<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996
REGISTRATION NO. 333-4440
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
EMPIRE OF CAROLINA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3944 13-2999480
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
(407) 498-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
STEVEN GELLER
CHIEF EXECUTIVE OFFICER
EMPIRE OF CAROLINA, INC.
5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
(407) 498-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
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<S> <C> <C>
MICHAEL M. FROY KENNETH G. KOLMIN ALAN G. BERKSHIRE
SONNENSCHEIN NATH & ROSENTHAL SCHWARTZ & FREEMAN KIRKLAND & ELLIS
8000 SEARS TOWER 401 N. MICHIGAN AVENUE 200 E. RANDOLPH DRIVE
CHICAGO, IL 60606 CHICAGO, IL 60611 CHICAGO, IL 60601
(312) 876-8000 (312) 222-0800 (312) 861-2000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is to be a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
registration statement of the earlier effective registration statement for the
same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2)(3) FEE(3)
<S> <C> <C> <C> <C>
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Common Stock, $.10 par value..... 4,198,234 shares $14.81 $54,108,785 $18,659
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</TABLE>
(1) Includes 547,595 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) and (c) under the Securities Act of 1933, as
amended.
(3) Based on a maximum offering price per share of $13.00 (as set forth in the
initial filing of this Registration Statement) with respect to 3,697,633
shares, $12.00 (the average of the high and low prices reported for the
Common Stock on the American Stock Exchange on May 23, 1996) with respect to
489,101 shares and $14.81 (the average of the high and low prices reported
for the Common Stock on the American Stock Exchange on June 13, 1996) with
respect to 11,500 shares. Of the $18,659 registration fee, $16,576 was paid
upon the initial filing of this Registration Statement and $2,024 was paid
upon the filing of Amendment No. 1 to this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EMPIRE OF CAROLINA, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
3. Summary Information; Risk Factors; Ratio
of Earnings to Fixed Charges.............. Outside Front Cover Page; Prospectus
Summary; Risk Factors
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Not applicable
6. Dilution.................................. Not applicable
7. Selling Security Holders.................. Principal and Selling Stockholders
8. Plan of Distribution...................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interest of Named Experts and Counsel..... Not applicable
11. Information with Respect to the
Registrant................................ Prospectus Summary; Risk Factors; Recent
Events; Common Stock Price Range and
Dividend Policy; Use of Proceeds;
Capitalization; Selected Consolidated
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal and Selling
Stockholders; Description of Capital
Stock; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not applicable
</TABLE>
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED JUNE 17, 1996
PROSPECTUS
3,650,639 SHARES
[EMPIRE LOGO]
COMMON STOCK
Of the 3,650,639 shares of Common Stock offered hereby, 1,500,000 shares
are being sold by Empire of Carolina, Inc. and 2,150,639 shares are being sold
by the Selling Stockholders, including 333,333 outstanding shares obtainable
upon the exercise of an option being sold to the Underwriters by a Selling
Stockholder. See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders.
The Common Stock is traded on the American Stock Exchange under the symbol
"EMP." On June 14, 1996, the closing sale price for the Common Stock on the
American Stock Exchange was $14.88 per share. See "Common Stock Price Range and
Dividend Policy."
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)(3)
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total(4)................ $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company and a Selling Stockholder
estimated at $650,000.
(3) One of the Selling Stockholders is selling to the Underwriters an option,
granted by another Selling Stockholder, to purchase an aggregate of 333,333
shares of Common Stock at a price per underlying share equal to the price
per share to the public less the sum of the per share underwriting discount
and per share exercise price of such option. The Underwriters will exercise
such option by payment to the other Selling Stockholder of the exercise
price therefor (which amount is included in proceeds to Selling
Stockholders) and will sell each share received upon such exercise to the
public at the per share price to public.
(4) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an additional 547,595 shares
of Common Stock in the aggregate solely to cover over-allotments, if any.
See "Underwriting." If all such shares are purchased, the total Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ , and $ ,
respectively.
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by them and subject to their right to reject
orders in whole or in part. It is expected that delivery of the certificates for
the shares of Common Stock will be made on or about , 1996.
WILLIAM BLAIR & COMPANY GERARD KLAUER MATTISON & CO., LLC
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
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GRAPHIC APPENDIX
The inside front cover of the Prospectus is comprised of a three-page
gatefold containing a series of multi-colored pictures of certain toys and
decorative holiday products manufactured by the Company. The pictures depict: a
Grand Champions(R) collectible horse, a Buddy L(R) truck, a Big Wheel(R) ride-
on, Power Drivers(R) battery-powered ride-on and plastic decorative holiday
products. The pictures on the two inside gatefold pages depict a Power
Drivers(R) battery-powered ride-on, a Snow Works(TM) plastic sled, a Grand
Champions(R) collectible horse, Buddy L(R) vehicles, plastic games and holiday
products. Across the top of the inside front cover page are the words
"EMPIRE(R)...POWER DRIVERS(TM)..." and across the top of the two inside gatefold
pages are the words "EMPIRE(R)...POWER DRIVERS(R)...SNOW WORKS(TM)...GRAND
CHAMPIONS(R)... BIG WHEEL(R)...BUDDY L(R)..."
Across the bottom of the inside front cover page are the following legends:
The Company intends to furnish its stockholders with annual reports
containing audited financial statements with a report thereon by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The inside back cover of the Prospectus contains a series of multi-colored
pictures of the Company's Tarboro, North Carolina manufacturing and warehouse
facility. An aerial overview of the Tarboro facility is depicted, with four
pictures of certain equipment and the control panels of certain machines used in
the Company's operations overlaying portions of the aerial overview picture of
the Tarboro facility. Across the top of the inside back cover are the words
"CROCODILE MILE(R)...HOLIDAY...MANUFACTURING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."
THE COMPANY
Empire of Carolina, Inc. designs, manufactures and markets a broad variety
of toys and plastic decorative holiday products. The Company manages its
business through four strategic business units ("SBUs") which are accountable
for specific product categories: (i) ride-on products including Big Wheel(R) and
Power Driver(R) brands; (ii) outdoor activities and games such as Snow Works(TM)
winter sleds and Water Works(TM) water slides and pools (including Crocodile
Mile(R) water slides); (iii) girls and boys toys featuring Buddy L(R) cars,
trucks and other vehicles and Grand Champions(R) collectible horses; and (iv)
holiday products featuring plastic decorative holiday display items, including
the recently introduced Light Toppers(TM) outdoor lighting add-ons. The Company
believes that it is the market share leader in non-powered ride-ons and in
plastic water slides, winter sleds, collectible horses and outdoor decorative
holiday products.
Empire has been a toy manufacturer for approximately 40 years. The
Company's business experienced significant change in 1993 when substantial
non-toy operations were sold, and since mid-1994 the Company has undergone a
change of control and management, established a new business strategy, and
effected two acquisitions which added established core toy product lines to the
Company's business. Following the divestitures of non-toy businesses, Empire's
operations were focused on its toy business, including the Big Wheel(R)
non-powered ride-on product line which has been sold throughout the United
States since 1970, and its plastic decorative holiday products business. In the
third quarter of 1994, current principal stockholders of the Company, led by
Steven Geller, the current Chairman and Chief Executive Officer of the Company,
acquired control of Empire as a base from which to build a diversified toy and
plastic products manufacturing company. In October 1994, Empire acquired
Marchon, Inc., a toy designer, marketer and manufacturer founded and managed by
Marvin Smollar, the current President and Chief Operating Officer of the
Company. Marchon's core toy products included Grand Champions(R) collectible
horses and Crocodile Mile(R) water slides. In July 1995, Empire acquired the toy
business and certain related liabilities of Buddy L Inc., one of the oldest toy
brands in the United States whose core toy products included plastic and metal
toy cars, trucks and other vehicles and battery-operated ride-ons. As a result
of these recent transactions, the Company believes it is well-positioned to
become a leading U.S. toy manufacturer. The Company's net sales were $41.4
million, $58.0 million and $153.7 million, respectively, for the years ended
December 31, 1993, 1994 and 1995, and net sales from toy products contributed
51%, 57% and 79%, respectively, of the Company's consolidated net sales.
The Company's goal is to become a leading supplier of toy and plastic
decorative holiday products to retailers throughout the world. The Company
believes it has distinct competitive advantages including: (i) a team of
managers that, with one exception, has joined the Company since July 1994, and
has extensive experience in the toy industry; (ii) a balanced line of stable
core products with long histories of consumer appeal; (iii) manufacturing and
sourcing flexibility through use of the Company's 1.2 million square foot
facility in Tarboro, North Carolina and foreign sourcing expertise; and (iv) its
decorative holiday product line, which has broad consumer appeal, has provided
the Company with a consistent source of revenue while reducing the Company's
dependence on major toy retailers and can be manufactured during off-peak
periods throughout the year in anticipation of seasonal demand.
According to the Toy Manufacturers' Association, total domestic shipments
of toys, excluding video games, were approximately $13.4 billion in 1995.
Management believes changing industry dynamics favor larger toy companies that
can offer a broad selection of popular toy products, supported by consistent,
high quality marketing programs to an increasingly concentrated distribution
channel. Management also believes that there is significant potential for the
Company to leverage its existing relationships with major retailers because many
of such retailers are seeking to expand their relationships with suppliers like
the Company in order to avoid becoming overly dependent on products from the
largest domestic toy companies and to help
3
<PAGE> 6
assure that reliable supplies of quality products may be obtained at competitive
prices. The following are the major elements of the Company's growth strategy:
- Focus on core brands with long histories of broad consumer appeal, such as
the Big Wheel(R) and Buddy L(R) product lines, which provide the Company
with a base from which to build a diversified toy and plastic products
manufacturing company.
- Leverage existing manufacturing capabilities by upgrading the equipment,
increasing the capacity and integrating all of the domestic manufacturing
operations of the Buddy L product line at its manufacturing facility in
Tarboro, North Carolina.
- Offer value to toy retailers and consumers by utilizing the Company's
diverse manufacturing capabilities and stable core product lines to offer
high quality products and customer support at prices which enable the
retailer to realize attractive gross margins.
- Expand international presence, especially in Western Europe and Japan, which
present significant growth opportunities for the Company.
- Acquire new product lines and deepen and expand its core product lines with
new licensing arrangements.
- Extend core product lines through product innovation resulting from
increased investment in research and development.
- Develop additional countercyclical product lines to, in part, counterbalance
the seasonality generally present in the toy industry and take advantage of
additional manufacturing capacity available during off-peak production
periods.
THE OFFERING
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<S> <C>
Common Stock Offered by the Company................. 1,500,000 shares
Common Stock Offered by the Selling Stockholders
(1)............................................... 2,150,639 shares
Common Stock to be Outstanding Immediately After the
Offering (2)...................................... 7,149,200 shares
Use of Proceeds to the Company...................... To prepay senior subordinated
notes, repay bank debt and for
general corporate purposes.
See "Use of Proceeds."
American Stock Exchange Symbol...................... EMP
</TABLE>
- ------------------------------
(1) Includes 333,333 outstanding shares obtainable upon exercise of an option
being sold to the Underwriters by a Selling Stockholder. See "Principal and
Selling Stockholders."
(2) Includes 444,000 shares of Common Stock to be issued upon the exercise by
certain Selling Stockholders of stock options and warrants concurrently with
this Offering, but does not include an aggregate of 6,761,324 shares
(758,000 of which are subject to warrants which will lapse upon the
application of the net proceeds to the Company from this Offering) comprised
of (i) 1,397,500 shares issuable upon the exercise of stock options
outstanding on the date of this Prospectus, (ii) 1,875,000 shares issuable
upon the exercise of warrants outstanding on the date of this Prospectus, of
which warrants for the purchase of 758,000 shares will lapse upon the
application of the net proceeds to the Company from this Offering as
described in "Use of Proceeds," (iii) 442,264 shares issuable upon the
conversion of the Series A cumulative convertible preferred stock upon the
affirmative vote of a majority of the shares represented at the Company's
1996 Annual Meeting of Stockholders, (iv) 2,000,000 shares issuable upon the
conversion of the convertible subordinated debentures, (v) up to 454,000
shares which may be issuable as a contingent payment obligation in
connection with the Buddy L acquisition in certain circumstances and (vi)
592,560 shares available for future grants under the Company's 1994 Employee
Stock Option Plan. See "Use of Proceeds" and "Certain Transactions."
