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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO.1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 1-7909
EMPIRE OF CAROLINA, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 13-2999480
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5150 Linton Boulevard, Delray Beach, Fl. 33484
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 498-4000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.10 par value per share American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the proxy statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 15, 1996, was $21,324,000 (assuming solely for the
purpose of this calculation that all directors and officers of the Registrant
are "affiliates").
The number of shares outstanding of the Registrant's Common Stock, par
value $.10 per share, as of March 15, 1996, was 5,205,200.
Documents Incorporated by Reference: None.
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PART I
ITEM 1. BUSINESS.
GENERAL
Empire of Carolina, Inc., a Delaware corporation and its subsidiaries
("Empire" or the "Company") is a designer, manufacturer and marketer of 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.
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. ("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.
Marchon had substantial experience at manufacturing toy products in the Far
East. In July 1995, Empire acquired the toy business and certain related
liabilities of Buddy L Inc. and its Hong Kong subsidiary (such assets and
liabilities collectively, "Buddy L"). , 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.
The Company's net sales were $153.7 million, $58.0 million and $41.4
million, respectively, for the years ended December 31, 1995, 1994 and 1993.
The Company's toy business net sales were $121.6 million, $33.0 million and
$21.1 million, respectively, for the years ended December 31, 1995, 1994, and
1993, and contributed 79%, 57% and 51%, 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 $32.2 million, $25.0 million and $20.2
million, respectively, for the years ended December 31, 1995, 1994, and 1993,
and contributed approximately 21% of the Company's consolidated net sales in
1995, 43% in 1994 and 49% in 1993. See Note 13 of Notes to Consolidated
Financial Statements.
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The Company's executive offices are located at 5150 Linton Boulevard,
Delray Beach, Florida 33484, telephone (407) 498-4000.
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, Inc. ("Mattel"), Hasbro, Inc. ("Hasbro") and Tyco Toys,
Inc. ("Tyco"), collectively were responsible for 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 product design, play value, pricing, marketing, in-store exposure and
product availability. While the success of some toy categories vary, other
categories generally perform well from year to year. The perennial best
sellers, 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
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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 and Analysis 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, home
improvement chains 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.
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.
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 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.
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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(TM) 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(R) 1500 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.
STRATEGIC BUSINESS UNITS
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 strategic business units, each of which has a general manager
accountable for its discrete product lines. SBUs operate across functional
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lines within the Company to facilitate the design, development, marketing, and
manufacturing of products within their SBUs. 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.
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 toy 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. The loss of one or
more of the Company's largest customers would have a material adverse effect on
the Company's business, financial condition and results of operations.
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 customary in the toy industry, these orders generally may be canceled
without penalty 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.
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Holiday Products
The Company markets its holiday items through an 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. The loss of either of these major customers could
have a material adverse effect on the Company's holiday product sales and on
the Company as a whole.
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 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. The
Company 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, as compared to approximately $1.1
million during 1994 and approximately $300,000 during 1993. Management expects
research and development expenses to be approximately $3.5 million during 1996.
Management also expects the rate of growth of the Company's research and
development expenditures to decline from the rate of growth in recent years,
primarily as a result of the substantial increases in such expenditures
following the Change of Control. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
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
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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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
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.
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
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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 seeks 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, approximately 30% of the Company's foreign production (based on cost)
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 the Company'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.
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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 "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.
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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.
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 ("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, 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.
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 emission, storage and
disposal of such materials.
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.
10
<PAGE> 12
EMPLOYEES
At December 31, 1995, the Company had approximately 1,200 employees in
the United States approximately 1,000 of whom were full-time, and approximately
40 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 has signed a letter of intent with respect to the 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.
OTHER
The Company also manufactures and sells apparel buttons, buckles and
novelty items for use in the garment industry. The Company has signed a letter
of intent with respect to the sale of this business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Annual Report 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. 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. Among the key factors that may have a direct bearing
on the Company's results are the reliance on key customers, seasonality of the
Company's business, competitive practices in the toy and seasonal 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> 13
ITEM 2. PROPERTIES.
<TABLE>
<CAPTION>
SEGMENT GENERAL CHARACTER
LOCATION USING PREMISES AND USE OF PROPERTY
-------- -------------- -------------------
<S> <C> <C>
OWNED:(1)
TARBORO, NC TOY & HOLIDAY BUSINESS 1,200,000 SQ. FT. OF FACTORY, WAREHOUSE
AND OFFICE SPACE
TARBORO, NC (BUTTONS) TOY BUSINESS 24,000 SQ. FT. OF FACTORY SPACE
LEASED:
GLOVERSVILLE, NY TOY BUSINESS 636,000 SQ. FT. OF WAREHOUSE & FACTORY
SPACE
MAYFIELD, NY TOY BUSINESS 86,000 SQ. FT. OF WAREHOUSE SPACE
NEW YORK, NY TOY & HOLIDAY BUSINESS 29,000 SQ. FT. OF SHOWROOM SPACE (4)
DELRAY BEACH, FL EXECUTIVE OFFICES 16,000 SQ. FT. OFFICE SPACE
HONG KONG TOY BUSINESS 2,600 SQ. FT. OFFICE SPACE
HONG KONG TOY BUSINESS 1,200 SQ. FT. SHOWROOM
NEW YORK, NY TOY BUSINESS (3) 3,500 SQ. FT. SHOWROOM
NEW YORK, NY(BUTTONS) TOY BUSINESS 3,000 SQ. FT. SALES AND DISTRIBUTION
FACILITY
ST. LOUIS (2) 122,000 SQ. FT. WAREHOUSE SPACE
</TABLE>
- -------------------------
(1) The real property owned by the Company is free of material liens and
encumbrances.
(2) Marchon leases this property from an affiliate of an officer. This
facility has been minimally occupied since Marchon moved operations to
its main Tarboro plant in the first quarter of 1995. The Company
intends to terminate this lease or sublease the property as soon as
practicable. There is no assurance that the Company will be able to
sublease the property or terminate the lease.
(3) This location is vacant.
(4) Approximately 11,000 square feet of the location is sub-leased.
12
<PAGE> 14
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 Florida.
ITEM 3. 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 named Maurice
A. Halperin, Barry S. Halperin, Carol A. Minkin, and Halco Industries, Inc.
(collectively, the "Halperin Group"), Jeffrey Swersky, Carl Derman and Steven
Geller as defendants. The complaint in the action included class and
derivative claims and alleged, 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 was 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 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.
13
<PAGE> 15
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.
On or about May 28, 1996, a complaint was filed in the United States
District Court for the Middle District of Pennsylvania in a Superfund lawsuit
captioned United States of America v. Keystone Sanitation Company, Inc., et
al., and naming as a third-party defendant, among 178 others, Empire of
Carolina, Inc., as a successor to or d/b/a or f/d/b/a Isaly Klondike Company.
The complaint also names the Hanover Klondike Company (a predecessor by merger
to Isaly Klondike), Isaly Klondike and Good Humor Corporation (as a successor
to Isaly Klondike). This Superfund suit seeks recovery of clean-up costs
associated with the Keystone Sanitation site in Pennsylvania. The Isaly
Klondike Company is alleged to have sent materials to the site. Isaly Klondike
and Empire sold certain assets to an affiliate or subsidiary of Good Humor
Corporation in 1993. The complaint seeks relief under CERCLA and its
Pennsylvania state equivalent, the Pennsylvania Hazardous Site Clean-Up Act,
claiming that all of the third-party defendants are liable directly as
potentially responsible parties and/or in contribution for the costs incurred
by the third-party plaintiffs in investigation and cleaning up the Keystone
Site. The Company intends to vigorously contest this matter. The Company 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.
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
14
<PAGE> 16
individually or in the aggregate, will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company, par value $.10 per share ("Common
Stock"), is listed on the American Stock Exchange. The following tables set
forth, for the fiscal quarters indicated, the high and low bid quotations for
the Common Stock as reported by the American Stock Exchange. Such quotations
reflect interdealer prices without retail markups, markdowns or commissions and
may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER 1995 1994
------- ------------------------------ ------------------------------
High Low High Low
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
1st $12.88 $6.50 $6.88 $6.00
2nd 12.13 8.50 6.50 5.63
3rd 11.50 7.88 6.88 5.38
4th 9.75 6.00 6.75 5.75
</TABLE>
As of March 13, 1996 the number of holders of record of Common Stock
was approximately 2,000.
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. The Company's bank facility does not restrict the payment of
dividends by the Company; however, that agreement limits the dividends which
Empire Industries, Inc. ("EII"), the Company's principal operating subsidiary,
may pay to the Company. Under the bank facility, EII may not pay dividends to
the Company in excess of the lesser of $3.6 million or 30% of EII's cumulative
net income (except for certain items specifically permitted for purposes other
than the payment of dividends by the Company, such as the payment of taxes).
