantially all shipments and operating income of the holiday products segment
occur in the third and fourth quarters of the year. Of 1995 sales of holiday
items, 55% occurred in the third quarter and 37% occurred in the last quarter.
Most Easter sales are made in the first quarter. Holiday products can be
manufactured throughout the year in anticipation of seasonal demand, because of
the more stable nature of the product line.
20
<PAGE> 23
The following table sets forth summary unaudited financial information of
the Company for each quarter in 1994 and 1995 and the first quarter of 1996.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or for any future period and there can
be no assurance that any trend reflected in such results will continue in the
future:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------------- ---------------------------------------- -------
Q1 Q2 Q3 Q4(1) Q1 Q2 Q3(2) Q4 Q1
------ ------ ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $6,740 $4,677 $19,966 $26,581 $19,088 $19,631 $53,621 $61,404 $22,186
Gross profit......... 1,372 995 6,324 8,716 6,151 6,692 13,975 15,021 5,969
Selling and
administrative..... 2,214 2,451 3,691 8,086 6,804 7,612 10,952 9,692 7,298
Nonrecurring
restructuring and
relocation
charges............ -- -- -- -- (150) (409) (1,177) (6,937) --
Net income (loss).... $ (47) $ (598) $ 1,960 $ (726) $(1,006) $(1,262) $ 53 $(2,286) $(2,156)
</TABLE>
- ------------------------------
(1) During the fourth quarter of 1994, the Company acquired Marchon. See Note 3
of Notes to Consolidated Financial Statements.
(2) During the third quarter of 1995, the Company acquired Buddy L. See Note 3
of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's shipments of its toys produced in
the United States are sold with seasonal dating terms. Payments on sales of the
Company's spring toy product lines produced domestically are generally due June
10th and payments on sales of its fall products are generally due December 10th.
Goods sourced in the Far East are primarily sold under bank letters of credit,
with most payments received within 30 days of shipment. A substantial portion of
the Company's shipments of holiday products are made on terms that permit
payment more than 90 days after shipment of merchandise. Such shipments are
generally made after June and require payment by December 10 of the year in
which shipment is made.
Due to the seasonality of its revenues, the Company's working capital
requirements fluctuate significantly during the year. The Company's seasonal
financing requirements are highest during the fourth quarter and lowest during
the first quarter.
The liquidity and capital resources of the Company reflect the July 7, 1995
acquisition of the toy business assets of Buddy L for a cash outlay of $20.1
million, funded in part through the issuance of $7.6 million principal amount of
three-year senior subordinated notes and the issuance of preferred and common
stock. See "Certain Transactions -- Buddy L Transaction." The Company intends to
exercise its option to redeem all of the senior subordinated notes on July 7,
1996 (for 110% of the original principal amount) and thereby retire the related
warrants to purchase common stock.
Marchon Toys, Ltd., a subsidiary of the Company located in Hong Kong, meets
its working capital needs through two bank credit facilities which are due on
demand. Marchon Toys, Ltd. can borrow up to approximately $2.5 million at
interest rates ranging from 0.5% to 1.75% over the banks' prime rate. The
availability of borrowings is primarily based on Marchon Toys, Ltd.'s accounts
receivable and inventory balances. All of Marchon Toys, Ltd.'s assets are
collateralized under the loan agreements.
The Company's accounts receivable decreased by approximately $19.6 million
during the three months ended March 31, 1996. The cash generated from accounts
receivable primarily funded the increase in inventory of $9.2 million, the
decrease in accounts payable of $3.7 million, and the decrease of notes payable
and current portion of long-term debt of $2.7 million. At March 31, 1996, the
Company had letters of credit outstanding totaling $1.2 million.
The Company's inventory, accounts receivable, notes payable, and accounts
payable balances were considerably higher at December 31, 1995 as compared to
December 31, 1994, due to the acquisition of Buddy L and sales growth of the
Company. At December 31, 1995, the Company had letters of credit
21
<PAGE> 24
outstanding totaling $1.2 million. The Company used approximately $24.8 million
of cash in its operations during the year ended December 31, 1995, primarily to
fund the increase in accounts receivable and inventory resulting from the sales
growth of the Company (principally due to the Buddy L acquisition) and to pay
nonrecurring restructuring and relocation charges.
Capital expenditures, principally the purchase of tooling for new products,
were $970,000 for the first quarter of 1996 as compared to $1.1 million for the
first quarter of 1995. Subsequent to March 31, 1996, the Company entered into an
operating lease with a commencement date of June 15, 1996 for new molding
machines having monthly lease payments of $25,000 for 120 months.
Capital expenditures, principally the purchase of tooling for new products,
were $5.8 million for the year ended December 31, 1995. Capital expenditures for
the year ended December 31, 1994 were $4.5 million and related principally to
warehouse expansion. The Company's capital budget for 1996 provides for
expenditures of approximately $7.5 million to acquire new equipment and tooling
and generally upgrade the Tarboro, North Carolina manufacturing facility.
During the first quarter of 1995, the Company sold marketable securities
for net proceeds of $2.1 million.
During May 1996, the Company entered into a new secured bank facility which
provides up to $85 million in financing. The financing is for a three-year term
at an interest rate of prime plus 1% or LIBOR plus 2.75%. Of the $85 million,
$12 million is in the form of a three-year term loan secured by the Company's
domestic machinery, equipment and real property. The balance of the availability
under the loan agreement is revolving borrowings based on the Company's domestic
accounts receivable and inventory balances as defined. The collateral under the
loan agreement is substantially all of the domestic assets of the Company. The
facility replaces two domestic facilities of $25 million each.
The Company believes that cash generated from operations, amounts available
under the new bank credit facility and the net proceeds to the Company from this
Offering will be adequate to finance its anticipated operating needs for the
foreseeable future, including the July 1996 prepayment of the senior
subordinated notes and the July 1996 repayment of approximately $4.8 million of
notes issued in connection with the Buddy L acquisition.
IMPACT OF INFLATION
The primary raw materials used in the manufacture of the Company's domestic
toys and holiday products are petrochemical derivatives, principally
polyethylene. During 1994 the price of polyethylene increased by approximately
80% from the levels at the end of 1993, with the increases primarily occurring
in the third and fourth quarter of 1994. The Company was unable to pass along a
significant portion of the price increases during 1995. Beginning in late 1995,
the price of polyethylene has declined but still remains above historical
levels. The Company has raised prices in an effort to pass along some of these
cost increases. Due to the time lag between the purchase of raw materials and
the sale of finished goods, results of operations may be only partially affected
in the period in which such prices change.
BACKLOG
The Company had open orders for toys of $17.2 million and $14.4 million as
of December 31, 1994 and December 31, 1995, respectively. Backlog at December
31, 1994 did not include orders for product lines acquired from Buddy L. Backlog
at December 31, 1994 included $9.5 million of orders for Mighty Morphin Power
Ranger(TM) products. Open orders at December 31, 1995 mainly reflected orders
for pool products and water slides and did not include orders for fall toy
product lines. The Company believes that because order patterns in the retail
industry vary from time to time, open orders on any date in a given year are not
a meaningful indication of the future sales.
The Company had open orders of $2.4 million and $4.6 million as of December
31, 1994 and 1995, respectively, for holiday products. Open orders consisted
primarily of sales of Easter products. Due to the seasonal nature of this
segment, management believes that the amount of open orders at December 31 in
any year is not a meaningful indication of future sales.
22
<PAGE> 25
BUSINESS
GENERAL
Empire of Carolina, Inc. designs, manufactures and markets a broad variety
of toys and plastic decorative holiday products. The Company manages its
business through four strategic business units ("SBUs") which are accountable
for specific product categories: (i) ride-on products including Big Wheel(R) and
Power Driver(R) brands; (ii) outdoor activities and games such as Snow Works(TM)
winter sleds and Water Works(TM) water slides and pools (including Crocodile
Mile(R) water slides); (iii) girls and boys toys featuring Buddy L(R) cars,
trucks and other vehicles and Grand Champions(R) collectible horses; and (iv)
holiday products featuring plastic decorative holiday display items, including
the recently introduced Light Toppers(TM) outdoor lighting add-ons. The Company
believes that it is the market share leader in non-powered ride-ons and in
plastic water slides, winter sleds, collectible horses and outdoor decorative
holiday products.
Empire has been a toy manufacturer for approximately 40 years. The
Company's business experienced significant change in 1993 when substantial
non-toy operations were sold, and since mid-1994 the Company has undergone a
change of control and management, established a new business strategy, and
effected two acquisitions which added established core toy product lines to the
Company's business. Following the divestitures of non-toy businesses, Empire's
operations were focused on its toy business, including the Big Wheel(R)
non-powered ride-on product line which has been sold throughout the United
States since 1970, and its plastic decorative holiday products business. In the
third quarter of 1994, current principal stockholders of the Company, led by
Steven Geller, the current Chairman and Chief Executive Officer of the Company,
acquired control of Empire as a base from which to build a diversified toy and
plastic products manufacturing company. In October 1994, Empire acquired
Marchon, a toy designer, marketer and manufacturer founded and managed by Marvin
Smollar, the current President and Chief Operating Officer of the Company.
Marchon's core toy products included Grand Champions(R) collectible horses and
Crocodile Mile(R) water slides. In July 1995, Empire acquired the toy business
and certain related liabilities of Buddy L Inc., one of the oldest toy brands in
the United States whose core toy products included plastic and metal toy cars,
trucks and other vehicles and battery-operated ride-ons.
As a result of these recent transactions, the Company believes it is
well-positioned to become a leading U.S. toy manufacturer. The Company's net
sales were $41.4 million, $58.0 million and $153.7 million, respectively, for
the years ended December 31, 1993, 1994 and 1995. The Company's toy business net
sales were $21.1 million, $33.0 million and $121.6 million, respectively, for
the years ended December 31, 1993, 1994, and 1995, and contributed 51%, 57% and
79%, respectively, of the Company's consolidated net sales. On an unaudited pro
forma basis, 1995 toy sales of the Company, including Buddy L's sales for all of
1995, would have been $155.0 million, or 83% of unaudited pro forma combined
sales. In addition, net sales of decorative holiday products were $20.2 million,
$25.0 million and $32.2 million, respectively, for the years ended December 31,
1993, 1994, and 1995, and contributed approximately 49% of the Company's
consolidated net sales in 1993, 43% in 1994 and 21% in 1995. See Note 13 of
Notes to Consolidated Financial Statements.
The Company's goal is to become a leading supplier of toy and plastic
decorative holiday products to retailers throughout the world. As a result of
the recent transactions, the Company believes it has the following distinct
competitive advantages:
Experienced Management Team. With one exception, all of the Company's
senior management has joined the Company since July 1994. The Company's
management team has extensive experience in the toy industry, and most have
experience at leading toy companies. Steven Geller began his career in the
toy industry in 1962, is the former president of Arco Toys, Inc. and, after
its acquisition by Mattel, served as a member of Mattel's senior management
executive committee. Marvin Smollar founded Marchon in 1984, and developed
its business to approximately $33 million (1993 net sales) prior to its
acquisition by the Company in 1994.
Stable Core Products with Long History of Broad Consumer
Appeal. Empire, Marchon and Buddy L have produced a number of core product
lines consisting of toys and seasonal items which have gained wide product
acceptance over the years. The Company's branded products, including Big
Wheel(R)
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ride-ons, Buddy L(R) vehicles, Grand Champions(R) horses and Crocodile
Mile(R) water slides, are perennial favorites. The majority of the
Company's net sales is from stable products which have long histories of
consumer appeal.
Substantial Domestic Manufacturing and International Sourcing
Capabilities. The Company owns and operates a 1.2 million square foot
manufacturing facility in Tarboro, North Carolina which management believes
is one of the largest plastic toy manufacturing facilities in the United
States and offers one of the broadest ranges of plastic manufacturing
capabilities, including extrusion, vacuum, blow, injection and rotation
plastic molding processes, as well as assembly, sealing and warehousing
operations. The Tarboro facility enables the Company to manufacture large
products at a domestic location, and has substantial additional capacity
during off-peak production periods. In addition, the Company has
considerable experience sourcing products through the Far East. The
Company's balanced manufacturing capabilities enable it to source or
manufacture products domestically or internationally depending on a number
of factors including lead time and shipping and labor costs.
Holiday Product Line. Empire's decorative holiday products have broad
appeal to American families and have provided the Company with a stable
source of revenue. Production of holiday products uses substantially the
same raw materials, equipment, personnel and skills as the Company's toy
business. Holiday products can be manufactured throughout the year in
anticipation of seasonal demand, enabling the Company to schedule
production during off-peak production periods. Holiday products reduce the
Company's dependence on major toy retailers by utilizing different channels
of distribution, such as home improvement and lawn and garden chains.
Strong Relations with Many of the Largest Toy Retailers in the
U.S. Due to the successful history of many of its product lines and its
experienced executives, Empire has strong relations with many of the
largest U.S. toy retailers. Members of management have worked with these
retailers throughout their careers. Since retailers seek a steady supply of
high-quality, appealing, price competitive products and reduced dependence
on single or limited source suppliers, the toy retail industry benefits by
having strong suppliers like Empire, in addition to the largest toy
companies such as Mattel, Hasbro and Tyco.
In order to exploit the available market opportunities in each of the
Company's four major product categories, the Company's products are managed
through four SBUs, each of which has a general manager accountable for its
discrete product lines. SBUs operate across functional lines within the Company
to facilitate the design, development, marketing and manufacturing of products.
The SBU manager is supported by a direct team of employees as well as support
services from other departments, including product development, sales and
manufacturing. Management believes that the SBUs create a highly focused,
entrepreneurial environment within the Company, and enable each SBU to tailor
its products and services to the needs of major customers and to respond quickly
and efficiently to changes in the competitive environment.
INDUSTRY
The Toy Industry
According to the Toy Manufacturers of America, Inc. ("TMA"), an industry
trade group, total domestic shipments of toys, excluding video games and
accessories, were approximately $13.4 billion in 1995. According to the TMA, the
United States is the world's largest toy market, followed by Japan and Western
Europe. The Company estimates that the three largest U.S. toy companies, Mattel,
Hasbro and Tyco, collectively represented less than half of total domestic toy
shipments in 1995. In addition, hundreds of smaller companies compete in the
design and development of new toys, the procurement of licenses, the improvement
and expansion of previously introduced products and product lines and the
marketing and distribution of toy products.
Many factors influence the success of a given toy or product line including
attractive product design, play value, pricing, marketing, in-store exposure and
product availability. While the success of some toy categories varies from year
to year, other categories generally perform well from year to year. The
perennial best sellers,
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which form the backbone of the toy business, are referred to as "core" or
"staple" toys. Less enduring products with relatively short life cycles are
referred to as "fad" or "promotional" items. Along with providing opportunities
for fun and learning, toys traditionally mirror scientific progress, changes in
social attitudes and topical customs and values from the adult world. Many of
the toys which garner the most attention reflect the latest technological
advances, incorporate characters made popular in other mediums or are innovative
extensions of core products.
Toy production is a labor intensive process requiring molding and shaping
or cutting and sewing, coloring, painting or detailing, assembling, inspecting,
packaging and warehousing. Management believes that the substantial majority of
the toys sold in the U.S. are manufactured, either in whole or in part, overseas
where labor rates are comparatively low. The largest foreign producer markets
are China and, to a lesser extent, other countries in the Far East. Most foreign
production is performed by independent contractors who utilize tools, molds and
designs provided by U.S. toy companies and who manufacture products under
exclusive contracts. While foreign manufacturing operations generally have
relatively inexpensive labor costs, such operations require greater lead times
than domestic manufacturing and also result in greater shipping costs,
particularly for larger toys. The design, production and sale of toy products in
the U.S. are subject to various regulations. See "Business -- Regulation."
Toy manufacturers sell their products either directly to retailers, or to
wholesalers who carry the product lines of many manufacturers. There are nearly
74,000 retail outlets in the United States which sell toys and games. These
outlets include small, independent toy stores, large toy specialty retailers;
general merchandise discount chains; department, drug and variety stores; gift
and novelty shops; price clubs and mail order catalogues. Despite the broad
number of toy outlets, retail toy sales have become increasingly concentrated
through a small number of large chains, such as Toys "R" Us, Inc. ("Toys "R"
Us"), Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart Corporation ("Kmart") and Target
Stores, Inc., a division of Dayton-Hudson Corp. ("Target"), which generally
feature a large selection of toys, some at discount prices, and seek to maintain
lean inventories to reduce their own inventory risk. This concentration has
tended to favor larger manufacturers who are able to offer these retail chains
broader product offerings, higher levels of advertising and marketing support
and consistent product support through electronic data interchange and
just-in-time delivery programs. The Company believes that the leading toy
retailers desire to have a greater number of toy suppliers which offer a variety
of quality, branded product lines and which have the financial strength to
support the retailers' product distribution requirements.
While toys are sold year round, toy industry retail sales are heavily
weighted toward the fourth quarter when many toys are purchased as holiday
gifts. Each calendar year begins with a major international toy fair held in
Hong Kong in the first week in January. This trade show is expanded and repeated
in New York in the middle of February. The toy fairs allow manufacturers to
display their current lines and begin the process of generating purchase orders
for the important holiday season. Due to the seasonality and long lead times
required for foreign production, retailer buying activity tends to significantly
lead production and shipment. See "Management's Discussion of Financial
Condition and Results of Operations -- Seasonality and Quarterly Results."
Licensing is a major influence on the toy industry affecting virtually all
product categories. Licensing is the business of leasing the right to use a
legally protected name, graphic, logo, saying or likeness in conjunction with a
product, promotion or service. Licensing is usually accomplished by a formal
agreement between the owner or agent of the licensed property (the licensor) and
the prospective licensee and typically defines the limits of the license, the
standards to be maintained and the compensation (royalties) to be paid the
licensee.
Plastic Decorative Holiday Products Industry
Plastic decorative holiday products, such as Santa Clauses, snowmen,
pumpkins, and Easter baskets, and lighted home and lawn decorative items,
generally are sold through retail outlets including mass merchants and home
improvement and lawn and garden chains. While the decorative holiday products
industry is generally highly fragmented with no dominant market leader, the
Company believes that it has a leading market position in several of the product
categories in which it participates. The Company is not aware of any
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other major manufacturer with a significant market share in most of the product
categories in which the Company participates.
GROWTH STRATEGY
The Company's goal is to become a major supplier of toys and related items
to retailers throughout the world. In order to achieve this goal, the Company's
strategy is to apply the benefits of domestic production and international
sourcing capabilities to basic, branded product lines which have well
established consumer appeal. Management believes changing industry dynamics
favor larger toy companies that can offer a broad selection of popular toy
products, supported by consistent, high quality marketing programs to an
increasingly concentrated distribution channel. Management also believes that
there is significant potential for the Company to leverage its existing
relationships with major retailers because many of such retailers are seeking to
expand their relationships with suppliers like the Company in order to avoid
becoming overly dependent on products from the largest domestic toy companies
and to help assure that reliable supplies of quality products may be obtained at
competitive prices. The following are the principal elements of the Company's
growth strategy:
- Focus on Core Brands with Long Histories of Broad Consumer Appeal. The
Company believes that it possesses a portfolio of branded core product
lines which have gained wide market acceptance over the years and which
have relatively long product life cycles. Management believes that the
Company's core product lines, such as the Big Wheel(R), Buddy L(R) and
Grand Champions(R) product lines, provide the Company with a base from
which to build a diversified toy and plastic products manufacturing
company, and that focusing on products and product line extensions in these
core categories will enhance the Company's financial stability and provide
a platform for continued revenue growth. Further, because many of the
Company's staple products, such as the Big Wheel(R), had not been
aggressively marketed for several years prior to the Change of Control,
management believes that significant additional growth can be realized by
invigorating existing toy lines through effective marketing, improved
packaging, and improved and broader advertising.
- Leverage Existing Manufacturing Capabilities. The Company is in the process
of closing the Buddy L manufacturing facility in Gloversville, New York and
transferring all domestic production to its 1.2 million square foot
facility in Tarboro, North Carolina, which the Company believes will result
in significantly improved overhead absorption and higher operating
efficiencies. While the Company expects its machinery and equipment to have
a relatively high level of capacity utilization during peak production
periods after the domestic manufacturing operations of Buddy L are fully
integrated into its Tarboro facility, the Company will continue to have
substantial additional capacity during non-peak production periods.
Moreover, if additional domestic manufacturing capacity is needed or
desired, the Tarboro facility has significant amounts of available space
for the installation of additional machinery and equipment. The Company
plans to make significant investments in upgrading the equipment and
reconfiguring the operations of the Tarboro facility, which management
believes will ultimately yield additional manufacturing efficiencies and
cost savings.
- Offer Value to Toy Retailers and Consumers. The Company seeks to establish
itself as a value leader in the toy and decorative holiday product
industries by offering retailers high quality products and customer support
at a price which enables the retailer to realize attractive gross margins.
Management believes that the Company's focus on core product lines, when
coupled with its domestic manufacturing capabilities and the operating
efficiencies which the Company expects to realize upon the integration of
all of its domestic manufacturing operations into the upgraded Tarboro
facility, will enable the Company to offer high quality core products and
position itself as a value leader to retailers. In many product categories,
the Company believes that its domestic manufacturing capabilities permit it
to provide significant value to customers through high quality products
that can be manufactured on shorter lead times with lower shipping costs.
Moreover, the Company's strategy of focusing on core product categories
allows the Company to gain economies in its advertising expenses by
leveraging them over multiple products in a category.
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- Expand International Presence. Management believes that markets outside the
United States, including in particular Western Europe and Japan, present
significant growth opportunities for the Company. To date, the Company has
not aggressively marketed its products in international markets. Sales in
such markets accounted for approximately 10% of the Company's consolidated
net sales in 1995, in contrast to Mattel and Hasbro, whose international
sales represented more than 40% of their total 1995 net sales. In addition,
management believes that the international expansion of certain major toy
retailers offers opportunities for the Company to leverage its existing
relationships with such retailers. A major customer of the Company, Toys
"R" Us, had approximately 300 stores in 15 countries outside of the United
States as of April 1995 and additional future growth is expected. To
capitalize on opportunities in international markets, the Company also
plans to develop strategic relationships with independent distributors in
key foreign markets, increase its international sales and marketing
capabilities and develop or modify its products for sale in international
markets.
- Acquire New Product Lines and Licenses. The Company intends to seek to
extend its existing product lines through selective acquisitions of
businesses and product lines. The Company also intends to selectively
pursue third party licensing opportunities, principally to deepen and
expand its existing product lines, as is the case with the Company's
existing licenses with Harley-Davidson(R), Disney(R) characters,
Chevrolet(R), Chrysler/Jeep(R) and Goodyear(R), and, to a lesser extent, to
enter new product categories.
- Product Innovation and Extension of Core Product Lines. Since the Change of
Control in 1994, the Company has created a focused 15 person in-house
research and development team and expenditures on research and development
of new products have increased from approximately $300,000 in 1993 to
approximately $3 million in 1995. Current management of the Company has
begun to introduce product line extensions, such as the Big Wheelie(TM) (a
pedal-powered ride-on designed to safely "pop a wheelie"), which management
believes will strengthen and extend the life cycle of the Company's core
product lines. The Company also has begun to apply the design, marketing
and manufacturing know-how developed in its toy business to its line of
decorative holiday products. The Company has updated many of the characters
in its holiday product line as well as introduced innovative new holiday
products. For example, the Company recently introduced Halloween and
Christmas decorations known as Light Toppers(TM) (decorative caps that fit
on standard pathway lights). Management believes that there is significant
potential for future product innovation, and intends to aggressively
develop new products and product line extensions.
- Develop Additional Countercyclical Product Lines. The Company intends to
continue to develop product lines and categories which will in part
counterbalance the seasonality generally present in the toy industry and to
take advantage of additional capacity at the Tarboro manufacturing facility
during off-peak production periods. The Company believes that its spring
and summer product offerings have significant future growth potential, and
together with the Company's focus on core product lines which ship year-
round, such as Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy
L(R) vehicles, will help reduce the seasonality traditionally associated
with the toy industry. Management is also exploring a possible expansion of
the Company's decorative holiday product lines, which historically have
focused principally on Christmas and Halloween, to include additional
Easter product offerings as well as plastic decorative products for other
holidays throughout the year, such as the Fourth of July. In addition, in
order to utilize excess capacity of the Tarboro facility and the Company's
manufacturing expertise, the array of plastic manufacturing capabilities of
the Tarboro facility is being considered for use in the production of
consumer products other than toys or decorative holiday products.
PRODUCTS
The Company produces and sells over 300 items which are grouped into four
distinct product categories: Ride-ons, Outdoor Activities and Games, Girls and
Boys Toys and Holiday Products.
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Ride-ons
Big Wheel(R), an internationally recognized branded product, is a
three-wheeled, pedal-driven ride-on targeted to appeal to children seven and
under and has been marketed in the United States since 1970. Big Wheels(R) are
manufactured in a variety of sizes and designs to appeal to boys and girls in
various age groups. Certain Big Wheels(R) utilize the Harley Davidson(TM)
licensed trademark and styling. Power Driver(R) products are battery operated
ride-on vehicles that resemble off-road vehicles, domestic passenger vehicles,
motorcycles and racing cars and are targeted at children ages 1 1/2 through
seven. Power Drivers(TM) are powered by D Cell or rechargeable batteries and
come in either three wheeled or four wheeled models. Power Drivers(TM) are
designed for either one or two passengers and travel at speeds ranging from one
to five miles per hour. Several models travel in both forward and reverse and
certain models are designed for multi-surface use -- hard surfaces, grass and
small hills.
Outdoor Activities and Games
Snow Works(TM) winter products consist of plastic sleds, toboggans,
snowboards, saucers and similar sledding items that come in a variety of styles,
sizes and colors. While considered toys, they are also distributed in the
traditional sporting goods market and are targeted to the toddler to teenage age
groups. Water Works(TM) spring and summer products include above ground pools,
water slides and smaller plastic wading pools targeted to toddlers through adult
groups and plastic sand boxes targeted to children. Crocodile Mile(R) water
slides, a long plastic mat over which water is run, is targeted to the five to
teenage age groups. Seasonal toys also include spring and summer items such as
T-ball sets, junior golf sets, plastic slides and other outdoor plastic toys.
The product lines in this SBU strongly favor domestic production where through
its quick manufacturing turnaround capability, the Company can take advantage of
weather conditions which stimulate strong reorder business.
Girls and Boys Toys
Boys Toys. Buddy L(R) vehicles consist of a wide variety of plastic and
metal cars, trucks, airplanes and helicopters. Buddy L(R) vehicles feature
electronic voice, lights, sounds, as well as motorized actions and are primarily
targeted to boys ages two to eight. Buddy L(R) products include highly detailed,
scale replicas of actual vehicles. A few examples include: Dodge Ram 1500(R)
pick-up truck, Ford Mustang GT(R), Chevrolet Camaro(R), Jeep(R) Grand Cherokee,
Sikorsky(R) Helicopter, F-14 Tomcat Jet, Kenworth(R) 18 Wheelers and
Harley-Davidson(R) Motorcycles. Buddy L(R) also offers a wide array of preschool
rescue and construction theme vehicles of various shapes and sizes for children
ages two through four.
Girls Toys. Grand Champions(R) is a branded line of collectible horses and
accessories which includes realistically sculpted and detailed horses. The Grand
Champions(R) line has been offered by the Company for eight years, and has grown
through introductions of new breeds, poses, colors, features and packaging. The
Sound N' Action Stallion(TM) collection features realistic sounds and features.
These horses snort, whinny, "gallop," stomp their foot and rear on their hind
legs. Fantasy Fillies(TM) is a new line of colorful horses which were introduced
at the 1996 New York Toy Fair. Unicorn and Pegasus Fantasy Fillies(TM) have long
manes and tails while Star Prancers have sparkling lights on their manes which
can be activated by pulling on their reins.
Holiday Products
This family of highly decorated plastic products has illuminated millions
of homes and lawns for the last 30 years. Holiday products come in a range of
colors, styles and sizes for three major holidays: Easter, Halloween and
Christmas. These products include Easter baskets and bunnies, Halloween pumpkin
baskets, scarecrows and ghosts, and Christmas nativity scenes, Santa Clauses,
snowmen and outdoor candles. Certain of these products are illuminated. In 1996,
the Company will introduce Light Toppers(TM) brand Halloween and Christmas
decorations, an innovative new way to decorate walkways and trees. With the
popularity of low voltage walkway light fixtures and outdoor lights, Light
Toppers(TM) create an easy way to decorate outdoor areas. The Company has relied
primarily on its domestic blow molding expertise to establish itself as the
leader in high quality illuminated outdoor decorative holiday products.
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MARKETING AND SALES
Toys
The Company's toy products are sold throughout the world, with the United
States representing approximately 90% of estimated 1995 revenues. The balance is
sold primarily in Western Europe and South America. In the United States, the
Company's products are distributed directly to large retailers, including
independent toy stores, toy specialty retailers, general merchandise chain
stores, department stores, gift and novelty shops and other retail outlets and,
to a lesser extent, to wholesalers who carry the product lines of many
manufacturers. In international markets, products are distributed primarily
through distributors and direct sales to retailers.
Although the Company sells to over 1,000 accounts, the Company's three
largest customers accounted for an aggregate of approximately 51% of its toy
sales in 1995. Sales to Toys "R" Us, Wal-Mart and Kmart accounted for 23%, 15%
and 13% of toy sales, respectively, in 1995; 18%, 17% and 11% of toys sales,
respectively, in 1994; and 17%, 14% and 8% of toy sales, respectively, in 1993.
Of the Company's 1995 consolidated net sales, including sales of holiday
products, Toys "R" Us accounted for 18%, Wal-Mart accounted for 18% and Kmart
accounted for 12% of such net sales. No other customer accounted for more than
10% of the Company's consolidated net sales in those years. See "Risk
Factors -- Dependence on Major Customers."
In general, the Company's major customers review its product lines and
product concepts for the upcoming year at showings beginning in January and
February. By the end of June, the Company has historically received orders or
order indications for a substantial majority of its full year's toy business. As
is traditional in the toy industry, these orders generally may be canceled at
any time before they are shipped. Historically, the greatest proportion of
shipments of products to retailers occurs during the third and fourth quarters
of each year.
The Company markets its toys principally through an in-house sales force
and a full-time marketing staff that covers most of the United States. In
addition, the Company uses several independent sales organizations to serve
selected customers or territories, although it has been decreasing its
historical emphasis on such organizations. The Company maintains sales offices
and showrooms in New York City and Hong Kong for its toy products, as well as a
Hong Kong office to oversee the sourcing of foreign production. See Note 13 of
Notes to Consolidated Financial Statements.
Historically, the Company's principal mode of advertising has been
cooperative advertising. Starting in 1995, the Company selectively expanded its
marketing budget to include television advertising, which generally focuses on
the promotion of individual products, such as the Big Wheelie(TM), which
reinforce and strengthen a core product line.
Holiday Products
The Company markets its holiday items through its recently-developed
in-house sales force of full-time salaried employees and approximately 10
independent sales organizations. Senior sales management supervises an
independent sales network, with management controlling the largest accounts as
house accounts. The Company maintains sales offices and showrooms in New York
City for its holiday products along with its toy business. Holiday products are
sold to a national market of approximately 35 large retail store chains and to
numerous other customers, including wholesalers, distributors and retailers. The
Company's marketing strategy also reflects changes in the retailing industry
which have created significant new channels of distribution for decorative
holiday products, such as home improvement and lawn and garden chains.
Wal-Mart and Target accounted for approximately 29% and 13%, respectively,
of the Company's holiday product net sales in 1995. No other holiday product
customer accounted for more than 10% of the Company's total holiday net sales in
1995. See "Risk Factors -- Dependence on Major Customers."
The Company advertises its holiday items through cooperative advertising
allowances to its customers. Management believes that because the Company
produces primarily staple products that have achieved
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market acceptance, it has been able to keep its advertising costs as percentage
of holiday products sales low. In 1995, this rate was less than 1%.
NEW PRODUCT DEVELOPMENT AND LICENSING
Through its product design and development group, the Company regularly
refreshes, redesigns and extends existing product lines and develops new product
lines. Product design and development are principally conducted by a group of
professional designers and engineers employed by the Company. Empire will also
enter into licensing agreements to utilize the name, character or product of a
licensor in its product line. The Company generally focuses on a licensing
agreement as an extension of one of its core product categories. Management
recognizes the importance of licensing and continues to conservatively
participate in this marketing strategy. The Company's current licenses include
certain rights to Harley-Davidson(R), Disney(R) characters, Chevrolet(R),
Chrysler/Jeep(R) and Goodyear(R) trademarks.
The Company devotes substantial resources to product design and
development. During the year ended December 31, 1995 the Company spent
approximately $3 million in connection with the design and development of
products, exclusive of royalty payments. The Company incurred approximately $3
million in research and development expenses during 1995 as compared to
approximately $1.1 million during 1994 and approximately $300,000 during 1993.