Empire of Carolina, Inc. was incorporated in Delaware in 1979. Unless the
context indicates otherwise, all references to "Empire" or the "Company" refer
to Empire of Carolina, Inc. and its subsidiaries. The Company's principal
executive offices are located at 5150 Linton Boulevard, Delray Beach, Florida
33484, and its telephone number is (407) 498-4000.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ------------------
1991(1)(2) 1992(1)(2) 1993(2) 1994(3) 1995(4) 1995 1996
---------- ---------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $ 41,253 $ 42,882 $41,354 $57,964 $153,744 $19,088 $22,186
Gross profit................... 13,936 13,439 11,621 17,407 41,839 6,151 5,969
Nonrecurring restructuring and
relocation charges........... -- -- -- -- 7,550 150 --
Operating income (loss)........ 983 1,267 (3,465) 965 (1,894) (803) (1,329)
Interest expense............... 13,549 10,314 2,937 1,407 5,996 667 2,132
After-tax income (loss) from
continuing operations before
extraordinary items and
cumulative effect of an
accounting change............ (6,318) (2,696) (1,516) 589 (4,501) (1,006) (2,156)
Net income (loss).............. 8,756 11,098 24,327 589 (4,501) (1,006) (2,156)
Weighted average shares
outstanding -- primary(5).... 10,536 10,537 14,670 12,159 4,681 4,191 5,201
Income (loss) per common share
from continuing operations --
primary(5)................... $ (.60) $ (.26) $ (.10) $ .05 $ (.96) $ (.24) $ (.41)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................ $ 5,978 $ 29,081
Total assets............................................................... 127,467 137,037
Total debt................................................................. 68,581 54,480
Stockholders' equity....................................................... 28,371 52,042
</TABLE>
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(1) Prior to 1992, the Company owned a minority interest in The Deltona
Corporation, a real estate development corporation based in Florida. Income
from continuing operations includes equity loss of The Deltona Corporation
for 1991 of $1,613. Income from continuing operations for 1992 includes the
gain on sale of common stock of, and notes receivable from, The Deltona
Corporation of $2,000.
(2) On October 6, 1992, the Company sold all of the stock of Wilbur Chocolate
Co., Inc. In February 1993, the Company sold the assets used in the
businesses of The Isaly Klondike Company and Popsicle Industries, Inc. These
businesses had been acquired in 1989. As a result of the sale of these
businesses, the results of operations and gains on sale from Wilbur, Isaly
Klondike, and Popsicle have been included in income from discontinued
operations. See Note 15 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) The results of operations for 1994 reflect the results of operations of
Marchon Inc. since its acquisition by the Company on October 13, 1994. See
Note 3 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) The results of operations for 1995 reflect the results of operations of
substantially all of the toy business of Buddy L Inc. and its Hong Kong
subsidiary since its acquisition by the Company on July 7, 1995. See Notes 3
and 14 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Fully diluted income (loss) per common share from continuing operations was
$(.28), $(.06), $(.07), $.05 and $(.96), respectively, during the five years
ending December 31, 1995 based on weighted average shares outstanding of
16,296, 16,297, 16,295, 12,159 and 4,681, respectively. Fully diluted loss
per common share from continuing operations was $(.24) and $(.41) for the
three month period ended March 31, 1995 and 1996, respectively, based on
weighted average shares outstanding of 4,191 and 5,201, respectively. During
September 1994, the Company repurchased approximately 11,800 shares in a
treasury stock transaction. Weighted average shares outstanding in 1995
reflects 454 shares which may become issuable as a contingent payment
obligation with respect to the acquisition of Buddy L in July 1995. See
Notes 2, 3 and 11 of Notes to Consolidated Financial Statements.
(6) Adjusted to give effect to (i) the sale by the Company of 1,500 shares of
Common Stock offered (at an assumed public offering price per share of
$14.88) and the application of the net proceeds therefrom and (ii) the
exercise by certain Selling Stockholders of stock options and warrants
concurrently with this Offering to purchase an aggregate of 444 shares of
Common Stock. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 8
RISK FACTORS
The Shares offered hereby involve a high degree of risk. In addition to the
other information in this Prospectus, prospective investors should carefully
consider the following factors in evaluating an investment in the shares of
Common Stock offered hereby.
Management of Growth; Limited Combined Operating History. 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
significant acquisitions. Since the acquisition of the Company by current
management in 1994, the Company has experienced rapid growth, due in large part
to the acquisition of Marchon, Inc. ("Marchon") in October 1994 and the
acquisition of substantially all of the toy business assets and the assumption
of certain liabilities of Buddy L Inc. and its Hong Kong subsidiary in July 1995
(such assets and liabilities collectively, "Buddy L"). These transactions have
significantly affected the size and scope of the Company's operations. For the
years ended December 31, 1993, 1994 and 1995, the Company had net sales of $41.4
million, $58.0 million and $153.7 million, respectively. The Company's ability
to manage its growth effectively will require it to attract and retain
management personnel to manage its operational, financial and management
information systems, to accurately forecast sales demand and calibrate
manufacturing to such demand, to accurately forecast retail sales, to control
its overhead, to manage its advertising and marketing programs in conjunction
with actual demand, and to attract, train, motivate and manage its employees
effectively. If the Company is unable to manage growth effectively, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
The future success of the Company depends in large measure on the Company's
ability to integrate the operations and financial and management information
systems of the businesses it acquires. In addition to the acquisitions of
Marchon and Buddy L, the Company may pursue the purchase of other toy and
related businesses as part of its growth strategy. The process of integrating
acquired businesses often involves unforeseen difficulties and may require a
disproportionate amount of the Company's financial and other resources,
including management time. The Company also intends to seek increased sales in
markets outside of the United States as part of its growth strategy. Considering
the dispositions of substantial non-toy operations, the Company's significant
recent growth and the change of control and management, the Company's historical
financial results may not be indicative of its future performance. There can be
no assurance that the Company will continue to grow, be successful in
identifying or consummating favorable acquisition opportunities, be effective in
integrating recent or future acquisitions, be successful in increasing its sales
in international markets, or that the Company will be effective in managing its
future growth, expanding its facilities and operations or in attracting and
retaining qualified personnel. Any failure to effectively achieve or manage
growth, manage its facilities and operations, or attract and retain qualified
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Recent Events" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Key Personnel. The Company's operations and prospects are
dependent in a large part on the performance of its senior management team,
including Steven Geller, the Chairman and Chief Executive Officer, and Marvin
Smollar, the President and Chief Operating Officer. No assurance can be given
that the Company would be able to find qualified replacements for any of these
individuals if their services were no longer available. The loss of the services
of one or more members of this senior management team could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, substantially all of the senior management team has been
hired by the Company since the change of control in July 1994. The Company has
entered into employment contracts with each of Messrs. Geller and Smollar. The
Company does not maintain any key-person life insurance policies. The Company's
future success and plans for growth also depend on its ability to attract, train
and retain skilled personnel in all areas of its business. There is strong
competition for skilled personnel in the toy and decorative holiday product
businesses. See "Management."
Dependence on Major Customers. Like other major toy companies, the Company
is dependent upon toy retailers and mass merchandisers to distribute its
products. The retail toy industry is highly concentrated, with
6
<PAGE> 9
the top five retailers accounting for approximately 53% of United States retail
toy sales in 1994. For the year ended December 31, 1995, approximately 61% of
the Company's net sales were to five customers and the Company's two largest
customers each accounted for approximately 18% of net sales. The Company does
not have long-term contracts with its customers. An adverse change in, or
termination of, the Company's relationship with or the financial viability of
one or more of its major customers could have a material adverse effect on the
Company's business, financial condition and results of operations. In recent
years, the retail toy industry has undergone significant consolidation. To the
extent this consolidation continues, the Company's distribution base could
shrink, thereby concentrating an even greater percentage of the Company's sales
in a smaller number of retailers and enhancing the remaining toy retailers'
ability to negotiate more favorable terms and prices from the Company.
Consumer Preferences and New Product Introductions. Consumer preferences in
the toy industry are continuously changing and are difficult to predict.
Relatively few products achieve market acceptance, and even when they do achieve
commercial success, products often have short life cycles. There can be no
assurance that (i) new products introduced by the Company will achieve any
significant degree of market acceptance, (ii) acceptance, if achieved, will be
sustained for any significant amount of time or (iii) such products' life cycles
will be sufficient to permit the Company to recover development, manufacturing,
marketing and other costs associated therewith. Failure of new product lines or
product innovations to achieve or sustain market acceptance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. The Company operates in a highly competitive environment. The
Company competes with several larger toy companies, such as Mattel, Inc.
("Mattel"), Hasbro, Inc. ("Hasbro") and Tyco Toys, Inc. ("Tyco"), and many
smaller companies in the design and development of new toys, the procurement of
licenses, the improvement and expansion of previously introduced products and
product lines and the marketing and distribution of its products. Some of these
companies have longer operating histories, broader product lines and
substantially greater resources and advertising budgets than the Company. In
addition, it is common in the toy industry for companies to market products
which are similar to products being successfully marketed by competitors.
Further, the introduction of new products and product lines by the Company makes
its operations susceptible to the risks associated with new products, such as
production, distribution and quality control problems and the need to gain
customer acceptance. See "Business -- Competition."
Raw Material Prices. The principal raw materials in most of the Company's
products are petrochemical resin derivatives such as polyethylene and high
impact polystyrene. The prices for such raw materials are influenced by numerous
factors beyond the control of the Company, including general economic
conditions, competition, labor costs, import duties and other trade restrictions
and currency exchange rates. Changing prices for such raw materials may cause
the Company's results of operations to fluctuate significantly. A large, rapid
increase in the price of raw materials could have a material adverse effect on
the Company's operating margins unless and until the increased cost can be
passed along to customers.
Inventory Management. Each of the Company's top five customers uses, to
some extent, inventory management systems which track sales of particular
products and rely on reorders being rapidly filled by suppliers rather than on
large inventories being maintained by retailers to meet consumer demand.
Although these systems reduce a retailer's investment in inventory, they
increase pressure on suppliers like the Company to fill orders promptly and
shift a portion of the retailer's inventory risk onto the supplier. Production
of excess products by the Company to meet anticipated retailer demand could
result in markdowns and increased inventory carrying costs for the Company on
even its most popular items. In addition, if the Company fails to anticipate the
demand for products, it may be unable to provide adequate supplies of popular
toys to retailers in a timely fashion, particularly during the Christmas season,
and may consequently lose sales.
Foreign Sourcing. Approximately 35% of the Company's sales in the year
ending December 31, 1995 were attributable to products manufactured for the
Company by unaffiliated parties in the Far East, substantially all of whom are
located in China. The Company has not entered into long-term contracts with any
of these manufacturers. Accordingly, the Company expects to continue to be
dependent upon these sources for timely production and quality workmanship.
Given the seasonal nature of the Company's business,
7
<PAGE> 10
any delay or quality control problems of such manufacturers, delay in product
deliveries, delay in locating or providing new tooling to acceptable
substitutes, or delay in increasing the production of alternative manufacturers
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, foreign operations are subject
to a number of risks, including transportation delays and interruptions,
political and economic disruptions, labor strikes, the imposition of tariffs and
import and export controls, changes in governmental policies, and fluctuations
in currency exchange rates, the occurrence of any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Recent changes in Chinese labor market conditions have made it more
difficult for Hong Kong based manufacturers, and in particular toy
manufacturers, to obtain the workforce necessary to meet aggressive seasonal
production schedules. The Company is working with its manufacturers to ensure
timely delivery of the Company's product. To date, the Company has not
experienced any delays in delivery of products from such manufacturers which had
a material adverse effect on the Company's business, financial condition or
results of operations. However, there can be no assurance that such
manufacturers will be able to meet the Company's production schedules in the
future.