Such restrictions could limit the funds available for the payment of dividends
by the Company.
16
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data have been derived from the
consolidated financial statements of the Company for the fiscal years 1995,
1994, 1993, 1992 and 1991. The selected financial data should be read in
conjunction with the audited consolidated financial statements and notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. All amounts in the
tables below are in thousands, except per share data.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1995(1) 1994(2) 1993(3) 1992(3)(4) 1991(3)(4)
------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
-----------------------------
Net Sales . . . . . . . . . . . . $153,744 $57,964 $41,354 $42,882 $41,253
Cost of Sales . . . . . . . . . . 111,905 40,557 29,733 29,443 27,317
------- ------ ------ ------
Gross Profit . . . . . . . . . . 41,839 17,407 11,621 13,439 13,936
Selling and administrative . . . 36,183 16,442 15,086 12,172 12,953
Nonrecurring restructuring and
relocation charges . . . . . . . 7,550 -- -- -- --
------- ------ ------- ------- ------
Operating income (loss) . . . . . (1,894) 965 (3,465) 1,267 983
Interest expense . . . . . . . . 5,996 1,407 2,937 10,314 13,549
Other income . . . . . . . . . . 514 1,839 5,952 2,713 3,147
------- ------ ------- ------- -------
Income (loss) from continuing
operations before income taxes,
extraordinary items and
cumulative effect of an
accounting change . . . . . . . . (7,376) 1,397 (450) (6,334) (9,419)
Income tax expense (benefit) . . (2,875) 808 1,066 (3,638) (3,101)
------- ------ ------- ------- -------
After-tax income (loss) from
continuing operations before
extraordinary items and
cumulative effect of an
accounting change . . . . . . . . (4,501) 589 (1,516) (2,696) (6,318)
Income from discontinued
operations, net of tax . . . . . -- -- 25,729 15,340 13,497
Extraordinary items . . . . . . . -- -- -- (1,546) 1,577
-------- ------- ------- ------- ------
Net income (loss) . . . . . . . . $ (4,501) $ 589 $ 24,327 $ 11,098 $ 8,756
========= ======= ======== ======== ========
Weighted average common shares
outstanding - primary (5) . . . . 4,681 12,159 14.670 10,537 10,536
Income (loss) per common share
from continuing operations -
primary (5) . . . . . . . . . . . $ (.96) $ .05 $ (.10) $ (.26) $ (.60)
========= ======= ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Working Capital . . . . . . . . . 6,837 8,915 92,871 84,377 113,406
Total assets . . . . . . . . . . 140,153 67,956 123,240 104,583 142,217
Total debt . . . . . . . . . . . 71,016 22,249 9,001 34,842 77,361
Stockholders' equity . . . . . . 30,462 20,577 98,419 54,532 45,127
</TABLE>
- --------------------
(Footnotes appear on following page)
17
<PAGE> 19
(1) 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."
(2) 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."
(3) 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."
(4) 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.
(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.
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.
18
<PAGE> 20
ITEM 7. 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 Annual Report.
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 1980's 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, the 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 $13.1 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 $31 million in
Common Stock, cash and notes plus contingent future payments under 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.
The Company's 1995 operating results were adversely affected by
approximately $7.6 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 in the third
quarter of 1996. The Company believes that the integration of all of its
domestic manufacturing operations into the Tarboro facility will ultimately
result in significantly improved overhead absorption and operating
efficiencies. 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 it deems appropriate.
Management also expects the rate of growth of the Company's research and
development expenditures to decline from the rate of growth in recent years,
primarily as a result of the substantial increases in such expenditures
following the change of control of the Company led by current management in the
third quarter of 1994.
19
<PAGE> 21
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 has signed a letter of intent with respect to the sale of this
business. The Company does not anticipate that such sale transaction will have
a material effect on its consolidated results of operations or financial
condition. There can be no assurance that such sale transaction will be
consummated. For financial reporting purposes, sales of these plastic apparel
buttons, buckles and novelty items are included in toy sales.
RECENT EVENTS
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 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
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 dollar for dollar reductions for
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 lapsed upon the repayment of such notes
by the Company in July 1996. The Company also issued 247,392 shares of Common
Stock at $7.25 per share and 442,264 of Series A cumulative convertible
preferred stock for an aggregate purchase price of approximately $5 million to
a related party. See "Management's Discussion of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and Notes 3 and 10 of
Notes to Consolidated Financial Statements.
On August 7, 1996, the Company issued a press release announcing the
Company's second quarter results of operations and certain developments
relating to operations at the Company's Tarboro, North Carolina facility. Such
press release is an exhibit to a Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 7, 1996. For further information,
reference is made to the Form 8-K filed by the Company with the Securities and
Exchange Commission on August 7, 1996.
20
<PAGE> 22
RESULTS OF OPERATIONS
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 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. Of the increase in sales, $78.8
million was due to the acquisition of Marchon and Buddy L and 7.2 million was
due to the increase in holiday product sales. Approximately 14% and 17% of the
Company's sales for the years ended December 31, 1995 and 1994, respectively,
were from products licensed under the Power Rangers(TM) license. 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 $7.6 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; $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 of $78.8 million,
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 are lower for the year ended December 31, 1995 as
compared to the year ended December 31, 1994 due primarily to (i) the sale of
products from the Buddy L product line (which generally had lower margins than
the Company's historical lines) and as a result of the Company's decision to
honor low-margin product delivery commitments made by Buddy L prior to the
Company's acquisition of the assets, (ii) higher raw material prices in 1995 as
compared to 1994 (principally plastic and paperboard products) and (iii)
unfavorable production cost variances related to the Company's efforts to
reduce manufacturing costs (particularly by integrating domestic manufacturing
at the Company's Tarboro, North Carolina manufacturing facility).
Selling and administrative ("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, a $5.1 million
increase in media advertising expenditures, the establishment of a marketing
department and product design and development group for expenses totaling
approximately $2.7 million,
21
<PAGE> 23
and an increase in royalty expense of $2.7 million 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 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 by approximately $1.7 million due to the issuance of $15.0
million principal amount of convertible debentures during the last quarter of
1994, by approximately $910,000 due to the issuance of $7.6 million principal
amount of senior subordinated notes during the third quarter of 1995, and by
approximately $1.2 million due to 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
net of tax of $27.1 million 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
of $5.3 million. The improvement in operating income was partially offset by
substantial increases in the cost of certain raw materials, $417,000 of
expenses incurred for the establishment of an in-house sales force for toys and
a new management infrastructure, higher research and development cost of
$802,000, a one-time charge of $189,000 relating to the 1994 management
changes, and a charge of $275,000 for charitable contributions to the Empire
Foundation. The loss from
22
<PAGE> 24
continuing operations before income tax for 1993 was principally due to
expenses of $3.6 million for two executive retirement pay packages, $2.0
million for charitable contributions, and a $500,000 charge for indemnification
obligations. This loss for 1993 was partially offset by the $2.9 million gain
on the settlement of a Connecticut tax assessment.
Sales from continuing operations increased to $5.8 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%. This
was principally 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 the Company's 1994 sales,
including Marchon's sales for all of 1994 on an unaudited pro forma basis, were
from products which were licensed under 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, which were 36% in 1993 as compared to 28% in
1994. 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.
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 $76.9 million 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.
23
<PAGE> 25
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, 53% 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.
24
<PAGE> 26
The following table sets forth summary unaudited financial information
of the Company for each quarter in 1994 and 1995. 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>
(in thousands) 1994 1995
------------------------------------------------ -----------------------------------------------
Q1 Q2 Q3 Q4 (1) Q1 Q2 Q3 (2) Q4
------------ --------- -------- ------ -------- --------- ------- ----------
<S> <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
Gross profit . . . 1,372 995 6,324 8,716 6,151 6,692 13,975 15,021
Selling and
administrative . . 2,214 2,451 3,691 8,086 6,804 7,612 11,589 10,178
Nonrecurring
restructuring and
relocation charges - - - - (150) (409) (540) (6,451)
Net income (loss) $ (47) $ (598) $ 1,960 $ (726) $(1,006) $ (1,262) $ 53 $ (2,286)
- --------------------
</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 product 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.
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. As of May 31, 1996, approximately $52 million of borrowings were
outstanding under the new bank facility and an additional $4 million of
borrowings were available thereunder.
25
<PAGE> 27
During June 1996, the Company completed a public offering of its
Common Stock which resulted in net proceeds to the Company of approximately
$17.9 million (including proceeds to the Company upon the exercise by certain
Selling Stockholders of stock options and warrants to acquire 356,100 shares of
Common Stock). It is anticipated that approximately $7.5 million of the net
public offering proceeds will be used to repay bank debt under the Company's
bank facility.