Product introductions have focused and generally will continue to focus on
line extensions relating to core product categories. Before tools, dies and
molds for new products are produced, the Company generally prepares mock-ups of
such products for exhibition to its customers. The decision to include a new
product and to build or have built the necessary tools, dies and molds generally
requires preliminary acceptance of the new product by major customers. With
respect to new product introductions, the Company's strategy is to begin
production on a limited basis until a product's initial success has been proven
in the marketplace. The production schedule is then modified to meet demand.
The Company uses licenses with third parties to permit the Company to
manufacture and market toys based on properties which have developed their own
popular identity, often through exposure in various media such as television
programs, movies and cartoons. The Company focuses on licensing agreements to
extend its core product categories. Management recognizes the importance of
licensing and continues to conservatively participate in this marketing
strategy. Sales of Power Rangers(TM) products represented approximately 18% of
toy sales and 14% of consolidated net sales in 1995, and total sales of toys
using licensed trademarks represented approximately 32% of toy sales and 25% of
consolidated net sales in 1995. With the exception of Power Rangers(TM), no
license involved more than 5% of the Company's toy sales in 1995. See "Risk
Factors -- License and Royalty Obligations."
The Company makes selective use of independent toy designers and
developers, who bring products to the Company and are generally paid a royalty
on the net selling price of any products licensed by the Company. These
independent toy designers may also create different products for other toy
companies. Sales of products developed by outside inventors were approximately
11% of toy sales and 8% of consolidated sales in 1995.
MANUFACTURING
The Company has substantial domestic manufacturing and international
sourcing capabilities. Approximately 65% of the Company's consolidated net sales
in 1995 were attributable to products manufactured in the United States. In
contrast, the products of many toy companies are principally manufactured by
third parties in the Far East. The Company also has considerable experience in
sourcing products through the Far East, which has enabled the Company to develop
extensive contacts and expertise in dealing with foreign sources of production.
The Company evaluates a number of factors when determining whether to
manufacture domestically or source through the Far East, including the available
lead time and shipping and labor costs.
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Domestic
The Company believes that its 1.2 million square foot manufacturing
facility in Tarboro, North Carolina is one of the largest plastic toy
manufacturing facilities in the United States, and offers a broad array of
manufacturing capabilities, including extrusion, vacuum, blow, injection and
rotation plastic molding processes, as well as assembly, sealing and warehousing
operations. In order to provide greater flexibility in the manufacture and
delivery of products, and as part of a continuing effort to reduce manufacturing
costs, the Company is concentrating production of its domestically manufactured
core products in the Tarboro facility.
The Company also leases on a month-to-month basis a factory and warehouse
facility located in Gloversville, New York where some of the Buddy L(R) products
are still manufactured. The Company decided not to acquire the Gloversville
facility in connection with the Buddy L acquisition and is in the process of
closing that facility and transferring all domestic production to Tarboro, which
the Company believes will result in significantly improved overhead absorption
and higher operating efficiencies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
The Company expects the machinery and equipment at its Tarboro facility to
have a relatively high level of capacity utilization during peak production
periods after the domestic manufacturing operations of Buddy L are fully
integrated. However, such facility will continue to have substantial additional
capacity during non-peak production periods and, if additional domestic
manufacturing capacity is needed or desired, the Tarboro facility has
significant amounts of available space for the installation of additional
machinery and equipment. Beyond increasing utilization, the Company has started
a significant capital investment program to upgrade the Tarboro facility,
including purchase of new equipment, the reconditioning and refurbishing of
machines and tools, and the rearrangement of production flows in order to
optimize worker efficiency and plant capacity. Management believes these steps
will yield additional manufacturing efficiencies and cost savings. However,
recoupment of the Company's expenditures on this modernization program will
require more than one year, and no assurance can be given as to the Company's
ability to achieve any level of utilization or increased productivity.
The Company bases its production schedules on customer orders, historical
trends, the results of market research and current market information. The
actual shipments of products ordered and the order cancellation rate are
affected by consumer acceptance of the product line, the strengths of competing
products, marketing strategies of retailers and overall economic conditions.
Unexpected changes in these factors can result in a lack of product availability
or excess inventory in a particular product line. Accordingly, the Company
closely monitors market activity and adjusts production schedules accordingly.
The Company manufactures its products chiefly from plastic resins. The
Company purchases certain plastic and non-plastic component parts and
accessories from various sources, including several located in Asia and Mexico.
Products are assembled, painted, decorated and packaged at the Company's
facilities and stored there for shipment.
Foreign
The Company sources product from various manufacturers in the Far East
through its facilities in Hong Kong. Approximately 40 manufacturers are utilized
for this purpose, with over 98% of this production taking place in China. The
Company's policy is generally to maintain ownership of all tooling used in
manufacturing its toys. Items sourced by the Company in the Far East generally
are sold under letters of credit to U.S. and international customers. However, a
portion of the Company's foreign production is sold in inter-company
transactions to Empire in the United States which in turn sells it to U.S.
customers which cannot open letters of credit or which require shorter lead
times than Empire's foreign production program permits.
The inability to obtain its products from foreign manufacturers because of
trade restrictions, work stoppages or otherwise, or a material rise in tariffs,
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Risk Factors -- Foreign Sourcing."
31
<PAGE> 34
RAW MATERIALS
The basic raw materials used by the Company are petrochemical resin
derivatives such as polyethylene and high impact polystyrene. Petrochemical
plastic resin derivatives were the single largest raw material component in cost
of goods sold in 1995. The cost of resin has been subject to volatility during
the past two years. In 1995, the Company obtained approximately 28% of its
petrochemical derivatives from a major domestic chemical company and the balance
from several other sources. The Company generally does not enter into long-term
supply contracts. The Company believes that an adequate supply of petrochemical
derivatives is available from existing and alternate suppliers. There can be no
assurance, however, that there will not be disruptions in the availability of
such supply. The other materials necessary to the various aspects of the
Company's business are generally available in the marketplace from numerous
suppliers.
Costs of petrochemical derivatives are affected by domestic demand and
supply as well as the value of the United States dollar in relation to foreign
currencies. The Company does not enter into any hedging or similar transactions
with respect to its raw materials. During 1994 the price of polyethylene
increased by approximately 80% from the levels at the end of 1993, with the
increases primarily occurring in the third and fourth quarter of 1994. The
Company has raised prices in an effort to pass along a portion of these cost
increases. The Company was unable to pass along a significant portion of the
price increases during 1995. At the beginning of 1995, the price of polyethylene
declined but still remains above historical levels. Due to the time lag between
the purchase of raw materials and the sale of finished goods, results of
operations may be only partially affected in the period in which such prices
change. See "Risk Factors -- Raw Material Prices" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Impact of
Inflation."
COMPETITION
The toy industry is highly competitive, with competition based primarily on
product design, promotion, price, quality and play value. In recent years, the
toy industry has experienced rapid consolidation driven, in part, by the desire
of industry competitors to offer a range of products across a broader variety of
categories. The Company competes with several larger toy companies, such as
Mattel, Hasbro and Tyco, and many smaller companies in the design and
development of new toys, the procurement of licenses, the improvement and
expansion of previously introduced products and product lines and the marketing
and distribution of its product. The larger toy companies, which generally have
greater financial resources than the Company, have generally pursued a strategy
of focusing on core product lines. Core product lines are those lines which are
expected to be marketed for an extended period of time, and which historically
have provided relatively consistent growth in sales and profitability. By
focusing on core product lines, such toy manufacturers have been able to reduce
their reliance on new product introductions and the associated risk and
volatility. The Company also competes with various foreign toy manufacturers and
marketers. Toy manufacturers such as the Company also compete with recreational
products and services that are alternatives or substitutes for toys, including
video games and computer software entertainment products. It is common in the
toy industry for companies to market products which are similar to products
being successfully marketed by competitors. Further, the introduction of new
products and product lines by the Company makes its operations susceptible to
the risks associated with new products, such as production, distribution and
quality control problems and the need to gain customer acceptance. See "Risk
Factors -- Competition."
The sale of holiday products is also competitive. The primary competitive
factors in the sale of holiday products are price, design and product quality.
The decorative holiday products industry is generally highly fragmented with no
dominant market leader. However, the Company believes that it has a leading
market position in several of the product categories in which it participates
and the Company is not aware of any other major manufacturer with a significant
market share in most of the product categories in which the Company
participates.
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<PAGE> 35
REGULATION
The Company's toys are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act (including the Federal Child
Protection and Toy Safety Act of 1969) and the Flammable Fabrics Act, and the
regulations promulgated thereunder. The Consumer Product Safety Act and the
Federal Hazardous Substances Act, enable the Consumer Product Safety Commission
to exclude from the market consumer products that fail to comply with applicable
product safety regulations or otherwise create a substantial risk of injury, and
articles that contain excessive amounts of a banned hazardous substance. The
Flammable Fabrics Act enables the CPSC to regulate and enforce flammability
standards for fabrics used in consumer products.
In addition, the Company may be required to give public notice of any
hazardous or defective products and to repair, replace or repurchase any such
products previously sold. The Company is also required to report to the CPSC any
information which reasonably supports the conclusion that any of its products
may be defective or entail a substantial risk of injury to the public. The
Company is also subject to various state, local and foreign laws designed to
protect children from hazardous or potentially hazardous products. If any of the
Company's products materially contributing to its dollar volume of sales were
found to be hazardous to the public health and safety or to contain a defect
which created a risk of injury to the public, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Product Liability and Regulation."
The Company maintains a quality control program to comply with the various
federal, state, local and international product safety requirements, as well as
to maintain appropriate quality and reliability standards of its products.
The Company uses paint and other raw materials classified as hazardous
substances and generates waste in the manufacture of its products. The Company
is subject to federal and state regulations in the storage and disposal of such
products. See "Risk Factors -- Product Liability and Regulation."
TRADEMARKS AND PATENTS
The Company believes that selective use of patent, copyright and trademark
protection is significant in protecting the Company's rights in its products and
establishing product recognition. The Company has registered more than 60
trademarks in the U.S., including Big Wheel(R), Crocodile Mile(R), Zig Zag
Zoom(R), Grand Champions(R), MR-1 Racing(R), Power Drivers(R) and Buddy L(R),
and owns approximately 30 U.S. patents, including several relating to features
of its Crocodile Mile(R) water slides. Other U.S. trademark and patent
applications are pending. The Company has also sought and obtained trademark
protection with respect to certain of its product lines in selected countries
outside of the United States in which such products are sold.
OTHER
The Company also manufactures and sells apparel buttons, buckles and
novelty items for use in the garment industry. The Company is exploring a
possible sale of this business. However, the Company is not currently
negotiating with any other party, and has no commitments, understandings or
arrangements with respect to any specific sale transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General."
EMPLOYEES
At March 31, 1996, the Company had approximately 1,200 employees in the
United States, approximately 1,000 of whom were full-time employees, and 55
employees in Hong Kong and China. Two employees of the Company who work in the
Company's button, buckle and novelty item business are covered by a collective
bargaining agreement which expires on September 30, 1997. The Company is
exploring a possible sale of such business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General." The
Company generally considers its employee relations to be good.
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<PAGE> 36
PROPERTIES
The 1.2 million square foot Company-owned manufacturing and warehouse
facility in Tarboro, North Carolina is the Company's most significant real
estate interest. The Company also leases on a month-to-month basis a factory and
warehouse facility located in Gloversville, New York where substantially all of
the Buddy L(R) products are currently manufactured. The Company is in the
process of closing the Gloversville facility and transferring all domestic
production to Tarboro. See "Business -- Manufacturing."
The Company also owns a small facility in Tarboro which the Company
presently uses to manufacture and sells plastic apparel buttons, buckles and
novelty items for use in the garment industry. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General."
The Company also leases showroom, office and warehouse space in various
locations, including Delray Beach, Florida, New York, New York, Hong Kong, St.
Louis, Missouri and Mayfield, New York. See "Certain Transactions." In the
opinion of management, the Company's various properties used in operations are
generally in good condition and adequate for the purposes for which they are
utilized. However, the Company is presently seeking to expand its executive
offices in Delray Beach, Florida.
LEGAL PROCEEDINGS
Change of Control Related Litigation. An action was commenced on October
19, 1994 in the Court of Chancery of the State of Delaware (New Castle County)
against the Company as a nominal defendant. The action names Maurice A.
Halperin, Barry S. Halperin, Carol A. Minkin, Halco Industries, Inc., Jeffrey
Swersky, Carl Derman and Steven Geller as defendants. The complaint in the
action, which includes class and derivative claims, alleges, among other things,
that the redemption of the Halperin Group's Common Stock in connection with the
Change of Control occurred at a substantial premium; that the transfer of
control from the Halperin Group to Mr. Geller was inequitable; that the Halperin
Group exercised its control of the Company to appropriate its assets for its own
benefit to the detriment of the plaintiffs; and that certain loans between the
Company and Halco were on terms unfavorable to the Company. The Company is only
a nominal defendant in the derivative claims, but the Company has agreed to
indemnify the Halperin Group to the extent permitted by law, with certain
exceptions. A motion to dismiss the claims was granted on February 5, 1996. The
plaintiff filed a notice of appeal, and on May 2, 1996 filed a voluntary
dismissal of his appeal. If the indemnification obligations of the Company to
the Halperin Group discussed above were triggered, substantial liabilities by
the Company could result. The Company is unable at this time to determine if the
indemnification agreement will be triggered, and, if so, the extent of financial
exposure on the part of the Company to the Halperin Group.
Intellectual Property Litigation. George Delaney and Rehkemper I.D., Inc.
v. Marchon, Inc., is an action pending in the Circuit Court of Cook County,
Illinois which was commenced on December 3, 1990, arising from a business
arrangement between the plaintiffs and Marchon alleging an interest in one of
Marchon's products. On November 22, 1991, the trial court judge issued an
opinion and dismissed plaintiff's complaint with prejudice. Plaintiffs appealed
and, on September 23, 1993, the Appellate Court reversed the dismissal and
remanded the case for further proceedings. To date, the plaintiffs have not
initiated any further proceedings in the trial court.
On August 4, 1992, a patent infringement action was filed against Marchon
and Toys "R" Us, entitled Dennis Merino v. Marchon, Inc. Damages were originally
determined by the jury to be $175,802. Subsequently, the Court, overturned the
jury verdict in part. The Court then entered an Amendment Judgment, which
included prejudgment interest in the amount of $33,472; damages in the amount of
$112,956; Merino's expenses, which were eventually found to be $39,336; and an
injunction against the manufacture, use or sale in the United States of
Marchon's Surf City and Super Surf Slide Waterslides or any waterslides merely
colorably different therefrom by Marchon and Toys "R" Us. On June 3, 1994,
Merino filed a Notice of Appeal on the issues of whether Marchon's Crocodile
Mile(R) and Super Crocodile Mile(R) waterslides infringe plaintiff's patent. On
June 17, 1994, Marchon cross-appealed on the issues of invalidity, patent
non-use, non-infringement of the Surf City and Super Surf Slide waterslides and
the scope of the injunction. On August 5, 1994, the court entered an order
granting Marchon a stay of enforcement of the judgment pending appeal. Empire's
present and past Crocodile Mile(R) waterslides were found non-infringing, and
the two products
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<PAGE> 37
alleged to be infringing are no longer marketed. On January 16, 1996, the U.S.
Federal Court of Appeals affirmed the other court's finding. Merino has filed a
petition for reconsideration.
Environmental Matters. CLR Corporation ("CLR"), a 75%-owned subsidiary of
the Company, is alleged by the EPA to be responsible for disposal activities of
two former subsidiaries at two Superfund sites, located in Southington,
Connecticut and Bennington, Vermont. CLR is among numerous potentially
responsible parties identified by the EPA in connection with each site. The
Company intends to vigorously contest each of these matters. It is the Company's
policy to accrue remediation costs when it is probable that such costs will be
incurred and when they can be reasonably estimated. As of March 31, 1996, the
Company had reserves for environmental liabilities of approximately $400,000.
Estimates of costs of future remediation are necessarily imprecise due to, among
other things, the allocation of costs among potentially responsible parties.
The Company has been notified that it will be served shortly in connection
with a Superfund lawsuit captioned USA, et al. v. Keystone Sanitation, et al.,
United States District Court, Middle District of Pennsylvania, as the party
responsible for the activities of Hanover Klondike Company, Inc., a predecessor
in interest to Isaly Klondike Company, a former subsidiary of the Company. The
Company intends to vigorously contest this matter. The Company and its
subsidiaries may be subject to various other potential environmental claims by
the EPA and state environmental regulatory authorities with respect to other
sites. Other than the Keystone Sanitation matter, neither the EPA nor any state
environmental regulatory authorities have initiated or threatened litigation
regarding any of these sites to date. Although it is possible that additional
environmental liability related to these matters could result in amounts that
could be material to the Company's business, financial position and results of
operations, a reasonably possible range of such amounts cannot presently be
estimated.
Product Liability Matters. Due to the nature of its business, the Company
at any particular time is a defendant in a number of product liability lawsuits
involving personal injury allegedly related to the Company's products. Many of
these claims allege damages for injuries suffered from the use of the Company's
products. Typical product liability claims might include allegations of failure
to warn, design defects or defects in the manufacturing process. While the
Company maintains product liability insurance, no assurance can be given that
such insurance will cover all such product liability claims, that an insurer
will seek to deny or limit coverage or that an insurer will be solvent at the
time of any covered loss. Further, there can be no assurance that the Company
will be able to obtain insurance coverage at acceptable levels, costs and
coverages in the future. Successful assertion against the Company of one or a
series of large uninsured claims, or of one or a series of claims exceeding any
insurance coverage, could have a material adverse effect on the Company's
business, financial condition and results of operations. It is also likely that,
due to deductible and self-retention levels under the Company's insurance
policies, the assertion in any given year of a large number of claims against
the Company could have a similar effect on the Company. See "Risk Factors --
Product Liability and Regulation."
Routine Matters. In addition, the Company is involved from time to time in
routine litigation incidental to its business. Although no assurance can be
given as to the outcome or expense associated with any of these routine
proceedings, the Company believes that none of such proceedings, either
individually or in the aggregate, will have a material adverse effect on the
financial condition of the Company.
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<PAGE> 38
MANAGEMENT
The following table sets forth certain information concerning each of the
Company's directors and executive officers and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------- --- -------------------------------------------------------
<S> <C> <C>
Steven E. Geller............ 54 Chairman of the Board of Directors and Chief
Executive Officer
Marvin Smollar.............. 51 President and Chief Operating Officer; Director
Michael S. Bauer............ 55 Executive Vice President - Sales and Marketing of EII
Stuart J. Drell............. 55 Executive Vice President - Operations of EII
Roy M. Cohen................ 44 Senior Vice President of EII; General Manager -
Outdoor Activities and Games
Harvey A. Katz.............. 44 Senior Vice President of EII; General Manager -
Holiday Products
Bradley D. Kurtz............ 38 Senior Vice President of EII; General Manager - Ride-on
Toys
Thomas W. Prichard.......... 37 Senior Vice President of EII; General Manager -
Girls and Boys Toys
J. Artie Rogers............. 36 Senior Vice President - Finance and Assistant Secretary
Kar Ye Yeung................ 53 Vice President and Managing Director of Marchon Toys
(Hong Kong) Ltd.
Robert A. Mistron........... 53 Senior Vice President - Operations of EII
Lawrence A. Geller.......... 32 Secretary and Counsel
Leonard E. Greenberg........ 68 Director
Steven N. Hutchinson........ 45 Director
Eugene M. Matalene, Jr. .... 48 Director
Peter B. Pfister............ 36 Director
</TABLE>
Steven E. Geller has 34 years experience in the toy industry. Mr. Geller
has served as Chairman of the Board and Chief Executive Officer of the Company
since September 1994, and as Chairman of the Board and Chief Executive Officer
of EII since July 1994. Prior to joining the Company, Mr. Geller served as
President of Arco Toys, Inc., a wholly owned subsidiary of Mattel from December
1986 through December 1991 and as a consultant for Mattel from January 1991
through December 1993. From January 1994 to July 1994, Mr. Geller was
self-employed, engaged in structuring, negotiating and financing the acquisition
of the Company. See "Certain Transactions."
Marvin Smollar has 18 years experience in the toy industry. Mr. Smollar has
been President and Chief Operating Officer of the Company since October 1994. He
founded Marchon, Inc. in 1983 and served as President of Marchon until its
acquisition by the Company in October 1994. From 1978 to 1983, Mr. Smollar was a
co-founder and President of Kidco, Inc., a toy manufacturer and marketing
company. Mr. Smollar is an attorney and prior to entering the toy industry in
1978, he practiced patent, trademark and copyright law. See "Certain
Transactions."
Michael S. Bauer has 30 years experience in the toy industry. Mr. Bauer has
served as a consultant to the Company since February 1996, and as of May 1,
1996, will serve as Executive Vice President -- Sales and Marketing of EII. From
1988 to 1996, Mr. Bauer owned and managed MSB, Inc., a management consulting
firm specializing in toy sales and marketing. Mr. Bauer served as Executive Vice
President of Sales of Coleco Industries (toy company) from 1985 to 1988.
Stuart J. Drell has 35 years experience in the toy industry. Mr. Drell has
served as Executive Vice President of EII since November 1994. Prior to joining
the Company, he served as an Executive Vice
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<PAGE> 39
President of Grand Toys from 1993 to 1994, as a Vice President of Tyco from 1991
to 1992 and as President of Matchbox USA (toy company) from 1989 to 1991.
Roy M. Cohen has 20 years experience in the toy industry. Mr. Cohen has
served as Senior Vice President of EII and General Manager -- Outdoor Activities
and Games since July 1995. Prior to joining the Company, Mr. Cohen founded
KidSource, Inc. in 1993 and served as its President and Chief Executive Officer.
From 1987 to 1993, Mr. Cohen was a founding executive of Sports Authority Inc.
(sporting goods retailer) and served as its Senior Vice President of
Merchandising and Marketing. Mr. Cohen served as Vice President and General
Merchandise Manager of Child World Stores from 1983 to 1987.
Harvey A. Katz has 22 years experience in the toy industry. Mr. Katz has
served as Senior Vice President of EII and General Manager -- Holiday Products
since December 1994. He was Senior Vice President of Sales and Marketing for
Marchon from 1989 until the acquisition of Marchon by the Company in 1994. Mr.
Katz has also served in senior sales and marketing positions with Arco Toys,
Inc., LJN Toys, Knickerbocker Toys, and as a toy buyer with J.C. Penney Co.
Bradley D. Kurtz has four years experience in the toy industry. Mr. Kurtz
has served as Senior Vice President of EII and General Manager -- Ride-on Toys
since December 1995. Prior to joining the Company, Mr. Kurtz served as the Vice
President of Marketing for Power Wheels, a line of ride-on toys at Mattel, from
1994 to 1995 and at Kransco (toy company) from 1992 until its acquisition by
Mattel in 1994. Before entering the toy business in 1992, Mr. Kurtz, held
various positions in both packaged goods marketing and retailing.
Thomas W. Prichard has 16 years experience in the toy industry. Mr.
Prichard has served as Senior Vice President of EII and General Manager -- Girls
and Boys Toys since 1995. Prior to joining the Company, Mr. Prichard served as
Vice President of Marketing and New Product Development for Original Appalachian
Artworks, Inc., the creator and licensor of Cabbage Patch dolls, in 1995. From
1989 to 1994, he served as Vice President of Marketing for Girls Toys, Activity
Toys and Tonka Vehicles at Hasbro, and from 1979 to 1989 he served as a Senior
Buyer for Wal-Mart.
J. Artie Rogers has 10 years experience in the toy industry. Mr. Rogers has
served as Senior Vice President -- Finance of the Company since December 1994.
From 1987 to December 1994, Mr. Rogers served as Vice President -- Finance of
the Company. From 1987 to December 1995, Mr. Rogers served as Secretary of the
Company, and has served as Assistant Secretary since December 1995. Mr. Rogers
is a certified public accountant, and prior to joining the Company in 1986, he
worked for Deloitte Haskins & Sells, predecessor to the Company's current
independent public accountants, for six years.
Kar Ye Yeung has 26 years experience in the toy industry. Mr. Yeung has
served as Vice President and Managing Director of Marchon Toys Ltd. (Hong Kong)
since 1984.
Robert A. Mistron has 28 years experience in the toy industry. Mr. Mistron
has served as Senior Vice President -- Operations of EII since March 1996 and as
Executive Vice President -- Operations of Empire Manufacturing, Inc. from
September 1995 to March 1996. Mr. Mistron was Executive Vice President of
Operations for Buddy L Inc. from 1994 until its acquisition by the Company in
July 1995. Prior to joining Buddy L, Mr. Mistron served as a Vice President for
Fisher Price (toy company) from 1991 to 1994.
Lawrence A. Geller has served as Secretary of the Company since December
1995. Mr. Geller joined the Company in April 1995 as corporate counsel. Prior to
joining the Company, Mr. Geller was engaged in the practice of law with an
emphasis on litigation as a partner with the firm of Imhoff & Geller in Norwalk,
Connecticut from 1993 to 1995. During 1991 and 1992, Mr. Geller was an associate
with the law offices of John W. Imhoff, Jr. and from 1989 to 1991 he was an
associate with the law offices of Francis J. Discala. Mr. Geller is the son of
Steven Geller, the Chairman and Chief Executive Officer of the Company.
Leonard E. Greenberg has served as a director of the Company since 1995.
Since 1986, Mr. Greenberg has served as Chairman of the Board and Chief
Executive Officer of the Resort at Indian Springs, a real estate development
company and home builder.
Stephen N. Hutchinson has served as a director of the Company since 1995.
Mr. Hutchinson has been a Principal of Weiss Peck & Greer, L.L.C. (investment
management) since July 1993. From September 1978
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<PAGE> 40
to June 1993, he served as a Vice President and Director of The Hillman Company
(investment management). Mr. Hutchinson is a member of the board of directors of
Core Source, Inc. and Dollar Financial Corporation. See "Certain Transactions."
Eugene M. Matalene, Jr. has served as a director of the Company since 1995.
Mr. Matalene has served as a Managing Director of PaineWebber Incorporated since
January 1989, as director of the Private Placement Group in the Investment
Banking division of PaineWebber Incorporated since May 1994, as President and
director of PaineWebber Development Corporation since June 1993, and as a
director of PaineWebber Properties Incorporated since June 1993. Mr. Matalene
has served as a member of the board of directors of American Bankers Insurance
Group since May 1990. See "Certain Transactions."
Peter B. Pfister has served as a director of the Company since 1995. Mr.
Pfister has been a Principal of Weiss Peck & Greer, L.L.C. or its predecessor,
since January 1987. Mr. Pfister is a member of the board of directors of Core
Source, Inc., MAC Acquisition, L.P. and Sunbelt Beverage Corporation. See
"Certain Transactions."
COMPENSATION OF DIRECTORS
The Company has agreed to pay each person who is not an affiliate of the
Company or any party to the Shareholders' Agreement (the "Independent
Directors") a retainer of $4,000 per quarter for serving on the Board of
Directors. Messrs. Matalene and Greenberg are currently the only two Independent
Directors. None of the other directors of the Company is paid directors' fees
for serving on the Board of Directors or its committees. All directors are
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings of the Board of Directors and meetings of committees of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees: an Executive
Committee, a Compensation Committee and an Audit Committee. Each such committee
has two or more members, who serve at the pleasure of the Board of Directors.
The Executive Committee is authorized to exercise all of the authority of
the Board of Directors that may be delegated to a committee of the Board under
Delaware law, other than the authority to authorize dividends and other
distributions, to fill vacancies on the Board or its committees, to amend, adopt
or repeal certificate of incorporation or by-law provisions, to approve mergers
or matters requiring stockholder approval, or (except within certain prescribed
limits) to authorize or approve the issuance or reacquisition of shares and
related matters. Currently, all members of the Board of Directors serve on the
Executive Committee.
The Compensation Committee is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Company's
equity benefit plans. Currently, Messrs. Matalene and Hutchinson serve on the
Compensation Committee.
The Audit Committee is responsible for reviewing the Company's financial
statements, audit reports, internal financial controls and the services
performed by the Company's independent public accountants, and for making
recommendations with respect to those matters to the Board of Directors.
Currently, Messrs. Greenberg, Matalene and Pfister serve on the Audit Committee.
TERMS OF DIRECTORS AND OFFICERS
Directors are nominated and placed for election at the annual meeting of
stockholders to hold office for a one-year term and until their successors are
duly elected and qualified. The Shareholders' Agreement and the Marchon
Stockholders' Agreement contain provisions regarding the composition of the
Board of Directors and certain committees of the Board of Directors. See
"Certain Transactions -- The Marchon Transaction" and "-- Shareholders'
Agreement."
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<PAGE> 41
Officers are appointed by the Board of Directors and serve at the pleasure
of the Board, except that Steven Geller, Chairman and Chief Executive Officer of
the Company, and Marvin Smollar, President and Chief Operating Officer of the
Company, are parties to employment agreements with the Company. See "Management
- -- Employment Agreements."
EXECUTIVE COMPENSATION
The following summary compensation table (the "Compensation Table")
summarizes compensation information with respect to the President and Chief
Executive Officer of the Company and each of the Company's most highly
compensated executive officers who earned more than $100,000 for services
rendered during the year ended December 31, 1995 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------------ UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS OTHER ANNUAL OPTIONS COMPENSATION
PRINCIPAL POSITION(S) YEAR ($) ($) COMPENSATION (#) ($)
- ------------------------------- ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller............... 1995 $324,519 -- $ 83,028(1) 200,000(2) $508,075(3)
(Chairman of the Board 1994(4) 132,692 $150,000 -- 500,000(5) --
and Chief Executive Officer) 325,000(6)
Marvin Smollar................. 1995 318,750 -- -- 200,000(2) 290,338(7)
(President and Chief 1994(8) 69,230 32,699 -- -- --
Operating Officer)
J. Artie Rogers................ 1995 132,211 15,000 -- -- --
(Senior Vice President -- 1994 95,385 35,000 -- 35,000(2) 1,190(9)
Finance) 1993 90,000 25,000 -- -- 1,009(9)
Neil B. Saul................... 1995(10) 262,019 -- 29,153(11) -- 69,175(12)
(Former President of 1994(13) 132,692 150,000 -- 500,000(5) --
Empire Industries, Inc.) 475,000(6)
</TABLE>
- ------------------------------
(1) Includes $70,000 paid to Mr. Geller in lieu of reimbursement of expenses
incurred for the benefit of the Company and allowances of $13,028 for
automobile expenses and club dues.
(2) Options granted pursuant to the Company's 1994 Employee Stock Option Plan.
(3) Relocation expenses including a gross-up for individual income taxes.
(4) Includes compensation paid to Mr. Geller from July 15, 1994 through
September 30, 1994.
(5) Includes 60,376 incentive stock options and 439,624 non-qualified stock
options granted pursuant to the Company's 1994 Employee Stock Option Plan.
(6) Represents warrants granted in connection with services rendered with
respect to the Debenture Purchase Agreement.
(7) Includes $287,908 of relocation expenses grossed up for individual income
taxes and $2,430 of life insurance premiums. Excludes $122,265 paid to Mr.
Smollar in 1995 which he earned at Marchon, Inc. prior to its acquisition
by the Company on October 13, 1994, which amount was paid by the Company is
1995.
(8) Includes compensation paid to Mr. Smollar as Chief Operating Officer of the
Company from October 13, 1994 through December 31, 1994.
(9) Includes Company contributions to the Carolina Employee Stock Bonus Plan.
(10) Mr. Saul resigned as President of EII effective October 13, 1995. Under the
terms of a settlement and termination agreement, Mr. Saul will be paid at
an annual rate of $300,000 from January 1, 1996 to July 15, 1998 plus
fringe benefits (which benefits are subject to reduction if Mr. Saul
obtains employment with an entity not affiliated with the Company).
(11) Includes $10,000 paid to Mr. Saul in lieu of reimbursement of expenses
incurred for the benefit of the Company and allowances of $19,153 for
automobile expenses and club dues.
(12) Includes $62,500 of payments subsequent to resignation (see note 10 above)
and $6,675 of life insurance premiums.
(13) Includes compensation paid to Mr. Saul as President of EII from July 15,
1994 through December 31, 1994.
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<PAGE> 42
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
SHARES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM($)(2)
OPTIONS EMPLOYEES PRICE(1) EXPIRATION --------------------
NAME GRANTED IN 1995 ($/SHARE) DATE 5% 10%
- --------------------------------- ---------- ------------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller................. 200,000(3) 40% 6.75 12/13/2005 849,008 2,151,552
Marvin Smollar................... 200,000(3) 40% 6.75 12/13/2005 849,008 2,151,552
J. Artie Rogers.................. -- -- -- -- -- --
Neil B. Saul..................... -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Based on the closing price of the Common Stock on the American Stock
Exchange on the date of grant.