China currently enjoys "most favored nation" ("MFN") status under United
States tariff laws, which provides the most favorable category of United States
import duties. There has been, and continues to be, opposition to the extension
or continuation of MFN status for China. The loss of MFN status for China would
result in a substantial increase in the import duty of toy products (which vary
depending on product category, and currently include duties of up to 70% for
non-MFN countries) manufactured in China which would result in increased costs
for the Company. Although the Company would attempt to mitigate this increased
cost by shifting its productions to other countries, there can be no assurance
that the Company would be able to do so or be successful in doing so in a timely
manner.
Price Protection; Timing of Payments. Many companies in the toy industry
discount prices of existing products, provide for certain advertising allowances
and credits or give other sales incentives to customers. In addition, many toy
companies lower the prices of their products to provide price adjustments
(referred to as price protection) for retail inventories on hand at the time the
price change occurs. The Company has made such accommodations to a limited
extent in the past. While the Company does not presently intend to materially
increase the extent to which it makes such accommodations, there can be no
assurance that the Company will not, as a result of competitive practices or
otherwise, make such accommodations to a significant degree in the future. Any
such accommodations by the Company in the future could have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, like other toy manufacturers, a substantial portion of the Company's
shipments of products are made on terms that permit payment more than 90 days
after shipment of merchandise. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Product Liability and Regulation. Due to the nature of its business, the
Company, at any particular time, is subject to a number of product liability
claims for personal injuries allegedly relating to the Company's products. The
Company has to date not incurred any material uninsured losses in defending or
settling such claims. The Company's products are designed to meet applicable
guidelines currently prescribed by the American Society of Testing and Materials
and Underwriters Laboratory, voluntary regulatory associations, as well as
requirements prescribed by the Consumer Product Safety Commission (the "CPSC").
However, sales of the Company's products have significantly increased since the
1994 change in control and several of the Company's products are new and,
therefore, the claims experience with such products is difficult to predict. For
the foregoing reasons, there can be no assurance that the Company will not be
subject to material liabilities on account of product liability claims in the
future.
The Company assumes a self-insured retention limit and, to date, the
Company has disposed of substantially all of its product liability claims on
this basis. The Company does maintain insurance on an occurrence basis to
provide excess coverage above the self-insured retention limit for each claim.
There can be no assurance that the limits provided by the excess insurance will
be sufficient to satisfy an adverse judgment in one or more large product
liability suits or to satisfy all claims in the aggregate within a single policy
period. Further, there can be no assurance that an insurer will be solvent at
the time of settlement of an insured claim that exceeds the amount of any state
guaranty fund, or that the Company will be able to obtain excess
8
<PAGE> 11
insurance at acceptable levels and costs in the future. Successful assertion
against the Company of one or a series of claims that materially exceed the
limits of any insurance coverage could have a material adverse effect on the
Company's business, financial condition or results of operation.
The Company's toys are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act (including the Federal Child
Protection and Toy Safety Act of 1969) and the Flammable Fabrics Act, and the
regulations promulgated thereunder. The Consumer Product Safety Act and the
Federal Hazardous Substances Act enable the CPSC to exclude from the market
consumer products that fail to comply with applicable product safety regulations
or otherwise create a substantial risk of injury and articles that contain
excessive amounts of a banned hazardous substance. The Flammable Fabrics Act
enables the CPSC to regulate and enforce flammability standards for fabrics used
in consumer products. In addition, the Company may be required to give public
notice of any hazardous or defective products and to repair, replace or
repurchase any such products previously sold. The Company is also subject to
various state, local and foreign laws designed to protect children from
hazardous or potentially hazardous products. If any of the Company's products
materially contributing to its dollar volume of sales was found to be hazardous
to the public health and safety or to contain a defect which created a risk of
injury to the public, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business -- Regulation."
Seasonality; Quarterly Fluctuations. The Company, like the toy and seasonal
holiday industries in general, experiences a significant seasonal pattern in
sales and net income due to the heavy demand for toys and holiday products
during the Christmas season. During 1993, 1994 and 1995, 72%, 80% and 75%,
respectively, of the Company's net sales were realized during the months of July
through December. The Company expects that its business will continue to
experience a significant seasonal pattern for the foreseeable future.
Consequently, the last six months of the year have tended to generate greater
sales and an even greater proportion of the Company's profits than the rest of
the year, which has been generally characterized by reduced production levels.
The timing of large, initial orders from customers, fluctuations in demand from
retailers during the peak selling season and weather patterns have also
contributed to quarterly fluctuations. The seasonality of the Company's business
requires funding of its working capital requirements to provide for increased
inventory levels and trade accounts receivable prior to the Christmas season. To
build its inventory in anticipation of the Christmas season, the Company
manufactures products and pays its suppliers throughout the year, although a
majority of the Company's shipments occur in the last five months of the year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results."
Control by Existing Stockholders. Certain stockholders of the Company,
including Messrs. Geller and Smollar and certain affiliates of Weiss, Peck &
Greer, L.L.C. ("WPG") are parties to a shareholders' agreement (the
"Shareholders' Agreement") pursuant to which the parties thereto and their
permitted transferees have agreed, among other things, to vote their shares of
Common Stock to effect the composition of the Board of Directors and certain
committees of the Board of Directors specified in the Shareholders' Agreement
and to carry out certain corporate governance provisions specified in the
Shareholders' Agreement. Upon completion of the Offering, persons subject to the
Shareholders' Agreement will beneficially own approximately 29.9% (25.3% if the
over-allotment option is exercised in full) of the issued and outstanding shares
of Common Stock and approximately 52.6% of the issued and outstanding Common
Stock on a fully diluted basis. As a result of such ownership and the provisions
of the Shareholders' Agreement, these stockholders will have the ability to
elect the Board of Directors and thereby control the affairs and management of
the Company and have the power to approve most actions requiring stockholder
approval. Such a high level of ownership may have the effect of delaying,
deferring or preventing a change in the control of the Company and may adversely
affect the voting and other rights of the holders of Common Stock. The parties
to the Shareholders' Agreement have agreed that, in certain circumstances, WPG
and its affiliates can designate nominees for the entire Board of Directors and
the parties thereto will vote their shares of Common Stock for such nominees. In
addition, in connection with the acquisition of Marchon, Messrs. Geller and
Smollar and Neil B. Saul entered into a stockholders' agreement (the "Marchon
Stockholders' Agreement") which, among other things, includes a voting agreement
among the parties thereto. However, so
9
<PAGE> 12
long as the Shareholders' Agreement remains in effect, the Shareholders'
Agreement takes precedence over the Marchon Stockholders' Agreement. See
"Principal and Selling Stockholders" and "Certain Transactions -- The Marchon
Transaction" and "-- Shareholders' Agreement."
The Company intends to use approximately $8.3 million of the net proceeds
to the Company from this Offering to prepay certain senior subordinated notes
(at 110% of their original principal amount) issued in connection with the
acquisition of Buddy L. Approximately $6.2 million of such amount will be used
to prepay notes held by American Bankers Insurance Company of Florida (which
Eugene Matalene, a director of the Company, serves as a director of) and one of
its affiliates, Mr. Matalene, Mr. Geller and certain affiliates of WPG. See "Use
of Proceeds" and "Certain Transactions -- The Buddy L Transaction."
License and Royalty Obligations. Certain of the Company's product lines
employ concepts or technologies created by outside designers. In addition,
certain of the Company's products incorporate other intellectual property
rights, such as characters or brand names, that are proprietary to third
parties. In each instance, the Company typically enters into a license agreement
to acquire the rights to the concepts, technologies or other rights for use with
the Company's products. These license agreements typically provide for the
retention of ownership of the technology, concepts or other intellectual
property by the licensor and the payment of a royalty to the licensor. Such
royalty payments generally are based on the net sales of the licensed product
for the duration of the license and, depending on the revenues generated from
the sale of the licensed product, may be substantial. In addition, such
agreements often provide for an advance payment of royalties and may require the
Company to guarantee payment of a minimum level of royalties that may exceed the
actual royalties generated from net sales of the licensed product. Some of these
agreements have fixed terms and may need to be renewed or renegotiated prior to
their expiration in order for the Company to continue to sell the licensed
product. While management does not believe that the loss of any of its existing
licenses would have a material adverse effect on the Company's business,
financial condition or results of operations, there can be no assurance that
there would not be such an effect. The Company intends to continue to obtain
third party licenses on a selective basis to deepen and expand its existing
product lines and, to a lesser extent, to enter new product categories.
Limited Prior Public Market; Possible Volatility of Price. Prior to the
Offering, the substantial majority of the outstanding Common Stock has been
controlled by affiliates of the Company and, accordingly, there has not been a
robust public market for the Common Stock. There can be no assurance as to the
liquidity of any markets that may develop for the Common Stock, the ability of
holders of Common Stock to sell their securities, or at what price holders would
be able to sell their securities. Prices for the Common Stock will be determined
by the marketplace and may be influenced by many factors, including the depth
and liquidity of any market which develops, investor perception of the Company
and general economic and market conditions. In addition, factors such as
quarterly variations in the Company's financial results, announcements by the
Company or others and developments affecting the Company could cause the market
price of the Common Stock to fluctuate significantly. The stock market has, on
occasion, experienced extreme price and volume fluctuations which have often
been unrelated to the operating performance of the affected companies.
Effect of Certain Charter, By-law and Statutory Provisions. Certain
provisions of the Company's Amended and Restated Certificate of Incorporation
(the "Charter") and Amended and Restated By-laws (the "By-laws") could delay or
frustrate the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such events
could be beneficial, in the short term, to the interests of the stockholders.
For example, the Charter provides that certain significant corporate actions
must be approved by more than 80% of the members of the Company's Board of
Directors and for certain limitations on the calling of a special meeting of
stockholders, and the Bylaws require advance notice of stockholder proposals and
nominations of directors. The Company also is subject to provisions of Delaware
corporation law that prohibit a publicly-held Delaware corporation from engaging
in a broad range of business combinations with a person who, together with
affiliates and associates, owns 15% or more of the corporation's common stock
(an "interested stockholder") for three years after the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Those provisions could discourage or make more difficult a
merger, tender offer or similar transaction, even if favorable to the Company's
stockholders. See "Description of Capital Stock."
10
<PAGE> 13
Authorized Preferred and Common Stock. Pursuant to the Charter, shares of
preferred stock and Common Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate transactions, could have the effect of
making it more difficult for a third party to acquire, or effectively preventing
a third party from acquiring, a majority of the outstanding voting stock of the
Company. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-law Provisions."
Shares Eligible for Future Sale; Registration Rights. Upon the completion
of this Offering, there will be 7,149,200 shares of Common Stock outstanding. In
addition, up to 4,956,764 shares of Common Stock will be immediately issuable
upon the exercise of outstanding options or warrants and the conversion of
outstanding preferred stock and debt securities. The Company, the Company's
directors and executive officers and certain stockholders of the Company have
agreed, subject to certain exceptions, not to sell any shares of Common Stock or
securities convertible into Common Stock for a period of 180 days following the
date of the final Prospectus without the prior written consent of the
Representatives of the Underwriters. Certain of the Selling Stockholders have
agreed, subject to certain exceptions, not to sell any shares of Common Stock or
securities convertible into Common Stock for a period of 90 days following the
date of the final Prospectus without the prior written consent of the
Representatives of the Underwriters. Approximately 14.6% of the outstanding
shares upon the completion of this Offering will be subject to the 90-day
lock-up provisions (14.0% if the over-allotment option is exercised in full) and
20.6% of the outstanding shares upon the completion of this Offering will be
subject to the 180-day lock-up provisions (16.4% if the over-allotment option is
exercised in full). Sales, or the possibility of sales, of Common Stock by the
Company's existing stockholders, whether in connection with the exercise of
registration rights or otherwise, could adversely affect the market price of the
Company's Common Stock. The Shareholders' Agreement grants the parties thereto
rights of first refusal and co-sale rights upon certain transfers of shares of
Common Stock. See "Certain Transactions -- Shareholders' Agreement."
Restrictions on the Payment of Dividends. The Company currently intends to
retain its earnings to finance the growth and development of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future dividend payments will depend upon the financial condition,
funding requirements and earnings of the Company as well as other factors that
the Board of Directors may deem relevant, including any contractual or statutory
restrictions on the Company's ability to pay dividends. See "Common Stock Price
Range and Dividend Policy."