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. The Company used approximately $8.3 million of the net
proceeds to the Company from the public offering 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.
Consideration payable by the Company in connection with the acquisition of
Buddy L also includes a five-year earnout (over the five years ended December
31, 2000 with the payment for each year, if any, made by April 30 of the
following year) 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 less than $3.25 million, with the excess over $3.25 million subject to
dollar for dollar reductions for certain offsets that are not to exceed $10
million. The amount of the earnout is also limited so as not to exceed certain
levels except under certain circumstances. As of March 31, 1996, the Company
had asserted offset claims of approximately $7.8 million. Based on the amounts
of such offsets, the Company does not anticipate that it will be required to
make any earnout payments with respect to the year ended December 31, 1996 and
that the payment, if any, for the year ended December 31, 1997 will not be
material. The amount of earnout payments, if any, is dependent upon the
Company's future offset claims and financial performance, subject to required
minimum payments of $750,000 in April 1999 and $1.25 million in April 2000. No
assurance can be given with respect to the actual amount of any such payment.
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
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.
26
<PAGE> 28
Capital expenditures, principally for the purchase of tooling for new
products and equipment, 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 and equipment, 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.
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 debt arrangements, including the Company's new secured bank facility,
grant various security interests and contain restrictive covenants which limit
the ability of the subsidiaries to loan, advance and dividend amounts to the
Company, and limit repayment of advances by the Company to such subsidiaries.
The Company currently is in compliance with the covenants and other
requirements under such debt arrangements.
The Company is subject to various actions and proceedings, including
those relating to intellectual property matters, environmental matters and
product liability matters. See "Legal Proceedings" and Note 12 of Notes to
Consolidated Financial Statements.
The Company believes that cash generated from operations, amounts
available under the new bank credit facility and the net proceeds to the
Company from the public offering will be adequate to finance its anticipated
operating needs for the next 12 to 24 months, including the implementation of
the Company's growth strategy other than significant acquisitions, 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. In addition to the sources described above, consummation of any
significant acquisitions in the future may require additional debt or equity
financing.
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.
27
<PAGE> 29
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 RangerTM 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data to be provided
pursuant to this Item 8 are included under Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
28
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning each of
the Company's directors and executive officers:
<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
J. Artie Rogers . . . . . . . . . . . 36 Senior Vice President - Finance and Assistant Secretary
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 Relationships and 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 Relationships and Transactions."
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.
29
<PAGE> 31
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 the 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 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 Relationships and
Transactions."
Eugene M. Matalene, Jr. has served as a director of the Company since
1995. Mr. Matalene has been an investment banker with Furman Selz LLC since
June 1996. Mr. Matalene served as a Managing Director of PaineWebber
Incorporated from January 1989 to June 1996, as director of the Private
Placement Group in the Investment Banking division of PaineWebber Incorporated
from May 1994 to June 1996, as President and director of PaineWebber
Development Corporation from June 1993 to June 1996, and as a director of
PaineWebber Properties Incorporated from June 1993 to June 1996. Mr. Matalene
has served as a member of the board of directors of American Bankers Insurance
Group since May 1990. See "Certain Relationships and 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 Relationships and Transactions."
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
30
<PAGE> 32
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. Hutchinson, 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 Relationships and Transactions -- The Marchon Transaction" and "--
Shareholder' Agreement."
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."
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Each director, officer, beneficial owner of more than ten percent of
any class of the Company's equity securities and certain other defined persons
are required to timely file Forms 3, 4, and 5 pursuant to Rule 16(a) of the
Exchange Act. With respect to such compliance, Mr. Matalene filed one report
late and Mr. Greenberg filed three reports late.
31
<PAGE> 33
ITEM 11. 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 $100,000 for services
rendered during the year ended December 31, 1995 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
Underlying All Other
Name and Fiscal Salary Bonus Other Annual Options Compensation
Principal Position(s) Year ($) ($) 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 . . 1994(4) 132,692 $150,000 --- 500,000(5) ---
Board and Chief . . 325,000(6)
Executive Officer)
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 1994 95,385 35,000 --- 35,000(2)
President - 1993 90,000 25,000 --- --- 1,190(9)
Finance) . . . . . 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
December 31, 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 in 1995.
(8) Includes compensation paid to Mr. Smollar 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 $6,675 of life insurance premiums.
(13) Includes compensation paid to Mr. Saul as President of EII from July
15, 1994 through December 31, 1994.
32
<PAGE> 34
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------
Percent of Potential Realizable Value at
Total Assumed Annual Rates of Stock
Shares Options Exercise or Price Appreciation
Underlying Granted to Base for Option Term ($)(2)
Options Employees Price(1) Expiration -----------------------------
Name Granted in 1995 ($/Share) Date 5% 10%
---------- --------- ------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven 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 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
Relationships and 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.
33
<PAGE> 35
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.
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 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
34
<PAGE> 36
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).
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company has a Compensation Committee consisting of two directors,
Mr. Eugene M. Matalene, Jr., who is the Chairman of the Committee, and Mr.
Steven N. Hutchinson. The board of directors has delegated matters relating to
compensation, including the grant of options under the stock option plan, to
the Compensation Committee. This report describes the Company's compensation
policies, the application of those policies to the Company's executive
officers, and the basis for the Chief Executive Officer's compensation for
1995.
General Compensation Policies
The policy and objectives of the Company with respect to executive
compensation is to improve stockholder value by enhancing corporate performance
through attracting and retaining highly qualified key executive personnel. The
philosophy of the Committee is to base executive compensation on short and long
term performance criteria, thereby providing the motivation and incentive for
outstanding performance by executive officers. The Company's executive
compensation program is designed to:
- Create an inducement and motivation for executive officers to
facilitate and sustain Company growth and market share and to find
attractive acquisition prospects complementary to the Company's
business.
- Align the financial interests of the executive officers with those
of the Company's stockholders.
- Reward above-average performances which will result in increased
returns to stockholders.
- Induce corporate loyalty in both the short and long term.
The Company's executive compensation program has three major
components: base salaries, bonuses, and long-term incentives.
Base Salaries
In determining an executive officer's salary, the Committee or the
Chairman and the President, as the case may be, generally review such officer's
knowledge, abilities, experience, responsibilities and anticipated workload for
the year, and his commitment and contribution to the Company's development and
financial performance. The Company has not established any formula or
pre-determined relationship between corporate performance and salary. Salary
is also intended to maintain the Company's competitiveness with similar
companies in the marketplace in attracting and retaining qualified executives.
In those cases where an executive has entered into an employment agreement, the
base salary is determined by that agreement, which is often the result of
negotiation between the new employee and the Company. The base salaries of Mr.
Steven Geller, the Chief Executive Officer, and Mr. Marvin Smollar, the Chief
Operating Officer, are set by their employment agreements, which were entered
into in 1994.
35
<PAGE> 37
Bonus Program
The Company's bonus program for its executive officers is designed to
motivate these individuals to enhance the value of the Company, reward
individual effort and further assist the Company in attracting and retaining
highly qualified executives. In setting bonuses, the Committee or the Chairman
and the President, as the case may be, consider specific goals and performance
criteria that are selected to enhance the profitability of the Company, the
prospects of the Company and the financial condition of the Company. In
addition, the Company attempts to recognize exceptional contributions to the
Company made by individual executives during the year.
Long-Term Incentives
The Company established a Stock Option Plan, pursuant to which stock
options are awarded by the Committee periodically to key employees, including
executive officers. The Stock Option Plan is designed to encourage executives
to acquire an equity interest in the Company and thereby align their long-term
financial interests with those of the shareholders.
Compensation to the Chief Executive Officer
Mr. Steven Geller, the Chief Executive Officer, has an existing
employment agreement providing for a base salary of $325,000. The Committee
believes that Mr. Geller's compensation is principally through his equity
interest in the Company and not through his salary, and for that reason, his
salary is modest compared to chief executive officers of other toy companies.
Consistent with that theme, and in reviewing the Company's financial
performance in 1995, the Committee determined that a cash bonus for the Chief
Executive Officer (and for the other executive officers) was not appropriate.
However, this lack of cash bonus was not in any way intended to demonstrate
that the Committee was critical of the performance of the Chief Executive
Officer, or of any of the executive officers. Rather, the Committee recognized
that the restructuring of the Company, together with the acquisition of Buddy
L, involved extraordinary effort on the part of the Chief Executive Officer and
the other executive officers, which could result in enhanced stockholder value
in the future. For that reason, the Committee determined that the appropriate
method of compensation was the grant of stock options, which would permit the
Chief Executive Officer and the Chief Operating Officer to participate in any
such increased stockholder value, and granted each of them a stock option for
200,000 shares.