(2) The amounts shown as potential realizable values are based on assumed
annualized rates of appreciation in the price of the Common Stock of five
percent and ten percent over the term of the options, as set forth in the
rules of the Securities and Exchange Commission. Actual gains, if any, on
stock option exercises are dependent upon the future performance of the
Common Stock. There can be no assurance that the potential realizable values
reflected in this table will be achieved.
(3) Options granted on December 13, 1995. Options to acquire 50,000 shares vest
on December 13, 1996 with like annual vesting thereafter through December
13, 1999.
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers that were outstanding at
December 31, 1995:
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(2)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME UPON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ---------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller.......... -- -- 208,338 491,662 $ 100,395 $ 192,058
Marvin Smollar............ -- -- -- 200,000 -- 50,000
J. Artie Rogers........... -- -- -- 35,000 -- 39,375
Neil B. Saul(3)........... 9,940 $21,123 -- -- -- --
</TABLE>
- ------------------------------
(1) Does not include warrants to acquire shares of Common Stock. See "Certain
Transactions."
(2) Based on the $7 per share closing price of the Company's Common Stock on the
American Stock Exchange on December 29, 1995.
(3) In connection with Mr. Saul's settlement and termination agreement, 500,000
options existing at December 31, 1995 were due to expire on February 7,
1996. On that date, Mr. Saul exercised options to acquire 9,940 shares, and
the remaining 490,060 options expired.
EMPLOYMENT AGREEMENTS
On July 15, 1994, Steven Geller entered into an employment agreement
pursuant to which he became Chairman and Chief Executive Officer of EII. Upon
the closing of the redemption of Common Stock from the Halperin Group in
connection with the Change of Control, the obligations of EII under such
agreement were assigned to the Company, and Mr. Geller subsequently became
Chairman of the Board and Chief Executive Officer of the Company. The agreement
provides for a base salary of $300,000 per annum, which was increased by the
Compensation Committee to $325,000 per annum effective January 1, 1995. The
initial term of the agreement expires on July 15, 1998, provided that such term
is automatically extended for successive
40
<PAGE> 43
one-year periods on July 15 of each year (the "Extension Date") commencing July
15, 1996, unless either the Company or Mr. Geller gives 60 days prior written
notice to the other party that it or he elects not to extend the term of the
agreement. Mr. Geller's employment agreement includes non-competition and
confidentiality provisions and a change of control provision which provides that
if for any reason Mr. Geller opposes a change of control (as defined in the
agreement) which occurs while Mr. Geller is employed by the Company, Mr. Geller
may within six months of such change in control elect to terminate his
employment by giving the Company 30 days prior written notice. In the event that
Mr. Geller elects to terminate his employment in such circumstances, he is
entitled to receive a lump sum severance payment equal to (i) 290% of his
then-current compensation (determined in accordance with the agreement) if the
majority of the Company's Board of Directors opposed the change of control or
(ii) 250% of his then-current compensation if the majority of the Company's
Board of Directors approved the change of control, subject in either case to
certain tax limitations.
On October 13, 1994, the Company entered into an employment agreement with
Marvin Smollar pursuant to which Mr. Smollar became President and Chief
Operating Officer of the Company. The agreement provides for a base salary of
$300,000 per annum, which was increased by the Compensation Committee to
$325,000 per annum effective January 1, 1995. The initial term of the agreement
expires on July 15, 1998, provided that such term is automatically extended for
successive one-year periods on July 15 of each year, commencing July 15, 1996,
in the same manner as Mr. Geller's employment agreement. Mr. Smollar's
employment agreement contains non-competition, confidentiality and change of
control provisions which are substantially identical to those in Mr. Geller's
employment agreement.
The Company entered into an employment agreement with Neil Saul, the former
President of EII, on July 15, 1994. Mr. Saul's employment agreement contains
compensation, non-competition, confidentiality and change of control provisions
which are substantially identical to those in Mr. Geller's employment agreement.
Mr. Saul resigned as President of EII effective October 13, 1995. Under the
terms of a settlement and termination agreement, Mr. Saul will be paid at an
annual rate of $300,000 from January 1, 1996 to July 15, 1998 plus fringe
benefits (which benefits are subject to reduction if Mr. Saul obtains employment
with an entity not affiliated with the Company).
CERTAIN TRANSACTIONS
TRANSACTIONS RELATING TO FORMER MANAGEMENT
Prior to September 30, 1994, the Halperin Group collectively owned over 90%
of the then-outstanding shares of Common Stock.
During the first quarter of 1993, the Company repaid borrowings from Halco
of $15 million. On April 7, 1993, Halco notified the Company that it had elected
to exercise its option to convert the remaining $18 million owed by the Company
to Halco into 5,760,000 shares of the Common Stock at the stated conversion
price of $3.125 per share. Halco assigned its rights to acquire the 5,760,000
shares to the following persons in the amounts indicated: Maurice A. Halperin
(2,327,700 shares); Barry S. Halperin (1,851,200 shares); Carol A. Minkin
(1,473,300 shares); and other immediate family members of such persons (107,800
shares). The closing sales price per share of the Common Stock on April 7, 1993
was $6.625.
During 1993, the Company loaned Halco $22 million. The Board of Directors
of the Company at that time had approved the loan to Halco of up to $27 million.
The interest rate on the loan was the prime rate plus 1% with interest paid
monthly. The loan was due on demand but no later than December 15, 1994 and was
secured by the 5,743,887 shares of the Common Stock owned by Halco. Subsequent
to December 31, 1993, an additional $3.8 million was loaned to Halco. On March
29, 1994, Halco repaid the loan in full. The Company does not intend to loan any
funds to Halco in the future.
During 1993, the Company contributed $2 million to the Empire Foundation, a
Florida charitable trust whose trustees were at that time three directors of the
Company, two of whom were also officers of the Company. None of such persons is
currently an officer or director of the Company. In September 1994, the Company
contributed $275,000 to the Empire Foundation. Effective September 30, 1994, the
Empire
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<PAGE> 44
Foundation changed its name to the Halco Foundation and the Halperin Group
agreed to become responsible for the management of the Foundation.
GELLER TRANSACTION AND RELATED MATTERS
During the first half of 1994, Steven Geller, the current Chairman of the
Board and the Chief Executive Officer of the Company, began discussions with the
Halperin Group, which ultimately led, in the second half of 1994, to the Change
of Control of the Company. The Board of Directors of the Company delegated to a
special committee comprised of the independent members of the Board of Directors
(the "Special Committee") the principal authority to make decisions for and on
behalf of the Company with respect to certain proposed transactions involving
the Company and members of the Halperin Group.
On July 15, 1994, Mr. Geller acquired 200,040 shares of Common Stock from
the Halperin Group pursuant to a Stock Purchase Agreement between Mr. Geller and
the Halperin Group (the "Stock Purchase Agreement"), at a purchase price of
$6.50 per share. On that date, Mr. Geller also acquired from Halco, pursuant to
a Stock Option Agreement between Mr. Geller and Halco, an option to purchase an
additional 500,000 shares of Common Stock from Halco over a period of three
years at exercise prices ranging from $6.50 per share to $7.78 per share (the
"Halco Grant"). On the same date, Mr. Geller and Neil B. Saul entered into
separate three year employment agreements pursuant to which Mr. Geller became
Chairman of the Board and Chief Executive Officer of Carolina Enterprises, Inc.,
a subsidiary of the Company (which subsequently changed its name to EII), and
Mr. Saul became President of EII. In connection with such employment, the
Company granted employee stock options for 500,000 shares to each of Messrs.
Geller and Saul. Such options vest over a three year period, and of the 500,000
options granted to each, 60,376 were incentive stock options with an exercise
price of $6.625 per share and the remaining 439,624 were non-qualified stock
options with an exercise price of $6.50 per share.
On September 30, 1994, the Company redeemed 11,766,634 shares of Common
Stock from the Halperin Group for $6.50 per share, the Halperin Group sold an
additional 299,960 shares of Common Stock to Mr. Geller for $6.50 per share and
Maurice A. Halperin agreed to extend a three-year secured subordinated $15
million line of credit to the Company at 3% over prime (which was fully funded
on October 13, 1994 and repaid on December 22, 1994) and resigned his positions
as officer and director of the Company, as did Barry S. Halperin and Carol A.
Minkin. In connection with these transactions, Halco entered into a ten-year
voting agreement with Steven Geller (the "Halco Voting Agreement"), pursuant to
which Mr. Geller was granted the right to vote 1,499,872 shares of Common Stock
owned by Halco, and a right of first refusal with respect to any sale by Halco
in an aggregate amount at any one time in excess of 18,000 shares of Common
Stock. Mr. Geller's right to vote such shares of Common Stock terminates on
Halco's sale thereof to a person other than Mr. Geller. Mr. Geller purchased all
of the shares of Common Stock from the Halperin Group with personal funds and a
loan from Wachovia Bank of North Carolina, N.A. ("Wachovia"). WPG Corporate
Development Associates IV, L.P. ("WPG IV") agreed to purchase Mr. Geller's loan
from Wachovia in the event of Mr. Geller's default.
After the redemption and the resignations of the members of the Halperin
Group from their respective board and officer positions, the two remaining
directors, Jeffrey Swersky and Carl Derman, appointed Mr. Geller to the
Company's Board of Directors, and Mr. Geller was elected Chairman of the Board
of Directors and appointed Chief Executive Officer of the Company. Messrs.
Swersky and Derman resigned their positions in March 1995.
In connection with the foregoing transactions, in September 1994 the
Company entered into indemnification agreements with the members of the Halperin
Group, individually and as custodians for certain of their minor children
(together, the "Halperin Indemnitees"). Pursuant to the terms of the agreements,
the Company agreed subject to certain exceptions to indemnify and hold harmless,
to the fullest extent from time to time permitted by law, each Halperin
Indemnitee who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (hereinafter, a
"proceeding") by reason of the fact that he or she is or was a director,
officer, employee, stockholder, agent or other representative of the Company, or
is or was serving at the request of the Company as a director, officer,
employee, trustee or agent
42
<PAGE> 45
of another enterprise, against any and all costs or losses (collectively,
"Losses") whatsoever, including but not limited to expenses (including
attorneys' and other fees), judgments, fines and amounts paid in settlement,
incurred by the Halperin Indemnitee in connection with such proceeding. The
agreements also require the Company to pay expenses incurred by each Halperin
Indemnitee in defending any proceeding in advance of the final disposition of
such proceeding.
On September 20, 1994, the Company also entered into an indemnification
agreement with Jeffrey Swersky and Carl Derman, each of whom served as a
director of the Company and a member of the Special Committee, pursuant to which
the Company agreed to indemnify, and advance expenses to, Messrs. Swersky and
Derman to the same extent as the Halperin Indemnitees, and in addition, with
respect to any action, suit or proceeding arising out of any actions or
omissions by the Special Committee. In addition, Maurice A. Halperin
individually agreed to indemnify Messrs. Swersky and Derman with respect to any
action, suit or proceeding arising out of any actions or omissions by the
Special Committee. A suit challenging matters related to the redemption, was
commenced on October 19, 1994, in Delaware chancery court against Maurice A.
Halperin, Barry S. Halperin, Carol A. Minkin, Jeffrey Swersky, Carl Derman,
Steven Geller and Halco, and included the Company as a nominal defendant. The
Company has paid the legal fees of those persons under the indemnity agreements.
See "Business -- Legal Proceedings."
THE MARCHON TRANSACTION
On October 13, 1994, the Company acquired Marchon for 1,076,329 shares of
Common Stock, $3.25 million in cash and $3.25 million in one-year purchase money
notes. Marvin Smollar, the former President and principal stockholder of
Marchon, received 90% of the stock, cash and notes, became a director of the
Company and its President and Chief Operating Officer. The Company and the
former Marchon stockholders ("Marchon Stockholders") also entered into a
Registration Rights Agreement pursuant to which a majority in interest of the
Marchon Stockholders have two rights to require the Company to register the
shares so received as well as unlimited "piggyback" rights to register Common
Stock upon certain public offerings by the Company of Common Stock or other
securities.
In connection with the Marchon acquisition, on October 13, 1994, Messrs.
Geller, Saul and Smollar entered into the Marchon Stockholders' Agreement which,
in addition to restricting the transfer of their shares of Common Stock, set
forth a voting agreement among the parties thereto. However, so long as the
Shareholders' Agreement remains in effect, the Shareholders' Agreement takes
precedence over the Marchon Stockholders' Agreement. See "Certain Transactions
- -- Shareholders' Agreement." Pursuant to the Marchon Stockholders' Agreement,
the parties to such agreement agreed to take whatever action is necessary to
elect to the Board of Directors of the Company each party thereto that is then
employed by the Company or any of its subsidiaries as an executive officer. In
addition, Messrs. Geller and Saul agreed to vote their shares of Common Stock to
elect Marvin Smollar or his designee to the Board of Directors until such time
as Mr. Smollar and his affiliates collectively own less than 5% of any class of
voting securities of the Company, and Mr. Smollar agreed to a parallel provision
for Mr. Geller.
On December 7, 1994, Mr. Smollar transferred all of his shares of Common
Stock in the Company to Champ Enterprises Limited Partnership, an Illinois
limited partnership ("Champ") of which Mr. Smollar is a general partner. See
note 7 to "Principal and Selling Stockholders."
THE WPG GROUP INVESTMENT
On December 22, 1994, WPG IV, WPG Corporate Development Associates IV
(Overseas), Ltd. ("WPG Overseas") and certain of their affiliates, including
Peter B. Pfister, a director of the Company (collectively the "WPG Group"),
purchased 300,000 shares (the "WPG Shares") of Common Stock from Mr. Geller for
$1.95 million ($6.50 per share). On that date, the Company issued $15 million
principal amount of debentures. The WPG Group purchased $14.9 million principal
amount of the debentures and Eugene Matalene, Jr., a director of the Company,
and another individual each purchased $50,000 principal amount of the
debentures. The debentures are convertible into an aggregate of 2,000,000 shares
at a conversion price of $7.50 per share (subject to adjustment upon the
occurrence of certain anti-dilution
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<PAGE> 46
events), bear interest at a rate of 9% per annum, are payable quarterly and
mature on December 22, 1999. These debentures are subordinate to the bank
lender's right of payment under its credit agreement with EII and certain other
debt of the Company. Proceeds from the sale of the debentures were used by the
Company to repay its loan from Mr. Halperin. In connection with the purchase of
Common Stock and debentures, the WPG Group and the Company entered into a
Registration Rights Agreement dated as of December 22, 1994 (the "Registration
Rights Agreement"). Pursuant to the Registration Rights Agreement, the WPG Group
has two rights to require the Company to register the Common Stock held by such
persons as well as unlimited "piggyback" rights to register shares of Common
Stock upon certain public offerings by the Company of its Common Stock.
In consideration for services rendered in connection with the December 1994
debenture financing, the Company issued warrants to purchase 1,000,000 shares of
Common Stock at an exercise price of $7.50 per share, of which 325,000 were
issued to Mr. Geller, 475,000 were issued to Mr. Saul, 75,000 were issued to
each of Irwin J. Goldsmith and Charles E. Emby, senior managers of a subsidiary
of the Company and son-in-laws of Mr. Geller, and 50,000 were issued to an
investment affiliate of former corporate counsel to the Company. Mr. Saul
assigned the 475,000 of the warrants issued to him to Leonard E. Greenberg, a
director of the Company, in January 1996. Pursuant to such warrants, Messrs.
Geller and the other warrant holders referred to above have registration rights
substantially identical to those set forth in the Registration Rights Agreement.
SHAREHOLDERS' AGREEMENT
In connection with the purchase of Common Stock and convertible debentures
by the WPG Group, on December 22, 1994, the WPG Group, Mr. Geller, Mr. Saul, Mr.
Smollar and Champ entered into the Shareholders' Agreement. Subsequent to
entering into the Shareholders' Agreement, Champ transferred its shares of
Common Stock to The Autumn Glory Trust, a Cook Islands Registered International
Trust (the "Trust"). See note 7 to "Principal and Selling Stockholders."
(Messrs. Geller, Smollar and Saul, and their permitted transferees (including
the Trust) are hereinafter referred to collectively as the "Geller Group"). The
Trust agreed to be bound by all the terms and conditions of the Shareholders'
Agreement.
So long as it is in effect, the Shareholders' Agreement takes precedence
over the Marchon Stockholders' Agreement. Under the Shareholders' Agreement, the
parties have been granted rights of first refusal and co-sale rights upon
certain transfers of shares of Common Stock and the Geller Group granted a put
right to WPG Group, which put option has expired because the market value of the
Company's Common Stock reached specified levels.
The parties to the Shareholders' Agreement agreed to take all action
(including voting their shares) at the 1995 Annual Meeting of Stockholders to
approve an amendment to the Company's Charter which would, among other things,
provide for the election of a Board of Directors consisting of eight persons, of
which only six were elected and qualified at that Annual Meeting, and which
would include the supermajority provisions contained in the Shareholders'
Agreement. See "Description of Capital Stock." The stockholders of the Company
adopted an amendment to the Charter at the Annual Meeting of Stockholders held
on June 21, 1995.
The Shareholders' Agreement also contains provisions regarding the
composition of the Board of Directors of the Company. The parties agreed that
after the 1995 Annual Meeting, they would vote all their shares of Common Stock
for a Board of Directors comprised of three persons designated by the Geller
Group, two persons designated by the WPG Group and two persons who are not an
affiliate of the parties to the Shareholders' Agreement or the Company (the
"Independent Directors") jointly designated by the WPG Group and the Geller
Group, with the remaining director to be designated by the Board at such time as
it so determines. In addition, the parties agreed to use their best efforts to
ensure that certain directors designated by the WPG Group are named as members
of the Compensation Committee and the Audit Committee of the Board of Directors.
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<PAGE> 47
The Board of Directors is currently comprised of Messrs. Geller, Smollar,
Pfister, Hutchinson, Greenberg and Matalene. Mr. Pfister and Mr. Hutchinson are
the designees of the WPG Group and Messrs. Matalene and Greenberg are the
Independent Directors. See "Management."
If, at any time, the percentage of shares of Common Stock held by the WPG
Group and certain of their transferees declines below 10% of the shares of
Common Stock on a fully diluted basis, the WPG Group would have the right to
designate only one director and the other members of the Board of Directors
previously designated by the WPG Group would be replaced by a person selected by
all of the other members of the Board of Directors. If, at any time, the
percentage of shares of Common Stock held by the WPG Group and certain of their
transferees declines below 5% of the shares of Common Stock on a fully diluted
basis, the WPG Group would have no right to designate members of the Board of
Directors, Audit Committee or Compensation Committee.
The Shareholders' Agreement includes certain supermajority provisions which
effectively give to each of the WPG Group and the Geller Group veto power over
certain corporate transactions. These include a merger or similar business
combination, sales of assets of the Company or its subsidiaries outside of the
ordinary course of business, amendment to the Charter or By-laws, any payment,
other than employment compensation, to any director, officer or stockholder or
affiliate of the Company or to their family members, any declaration or payment
of dividends, any public or private offering of debt or equity (with some
limited exceptions), incurrence of certain indebtedness, adoption of a plan of
liquidation, and acquisition of stock or assets, other than in the ordinary
course of business, for more than $10 million in any calendar year. The
Shareholders' Agreement also includes provisions which give the WPG Group the
right to designate all of the directors if the Company experiences specified
financial difficulties or Messrs. Geller and Saul collectively fail to purchase
(including pursuant to the exercise of options or warrants) at least 500,000
shares of Common Stock by December 22, 1997. However, the WPG Group has agreed
that it will designate Mr. Smollar as one of the directors if he and his
affiliates own at least 5% of the shares of Common Stock of the Company. These
provisions terminate on December 22, 2000, or earlier if (i) the percentage of
shares of Common Stock held by the WPG Group and certain of their transferees on
a fully-diluted basis declines below 19.59% and the market capitalization of the
Company, on a fully diluted basis (as defined in the Shareholders' Agreement)
exceeds $125 million, or (ii) the percentage of shares of Common Stock held by
the WPG Group and certain of their transferees on a fully-diluted basis declines
below 14.69%.
As required by the Shareholders' Agreement, the parties to the
Shareholders' Agreement and their permitted transferees are subject to a voting
agreement under which they and their permitted transferees agree to vote their
shares of Common Stock in order to carry out the corporate governance provisions
contained in the Shareholders' Agreement. In addition, Mr. Pfister and certain
other parties affiliated with WPG (collectively, the "Individual Purchasers")
granted a proxy to WPG IV to vote all shares owned by them on all matters
requiring a vote of stockholders of the Company, and granted WPG IV full power
and authority to take such actions and refrain from taking such actions under
the Shareholders' Agreement as WPG IV deems necessary or appropriate.
THE BUDDY L TRANSACTION
On July 7, 1995, two subsidiaries of the Company, Empire Acquisition Corp.,
now known as Empire Manufacturing, Inc. ("Empire Manufacturing"), and Carnichi
Limited, acquired substantially all of the toy business assets and assumed
certain liabilities of Buddy L, Inc., a debtor-in-possession, and wholly-owned
subsidiary of SLM International, Inc., and Buddy L (Hong Kong) Limited, a
subsidiary of Buddy L, Inc. The purchased assets comprise substantially all of
the former toy manufacturing, design and marketing business of Buddy L. The 1994
toy sales of Buddy L were approximately $118.7 million.
The consideration paid by the Company in the Buddy L acquisition included
the following: (i) 756,667 shares of Common Stock (and up to 454,000 additional
shares of Common Stock as price protection in the event Buddy L sells the
aforementioned received Common Stock under certain circumstances between July 7,
1996 and December 31, 1997 for less than $12 per share); (ii) approximately
$15.6 million in cash and $4.8 million of one-year 10% notes issued to Buddy L
for the purchase of domestic and Canadian inventory and
45
<PAGE> 48
receivables; and (iii) a five-year earnout based upon an amount equal to either
1.5% of the consolidated net revenues of the Company's and Buddy L's products
or, at Buddy L's option, a percentage of the Company's consolidated earnings
before interest and income taxes based on the sales of Buddy L products, but in
no event will the earnout be (x) less than $3.25 million, including $1.25
million in cash paid at closing, (which sum was included in (ii) above), with
the excess over $3.25 million subject to certain offsets that are not to exceed
$10 million or (y) more than $20 million; provided that if the earnout payments
under certain circumstances would have exceeded $25 million, the Company shall
make an additional payment equal to such amount in excess of $25 million. As of
March 31, 1996, the Company had asserted offset claims of approximately $7.8
million. Buddy L also received certain demand and "piggyback" registration
rights with respect to the common stock received by it.
To provide a portion of the funds needed to finance the Buddy L
acquisition, the Company issued $7.58 million of three-year 12% senior
subordinated notes (which notes grant the Company the right to call all but not
less than all of the notes on the first anniversary thereof at a premium equal
to 10% of the principal balance and the right of a majority in interest of the
holders of such notes to put them to the Company at a premium equal to 20% of
the principal balance thereof on the second anniversary of the issuance of such
notes) and 758,000 detachable four-year warrants exercisable commencing July 7,
1997 at $9.00 per share, which warrants lapse if such notes are repaid by the
Company on the first or second anniversary of the issuance thereof. See "Use of
Proceeds." Mr. Geller and Mr. Matalene acquired $500,000 and $100,000 principal
amount of these senior subordinated notes, respectively. In addition, Mr.
Matalene serves as a non-employee director of American Bankers Insurance Company
of Florida, which together with one of its affiliates, acquired an aggregate of
$5 million principal amount of these senior subordinated notes.
Also in connection with the Company's acquisition of Buddy L, affiliates of
WPG purchased 247,392 shares of Common Stock at $7.25 per share and 442,264
shares of Series A cumulative convertible preferred stock at $7.25 per share for
an aggregate purchase price of approximately $5 million. See Notes 3 and 10 of
Notes to Consolidated Financial Statements. Two principals of WPG, Messrs.
Hutchinson and Pfister, are members of the Company's Board of Directors. See
"Management."
TRANSACTIONS WITH AFFILIATES
Effective June 12, 1995, the Company terminated the lease of a facility
located at 555 Corporate Woods Parkway, Vernon Hills, Illinois formerly occupied
by Marchon. The owner of this property was indebted to Marchon for costs
incurred during the construction of the facility in the principal amount of
$506,000 as of December 31, 1995. The loan bears interest at 7.5% per annum, and
principal and interest are due and payable on December 31, 1998. Mr. Smollar is
a guarantor of this debt.
1431 Kingsland Avenue Limited Partnership, of which Mr. Smollar is a
limited partner, owns a facility located at 1431 Kingsland Avenue, St. Louis,
Missouri, which is leased to Marchon Manufacturing, Inc. under a lease
commencing December 15, 1992 and continuing through June 30, 2013. The lease was
assumed by Marchon in connection with the Marchon Transaction. The lease
provides for a monthly rental of $15,000 through December 15, 1995 and $20,000
thereafter. Marchon has transferred its manufacturing function to the Company's
facility in Tarboro, North Carolina, and is attempting to sublet the
aforementioned property in St. Louis or negotiate a lease termination
arrangement. 1431 Kingsland Avenue Limited Partnership was indebted to Marchon
in the principal amount of $55,000 at December 31, 1995, the repayment of which
indebtedness is guaranteed by Mr. Smollar. The loan is due December 31, 1998 and
is non-interest bearing.
During 1994, the Company paid PaineWebber Incorporated ("PaineWebber"), of
which Mr. Matalene, a director of the Company, is a Managing Director, the sum
of $257,055 in connection with the placement of Convertible Debentures. On
December 27, 1994, the Company and PaineWebber entered into an agreement whereby
PaineWebber agreed to perform investment banking services for the Company for a
one year term ending December 27, 1995, in consideration for $275,000 and
warrants to purchase 63,000 shares of Common Stock at $7.50 per share, expiring
December 27, 1997. In 1995, PaineWebber was also paid fees in the amounts of (a)
$225,000 in connection with the placement of $15 million principal amount of
convertible debentures of the Company, (b) $260,000 in connection with the
placement of $7.5 million principal amount
46
<PAGE> 49
of one-year notes of the Company and (c) $94,000 as an advisory fee in
connection with the arrangement of a $25 million bank facility. The Company has
committed to pay PaineWebber an advisory fee of $318,750 in connection with the
arrangement of a pending $85 million bank facility upon the closing of the
facility.
On March 13, 1995, a written agreement was entered into to confirm an
agreement of December 28, 1994 by and between the Company, WPG IV and WPG
Private Equity Partners (Overseas), L.P. ("Private Equity") whereby WPG IV and
Private Equity agreed to provide certain managerial services for the Company to
assist the executive officers of the Company in strategic and financial planning
for the Company for a period ending December 31, 1995. WPG IV and Private Equity
agreed to provide no less than 30 hours per month of service to the Company. In
consideration for such services, WPG IV and Private Equity received,
respectively, warrants to purchase 80,571 and 19,429 shares of Common Stock at
$7.50 per share, expiring December 27, 1997.
The Company's policy is that all transactions between the Company and its
executive officers, directors and principal stockholders occurring outside the
ordinary course of the Company's business be on terms no less favorable than
could be obtained from unaffiliated third parties or are subject to the approval
of the Company's disinterested directors.
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<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996, before and after
giving effect to the sale of the shares of Common Stock offered hereby, by (i)
each person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Selling Stockholder, (iii) each
director of the Company, (iv) each of the Named Executive Officers and (v) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)
NAME AND ADDRESS OF ----------------------- SHARES BEING -----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT(4)
- ---------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Steven E. Geller (5)(6)(25)............. 2,316,669 39.8 333,333 1,483,336 19.1
Marvin Smollar (6)(7)(25)............... 969,283 18.6 -- 969,283 13.6
Neil B. Saul (6)(8)..................... 9,941 * -- 9,941 *
Steven N. Hutchinson (9)................ 2,684,057 36.8 2,384,057 25.8
One New York Plaza
New York, NY 10004
Eugene M. Matalene, Jr.(10)............. 7,667 * -- 7,667 *
Leonard E. Greenberg (6)(11)............ 477,000 8.4 -- 477,000 6.3
11500 El Clair Ranch Road
Boynton Beach, FL 33437
Peter B. Pfister (6)(12)................ 2,041 * -- 2,041 *
J. Artie Rogers......................... 0 -- -- 0 --
Halco Industries, Inc. (13)............. 1,499,872 28.8 500,000 666,539 9.3
441 South Federal Highway
Deerfield Beach, FL 33441
The Autumn Glory Trust (6)(7)(25)....... 819,283 15.7 -- 819,283 11.5
P.O. Box 11
Avarua, Rarotonga
Cook Islands
The Iridium Trust (6)(7)(25)............ 150,000 2.9 -- 150,000 2.1
WPG Corporate Development Associates IV,
L.P. (6)(14).......................... 2,184,294 31.6 231,800 1,952,494 22.1
One New York Plaza
New York, NY 10004
WPG Corporate Development Associates IV
(Overseas), L.P. (6)(15).............. 480,334 8.6 55,900 424,434 5.7
One New York Plaza
New York, NY 10004
Westpool Investment Trust PLC (6)(16)... 67,902 1.3 7,900 60,002 *
Glenbrook Partners, L.P. (6)(17)........ 37,723 * 4,400 33,323 *
Olin Corporation (18)................... 396,000 7.3 396,000 0 --
501 Merritt Seven
Norwalk, CT 06851
Smedley Industries, Inc. (19)........... 756,667 14.5 378,000 378,667 5.3
(formerly Buddy L Inc.)
30 Rockefeller Plaza Suite 4314
New York, NY 10112
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)
NAME AND ADDRESS OF ----------------------- SHARES BEING -----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT(4)
- ---------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Jericho State Capital Corp. (20)........ 13,800 * 13,800 0 --
Harvey Klaris (20)...................... 18,400 * 18,400 0 --
Glenn Chwatt (20)....................... 18,400 * 18,400 0 --
Richard Chwatt (20)..................... 18,400 * 18,400 0 --
William Forester (21)................... 5,000 * 5,000 0 --
Alfred A. LaSorte, Jr. (21)............. 5,000 * 5,000 0 --
SBK Investment Partners (22)............ 50,000 * 50,000 0 --
Charles E. Emby (23).................... 75,000 1.4 37,500 37,500 *
Irwin J. Goldsmith (23)................. 75,000 1.4 37,500 37,500 *
Kar Ye Yeung(24)........................ 43,056 * 4,306 38,750 *
c/o Marchon Toys
Unit 3804-5, 38/F
Wharf Cable Tower
9 Hoi Shing Road
Tsuen Wan, N.T., Hong Kong
Tyler Bulkley........................... 43,056 * 10,000 33,056 *
Harvey Katz............................. 21,528 * 15,000 6,528 *
All directors and executive officers as
a group (7 persons) (25)(26).......... 6,454,675 76.9 333,333 5,321,342 51.5
</TABLE>
- ------------------------------
* Less than 1%.
(1) Unless otherwise indicated, the business address of the 5% beneficial
owners named in the above table is care of Empire of Carolina, Inc., 5150
Linton Boulevard, Delray Beach, Florida 33484.
(2) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares listed in the table, subject to community
property laws, where applicable. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares
which such person has the right to acquire within 60 days. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above, any security which such person or group of persons
has the right to acquire within 60 days is deemed to be outstanding for the
purpose of computing the percentage ownership for such person or persons,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Based upon 5,205,200 shares of Common Stock outstanding plus shares
issuable upon exercise of options, warrants and convertible securities
which are included in the number of shares beneficially owned by such
person.
(4) Based upon 7,149,200 shares of Common Stock to be outstanding upon the
completion of this Offering, plus shares issuable upon exercise of options,
warrants and convertible securities which are included in the number of
shares beneficially owned by such person.
(5) Includes 1,499,872 shares of Common Stock with respect to which Steven
Geller has held voting power pursuant to the Halco Voting Agreement.
500,000 shares subject to the Halco Voting Agreement are anticipated to be
sold by Halco in this Offering. Such 1,499,872 shares include 333,333
shares of Common Stock with respect to which Steven Geller has an option to
purchase from Halco over a period of two years at prices ranging from $6.50
per share to $7.78 per share (the "Halco Grant"). Notwithstanding the
above, Mr. Saul claims beneficial ownership of 166,667 shares of Common
Stock which may be acquired pursuant to the Halco Grant. Includes 291,669
shares of Common Stock which Steven Geller has a right to acquire within 60
days pursuant to options granted under the Company's Amended 1994 Stock
Option Plan and warrants to purchase an additional 325,000 shares of Common
49
<PAGE> 52
Stock at an exercise price of $7.50 per share. Mr. Geller directly owns
200,128 shares of Common Stock.
(6) Does not include shares owned or controlled in certain circumstances by
certain other stockholders of the Company who are parties to the
Shareholders' Agreement, which shares the named beneficial owner may be
deemed to beneficially own pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934, as amended ("Exchange Act").