Forward-Looking Information May Prove Inaccurate. This Prospectus contains
various forward-looking statements and information that are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used in this document, the words "expect,"
"anticipate," "estimate," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions including those identified above. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. In addition to the other risk factors set
forth above, among the key factors that may have a direct bearing on the
Company's results are competitive practices in the toy and decorative holiday
products industries generally and particularly in the Company's principal
markets, the ability of the Company to meet existing financial obligations in
the event of adverse industry or economic conditions or to obtain additional
capital to fund future commitments and expansion, the Company's relationship
with employees and the impact of current and future laws and governmental
regulations affecting the toy industry and the Company's operations.
11
<PAGE> 14
RECENT EVENTS
The Company has been a toy manufacturer for approximately 40 years. Until
the 1980s, the Company's primary line of business was the design and manufacture
of toys. In the 1980s, the Company diversified into other non-related industries
such as food products. During this period, Maurice Halperin and certain members
of his family owned over 90% of Empire and acted as executive management of the
Company. In 1993, Empire sold its food businesses, and since mid-1994, the
Company has undergone a change of control and management, established a new
business strategy, and effected two acquisitions which have added established
core toy product lines to the Company's business.
In the third quarter of 1994, current principal stockholders led by Steven
Geller, the Company's current Chairman and Chief Executive Officer, obtained a
controlling interest in Empire (the "Change of Control") as a base from which to
build a diversified toy and plastic products manufacturing company. Empire's
core products included non-powered ride-ons such as the Big Wheel(R) and plastic
decorative holiday products. The Change of Control was effected through (i) the
redemption by the Company of approximately 11.8 million shares of Common Stock
from Maurice A. Halperin, the former Chairman of the Board of the Company, Barry
S. Halperin, the former President of the Company, Carol A. Minkin, a former
director of the Company, Halco Industries, Inc. ("Halco") and certain other
members of the Halperin family (collectively, the "Halperin Group") at a price
of $6.50 per share, (ii) the purchase by Steven Geller of 500,000 shares of
Common Stock from the Halperin Group for $6.50 per share, (iii) the acquisition
by Steven Geller of an option to purchase up to 500,000 shares of Common Stock
from Halco at prices between $6.50 and $7.78 per share over a three-year period,
and (iv) the acquisition by Steven Geller of the right to vote Halco's remaining
shares of Common Stock. This transaction was principally financed with excess
cash generated by the Company's 1993 sale of its food businesses and a $15
million loan from Maurice Halperin to the Company (the "Halperin Loan"). The
Halperin Loan was repaid upon the issuance by the Company of $15 million of 9%
convertible subordinated debentures to affiliates of WPG. Empire had generated
net sales of approximately $41 million in 1993. See "Certain Transactions --
Geller Transaction and Related Matters" and "-- The WPG Group Investment."
In October 1994, in connection with the Change of Control, Empire acquired
Marchon, a toy designer, marketer and manufacturer founded and managed by Marvin
Smollar, the current President and Chief Operating Officer of the Company for a
total consideration of approximately $13.1 million in Common Stock, cash and
notes. Marchon's principal products included Grand Champions(R) horses and
Crocodile Mile(R) water slides and it had net sales of approximately $33 million
in 1993. Marchon also had substantial experience at sourcing toy products
manufactured in the Far East. See "Certain Transactions -- The Marchon
Transaction."
In July 1995, Empire purchased the toy assets and assumed certain
liabilities of Buddy L Inc., debtor-in-possession and wholly-owned subsidiary of
SLM International, Inc., and its Hong Kong subsidiary for total consideration of
approximately $31 million in Common Stock, cash and notes plus contingent future
payments under a five-year earnout. Buddy L's line of toy vehicles is one of the
oldest toy brands in America. Prior to its acquisition by the Company, the Buddy
L business generated net sales of approximately $119 million in 1994. See
"Certain Transactions -- The Buddy L Transaction."
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<PAGE> 15
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol EMP. The following table sets forth, for the fiscal quarters
indicated, the high and low sale prices for the Common Stock on the American
Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994:
First Quarter............................................................. $ 6.88 $ 6.00
Second Quarter............................................................ 6.50 5.63
Third Quarter............................................................. 6.88 5.38
Fourth Quarter............................................................ 6.75 5.75
1995:
First Quarter............................................................. $12.88 $ 6.50
Second Quarter............................................................ 12.13 8.50
Third Quarter............................................................. 11.50 7.88
Fourth Quarter............................................................ 9.75 6.00
1996:
First Quarter............................................................. $12.25 $ 6.88
Second Quarter (through June 14, 1996).................................... 15.00 11.88
</TABLE>
On June 14, 1996, the closing sale price for the Common Stock on the
American Stock Exchange was $14.88 per share. As of June 14, 1996, the Company
had 5,205,200 shares of Common Stock outstanding held by approximately 2,000
stockholders of record.
The Company has not paid any cash dividends since 1990 and does not
anticipate paying cash dividends in the foreseeable future. The Company's
current policy is to retain earnings to provide funds for the operation and
expansion of its business and for the repayment of indebtedness. Any
determination in the future to pay dividends will depend upon the Company's
financial condition, capital requirements, results of operations and other
factors deemed relevant by the Company's Board of Directors, including any
contractual or statutory restrictions on the Company's ability to pay dividends.
The Company is not permitted to pay any dividends on its Common Stock without
the consent of the holders of a majority of the senior subordinated notes (which
notes will be retired with a portion of the net proceeds to the Company from
this Offering.) 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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company (including proceeds to the Company upon the exercise by
certain Selling Stockholders of stock options and warrants to acquire 444,000
shares of Common Stock) are estimated to be approximately $23.7 million after
deducting the underwriting discount and estimated offering expenses payable by
the Company, based upon an assumed public offering price of $14.88 per share.
The Company intends to use the net proceeds to prepay in full certain senior
subordinated notes bearing interest at a rate of 12% per annum which were issued
in connection with the acquisition of Buddy L. The Company estimates that
approximately $8.3 million will be required to prepay such notes at 110% of
their original principal amount. Approximately $6.2 million of such amount will
be used to prepay senior subordinated notes held by American Bankers Insurance
Company of Florida (which Eugene Matalene, a director of the Company, serves as
a director of) and one of its affiliates, Mr. Matalene, Mr. Geller and certain
affiliates of WPG. Approximately $7.5 million of the remaining net proceeds will
be used to repay bank debt under the Company's bank facility, currently bearing
interest at a rate of 9.25%, and the balance will be used for general corporate
purposes. The Company will not receive any of the proceeds from the sale of
Common Stock by the Selling Stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Transactions -- The Buddy L Transaction."
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<PAGE> 16
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
March 31, 1996 and as adjusted to reflect (i) the sale by the Company of
1,500,000 shares of Common Stock offered hereby (at an assumed public offering
price of $14.88 per share) and the application of the estimated net proceeds
therefrom to repay certain indebtedness as described in "Use of Proceeds," (ii)
the exercise by certain Selling Stockholders of stock options and warrants to
purchase an aggregate of 444,000 shares of Common Stock concurrently with this
Offering and (iii) the establishment of the Company's new bank credit facility
in May 1996 and the application of initial borrowings thereunder to repay
short-term bank indebtedness existing at March 31, 1996. See "Use of Proceeds"
and "Principal and Selling Stockholders."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt......................................................... $46,510 $31,277
======= =======
Long-term debt:
Convertible subordinated debentures................................... 13,923 13,923
Senior subordinated notes............................................. 8,148 --
Bank facility......................................................... -- 9,280
------- -------
Total long-term debt............................................... 22,071 23,203
------- -------
Stockholders' equity:
Common stock, par value $.10 per share; 30,000,000 shares authorized;
5,205,200 shares issued and outstanding, actual; 7,149,200 shares
issued and outstanding, as adjusted(1)............................. 521 715
Preferred stock, par value $.01 per share; 5,000,000 shares
authorized; 442,264 shares of Series A cumulative convertible
preferred stock authorized, issued and outstanding, actual and as
adjusted........................................................... 4 4
Additional paid-in capital............................................ 33,256 56,733
Retained earnings (deficit)........................................... (4,815) (4,815)
Stockholders' loans................................................... (595) (595)
------- -------
Total stockholders' equity......................................... 28,371 52,042
------- -------
Total capitalization............................................. $50,442 $75,245
======= =======
</TABLE>
- ------------------------------
(1) Includes an aggregate of 444,000 shares of Common Stock to be issued upon
the exercise by certain Selling Stockholders of stock options and warrants
concurrently with this Offering, but does not include an aggregate of
6,761,324 shares (758,000 of which are subject to warrants which will lapse
upon the application of the net proceeds to the Company from this Offering)
comprised of (i) 1,397,500 shares issuable upon the exercise of stock
options outstanding on the date of this Prospectus, (ii) 1,875,000 shares
issuable upon the exercise of warrants outstanding on the date of this
Prospectus, of which warrants for the purchase of 758,000 shares will lapse
upon the application of the net proceeds to the Company from this Offering
as described in "Use of Proceeds," (iii) 442,264 shares issuable upon the
conversion of the Series A cumulative convertible preferred stock upon the
affirmative vote of a majority of the shares represented at the Company's
1996 Annual Meeting of Stockholders, (iv) 2,000,000 shares issuable upon the
conversion of the convertible subordinated debentures, (v) up to 454,000
shares which may be issuable as a contingent payment obligation in
connection with the Buddy L acquisition in certain circumstances and (vi)
592,560 shares available for future grants under the Company's 1994 Employee
Stock Option Plan. See "Use of Proceeds" and "Certain Transactions."
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial information for the
Company for the periods and at the dates indicated. The selected statement of
operations and balance sheet data, at or for each of the full fiscal years
presented below was derived from the consolidated financial statements of the
Company, which were audited by Deloitte & Touche LLP, independent auditors. The
selected financial data for the three months ended March 31, 1995 and 1996 are
derived from consolidated financial statements that have not been audited. In
the opinion of management, the unaudited consolidated financial data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the consolidated financial position and results of
operations for that period. The results of operations for the three months ended
March 31, 1995 and 1996 are not necessarily indicative of the results of
operations for a full fiscal year. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the audited consolidated financial statements, including
the notes thereto, and other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------- -------------------
1991(1)(2) 1992(1)(2) 1993(2) 1994(3) 1995(4) 1995 1996
---------- ---------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 41,253 $ 42,882 $ 41,354 $57,964 $153,744 $19,088 $ 22,186
Cost of sales......................... 27,317 29,443 29,733 40,557 111,905 12,937 16,217
-------- -------- -------- ------- -------- ------- --------
Gross profit.......................... 13,936 13,439 11,621 17,407 41,839 6,151 5,969
Selling and administrative............ 12,953 12,172 15,086 16,442 36,183 6,804 7,298
Nonrecurring restructuring and
relocation charges.................. -- -- -- -- 7,550 150 --
-------- -------- -------- ------- -------- ------- --------
Operating income (loss)............... 983 1,267 (3,465) 965 (1,894) (803) (1,329)
Interest expense...................... 13,549 10,314 2,937 1,407 5,996 667 2,132
Other income (expense)................ 3,147 2,713 5,952 1,839 514 54 13
-------- -------- -------- ------- -------- ------- --------
Income (loss) from continuing
operations before income taxes,
extraordinary items and cumulative
effect of an accounting change...... (9,419) (6,334) (450) 1,397 (7,376) (1,416) (3,448)
Income tax expense (benefit).......... (3,101) (3,638) 1,066 808 (2,875) (410) (1,292)
-------- -------- -------- ------- -------- ------- --------
After-tax income (loss) from
continuing operations before
extraordinary items and cumulative
effect of an accounting change...... (6,318) (2,696) (1,516) 589 (4,501) (1,006) (2,156)
Income from discontinued operations,
net of tax.......................... 13,497 15,340 25,729 -- -- -- --
Extraordinary items................... 1,577 (1,546) -- -- -- -- --
-------- -------- -------- ------- -------- ------- --------
Net income (loss)..................... $ 8,756 $ 11,098 $ 24,327 $ 589 $ (4,501) $(1,006) $ (2,156)
======== ======== ======== ======= ======== ======= ========
Weighted average common shares
outstanding -- primary(5)(6)........ 10,536 10,537 14,670 12,159 4,681 4,191 5,201
Income (loss) per common share from
continuing operations --
primary(5)(6)....................... $ (.60) $ (.26) $ (.10) $ .05 $ (.96) $ (.24) $ (.41)
======== ======== ======== ======= ======== ======= ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................... $113,406 $ 84,377 $ 92,871 $8,915 $ 6,837 $ 8,712 5,978
Total assets.......................... 142,217 104,583 123,240 67,956 140,153 72,503 127,467
Total debt............................ 77,361 34,842 9,001 22,249 71,016 26,574 68,581
Stockholders' equity.................. 45,127 54,532 98,419 20,577 30,462 19,740 28,371
</TABLE>
- ------------------------------
(1) Prior to 1992, the Company owned a minority interest in The Deltona
Corporation, a real estate development corporation based in Florida. Income
from continuing operations includes equity loss of The Deltona Corporation
for 1991 of $1,613. Income from continuing operations for 1992 includes the
gain on sale of common stock of, and notes receivable from, The Deltona
Corporation of $2,000.