Members of the Compensation Committee
Eugene M. Matalene, Jr., Chairman
Steven N. Hutchinson
36
<PAGE> 38
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the cumulative total returns
(assuming dividend reinvestment) of the Company's Common Stock, the Media
General Toys and Games Industry Group Index as a representative industry index
and the American Stock Exchange Market Index ("Amex Index") as the required
board equity market index. The Media General Toys and Games Industry Group
Index is comprised of 38 toy and game companies.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Empire of Carolina, MG Toys & Games Industry
Measurement Period Inc. Group Index AMEX Index
------------------ ---- ----------- ----------
<S> <C> <C> <C>
December 31, 1990 $100.00 $100.00 $100.00
Year Ended December 31, 1991 177.27 223.98 123.17
Year Ended December 31, 1992 231.82 299.11 124.86
Year Ended December 31, 1993 236.36 331.61 148.34
Year Ended December 31, 1994 240.91 254.93 131.04
Year Ended December 31, 1995 254.55 284.05 168.90
</TABLE>
37
<PAGE> 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 28, 1996, certain
information concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as such
is defined in Rule 13d-3 under the Securities Exchange Act of 1934, hereinafter
referred to as the "Exchange Act") of Common Stock by (i) each person known by
the Company to be the owner of more than 5% of the outstanding Common Stock,
(ii) each Director, (iii) each executive officer named in the Summary
Compensation Table and (iv) all Directors, and executive officers as a group:
<TABLE>
<CAPTION>
Shares Beneficially Owned(2)
----------------------------
Name and Address of Beneficial Owner(1) Number Percent
-------- ---------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Steven Geller(4)(5) . . . . . . . . . . . . . . . . 1,550,836 20.5
Marvin Smollar(5)(6) . . . . . . . . . . . . . . . 969,283 13.9
Neil B. Saul . . . . . . . . . . . . . . . . . . . 0 --
Stephen N. Hutchinson(7) . . . . . . . . . . . . . 2,574,057 28.4
One New York Plaza
New York, NY 10004
Eugene M. Matalene, Jr.(8) . . . . . . . . . . . . 7,667 *
Leonard E. Greenberg(5)(9) . . . . . . . . . . . . 477,000 6.4
11500 El Clair Ranch Road
Boynton Beach, FL 33437
Peter B. Pfister(5)(10) . . . . . . . . . . . . . . 2,041 *
One New York Plaza
New York, NY 10004
J. Artie Rogers . . . . . . . . . . . . . . . . . . 0 --
OTHER 5% STOCKHOLDERS
Halco Industries, Inc.(11) . . . . . . . . . . . . 734,039 10.5
441 South Federal Highway
Deerfield Beach, FL 33441
The Autumn Glory Trust(5)(6) . . . . . . . . . . . 819,283 11.8
P.O. Box 11
Avarua, Rarotonga
Cook Islands
WPG Corporate Development . . . . . . . . . . . . . 2,099,294 24.2
Associates IV, L.P.(5)(12)
One New York Plaza
New York, NY 10004
WPG Corporate Development . . . . . . . . . . . . . 459,834 6.3
Associates IV (Overseas), Ltd.(5)(13)
One New York Plaza
New York, NY 10004
</TABLE>
38
<PAGE> 40
<TABLE>
<S> <C> <C>
Smedley Industries, Inc.(14) . . . . . . . . . . . 416,467 6.0
(formerly Buddy L Inc.)
30 Rockefeller Plaza, Suite 4314
New York, NY 10112
All directors and officers . . . . . . . . . . . . 5,578,843 55.0
as a group (7 persons)(15)
- ---------------
</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 6,961,300 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) Includes 1,049,872 shares of Common Stock with respect to which Steven
Geller has held voting power pursuant to the Halco Voting Agreement,
which shares include 17,501 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 Option"). Includes 291,674 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 Stock at
an exercise price of $7.50 per share. Mr. Geller directly owns
200,128 shares of Common Stock.
(5) Under the Shareholders' Agreement, each of the WPG Group and the
Geller Group may have voting rights, rights of first refusal and co-
sale rights in the other group's shares. Those rights generally
become effective upon the occurrence of certain events, such as a
major corporate transaction or financial difficulty. The shares owned
by one group have not been shown in the table as also beneficially
owned by the other group as a result of the provisions of the
Shareholders' Agreement.
(6) 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 respective 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'
39
<PAGE> 41
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.
(7) Solely in his capacity as one of two managing general partners of WPG
Private Equity Partners IV, 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), L.P., and in his capacity as a director of WPG CDA IV
(Overseas), Ltd., the general partner of WPG Corporate Development
Associates IV (Overseas), Ltd., and includes all shares beneficially
owned by these entities. Mr. Hutchinson does not directly own any
shares of Common Stock.
(8) Represents 6,667 shares of Common Stock which Mr. Matalene has the
right to acquire upon the conversion of 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.
(9) 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.
(10) Includes 1,735 shares of Common Stock which may be acquired upon
conversion of 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.
(11) All of these shares are directly owned by Halco, subject to the Halco
Option. Voting power with respect to these shares is held by Steven
Geller pursuant to the Halco Voting Agreement. Maurice A. Halperin 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.
(12) 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 and other affiliates of WPG 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
40
<PAGE> 42
Common Stock which such persons have the right to acquire upon
conversion of 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. 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 Investment Trust plc ("Westpool") and Glenbrook
Partners, L.P. ("Glenbrook").
(13) 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 WPG Private Equity Partners
(Overseas), L.P. and as directors of 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 which are not
included in the shares listed as beneficially owned by WPG Corporate
Development Associates IV (Overseas), L.P., but which are included in
the shares listed as beneficially owned by Steven N. Hutchinson.
(14) 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.
(15) 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 6 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.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS.
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
41
<PAGE> 43
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 financing of 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 to Consolidated Financial Statements. Two principals of
WPG, Messrs. Hutchinson and Pfister, are members of the Company's Board of
Directors. See "Management."
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 to the consolidated financial
statements. Concurrent with the closing of this debenture financing in
December 1994, WP&G were issued warrants to purchase 100,000 shares of common
stock at the exercise price of $7.50 per share.
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 the 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, was 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 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
the new $85 million bank facility.
42
<PAGE> 44
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.
43
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
10-K.
(a) Documents filed as a part of this Report.
(1) Financial Statements:
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated balance sheets as of December 31, 1995 and 1994 . . . . . . . . . . . F-2
Consolidated statements of operations for the years ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated statements of stockholders' equity for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated statements of cash flows for the years ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . F-11
Supplementary Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
(2) Financial Statement Schedules:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Schedule I - Condensed Financial Information of Registrant . . . . . . . . . . . . S-2
</TABLE>
The financial statement schedule should be read in conjunction
with the consolidated financial statements. Financial
statement schedules not included in this Annual Report on Form
10-K have been omitted because they are not applicable or the
required information is shown in the financial statements or
notes thereto.
(3) Exhibits filed as part of this Report:
EXHIBIT
NO. DESCRIPTION
- --- -----------
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. ("AmBrit") and Empire of Carolina, Inc.
(the "Company"), including amendment thereto, dated as of
December 4, 1989.(3)
44
<PAGE> 46
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, Inc. ("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
Empire of Carolina, Inc. (the "Company"), Buddy L Inc.,
Debtor-in-Possession ("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 amended the Asset
Purchase Agreement.(4)
2.11 - Agreement dated August 31, 1995, among the Company, CLR
Corporation, Clabir Corporation, 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.(4)
4.3 - Form of 9% Convertible Debentures, issued December 22,
1994.(14)
4.4 - Form of Warrant Certificate of purchase common stock of the
Company, issued December 22, 1994. (12)
45
<PAGE> 47
9.1 - Voting Agreement, dated September 30, 1994, by and between
Halco Industries, Inc. ("Halco") and Steven Geller. (11)
10.1 - Industries 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)
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, Industries and Steve Geller. (10)
10.9 - Employment Agreement, dated July 15, 1994, by and among the
Company, Industries and Neil Saul.(10)
10.10 - Stock Purchase Agreement, dated July 15, 1994, among Steven
Geller, Maurice A. Halperin, individually and as custodian
for the benefit of Lauren Halperin and Heather Halperin,
Carol A. Minkin, individually and as custodian for the
benefit of Joshua Minkin and Rebecca Minkin, and Halco (the
Halperins and Minkins, collectively, 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 Empire
Industries, Inc. ("Industries", formerly Carolina Enterprises,
Inc.) 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)
46
<PAGE> 48
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 Industries. (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, WPG Corporate Development Associates IV
(Overseas), Ltd., Westpool Investment Trust PLC, Glenbrook
Partners, L.P., Eugene Matalene, Jr., Richard Hockman, Weiss,
Peck & Greer, as Trustee under Nora E. Kerppola IRA, Peter B.
Pfister and Weiss, Peck & Greer, as Trustee under Craig S.