(7) Mr. Smollar disclaims beneficial ownership of all of these shares. The
beneficial and direct owner of such shares are The Autumn Glory Trust, a
Cook Islands trust, and the Iridium Trust, a Bahamian trust (collectively,
the "Trusts"). The discretionary beneficiaries of the Trusts are Champ
Enterprises Limited Partnership, an Illinois limited partnership ("Champ"),
of which Mr. Smollar is a general partner, as well as the limited partners
of Champ individually, including Mr. Smollar and members of his family.
Champ irrevocably transferred shares to The Autumn Glory Trust subject to
the terms of the Shareholders' Agreement and the Marchon Stockholders'
Agreement, and The Autumn Glory Trust irrevocably shares to the Iridium
Trust, subject to the terms of the Shareholders' Agreement and the Marchon
Stockholders' Agreement. Pursuant to such agreements, Mr. Smollar is to be
designated a director for such time as the Trusts and certain permitted
transferees own 5% of the outstanding Common Stock. The Trusts, through
their respective independent trustees (the "Trustees"), possess all voting
rights with respect to the shares of the Common Stock, subject to the
Shareholders' Agreement and the Marchon Stockholders' Agreement. However,
the Trustees require the confirmation of the respective Protectors of the
Trusts (the "Protector"), in connection with certain activities, including
the exercise of dispositive powers with respect to such shares. Mr. Kar Ye
Yeung, an officer of a subsidiary of the Company, is the Protector of each
of the Trusts, and cannot be removed by any third party. The Protector has
the sole right to appoint his successor, as well as the right to remove the
Trustee at any time. Mr. Smollar does not directly or indirectly have the
legal right to vote or dispose of the shares.
(8) Does not include a right to 50% of the remaining portion of the Halco
Grant, with respect to which Mr. Saul claims beneficial ownership (see note
5 above).
(9) Solely in his capacity as one of two managing general partners of WPG
Private Equity Partners L.P., the general partner of WPG Corporate
Development Associates IV, L.P., and in his capacity as one of the two
managing general partners of WPG Private Equity Partners IV (Overseas) and
in his capacity as a director of WPG CDA IV (Overseas), Ltd., the general
partners of WPG Corporate Development Associates IV, L.P. and WPG Corporate
Development Associates IV (Overseas), L.P. Mr. Hutchinson does not directly
own any shares of Common Stock. The number of shares deemed to be
beneficially owned by Mr. Hutchinson after this Offering will be reduced as
a result of sales by certain of such entities.
(10) Represents 6,667 shares of Common Stock which Mr. Matalene has the right to
acquire upon the conversion of the Convertible Debentures and 1,000 shares
held for the benefit of Mr. Matalene's child. Excludes warrants held by
PaineWebber Incorporated to purchase 63,000 shares of Common Stock at $7.50
per share, expiring December 27, 1997, which were received in connection
with its performance of investment banking services for the Company for the
one year period ending December 27, 1995, as to which Mr. Matalene
disclaims beneficial ownership.
(11) Includes 475,000 shares of Common Stock which Mr. Greenberg has the right
to acquire upon exercise of warrants at an exercise price of $7.50 per
share. Mr. Greenberg purchased these warrants from Neil Saul.
(12) Includes 1,735 shares of Common Stock which may be acquired upon conversion
of the Convertible Debentures and 306 shares directly owned by him which
are subject to the Shareholders' Agreement pursuant to which WPG Corporate
Development Associates, IV, L.P. has the right to vote such shares and
certain other rights. Does not include shares owned by WPG Private Equity
Partners, L.P. and WPG Private Equity Partners (Overseas), L.P. Mr. Pfister
is a general partner of each of these partnerships.
(13) All of these shares are directly owned by Halco, subject to the Halco
Grant. Voting power with respect to these shares is held by Steven Geller
pursuant to the Halco Voting Agreement. Maurice A. Halperin
50
<PAGE> 53
is the indirect owner of the shares owned by Halco and shares investment
power with respect to the shares of Common Stock owned by Halco. Maurice A.
Halperin does not directly own any shares of Common Stock. Barry S.
Halperin, as the owner of substantially all of the shares of common stock
of Halco, is the indirect owner of the shares of Common Stock owned by
Halco and shares investment power with respect to the shares of Common
Stock owned by Halco. Barry S. Halperin does not directly own any shares of
Common Stock.
(14) Voting and dispositive powers are exercised through its sole general
partner, WPG Private Equity Partners, L.P. Voting and dispositive powers of
WPG Private Equity Partners, L.P., which does not directly own any shares
of Common Stock, are exercised through its two managing general partners,
Steven N. Hutchinson and Wesley W. Lang, Jr. Includes (a) 1,531,252 shares
of Common Stock which WPG Corporate Development Associates IV, L.P. has the
right to acquire upon conversion of the Convertible Debentures; (b) 25,573
shares owned in the aggregate by Mr. Pfister, Mr. Whiting, Ms. Kerppola,
Glenbrook and Westpool which are subject to the Shareholders' Agreement
pursuant to which WPG Corporate Development Associates IV, L.P. has the
right to vote such shares, and certain other rights, (c) 86,175 shares of
Common Stock which such persons have the right to acquire upon conversion
of the Convertible Debentures and (d) warrants held by WPG Corporate
Development Associates IV, L.P. to purchase an additional 80,571 shares of
Common Stock at an exercise price of $7.50 per share which were received as
consideration for agreeing to provide certain managerial services to the
Company for the period ending December 31, 1995. However, does not include
shares of Common Stock currently owned by Halco Industries, Inc. which WPG
Corporate Development Associates IV, L.P. may have the right to purchase
pursuant to the terms of a certain stock purchase agreement with Mr.
Geller. Pursuant to Rule 13d-4, WPG Corporate Development Associates IV,
L.P. disclaims beneficial ownership of all such shares. WPG Corporate
Development Associates IV, L.P. directly owns 460,723 shares of Common
Stock. Does not include shares of Common Stock issuable upon conversion of
the Class A Preferred Stock, of which 341,372 are held by WPG Corporate
Development Associates IV, L.P., 82,317 are held by WPG Corporate
Development Associates IV (Overseas), L.P., and 18,575 are held in the
aggregate by Westpool and Glenbrook.
(15) Voting and dispositive powers may be deemed to be shared with its two
general partners, WPG Private Equity Partners (Overseas), L.P. and WPG CDA
IV (Overseas), Ltd. Steven N. Hutchinson and Wesley W. Lang, Jr. serve as
managing general partners of each of WPG Private Equity Partners
(Overseas), L.P. and WPG CDA IV (Overseas), Ltd. Includes 369,238 shares of
Common Stock which it has the right to acquire upon conversion of
Convertible Debentures. Does not include shares of Common Stock issuable
upon conversion of the Class A Preferred Stock, of which 341,372 are held
by WPG Corporate Development Associates IV, L.P., 82,317 are held by WPG
Corporate Development Associates IV (Overseas), L.P., and 18,575 are held
in the aggregate by Westpool and Glenbrook. In addition to shares owned of
record by WPG Corporate Development Associates IV (Overseas), L.P., WPG
Private Equity Partners (Overseas), L.P. beneficially owns warrants to
purchase 19,429 shares of Common Stock.
(16) Includes 52,052 shares subject to convertible debentures.
(17) Includes 28,918 shares subject to convertible debentures.
(18) Includes 240,000 shares issuable upon exercise of warrants exercisable at
$8.50 per share.
(19) Does not include a maximum of 454,000 additional shares of Common Stock
which may be issued for price protection related to the Buddy L
acquisition. The proposed sale of 378,000 shares in this Offering is
subject to the approval of the bankruptcy court overseeing the affairs of
the Selling Stockholder, a debtor in possession.
(20) All of such shares are issuable upon the exercise of currently exercisable
warrants. The business address of each of such persons is 420 East 50th
Street, New York, New York 10022.
(21) All of these shares are issuable upon the exercise of currently exercisable
warrants. The address of each of such persons is care of Alfred A. LaSorte,
Jr., 1645 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401.
(22) All of these shares are issuable upon the exercise of currently exercisable
warrants.
51
<PAGE> 54
(23) Mr. Emby and Mr. Goldsmith are senior managers of a subsidiary of the
Company and sons-in-law of Steven Geller.
(24) Does not include shares owned by The Autumn Glory Trust or The Iridium
Trust. See note 7 above.
(25) These stockholders have granted the options to the Underwriters to purchase
shares of Common Stock to cover over-allotments, if any. Such shares will
not be sold unless the Underwriters exercise the over-allotment option, and
the above table assumes that such over-allotment option will not be
exercised. If the over-allotment option is exercised in full, Mr. Geller
and the Company will sell 100,000 and 296,095, respectively, additional
shares of Common Stock and the Iridium Trust will sell 150,000 shares of
Common Stock.
(26) Where more than one person or entity is the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) of the same shares listed in the table,
such shares are counted only once in determining the totals listed in the
table. Includes the shares of Common Stock attributable to Mr. Smollar as
to which he disclaims beneficial ownership. See note 7 above. Such shares
are directly owned and voted by the Trusts, even though they may be voted
on certain occasions with the Geller Group and the WPG Group pursuant to
the Shareholders' Agreement.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.10 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share, issuable in series (the "Preferred Stock"). The
Board of Directors has designated 442,264 shares of Preferred Stock as Series A
Cumulative Convertible Preferred Stock, $.01 par value (the "Series A Preferred
Stock") and all of such shares of Series A Preferred Stock are outstanding as of
the date of this Prospectus. As of May 28, 1996, there were 5,205,200 shares of
Common Stock outstanding held of record by approximately 2,000 stockholders.
Upon the completion of this Offering, there will be 7,149,200 shares (7,205,295
shares if the over-allotment option is exercised in full) of Common Stock
outstanding.
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Charter and By-laws.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and to not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this Offering will be, when issued and paid
for, fully paid and nonassessable.
PREFERRED STOCK
The Company's Charter provides that the Board of Directors is authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, to issue from time to time up to an aggregate of 5,000,000 shares of
Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying, deferring
52
<PAGE> 55
or preventing a change in control of the Company. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future. The Company has
no present plans to issue any additional shares of Preferred Stock.
TERMS OF SERIES A PREFERRED STOCK
The Board of Directors has designated 442,264 shares of Series A Preferred
Stock. The number of authorized shares of Series A Preferred Stock may be
increased or decreased from time to time by resolution of the Board of
Directors, but in no event shall the number of shares be decreased below the
number of shares of Series A Preferred Stock then outstanding.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series A Preferred Stock are
entitled to receive an amount equal to $7.25 per share, for each share of Series
A Preferred Stock then held by them, as adjusted for any stock split, stock
dividend, merger, reorganization, reclassification or other recapitalization of
the Company, less any distributions previously made to such holders pursuant to
the events described in this paragraph (the "Stated Liquidation Value"). A
consolidation or merger of the Company with or into any other company or
companies, or a sale of all or substantially all of the assets of the Company
shall not be deemed to be a liquidation, dilution or winding up for purposes of
the provision described in the foregoing sentence. Such payment shall be made on
a pro-rata basis, if the assets distributable to holders of the Series A
Preferred Stock are insufficient to pay such amounts in full. Such dividends
shall be payable from the Company's net profits or surplus when determined by
the Board of Directors in its discretion. The Series A Preferred Stock shall not
be entitled to participate in any other or additional surplus or net profits of
the Company prior to the conversion of the Series A Preferred Stock into Common
Stock.
In no event while the Series A Preferred Stock is outstanding may the
Company redeem any shares of Common Stock without the approval of the majority
in interest of the holders of the Series A Preferred Stock. The holders of the
Series A Preferred Stock do not have the right to convert such shares into
shares of Common Stock. Notwithstanding such provision, the shares of Series A
Preferred Stock shall automatically convert into shares of Common Stock on a
share-for-share basis, as adjusted for any stock split, reverse stock split,
stock dividend, merger, reorganization, reclassification or other
recapitalization of the Company, upon the affirmative vote of a majority of the
shares of Common Stock represented at the 1996 Annual Meeting or upon compliance
with Section 228 of the Delaware General Corporate Law (the "DGCL") prior to the
1996 Annual Meeting. On or after such conversion of the Series A Preferred Stock
into Common Stock, all rights to any accrued and unpaid dividends shall lapse.
The WPG Group and the Geller Group have agreed to vote the shares of Common
Stock beneficially owned by them to approve such conversion, and the Company
expects that such conversion will be approved at the 1996 Annual Meeting.
In the event that the Series A Preferred Stock is not automatically
converted into Common Stock on the day after the 1996 Annual Meeting, dividends
shall be payable quarterly at a preferential return equal to 15% per annum of
the Stated Liquidation Value out of funds legally available therefor, such
dividend shall commence on the first day of the third month after the date of
the 1996 Annual Meeting. Such right to return shall be cumulative until such
dividend is paid by the Company. To the extent that dividends are declared and
unpaid, additional dividends or interest shall accumulate on such unpaid
dividends.
Except as required by law or provided as described below, the holders of
the Series A Preferred Stock shall not be entitled to vote such shares of Series
A Preferred Stock. So long as the Series A shall remain outstanding, the Company
shall not, without first obtaining the approval (by vote or written consent), as
provided by law, of the holders of the majority of the outstanding number of
shares of Series A Preferred Stock: (i) alter or change the rights, preferences,
or privileges of the Series A Preferred Stock so as to materially adversely
affect the holders of the Series A Preferred Stock; (ii) increase the authorized
number of shares of the Series A Preferred Stock; or (iii) create any new class
or series of shares having preferences over any outstanding Series A Preferred
Stock as to dividends or assets.
53
<PAGE> 56
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The provisions of the Company's Charter, By-laws and Delaware statutory law
described in this section may delay or make more difficult acquisitions or
changes in control of the Company that are not approved by the Board of
Directors.
The Company is subject to the provisions of Section 203 of the DGCL.
Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Company's Charter provides for eight directors, subject to an increase
by the Board of Directors upon the affirmative vote of more than 80% of the
directors then in office. The Charter provides that the Company will not take
nor permit any of its subsidiaries to take corporate action with respect to the
following matters, except upon the affirmative vote of more than 80% of the
directors then in office: (a) any merger, consolidation or other business
combination of the Company or any of its subsidiaries; (b) sales of assets
(other than the sales of inventory in the ordinary course of business) of the
Company or its subsidiaries (including assets consisting of shares of stock of a
subsidiary) where the gross proceeds of the sale (exclusive of assumptions of
liabilities) are, in the aggregate in excess of $7 million in any calendar year;
(c) any amendment to the Certificate of Incorporation or By-laws of the
Corporation or the subsidiaries; (d) any payment (other than employee
compensation and other ordinary incidents of employment) to any director,
officer, stockholder or affiliate of the Corporation or any of its subsidiaries
or any present or former known spouse, ancestor or descendant of the
aforementioned persons or a trust or other similar entity for the benefit of the
foregoing persons; (e) any declaration or payment of dividends or similar
distributions on securities of the Company; (f) any public or private offering
of convertible debt or other equity securities of the Company or the
subsidiaries, other than (i) the offering of the Shares pursuant to an employee
stock option plan for the benefit of the Company or the subsidiaries and (ii)
certain other issuances of securities; (g) incurrence of indebtedness (other
than indebtedness under the Company's bank credit facility and the purchase
agreement relating to the 1994 debenture financing) by the Company and its
subsidiaries where such indebtedness incurred, together with other indebtedness
then outstanding (other than the Company's bank credit facility, the purchase
agreement relating to the 1994 debenture financing and indebtedness attributable
to amounts owed under the Marchon Stockholders as a result of the exchange of
their shares in Marchon for Common Stock) aggregates $10 million or more; (h)
any adoption of a plan of liquidation of the Company; or (i) any acquisition of
assets and/or stock or related series of acquisitions of assets and/or stock
(other than purchases of inventory and capital expenditures in the ordinary
course of business) which would cause the amount expended (or committed to be
expended) by the Company and its subsidiaries for the acquisition of such assets
and/or stock during a calendar year to exceed $10 million. See "Certain
Transactions -- Shareholders' Agreement."
As permitted by DGCL, the Charter and By-laws provide that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director by reason of any act
or omission occurring on or after July 18, 1988, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
(iv) for any transaction from which the director shall derive an improper
personal benefit or (v) to any extent that such liability shall not be limited
or eliminated by virtue of the provisions of Section 102(b)(7) of the DGCL or
any successor thereof. In addition, the Charter provides that the Company shall,
to the fullest extent authorized by the DGCL, as amended from time to time,
indemnify and hold harmless all directors and officers against all expense,
liability and loss reasonably incurred or suffered by such indemnitee in
connection therewith. Such indemnification shall continue as to an indemnitee
who has
54
<PAGE> 57
ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators. The right to indemnification
includes the right to be advanced funds from the Company for expenses incurred
in defending any proceeding for which a right to indemnification is applicable.
The Company's By-laws provide that special meetings of the stockholders may
be called at any time by resolution of the Board of Directors, the Chairman of
the Board, the Chief Executive Officer, the Chief Operating Officer or the
President, but may not be called by other persons.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
55
<PAGE> 58
UNDERWRITING
The several underwriters named below (the "Underwriters"), for whom William
Blair & Company, L.L.C. and Gerard Klauer Mattison & Co., LLC ("GKM") are acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions set forth in the underwriting agreement by and among
the Company, the Selling Stockholders and the Representatives (the "Underwriting
Agreement"), to purchase from the Company and the Selling Stockholders, and the
Company and the Selling Stockholders have agreed to sell to the Underwriters,
the respective number of shares of Common Stock (excluding the over-allotment
shares) set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------- ---------
<S> <C>
William Blair & Company, L.L.C.....................................
Gerard Klauer Mattison & Co., LLC..................................
---------
Total......................................................... 3,640,639
=========
</TABLE>
The nature of the Underwriters' obligations under the Underwriting
Agreement is such that all shares of Common Stock being offered, excluding
shares covered by the over-allotment option granted to the Underwriters, must be
purchased if any are purchased. In the event of a default by any Underwriter,
the Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters pertaining to the Underwriting
Agreement may be increased or such Underwriting Agreement may be terminated.
The Representatives have advised the Company and the Selling Stockholders
that they propose to offer the shares of Common Stock directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to selected dealers at such price less a concession of not more
than $ per share. Additionally, the Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
other dealers. After the public offering of the Common Stock, the public
offering price and other selling terms may be changed by the Representatives.
The Company and certain Selling Stockholders have granted the Underwriters
an option, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 546,095 shares of Common Stock at the same price
per share to be paid by the Underwriters for the other shares offered hereby. If
the Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
overallotments, if any, made in connection with the distribution of the shares
of Common Stock offered hereby.
The Company, the Company's directors and officers and certain stockholders
of the Company have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into Common
Stock for a period of 180 days, and certain Selling Stockholders have agreed not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into Common Stock for a period of 90 days,
in each case after the effective date of the Registration Statement of which
this Prospectus is a part without the written consent of the Representatives,
except for the shares of Common Stock offered hereby and the sale of shares
pursuant to the over-allotment option.
56
<PAGE> 59
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
GKM has provided various investment banking services to Marchon and the
Company since 1994. In 1994, Marchon paid GKM fees in an aggregate amount of
$237,500 relating to general investment banking services and in connection with
the Company's acquisition of Marchon, and the Company paid GKM fees in an
aggregate amount of $150,000 in connection with the December 1994 placement of
the convertible debentures. In 1995, the Company paid GKM fees in an aggregate
amount of $245,000 and issued three-year warrants to purchase up to 79,000
shares of common stock of the Company at $7.50 per share to GKM for investment
banking services provided in connection with the Buddy L transaction.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Schwartz & Freeman, Chicago, Illinois. Certain legal matters with
respect to the Offering will be passed upon for the Company by Sonnenschein Nath
& Rosenthal, Chicago, Illinois. Certain legal matters with respect to the
Offering will be passed upon for the Underwriters by Kirkland & Ellis, Chicago,
Illinois.
EXPERTS
The consolidated financial statements included in this Prospectus, the
related consolidated financial statement schedules included elsewhere in the
Registration Statement of which this Prospectus is a part, and the consolidated
financial statements as of and for each of the years in the five-year period
ended December 31, 1995, from which the Statement of Operations Data and the
Balance Sheet Data appearing on pages 5 and 15 of this Prospectus have been
derived, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in this Registration
Statement. Such consolidated financial statements, consolidated financial
statement schedules and Statement of Operations and Balance Sheet Data have been
included herein and elsewhere in this Registration Statement in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The audited schedules of the toy business of Buddy L Inc. and subsidiaries
for the years ended December 31, 1993 and 1994 appearing in this Prospectus and
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report appearing herein and
elsewhere in the Registration Statement, and have been so included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Marchon, Inc. and subsidiaries at
December 31, 1993 and for the year then ended appearing in this Prospectus and
the Registration Statement have been audited by Coopers & Lybrand, LLP,
independent auditors, as set forth in their report appearing herein and
elsewhere in the Registration Statement which, as to Marchon Toys Ltd. (Hong
Kong), are based in part on the report of other auditors, and have been so
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Marchon Toys Ltd. (Hong Kong) at
December 31, 1993 and for the year then ended, not separately presented herein,
have been audited by Wong Brothers & Co., independent public accountants, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
57
<PAGE> 60
AVAILABLE INFORMATION
The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "Commission") on Form S-1 under the Securities Act of
1933, as amended, with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by rules of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. With
respect to each such contract or other document filed as a part of or otherwise
incorporated in the Registration Statement, reference is made to the exhibit for
a more complete description of the matters involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Commission. The Registration
Statement, including the schedules and exhibits thereto, as well as such
reports, proxy statements and other information filed by the Company can be
inspected, without charge, and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices maintained by the
Commission at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such materials can also be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on the
American Stock Exchange and copies of such materials may also be inspected and
copied at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006.
58
<PAGE> 61
EMPIRE OF CAROLINA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Empire of Carolina, Inc. and Subsidiaries:
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994, December 31, 1995 and March 31,
1996 (unaudited).................................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996 (unaudited)......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements........................................... F-8
Buddy L Inc. and Subsidiaries:
Independent Auditors' Report......................................................... F-27
Schedules of Net Sales, Cost of Sales and Direct Expenses for the Toy Business of
Buddy L Inc. and subsidiaries for the years ended December 31, 1993 and 1994...... F-28
Unaudited Schedule of Net Sales, Cost of Sales and Direct Expenses for the Toy
Business of Buddy L Inc. and subsidiaries for the period ended July 7, 1995....... F-29
Notes to Schedules of Net Sales, Cost of Sales and Direct Expenses for the Toy
Business of Buddy L Inc. and subsidiaries for the years ended December 31, 1993
and 1994 and the unaudited period ended July 7, 1995.............................. F-30
Marchon, Inc. and Subsidiaries:
Reports of Independent Accountants................................................... F-32
Consolidated Balance Sheet as of December 31, 1993................................... F-34
Consolidated Statement of Operations for the year ended December 31, 1993............ F-35
Consolidated Statement of Changes in Stockholders' Equity for the year ended December
31, 1993.......................................................................... F-36
Consolidated Statement of Cash Flows for the year ended December 31, 1993............ F-37
Notes to Consolidated Financial Statements........................................... F-38
Unaudited Consolidated Condensed Statements of Operations and Retained Earnings
(Deficit) and Cash Flows for the nine months ended September 30, 1994............. F-43
Notes to Unaudited Consolidated Condensed Statements of Operations and Retained
Earnings (Deficit) and of Cash Flows.............................................. F-45
Empire of Carolina, Inc. and Subsidiaries Unaudited Pro Forma Statement of Operations:
Introduction to Unaudited Pro Forma Consolidated Condensed Statement of Operations... F-46
Unaudited Pro Forma Consolidated Condensed Statement of Operations for the year ended
December 31, 1995................................................................. F-47
Notes to Unaudited Pro Forma Consolidated Condensed Statement of Operations.......... F-48
</TABLE>
F-1
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Empire of Carolina, Inc.
We have audited the accompanying consolidated balance sheets of Empire of
Carolina, Inc. and its subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Empire of Carolina, Inc. and
its subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in accordance with generally accepted accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective January 1,
1993 to conform with Statement of Financial Accounting Standards No. 109.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of December 31, 1991,
1992 and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1991 and
1992 (none of which are presented herein); and we expressed unqualified opinions
on those consolidated financial statements. In our opinion, the information set
forth in the statement of operations data and the balance sheet data for each of
the five years in the period ended December 31, 1995, appearing on pages 5 and
15, is fairly stated in all material respects in relation to the consolidated
financial statements from which it has been derived.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 29, 1996
(April 8, 1996 as to Note 17)
F-2
<PAGE> 63
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 2,738 $ 2,568 $ 339
Marketable securities................................... 2,305 189 173
Accounts receivable, less allowances and other
deductions (1994 -- $3,770; 1995 -- $4,290;
1996 -- $4,560)...................................... 15,260 48,957 29,336
Inventories, net........................................ 11,775 30,178 39,367
Prepaid expenses and other current assets............... 1,735 2,046 4,174
Deferred income taxes................................... 4,464 5,596 4,503
-------- -------- ---------
Total current assets................................. 38,277 89,534 77,892
Property, plant and equipment, net........................ 11,171 23,640 22,894
Excess cost over fair value of net assets acquired........ 9,970 15,174 14,965
Trademarks, patents, tradenames and licenses.............. 7,044 10,253 10,052
Other noncurrent assets................................... 1,494 1,552 1,664
-------- -------- ---------
Total................................................ $ 67,956 $140,153 $ 127,467
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt..... $ 8,686 $ 49,206 $ 46,510
Accounts payable -- trade............................... 6,080 17,516 13,828
Accrued income taxes.................................... 3,066 1,575 --
Accrued employee compensation........................... 1,830 1,293 641
Accrued royalties....................................... 1,576 3,705 2,026
Accrued nonrecurring restructuring and relocation
expenses............................................. -- 3,227 1,727
Indemnification obligations related to sales of
subsidiaries......................................... 3,363 1,926 1,117
Other accrued liabilities............................... 4,761 4,249 6,065
-------- -------- ---------
Total current liabilities............................ 29,362 82,697 71,914
-------- -------- ---------
Long-term liabilities:
Convertible subordinated debentures..................... 13,563 13,851 13,923
Senior subordinated notes............................... -- 7,959 8,148
Deferred income taxes................................... 2,894 2,083 2,057
Other noncurrent liabilities............................ 1,560 3,101 3,054
-------- -------- ---------
Total long-term liabilities.......................... 18,017 26,994 27,182
-------- -------- ---------
Total liabilities.................................... 47,379 109,691 99,096
-------- -------- ---------
Commitments and contingencies (See Note 12)
Stockholders' equity:
Common stock, $.10 par value, 30,000,000 shares
authorized, shares issued and outstanding: 1994 --
4,191,000; 1995 -- 5,195,000;
1996 -- 5,205,000.................................... 419 519 521
Preferred stock, $.01 par value, 5,000,000 shares
authorized, shares of series A cumulative convertible
preferred stock authorized, issued and outstanding:
1994 -- 0; 1995 and 1996 -- 442,264 ($3,206,000
involuntary liquidation preference).................. -- 4 4
Additional paid-in capital.............................. 18,972 33,193 33,256
Retained earnings (deficit)............................. 1,842 (2,659) (4,815)
Stockholders' loans..................................... (656) (595) (595)
-------- -------- ---------
Total stockholders' equity........................... 20,577 30,462 28,371
-------- -------- ---------
Total..................................................... $ 67,956 $140,153 $ 127,467
======== ======== =========
</TABLE>
See notes to the consolidated financial statements
F-3
<PAGE> 64
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $41,354 $57,964 $153,744 $19,088 $22,186
Cost of sales.................................. 29,733 40,557 111,905 12,937 16,217
------- ------- -------- ------- -------
Gross profit................................... 11,621 17,407 41,839 6,151 5,969
Selling and administrative..................... 15,086 16,442 35,060 6,804 7,298
Nonrecurring restructuring and relocation
charges...................................... -- -- 8,673 150 --
------- ------- -------- ------- -------
Operating income (loss)........................ (3,465) 965 (1,894) (803) (1,329)
Other income (expenses):
Interest income, dividends and net realized
gains..................................... 3,027 2,612 514 54 13
Unrealized loss on marketable securities..... -- (773) -- -- --
Interest expense............................. (2,937) (1,407) (5,996) (667) (2,132)
Gain on settlement of Connecticut tax
assessment................................ 2,925 -- -- -- --
------- ------- -------- ------- -------
Total other income (expenses)........... 3,015 432 (5,482) (613) (2,119)
------- ------- -------- ------- -------
Income (loss) from continuing operations before
income taxes and cumulative effect of an
accounting change............................ (450) 1,397 (7,376) (1,416) (3,448)
Income tax expense (benefit)................... 1,066 808 (2,875) (410) (1,292)
------- ------- -------- ------- -------
Income (loss) from continuing operations before
cumulative effect of an accounting change.... (1,516) 589 (4,501) (1,006) (2,156)
Income from discontinued operations, net of
tax.......................................... 25,729 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before cumulative effect of an
accounting change............................ 24,213 589 (4,501) (1,006) (2,156)
Cumulative effect of change in accounting for
income taxes................................. 114 -- -- -- --
------- ------- -------- ------- -------
Net income (loss).............................. $24,327 $ 589 $ (4,501) $(1,006) $(2,156)
======= ======= ======== ======= =======
Income (loss) per common share:
Primary earnings per share --
Income (loss) from continuing operations
before cumulative effect of an accounting
change.................................... $ (0.10) $ 0.05 $ (0.96) $ (0.24) $ (0.41)
Income from discontinued operations.......... 1.75 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before cumulative effect of an
accounting change......................... 1.65 0.05 (0.96) (0.24) (0.41)
Cumulative effect of change in accounting for
income taxes.............................. 0.01 -- -- -- --
------- ------- -------- ------- -------
Net income (loss).............................. $ 1.66 $ 0.05 $ (0.96) $ (0.24) $ (0.41)
======= ======= ======== ======= =======
Fully diluted earnings per share --
Income (loss) from continuing operations
before cumulative effect of an accounting
change.................................... $ (0.07) $ 0.05 $ (0.96) $ (0.24) $ (0.41)
Income from discontinued operations.......... 1.58 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before cumulative effect of an
accounting change......................... 1.51 0.05 (0.96) (0.24) (0.41)
Cumulative effect of change in accounting for
income taxes.............................. 0.01 -- -- -- --
------- ------- -------- ------- -------
Net income (loss).............................. $ 1.52 $ 0.05 $ (0.96) $ (0.24) $ (0.41)
======= ======= ======== ======= =======
Dividends per common share..................... $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======== ======= =======
</TABLE>
See notes to the consolidated financial statements
F-4
<PAGE> 65
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CUMULATIVE
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL RETAINED TREASURY STOCK FOREIGN
----------------- --------------- PAID-IN EARNINGS ------------------ CURRENCY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TRANSLATION LOANS TOTAL
------- ------- ------ ------ ---------- -------- ------- -------- ----------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1,
1993....... 10,640 $ 1,064 -- $ -- $ 39,157 $ 16,660 (105) $ (789) $(1,560) $-- $ 54,532
Net income... -- -- -- -- -- 24,327 -- -- -- -- 24,327
Conversion of
debt into
common
stock...... 5,760 576 -- -- 17,424 -- -- -- -- -- 18,000
Sale of
assets of
foreign
subsidiary... -- -- -- -- -- -- -- -- 1,560 -- 1,560
------- ------- ---- ---- -------- ------- -------- ------- ------ ----- --------
Balance,
December 31,
1993...... 16,400 1,640 -- -- 56,581 40,987 (105) (789) -- -- 98,419
Net income... -- -- -- -- -- 589 -- -- -- -- 589
Purchase of
treasury
stock...... -- -- -- -- -- -- (13,181) (86,111) -- -- (86,111)
Cancellation
of treasury
stock...... (13,286) (1,329) -- -- (45,837) (39,734) 13,286 86,900 -- -- --
Issuance of
common
stock in
Marchon
acquisition...1,077 108 -- -- 6,488 -- -- -- -- -- 6,596
Net
stockholders'
loans...... -- -- -- -- -- -- -- -- -- (656) (656)
Issuance of
common
stock
warrants... -- -- -- -- 1,740 -- -- -- -- -- 1,740
------- ------- --- ---- -------- ------- -------- ------- ------- ------ --------
Balance,
December 31,
1994..... 4,191 419 -- -- 18,972 1,842 -- -- -- (656) 20,577
Net loss..... -- -- -- -- -- (4,501) -- -- -- -- (4,501)
Issuance of
common
stock in
Buddy L
acquisition... 757 76 -- -- 9,004 -- -- -- -- -- 9,080
Issuance of
common
stock...... 247 24 -- -- 1,770 -- -- -- -- -- 1,794
Issuance of
preferred
stock...... -- -- 442 4 3,202 -- -- -- -- -- 3,206
Collections
on
stockholders'
loans...... -- -- -- -- -- -- -- -- -- 61 61
Other capital
transactions -- -- -- -- 245 -- -- -- -- -- 245
------- ------- ---- ---- -------- ------- -------- ------- ------ ----- --------
Balance,
December 31,
1995....... 5,195 519 442 4 33,193 (2,659) -- -- -- (595) 30,462
Net loss
(unaudited)... -- -- -- -- -- (2,156) -- -- -- -- (2,156)
Issuance of
common
stock
(unaudited)... 10 2 -- -- 63 -- -- -- -- -- 65
------- ------- ---- ---- -------- ------- -------- ------- ------ ----- --------
Balance,
March 31,
1996
(unaudited)...5,205 $ 521 442 $ 4 $ 33,256 $ (4,815) -- $ -- $-- $(595) $ 28,371
======= ======= === ==== ======== ======= ======== ======= ====== ===== ========
</TABLE>
See notes to the consolidated financial statements
F-5
<PAGE> 66
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------
1993 1994 1995 1995 1996
--------- -------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 24,327 $ 589 $ (4,501) $(1,006) $(2,156)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Cumulative effect of change in accounting for
income taxes.................................... (114) -- -- -- --
Depreciation and amortization..................... 1,796 2,283 7,211 1,200 2,273
Changes in allowances for losses on assets........ 492 1,444 703 178 224
Losses (gains) on sales of securities ............ (2) 141 3 -- 16
Income from discontinued operations............... (25,729) -- -- -- --
Writedown of assets............................... -- 773 17 -- --
Other............................................. 1,067 163 -- -- (800)
Changes in assets and liabilities, net of
acquisitions and dispositions of businesses:
Accounts receivable............................. 590 6,294 (31,422) 231 19,497
Inventories..................................... (492) (1,312) (5,095) (5,435) (9,289)
Prepaid expenses and other current assets....... 122 84 135 (1,218) (2,128)
Increase in other noncurrent assets............. -- (749) (58) 464 (187)
Accounts payable -- trade....................... 386 (8,754) 11,436 3,026 (3,688)
Accrued and other liabilities................... (1,305) 589 (1,368) (1,294) (2,024)
Accrued and deferred income taxes............... (1,540) (1,528) (3,434) (520) (508)
Other noncurrent liabilities.................... (424) (352) 1,541 88 142
-------- ------- -------- ------- -------
Net cash provided by (used in) operating
activities................................. (826) (335) (24,832) (4,286) 1,372
-------- ------- -------- ------- -------
Cash flows from investing activities:
Capital expenditures................................ (1,423) (4,453) (5,750) (1,118) (970)
Acquisition of Marchon, net of cash acquired........ -- (2,618) -- -- --
Acquisition of Buddy L.............................. -- -- (20,092) -- --
Loans to Halco Industries, Inc...................... (22,000) (3,825) -- -- --
Repayment of loan by Halco Industries, Inc.......... -- 25,825 -- -- --
Proceeds from sales of property and equipment....... 575 139 -- -- --
Proceeds from sales of marketable securities........ 529 68,538 2,096 2,099 --
Collections on stockholders' loans.................. 61 -- --
Net proceeds from the sales of subsidiaries......... 103,376 -- -- -- --
Purchase of marketable securities................... (71,841) -- -- -- --
Net cash provided by discontinued operations........ 446 -- -- -- --
-------- ------- -------- ------- -------
Net cash provided by (used in) investing
activities................................. 9,662 83,606 (23,685) 981 (970)
-------- ------- -------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) under lines-of-credit... 8,912 (11,538) 35,767 7,178 (1,428)
Proceeds from issuance of common stock.............. -- -- 1,794 -- 65
Proceeds from issuance of preferred stock........... -- -- 3,206 -- --
Repayments of long-term debt........................ (16,753) (204) -- (2,925) (1,268)
Proceeds from issuance of long-term debt............ -- 15,000 7,580 -- --
Purchase of treasury stock.......................... -- (86,111) -- --
Sale of minority interest in CLR 25 -- -- -- --
-------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities:................................ (7,816) (82,853) 48,347 4,253 (2,631)
-------- ------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents......................................... 1,020 418 (170) 948 (2,229)
Cash and cash equivalents, beginning of period........ 1,300 2,320 2,738 2,738 2,568
-------- ------- -------- ------- -------
Cash and cash equivalents, end of period.............. $ 2,320 $ 2,738 $ 2,568 $ 3,686 $ 339
======== ======= ======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................... $ 2,897 $ 1,413 $ 4,246 $ 611 $ 1,554
Income taxes, net of refunds...................... 35,209 3,310 163 110 43
</TABLE>
See notes to the consolidated financial statements
F-6
<PAGE> 67
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NONCASH INVESTING AND FINANCING ACTIVITIES
On July 7, 1995, the Company acquired the toy business assets and assumed
certain liabilities of Buddy L Inc. and its subsidiary, Buddy L (Hong Kong)
Limited, for an aggregate purchase price of $33,925,000, including the issuance
of (i) $4,753,000 one-year notes and (ii) 756,667 shares of common stock. The
acquisition was funded as follows (in thousands):
<TABLE>
<S> <C>
Sale of common stock (247,392 shares)...................................... $ 1,794
Sale of Series A cumulative convertible preferred stock (442,264 shares)... 3,206
Borrowings under line of credit............................................ 7,512
Borrowings under senior subordinated notes................................. 7,580
One-year notes issued to seller............................................ 4,753
Issuance of common stock to seller (756,667 shares)........................ 9,080
-------
$33,925
=======
</TABLE>
The components of cash used for the acquisition as reflected in the
consolidated statements of cash flows are as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired.............................................. $37,829
Liabilities assumed........................................................ (3,904)
One-year notes issued...................................................... (4,753)
Common stock issued (756,667 shares)....................................... (9,080)
-------
Cash paid in acquisition................................................... $20,092
=======
</TABLE>
On October 13, 1994, the Company acquired all of the common stock of
Marchon, Inc. ("Marchon") for approximately $13,664,000. In connection with the
acquisition, the Company issued $3,250,000 one-year notes and 1,076,923 shares
of common stock as partial consideration for the purchase. Components of cash
used for the acquisition as reflected in the consolidated statements of cash
flows are summarized as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, net of cash acquired....................... $ 37,371
Liabilities assumed....................................................... (24,907)
One-year notes issued..................................................... (3,250)
Common stock issued (1,076,923 shares).................................... (6,596)
--------
Cash paid in acquisition, net of cash acquired............................ $ 2,618
========
</TABLE>
During 1995, the Company finalized its allocation of the purchase price of
Marchon by decreasing assets acquired and increasing liabilities assumed by
$65,000 and $461,000, respectively, and increasing excess cost over fair value
of net assets acquired by $526,000.