(2) On October 6, 1992, the Company sold all of the stock of Wilbur Chocolate
Co., Inc. In February 1993, the Company sold the assets used in the
businesses of The Isaly Klondike Company and Popsicle Industries, Inc. These
businesses had been acquired in 1989. As a result of the sale of these
businesses, the results of operations and gains on sale from Wilbur, Isaly
Klondike, and Popsicle have been included in income from discontinued
operations. See Note 15 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) The results of operations for 1994 reflect the results of operations of
Marchon since its acquisition by the Company on October 13, 1994. See Note 3
of Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) The results of operations for 1995 reflect the results of operations of
Buddy L since its acquisition by the Company on July 7, 1995. See Notes 3
and 14 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Fully diluted income (loss) per common share from continuing operations was
$(.28), $(.06), $(.07), $.05 and $(.96), respectively, during the five years
ending December 31, 1995 based on weighted average shares outstanding of
16,296, 16,297, 16,295, 12,159 and 4,681 respectively. Fully diluted loss
per common share from continuing operations was $(.24) and $(.41) for the
three month period ended March 31,1995 and 1996, respectively, based on
weighted average shares outstanding of 4,191 and 5,201, respectively. During
September 1994, the Company repurchased approximately 11,800 shares in a
treasury stock transaction. Weighted average shares outstanding in 1995
reflects 454 shares which may be issuable as a contingent payment obligation
with respect to the acquisition of Buddy L in July 1995. See Notes 2, 3 and
11 of Notes to Consolidated Financial Statements.
(6) Supplementary loss per share, assuming that the net proceeds to the Company
from this Offering (based on an assumed public offering price per share of
$14.88) were used to prepay in full the senior subordinated notes with the
remaining net proceeds utilized to repay short-term bank debt, were $(.45)
and $(.27) for the year ended December 31, 1995 and the quarter ended March
31, 1996, respectively. Such supplementary loss per share assume that the
transaction occurred as of the beginning of the respective period.
Weighted-average shares outstanding for purposes of this computation are
6,625 and 7,145, respectively.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated results
of operations and consolidated financial position should be read in conjunction
with the Selected Consolidated Financial Data and the Company's consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus.
GENERAL
The Company designs, manufactures and markets a broad variety of toys and
plastic decorative holiday products. The Company has been involved in the toy
industry for approximately 40 years, and in the 1980s the Company diversified
into non-related industries such as food products. In 1993, the Company sold its
food businesses, and since mid-1994, the Company has undergone a change of
control and management, established a new business strategy, and effected two
significant acquisitions. See "Recent Events."
During the third quarter of 1994, current principal stockholders of the
Company, led by Steven Geller, the current Chairman and Chief Executive Officer
of the Company, acquired control of Empire. In October 1994, Empire acquired
Marchon, a toy designer, marketer and manufacturer founded and managed by Marvin
Smollar, the current President and Chief Operating Officer of the Company, for
total consideration of approximately $13.1 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 $30.8 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. See "Certain Transactions."
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 to 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.
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.
16
<PAGE> 19
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
The results of operations for the three months ended March 31, 1996
reflects the impact of the Buddy L acquisition (which acquisition occurred on
July 7, 1995).
Net sales for the three months ended March 31, 1996 increased by 16% to
$22.2 million from $19.1 million for the three months ended March 31, 1995. The
increase in sales was due primarily to the acquisition of the Buddy L(R) line of
products in July 1995, sales of new products, and an increase in holiday product
sales.
The net loss for the quarter ended March 31, 1996 increased to $2.2 million
from $1.0 million for the quarter ended March 31, 1995. The increase in the net
loss was due primarily to higher selling and administrative ("S&A") expenses and
higher interest expense, partially offset by the resulting income tax benefit.
Toy sales increased $1.8 million to $18.3 million for the three months
ended March 31, 1996 from $16.5 million for the three months ended March 31,
1995. The increase was primarily due to approximately $9.1 million of sales from
acquired Buddy L(R) toy lines, increased sales of new products such as Big
Wheelie(TM), and increased sales of ride-on products. This increase was
partially offset by decreased sales of other products, including the virtual
elimination of Power Ranger(TM) sales, which were approximately $7.1 million
during the first quarter of 1995, due to the Company's decision to de-emphasize
production of these products.
The Company's sales of holiday products increased 49% to $3.9 million for
the three months ended March 31, 1996 from $2.6 million for the three months
ended March 31, 1995 due to increased sales volume in the Easter product
category.
Gross profit margins were lower for the three months ended March 31, 1996
as compared to the three months ended March 31, 1995, due to loss of Power
Ranger(TM) sales, which products sold at higher margins than the Company's
existing lines. However, the impact of the loss of the Power Ranger(TM) sales on
operating income for the quarter ended March 31, 1996 was reduced by the
corresponding decrease in royalties on the sales of Power Ranger(TM) products.
For the quarter ended March 31, 1996, royalties which are included in selling
expenses, were approximately 1% of sales as compared to approximately 6% of
sales for the quarter ended March 31, 1995.
Despite lower royalty expense, S&A expenses were higher for the three
months ended March 31, 1996 as compared to the three months ended March 31, 1995
primarily due to the continuing integration of Buddy L, including certain
duplicate facilities costs of approximately $493,000, and the incremental cost
of approximately $567,000 for staffing of four strategic business units
("SBUs"). SBU's are accountable for the sales and marketing for specific product
categories: ride-ons, outdoor activities and games, girls and boys toys and
holiday products. S&A expenses for the three months ended March 31, 1996 reflect
the reversal of approximately $600,000 of certain indemnification reserves due
to the expiration of certain time limitations and the reversal of $200,000 of
environmental reserves. Excluding the impact of the reversal of the
indemnification reserves, S&A expenses were approximately 36% of sales for the
three months ended March 31, 1996 as compared to 36% of sales for the three
months ended March 31, 1995.
In the toy segment, the operating loss was $1.2 million for the quarter
ended March 31, 1996 as compared to an operating loss of $484,000 for the
quarter ended March 31, 1995. The increase in operating loss was due primarily
to higher S&A expenses.
In the holiday product segment, operating loss was $122,000 for the quarter
ended March 31, 1996 as compared to an operating loss of $169,000 for the
quarter ended March 31, 1995. The decrease in operating loss was due to higher
sales and gross profit margins.
Nonrecurring restructuring and relocation charges were $150,000 for the
quarter ended March 31, 1995 and related primarily to establishment of corporate
headquarters in Delray Beach, Florida.
Interest expense was $2.1 million for the three months ended March 31, 1996
as compared to $667,000 for the three months ended March 31, 1995. Interest
expense was approximately $437,000 higher due to the
17
<PAGE> 20
issuance of $7.6 million of senior subordinated notes during the third quarter
of 1995 to finance the Buddy L acquisition, and approximately $815,000 higher
due to higher balances of the Company's revolving credit lines resulting from
increased sales, inventory, and accounts receivable levels.
The tax benefit for the three months ended March 31, 1996 and the three
months ended March 31, 1995 approximates the federal statutory rate net of
certain nondeductible expenses, primarily amortization of goodwill.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The results of operations for 1995 reflects the impact of the Marchon
acquisition for the full year of 1995 (which acquisition occurred on October 13,
1994) and the impact of the Buddy L acquisition for the second half of the year
(which acquisition occurred on July 7, 1995).
Net sales for the year ended December 31, 1995 increased to $153.7 million
from $58.0 million for the year ended December 31, 1994. Unaudited pro forma net
sales (assuming Buddy L had been acquired on January 1, 1995) for the full year
1995 would have been $187.2 million. 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 17% and 14% of the Company's
sales for the years ended December 31, 1994 and 1995, respectively, were from
products licensed under the Power Rangers(TM) license, assuming the inclusion of
Marchon's net sales for the full year of 1994, on an unaudited pro forma basis.
The Company deemphasized production of these products in 1995 based on its
belief that the popularity level of these toys was not sustainable.
The net loss for the year ended December 31, 1995 was $4.5 million as
compared to net income of $589,000 for the year ended December 31, 1994. The net
loss for the year ended December 31, 1995 is due primarily to $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 were 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) to
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).
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 $2.9 million, and an increase in royalty
expense of $2.9 million resulting primarily from sales of Power Rangers(TM)
licensed products in the toy segment. Advertising expenses
18
<PAGE> 21
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 $900,000 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 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 $58.0 million for the year
ended December 31, 1994 as compared to $41.4 million for the year ended December
31, 1993. For 1994, sales for the toy segment increased 56%. 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 Marchon full year 1994 sales were from
products which incorporated the Power Ranger(TM) license.
The Company's sales of holiday products increased from 1993 to 1994 by $4.8
million or approximately 24% because of increased sales volume in all major
categories of its holiday products segment -- Christmas, Halloween and Easter.
19
<PAGE> 22
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.
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.
20
<PAGE> 23
The following table sets forth summary unaudited financial information of
the Company for each quarter in 1994 and 1995 and the first quarter of 1996.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or for any future period and there can
be no assurance that any trend reflected in such results will continue in the
future:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------------- ---------------------------------------- -------
Q1 Q2 Q3 Q4(1) Q1 Q2 Q3(2) Q4 Q1
------ ------ ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $6,740 $4,677 $19,966 $26,581 $19,088 $19,631 $53,621 $61,404 $22,186
Gross profit......... 1,372 995 6,324 8,716 6,151 6,692 13,975 15,021 5,969
Selling and
administrative..... 2,214 2,451 3,691 8,086 6,804 7,612 10,952 9,692 7,298
Nonrecurring
restructuring and
relocation
charges............ -- -- -- -- (150) (409) (1,177) (6,937) --
Net income (loss).... $ (47) $ (598) $ 1,960 $ (726) $(1,006) $(1,262) $ 53 $(2,286) $(2,156)
</TABLE>
- ------------------------------
(1) During the fourth quarter of 1994, the Company acquired Marchon. See Note 3
of Notes to Consolidated Financial Statements.
(2) During the third quarter of 1995, the Company acquired Buddy L. See Note 3
of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's shipments of its toys produced in
the United States are sold with seasonal dating terms. Payments on sales of the
Company's spring toy product lines produced domestically are generally due June
10th and payments on sales of its fall products are generally due December 10th.
Goods sourced in the Far East are primarily sold under bank letters of credit,
with most payments received within 30 days of shipment. A substantial portion of
the Company's shipments of holiday products are made on terms that permit
payment more than 90 days after shipment of merchandise. Such shipments are
generally made after June and require payment by December 10 of the year in
which shipment is made.
Due to the seasonality of its revenues, the Company's working capital
requirements fluctuate significantly during the year. The Company's seasonal
financing requirements are highest during the fourth quarter and lowest during
the first quarter.
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 $51 million of borrowings were outstanding under the new
bank facility and an additional $5 million of borrowings were available
thereunder.
The liquidity and capital resources of the Company reflect the July 7, 1995
acquisition of the toy business assets of Buddy L for a cash outlay of $20.1
million, funded in part through the issuance of $7.6 million principal amount of
three-year senior subordinated notes and the issuance of preferred and common
stock. See "Certain Transactions -- The Buddy L Transaction." The Company
intends to exercise its option to redeem all of the senior subordinated notes on
July 7, 1996 (for 110% of the original principal amount) and thereby retire the
related warrants to purchase common stock. 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
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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.