Whiting IRA and WPG Corporate Development Associates IV, L.P.
(all of such parties, other than the Company, collectively, 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, Industries and the WPG Group.(13)
10.28 - Subsidiary Guaranty, dated as of December 22, 1994, between
Industries 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)
47
<PAGE> 49
10.30 - Modification to Financing Agreement, dated January 30, 1995,
between Industries and Wachovia. (14)
10.31 - Asset Purchase Agreement, dated as of March 3, 1995, by and
among the Company, Buddy L Inc. and Buddy L (Hong Kong)
Limited. (14)
10.32 - Bid Protection Agreement, dated as of March 3, 1995, between
the Company and Buddy L Inc. (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, Empire Industries, Inc.,
Wachovia Bank of North Carolina, N. A., the Lenders and the
holders of certain debentures dated December 22, 1994 issued
by the Company.
10.46 - Registration Rights Agreement dated July 7, 1995 by and
between the Company and the Lenders.(4)
48
<PAGE> 50
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)
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)
10.54 - Loan and Security Agreement between LaSalle National Bank and
BT Commercial Corporation and EII, with exhibits and security
instruments.(19)
21 - Subsidiaries of the Company.(19)
23.1 - Consent of Deloitte & Touche LLP
- ---------------
(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.
(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.
49
<PAGE> 51
(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.
(4) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated July 21, 1995, and incorporated by reference.
(5) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated October 6, 1992 and incorporated by reference.
(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.
(7) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 1, 1993 and incorporated by reference.
(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.
(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.
(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.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K for September 30, 1994 and incorporated by reference.
(12) Previously filed as an exhibit to the Company's Current Report on Form
8-K for December 22, 1994 and incorporated by reference.
(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.
(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.
(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.
(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.
50
<PAGE> 52
(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.
(19) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 for (Reg. No. 333-4440) declared effective by the
Commission on June 25, 1996 and incorporated by reference herein.
(b) The following reports on Form 8-K have been filed by the Company
during the last quarter of the period covered by this report:
None
(c) The exhibits to this Form 10-K appear following the Company's
Consolidated Financial Statements and Schedules included in this Form
10- K.
(d) The Financial Statements and Schedules to this Form 10-K begin on page
F-1 of this Form 10-K.
51
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Empire of Carolina, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EMPIRE OF CAROLINA, INC.
Date: August 7, 1996 By: /s/ Steven Geller
----------------------------------
Steven Geller
Chairman of the Board of Directors
and Chief Executive Officer
52
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
To the 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, 1995 and 1994, 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, 1995 and 1994, 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.
DELOITTE & TOUCHE L.L.P
Raleigh, North Carolina
March 29, 1996
(April 8, 1996 as to Note 17)
F-1
<PAGE> 55
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
ASSETS 1995 1994
- ----------------------------------------------------------- ------------ -------------
(In Thousands)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . $ 2,568 $ 2,738
=========== ==========
Marketable securities . . . . . . . . . . . . . . . . . 189 2,305
=== =====
Accounts receivable, less allowances and 48,957 15,260
other deductions (1995 - $4,290; 1994 - $3,770) . . . . ====== ======
Inventories, net . . . . . . . . . . . . . . . . . . . . 30,178 11,775
====== ======
Prepaid expenses and other current assets . . . . . . . 2,046 1,735
===== =====
Deferred income taxes . . . . . . . . . . . . . . . . . 5,596 4,464
----------- ----------
Total current assets . . . . . . . . . . . . . . . . 89,534 38,277
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . 23,640 11,171
EXCESS COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED . . . . . . . . . . . . . . . . . . 15,174 9,970
TRADEMARKS, PATENTS, TRADENAMES
AND LICENSES . . . . . . . . . . . . . . . . . . . . . . 10,253 7,044
OTHER NONCURRENT ASSETS . . . . . . . . . . . . . . . . . 1,552 1,494
----------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,153 $ 67,956
=========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-2
<PAGE> 56
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 (CONCLUDED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- --------------------------------------------------------------- --------- ---------
(IN THOUSANDS)
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable and current portion of
long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 49,206 $ 8,686
Accounts payable - trade . . . . . . . . . . . . . . . . . . . 17,516 6,080
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . 1,575 3,066
Accrued employee compensation . . . . . . . . . . . . . . . . 1,293 1,830
Accrued royalties . . . . . . . . . . . . . . . . . . . . . . 3,705 1,576
Accrued nonrecurring restructuring and
relocation expenses . . . . . . . . . . . . . . . . . . . . . 3,227
Indemnification obligations related to sales
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 1,926 3,363
Other accrued liabilities . . . . . . . . . . . . . . . . . . 4,249 4,761
--------- --------
Total current liabilities . . . . . . . . . . . . . . . . 82,697 29,362
LONG-TERM LIABILITIES:
Convertible subordinated debentures . . . . . . . . . . . . . 13,851 13,563
Senior subordinated notes . . . . . . . . . . . . . . . . . . 7,959
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,083 2,894
Other noncurrent liabilities . . . . . . . . . . . . . . . . . 3,101 1,560
--------- --------
Total long-term liabilities . . . . . . . . . . . . . . . 26,994 18,017
--------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . 109,691 47,379
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000
shares authorized, shares issued and outstanding:
1995 - 5,195,000; 1994 - 4,191,000 . . . . . . . . . . . . . 519 419
Preferred stock, $.01 par value, 5,000,000
shares authorized, shares of Series A cumulative
convertible preferred stock authorized, issued
and outstanding: 1995 - 442,264; 1994 - 0 ($3,206,000
involuntary liquidation preference) . . . . . . . . . . . . . 4 --
Additional paid-in capital . . . . . . . . . . . . . . . . . 33,193 18,972
Retained earnings (deficit) . . . . . . . . . . . . . . . . . (2,659) 1,842
======
Stockholders' loans . . . . . . . . . . . . . . . . . . . . . (595) (656)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . 30,462 20,577
--------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,153 $ 67,956
========= ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 57
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------- --------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . $153,744 $ 57,964 $ 41,354
COST OF SALES . . . . . . . . . . . . . . . . . . 111,905 40,557 29,733
GROSS PROFIT . . . . . . . . . . . . . . . . . . 41,839 17,407 11,621
SELLING AND ADMINISTRATIVE . . . . . . . . . . . 36,183 16,442 15,086
NONRECURRING RESTRUCTURING AND
RELOCATION CHARGES . . . . . . . . . . . . . . . 7,550 --- ---
-------- ---------- -------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . (1,894) 965 (3,465)
OTHER INCOME (EXPENSES):
Interest income, dividends and net realized 514 2,612 3,027
gains . . . . . . . . . . . . . . . . . . . . . . --- (773) ---
Unrealized loss on marketable securities (5,996) (1,407) (2,937)
-------- ---------- -------
Interest expense . . . . . . . . . . . . . . . . --- --- 2,925
Gain on settlement of Connecticut tax assessment -------- ---------- -------
Total other income (expenses) . . . . . . . (5,482) 432 3,015
-------- ---------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE . . . . . . . . . . . . . . . (7,376) 1,397 (450)
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . (2,875) 808 1,066
-------- ---------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE . . . . . . . . . (4,501) 589 (1,516)
INCOME FROM DISCONTINUED
OPERATIONS, NET OF TAX . . . . . . . . . . . . . --- --- 25,729
-------- ---------- -------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE . . . . . . . . . (4,501) 589 24,213
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES . . . . . . . . . . --- --- 114
-------- ---------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . $ (4,501) $ 589 $24,327
======== ========== =======
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE> 58
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONCLUDED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1995 1994 1993
-------------- ------------- --------------
<S> <C> <C> <C>
INCOME (LOSS) PER COMMON SHARE:
Primary earnings per share -
Income (loss) from continuing operations
before cumulative effect of an accounting
change . . . . . . . . . . . . . . . . . . $ (0.96) $ 0.05 $ (0.10)
Income from discontinued operations . . . --- --- 1.75
------------ ----------- ------------
Income (loss) before cumulative effect of an
accounting change . . . . . . . . . . . . (0.96) 0.05 1.65
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . --- --- 0.01
------------ ----------- ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ (0.96) $ 0.05 $ 1.66
============ =========== ============
Fully diluted earnings per share -
Income (loss) from continuing operations
before cumulative effect of an accounting $ (0.07)
change . . . . . . . . . . . . . . . . . . . $ (0.96) $ 0.05
Income from discontinued operations . . . . . --- --- 1.58
------------ ----------- ------------
Income (loss) before cumulative effect of an
accounting change . . . . . . . . . . . . . . (0.96) 0.05 1.51
Cumulative effect of change in accounting for
income taxes . . . . . . . . . . . . . . . . --- --- 0.01
------------ ----------- ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ (0.96) $ 0.05 $ 1.52
============ =========== ============
DIVIDENDS PER COMMON SHARE . . . . . . . . . $ 0 $ 0 $ 0
============ =========== ============
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE> 59
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONCLUDED)
<TABLE>
<CAPTION>
Series A Cumulative
Convertible Preferred
Common Stock Stock Treasury Stock
------------------ --------------------- Additional Retained --------------------
Paid-In Earnings
(in thousands) Shares Amount Shares Amount Capital (Deficit) Shares Amount
------ ------ ---------- --------- ---------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 . . . 10,640 $1,064 --- $--- $ 39,157 $ 16,660 (105) $ (789)
Net income . . . . . . . . . . --- --- --- --- --- 24,327 --- ---
Conversion of debt into
common stock . . . . . . . . 5,760 576 --- --- 17,424 --- --- ---
Sale of assets of foreign
subsidiary . . . . . . . . . --- --- --- --- --- --- --- ---
------ ------ ------ ------ -------- -------- ------ ------
BALANCE, DECEMBER 31, 1993 16,400 1,640 --- --- 56,581 40,987 (105) (789)
Net income . . . . . . . . . . --- --- --- --- --- 589 --- ---
Purchase of treasury stock . . --- --- --- --- --- --- (13,181) (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 --- --- ---
Net stockholders' loans. . . . --- --- --- --- --- --- --- ---
Issuance of common stock
warrants . . . . . . . . . . --- --- --- --- --- 1,740 --- ---
------ ------ ------ ------ -------- -------- ------ ------
BALANCE, DECEMBER 31, 1994 4,191 419 --- --- --- (656) 20,577 18,972
Net loss . . . . . . . . . . . --- --- --- --- --- (4,501) --- ---
Issuance of common stock
in Buddy L acquisiton . . . . 757 76 9,004
Issuance of common stock . . . 247 24 --- --- 1,770 --- --- ---
Issuance of preferred
stock . . . . . . . . . . . . --- --- 442 4 3,202 --- --- ---
Collections on stockholder
loans . . . . . . . . . . . . --- --- --- --- --- --- --- ---
Other capital transactions . . --- --- --- --- 245 --- --- ---
------ ------ ------ ------ -------- ------- ------ -------
BALANCE, DECEMBER 31, 1995. . . 5,195 $ 519 442 $ 4 $ 33,193 $ (2,659) --- $ ---
====== ====== ====== ====== ======== ======== ====== =======
<CAPTION>
Foreign Stock-
Currency holders'
(in thousands) Tranlation Loans Total
---------- -------- -------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1993 . . . (1,560) $ --- $ 54,532
--- --- 24,327
Net income . . . . . . . . . .