During 1994, the Company issued warrants to Steve Geller, Neil Saul and
their designees who assisted them in connection with debenture financing and to
certain investment bankers to purchase 1,242,000 shares of the Company's common
stock. As a result, paid in capital increased $1,740,000, prepaid assets
increased $303,000, and debt decreased $1,437,000.
During 1994, the Company cancelled all shares held in treasury at September
30, 1994. The result of the cancellation was a reduction in common stock of
$1,329,000, a reduction in paid in capital of $45,837,000, a reduction in
retained earnings of $39,734,000, and a reduction in treasury stock of
$86,900,000.
During 1993, Halco Industries, Inc. converted $18,000,000 of debt owed by
the Company into an aggregate of 5,760,000 shares of the Company's common stock.
As a result, common stock increased $576,000 and additional paid-in capital
increased $17,424,000.
See notes to the consolidated financial statements
F-7
<PAGE> 68
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION)
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business Operations -- Empire of Carolina, Inc. ("Empire" or the "Company")
is engaged in the design, manufacture and marketing of toys, plastic decorative
holiday products and buttons through its wholly-owned subsidiaries Empire
Industries, Inc. ("Empire Industries"), Marchon, Inc. ("Marchon") and Empire
Manufacturing, Inc. ("Empire Manufacturing").
On July 7, 1995, two wholly-owned subsidiaries of Empire, Empire
Acquisition Corp., now known as Empire Manufacturing, Inc., a Delaware
corporation, and Carnichi Limited acquired the toy business assets and assumed
certain liabilities of Buddy L Inc., a Delaware corporation and a wholly-owned
subsidiary of SLM International, Inc., and Buddy L (Hong Kong) Limited, a Hong
Kong corporation and a subsidiary of Buddy L Inc. (the toy business of Buddy L
Inc. and Buddy L (Hong Kong) Limited, collectively referred to as "Buddy L").
The 1995 acquisition of Buddy L and the 1994 acquisition of Marchon are
discussed in Note 3.
From 1989 through early 1993, the Company was engaged in additional
businesses through other subsidiaries. See Note 15.
See Note 2 concerning a change in control of the Company during 1994.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and all of its majority-owned subsidiaries
after elimination of intercompany accounts and transactions. See Notes 3 and 15.
Unaudited Financial Statements -- In the opinion of management, the
consolidated statements of earnings and the consolidated statements of cash
flows for the three months ended March 31, 1995 and 1996 and the consolidated
balance sheet as of March 31, 1996 include all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
and results of operations and cash flows for the periods then ended in
accordance with generally accepted accounting principles.
Cash and Cash Equivalents -- Cash and cash equivalents include all highly
liquid investments having an original maturity of three months or less.
Marketable Securities -- Marketable securities are classified as available
for sale and consist of liquid equity securities. The specific identification
method is used to determine gains or losses when securities are sold.
Inventories -- Inventories are stated at the lower of cost or net
realizable value. Cost is determined on a first-in, first-out ("FIFO") basis.
Property -- Property is stated at cost and includes expenditures for major
betterment's and renewals. Depreciation is recorded over the estimated useful
lives of the assets using straight-line or accelerated methods. Assets lives by
property types are as follows:
<TABLE>
<S> <C>
Building and improvements........................................ 10-35 years
Machinery and equipment.......................................... 5-10 years
Molds............................................................ 3 years
Furniture and fixtures........................................... 7-10 years
Computer equipment............................................... 3-5 years
</TABLE>
Debt Issue Costs -- The costs related to the issuance of debt are
capitalized and amortized to interest expense using the effective interest
method over the lives of the related debt. Such amounts are included in other
noncurrent assets in the consolidated balance sheets.
Sales -- Sales are recorded net of anticipated returns, discounts and
allowances.
F-8
<PAGE> 69
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Research and Development -- Research and development costs, included in
selling and administrative expenses (1993 -- $311,000; 1994 -- $1,112,000; 1995
- -- $2,984,000; three months ended March 31, 1996 -- $837,000), are expensed as
incurred.
Deferred Income Taxes -- Deferred income taxes are accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes
(benefits) are provided on temporary differences between the financial statement
carrying values and the tax bases of assets and liabilities. See Note 8.
Identifiable and Unidentifiable Intangible Assets -- Excess of cost over
fair value of net assets acquired relating to the Company's acquisitions of
Marchon and Buddy L are being amortized on a straight-line basis over a period
of twenty years. Amortization expense for 1993, 1994 and 1995 was $0, $104,000
and $641,000, respectively. Accumulated amortization at December 31, 1995 was
$745,000.
Patents, trademarks, tradenames, and licensing agreements represent assets
acquired relating to the Company's acquisitions of Marchon and Buddy L and are
carried at fair market value on the date of acquisition less accumulated
amortization. These assets are being amortized on a straight-line basis over
their estimated useful lives, which range from one to fifteen years.
Amortization expense for 1993, 1994 and 1995 was $0, $200,000 and $1,091,000,
respectively. Accumulated amortization at December 31, 1995 was $1,291,000.
The Company assesses the recoverability of identifiable and unidentifiable
intangible assets based on management's projections of future cash flows of
acquired businesses, including the related product lines, as appropriate.
Foreign Currency -- The financial position and results of operations of
Marchon Toys, Ltd. ("Marchon Toys"), Marchon's wholly-owned Hong Kong
subsidiary, are measured using local currency as the functional currency.
Foreign currency assets and liabilities are translated into their US dollar
equivalents based on rates of exchange prevailing at the end of each respective
year. Revenue and expense accounts are translated at prevailing exchange rates
during the year. Gains and losses resulting from foreign currency translation
are accumulated as a separate component of stockholders' equity. Transactions in
foreign currencies are translated at the rates in effect on the dates of the
transactions.
Earnings Per Share -- Primary earnings per share are based on the
weighted-average shares of common stock and dilutive common stock equivalents
outstanding during the year. Fully diluted earnings per share are based on the
weighted-average shares of common stock and dilutive common stock equivalents
outstanding during the year adjusted for the assumed conversion of certain debt
into common stock. See Note 11.
Newly Issued Accounting Pronouncements -- In May 1995, SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, was issued. This Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed. The Company does not
believe the adoption of SFAS No. 121 will have a material effect on its
consolidated financial statements. The Statement is required to be implemented
by the Company in 1996.
Accounting for Stock Based Compensation -- In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which was effective
for the Company beginning January 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. Companies are permitted, however,
to continue to apply APB Opinion No. 25, which recognizes compensation
F-9
<PAGE> 70
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
cost based on the intrinsic value of the equity instrument awarded. The Company
will continue to apply APB Opinion No. 25 to its stock based compensation awards
to employees and will disclose the required pro forma effect on net income and
earnings per share for the year ending December 31, 1996.
Reclassifications -- Certain amounts for 1993 and 1994 have been
reclassified to conform to 1995 presentation.
2. CHANGE IN CONTROL
Prior to the 1994 change in control, Maurice A. Halperin, Barry S.
Halperin, and Carol A. Minkin, officers and/or directors of the Company, and
Halco Industries, Inc. ("Halco"), a corporation whose stock was held principally
by Barry S. Halperin, owned, in the aggregate, approximately 91% or 13,566,000
shares of the outstanding shares of common stock of the Company after the
purchase by the Company of the shares tendered under the tender offer that
expired on January 11, 1994. See Note 10.
On September 30, 1994 the Company redeemed 11,766,634 shares of its common
stock for $6.50 per share from Maurice A. Halperin, Barry S. Halperin, Carol A.
Minkin, members of their families and Halco (collectively, the "Halperin
Group"). Subsequent to the redemption on September 30, 1994, Maurice A. Halperin
and Barry S. Halperin resigned as directors and officers of Empire and its
subsidiaries, and Carol A. Minkin resigned as a director of Empire. Thereafter,
on September 30, 1994, Steven Geller ("Geller") was elected Chairman of the
Board and Chief Executive Officer of Empire.
Geller, under separate agreements with the Halperin Group, (a) purchased
500,000 shares of common stock of the Company from the Halperin Group at $6.50
per share, (b) acquired an option to purchase up to 500,000 shares of common
stock of the Company from Halco at prices between $6.50 and $7.78 per share over
a three-year period and (c) acquired the right to vote Halco's remaining
1,499,872 shares of common stock of the Company (which shares include the shares
Geller has the option to purchase referred to in (b) above). Geller's right to
vote such shares terminates upon the Halperin Group's disposal thereof. Geller
has certain rights of first refusal relative to the Halperin Group's disposal of
their remaining shares.
Effective July 15, 1994, Geller and Neil Saul ("Saul") entered into
employment agreements with minimum terms of three years, pursuant to which
Geller became Chairman and Chief Executive Officer of Empire Industries, and
Saul became President of Empire Industries. In connection with such employment,
on July 18, 1994, each of Messrs. Geller and Saul were granted options to
purchase an aggregate of 500,000 shares of common stock pursuant to the
Company's 1994 Stock Option Plan. Options to acquire 60,376 shares of common
stock vest over a three-year period and are exercisable at $6.625 per share and
options to acquire 439,624 shares of common stock vest over a three-year period
and are exercisable at $6.50 per share. Pursuant to the terms of Geller's
employment agreement, upon the closing of the redemption of the Halperin Group's
shares, the obligations of Empire Industries under such employment agreement
were assigned to the Company. Thereafter, the Board elected Geller Chairman of
the Board and Chief Executive Officer of the Company. In connection with a 1995
severance agreement, all of Saul's options, except for 9,940 shares exercised
subsequent to December 31, 1995, expired during the first quarter of 1996.
In connection with the merger of Marchon, which is discussed in Note 3,
Marvin Smollar ("Smollar"), the former Chairman of the Board of Directors,
President and principal stockholder of Marchon, was appointed to the Company's
Board of Directors and became the Company's President and Chief Operating
Officer on October 13, 1994.
F-10
<PAGE> 71
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
2. CHANGE IN CONTROL (CONTINUED)
Subsequent to the merger of Marchon, Smollar transferred shares he received
in the merger to Champ Enterprises Limited Partnership ("Champ"), of which
Smollar is a general partner and one of the limited partners. Subsequent to the
execution of the Shareholders' Agreement, Champ assigned its stock in the
Company to the Autumn Glory Trust, an International Registered Trust (the
"Trust"). The Trust agreed to be bound by the Shareholders' Agreement and the
Marchon Shareholders' Agreement, as discussed below.
Geller, Saul, Smollar, Champ, and holders of $14.9 million of the Company's
9% convertible debentures, entered into a Shareholders' Agreement
("Shareholders' Agreement") dated December 22, 1994. So long as it is in effect,
the Shareholders' Agreement takes precedence over a stockholders' agreement (the
"Marchon Shareholders' Agreement") among Geller, Smollar and Saul, dated October
14, 1994 (Geller, Smollar and Saul, and their permitted transferees collectively
the "Geller Group"). Under the Shareholders' Agreement, the parties have been
granted rights of first refusal and co-sale rights upon certain transfers of
shares of the Company's common stock. In addition, the debenture holders, for a
one-year period commencing on the fifth anniversary of the date of the
Shareholders' Agreement, have one-right (the "Put Right"), subject to certain
conditions, to cause the Geller Group, at the option of the Geller Group, to
either (i) purchase the Company's common stock or cause third parties to
purchase the Company's common stock that would result from the conversion by the
debenture holders and certain other shares at either an agreed to or appraised
value or (ii) use their best efforts (including, but not limited to, voting
their shares) to effectuate a sale of the Company's stock or assets on terms
reasonably acceptable to the debenture holders and the Geller Group. The Put
Right shall terminate at such time, if ever, as the Company's trading market
value (determined on a fully-diluted basis) is in excess of $125,000,000 or the
Company has sold either $30,000,000 in shares or 2,000,000 shares at $7.50 per
share, pursuant to one or more registration statements solely for cash.
The Shareholders' Agreement also contains provisions regarding the
composition of the Board of Directors of the Company (the "Board of Directors").
The Shareholders' Agreement provides that more than 80% of the members of the
Board of Directors are required to approve certain major transactions. Upon the
occurrence of certain unfavorable events, the debenture holders would have the
right commencing in 1996 to designate all of the members of the Board of
Directors.
At December 31, 1995, Geller, Saul, the Trust and the debenture holders
collectively owned, assuming conversion of exercisable options, warrants, and
convertible debentures, or have voting power with respect, to approximately
6,583,000 shares or 77% of the Company's common stock.
3. ACQUISITION OF MARCHON, INC. AND BUDDY L
Marchon, Inc. -- On October 13, 1994, Marchon, Inc. was merged into a
newly-created wholly-owned subsidiary of the Company, which then changed its
name to Marchon, Inc. The stockholders of the former Marchon, Inc. received, in
consideration of such merger, 1,076,923 shares of the Company's common stock and
$6,500,000 in cash (payable $3,250,000 at closing and the balance one year from
closing). The acquisition has been accounted for by the purchase method of
accounting. An excess purchase price of approximately $10,500,000 has been
determined, based upon the fair values of assets acquired and liabilities
assumed with the acquisition. The operating results of this acquisition are
included in the Company's consolidated results of operations from the date of
acquisition.
Buddy L -- On July 7, 1995, two subsidiaries of the Company, Empire
Manufacturing, Inc. and Carnichi Limited, a Hong Kong corporation, acquired the
toy business assets and assumed certain liabilities of Buddy L.
F-11
<PAGE> 72
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
3. ACQUISITION OF MARCHON, INC. AND BUDDY L (CONTINUED)
The purchased assets comprise the former toy manufacturing, design and
marketing business of Buddy L. The Company will continue to operate the business
using the trademark "Buddy L" in order to take advantage of Buddy L brand
recognition.
The consideration for the acquisition included the following: (i) 756,667
shares of the Company's common stock (and up to 454,000 shares of common stock
as price protection in the event Buddy L sells the aforementioned received
common stock under certain circumstances between July 7, 1996 and December 31,
1997 for less than $12.00 per share); (ii) approximately $15,600,000 in cash and
$4,753,000 of one-year 10% notes issued to Buddy L for the purchase of domestic
and Canadian inventory and receivables; and (iii) a five-year earnout based upon
an amount equal to either 1 1/2% of consolidated sales of the Company's and
Buddy L's products or, at Buddy L's option, a percentage of the Company's
consolidated earnings before interest and income taxes based on the sale of
Buddy L products, but in no event will the earnout be less than $3,250,000,
including $1,250,000 in cash paid at closing (which sum was included in (ii)
above), with the excess over $3,250,000 subject to certain offsets not to exceed
$10,000,000. The amount of earnout is also limited so as not to exceed certain
levels except under certain circumstances. Buddy L also received certain demand
and "piggyback" registration rights with respect to the Company's common stock.
An excess purchase price of approximately $5,300,000 has been determined,
based upon the fair values of assets acquired and liabilities assumed with the
acquisition. Excess of cost over fair value of net assets acquired relating to
the Company's acquisition of the net assets of Buddy L is being amortized on a
straight-line basis over a period of twenty years.
Approximately $4,300,000 of the purchase price of the assets of Buddy L has
been allocated to the trademarks acquired.
To provide a portion of the funds needed to finance the acquisition, the
Company issued three-year senior subordinated notes in the aggregate principal
amount of $7,580,000 bearing interest at the rate of 12% per annum (see Note 7).
The holders of the notes were issued four-year warrants for the purchase of up
to 758,000 shares of the Company's common stock on the basis of one share of
common stock for each $10 of notes acquired, exercisable commencing July 7, 1997
at an exercise price of $9.00 per share. If the notes are redeemed, the warrants
lapse. The Company also issued 247,392 shares of its $.10 par value common stock
at $7.25 per share and 442,264 shares of its $.01 par value Series A cumulative
convertible preferred stock at $7.25 per share.
In addition, the Company secured a new revolving credit loan through Empire
Manufacturing (see Note 7).
The following unaudited proforma results of continuing operations assume
the transactions described above occurred as of January 1, 1994 after giving
effect to certain adjustments, including amortization of the excess of cost over
underlying net assets (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Net sales.................................................... $215,102 $187,193
Loss from continuing operations before income taxes and
cumulative effect of an accounting change.................. (73,212) (22,818)
Net loss..................................................... (48,647) (14,693)
Loss per share:
Primary and fully diluted............................... (9.27) (2.83)
</TABLE>
F-12
<PAGE> 73
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
3. ACQUISITION OF MARCHON, INC. AND BUDDY L (CONTINUED)
The unaudited pro forma financial information does not purport to be
indicative of the results of operations that would have occurred had the
transactions taken place at the beginning of the periods presented or of future
results of operations.
4. INVESTMENTS
Marketable Securities -- Effective January 1, 1994, the Company adopted
SFAS No. 115. In accordance with SFAS No. 115, the Company records its
investments in marketable equity securities, which are classified as available
for sale, at fair value. The effect of the adoption of SFAS No. 115 was not
material to the Company's financial statements.
At December 31, 1994, the Company determined that the decline in fair value
for all of their securities was other than temporary. In accordance with SFAS
No. 115, the Company recorded a $773,000 writedown to reflect its securities at
net realizable value and included such writedown in the consolidated statement
of operations for the year ended December 31, 1994. Included in interest income,
dividends and net realized gains are net realized gains (losses) on sales of
marketable securities of $2,000, $(140,000) and $(3,000) for the three years
ended December 31, 1993, 1994 and 1995, respectively.
The Company's and its subsidiaries' investments consist of the following:
<TABLE>
<CAPTION>
MARKET VALUE CARRYING VALUE
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1994:
Investment in common stocks........................... $1,734 $1,734
Investment in preferred stocks........................ 399 399
Investments in limited partnerships................... 172 172
------ ------
Total................................................. $2,305 $2,305
====== ======
December 31, 1995:
Investments in preferred stocks....................... $ 189 $ 189
====== ======
March 31, 1996:
Investments in preferred stocks....................... $ 173 $ 173
====== ======
</TABLE>
5. INVENTORIES
A summary of inventories, by major classification, at December 31, 1994 and
1995 and March 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Raw materials................................. $ 4,393 $ 13,591 $10,980
Work-in-process............................... 980 2,169 7,183
Finished goods................................ 6,402 14,418 21,204
------- ------- -------
$ 11,775 $ 30,178 $39,367
======= ======= =======
</TABLE>
Inventories are net of writedowns for lower of cost or market reserves of
$1,283,000, $3,141,000 and $3,332,000 at December 31, 1994 and 1995 and March
31, 1996, respectively.
F-13
<PAGE> 74
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at December 31, 1994 and 1995 and March 31,
1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Land....................................................... $ 223 $ 223 $ 223
Buildings and improvements................................. 10,371 11,393 11,443
Machinery and equipment.................................... 13,046 21,683 22,150
Molds...................................................... 7,706 15,472 15,904
Furniture and fixtures..................................... 853 709 730
------- ------- -------
Total.................................................... 32,199 49,480 50,450
Less accumulated depreciation.............................. 21,028 25,840 27,556
------- ------- -------
Property, plant and equipment, net......................... $ 11,171 $ 23,640 $22,894
======= ======= =======
</TABLE>
No interest was capitalized during 1994 and 1995.
7. NOTES PAYABLE AND LONG-TERM DEBT
The following table summarizes notes payable and long-term debt as of
December 31, 1994 and 1995 and March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Lines of Credit(a)........................................ $ 4,559 $ 45,612 $ 44,578
One-year notes issued in Marchon acquisition(b)........... 3,250 166 16
Hong Kong facilities(c)................................... 877 600 206
9% convertible subordinated debentures(d)................. 13,563 13,851 13,923
12% senior subordinated notes(e).......................... -- 7,959 8,148
One-year notes issued in Buddy L acquisition(f)........... -- 2,828 1,710
------- ------- --------
22,249 71,016 68,581
Less notes payable and current portion of long-term
debt.................................................... 8,686 49,206 (46,510)
------- ------- --------
Total long-term debt...................................... $ 13,563 $ 21,810 $ 22,071
======= ======= ========
</TABLE>
(a) Empire Industries has a credit facility, expiring May 15, 1996, under
which Empire Industries can borrow up to $25,000,000 at an interest rate ranging
from LIBOR plus 3.75% to LIBOR plus 4.25% (9.78% at December 31, 1995). The
availability of borrowings under the loan agreement is based on Empire
Industries' eligible domestic accounts receivable and inventory balances, as
defined. In addition, Empire Industries may borrow up to an additional
$5,000,000 subject to the total facility limit of $25,000,000. The collateral
under the loan agreement is Empire Industries' accounts receivable, inventories,
and machinery and equipment. The loan is due on demand.
Empire Manufacturing has a revolving credit loan, expiring July 7, 1996,
under which Empire Manufacturing can borrow up to a maximum principal balance of
$25,000,000 at an interest rate of prime plus 1% (9.50% at December 31, 1995).
The availability of borrowings under the credit loan is based on Empire
Manufacturing's eligible accounts receivable, inventory, equipment and the face
amount of Commercial Letters of Credit issued by the bank for the purpose of
purchasing inventory. The revolving credit loan is
F-14
<PAGE> 75
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
payable on demand and is collateralized by substantially all the assets of
Empire Manufacturing. Empire has provided to the bank a guaranty securing
payment of the loan with respect to principal amounts up to $5,000,000
outstanding from time to time together with interest on such outstanding
principal amounts. Empire has also agreed to subordinate any amounts payable to
Empire from Empire Manufacturing in connection with up to $9,500,000 of loans
made by Empire to Empire Manufacturing in connection with the Buddy L
acquisition.
See Note 17 for information concerning a new credit facility.
(b) On October 13, 1994 and in connection with the Marchon acquisition as
described in Note 3, the Company issued $3,250,000 one-year notes. The notes
bear interest at prime (8.50% at December 31, 1995).
(c) Marchon Toys meets its working capital needs through two bank credit
facilities which are due on demand. Under the loan agreements, Marchon Toys can
borrow up to $2,468,000 at interest rates ranging from .5% to 1.75% over the
banks' prime lending rates (9.25% and 10.5% at December 31, 1995). The
availability of borrowings under the loan agreements is based on Marchon Toys'
eligible accounts receivable and inventory balances, as defined. All of Marchon
Toys' assets are collateral under the loan agreements.
(d) On December 22, 1994, the Company issued 9%, five-year subordinated
debentures in the aggregate principal amount of $15,000,000, convertible into an
aggregate of up to 2,000,000 shares of the Company's common stock at $7.50 per
share. Concurrent with and dependent upon the closing of the debenture
financing, the Company issued warrants to purchase an additional 1,000,000
shares of common stock at an exercise price of $7.50 per share to Geller and his
designees. The proceeds from the debenture financing have been allocated between
the debentures and the warrants based on fair values.
(e) In connection with the Buddy L acquisition described in Note 3, the
Company issued three-year senior subordinated notes in the aggregate principal
amount of $7,580,000 bearing interest at the rate of 12% per annum, with no
right of redemption prior to maturity other than (i) the right of the Company to
call for the entire redemption thereof on the first anniversary of the issuance
of such notes by paying the principal balance thereof, accrued interest thereon
and a premium equal to 10% of the principal balance and (ii) the right of a
majority in interest of the holders of the notes to put all of the notes to the
Company for the principal balance thereof, accrued interest thereon and a
premium equal to 20% of the principal balance on the second anniversary of the
issuance of such notes.
(f) On July 7, 1995 and in connection with the Buddy L acquisition as
described in Note 3, the Company issued $4,753,000 one-year notes. The notes
bear interest at the rate of 10% per annum.
Long-term debt is carried net of any related discount or premium and
unamortized debt issuance cost.
Certain of the Company's debt arrangements contain requirements as to the
maintenance of minimum levels of working capital, leverage ratios and tangible
net worth, and prohibit the Company from paying dividends. Also, certain of the
debt arrangements contain various security interests and restrictive covenants
which limit the ability of the subsidiaries to loan, advance and dividend a
substantial portion of their net assets (approximately $5,341,000 restricted at
December 31, 1995). At December 31, 1995, the Company was in compliance with all
covenants. Machinery and equipment, with a net book value of approximately
$10,951,000 at December 31, 1995 and inventory and accounts receivable
(approximately $79,000,000 at December 31, 1995) have been pledged as collateral
for certain of the Company's indebtedness.
F-15
<PAGE> 76
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Principal maturities of notes payable and long-term debt are as follows (in
thousands):
<TABLE>
<S> <C>
1996................................................................ $49,206
1997................................................................ --
1998................................................................ 7,580
1999................................................................ 15,000
</TABLE>
8. INCOME TAXES
Effective January 1, 1993, the Company adopted prospectively SFAS No. 109.
SFAS No. 109 requires a change from the deferred method as required under APB
Opinion No. 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The net cumulative effect of the change in accounting for income taxes was an
expense of $910,000, of which $1,024,000 of expense was related to discontinued
operations.
The balances of deferred income tax assets and liabilities at December 31,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Current deferred income tax assets relate to:
Reserves for indemnification obligations and accrued expenses of companies
sold.................................................................... $ 1,039 $ 517
Accruals to related parties............................................... 187 260
Other accruals not currently deductible................................... 1,305 3,078
Inventory capitalization.................................................. 386 812
Allowance for bad debts................................................... 1,650 711
Allowance for marketable securities....................................... 301 147
Prepaid assets relating to common stock warrants.......................... -- 116
Other..................................................................... 230 150
------- -------
5,098 5,791
Less valuation allowance.................................................. 634 195
------- -------
Net current deferred tax assets...................................... $ 4,464 $ 5,596
======= =======
Noncurrent deferred income taxes assets (liabilities) relate to:
Basis in the stock of a majority-owned subsidiary......................... $ 3,472 $ 3,472
Accruals and reserves not currently deductible............................ 786 594
Operating loss carryforwards.............................................. -- 792
Basis and depreciation differences........................................ (3,521) (3,433)
Other..................................................................... 28 (36)
------- -------
765 1,389
Less valuation allowance.................................................. 3,659 3,472
------- -------
Net noncurrent deferred tax liability................................ $(2,894) $(2,083)
======= =======
</TABLE>
F-16
<PAGE> 77
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
8. INCOME TAXES (CONTINUED)
The components of income tax expense (benefit) for the years ended December
31, 1993, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ---- -------
<S> <C> <C> <C>
Current income taxes (benefits):
Federal.................................................... $ 425 $570 $(1,792)
State...................................................... (342) 143 (260)
------ ---- -------
Total current income taxes (benefits)...................... 83 713 (2,052)
Deferred income taxes (benefit)............................ 983 95 (823)
------ ---- -------
Total...................................................... $1,066 $808 $(2,875)
====== ==== =======
</TABLE>
The following is a reconciliation of income tax expense (benefit) to that
computed by applying the federal statutory rate of 35%, 34%, and 34% to income
(loss) from continuing operations before income taxes and cumulative effect of
an accounting change for the years ended December 31, 1993, 1994 and 1995,
respectively (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ---- -------
<S> <C> <C> <C>
Federal tax (benefit) at the statutory rate.................. $ (158) $475 $(2,508)
Equity earnings (loss) of foreign subsidiary................. -- 30 (230)
Amortization of goodwill..................................... -- -- 187
Equity losses of subsidiary excluded from consolidated
federal income tax return.................................. -- 92 --
Settlement of income tax audit............................... 1,173 -- --
Tax exempt interest income................................... (343) -- --
State income taxes, net of federal tax benefit............... 110 93 (369)
Other........................................................ 284 118 18
------ ---- -------
Total........................................................ $1,066 $808 $(2,875)
====== ==== =======
</TABLE>
The Company files a consolidated federal income tax return with its
subsidiaries for any period that it possesses the required ownership. On
December 30, 1993, the Company sold 25% of the common stock of CLR Corporation
("CLR"), previously a wholly-owned subsidiary of the company. Effective on this
date, CLR was no longer included in the Company's consolidated federal income
tax return.