Capital expenditures, principally the purchase of tooling for new products,
were $970,000 for the first quarter of 1996 as compared to $1.1 million for the
first quarter of 1995. Subsequent to March 31, 1996, the Company entered into an
operating lease with a commencement date of June 15, 1996 for new molding
machines having monthly lease payments of $25,000 for 120 months.
Capital expenditures, principally the purchase of tooling for new products,
were $5.8 million for the year ended December 31, 1995. Capital expenditures for
the year ended December 31, 1994 were $4.5 million and related principally to
warehouse expansion. The Company's capital budget for 1996 provides for
expenditures of approximately $7.5 million to acquire new equipment and tooling
and generally upgrade the Tarboro, North Carolina manufacturing facility.
During the first quarter of 1995, the Company sold marketable securities
for net proceeds of $2.1 million.
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 is subject to various actions and proceedings, including those
relating to the Change of Control, intellectual property matters, environmental
matters and product liability matters. See "Business -- 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 this
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
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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.
BACKLOG
The Company had open orders for toys of $17.2 million and $14.4 million as
of December 31, 1994 and December 31, 1995, respectively. Backlog at December
31, 1994 did not include orders for product lines acquired from Buddy L. Backlog
at December 31, 1994 included $9.5 million of orders for Mighty Morphin Power
Ranger(TM) products. Open orders at December 31, 1995 mainly reflected orders
for pool products and water slides and did not include orders for fall toy
product lines. The Company believes that because order patterns in the retail
industry vary from time to time, open orders on any date in a given year are not
a meaningful indication of the future sales.
The Company had open orders of $2.4 million and $4.6 million as of December
31, 1994 and 1995, respectively, for holiday products. Open orders consisted
primarily of sales of Easter products. Due to the seasonal nature of this
segment, management believes that the amount of open orders at December 31 in
any year is not a meaningful indication of future sales.
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BUSINESS
GENERAL
Empire of Carolina, Inc. designs, manufactures and markets a broad variety
of toys and plastic decorative holiday products. The Company manages its
business through four strategic business units ("SBUs") which are accountable
for specific product categories: (i) ride-on products including Big Wheel(R) and
Power Driver(R) brands; (ii) outdoor activities and games such as Snow Works(TM)
winter sleds and Water Works(TM) water slides and pools (including Crocodile
Mile(R) water slides); (iii) girls and boys toys featuring Buddy L(R) cars,
trucks and other vehicles and Grand Champions(R) collectible horses; and (iv)
holiday products featuring plastic decorative holiday display items, including
the recently introduced Light Toppers(TM) outdoor lighting add-ons. The Company
believes that it is the market share leader in non-powered ride-ons and in
plastic water slides, winter sleds, collectible horses and outdoor decorative
holiday products.
Empire has been a toy manufacturer for approximately 40 years. The
Company's business experienced significant change in 1993 when substantial
non-toy operations were sold, and since mid-1994 the Company has undergone a
change of control and management, established a new business strategy, and
effected two acquisitions which added established core toy product lines to the
Company's business. Following the divestitures of non-toy businesses, Empire's
operations were focused on its toy business, including the Big Wheel(R)
non-powered ride-on product line which has been sold throughout the United
States since 1970, and its plastic decorative holiday products business. In the
third quarter of 1994, current principal stockholders of the Company, led by
Steven Geller, the current Chairman and Chief Executive Officer of the Company,
acquired control of Empire as a base from which to build a diversified toy and
plastic products manufacturing company. In October 1994, Empire acquired
Marchon, a toy designer, marketer and manufacturer founded and managed by Marvin
Smollar, the current President and Chief Operating Officer of the Company.
Marchon's core toy products included Grand Champions(R) collectible horses and
Crocodile Mile(R) water slides. In July 1995, Empire acquired the toy business
and certain related liabilities of Buddy L Inc., one of the oldest toy brands in
the United States whose core toy products included plastic and metal toy cars,
trucks and other vehicles and battery-operated ride-ons.
As a result of these recent transactions, the Company believes it is
well-positioned to become a leading U.S. toy manufacturer. The Company's net
sales were $41.4 million, $58.0 million and $153.7 million, respectively, for
the years ended December 31, 1993, 1994 and 1995. The Company's toy business net
sales were $21.1 million, $33.0 million and $121.6 million, respectively, for
the years ended December 31, 1993, 1994, and 1995, and contributed 51%, 57% and
79%, respectively, of the Company's consolidated net sales. On an unaudited pro
forma basis, 1995 toy sales of the Company, including Buddy L's sales for all of
1995, would have been $155.0 million, or 83% of unaudited pro forma combined
sales. In addition, net sales of decorative holiday products were $20.2 million,
$25.0 million and $32.2 million, respectively, for the years ended December 31,
1993, 1994, and 1995, and contributed approximately 49% of the Company's
consolidated net sales in 1993, 43% in 1994 and 21% in 1995. See Note 13 of
Notes to Consolidated Financial Statements.
The Company's goal is to become a leading supplier of toy and plastic
decorative holiday products to retailers throughout the world. As a result of
the recent transactions, the Company believes it has the following distinct
competitive advantages:
Experienced Management Team. With one exception, all of the Company's
senior management has joined the Company since July 1994. The Company's
management team has extensive experience in the toy industry, and most have
experience at leading toy companies. Steven Geller began his career in the
toy industry in 1962, is the former president of Arco Toys, Inc. and, after
its acquisition by Mattel, served as a member of Mattel's senior management
executive committee. Marvin Smollar founded Marchon in 1984, and developed
its business to approximately $33 million (1993 net sales) prior to its
acquisition by the Company in 1994.
Stable Core Products with Long History of Broad Consumer
Appeal. Empire, Marchon and Buddy L have produced a number of core product
lines consisting of toys and seasonal items which have gained wide product
acceptance over the years. The Company's branded products, including Big
Wheel(R)
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ride-ons, Buddy L(R) vehicles, Grand Champions(R) horses and Crocodile
Mile(R) water slides, are perennial favorites. The majority of the
Company's net sales is from stable products which have long histories of
consumer appeal.
Substantial Domestic Manufacturing and International Sourcing
Capabilities. The Company owns and operates a 1.2 million square foot
manufacturing facility in Tarboro, North Carolina which management believes
is one of the largest plastic toy manufacturing facilities in the United
States and offers one of the broadest ranges of plastic manufacturing
capabilities, including extrusion, vacuum, blow, injection and rotation
plastic molding processes, as well as assembly, sealing and warehousing
operations. The Tarboro facility enables the Company to manufacture large
products at a domestic location, and has substantial additional capacity
during off-peak production periods. In addition, the Company has
considerable experience sourcing products through the Far East. The
Company's balanced manufacturing capabilities enable it to source or
manufacture products domestically or internationally depending on a number
of factors including lead time and shipping and labor costs.
Holiday Product Line. Empire's decorative holiday products have broad
appeal to American families and have provided the Company with a stable
source of revenue. Production of holiday products uses substantially the
same raw materials, equipment, personnel and skills as the Company's toy
business. Holiday products can be manufactured throughout the year in
anticipation of seasonal demand, enabling the Company to schedule
production during off-peak production periods. Holiday products reduce the
Company's dependence on major toy retailers by utilizing different channels
of distribution, such as home improvement and lawn and garden chains.
Strong Relations with Many of the Largest Toy Retailers in the
U.S. Due to the successful history of many of its product lines and its
experienced executives, Empire has strong relations with many of the
largest U.S. toy retailers. Members of management have worked with these
retailers throughout their careers. Since retailers seek a steady supply of
high-quality, appealing, price competitive products and reduced dependence
on single or limited source suppliers, the toy retail industry benefits by
having strong suppliers like Empire, in addition to the largest toy
companies such as Mattel, Hasbro and Tyco.
In order to exploit the available market opportunities in each of the
Company's four major product categories, the Company's products are managed
through four SBUs, each of which has a general manager accountable for its
discrete product lines. SBUs operate across functional lines within the Company
to facilitate the design, development, marketing and manufacturing of products.
The SBU manager is supported by a direct team of employees as well as support
services from other departments, including product development, sales and
manufacturing. Management believes that the SBUs create a highly focused,
entrepreneurial environment within the Company, and enable each SBU to tailor
its products and services to the needs of major customers and to respond quickly
and efficiently to changes in the competitive environment.
INDUSTRY
The Toy Industry
According to the Toy Manufacturers of America, Inc. ("TMA"), an industry
trade group, total domestic shipments of toys, excluding video games and
accessories, were approximately $13.4 billion in 1995. According to the TMA, the
United States is the world's largest toy market, followed by Japan and Western
Europe. The Company estimates that the three largest U.S. toy companies, Mattel,
Hasbro and Tyco, collectively represented less than half of total domestic toy
shipments in 1995. In addition, hundreds of smaller companies compete in the
design and development of new toys, the procurement of licenses, the improvement
and expansion of previously introduced products and product lines and the
marketing and distribution of toy products.
Many factors influence the success of a given toy or product line including
attractive product design, play value, pricing, marketing, in-store exposure and
product availability. While the success of some toy categories varies from year
to year, other categories generally perform well from year to year. The
perennial best sellers,
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which form the backbone of the toy business, are referred to as "core" or
"staple" toys. Less enduring products with relatively short life cycles are
referred to as "fad" or "promotional" items. Along with providing opportunities
for fun and learning, toys traditionally mirror scientific progress, changes in
social attitudes and topical customs and values from the adult world. Many of
the toys which garner the most attention reflect the latest technological
advances, incorporate characters made popular in other mediums or are innovative
extensions of core products.
Toy production is a labor intensive process requiring molding and shaping
or cutting and sewing, coloring, painting or detailing, assembling, inspecting,
packaging and warehousing. Management believes that the substantial majority of
the toys sold in the U.S. are manufactured, either in whole or in part, overseas
where labor rates are comparatively low. The largest foreign producer markets
are China and, to a lesser extent, other countries in the Far East. Most foreign
production is performed by independent contractors who utilize tools, molds and
designs provided by U.S. toy companies and who manufacture products under
exclusive contracts. While foreign manufacturing operations generally have
relatively inexpensive labor costs, such operations require greater lead times
than domestic manufacturing and also result in greater shipping costs,
particularly for larger toys. The design, production and sale of toy products in
the U.S. are subject to various regulations. See "Business -- Regulation."
Toy manufacturers sell their products either directly to retailers, or to
wholesalers who carry the product lines of many manufacturers. There are nearly
74,000 retail outlets in the United States which sell toys and games. These
outlets include small, independent toy stores, large toy specialty retailers;
general merchandise discount chains; department, drug and variety stores; gift
and novelty shops; price clubs and mail order catalogues. Despite the broad
number of toy outlets, retail toy sales have become increasingly concentrated
through a small number of large chains, such as Toys "R" Us, Inc. ("Toys "R"
Us"), Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart Corporation ("Kmart") and Target
Stores, Inc., a division of Dayton-Hudson Corp. ("Target"), which generally
feature a large selection of toys, some at discount prices, and seek to maintain
lean inventories to reduce their own inventory risk. This concentration has
tended to favor larger manufacturers who are able to offer these retail chains
broader product offerings, higher levels of advertising and marketing support
and consistent product support through electronic data interchange and
just-in-time delivery programs. The Company believes that the leading toy
retailers desire to have a greater number of toy suppliers which offer a variety
of quality, branded product lines and which have the financial strength to
support the retailers' product distribution requirements.
While toys are sold year round, toy industry retail sales are heavily
weighted toward the fourth quarter when many toys are purchased as holiday
gifts. Each calendar year begins with a major international toy fair held in
Hong Kong in the first week in January. This trade show is expanded and repeated
in New York in the middle of February. The toy fairs allow manufacturers to
display their current lines and begin the process of generating purchase orders
for the important holiday season. Due to the seasonality and long lead times
required for foreign production, retailer buying activity tends to significantly
lead production and shipment. See "Management's Discussion of Financial
Condition and Results of Operations -- Seasonality and Quarterly Results."