Conversion of debt into --- --- 18,000
common stock . . . . . . . . 1,560 --- 1,560
-------- -------- --------
Sale of assets of foreign
subsidiary . . . . . . . . . --- --- 98,419
BALANCE, DECEMBER 31, 1993
--- --- 589
Net income . . . . . . . . . . --- --- (86,111)
Purchase of treasury stock --- --- ---
Cancellation of treasury
stock . . . . . . . . . . . . --- --- 6,596
Issuance of common stock in
Marchon acquisition . . . . . --- (656) (656)
Net stockholders' loans . . . --- --- 1,740
Issuance of common stock
warrants . . . . . . . . . . --- ---
-------- -------- --------
BALANCE, DECEMBER 31, 1994 1,842 --- ---
Net loss . . . . . . . . . . . --- --- (4,501)
Issuance of common stock --- --- ---
in Buddy L acquisition. . . . 9,080
Issuance of common stock . . . --- --- 1,794
Issuance of preferred
stock . . . . . . . . . . . . --- --- 3,206
Collections on stockholder
loans . . . . . . . . . . . . --- 61 61
Other capital transactions . . --- --- 245
BALANCE, DECEMBER 31, 1995. . . $ --- $(595) $ 30,462
======= ======== ========
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE> 60
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . $ (4,501) $ 589 $ 24,327
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 . . . . . . . . . 7,211 2,283 1,796
Changes in allowances for losses on assets . . . 703 1,444 492
Losses (gains) on sales of securities . . . . . 3 141 (2)
Income from discontinued operations . . . . . . --- --- (25,729)
Writedown of assets . . . . . . . . . . . . . . 17 773 ---
Other . . . . . . . . . . . . . . . . . . . . . --- 163 1,067
Changes in assets and liabilities, net of
acquisitions and dispositions of businesses:
Accounts receivable . . . . . . . . . . . . . . (31,422) 6,294 590
Inventories . . . . . . . . . . . . . . . . . . (5,095) (1,312) (492)
Prepaid expenses and other current assets . . . 135 84 122
Increase in other noncurrent assets . . . . . . (58) (749) ---
Accounts payable - trade . . . . . . . . . . . 11,436 (8,754) 386
Accrued and other liabilities . . . . . . . . . (1,368) 589 (1,305)
Accrued and deferred income taxes . . . . . . . (3,434) (1,528) (1,540)
Other noncurrent liabilities . . . . . . . . . 1,541 (352) (424)
-------- -------- --------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . (24,832) (335) (826)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . (5,750) (4,453) (1,423)
Acquisition of Marchon, net of cash acquired . . . --- (2,618) ---
Acquisition of Buddy L . . . . . . . . . . . . . . (20,092) --- ---
Loans to Halco Industries, Inc. . . . . . . . . . --- (3,825) (22,000)
Repayment of loan by Halco Industries, Inc. . . . --- 25,825 ---
Proceeds from sales of property and equipment. . .
--- 139 575
Proceeds from sales of marketable securities . . . 2,096 68,538 529
Collections on stockholders' loans . . . . . . . . 61 --- ---
Net proceeds from the sales of subsidiaries. . . . --- --- 103,376
Purchases of marketable securities . . . . . . . . --- --- (71,841)
Net cash provided by discontinued operations . . . --- --- 446
-------- -------- --------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . (23,685) 83,606 9,662
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
lines-of-credit . . . . . . . . . . . . . . $ 35,767 $(11,538) $ 8,912
Proceeds from issuance of common stock . . . 1,794 --- ---
Proceeds from issuance of preferred stock . 3,206 --- ---
Repayments of long-term debt . . . . . . . . --- (204) (16,753)
Proceeds from issuance of long-term debt . . 7,580 15,000 ---
Purchase of treasury stock . . . . . . . . . --- (86,111) ---
Sale of minority interest in CLR . . . . . . --- --- 25
-------- -------- --------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . 48,347 (82,853) (7,816)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . (170) 418 1,020
</TABLE>
See notes to the consolidated financial statements.
F-7
<PAGE> 61
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD . . . . . . . . . . . . 2,738 2,320 1,300
-------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD . . . . . . . . . . . . . . . $ 2,568 $ 2,738 $ 2,320
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . $ 4,246 $ 1,413 $ 2,897
Income taxes, net of refunds . . . . . . 163 3,310 35,209
</TABLE>
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 expenses,
and 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, including expenses. 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
See notes to the consolidated financial statements.
F-8
<PAGE> 62
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONCLUDED)
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-9
<PAGE> 63
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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.
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 original cost, reduced for any
identified long-term impairments, and includes expenditures for major
betterments 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>
Buildings 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>
F-10
<PAGE> 64
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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.
RESEARCH AND DEVELOPMENT - Research and development costs, included in
selling, and administrative expenses (1995 - $2,984,000; 1994 -
$1,112,000; 1993 - $311,000), 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 1995, 1994 and 1993
was $641,000, $104,000 and $0, respectively. Accumulated amortization
at December 31, 1995 was $745,000. Additional consideration paid in
connection with the earnout provision of the Buddy L acquisition will
result in an adjustment of the purchase price and a corresponding
increase of the excess of cost over fair value of net assets acquired.
Such amounts will be amortized over the remaining useful life. See Note
3.
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 1995, 1994 and 1993 was
$1,091,000, $200,000 and $0, 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. If an impairment is indicated, based on a
companion of the projected future cash flows with the carrying value of
the intangible assets, an adjustment to the carrying value to reduce it
to the estimated recoverable amount is made. The Company also evaluates
the remaining useful lives to determine whether events and circumstances
warrant revised estimates of such lives.
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
F-11
<PAGE> 65
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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 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.
RECLASSIFICATIONS - Certain amounts for 1994 and 1993 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,
F-12
<PAGE> 66
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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.
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 he fifth anniversary of
F-13
<PAGE> 67
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.
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
F-14
<PAGE> 68
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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):
F-15
<PAGE> 69
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 187,193 $ 215,102
Loss from continuing operations before
income taxes and cumulative effect of
an accounting change . . . . . . . . . . . . . . . . (22,818) (73,212)
Net loss . . . . . . . . . . . . . . . . . . . . . . . (14,693) (48,647)
Loss per share:
Primary and fully diluted . . . . . . . . . . . . . . (2.83) (9.27)
</TABLE>
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 $(3,000), $(140,000) and $2,000 for the three years ended
December 31, 1995, 1994 and 1993, respectively.