Management has determined, based on CLR's history of prior earnings and
alternative tax strategies, that CLR's earnings will not be sufficient to
recognize its net deferred tax assets. Accordingly, the Company has provided
allowances at December 31, 1994 and 1995 for CLR's net deferred tax assets.
During the year ended December 31, 1994, the Company reduced its deferred
tax assets and valuation allowance by approximately $3,500,000, principally for
the expiration of unused capital loss carryforwards.
During 1993, the Company recorded a deferred tax asset and increased its
valuation allowance by approximately $3,472,000 for the basis in the stock of a
majority-owned subsidiary, and reduced its deferred tax assets and valuation
allowance by approximately $6,591,000 for the utilization of capital loss
carryforwards. Also during 1993, the Company reduced its deferred tax assets and
valuation allowance by approximately $35,000,000, principally for the expiration
of unused capital loss carryforwards.
F-17
<PAGE> 78
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
8. INCOME TAXES (CONTINUED)
Due to the change in control of the Company during 1994, CLR will be unable
to utilize approximately $35,000,000 of operating loss carryforwards. As a
result, the deferred tax asset and offsetting valuation allowance for these
operating loss carryforwards have been eliminated with no effect on the
Company's 1994 results of operations.
During 1993, CLR settled a Connecticut state tax and interest assessment
totaling $3,525,000 for $600,000. As a result of the settlement, the Company
recorded a gain on the settlement of $2,925,000.
During 1993, the Company agreed to pay approximately $8,900,000 to settle
an income tax audit of the Company's 1990 and 1991 federal income tax returns.
As a result of the settlement, income tax and interest expense were increased by
$1,173,000 and $1,460,000, respectively.
The Company is currently involved in a federal and various state income tax
audits.
9. EMPLOYEE BENEFIT PLANS
Empire Industries had a contributory profit sharing plan covering
substantially all employees of Empire Industries. Profit sharing contributions
expensed for 1993, 1994 and 1995 were $83,000, $100,000, and $0, respectively.
During the fourth quarter of 1995 this plan was converted into a 401(k) plan.
This plan allows for voluntary contributions by employees as well as an employer
matching contribution of up to 10% of the participants' contribution. The
employers' contribution is determined each year by the board of directors.
Participants are 100% vested in their tax-deferred, rollover, and after-tax
accounts. Employer contributions are subject to a vesting schedule by which
employees are 100% vested after five years of participation in the plan.
In connection with the Marchon acquisition, the Company assumed the
liability of a defined contribution employee benefit plan under Section 401(k)
of the Internal Revenue Code. The Company is in the process of winding up this
plan which was effectively terminated during 1994. In addition, Marchon Toys has
a similar plan under which the subsidiary is required to make annual
contributions equal to 5% or 7.5% of each employee's individual annual
contributions based on employee compensation.
The Company assumed the liability of a defined benefit plan of a former CLR
subsidiary. The plan benefits have been frozen. During 1995, the plan was
settled through the purchase of a nonparticipating annuity contract to cover
vested benefits. The cost of the annuity contract was approximately $3,114,000,
which approximated the plan's net assets. Accordingly, no gain or loss has been
recognized. As of January 31, 1994, the projected benefit obligation of the plan
was approximately $2,379,000 and the plan's net assets were approximately
$3,382,000. The unrecognized net gain at December 31, 1994 was approximately
$605,000. Pension cost (benefit) associated with this plan for 1993, 1994 and
1995 was $(176,000), $0, and $0, respectively.
With respect to discontinued operations, the Company retained sponsorship
of The Isaly Klondike Company 401(k) Plan and Popsicle Industries Ltd. pension
plan, both of which were effectively terminated at the closing of the sale of
Isaly Klondike Company and Popsicle Industries Ltd. The Company is responsible
for winding up these plans. During 1993, assets of The Isaly Klondike Company
401(k) Plan were distributed to participants. The Company is awaiting approval
from the Canadian government to terminate the Popsicle Industries Ltd. pension
plan.
In connection with the sale of the assets of The Isaly Klondike Company
("Isaly Klondike"), Thomas J. Lipton and its affiliates ("Lipton") assumed
sponsorship of the pension plan for the Isaly Klondike employees. The plan
benefits were frozen as of October 2, 1992, and the Company recorded a gain from
curtailment of
F-18
<PAGE> 79
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
$243,000 during 1992. Under the terms of the sales agreement, the Company agreed
to indemnify Lipton for any shortfall of plan assets necessary to satisfy the
plan's benefits. See Note 15.
The Company has assumed the liability for postretirement health care and
life insurance benefits to former employees of a CLR subsidiary. The benefits
will be funded as they are paid. The present value of the projected benefits due
these former employees has been accrued, using a discount rate of 8.5% for 1994
and 1995, in the consolidated financial statements in accordance with SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The
Company has accrued $991,000 and $911,000 as of December 31, 1994 and 1995,
respectively, for these benefits. The net postretirement benefit cost for each
of the three years ended December 31, 1995 is not material to the consolidated
financial statements.
10. STOCKHOLDERS' EQUITY
Capital Stock -- The Company has 35,000,000 shares of capital stock
authorized, comprised of (i) 30,000,000 shares of common stock, $.10 par value
and (ii) 5,000,000 shares of preferred stock, $.01 par value. The Board of
Directors has designated 442,264 shares of preferred stock as Series A
cumulative convertible preferred stock and, as of December 31, 1995, 442,264
shares of such Series A cumulative preferred stock were issued and outstanding.
The Series A preferred stock automatically converts into shares of common
stock on a share for share basis upon the affirmative vote of a majority of the
shares of common stock represented at the 1996 annual meeting. In the event the
Series A preferred stock is automatically converted, the holders of Series A
preferred stock shall not be entitled to receive any dividend. In the event the
preferred stock is not converted, then commencing on the third month after the
date of the 1996 annual meeting, the holders will be paid a quarterly dividend
of 15% per annum of the stated liquidation value per share. The stated
liquidation value is $7.25 per share.
Paid-In Capital -- During 1995, paid-in capital was increased by
$10,774,000 and $3,202,000 for the issuance of 1,004,059 shares of common stock
and 442,264 shares of Series A cumulative convertible preferred stock,
respectively, related to the Buddy L acquisition described in Note 3.
During 1994, paid in capital was increased by $6,488,000 due to the
issuance of 1,076,923 shares of common stock in the Marchon acquisition
described in Note 3. Also during 1994, paid-in capital was increased by
$1,740,000 due to the issuance of certain warrants as described below. The
Company reduced paid-in capital during 1994 by $45,837,000 due to the retirement
of treasury shares.
Treasury Stock -- At December 31, 1994 and 1995, there are no shares of
common stock held in treasury. As described in Note 2, the Company redeemed
11,766,634 shares of the Company's stock from the Halperin Group at $6.50 per
share on September 30, 1994. The total cost of the redemption, including
expenses, was $76,863,000. The shares so redeemed were retired as of September
30, 1994.
During 1993, the Company made a tender offer to purchase up to 14,000,000
shares of its common stock at the price of $6.50 per share. The offer expired on
January 11, 1994. In this tender offer, 1,414,268 shares were tendered and
purchased by the Company at a total purchase price of approximately $9,193,000
during the first quarter of 1994. The shares repurchased under the tender offer
were retired as of September 30, 1994.
Stock Options -- During 1994, the Company granted to certain of its
employees, including Geller as discussed in Note 2, options to purchase shares
of its common stock. At December 31, 1995, there were options outstanding to
purchase 1,842,500 shares of common stock at exercise prices ranging from $5.875
to $8.625 per share, which approximated the closing price of the stock on the
date of issuance, and which expire
F-19
<PAGE> 80
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
10. STOCKHOLDERS' EQUITY (CONTINUED)
from 1999 to 2004. During 1995, 502,500 options were granted, 10,000 options
expired, and no options were exercised. Subsequent to December 31, 1995, options
to purchase 9,940 shares were exercised and 490,060 options expired. See Note 2.
During 1991, CLR granted Olin Corporation ("Olin") options that entitle
Olin to purchase 240,000 shares of Empire's common stock at $8.50 per share. If
Olin should exercise its options, CLR would have the right to elect to pay Olin
any excess of the current market price over the exercise price in lieu of
transferring these shares. The Company has guaranteed CLR's performance of these
options. In 1995, and in connection with the settlement with Olin, the Company
extended the option expiration date from September 30, 1996 to September 30,
1997 (see Note 12).
Stock Warrants -- In 1995, the holders of the 12% three-year senior
subordinated notes were issued four-year warrants for the purchase of up to
758,000 shares of the Company's common stock on the basis of one share of common
stock for each $10 of notes acquired, exercisable commencing on the second
anniversary of issuance (provided the notes are not redeemed on or by such date,
see Note 7), at an exercise price of $9.00 per share. If the notes are so
redeemed, the warrants lapse. The warrantholders are also entitled to one demand
and certain "piggyback" registration rights, commencing on the second
anniversary of issuance and certain anti-dilution and price-protection rights.
During 1994 and 1995, the Company issued warrants to certain investment
bankers and consultants to purchase 321,000 shares of common stock at $7.50 per
share in exchange for future services. The warrants expire as follows: 79,000 on
November 3, 1997; 163,000 on December 27, 1997; and 79,000 on January 3, 1998.
As discussed in Note 7, the Company issued warrants to Geller, Saul and
their designees that assisted them in connection with the debenture financing,
to purchase 1,000,000 shares of common stock at $7.50 per share. Fifty percent
of the warrants expire on December 22, 1996 with the balance on December 22,
1997.
11. EARNINGS PER SHARE
Earnings per share are based on the weighted-average shares of common stock
and dilutive common stock equivalents outstanding during the period.
Weighted-average shares for the years ended December 31, 1993, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Primary........................................... 14,669,773 12,158,548 4,680,852
Fully diluted..................................... 16,295,198 12,158,548 4,680,852
</TABLE>
In the calculation of fully diluted earnings per share, net income was
increased by $429,000 for the year ended December 31, 1993 for interest expense,
net of tax, due to the assumed conversion of debt into common stock. See Note
16.
All of the various outstanding stock options and warrants during 1994 and
1995 are excluded from primary and fully diluted earnings per share because they
are anti-dilutive. See Note 10. Common stock contingently issuable as price
protection related to the Buddy L acquisition is included in primary and fully
diluted earnings per share.
F-20
<PAGE> 81
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
12. COMMITMENTS AND CONTINGENCIES
Letters of credit -- At December 31, 1995 and March 31, 1996, the Company
had outstanding commitments under letters of credit totaling $1,246,000 and
$1,184,000, respectively.
Leases -- The Company is committed under various noncancelable operating
leases. Future minimum lease obligations under these operating leases by year
are as follows: 1996 -- $1,122,000; 1997 -- $638,000; 1998 -- $439,000; 1999 --
$443,000; 2000 -- $355,000; thereafter -- $531,000.
The net rental expense for operating leases was approximately $416,000 in
1993, $589,000 in 1994, and $1,196,000 in 1995.
Subsequent to March 31, 1996, the Company entered into an operating lease
with a commencement date of June 15, 1996 for new molding machines having
monthly lease payments of $25,000 for 120 months.
Indemnifications -- See Note 15 for a description of the terms of
indemnifications relating to the sale of Wilbur Chocolate Co., Inc., The Isaly
Klondike Company and Popsicle Industries Ltd.
During 1995, the Company and its majority-owned subsidiary, CLR, were
released from substantially all indemnification obligations including certain
tax matters arising from the December 23, 1988 sale of General Defense
Corporation ("GDC") to Olin Corporation by CLR's predecessor, Clabir
Corporation. In exchange for the release, the Company paid $475,000 and extended
the expiration date of the options granted to Olin Corporation from September
30, 1996 to September 30, 1997. The Company believes future obligations, if any,
related to the indemnification will not have a material adverse effect on its
consolidated financial statements.
Litigation -- An action was commenced on October 19, 1994 in the Court of
Chancery of the State of Delaware (New Castle County) against the Company as a
nominal defendant. The action names Maurice A. Halperin, Barry S. Halperin,
Carol A. Minkin, Jeffrey Swersky, Carl Derman, Steven Geller and Halco
Industries, Inc. as defendants. The complaint includes class and derivative
claims. The Company is only a nominal defendant in the derivative claims, but
the Company has agreed to indemnify the Halperin Group to the extent permitted
by law, with certain exceptions. Certain defendants in interest (the Halperin
Group and Messrs. Swersky and Derman) have stated that they intend to defend the
claims vigorously. A motion to dismiss the claims was filed on behalf of the
Company and Mr. Geller. The court granted the motion on February 5, 1996,
dismissing the claims against each named defendant. The plaintiff filed a notice
of appeal, and on May 2, 1996 filed a voluntary dismissal of his appeal. If the
indemnification obligations of the Company to the Halperin Group discussed above
were triggered, substantial liabilities by the Company could result. The Company
is unable at this time to determine if the indemnification agreement will be
triggered, and, if so, the extent of financial exposure on the part of the
Company to the Halperin Group.
There are two suits claiming infringement of various intellectual property
rights which have been filed against Marchon. These claims are in various stages
of litigation. The Company believes that it has meritorious defenses to the open
claims and has provided reserves for its estimated costs to settle these
matters. The Company does not believe that any additional amounts required to
ultimately resolve these matters will have a material adverse effect on the
consolidated financial statements.
The Company's operating subsidiaries and its former operating subsidiaries
are subject to various types of consumer claims for personal injury from their
products. The Company's subsidiaries maintain product liability insurance.
Various product liability claims, each of which management believes is
adequately covered by insurance and/or reserves, are currently pending. The
Company does not believe the outcome of any of this litigation either
individually or in the aggregate would have a material adverse effect on the
Company's consolidated financial statements.
F-21
<PAGE> 82
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies -- The Company has been identified as a potentially
responsible party, along with numerous other parties, at various U.S.
Environmental Protection Agency ("EPA") designated superfund sites. The Company
intends to vigorously contest these matters. It is the Company's policy to
accrue remediation costs when it is probable that such costs will be incurred
and when they can be reasonably estimated. As of December 31, 1995, the Company
had reserves for environmental liabilities of $600,000. Estimates of costs for
future remediation are necessarily imprecise due to, among other things, the
allocation of costs among potentially responsible parties. Although it is
possible that additional environmental liability related to these matters could
result in amounts that could be material to the Company's consolidated financial
statements, a reasonably possible range of such amounts cannot presently be
estimated. Based upon the facts presently known, the large number of other
potentially responsible parties and potential defenses that exist, the Company
believes that its share of the costs of cleanup for its current remediation
sites will not, in the aggregate, have a material adverse impact on its
consolidated financial statements.
13. SEGMENT INFORMATION
The Company's consolidated operations are concentrated in the following
segments: (1) toys and buttons ("toys") and (2) holiday products. Information by
industry segment is shown below (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Net sales:
Toys......................................................... $ 21,143 $33,003 $121,573
Holiday products............................................. 20,211 24,961 32,171
-------- ------- --------
Net sales...................................................... $ 41,354 $57,964 $153,744
======== ======= ========
Operating income (loss)(1):
Toys......................................................... $ 693 $ 127 $ 1,869
Holiday products............................................. 3,598 3,335 4,910
Nonrecurring restructuring and relocation charges............ -- -- (8,673)
Corporate.................................................... (7,756) (2,497) --
-------- ------- --------
Operating income (loss)........................................ $ (3,465) $ 965 $ (1,894)
======== ======= ========
Identifiable assets(2):
Toys......................................................... $ 12,551 $49,913 $114,743
Holiday Products............................................. 12,365 12,303 21,610
Corporate.................................................... 98,324 5,740 3,800
-------- ------- --------
Total assets................................................... $123,240 $67,956 $140,153
======== ======= ========
Capital expenditures:
Toys......................................................... $ 685 $ 1,906 $ 4,855
Holiday Products............................................. 713 2,547 895
Corporate.................................................... 25 -- --
-------- ------- --------
Total.......................................................... $ 1,423 $ 4,453 $ 5,750
======== ======= ========
Depreciation and amortization:
Toys......................................................... $ 881 $ 1,277 $ 5,925
Holiday Products............................................. 842 994 1,286
Corporate.................................................... 73 12 --
-------- ------- --------
Total.......................................................... $ 1,796 $ 2,283 $ 7,211
======== ======= ========
</TABLE>
- ------------------------------
(1) Corporate expenses for 1993 and 1994 related primarily to executive
compensation of the prior management group and contributions not directly
attributable to the Company's toy and holiday product
F-22
<PAGE> 83
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
13. SEGMENT INFORMATION (CONTINUED)
segments. For 1995, nonrecurring restructuring and relocation charges have
not been allocated to a segment.
(2) The identifiable assets of each industry segment include: (i) assets that
are used exclusively by that industry segment and (ii) an allocated portion
of assets used jointly by more than one industry segment. Corporate assets
consist principally of cash, marketable securities, note receivable from
Halco, and other assets.
The Company has a Hong Kong based subsidiary, acquired in the Marchon
acquisition, which oversees the sourcing of products from manufacturers in the
Far East. Sales sourced through Marchon's Hong Kong based subsidiary for the
year ended December 31, 1995 were $34,455,000 to U.S. based customers and
$7,390,000 to foreign customers. For the period from the acquisition date,
October 13, 1994, to December 31, 1994, sales were $9,012,000 to U.S. based
customers and $2,728,000 to foreign customers. Gross profit for the period
October 13 to December 31, 1994 and for the year ended December 31, 1995 was
$5,088,000 and $13,844,000, respectively. Total assets as of December 31, 1994
and 1995 were $7,981,000 and $6,697,000, respectively.
Intercompany sales between the Company's foreign and domestic operations
for the period October 13 to December 31, 1994 and for the year ended December
31, 1995 were $1,299,000 and $11,557,000, respectively.
For the toy segment, sales to significant customers, individually, were
14%, 8%, and 17% of toy sales, respectively, in 1993; 17%, 11%, and 18% of toy
sales, respectively, in 1994; and 15%, 13%, and 23% of toy sales, respectively,
in 1995. No other customer accounted for more than 10% of the Company's toy
sales in those years.
For the holiday products segment, sales to significant customers,
individually, were 34% and 3% of holiday products sales, respectively, in 1993;
34% and 6% of holiday products sales, respectively, in 1994; and 29% and 13% of
holiday products sales, respectively, in 1995. No other customer accounted for
more than 10% of the Company's holiday products sales in those years.
14. NONRECURRING RESTRUCTURING AND RELOCATION CHARGES
During 1995, the Company recorded nonrecurring restructuring and relocation
charges of $8,673,000 ($6,937,000 in the fourth quarter) pursuant to a formal
plan of restructure and relocation of operations and corporate offices,
primarily resulting from its acquisition of Buddy L and Marchon.
The costs include $4,200,000 for relocation of its operations to North
Carolina; $2,267,000 for the establishment of corporate headquarters in Delray
Beach, Florida; $1,123,000 for investment banking fees; $783,000 for employee
severance; and $300,000 for lease termination costs for duplicate facilities. It
is currently anticipated that substantially all incurred but unpaid amounts as
of the December 31, 1995 will be expended during 1996.
15. DISCONTINUED OPERATIONS
From 1989 through early 1993, the Company was engaged in additional
businesses through other subsidiaries. Control of these businesses was acquired
through stock acquisitions during 1989 and through the December 29, 1989 merger
of AmBrit, Inc. into the Company and the December 29, 1989 merger of Clabir
Corporation into the Company's newly formed subsidiary, CLR. As a result of
these acquisitions, the Company manufactured, marketed and distributed frozen
novelty products through The Isaly Klondike Company ("Isaly Klondike");
manufactured a variety of chocolate and confectionery products through Wilbur
Chocolate Co., Inc. ("Wilbur"); and sold proprietary flavoring systems and
packaging to licensees
F-23
<PAGE> 84
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
15. DISCONTINUED OPERATIONS (CONTINUED)
which manufactured and distributed frozen novelty products in Canada through
Popsicle Industries Ltd. ("Popsicle Canada"). Isaly Klondike and Popsicle Canada
were sold on February 1, 1993, and Wilbur was sold on October 6, 1992.
Income from discontinued operations for the year ended December 31, 1993
consists of the following (in thousands):
<TABLE>
<S> <C>
Net loss of Isaly Klondike................................................. $ (319)
Net loss of Popsicle Canada................................................ (57)
Gain on sale of Isaly Klondike and Popsicle Canada, net of tax............. 27,129
Cumulative effect of change in accounting for income taxes (See Note 8).... (1,024)
-------
Total...................................................................... $25,729
=======
</TABLE>
Sale of Isaly Klondike and Popsicle Canada -- On February 1, 1993, the
Company sold the assets used in the businesses of its wholly-owned subsidiaries,
Isaly Klondike and Popsicle Canada, to Lipton for approximately $154 million in
cash plus the assumption of certain trade and other short-term liabilities. The
Company agreed to a five-year covenant not to compete in businesses similar to
Isaly Klondike's and Popsicle Canada's businesses. The long-term debt of Isaly
Klondike and Popsicle Canada remained an obligation of the Company and was
repaid at closing. The Company also retained the liability for certain contracts
including the responsibility to wind up certain employee benefit plans (see Note
9). The Company indemnified Lipton for breaches of representations and
warranties and certain claims and contracts arising before the businesses were
sold. The Company's indemnification obligations for income taxes for preclosing
periods, certain contracts, and certain other preclosing matters are unlimited.
The Company's remaining indemnification obligations were subject to a limit of
$8.5 million. Certain of the Company's expenses in winding up the operations of
Isaly Klondike and Popsicle Canada will be applied against and reduce this
limitation. The Company's indemnification obligations are subject to time
limitations ranging from fourteen months to three years, except for income tax
matters and breaches of environmental representations for which Lipton may
assert claims until 90 days after the expiration of the applicable statute of
limitations. The Company has established reserves for all claims known to it and
for other contingencies in connection with the sale. During the quarter ended
March 31, 1996, the Company reduced the reserves by $600,000 due to the
expiration of certain time limitations. Although there can be no assurance that
claims and other contingencies related to the sale will not exceed established
reserves, the Company believes that additional exposure related to the
indemnification obligations will not be material to the consolidated financial
statements.
During 1993, the Company recorded a gain from the sale of Isaly Klondike
and Popsicle Canada of $27,129,000, net of taxes of $37,644,000.
Due to the sale of Isaly Klondike and Popsicle Canada, which comprised the
frozen novelty products segment and proprietary flavoring systems and packaging
segment, respectively, these segments are reported in discontinued operations in
the consolidated statements of operations.
F-24
<PAGE> 85
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
15. DISCONTINUED OPERATIONS (CONTINUED)
Results of the discontinued operations of Isaly Klondike and Popsicle
Canada for the year ended December 31, 1993 consists of the following (in
thousands):
<TABLE>
<CAPTION>
ISALY POPSICLE
KLONDIKE CANADA
-------- --------
<S> <C> <C>
Net sales........................................................ $2,974 $778
====== ====
Loss from operations before tax.................................. (435) (94)
Income tax benefit............................................... (116) (37)
------ ----
Loss from discontinued operations................................ $ (319) $(57)
====== ====
</TABLE>
For 1993, discontinued operations of Isaly Klondike and Popsicle Canada
include results of operations through the date of sale, February 1, 1993.
16. RELATED PARTIES
During 1995 and in connection with the Company's acquisition of Buddy L,
affiliates of Weiss, Peck & Greer L.L.C. (collectively referred to as "WP&G"),
an investment firm, purchased 247,392 shares of common stock at $7.25 per share
and 442,264 shares of Series A cumulative convertible preferred stock at $7.25
per share for an aggregate purchase price of $5,000,006. See Note 3. At December
1, 1995, WP&G is the holder of 597,392 shares of common stock and 442,264 shares
of Series A cumulative convertible preferred stock. Two principals of WP&G are
also members of the Company's Board of Directors.
WP&G, on behalf of investment funds for which they are managers, is the
holder of approximately $14,900,000 of the Company's 9%, five-year, subordinated
convertible debentures and a party to the Shareholders' Agreement dated December
22, 1994. See Notes 2 and 7. Concurrent with the closing of this debenture
financing in December 1994, WP&G was issued warrants to purchase 100,000 shares
of common stock at the exercise price of $7.50 per share.
At December 31, 1994 and 1995, the Company had an unsecured receivable from
the owner of its facility in Vernon Hills, Illinois of $472,000 and $506,000,
respectively, related to costs incurred during its construction, which
receivable is guaranteed by the Company's President and Chief Operating Officer.
This receivable bears interest at an annual rate of 7.5% and is due on December
31, 1998. Subsequent to December 31, 1994, the operations of Marchon were moved
to the Company's facilities in Tarboro, North Carolina. Marchon sent notice to
terminate the lease on the Illinois facility effective June 1995. The Company
also had an unsecured receivable of $82,000 and $55,000 at December 31, 1994 and
1995, respectively, from an entity of which the Company's President and Chief
Operating Officer is a principal, related to Marchon's Pagedale, Missouri
facility. This borrowing is due December 31, 1998 and is non-interest bearing.
The Company is seeking to sublease the Missouri facility but until such time,
the Company remains liable on the lease. These receivables are included in the
consolidated financial statements as a reduction of consolidated stockholders'
equity.
During 1993 and 1994, the Company expensed $2,000,000 and $275,000,
respectively, for contributions made to the Empire Foundation (the
"Foundation"), a Florida trust whose trustees were three directors of the
Company, two of which were also officers of the Company, prior to the change in
control discussed in Note 2. The Company does not intend to make any further
contributions to the Foundation. On September 30, 1994, the Halperin Group
agreed to become responsible for the management of the Foundation.
F-25
<PAGE> 86
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
16. RELATED PARTIES (CONTINUED)
During 1994, the Company borrowed $15,000,000 from Maurice Halperin under a
bridge loan financing to finance the acquisition of Marchon. Proceeds from the
issuance of subordinated debentures discussed in Note 7 were used to repay
$15,000,000.
During 1993, the Company loaned Halco a total of $22,000,000. The Board of
Directors of the Company had approved the loan to Halco of up to $27,000,000.
The loan accrued interest at a rate equal to the prime rate plus 1%, was due on
demand but no later than December 15, 1994 and was secured by the 5,743,887
shares of the Company's common stock owned by Halco. During the first quarter of
1994, an additional $3,825,000 was loaned to Halco. On March 29, 1994, Halco
repaid the loan in full.
As of December 31, 1992, the Company had borrowed a total of $33,000,000
from Halco under an unsecured promissory note that allowed the Company to borrow
up to $36,000,000. The loan called for an interest rate of 15.6% per annum.
$18,000,000 of the principal amount of the loan was convertible into shares of
the Company's common stock at the conversion price of one share for each $3.125
principal amount converted. During the first quarter of 1993, the Company repaid
borrowings of $15,000,000. On April 7, 1993, Halco notified the Company that it
had elected to exercise its option to convert the remaining $18,000,000 owed by
the Company to Halco into 5,760,000 shares of the Company's common stock at the
stated conversion price of $3.125 per share. Halco assigned its rights to
acquire these shares to certain officers and/or directors of the Company.
During 1993, the Company expensed $3,620,000 related to a $2,750,000
retirement pay package for the Chairman and Chief Executive Officer of the
Company and a $870,000 retirement pay package for an executive of the Company.
17. SUBSEQUENT EVENTS
On April 8, 1996, a bank issued a commitment to the Company to provide up
to $85,000,000 in financing subject to documentation. The financing is for a
three-year term at an interest rate of prime plus 1% or LIBOR plus 275 basis
points. Of the $85,000,000, $12,000,000 will be in the form of a three-year term
loan secured by the Company's domestic machinery, equipment and real property.
The balance of the availability of borrowings under the proposed loan agreement
is based on the Company's domestic accounts receivable and inventory balances as
defined. The collateral under the proposed loan agreement is substantially all
of the domestic assets of the Company. The facility will replace two existing
domestic facilities of $25,000,000 each.
F-26
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Empire of Carolina, Inc.
We have audited the accompanying schedules of net sales, cost of sales and
direct expenses of the Toy Business of Buddy L Inc. and subsidiaries for the
years ended December 31, 1993 and 1994. These schedules are the responsibility
of Buddy L Inc.'s management. Our responsibility is to express an opinion on
these schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the schedules are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the schedules. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the schedules. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such schedules present fairly, in all material respects,
the net sales, cost of sales and direct expenses of the Toy Business of Buddy L
Inc. and subsidiaries for the years ended December 31, 1993 and 1994 in
accordance with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
December 22, 1995
F-27
<PAGE> 88
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
SCHEDULES OF NET SALES, COST OF SALES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1993 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................................... $116,446 $118,678
Cost of sales........................................................... 87,698 119,524
-------- --------
Gross profit (loss)..................................................... 28,748 (846)
Direct expenses......................................................... 15,743 32,651
-------- --------
Contribution (loss) before indirect expenses............................ $ 13,005 $(33,497)
======== ========
</TABLE>
See notes to schedules of net sales, cost of sales and direct expenses.
F-28
<PAGE> 89
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
UNAUDITED SCHEDULE OF NET SALES, COST OF SALES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JULY 7, 1995
------------
<S> <C>
Net sales........................................................................ $ 33,449
Cost of sales.................................................................... 30,715
-------
Gross profit..................................................................... 2,734
Direct expenses.................................................................. 1,617
-------
Contribution before indirect expenses............................................ $ 1,117
=======
</TABLE>
See notes to schedules of net sales, cost of sales and direct expenses.
F-29
<PAGE> 90
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
NOTES TO SCHEDULES OF NET SALES, COST
OF SALES AND DIRECT EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE UNAUDITED PERIOD ENDED JULY 7, 1995
1. DESCRIPTION OF BUSINESS ACQUIRED AND BASIS OF PRESENTATION
On July 7, 1995, two subsidiaries of Empire of Carolina, Inc. (the
"Company"), Empire Acquisition Corp., now known as Empire Manufacturing, Inc.
("EAC"), a Delaware corporation, and Carnichi Limited, a Hong Kong corporation
(Carnichi Limited and EAC together, the "Buyers"), acquired the toy business
assets and assumed certain liabilities of Buddy L Inc., debtor in possession, a
Delaware corporation ("Buddy L") and wholly-owned subsidiary of SLM
International, Inc. ("SLM") and Buddy L (Hong Kong) Limited, a Hong Kong
Corporation ("Buddy L Hong Kong") and a subsidiary of Buddy L. The purchased
assets comprise the former toy manufacturing, design and marketing business (the
"Business") of Buddy L and Buddy L Hong Kong. The Buyers will continue to
operate the Business using the trademark "Buddy L" in order to take advantage of
Buddy L brand recognition.
The accompanying schedules present the net sales, cost of sales and direct
expenses for the years ended December 31, 1993 and 1994 and the unaudited period
ended July 7, 1995 for the Business.
Buddy L did not account for the Business as a separate entity or operation.
Accordingly, the information included in the accompanying schedules of net
sales, cost of sales and direct expenses has been obtained from Buddy L's
accounting records and does not purport to represent the net sales, cost of
sales and direct expenses for Buddy L or for SLM.
The accompanying schedules of net sales, cost of sales and direct expenses
are presented in accordance with generally accepted accounting principles. Sales
are recorded net of all discounts, returns and other allowances.