Licensing is a major influence on the toy industry affecting virtually all
product categories. Licensing is the business of leasing the right to use a
legally protected name, graphic, logo, saying or likeness in conjunction with a
product, promotion or service. Licensing is usually accomplished by a formal
agreement between the owner or agent of the licensed property (the licensor) and
the prospective licensee and typically defines the limits of the license, the
standards to be maintained and the compensation (royalties) to be paid the
licensee.
Plastic Decorative Holiday Products Industry
Plastic decorative holiday products, such as Santa Clauses, snowmen,
pumpkins, and Easter baskets, and lighted home and lawn decorative items,
generally are sold through retail outlets including mass merchants and home
improvement and lawn and garden chains. While the decorative holiday products
industry is generally highly fragmented with no dominant market leader, the
Company believes that it has a leading market position in several of the product
categories in which it participates. The Company is not aware of any
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other major manufacturer with a significant market share in most of the product
categories in which the Company participates.
GROWTH STRATEGY
The Company's goal is to become a major supplier of toys and related items
to retailers throughout the world. In order to achieve this goal, the Company's
strategy is to apply the benefits of domestic production and international
sourcing capabilities to basic, branded product lines which have well
established consumer appeal. Management believes changing industry dynamics
favor larger toy companies that can offer a broad selection of popular toy
products, supported by consistent, high quality marketing programs to an
increasingly concentrated distribution channel. Management also believes that
there is significant potential for the Company to leverage its existing
relationships with major retailers because many of such retailers are seeking to
expand their relationships with suppliers like the Company in order to avoid
becoming overly dependent on products from the largest domestic toy companies
and to help assure that reliable supplies of quality products may be obtained at
competitive prices. The following are the principal elements of the Company's
growth strategy:
- Focus on Core Brands with Long Histories of Broad Consumer Appeal. The
Company believes that it possesses a portfolio of branded core product lines
which have gained wide market acceptance over the years and which have
relatively long product life cycles. Management believes that the Company's
core product lines, such as the Big Wheel(R), Buddy L(R) and Grand
Champions(R) product lines, provide the Company with a base from which to
build a diversified toy and plastic products manufacturing company, and that
focusing on products and product line extensions in these core categories
will enhance the Company's financial stability and provide a platform for
continued revenue growth. Further, because many of the Company's staple
products, such as the Big Wheel(R), had not been aggressively marketed for
several years prior to the Change of Control, management believes that
significant additional growth can be realized by invigorating existing toy
lines through effective marketing, improved packaging, and improved and
broader advertising.
- Leverage Existing Manufacturing Capabilities. The Company is in the process
of closing the Buddy L manufacturing facility in Gloversville, New York and
transferring all domestic production to its 1.2 million square foot facility
in Tarboro, North Carolina, which the Company believes will result in
significantly improved overhead absorption and operating efficiencies. While
the Company expects its machinery and equipment to have a relatively high
level of capacity utilization during peak production periods after the
domestic manufacturing operations of Buddy L are fully integrated into its
Tarboro facility, the Company will continue to have substantial additional
capacity during non-peak production periods. Moreover, if additional
domestic manufacturing capacity is needed or desired, the Tarboro facility
has significant amounts of available space for the installation of
additional machinery and equipment. The Company plans to make significant
investments in upgrading the equipment and reconfiguring the operations of
the Tarboro facility, which management believes will ultimately yield
additional manufacturing efficiencies and cost savings.
- Offer Value to Toy Retailers and Consumers. The Company seeks to establish
itself as a value leader in the toy and decorative holiday product
industries by offering retailers high quality products and customer support
at a price which enables the retailer to realize attractive gross margins.
Management believes that the Company's focus on core product lines, when
coupled with its domestic manufacturing capabilities and the operating
efficiencies which the Company expects to realize upon the integration of
all of its domestic manufacturing operations into the upgraded Tarboro
facility, will enable the Company to offer high quality core products and
position itself as a value leader to retailers. In many product categories,
the Company believes that its domestic manufacturing capabilities permit it
to provide significant value to customers through high quality products that
can be manufactured on shorter lead times with lower shipping costs.
Moreover, the Company's strategy of focusing on core product categories
allows the Company to gain economies in its advertising expenses by
leveraging them over multiple products in a category.
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- Expand International Presence. Management believes that markets outside the
United States, including in particular Western Europe and Japan, present
significant growth opportunities for the Company. To date, the Company has
not aggressively marketed its products in international markets. Sales in
such markets accounted for approximately 10% of the Company's consolidated
net sales in 1995, in contrast to Mattel and Hasbro, whose international
sales represented more than 40% of their total 1995 net sales. In addition,
management believes that the international expansion of certain major toy
retailers offers opportunities for the Company to leverage its existing
relationships with such retailers. A major customer of the Company, Toys
"R" Us, had approximately 300 stores in 15 countries outside of the United
States as of April 1995 and additional future growth is expected. To
capitalize on opportunities in international markets, the Company also
plans to develop strategic relationships with independent distributors in
key foreign markets, increase its international sales and marketing
capabilities and develop or modify its products for sale in international
markets.
- Acquire New Product Lines and Licenses. The Company intends to seek to
extend its existing product lines through selective acquisitions of
businesses and product lines. The Company also intends to selectively
pursue third party licensing opportunities, principally to deepen and
expand its existing product lines, as is the case with the Company's
existing licenses with Harley-Davidson(R), Disney(R) characters,
Chevrolet(R), Chrysler/Jeep(R) and Goodyear(R), and, to a lesser extent, to
enter new product categories.
- Product Innovation and Extension of Core Product Lines. Since the Change of
Control in 1994, the Company has created a focused 15 person in-house
research and development team and expenditures on research and development
of new products have increased from approximately $300,000 in 1993 to
approximately $3 million in 1995. Current management of the Company has
begun to introduce product line extensions, such as the Big Wheelie(TM) (a
pedal-powered ride-on designed to safely "pop a wheelie"), which management
believes will strengthen and extend the life cycle of the Company's core
product lines. The Company also has begun to apply the design, marketing
and manufacturing know-how developed in its toy business to its line of
decorative holiday products. The Company has updated many of the characters
in its holiday product line as well as introduced innovative new holiday
products. For example, the Company recently introduced Halloween and
Christmas decorations known as Light Toppers(TM) (decorative caps that fit
on standard pathway lights). Management believes that there is significant
potential for future product innovation, and intends to aggressively
develop new products and product line extensions.
- Develop Additional Countercyclical Product Lines. The Company intends to
continue to develop product lines and categories which will in part
counterbalance the seasonality generally present in the toy industry and to
take advantage of additional capacity at the Tarboro manufacturing facility
during off-peak production periods. The Company believes that its spring
and summer product offerings have significant future growth potential, and
together with the Company's focus on core product lines which ship year-
round, such as Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy
L(R) vehicles, will help reduce the seasonality traditionally associated
with the toy industry. Management is also exploring a possible expansion of
the Company's decorative holiday product lines, which historically have
focused principally on Christmas and Halloween, to include additional
Easter product offerings as well as plastic decorative products for other
holidays throughout the year, such as the Fourth of July. In addition, in
order to utilize excess capacity of the Tarboro facility and the Company's
manufacturing expertise, the array of plastic manufacturing capabilities of
the Tarboro facility is being considered for use in the production of
consumer products other than toys or decorative holiday products.
The Company believes that cash generated from operations, amounts expected
to be available under its bank credit facility and the net proceeds to the
Company from this Offering will be adequate to implement its growth strategy for
the next 12 to 24 months other than the financing of any significant future
acquisitions, which may require additional debt or equity financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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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 boys and girls in
various age groups. Certain Big Wheels(R) utilize the Harley Davidson(TM)
licensed trademark and styling. Power Driver(R) products are battery operated
ride-on vehicles that resemble off-road vehicles, domestic passenger vehicles,
motorcycles and racing cars and are targeted at children ages 1 1/2 through
seven. Power Drivers(TM) are powered by D Cell or rechargeable batteries and
come in either three wheeled or four wheeled models. Power Drivers(TM) are
designed for either one or two passengers and travel at speeds ranging from one
to five miles per hour. Several models travel in both forward and reverse and
certain models are designed for multi-surface use -- hard surfaces, grass and
small hills.
Outdoor Activities and Games
Snow Works(TM) winter products consist of plastic sleds, toboggans,
snowboards, saucers and similar sledding items that come in a variety of styles,
sizes and colors. While considered toys, they are also distributed in the
traditional sporting goods market and are targeted to the toddler to teenage age
groups. Water Works(TM) spring and summer products include above ground pools,
water slides and smaller plastic wading pools targeted to toddlers through adult
groups and plastic sand boxes targeted to children. Crocodile Mile(R) water
slides, a long plastic mat over which water is run, is targeted to the five to
teenage age groups. Seasonal toys also include spring and summer items such as
T-ball sets, junior golf sets, plastic slides and other outdoor plastic toys.
The product lines in this SBU strongly favor domestic production where through
its quick manufacturing turnaround capability, the Company can take advantage of
weather conditions which stimulate strong reorder business.
Girls and Boys Toys
Boys Toys. Buddy L(R) vehicles consist of a wide variety of plastic and
metal cars, trucks, airplanes and helicopters. Buddy L(R) vehicles feature
electronic voice, lights, sounds, as well as motorized actions and are primarily
targeted to boys ages two to eight. Buddy L(R) products include highly detailed,
scale replicas of actual vehicles. A few examples include: Dodge Ram 1500(R)
pick-up truck, Ford Mustang GT(R), Chevrolet Camaro(R), Jeep(R) Grand Cherokee,
Sikorsky(R) Helicopter, F-14 Tomcat Jet, Kenworth(R) 18 Wheelers and
Harley-Davidson(R) Motorcycles. Buddy L(R) also offers a wide array of preschool
rescue and construction theme vehicles of various shapes and sizes for children
ages two through four.
Girls Toys. Grand Champions(R) is a branded line of collectible horses and
accessories which includes realistically sculpted and detailed horses. The Grand
Champions(R) line has been offered by the Company for eight years, and has grown
through introductions of new breeds, poses, colors, features and packaging. The
Sound N' Action Stallion(TM) collection features realistic sounds and features.
These horses snort, whinny, "gallop," stomp their foot and rear on their hind
legs. Fantasy Fillies(TM) is a new line of colorful horses which were introduced
at the 1996 New York Toy Fair. Unicorn and Pegasus Fantasy Fillies(TM) have long
manes and tails while Star Prancers have sparkling lights on their manes which
can be activated by pulling on their reins.
Holiday Products
This family of highly decorated plastic products has illuminated millions
of homes and lawns for the last 30 years. Holiday products come in a range of
colors, styles and sizes for three major holidays: Easter, Halloween and
Christmas. These products include Easter baskets and bunnies, Halloween pumpkin
baskets, scarecrows and ghosts, and Christmas nativity scenes, Santa Clauses,
snowmen and outdoor candles. Certain of these products are illuminated. In 1996,
the Company will introduce Light Toppers(TM) brand Halloween and
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Christmas decorations, an innovative new way to decorate walkways and trees.
With the popularity of low voltage walkway light fixtures and outdoor lights,
Light Toppers(TM) create an easy way to decorate outdoor areas. The Company has
relied primarily on its domestic blow molding expertise to establish itself as
the leader in high quality illuminated outdoor decorative holiday products.
MARKETING AND SALES
Toys
The Company's toy products are sold throughout the world, with the United
States representing approximately 90% of estimated 1995 revenues. The balance is
sold primarily in Western Europe and South America. In the United States, the
Company's products are distributed directly to large retailers, including
independent toy stores, toy specialty retailers, general merchandise chain
stores, department stores, gift and novelty shops and other retail outlets and,
to a lesser extent, to wholesalers who carry the product lines of many
manufacturers. In international markets, products are distributed primarily
through distributors and direct sales to retailers.
Although the Company sells to over 1,000 accounts, the Company's three
largest customers accounted for an aggregate of approximately 51% of its toy
sales in 1995. Sales to Toys "R" Us, Wal-Mart and Kmart accounted for 23%, 15%
and 13% of toy sales, respectively, in 1995; 18%, 17% and 11% of toys sales,
respectively, in 1994; and 17%, 14% and 8% of toy sales, respectively, in 1993.