The Company's and its subsidiaries' investments consist of the
following:
<TABLE>
<CAPTION>
DESCRIPTION MARKET VALUE CARRYING VALUE
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1995 -
Investments in preferred stocks . . . . . . . . . . . . . . . . . . . . . $ 189 $ 189
=========== ============
December 31, 1994:
Investments in common stocks . . . . . . . . . . . . . . . . . . . . . $ 1,734 $ 1,734
Investments in preferred stocks . . . . . . . . . . . . . . . . . . . . 399 399
Investments in limited partnerships . . . . . . . . . . . . . . . . . . 172 172
----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,305 $ 2,305
=========== ============
</TABLE>
F-16
<PAGE> 70
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
5. INVENTORIES
A summary of inventories, by major classification, at December 31, 1995
and 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . $ 13,591 $ 4,393
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . 2,169 980
Finished goods . . . . . . . . . . . . . . . . . . . . . . . 14,418 6,402
-------------- --------------
$ 30,178 $ 11,775
============== ==============
</TABLE>
Inventories are net of writedowns for lower of cost or market reserves
of $3,141,000 and $1,283,000 at December 31, 1995 and 1994,
respectively.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at December 31, 1995 and 1994 consists of
the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 223 $ 223
Buildings and improvements . . . . . . . . . . . . . . . . . . . 11,393 10,371
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . 21,683 13,046
Molds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,472 7,706
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . 709 853
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,480 32,199
Less accumulated depreciation . . . . . . . . . . . . . . . . . . 25,840 21,028
------------ ------------
Property, plant and equipment, net . . . . . . . . . . . . . . . $ 23,640 $ 11,171
============ ============
</TABLE>
No interest was capitalized during 1995 and 1994.
7. NOTES PAYABLE AND LONG TERM DEBT
The following table summarizes notes payable and long-term debt as of
December 31, 1994 and 1993 (in thousands):
F-17
<PAGE> 71
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) 45,612 $ 4,559
One-year notes issued in Marchon acquisition . . . . . . . . . . . . . . . . . . (b) 166 3,250
Hong Kong facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) 600 877
9% convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . (d) 13,851 13,563
12% senior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . (e) 7,959 --
One-year notes issued in Buddy L acquisition . . . . . . . . . . . . . . . . . . (f) 2,828 --
---------- ----------
71,016 22,249
Less notes payable and current portion of
long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (49,206) (8,686)
---------- ----------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,810 $ 13,563
---------- ----------
</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 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).
F-18
<PAGE> 72
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(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' best 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-19
<PAGE> 73
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current deferred income tax assets relate to:
Reserves for indemnification obligations and accrued
expenses of companies sold . . . . . . . . . . . . . . $ 517 $ 1,039
Accruals to related parties . . . . . . . . . . . . . . . 260 187
Other accruals not currently deductible . . . . . . . . . 3,078 1,305
Inventory capitalization . . . . . . . . . . . . . . . . 812 386
Allowance for bad debts . . . . . . . . . . . . . . . . . 711 1,650
Allowance for marketable securities . . . . . . . . . . . 147 301
Prepaid assets relating to common stock warrants . . . . 116 ---
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 150 230
------- -------
5,791 5,098
Less valuation allowance . . . . . . . . . . . . . . . . . 195 634
------- -------
Net current deferred tax assets . . . . . . . . . . . . . . $ 5,596 $ 4,464
======= =======
</TABLE>
F-20
<PAGE> 74
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
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 . . . . . . . . . . . . . . . . . . . . . 594 786
Operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 --
Basis and depreciation differences . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,433) (3,521)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) 28
------------ -----------
1,389 765
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,472 3,659
----------- ----------
Net noncurrent deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,083) $ (2,894)
========== ==========
</TABLE>
The components of income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current income taxes (benefits):
Federal . . . . . . . . . . . . . . . . . . $ (1,792) $ 570 $ 425
State . . . . . . . . . . . . . . . . . . . (260) 143 (342)
------------- ------------- ------------
Total current income taxes (benefits) . . . . (2,052) 713 83
Deferred income taxes (benefits) . . . . . . (823) 95 983
------------- ------------- ------------
Total . . . . . . . . . . . . . . . . . . . . $ (2,875) $ 808 $ 1,066
============= ============= ============
</TABLE>
The following is a reconciliation of income tax expense (benefit) to
that computed by applying the federal statutory rate of 34%, 34%, and
35% to income (loss) from continuing operations before income taxes and
cumulative effect of an accounting change for the years ended December
31, 1995, 1994 and 1993, respectively (in thousands):
F-21
<PAGE> 75
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal tax (benefit) at the statutory rate . . . . $ (2,508) $ 475 $ (158)
Equity earnings (loss) of foreign subsidiary . . . (203) 30 --
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 . . (369) 93 110
Other . . . . . . . . . . . . . . . . . . . . . . . 18 118 284
------------ ----------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ (2,875) $ 808 $ 1,066
</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, 1995 and 1994 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.
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.
F-22
<PAGE> 76
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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. The Company believes it has adequate reserves for the
potential impact of such 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 1995, 1994 and 1993 were $0, $100,000, and
$83,000, 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 employer's
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 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.
The Company assumed the liability of a defined benefit plan of a former
CLR subsidiary. The plan benefits were frozen at such time. During
1995, the plan was terminated and the plan obligations were settled
through the purchase of a nonparticipating annuity contract to cover
vested benefits. In accordance with the provisions of SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," the unrecognized
net gain at December 31, 1994 of approximately $605,000 is eliminated
against the excess of the cost of the annuity contract over the
previously recorded projected benefit obligation. The cost of the
annuity contract was approximately $3,114,000, which also approximated
the plan's net assets. Accordingly, no gain or loss was recognized upon
termination of the plan. Pension cost (benefit) associated with this
plan for 1995, 1994 and 1993 was $0, $0, and ($176,000), 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.
F-23
<PAGE> 77
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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 $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 1995 and 8.5% for 1994, in the consolidated
financial statements in accordance with SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. The Company
has accrued $911,000 and $991,000 as of December 31, 1995 and 1994,
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 as of December 31, 1995,
442,264 shares of Series A cumulative convertible 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, 1995 and 1994, 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
F-24
<PAGE> 78
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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
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 1995 and 1994, 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.
F-25
<PAGE> 79
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Primary . . . . . . . . 4,680,852 12,158,548 14,669,773
Fully diluted . . . . . 4,680,852 12,158,548 16,295,198
</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 1995
and 1994 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.
12. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT - At December 31, 1995, the Company had outstanding
commitments under letters of credit totaling $1,246,000.
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 $1,196,000
in 1995, $589,000 in 1994, and $416,000 in 1993.
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
F-26
<PAGE> 80
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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. 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 be 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.
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. The amount accrued for environmental
liabilities was determined without consideration of possible recoveries
from third parties. 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.
F-27
<PAGE> 81
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Net Sales:
Toys . . . . . . . . . . . . . . . . . $121,573 $33,003 $ 21,143
Holiday products . . . . . . . . . . . 32,171 24,961 20,211
-------- ------- --------
Net Sales . . . . . . . . . . . . . . . . $153,744 $57,964 $ 41,354
======== ======= ========
Operating income (loss)(1):
Toys . . . . . . . . . . . . . . . . . $ 1,869 $ 127 $ 693
Holiday products . . . . . . . . . . . 4,910 3,335 3,598
Nonrecurring restructuring and
relocation charges . . . . . . . . . (7,550) - -
Corporate . . . . . . . . . . . . . . . (1,123) (2,497) (7,756)
-------- ------- --------
Operating income (loss) . . . . . . . . . $ (1,894) $ 965 $ (3,465)
======== ======= ========
Identifiable assets(2):
Toys . . . . . . . . . . . . . . . . . $114,743 $49,913 $ 12,551
Holiday products . . . . . . . . . . . 21,610 12,303 12,365
Corporate . . . . . . . . . . . . . . . 3,800 5,740 98,324
-------- ------- --------
Total assets . . . . . . . . . . . . . . $140,153 $67,956 $123,240
Capital expenditures:
Toys . . . . . . . . . . . . . . . . . $ 4,855 $ 1,906 $ 685
Holiday products . . . . . . . . . . . 895 2,547 713
Corporate . . . . . . . . . . . . . . . - - 25
-------- ------- --------
Total . . . . . . . . . . . . . . . . . . $ 5,750 $ 4,453 $ 1,423
Depreciation and amortization:
Toys . . . . . . . . . . . . . . . . . $ 5,925 $ 1,277 $ 881
Holiday products . . . . . . . . . . . 1,286 994 842
Corporate . . . . . . . . . . . . . . . - 12 73
-------- ------- --------
Total . . . . . . . . . . . . . . . . . . $ 7,211 $ 2,283 $ 1,796
======== ======= ========
</TABLE>
F-28
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(1) Corporate expenses for 1994 and 1993 related primarily to
executive compensation of the prior management group and
contributions not directly attributable to the Company's toy and
holiday product 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, notes 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 year ended December 31, 1995 and for
the period October 13 to December 31, 1994 was $13,844,000 and
$5,088,000, respectively. Total assets as of December 31, 1995 and 1994
were $6,697,000 and $7,981,000, respectively.