2. DIRECT EXPENSES
Direct expenses represent selling, general and administrative costs
directly related to the toy operations of Buddy L and consist of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1993 1994
------- ------- PERIOD
ENDED
JULY 7, 1995
------------
(UNAUDITED)
<S> <C> <C> <C>
Advertising............................................ $ 5,866 $11,169 $ 2
Obsolete tooling write-off............................. -- 6,023 --
Royalties.............................................. 4,529 6,454 404
Commissions............................................ 1,849 1,959 340
Product Development.................................... 969 2,590 199
Other Sales and Marketing.............................. 1,071 1,809 --
Other General and Administrative....................... 1,459 2,647 672
------- ------- ------
Total............................................. $15,743 $32,651 $1,617
======= ======= ======
</TABLE>
3. OTHER EXPENSES (UNAUDITED)
The accompanying schedules of net sales, cost of sales and direct expenses
do not include an allocation of certain other historical operating costs
incurred by Buddy L during the period ended July 7, 1995 and for the years ended
December 31, 1993 and 1994. Such costs include accounting and finance, credit
and collection costs, bad debt expense, warehousing costs, insurance, SLM
management fees and other general and administrative expenses not directly
related to production. Such costs have not been allocated to the toy
F-30
<PAGE> 91
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
NOTES TO SCHEDULES OF NET SALES, COST
OF SALES AND DIRECT EXPENSES, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE UNAUDITED PERIOD ENDED JULY 7, 1995
3. OTHER EXPENSES (UNAUDITED) (CONTINUED)
operations because such costs are generally fixed in that they do not vary with
sales or production levels, and Buddy L has not maintained records that would
facilitate allocation of such costs to its business lines.
Total amounts of such indirect expenses for Buddy L are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD
------------------ ENDED
1993 1994 JULY 7, 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Sales and marketing................................... $ 9,752 $12,091 $ 2,414
General and administrative............................ 10,469 16,678 13,131
Warehouse expenses.................................... 3,532 6,023 1,668
Interest expense -- net............................... 1,712 6,637 1,564
------- ------- -------
Total indirect expenses.......................... $25,465 $41,429 $18,777
======= ======= =======
</TABLE>
Interest expense is net of interest income and includes interest on direct
Buddy L borrowings, as well as an allocation of financing costs from Buddy L's
parent, SLM.
F-31
<PAGE> 92
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Marchon, Inc.
We have audited the accompanying consolidated balance sheet of Marchon,
Inc. and Subsidiaries as of December 31, 1993 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. We did not audit the
financial statements of Marchon Toys, Ltd. a 99.9% owned subsidiary, which
statements reflect total assets of $5,341,115 as of December 31, 1993, and total
revenues of $14,779,736 for the year then ended. These statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Marchon Toys, Ltd., is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Marchon, Inc. and
Subsidiaries as of December 31, 1993, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company was required to change its method of accounting for
income taxes.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 20, 1994, except for
Note 4 for which the date
is September 8, 1994
F-32
<PAGE> 93
REPORT OF THE AUDITORS
To the Members of Marchon Toys Limited
We have audited the financial statements on pages 4 to 12 in accordance
with Auditing Standards.
In our opinion the financial statements give a true and fair view of the
state of affairs of the Company at 31 December 1993 and of its profit and cash
flows for the year then ended and have been properly prepared in accordance with
the Companies Ordinance.
WONG BROTHERS & CO.
Certified Public Accountants
Hong Kong
March 29, 1994
F-33
<PAGE> 94
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 317,854
Accounts receivable, less allowance for doubtful accounts of $1,665,000...... 6,552,493
Inventories.................................................................. 4,498,454
Prepaid expenses............................................................. 971,353
Refundable income taxes...................................................... 42,835
-----------
Total current assets...................................................... 12,382,989
-----------
Property and equipment:
Office furniture and equipment............................................... 1,477,254
Product tooling.............................................................. 4,674,272
-----------
6,151,526
Less accumulated depreciation.................................................. 3,701,190
-----------
Net property and equipment................................................ 2,450,336
Other assets................................................................... 1,259,659
-----------
Total assets.............................................................. $16,092,984
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................................... $ 36,878
Current portion of long-term debt............................................ 9,876,760
Accounts payable............................................................. 3,691,989
Accrued liabilities.......................................................... 2,232,764
Income taxes payable......................................................... 32,448
-----------
Total current liabilities................................................. 15,870,839
Long-term debt, net of current portion......................................... 65,638
-----------
Total liabilities......................................................... 15,936,477
-----------
Stockholders' equity:
Common stock, $.01 par value, 20,000 shares authorized, 17,257 shares issued;
14,167 shares outstanding................................................. 173
Additional paid-in capital................................................... 1,157,242
Accumulated deficit.......................................................... (44,497)
-----------
1,112,918
Due from affiliates.......................................................... (842,941)
Common stock, 3,090 shares, held in treasury at cost......................... (113,470)
-----------
Total stockholders' equity................................................ 156,507
-----------
Total liabilities and stockholders' equity................................ $16,092,984
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-34
<PAGE> 95
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Net sales...................................................................... $33,300,944
Cost of sales.................................................................. 20,145,704
-----------
Gross profit.............................................................. 13,155,240
-----------
Operating expenses:
Sales and marketing.......................................................... 6,940,033
General and administrative................................................... 5,346,346
Research and development..................................................... 1,429,928
-----------
Operating loss............................................................ (561,067)
Other income (expense):
Interest expense............................................................. (1,123,435)
Interest income.............................................................. 36,434
Other........................................................................ 107,869
-----------
Loss before income taxes and cumulative effect of a change in accounting
principle.................................................................... (1,540,199)
Income tax provision........................................................... (127,438)
-----------
Loss before cumulative effect of change in accounting principle................ (1,667,637)
Cumulative effect of change in accounting principle related to income taxes.... (95,500)
-----------
Net loss....................................................................... $(1,763,137)
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
<PAGE> 96
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS DUE FROM TREASURY
STOCK CAPITAL (DEFICIT) AFFILIATES STOCK TOTAL
------ ---------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993.... $173 $ 232,632 $ 1,718,640 $(359,269) $(113,470) $ 1,478,706
Forgiveness of subordinated
notes payable
Stockholder............ 808,084 808,084
Officer................ 116,526 116,526
Net advance to affiliate.... (483,672) (483,672)
Net loss.................... (1,763,137) (1,763,137)
---- ---------- ----------- ----------- --------- -----------
Balance, December 31,
1993...................... $173 $1,157,242 $ (44,497) $(842,941) $(113,470) $ 156,507
==== ========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
<PAGE> 97
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (1,763,137)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................ 605,484
Provision for uncollectible accounts..................................... 1,117,905
Interest income added to due from affiliate.............................. (46,163)
Cumulative effect of accounting change................................... 95,500
Changes in operating assets and liabilities:
Accounts receivable.................................................... (1,003,456)
Inventories............................................................ 822,514
Prepaid expenses....................................................... (41,549)
Refundable income taxes................................................ 461,649
Other assets........................................................... (919,868)
Accounts payable....................................................... 1,197,597
Accrued liabilities.................................................... 1,662,278
Income taxes payable................................................... (136,084)
------------
Net cash provided by operating activities................................ 2,052,670
Cash flows from financing activities:
Net advances to affiliate................................................... (437,509)
Purchases of property, plant and equipment.................................. (985,063)
------------
Net cash used in investing activities.................................... (1,422,572)
------------
Cash flows from financing activities:
Borrowings under bank line of credit agreements............................. 17,075,362
Payments under bank line of credit agreements............................... (17,195,261)
Proceeds of notes payable and capital lease obligations..................... 94,969
Increase in sight drafts.................................................... 233,531
Decrease in cash overdraft.................................................. (577,189)
------------
Net cash used in financing activities.................................... (368,588)
------------
Net increase in cash and cash equivalents..................................... 261,510
Cash and cash equivalents:
Beginning of year........................................................... 56,344
------------
End of year................................................................. $ 317,854
============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................. $ 1,169,809
============
Income taxes............................................................. $ 76,461
============
Supplemental disclosure of noncash investing and financing activities:
Forgiveness of subordinated notes payable to stockholders and officers
contributed to additional paid-in capital................................ $ 924,610
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE> 98
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation and Nature of Business
The consolidated financial statements include the accounts of Marchon,
Inc., Marchon Manufacturing, Inc. and a 99.9% owned Hong Kong subsidiary,
Marchon Toys, Ltd., (collectively, the "Company"). The Company is engaged in the
design, development, marketing and distribution of toy products to mass
merchandisers and other retailers. Significant intercompany balances and
transactions have been eliminated in consolidation.
Translation of Foreign Currencies
The financial position and results of operations of the Hong Kong
subsidiary are measured using local currency as the functional currency. Assets
and liabilities of these operations are translated into U.S. dollars at the
exchange rate in effect at year-end. Income statement accounts are translated at
the average rate of exchange prevailing during the year.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine the cost of domestic purchased or
produced inventories. Inventories purchased or produced outside the United
States are valued by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed principally by the straight-line method over the estimated useful
lives of the related assets or terms of the related leases.
Amounts incurred for maintenance and repairs are charged to operations as
incurred. Expenditures for improvements are capitalized. Upon sale or
retirement, the related cost and accumulated depreciation are removed from the
respective accounts and any resulting gain or loss is included in the
consolidated statement of operations.
Prepaid Expenses
Costs incurred in producing television commercials are deferred and
amortized on the straight-line method over their estimated useful lives, two to
three years.
Other Assets
The cost of patents, including costs to maintain the patents, are
capitalized and amortized on the straight-line method over the shorter of the
remaining life of the patents or estimated lives of the related products.
Income Taxes
Effective January 1, 1993, the Company was required to adopt Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
Prior to this date, the Company accounted for income taxes in accordance with
Accounting Principles Board Opinion No. 11 (APB 11). The cumulative
F-38
<PAGE> 99
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
effect of adopting FAS 109, as of the beginning of 1993, is reported separately
in the accompanying consolidated statement of operations.
Under FAS 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
2. CHANGE IN ACCOUNTING ESTIMATE:
Effective January 1, 1993, the Company revised the estimated useful lives
of product tooling from three to five years to more closely approximate
historical experience. The effect of this change was to decrease 1993
depreciation expense and net loss by approximately $335,000.
3. INVENTORIES:
Inventories totaling $3,515,979 at December 31, 1993 were determined by the
LIFO method. The major classes of inventories at December 31, 1993 are as
follows:
Current cost:
<TABLE>
<S> <C>
Finished products..................................................... $2,125,685
Raw Materials......................................................... 2,447,503
----------
4,573,188
Current cost over LIFO method........................................... (74,734)
----------
Total at LIFO cost................................................. $4,498,454
==========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1993:
<TABLE>
<S> <C>
Revolving Credit Agreement.............................................. $7,778,323
Banking Facility........................................................ 211,358
Other bank borrowings, due on demand, bearing interest at 1.75% over the
prime rate (6.0% at December 31, 1993)................................ 245,596
Sight drafts............................................................ 1,513,000
Note payable to former stockholder, due May 1995, interest due
semiannually
at 8.63%.............................................................. 23,665
Capitalized lease obligations........................................... 170,456
----------
9,942,398
Less current portion.................................................... 9,876,760
----------
Total long-term debt............................................... $ 65,638
==========
</TABLE>
The Revolving Credit Agreement (the "Agreement"), as amended March 18,
1994, expires January 31, 1995 and provides maximum borrowings and outstanding
letters of credit of $12,000,000 through October 31, 1994, and $8,000,000 from
November 1, 1994 until maturity January 31, 1995. Interest on outstanding
borrowings, as amended, is at 3% above the bank's prime rate (6.0% at December
31, 1993). Maximum
F-39
<PAGE> 100
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LONG-TERM DEBT: (CONTINUED)
borrowings under the Agreement are limited principally to certain percentages of
eligible accounts receivable, inventories and letters of credit. Letters of
credit outstanding under the Agreement were approximately $701,000 at December
31, 1993.
The Company also has certain term loan and seasonal borrowings available
under the Agreement. The seasonal borrowings are due in equal monthly
installments of $30,000 from April 30, 1994 through October 31, 1994, $50,000 on
November 30, 1994 and December 31, 1994 with the balance, $1,440,000 due at
maturity January 31, 1995. The term loan is due in equal installments of
$600,000 on October 15 and October 31, 1994.
Borrowings under the Agreement are collateralized by substantially all of
the Company's assets. The Agreement requires the Company to maintain certain
financial ratios, restricts the redemption of the Company's common stock and
additional indebtedness, as defined, and limits capital expenditures and
dividends. The Company was not in compliance with certain covenants at December
31, 1993 and obtained a waiver for these violations as of September 1, 1994.
Repayment of outstanding borrowings of up to $5,000,000 are personally
guaranteed by the Company's principal stockholder.
The Banking Facility expires on December 31, 1995 and provides Marchon
Toys, Ltd. maximum borrowings of $1,818,000 at December 31, 1993. Borrowings are
limited principally to certain percentages of Marchon Toys, Ltd. eligible
accounts receivable and inventories. Interest on outstanding borrowings is at
1.5% over the prevailing market rate (6% at December 31, 1993). Borrowings under
the banking facility are collateralized by substantially all of Marchon Toys,
Ltd.'s assets and are guaranteed by the Company and its principal stockholder
have also guaranteed repayment of borrowings up to $1,818,000. The facility also
requires Marchon Toys, Ltd. to maintain a minimum net worth and restricts
dividends. The bank also holds one of the standby letters of credit for which
the Company is contingently liable.
5. FORGIVENESS OF DEBT:
During 1993, the Company's principal stockholder contributed $808,084 to
additional paid-in capital by forgiveness of a subordinated note payable to
stockholder. In addition, an officer contributed $116,526 to additional paid-in
capital by forgiveness of a subordinated note payable to officer.
6. LEASES AND DUE FROM AFFILIATES:
The Company leases its warehouse and office facilities from entities owned
by the Company's principal stockholder. Rentals range from $195,000 to $270,000
per year through July 2001 for the Vernon Hills facility and the rental is
$60,000 per year through June 2013 for the St. Louis facility.
Future minimum lease payments under operating leases as of December 31,
1993 are approximately:
<TABLE>
<S> <C>
1994.............................................................. $ 346,200
1995.............................................................. 471,200
1996.............................................................. 413,850
1997.............................................................. 417,037
1998.............................................................. 421,500
Thereafter........................................................ 1,903,475
----------
$3,973,262
==========
</TABLE>
Total rent expense was $543,000 in 1993.
F-40
<PAGE> 101
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LEASES AND DUE FROM AFFILIATES: (CONTINUED)
The Company has a due from affiliate for costs incurred during the
construction of the Vernon Hills, Illinois warehouse and office facility. At
December 31, 1993, the due from affiliate related to this facility totals
approximately $440,000 and bears interest at an annual rate of 7.5%, due on
December 31, 1998.
The Company also has approximately $403,000 due from affiliate related to
the Pagedale, Missouri facility for various advances to/from the affiliate.
These borrowings are due December 31, 1998 and are non-interest bearing.
The amounts due from affiliates are guaranteed by the Company's principal
stockholder.
7. DEFINED CONTRIBUTION PLAN:
The Company has a defined contribution employee benefit plan (the "Plan")
under Section 401(k) of the Internal Revenue Code, which covers all employees
meeting the service criteria for participation as set forth in the Plan. The
Company is required to make annual contributions equal to 25% of each
participating employee's individual annual contributions. Company contributions
were approximately $5,000 for 1993.
Marchon Toys, Ltd. has a similar plan under which the subsidiary is
required to make annual contributions equal to 5% or 7.5% of each employee's
individual annual contributions based on employee compensation. Contributions
were approximately $2,000 for 1993.
8. CONCENTRATIONS OF RISK:
The Company sells a substantial portion of its products to three customers.
Sales to those customers aggregated approximately $16,700,000 in 1993. At
December 31, 1993, amounts due from those customers, included in accounts
receivable, were approximately $4,300,000.
9. INCOME TAXES:
The Company files a consolidated United States (domestic) federal income
tax return. Marchon Toys, Ltd. files a separate income tax return in Hong Kong.
The components of loss before income taxes and cumulative effect of change
in accounting principle consist of the following:
<TABLE>
<S> <C>
Domestic......................................................... $(1,928,381)
Foreign.......................................................... 388,182
-----------
$(1,540,199)
===========
</TABLE>
The income tax provision consists of the following:
<TABLE>
<S> <C>
Current:
Foreign.......................................................... $ 63,636
Domestic federal................................................. 63,802
--------
Income tax provision............................................... $127,438
========
</TABLE>
The 1993 provision for domestic federal income taxes consists of additional
taxes due upon settlement of an Internal Revenue Service audit for prior years.
F-41
<PAGE> 102
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES: (CONTINUED)
The income tax effects of temporary differences between financial and
income tax reporting are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward (NOL).............................. $ 306,999
Allowance for doubtful accounts.................................... 647,459
Expenses not deductible for tax purposes in the year accrued....... 91,960
Other.............................................................. 39,186
Valuation allowance................................................ (915,435)
---------
Total deferred tax asset......................................... 170,169
---------
Property and equipment............................................. (170,169)
---------
Total deferred tax liability..................................... (170,169)
---------
Net................................................................ $ --
=========
</TABLE>
The NOL expires in 2008.
The Company has provided a valuation allowance for the entire net deferred
tax asset at December 31, 1993 due to uncertainty as to future realization of
the related tax benefits.
F-42
<PAGE> 103
MARCHON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $35,006
Cost of sales...................................................................... 20,508
-------
Gross profit....................................................................... 14,498
Operating expenses................................................................. 11,296
-------
Income from operations............................................................. 3,202
Interest expense................................................................... 945
-------
Income before income taxes......................................................... 2,257
Income tax expense................................................................. 260
-------
Net income......................................................................... 1,997
Deficit, beginning of year......................................................... (45)
-------
Retained earnings, end of period................................................... $ 1,952
=======
</TABLE>
F-43
<PAGE> 104
MARCHON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Net cash provided by operating activities.................................. $ 605
-------
Cash flows from financing activities:
Increase in cash overdraft............................................... 667
Net payments under notes payable......................................... (1,524)
Repayments of long-term debt............................................. (66)
-------
Net cash used in financing activities...................................... (923)
-------
Net decrease in cash and cash equivalents.................................. (318)
Cash and cash equivalents, beginning of year............................... 318
-------
Cash and cash equivalents, end of period................................... $ --
=======
</TABLE>
F-44
<PAGE> 105
MARCHON, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (DEFICIT) AND OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994
1. BASIS OF PRESENTATION
The unaudited consolidated condensed Statements of Operations and Retained
Earnings (Deficit) and of Cash Flows reflect all adjustments which are, in the
opinion of management, necessary to a fair presentation of the results for the
nine months ended September 30, 1994.
2. CONTINGENCIES
There are two suits claiming infringement of various intellectual property
rights which have been filed against the Company. These claims are in various
stages of litigation. The Company believes that it has meritorious defenses to
the open claims and has provided reserves for its estimated costs to settle
these matters. The Company does not believe that any additional amounts required
to ultimately resolve these matters will be material.
The Company's operating subsidiaries are subject to various types of
consumer claims for personal injury from their products. The Company's
subsidiaries maintain product liability insurance. Various product liability
claims, each of which management believes is adequately covered by insurance
and/or reserves, are currently pending. The Company does not believe the outcome
of any of this litigation would have a material adverse effect on the Company's
consolidated financial statements.
3. INCOME TAXES
During the nine months ended September 30, 1994, the Company utilized net
operating loss carryforwards to partially offset taxable income.
F-45
<PAGE> 106
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Consolidated Condensed Statement of
Operations gives effect to Empire of Carolina, Inc.'s ("Empire") July 7, 1995
acquisition of the toy business assets and assumption of certain liabilities of
Buddy L Inc., a wholly-owned subsidiary of SLM International, Inc., and Buddy L
(Hong Kong) Limited, a subsidiary of Buddy L Inc. (the toy business of Buddy L
Inc. and Buddy L (Hong Kong) Limited collectively referred to as "Buddy L"). The
Unaudited Pro Forma Consolidated Condensed Statement of Operations is based on
the estimates and assumptions set forth herein and in the notes to such
statements. This pro forma information has been prepared utilizing the
historical consolidated financial statements of Empire and the historical
financial information of Buddy L appearing elsewhere herein. The pro forma
financial data is provided for comparative purposes only and does not purport to
be indicative of the results which actually would have been obtained if the
events had been effected on the date indicated or of those results which may be
obtained in the future.
The pro forma adjustments are described in the accompanying Notes to the
Unaudited Pro Forma Consolidated Condensed Statement of Operations. The
Unaudited Pro Forma Consolidated Condensed Statement of Operations for the year
ended December 31, 1995 assumes that the acquisition of Buddy L occurred as of
January 1, 1995.
PURCHASE PRICE ALLOCATION
An estimate of the purchase price allocation to individual assets and
liabilities has been made on the basis of currently available information.
However, adjustments to these allocations could occur during the allocation
period which could alter the ultimate determination of fair value.
For purposes of pro forma presentations, the excess purchase price over the
net assets acquired is being amortized over twenty years. Trademarks and trade
names are being amortized over fifteen years.
F-46
<PAGE> 107
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
BUDDY L PRO FORMA
EMPIRE TOY BUSINESS ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales................................ $ 153,744 $ 33,449 $ -- $ 187,193
Cost of goods sold....................... 111,905 30,715 -- 142,620
---------- ------- ------- ----------
Gross profit............................. 41,839 2,734 -- 44,573
Selling and administrative expenses...... 35,060 1,617 14,212(1)(4) 50,889
Nonrecurring restructuring and relocation
charges................................ 8,673 -- -- 8,673
---------- ------- ------- ----------
Operating income (loss).................. (1,894) 1,117 (14,212) (14,989)
Other income (expense):
Interest, dividends and net realized
gains............................... 514 -- 514
Interest expense....................... (5,996) -- (2,347)(2)(4) (8,343)
---------- ------- ------- ----------
Total other income (expense)........... (5,482) -- (2,347) (7,829)
---------- ------- ------- ----------
Income (loss) from continuing operations
before income tax benefits............. (7,376) 1,117 (16,559) (22,818)
Income tax benefits...................... (2,875) -- (5,250)(3) (8,125)
---------- ------- ------- ----------
Income (loss) from continuing
operations............................. $ (4,501) $ 1,117 $ (11,309) $ (14,693)
---------- ------- ------- ----------
Primary loss per share(5)................ $ (0.96) $ (2.83)
Fully diluted loss per share(5).......... $ (0.96) $ (2.83)
---------- ----------
Weighted-average shares -- primary and
fully diluted.......................... 4,680,852 5,195,260(5)
========== ==========
</TABLE>
F-47
<PAGE> 108
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS (IN THOUSANDS)
1. Adjustment includes:
<TABLE>
<S> <C>
Amortization of excess cost over fair value of net assets acquired over
twenty years......................................................... $144
Amortization of trademarks acquired over fifteen years................. 143
----
Total.................................................................. $287
====
</TABLE>
2. Adjustment includes increase in interest expense from debt issued in
connection with the Buddy L acquisition ($1,082).
3. Reflects the income tax benefit from the carryback of operating losses
resulting from the pro forma combination and adjustments to offset Empire's
taxable income in previous years. Tax benefits have been computed at the
Federal statutory rate.
4. Includes an allocation of other selling, general and administrative expenses
and interest expense based upon the pro rata percentage of Toy Business sales
to total Buddy L sales.
5. The calculation of pro forma earnings per share for the Unaudited Pro Forma
Consolidated Condensed Statement of Operations for the year ended December
31, 1995 assumes the issuance of 756,667 shares of the Company's common stock
for the Buddy L acquisition and the issuance of 247,392 shares of common
stock used to provide a portion of the funding for the Buddy L acquisition.
F-48
<PAGE> 109
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY UNDERWRITER OR ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY COMMON
STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Recent Events......................... 12
Common Stock Price Range and Dividend
Policy.............................. 13
Use of Proceeds....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 36
Certain Transactions.................. 41
Principal and Selling Stockholders.... 48
Description of Capital Stock.......... 52
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Available Information................. 58
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,640,639 SHARES
[EMPIRE LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
, 1996
---------------------------
WILLIAM BLAIR & COMPANY
GERARD KLAUER MATTISON
& CO., LLC
------------------------------------------------------
------------------------------------------------------
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
Offering described in this Registration Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 18,600
NASD Examination Fee...................................................... $ 5,894
American Stock Exchange Listing Fee....................................... $ 17,500
Accounting Fees and Expenses.............................................. $100,000
Printing and Engraving Expenses........................................... $100,000
Legal Fees and Expenses................................................... $350,000
Blue Sky Fees and Expenses................................................ $ 12,000
Miscellaneous............................................................. $ 46,006
-------
Total................................................................... $650,000
=======
</TABLE>
The foregoing items, except for the Securities and Exchange Commission and
NASD fees, are estimated. All expenses, except certain incremental expenses to
be borne by a Selling Stockholder, will be borne by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Similar indemnity is
authorized for such persons against expenses (including attorneys' fees) actual
and reasonably incurred in connection with the defense or settlement of any such
threatened, pending or completed action or suit by or in the right of the
corporation if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the corporation.
Any such indemnification may be made only as authorized in each specific case
upon a determination by the shareholders or disinterested directors or by
independent legal counsel in a written opinion that indemnification is proper
because the indemnitee has met the applicable standard of conduct. The
Certificate of Incorporation of the Company provides that directors and officers
shall be indemnified as described above in this paragraph to the fullest extent
permitted by the DGCL; provided, however, that any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person shall be indemnified only if such proceeding (or part thereof) was
authorized by the board of directors of the Company.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in such capacity,
or arising out of his status as such, whether or not the corporation would
otherwise have the power to indemnify him under Section 145.
The Charter provides that, to the fullest extent permitted by the DGCL, no
director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary as a
II-1
<PAGE> 111
director. Section 102(b)(7) of the DGCL currently provides that such provisions
do not eliminate the liability of a director (i) for a breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (relating to the declaration of
dividends and purchase or redemption of shares in violation of the DGCL), or
(iv) for any transaction from which the director derived an improper personal
benefit. Reference is made to the Company's Charter and By-laws filed as
Exhibits 3.1 and 3.2 hereto, respectively.
The Company maintains directors' and officers' liability insurance policies
covering certain liabilities of persons serving as officers and directors and
providing reimbursement to the Company for its indemnification of such persons.
Pursuant to the Underwriting Agreement to be entered into among the
Company, the Selling Stockholders and the Underwriters, officers and directors
of the Company are indemnified for certain liabilities, including liabilities
incurred under the Securities Act of 1933, as amended. Reference is made to the
form of Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company has issued the following securities that were not registered under the
Securities Act:
(a) On July 18, 1994, the Company granted to each of Messrs. Steven Geller
and Neil B. Saul, in conjunction with their employment agreements with a
subsidiary of the Company, options to purchase 500,000 shares of Common Stock
under the Company's Amended 1994 Stock Option Plan, which options vest over a
three year period. Each received incentive stock options to purchase 60,376
shares of Common Stock which are exercisable at $6.625 per share and
non-qualified options to purchase 439,624 shares of Common Stock which are
exercisable at $6.50 per share.
(b) On October 13, 1994, the Company issued, as part of the consideration
for the acquisition of Marchon, Inc., an aggregate of 1,076,323 shares of Common
Stock to the Marchon Stockholders. See "Certain Transactions -- The Marchon
Transaction."
(c) On November 2, 1994, in consideration for services, the Company issued
warrants to purchase an aggregate of 73,000 shares at $7.50 per share, to Harvey
Klaris (21,067 warrants), Glen Chwatt (21,067 warrants), Richard Chwatt (21,067
warrants) and Jerico State Capital Corp. (15,800 warrants), expiring on November
2, 1997.
(d) On December 22, 1994, the Company issued, for an aggregate cash
consideration of $15 million, convertible debentures in such principal amount to
the WPG Group, Eugene M. Matalene, Jr. and Richard Hochman. The convertible
debentures are convertible at any time into newly issued shares of Common Stock
at a conversion price of $7.50 per share. See "Certain Transactions -- The WPG
Group Investment."
(e) On December 22, 1994, in consideration for services, the Company issued
warrants to acquire an aggregate of 1,000,000 shares of Common Stock at an
exercise price of $7.50 per share of which 325,000 were issued to Mr. Geller,
475,000 were issued to Mr. Saul, 75,000 to each of Irwin J. Goldsmith and
Charles Emby, senior managers of a subsidiary of the Company, and 50,000 to SBK
Investment Partners, an affiliate of the former corporate counsel to the
Company. See "Certain Transactions -- The WPG Group Investment."
(f) On December 27, 1994, in consideration for services, the Company issued
to PaineWebber Incorporated, a warrant to purchase 63,000 shares of Common Stock
for $7.50 per share, expiring on December 27, 1997. See "Certain Transactions --
Transactions with Affiliates."
(g) On December 28, 1994, in consideration for services, the Company issued
warrants to purchase 80,571 and 19,429 shares of Common Stock at $7.50 per
share, expiring December 27, 1997, to WPG IV and the general partner of WPG
Overseas, respectively. See "Certain Transactions -- Transactions with
Affiliates."
II-2
<PAGE> 112
(h) On January 3, 1995, in consideration for services, the Company issued
to Gerard Klauer Mattison & Co., Inc., a warrant to purchase 79,000 shares of
Common Stock for $7.50 per share expiring January 3, 1998. See "Underwriting."
(i) On July 7, 1995, the Company issued to Buddy L Inc. as part of the
consideration for the acquisition by the Company of the Toy Business of Buddy L,
an aggregate of 756,667 shares of the Company's common stock (and up to 454,000
additional shares of common stock as price protection in the event Buddy L sells
the aforementioned received common stock under certain circumstances between
July 7, 1996 and December 31, 1997 for less than $12 per share). Under the
acquisition agreement, the Company also agreed to pay to Buddy L Inc. a
five-year earnout based upon an amount equal to either 1.5% of the consolidated
net revenues of the Company's and Buddy L's products or, at the Buddy L's
option, a percentage of the Company's consolidated earnings before interest and
income taxes based on the sales of Buddy L products, but in no event will the
earnout be (x) less than $3.25 million, including $1.25 million in cash paid at
closing (which sum was included in (ii) above), with the excess over $3.25
million subject to certain offsets that are not to exceed $10 million or (y)
more than $20 million; provided that if the earnout payments under certain
circumstances would have exceeded $25 million, the Company shall make an
additional payment equal to such amount in excess of $25 million. See "Certain
Transactions -- The Buddy L Transaction."
(j) On July 7, 1995, the Company issued, for an aggregate cash
consideration of $7.6 million three-year 12% senior subordinated notes in the
principal amount of $7.58 million and 758,000 of detachable four-year warrants
exercisable commencing July 7, 1997 at $9.00 per share, to American Bankers
Insurance Company of Florida ($2.5 million principal amount of notes and 250,000
warrants), American Bankers Life Assurance Company of Florida ($2.5 million of
notes and 250,000 warrants), Regent Capital Partners L.P. ($1.5 million of notes
and 150,000 warrants), Eugene M. Matalene, Jr. ($100,000 of notes and 10,000
warrants), Robert W. Pangia ($100,000 of notes and 10,000 warrants), Steven
Geller ($500,000 of notes and 50,000 warrants), Roger Schneier ($250,000 of
notes and 25,000 warrants), Peter B. Pfister ($10,000 of notes and 1,000
warrants), Craig S. Whiting, through his self-directed IRA ($10,000 of notes and
1,000 warrants), Nora E. Kerppola ($10,000 of notes and 1,000 warrants) and Paul
M. Higbee ($100,000 of notes and 1,000 warrants). See "Certain Transactions --
The Buddy L Transaction."
(k) On July 7, 1995, the Company issued, for an aggregate cash
consideration of $1.8 million, 247,392 shares of Common Stock at $7.25 per
share, of which 190,000 shares were issued to WPG IV, 46,046 were issued to WPG
Overseas, 3,711 were issued to Glenbrook and 6,680 were issued to Westpool. See
"Certain Transactions -- The WPG Group Investment."
(l) On July 7, 1995, the Company issued, for an aggregate cash
consideration of $3.2 million, 442,264 shares of $.01 par value Series A
Cumulative Convertible Preferred Stock. Such securities were issued as follows:
341,372 shares to WPG IV, 82,317 shares to WPG Overseas, 6,634 shares to
Glenbrook and 11,941 shares to Westpool. See "Certain Transactions -- The Buddy
L Transaction."
(m) On August 31, 1995, the Company extended the term of an option for an
aggregate of 240,000 shares of Common Stock to September 30, 1997, from
September 30, 1996. The option is exercisable at $8.50 per share. See Note 12 of
Notes to Consolidated Financial Statements.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering.
II-3
<PAGE> 113
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
1.1 * -- Form of Underwriting Agreement
2.1 -- Stock Purchase Agreement, dated July 29, 1988, by and among Clabir, Clabir
Corporation (California), HMW Industries, Inc. and Olin Corporation.(2)
2.2 -- Agreement and Plan of Merger, dated as of November 14, 1989, between AmBrit,
Inc. and the Company, including amendment thereto, dated as of December 4,
1989.(3)
2.3 -- Agreement and Plan of Merger, dated as of November 14, 1989, by and among the
Company, Clabir Corporation ("Clabir") and CLR Corporation, including amendment
thereto, dated as of December 4, 1989.(3)
2.4 -- Sale and Purchase Agreement between the Company and Cargill, Incorporated, dated
September 30, 1992.(5)
2.5 -- Purchase Agreement among Conopco, Inc., the Company, The Isaly Klondike Company,
Inc., The Isaly Company, Popsicle Industries, Ltd., Ice Cream Novelties, Inc.
and Smith & O'Flaherty Limited, dated as of January 27, 1993.(7)
2.6 -- Agreement and Plan of Reorganization, dated October 13, 1994, by and among the
Company, Marchon, and the stockholders of Marchon.(11)
2.7 -- Amended and Restated Asset Purchase Agreement (the "Asset Purchase Agreement")
dated as of May 19, 1995 by and among the Company, Buddy L, and Buddy L (Hong
Kong) Limited ("BLHK").(16)
2.8 -- Agreement dated June 2, 1995 amending the Asset Purchase Agreement, by and among
the Company and Buddy L and acknowledged and agreed to by BLHK.(4)
2.9 -- Second Amendment dated June 30, 1995 further amending the Asset Purchase
Agreement.(4)
2.10 -- Third Amendment, dated July 7, 1995 further amending the Asset Purchase
Agreement.(4)
2.11 -- Agreement dated August 31, 1995, among the Company, CLR Corporation, Clabir,
Olin Corporation and General Defense Corporation.(18)
3.1 -- Restated Certificate of Incorporation of the Company.(4)
3.2 -- Amended and Restated By-Laws of the Company.(15)
3.3 -- Certificate of Designation, Preference and Rights of the Company filed June 30,
1995.(4)
4.1 -- Form of specimen certificate representing the Company's Common Stock.(1)
4.2 -- Excerpts from the Company's amended By-Laws and the Company's amended
Certificate of Incorporation relating to rights of holders of the Company's
Common Stock.(3)
4.3 -- Form of 9% Convertible Debentures, issued December 22, 1994.(14)
4.4 -- Form of Warrant Certificate to purchase common stock of the Company, issued
December 22, 1994.(12)
5.1 * -- Opinion of Schwartz & Freeman
9.1 -- Voting Agreement, dated September 30, 1994, by and between Halco Industries,
Inc. ("Halco") and Steven Geller.(11)
10.1 -- EII Incentive Plan for 1993.(6)
10.2 -- Corporate Incentive Plan for 1993.(6)
10.3 -- Promissory Note, dated July 31, 1993, from Halco to the Company.(8)
10.4 -- Modification Agreement, dated September 29, 1993, to the Promissory Note from
Halco to the Company.(8)
</TABLE>
II-4
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.5 -- Modification Agreement, dated December 7, 1993, to the Promissory Note from
Halco to the Company.(9)
10.6 -- Pledge Agreement, dated December 7, 1993, between Halco and the Company.(9)
10.7 -- Stock Purchase Agreement, dated December 30, 1993, between the Company and Rhoda
Kleinman.(9)
10.8 -- Employment Agreement, dated July 15, 1994, by and among the Company, EII and
Steven Geller.(10)
10.9 -- Employment Agreement, dated July 15, 1994, by and among the Company, EII and
Neil Saul.(10)
10.10 -- Stock Purchase Agreement, dated July 15, 1994, among Steven Geller and the
Halperin Group.(11)
10.11 -- Stock Option Agreement, dated July 15, 1994, between Steven Geller and the
Halperin Group.(11)
10.12 -- Stock Option Agreement, dated July 18, 1994, between the Company and Steven
Geller.(10)
10.13 -- Stock Option Agreement, dated July 18, 1994, between the Company and Neil
Saul.(10)
10.14 -- Amended and Restated 1994 Stock Option Plan of the Company.(15)
10.15 -- Financing Agreement and supplements thereto, between EII and Wachovia Bank of
North Carolina, N.A. ("Wachovia") and related Promissory Note, Acknowledgment of
Security Interest in Inventory, Agreement of Licensor and Guaranty Agreement
between the Company and Wachovia, all dated September 30, 1994.(14)
10.16 -- Redemption Agreement, dated September 30, 1994, between the Company and the
Halperin Group.(14)
10.17 -- Omnibus Agreement, dated September 30, 1994, by and among the Halperin Group,
Steven Geller, the Company and EII.(11)
10.18 -- Subordinated Promissory Note, dated September 30, 1994, between Maurice Halperin
and the Company.(14)
10.19 -- Loan and Subordination Agreement, dated September 30, 1994, between the Company
and Maurice Halperin.(14)
10.20 -- Stockholder's Agreement, dated October 13, 1994, by and among Steven Geller,
Marvin Smollar and Neil Saul.(11)
10.21 -- Investor's Rights Agreement, dated October 13, 1994, by and among the Company,
Marvin Smollar, Kar Ye Yeung, Tyler Bulkley and Harvey Katz.(11)
10.22 -- Employment Agreement, dated October 13, 1994, between the Company and Marvin
Smollar.(11)
10.23 -- Stockholders Agreement dated October 13, 1994, among Steven Geller, Marvin
Smollar and Neil Saul.(11)
10.24 -- Debenture Purchase Agreement, dated as of December 2, 1994, among the Company
and the WPG Group.(13)
10.25 -- Registration Rights Agreement, dated as of December 22, 1994, by and between the
Company and the WPG Group.(13)
10.26 -- Shareholders' Agreement, dated December 22, 1994, by and among the WPG Group,
Steven Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited
Partnership.(13)
10.27 -- Intercreditor Agreement, dated December 22, 1994, by and among Wachovia, the
Company, EII and the WPG Group.(13)
10.28 -- Subsidiary Guaranty, dated as of December 22, 1994, between EII and Marchon.(14)
</TABLE>
II-5
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.29 -- Stock Purchase Agreement, dated as of December 22, 1994, between WPG Corporate
Development Associates IV (Overseas), Ltd. and Steven Geller.(13)
10.30 -- Modification to Financing Agreement, dated January 30, 1995, between EII and
Wachovia.(14)
10.31 -- Asset Purchase Agreement, dated as of March 3, 1995, by and among the Company,
Buddy L and Buddy L (Hong Kong) Limited.(14)
10.32 -- Bid Protection Agreement, dated as of March 3, 1995, between the Company and
Buddy L.(14)
10.33 -- Assignment and Assumption Agreement dated as of June 21, 1995 between the
Company and EAC.(4)
10.34 -- Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(4)
10.35 -- Lease dated July 7, 1995 between Buddy L and EAC.(4)
10.36 -- Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy
L Canada Inc., and EAC.(4)
10.37 -- Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy
L Canada Inc., and EAC.(4)
10.38 -- Assignment and Assumption of Lease dated as of July 7, 1995 between Buddy L and
EAC.(4)
10.39 -- Loan and Security Agreement dated as of June 30, 1995 between LaSalle National
Bank, N.A. ("LaSalle") and EAC.(4)
10.40 -- Guaranty dated as of June 30, 1995 between LaSalle and the Company.(4)
10.41 -- Subordination Agreement dated as of June 30, 1995 between LaSalle and the
Company.(4)
10.42 -- $7,580,000 Senior/Subordinated Term Loan Agreement dated July 7, 1995 among the
Company as Borrower and the Lenders Listed therein ("Lenders").(4)
10.43 -- Form of the Company's 12% Senior/Subordinated Note due July 7, 1998.(4)
10.44 -- Form of Warrant to Purchase Common Stock of the Company issued to the
Lenders.(4)
10.45 -- Amended and Restated Intercreditor Agreement dated July 7, 1995 by and among the
Company, EII, Wachovia, the Lenders and the holders of certain debentures dated
December 22, 1994 issued by the Company.(4)
10.46 -- Registration Rights Agreement dated July 7, 1995 by and between the Company and
the Lenders.(4)
10.47 -- Form of Subscription Agreement executed in connection with subscription of
Common Stock and Preferred Stock by WPG Corporate Development Associates IV
(Overseas), L.P., Westpool Investment Trust PLC, Glenbrook Partners, L.P., and
WPG Corporate Development Associates IV, L.P.(4)
10.48 -- Shareholders' agreement ("Shareholders' Agreement") dated December 22, 1994
among WPG Corporate Development Associates IV, L.P., WPG Corporate Development
Associates IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee of Craig S.
Whiting IRA, Peter Pfister, Weiss, Peck & Greer, as Trustee of Nora E. Kerppola
IRA Westpool Investment Trust, PLC, Glenbrook Partners, L.P., Steve Geller, Neil
Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(17)
</TABLE>
II-6
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.49 -- Amendment No. 2 to Shareholders Agreement dated as of June 29, 1995 among WPG
Corporate Development Associates IV, L.P., WPG Corporate Development Associates
IV (Overseas), Ltd., as the exempt transferee of WPG Corporate Development
Associates IV (Overseas), Ltd., certain persons identified on Schedule I of
Amendment No. 2 to the Shareholders' Agreement, Steven E. Geller ("Geller"),
Neil B. Saul ("Saul") and The Autumn Glory Trust, a Cook Islands Registered
International Trust ("Trust") as the permitted transferee of Champ Enterprises
Limited Partnership.(4)
10.50 -- Registration Rights Agreement ("Registration Rights Agreement") dated as of
December 22, 1994 by and between Empire of Carolina, Inc., WPG Corporate
Development Associates IV, L.P. WPG Corporate Development Associates IV
(Overseas), Ltd., Weiss Peck & Greer, as Trustee under Craig Whiting IRA, Peter
B. Pfister, Weiss, Peck & Greer, as Trustee under Nora Kerppola IRA, Westpool
Investment Trust PLC and Glenbrook Partners, L.P.(17)
10.51 -- Amendment No. 1 to Registration Rights Agreement.(4)
10.52 -- Settlement and Termination Agreement with Neil Saul.(18)
10.53 -- Extension to Financing Agreement, dated February 12, 1996 between Empire and
Wachovia.(18)
21 -- Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Coopers & Lybrand LLP
23.3+ -- Consent of Wong Brothers & Co.
23.4 * -- Consent of Schwartz & Freeman (to be included in Exhibit 5.1)
24.1+ -- Powers of Attorney (included on signature page)
</TABLE>
- ------------------------------
* To be filed by amendment
+ Previously filed
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by
reference herein.
(2) Previously filed as an exhibit to Clabir's Current Report on Form 8-K,
dated December 23, 1988 (File No. 1-7769) and incorporated by reference
herein.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-32186), dated November 17, 1989 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated July 21, 1995, and incorporated by reference herein.
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated October 6, 1992 and incorporated by reference herein.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated by reference herein.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated February 1, 1993 and incorporated by reference herein.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993 and incorporated by reference
herein.
(9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated by reference herein.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated by reference
herein.
II-7
<PAGE> 117
(11) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for September 30, 1994 and incorporated by reference herein.
(12) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for December 22, 1994 and incorporated by reference herein.
(13) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
the WPG Group, dated December 23, 1994 and incorporated by reference
herein.
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated by reference herein.
(15) Previously filed as an exhibit to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(16) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for May 19, 1995 and hereby incorporated by reference herein.
(17) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
WPG Corporate Development Associates IV, L.P., WPG Private Equity Partners,
L.P., WPG Corporate Development Associates IV (Overseas), L.P., WPG Private
Equity Partners (Overseas), L.P., Steven Hutchinson, Wesley Lang, Peter
Pfister, Craig Whiting, Nora Kerppola, Glenbrook Partners, L.P., Prim
Ventures, Inc., Westpool Investment Trust PLC and Weiss, Peck & Greer with
the Securities and Exchange Commission on December 23, 1994.
(18) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated by reference herein.
(b) Financial Statement Schedules
The following financial statement schedule of the Company is filed as part
of this Registration Statement and should be read in conjunction with the
Consolidated Financial Statements of the Company:
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Schedules other than those listed above have been omitted for the reason
that they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) It will provide to the Underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-8
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Delray Beach, Florida on
May 28, 1996.
EMPIRE OF CAROLINA, INC.
By: /s/ STEVEN GELLER
---------------------------------
Steven Geller,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ STEVEN GELLER Chairman of the Board of Directors May 28, 1996
- ------------------------------------------ and Chief Executive Officer
Steven Geller (Principal Executive Officer)
/s/ MARVIN SMOLLAR President, Chief Operating Officer May 28, 1996
- ------------------------------------------ and Director
Marvin Smollar
/s/ J. ARTIE ROGERS Senior Vice President-Finance and May 28, 1996
- ------------------------------------------ Assistant Secretary (Principal
J. Artie Rogers Financial and Accounting Officer)
* Director May 28, 1996
- ------------------------------------------
Leonard E. Greenberg
* Director May 28, 1996
- ------------------------------------------
Steven N. Hutchinson
* Director May 28, 1996
- ------------------------------------------
Eugene M. Matalene
* Director May 28, 1996
- ------------------------------------------
Peter B. Pfister
*By: /s/ STEVEN GELLER
- ------------------------------------------
(Steven Geller,
Attorney-in-Fact)
</TABLE>
II-9
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Empire of Carolina, Inc.
We have audited the consolidated financial statements of Empire of
Carolina, Inc. and its subsidiaries as of December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995, and have issued
our report thereon dated March 29, 1996 (April 8, 1996 as to Note 17 to the
Consolidated Financial Statements); such report is included elsewhere in this
Registration Statement. Our audits also included the consolidated financial
statement schedule of Empire of Carolina, Inc. and its subsidiaries, listed in
Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 29, 1996
(April 8, 1996 as to Note 17 to the Consolidated Financial Statements)
S-1
<PAGE> 120
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ADMINISTRATIVE EXPENSES................................................... $(2,243) $ (710)
------- -------
OTHER INCOME (EXPENSES):
Interest income, dividends and net realized gains....................... 2,459 1,241
Unrealized loss on marketable securities................................ (670) --
Interest expense........................................................ (61) (1,912)
Equity in earnings of subsidiaries...................................... 310 (5,621)
Management fee income................................................... 1,100 3,060
------- -------
Total other income (expenses)........................................ 3,138 (3,232)
------- -------
INCOME (LOSS) BEFORE TAXES................................................ 895 (3,942)
INCOME TAX EXPENSE........................................................ 306 559
------- -------
NET INCOME (LOSS)......................................................... $ 589 $(4,501)
======= =======
</TABLE>
S-2
<PAGE> 121
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, CONTINUED
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ -- $ 1,416
Marketable securities................................................... 1,861 189
Receivables from subsidiaries........................................... 11,706 23,952
Prepaid expenses and other current assets............................... 1,626 920
------- -------
Total current assets................................................. 15,193 26,477
NOTE RECEIVABLE FROM SUBSIDIARY........................................... -- 9,580
INVESTMENT IN SUBSIDIARIES................................................ 28,574 21,947
OTHER NONCURRENT ASSETS................................................... 718 1,695
------- -------
TOTAL ASSETS.............................................................. $44,485 $59,699
======= =======
</TABLE>
The note receivable from subsidiary is subordinated to the subsidiary's
bank facility and bears interest at the prime rate.
S-3
<PAGE> 122
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, CONCLUDED
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................................................... $ 3,250 $ --
Accounts payable and accrued expenses................................... 1,496 1,040
Federal and state taxes payable......................................... 2,532 3,685
Indemnification obligations related to sales of subsidiaries............ 1,541 1,326
------- -------
Total current liabilities............................................ 8,819 6,051
CONVERTIBLE SUBORDINATED DEBENTURES....................................... 13,563 13,851
SENIOR SUBORDINATED NOTES................................................. -- 7,959
OTHER NONCURRENT LIABILITIES.............................................. 905 781
------- -------
Total liabilities....................................................... 23,287 28,642
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000 shares authorized; shares
issued and outstanding: 1994 -- 4,191,000; 1995 -- 5,195,000......... 419 519
Series A cumulative convertible preferred stock, $.01 par value,
5,000,000 shares authorized; shares issued and outstanding: 1994 --
0; 1995 -- 442,264 ($3,206,000 involuntary liquidation preference)... -- 4
Additional paid-in capital................................................ 18,972 33,193
Retained earnings (deficit)............................................... 1,842 (2,659)
Stockholders' loans....................................................... (35) --
------- -------
Total stockholders' equity.............................................. 21,198 31,057
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................ $44,485 $59,699
======= =======
</TABLE>
Note: The Parent accounts for its investment in its majority-owned
subsidiaries using the equity method of accounting. Under the equity method,
original investments are recorded at cost and adjusted by the Parent's share of
undistributed earnings or losses of these components.
S-4
<PAGE> 123
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995, CONTINUED
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 589 $(4,501)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Non-cash adjustments............................................... 556 6,305
Changes in assets and liabilities.................................. (1,887) 87
------- -------
Net cash provided by (used in) operating activities............. (742) 1,891
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Marchon.................................................. (3,818) --
Loans to Halco Industries, Inc.......................................... (3,825) --
Repayment of loan by Halco Industries, Inc.............................. 25,825 --
------- -------
Proceeds from sales of property and equipment........................... 125 --
Proceeds from sales of marketable securities............................ 66,606 1,655
Note receivable from subsidiary......................................... -- (9,580)
Net advances to subsidiaries............................................ (7,524) (5,220)
Management fees received from subsidiaries.............................. 1,050 3,060
Collections from (advances to) stockholder.............................. (35) 35
------- -------
Net cash provided by (used in) investing activities.................. 78,404 (10,050)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Marchon long-term debt..................................... (6,639) --
Repayments of notes payable............................................. -- (3,250)
Proceeds from issuance of convertible subordinated debentures........... 15,000 --
Purchase of treasury stock.............................................. (86,111) --
Proceeds from issuance of common stock.................................. -- 1,794
Proceeds from issuance of preferred stock............................... -- 3,206
Proceeds from issuance of senior subordinated notes..................... -- 7,580
Other................................................................... -- 245
------- -------
Net cash provided by (used in) financing activities.................. (77,750) 9,575
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (88) 1,416
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 88 --
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................. $ -- $ 1,416
======= =======
</TABLE>
S-5
<PAGE> 124
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995, CONCLUDED
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Cash paid during the year for:
Interest................................................................ $ 316 $1,046
Income taxes, net of refunds............................................ 2,027 97
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
On July 7, 1995, two subsidiaries of the Company acquired the toy business
assets and assumed certain liabilities of Buddy L Inc. and its affiliate, Buddy
L (Hong Kong) Limited, for an aggregate purchase price of $33,925,000, including
(i) the issuance of $4,753,000 one-year notes and (ii) the issuance of 756,667
shares of common stock. Funding for the acquisition included (i) issuance of
247,392 shares of common stock (ii) issuance of 442,264 shares of Series A
cumulative convertible preferred stock and (iii) borrowings under senior
subordinated notes ($7,580,000).
During 1994, the Company acquired all of the common stock of Marchon, Inc.
for approximately $13,664,000. In connection with the acquisition, the Company
issued $3,250,000 one-year notes and 1,076,923 shares of common stock as partial
consideration for the purchase.
During 1994, the Company issued warrants to Geller, Saul and their
designees that assisted them in connection with debenture financing and to
certain investment bankers to purchase 1,242,000 shares of the Company's common
stock. As a result, paid-in capital increased $1,740,000, prepaid assets
increased $303,000, and debt decreased $1,437,000.
During 1994, the Company canceled all shares held in treasury at September
30, 1994. The result of the cancellation was a reduction in common stock of
$1,329,000, a reduction in paid-in capital of $45,837,000, a reduction in
retained earnings of $39,734,000, and a reduction in treasury stock of
$86,900,000.
S-6
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
</TABLE>
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Stock Purchase Agreement, dated July 29, 1988, by and among Clabir, Clabir
Corporation (California), HMW Industries, Inc. and Olin Corporation.(2)
2.2 Agreement and Plan of Merger, dated as of November 14, 1989, between AmBrit, Inc.
and the Company, including amendment thereto, dated as of December 4, 1989.(3)
2.3 Agreement and Plan of Merger, dated as of November 14, 1989, by and among the
Company, Clabir Corporation ("Clabir") and CLR Corporation, including amendment
thereto, dated as of December 4, 1989.(3)
2.4 Sale and Purchase Agreement between the Company and Cargill, Incorporated, dated
September 30, 1992.(5)
2.5 Purchase Agreement among Conopco, Inc., the Company, The Isaly Klondike Company,
Inc., The Isaly Company, Popsicle Industries, Ltd., Ice Cream Novelties, Inc. and
Smith & O'Flaherty Limited, dated as of January 27, 1993.(7)
2.6 Agreement and Plan of Reorganization, dated October 13, 1994, by and among the
Company, Marchon, and the stockholders of Marchon.(11)
2.7 Amended and Restated Asset Purchase Agreement (the "Asset Purchase Agreement") dated
as of May 19, 1995 by and among the Company, Buddy L, and Buddy L (Hong Kong)
Limited ("BLHK").(16)
2.8 Agreement dated June 2, 1995 amending the Asset Purchase Agreement, by and among the
Company and Buddy L and acknowledged and agreed to by BLHK.(4)
2.9 Second Amendment dated June 30, 1995 further amending the Asset Purchase
Agreement.(4)
2.10 Third Amendment, dated July 7, 1995 further amending the Asset Purchase
Agreement.(4)
2.11 Agreement dated August 31, 1995, among the Company, CLR Corporation, Clabir, Olin
Corporation and General Defense Corporation.(18)
3.1 Restated Certificate of Incorporation of the Company.(4)
3.2 Amended and Restated By-Laws of the Company.(15)
3.3 Certificate of Designation, Preference and Rights of the Company filed June 30,
1995.(4)
4.1 Form of specimen certificate representing the Company's Common Stock.(1)
4.2 Excerpts from the Company's amended By-Laws and the Company's amended Certificate of
Incorporation relating to rights of holders of the Company's Common Stock.(3)
4.3 Form of 9% Convertible Debentures, issued December 22, 1994.(14)
4.4 Form of Warrant Certificate to purchase common stock of the Company, issued December
22, 1994.(12)
5.1* Opinion of Schwartz & Freeman
9.1 Voting Agreement, dated September 30, 1994, by and between Halco Industries, Inc.
("Halco") and Steven Geller.(11)
10.1 EII Incentive Plan for 1993.(6)
10.2 Corporate Incentive Plan for 1993.(6)
10.3 Promissory Note, dated July 31, 1993, from Halco to the Company.(8)
10.4 Modification Agreement, dated September 29, 1993, to the Promissory Note from Halco
to the Company.(8)
10.5 Modification Agreement, dated December 7, 1993, to the Promissory Note from Halco to
the Company.(9)
10.6 Pledge Agreement, dated December 7, 1993, between Halco and the Company.(9)
</TABLE>
i
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.7 Stock Purchase Agreement, dated December 30, 1993, between the Company and Rhoda
Kleinman.(9)
10.8 Employment Agreement, dated July 15, 1994, by and among the Company, EII and Steven
Geller.(10)
10.9 Employment Agreement, dated July 15, 1994, by and among the Company, EII and Neil
Saul.(10)
10.10 Stock Purchase Agreement, dated July 15, 1994, among Steven Geller and the Halperin
Group.(11)
10.11 Stock Option Agreement, dated July 15, 1994, between Steven Geller and the Halperin
Group.(11)
10.12 Stock Option Agreement, dated July 18, 1994, between the Company and Steven
Geller.(10)
10.13 Stock Option Agreement, dated July 18, 1994, between the Company and Neil Saul.(10)
10.14 Amended and Restated 1994 Stock Option Plan of the Company.(15)
10.15 Financing Agreement and supplements thereto, between EII and Wachovia Bank of North
Carolina, N. A. ("Wachovia") and related Promissory Note, Acknowledgment of Security
Interest in Inventory, Agreement of Licensor and Guaranty Agreement between the
Company and Wachovia, all dated September 30, 1994.(14)
10.16 Redemption Agreement, dated September 30, 1994, between the Company and the Halperin
Group.(14)
10.17 Omnibus Agreement, dated September 30, 1994, by and among the Halperin Group, Steven
Geller, the Company and EII.(11)
10.18 Subordinated Promissory Note, dated September 30, 1994, between Maurice Halperin and
the Company.(14)
10.19 Loan and Subordination Agreement, dated September 30, 1994, between the Company and
Maurice Halperin.(14)
10.20 Stockholder's Agreement, dated October 13, 1994, by and among Steven Geller, Marvin
Smollar and Neil Saul.(11)
10.21 Investor's Rights Agreement, dated October 13, 1994, by and among the Company,
Marvin Smollar, Kar Ye Yeung, Tyler Bulkley and Harvey Katz.(11)
10.22 Employment Agreement, dated October 13, 1994, between the Company and Marvin
Smollar.(11)
10.23 Stockholders' Agreement dated October 13, 1994, among Steven Geller, Marvin Smollar
and Neil Saul.(11)
10.24 Debenture Purchase Agreement, dated as of December 2, 1994, among the Company and
the WPG Group.(13)
10.25 Registration Rights Agreement, dated as of December 22, 1994, by and between the
Company and the WPG Group.(13)
10.26 Shareholders' Agreement, dated December 22, 1994, by and among the WPG Group, Steven
Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(13)
10.27 Intercreditor Agreement, dated December 22, 1994, by and among Wachovia, the
Company, EII and the WPG Group.(13)
10.28 Subsidiary Guaranty, dated as of December 22, 1994, between EII and Marchon.(14)
10.29 Stock Purchase Agreement, dated as of December 22, 1994, between WPG Corporate
Development Associates IV (Overseas), Ltd. and Steven Geller.(13)
10.30 Modification to Financing Agreement, dated January 30, 1995, between EII and
Wachovia.(14)
</TABLE>
ii
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.31 Asset Purchase Agreement, dated as of March 3, 1995, by and among the Company, Buddy
L and Buddy L (Hong Kong) Limited.(14)
10.32 Bid Protection Agreement, dated as of March 3, 1995, between the Company and Buddy
L.(14)
10.33 Assignment and Assumption Agreement dated as of June 21, 1995 between the Company
and EAC.(4)
10.34 Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(4)
10.35 Lease dated July 7, 1995 between Buddy L and EAC.(4)
10.36 Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy L
Canada Inc., and EAC.(4)
10.37 Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy L
Canada Inc., and EAC.(4)
10.38 Assignment and Assumption of Lease dated as of July 7, 1995 between Buddy L and
EAC.(4)
10.39 Loan and Security Agreement dated as of June 30, 1995 between LaSalle National Bank,
N. A. ("LaSalle") and EAC.(4)
10.40 Guaranty dated as of June 30, 1995 between LaSalle and the Company.(4)
10.41 Subordination Agreement dated as of June 30, 1995 between LaSalle and the
Company.(4)
10.42 $7,580,000 Senior/Subordinated Term Loan Agreement dated July 7, 1995 among the
Company as Borrower and the Lenders Listed therein ("Lenders").(4)
10.43 Form of the Company's 12% Senior/Subordinated Note due July 7, 1998.(4)
10.44 Form of Warrant to Purchase Common Stock of the Company issued to the Lenders.(4)
10.45 Amended and Restated Intercreditor Agreement dated July 7, 1995 by and among the
Company, EII, Wachovia, the Lenders and the holders of certain debentures dated
December 22, 1994 issued by the Company.(4)
10.46 Registration Rights Agreement dated July 7, 1995 by and between the Company and the
Lenders.(4)
10.47 Form of Subscription Agreement executed in connection with subscription of Common
Stock and Preferred Stock by WPG Corporate Development Associates IV (Overseas),
L.P., Westpool Investment Trust PLC, Glenbrook Partners, L.P., and WPG Corporate
Development Associates IV, L.P.(4)
10.48 Shareholders' agreement ("Shareholders' Agreement") dated December 22, 1994 among
WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates
IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee of Craig S. Whiting IRA, Peter
Pfister, Weiss, Peck & Greer, as Trustee of Nora E. Kerppola IRA Westpool Investment
Trust, PLC, Glenbrook Partners, L. P., Steve Geller, Neil Saul, Marvin Smollar and
Champ Enterprises Limited Partnership.(17)
10.49 Amendment No. 2 to Shareholders Agreement dated as of June 29, 1995 among WPG
Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV
(Overseas), Ltd., as the exempt transferee of WPG Corporate Development Associates
IV (Overseas), Ltd., certain persons identified on Schedule I of Amendment No. 2 to
the Shareholders' Agreement, Steven E. Geller ("Geller"), Neil B. Saul ("Saul") and
The Autumn Glory Trust, a Cook Islands Registered International Trust ("Trust") as
the permitted transferee of Champ Enterprises Limited Partnership.(4)
10.50 Registration Rights Agreement ("Registration Rights Agreement") dated as of December
22, 1994 by and between Empire of Carolina, Inc., WPG Corporate Development
Associates IV, L.P. WPG Corporate Development Associates IV (Overseas), Ltd., Weiss
Peck & Greer, as Trustee under Craig Whiting IRA, Peter B. Pfister, Weiss, Peck &
Greer, as Trustee under Nora Kerppola IRA, Westpool Investment Trust PLC and
Glenbrook Partners, L. P.(17)
10.51 Amendment No. 1 to Registration Rights Agreement.(4)
</TABLE>
iii
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.52 Settlement and Termination Agreement with Neil Saul.(18)
10.53 Extension to Financing Agreement, dated February 12, 1996 between Empire and
Wachovia.(18)
21 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand LLP
23.3+ Consent of Wong Brothers & Co.
23.4* Consent of Schwartz & Freeman (to be included in Exhibit 5.1)
24.1+ Powers of Attorney (included on signature page)
</TABLE>
- ------------------------------
* To be filed by amendment
+ Previously filed
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by
reference herein.
(2) Previously filed as an exhibit to Clabir's Current Report on Form 8-K,
dated December 23, 1988 (File No. 1-7769) and incorporated by reference
herein.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-32186), dated November 17, 1989 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated July 21, 1995, and incorporated by reference herein.
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated October 6, 1992 and incorporated by reference herein.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated by reference herein.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated February 1, 1993 and incorporated by reference herein.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993 and incorporated by reference
herein.
(9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated by reference herein.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated by reference
herein.
(11) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for September 30, 1994 and incorporated by reference herein.
(12) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for December 22, 1994 and incorporated by reference herein.
(13) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
the WPG Group, dated December 23, 1994 and incorporated by reference
herein.
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated by reference herein.
(15) Previously filed as an exhibit to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(16) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for May 19, 1995 and hereby incorporated by reference herein.
iv
<PAGE> 129
(17) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
WPG Corporate Development Associates IV, L.P., WPG Private Equity Partners,
L. P., WPG Corporate Development Associates IV (Overseas), L.P., WPG
Private Equity Partners (Overseas), L.P., Steven Hutchinson, Wesley Lang,
Peter Pfister, Craig Whiting, Nora Kerppola, Glenbrook Partners, L.P., Prim
Ventures, Inc., Westpool Investment Trust PLC and Weiss, Peck & Greer with
the Securities and Exchange Commission on December 23, 1994.
(18) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated by reference herein
v
<PAGE> 1
EXHIBIT 21
EMPIRE OF CAROLINA, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY OR VOTING SECURITIES
STATE OF OWNED BY THE
NAME OF SUBSIDIARY INCORPORATION COMPANY
- ------------------------------------------------------------ -------------- -----------------
<S> <C> <C>
Empire Industries, Inc.(1)(2)............................... North Carolina 100%
Marchon Toys, Ltd.(2)....................................... Hong Kong 99.9%
CLR Corporation............................................. Delaware 75%
Carnichi Limited............................................ Hong Kong 100%
</TABLE>
- ------------------------------
(1) The name of this corporation was changed from Carolina Enterprises, Inc. to
Empire Industries, Inc. as of February 7, 1995. Empire Industries, Inc.
does business under the names "Empire of Carolina," "Empire Manufacturing,"
"Marchon" and "Caldwell Button Company."
(2) Effective May 1996, Empire Manufacturing, Inc. and Marchon, Inc.,
wholly-owned subsidiaries of Empire of Carolina, Inc., were merged into
Empire Industries, Inc., and Marchon, Inc.'s subsidiary, Marchon Toys,
Ltd., was dividended up to Empire of Carolina, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S REPORT
We consent to the use in this Registration Statement of Empire of Carolina,
Inc. on Form S-1 of our reports dated December 22, 1995 and March 29, 1996
(April 8, 1996 as to Note 17), appearing in the Prospectus, which is part of
this Registration Statement, and of our report dated March 19, 1996 (April 8,
1996 as to Note 17) relating to the financial statement schedule appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
May 28, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
Empire of Carolina, Inc. and Subsidiaries of our report dated April 20, 1994,
except for Note 4 for which the date is September 8, 1994 on our audit of the
financial statements of Marchon Inc. and Subsidiaries as and for the year ended
December 31, 1993. We also consent to the reference to our firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
May 28, 1996