Intercompany sales between the Company's foreign and domestic operations
for the year ended December 31, 1995 and for the period October 13 to
December 31, 1994 were $11,557,000 and $1,299,000, respectively.
For the toy segment, sales to significant customers, individually, were
15%, 13%, and 23% of toy sales, respectively, in 1995; 17%, 11%, and 18%
of toy sales, respectively, in 1994; and 14%, 8%, and 17% of toy sales,
respectively, in 1993. 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 29% and 13% of holiday products sales, respectively,
in 1995; 34% and 6% of holiday products sales, respectively, in 1994;
and 34% and 3% of holiday products sales, respectively, in 1993. 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 $7,550,000 ($6,451,000 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; $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
December 31, 1995 will be expended during 1996.
F-29
<PAGE> 83
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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 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. 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.
F-30
<PAGE> 84
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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.
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 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 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, 1995 and 1994, the Company had an unsecured receivable
from the owner of its facility in Vernon Hills, Illinois of $506,000 and
$472,000, 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
F-31
<PAGE> 85
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
$55,000 and $82,000 at December 31, 1995 and 1994, 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 1994 and 1993, the Company expensed $275,000 and $2,000,000,
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.
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.
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
F-32
<PAGE> 86
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
property. The balance of the availability of borrowings under the
proposed loan agreement is based on and secured by 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. See Note 13.
F-33
<PAGE> 87
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
1995
----
FIRST SECOND THIRD(1) FOURTH
----- ------ -------- ------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $19,088 $19,631 $53,621 $61,404
Gross profit . . . . . . . . . . . . . . . . . 6,151 6,692 13,975 15,021
Nonrecurring restructuring and relocation
charges . . . . . . . . . . . . . . . . . . . (150) (409) (540) (6,451)
Net income (loss) . . . . . . . . . . . . . . . (1,006) (1,262) 53 (2,286)
Net Income (loss) per Common share:
----------------------------------
Primary earnings per share . . . . . . . . . . (.24) (.30) .01 (.44)
Fully diluted earnings per share . . . . . . . (.24) (.30) .01 (.44)
</TABLE>
<TABLE>
<CAPTION>
1994
----
FIRST SECOND THIRD FOURTH(2)
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $6,740 $4,677 $19,966 $26,581
Gross profit . . . . . . . . . . . . . . . . . 1,372 995 6,324 8,716
Net income (loss) . . . . . . . . . . . . . . . (47) (598) 1,960 (726)
Net Income (loss) per Common share:
----------------------------------
Primary earnings per share . . . . . . . . . . (.01) (.04) .13 (.18)
Fully diluted earnings per share . . . . . . . (.01) (.04) .13 (.18)
</TABLE>
------------------------------
(1) During the third quarter of 1995, the Company acquired certain assets and
assumed certain liabilities of Buddy L. See Note 3 to the Consolidated
Financial Statements.
(2) During the fourth quarter of 1994, the Company acquired Marchon. See Note
3 to the Consolidated Financial Statements.
F-34
<PAGE> 88
[DELOITTE & TOUCHE LLP
LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the 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, 1995 and 1994, 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); such report is
included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of Empire of Carolina, Inc. and its
subsidiaries, listed in Item 14. 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.
Raleigh, North Carolina
March 29, 1996
(April 8, 1996 as to Note 17)
S-1
<PAGE> 89
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARANT)
STATEMENTS OF OPRATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
(In Thousands)
<S> <C> <C>
ADMINISTRATIVE EXPENSES . . . . . . . . . . . . . . . . . . . $ (710) $ (2,243)
-------- --------
OTHER INCOME (EXPENSES):
Interest income, dividends and net realized gains . . . . 1,241 2,459
Unrealized loss on marketable securities . . . . . . . . (670)
Interest expense . . . . . . . . . . . . . . . . . . . . (1,912) (61)
Equity in earnings of subsidiaries . . . . . . . . . . . (5,621) 310
Management fee income . . . . . . . . . . . . . . . . . . 3,060 1,100
-------- --------
Total other income (expenses) . . . . . . . . . . . . (3,232) 3,138
-------- --------
INCOME (LOSS) BEFORE TAXES . . . . . . . . . . . . . . . . . (3,942) 895
-------- --------
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . 559 306
-------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . $ (4,501) $ 589
======== ========
</TABLE>
S-2
<PAGE> 90
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARENT)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
(In Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 1,416 $ --
Marketable securities . . . . . . . . . . . . . . . . . . 189 1,861
Receivables from subsidiaries . . . . . . . . . . . . . . 23,952 11,706
Prepaid expenses and other current assets . . . . . . . . 920 1,626
-------- --------
Total current assets . . . . . . . . . . . . . . . . 26,477 15,193
NOTE RECEIVABLE FROM SUBSIDIARY . . . . . . . . . . . . . . . 9,580 --
INVESTMENT IN SUBSIDIARIES . . . . . . . . . . . . . . . . . 21,947 28,574
OTHER NONCURRENT ASSETS . . . . . . . . . . . . . . . . . . . 1,695 718
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 59,699 $ 44,485
======== ========
</TABLE>
The note receivable from subsidiary is subordinated to the
subsidiary's bank facility and bears interest at the prime rate.
S-3
<PAGE> 91
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARENT)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 (CONCLUDED)
<TABLE>
<CAPTION>
1995 1994
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 3,250
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,040 1,496
Federal and state taxes payable . . . . . . . . . . . . . . . . . . . 3,685 2,532
Indemnification obligations related to sales of subsidiaries . . . . 1,326 1,541
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 6,051 8,819
CONVERTIBLE SUBORDINATED DEBENTURES . . . . . . . . . . . . . . . . . . . 13,851 13,563
SENIOR SUBORDINATED NOTES . . . . . . . . . . . . . . . . . . . . . . . . 7,959 --
OTHER NONCURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 781 905
------- -------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 28,642 23,287
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000 shares authorized; shares
issued and outstanding: 1995 - 5,194,000; 1994 - 4,191,000 . . . . .
Series A cumulative convertible preferred stock, $.01 par 519 419
value, 5,000,000 shares authorized; shares issued and
outstanding: 1995 - 442,264; 1994 - 0 . . . . . . . . . . . . . . .
($3,206,000 involuntary liquidation preference) 4 --
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . .
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . 33,193 18,972
Stockholders' loans . . . . . . . . . . . . . . . . . . . . . . . . . (2,659) 1,842
(35)
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 31,057 21,198
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . $59,699 $44,485
======= =======
</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 companies.
S-4
<PAGE> 92
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARENT)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,501) $ 589
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: . . . . . . . . . . . . . 6,305 --
Non-cash adjustments . . . . . . . . . . . . . . . . . . . . . . . 556
Changes in assets and liabilities . . . . . . . . . . . . . . . . . 87 (1,887)
------- --------
Net cash provided by (used in) operating activities . . . 1,891 (742)
------- --------
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 . . . . . . . . . . . . . 1,655 66,606
Note receivable from subsidiary . . . . . . . . . . . . . . . . . . . . (9,580) --
Net advances to subsidiaries . . . . . . . . . . . . . . . . . . . . . (5,220) (7,524)
Management fees received from subsidiaries . . . . . . . . . . . . . . 3,060 1,050
Collections from (advances to) stockholder . . . . . . . . . . . . . . 35 (35)
------- --------
Net cash provided (used in) by investing activities . . . (10,050) 78,404
------- --------
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 . . . 9,575 (77,750)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . 1,416 (88)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . . . . . . . -- 88
------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . . . $ 1,416 $ --
======= ========
</TABLE>
S-5
<PAGE> 93
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARENT)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW 1995 1994
INFORMATION (In Thousands)
<S> <C> <C>
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . $1,046 $ 316
Income taxes, net of refunds . . . . . . . . . . . 97 2,027
</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 441,264 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.
("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.
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> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-93824 of Empire of Carolina, Inc. on Form S-8 of our reports dated March 29,
1996 (April 8, 1996 as to Note 17), appearing in this Annual Report on Form
10-K/A of Empire of Carolina, Inc. for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
August 7, 1996