Of the Company's 1995 consolidated net sales, including sales of holiday
products, Toys "R" Us accounted for 18%, Wal-Mart accounted for 18% and Kmart
accounted for 12% of such net sales. No other customer accounted for more than
10% of the Company's consolidated net sales in those years. See "Risk
Factors -- Dependence on Major Customers."
In general, the Company's major customers review its product lines and
product concepts for the upcoming year at showings beginning in January and
February. By the end of June, the Company has historically received orders or
order indications for a substantial majority of its full year's toy business. As
is 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.
Holiday Products
The Company markets its holiday items through its recently-developed
in-house sales force of full-time salaried employees and approximately 10
independent sales organizations. Senior sales management supervises an
independent sales network, with management controlling the largest accounts as
house accounts. The Company maintains sales offices and showrooms in New York
City for its holiday products along with its toy business. Holiday products are
sold to a national market of approximately 35 large retail store chains and to
numerous other customers, including wholesalers, distributors and retailers. The
Company's marketing strategy also reflects changes in the retailing industry
which have created significant new channels of distribution for decorative
holiday products, such as home improvement and lawn and garden chains.
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<PAGE> 33
Wal-Mart and Target accounted for approximately 29% and 13%, respectively,
of the Company's holiday product net sales in 1995. No other holiday product
customer accounted for more than 10% of the Company's total holiday net sales in
1995. See "Risk Factors -- Dependence on Major Customers."
The Company advertises its holiday items through cooperative advertising
allowances to its customers. Management believes that because the Company
produces primarily staple products that have achieved market acceptance, it has
been able to keep its advertising costs as percentage of holiday products sales
low. In 1995, this rate was less than 1%.
NEW PRODUCT DEVELOPMENT AND LICENSING
Through its product design and development group, the Company regularly
refreshes, redesigns and extends existing product lines and develops new product
lines. Product design and development are principally conducted by a group of
professional designers and engineers employed by the Company. Empire will also
enter into licensing agreements to utilize the name, character or product of a
licensor in its product line. The Company generally focuses on a licensing
agreement as an extension of one of its core product categories. Management
recognizes the importance of licensing and continues to conservatively
participate in this marketing strategy. The Company's current licenses include
certain rights to Harley-Davidson(R), Disney(R) characters, Chevrolet(R),
Chrysler/Jeep(R) and Goodyear(R) trademarks.
The Company devotes substantial resources to product design and
development. During the year ended December 31, 1995 the Company spent
approximately $3 million in connection with the design and development of
products, exclusive of royalty payments. The Company incurred approximately $3
million in research and development expenses during 1995 as compared to
approximately $1.1 million during 1994 and approximately $300,000 during 1993.
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 to include a new
product and to build or have built the necessary tools, dies and molds generally
requires preliminary acceptance of the new product by major customers. With
respect to new product introductions, the Company's strategy is to begin
production on a limited basis until a product's initial success has been proven
in the marketplace. The production schedule is then modified to meet demand.
The Company uses licenses with third parties to permit the Company to
manufacture and market toys based on properties which have developed their own
popular identity, often through exposure in various media such as television
programs, movies and cartoons. The Company focuses on licensing agreements to
extend its core product categories. Management recognizes the importance of
licensing and continues to conservatively participate in this marketing
strategy. Sales of Power Rangers(TM) products represented approximately 18% of
toy sales and 14% of consolidated net sales in 1995, and total sales of toys
using licensed trademarks represented approximately 32% of toy sales and 25% of
consolidated net sales in 1995. With the exception of Power Rangers(TM), no
license involved more than 5% of the Company's toy sales in 1995. See "Risk
Factors -- License and Royalty Obligations."
The Company makes selective use of independent toy designers and
developers, who bring products to the Company and are generally paid a royalty
on the net selling price of any products licensed by the Company. These
independent toy designers may also create different products for other toy
companies. Sales of products developed by outside inventors were approximately
11% of toy sales and 8% of consolidated sales in 1995.
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<PAGE> 34
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 believes will result in significantly improved overhead absorption
and higher operating efficiencies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
The Company expects the machinery and equipment at its Tarboro facility to
have a relatively high level of capacity utilization during peak production
periods after the domestic manufacturing operations of Buddy L are fully
integrated. However, such facility will continue to have substantial additional
capacity during non-peak production periods and, if additional domestic
manufacturing capacity is needed or desired, the Tarboro facility has
significant amounts of available space for the installation of additional
machinery and equipment. Beyond increasing utilization, the Company has started
a significant capital investment program to upgrade the Tarboro facility,
including purchase of new equipment, the reconditioning and refurbishing of
machines and tools, and the rearrangement of production flows in order to
optimize worker efficiency and plant capacity. Management believes these steps
will yield additional manufacturing efficiencies and cost savings. However,
recoupment of the Company's expenditures on this modernization program will
require more than one year, and no assurance can be given as to the Company's
ability to achieve any level of utilization or increased productivity.
The Company bases its production schedules on customer orders, historical
trends, the results of market research and current market information. The
actual shipments of products ordered and the order cancellation rate are
affected by consumer acceptance of the product line, the strengths of competing
products, marketing strategies of retailers and overall economic conditions.
Unexpected changes in these factors can result in a lack of product availability
or excess inventory in a particular product line. Accordingly, the Company
closely monitors market activity and adjusts production schedules accordingly.
The Company manufactures its products chiefly from plastic resins. The
Company purchases certain plastic and non-plastic component parts and
accessories from various sources, including several located in Asia and Mexico.
Products are assembled, painted, decorated and packaged at the Company's
facilities and stored there for shipment.
Foreign
The Company sources product from various manufacturers in the Far East
through its facilities in Hong Kong. Approximately 40 manufacturers are utilized
for this purpose, with over 98% of this production taking place in China. The
Company's policy is generally to maintain ownership of all tooling used in
manufacturing
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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 Empire's foreign production program permits.
The inability to obtain its products from foreign manufacturers because of
trade restrictions, work stoppages or otherwise, or a material rise in tariffs,
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Risk Factors -- Foreign Sourcing."
RAW MATERIALS
The basic raw materials used by the Company are petrochemical resin
derivatives such as polyethylene and high impact polystyrene. Petrochemical
plastic resin derivatives were the single largest raw material component in cost
of goods sold in 1995. The cost of resin has been subject to volatility during
the past two years. In 1995, the Company obtained approximately 28% of its
petrochemical derivatives from a major domestic chemical company and the balance
from several other sources. The Company generally does not enter into long-term
supply contracts. The Company believes that an adequate supply of petrochemical
derivatives is available from existing and alternate suppliers. There can be no
assurance, however, that there will not be disruptions in the availability of
such supply. The other materials necessary to the various aspects of the
Company's business are generally available in the marketplace from numerous
suppliers.
Costs of petrochemical derivatives are affected by domestic demand and
supply as well as the value of the United States dollar in relation to foreign
currencies. The Company does not enter into any hedging or similar transactions
with respect to its raw materials. During 1994 the price of polyethylene
increased by approximately 80% from the levels at the end of 1993, with the
increases primarily occurring in the third and fourth quarter of 1994. The
Company has raised prices in an effort to pass along a portion of these cost
increases. The Company was unable to pass along a significant portion of the
price increases during 1995. At the beginning of 1995, the price of polyethylene
declined but still remains above historical levels. Due to the time lag between
the purchase of raw materials and the sale of finished goods, results of
operations may be only partially affected in the period in which such prices
change. See "Risk Factors -- Raw Material Prices" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Impact of
Inflation."
COMPETITION
The toy industry is highly competitive, with competition based primarily on
product design, promotion, price, quality and play value. In recent years, the
toy industry has experienced rapid consolidation driven, in part, by the desire
of industry competitors to offer a range of products across a broader variety of
categories. The Company competes with several larger toy companies, such as
Mattel, Hasbro and Tyco, and many smaller companies in the design and
development of new toys, the procurement of licenses, the improvement and
expansion of previously introduced products and product lines and the marketing
and distribution of its product. The larger toy companies, which generally have
greater financial resources than the Company, have generally pursued a strategy
of focusing on core product lines. Core product lines are those lines which are
expected to be marketed for an extended period of time, and which historically
have provided relatively consistent growth in sales and profitability. By
focusing on core product lines, such toy manufacturers have been able to reduce
their reliance on new product introductions and the associated risk and
volatility. The Company also competes with various foreign toy manufacturers and
marketers. Toy manufacturers such as the Company also compete with recreational
products and services that are alternatives or substitutes for toys, including
video games and computer software entertainment products. It is common in the
toy industry for companies to market products which are similar to products
being successfully marketed by competitors. Further, the introduction of new
products and product lines by the Company makes its operations susceptible to
the risks associated with new products, such as production, distribution and
quality control problems and the need to gain customer acceptance. See "Risk
Factors -- Competition."
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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
to exclude from the market consumer products that fail to comply with applicable
product safety regulations or otherwise create a substantial risk of injury, and
articles that contain excessive amounts of a banned hazardous substance. The
Flammable Fabrics Act enables the CPSC to regulate and enforce flammability
standards for fabrics used in consumer products.
In addition, the Company may be required to give public notice of any
hazardous or defective products and to repair, replace or repurchase any such
products previously sold. The Company is also required to report to the CPSC any
information which reasonably supports the conclusion that any of its products
may be defective or entail a substantial risk of injury to the public. The
Company is also subject to various state, local and foreign laws designed to
protect children from hazardous or potentially hazardous products. If any of the
Company's products materially contributing to its dollar volume of sales were
found to be hazardous to the public health and safety or to contain a defect
which created a risk of injury to the public, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Product Liability and Regulation."
The Company maintains a quality control program to comply with the various
federal, state, local and international product safety requirements, as well as
to maintain appropriate quality and reliability standards of its products.
The Company uses paint and other raw materials classified as hazardous
substances and generates waste in the manufacture of its products. The Company
is subject to federal and state regulations in the emission, storage and
disposal of such materials. See "Risk Factors -- Product Liability and
Regulation."
TRADEMARKS AND PATENTS
The Company believes that selective use of patent, copyright and trademark
protection is significant in protecting the Company's rights in its products and
establishing product recognition. The Company has registered more than 60
trademarks in the U.S., including Big Wheel(R), Crocodile Mile(R), Zig Zag
Zoom(R), Grand Champions(R), MR-1 Racing(R), Power Drivers(R) and Buddy L(R),
and owns approximately 30 U.S. patents, including several relating to features
of its Crocodile Mile(R) water slides. Other U.S. trademark and patent
applications are pending. The Company has also sought and obtained trademark
protection with respect to certain of its product lines in selected countries
outside of the United States in which such products are sold.
OTHER
The Company also manufactures and sells apparel buttons, buckles and
novelty items for use in the garment industry. The Company 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."
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EMPLOYEES
At May 31, 1996, the Company had approximately 1,200 employees in the
United States, approximately 1,000 of whom were full-time employees, and
approximately 55 employees in Hong Kong and China. Two employees of the Company
who work in the Company's button, buckle and novelty item business are covered
by a collective bargaining agreement which expires on September 30, 1997. The
Company 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.
PROPERTIES
The 1.2 million square foot Company-owned manufacturing and warehouse
facility in Tarboro, North Carolina is the Company's most significant real
estate interest. The Company also leases on a month-to-month basis a factory and
warehouse facility located in Gloversville, New York where substantially all of
the Buddy L(R) products are currently manufactured. The Company is in the
process of closing the Gloversville facility and transferring all domestic
production to Tarboro. The integration of Buddy L's manufacturing operations
into the Tarboro facility is expected to be substantially complete in the third
quarter of 1996. After such date, the Company intends to warehouse certain
inventory in the leased Gloversville warehouse facility on a month-to-month
basis. See "Business -- Manufacturing."
The Company also owns a small facility in Tarboro which the Company
presently uses to manufacture and sells plastic apparel buttons, buckles and
novelty items for use in the garment industry. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General."
The Company also leases showroom, office and warehouse space in various
locations, including Delray Beach, Florida, New York, New York, Hong Kong, St.
Louis, Missouri and Mayfield, New York. See "Certain Transactions." In the
opinion of management, the Company's various properties used in operations are
generally in good condition and adequate for the purposes for which they are
utilized. However, the Company is presently seeking to expand its executive
offices in Delray Beach, Florida.
LEGAL PROCEEDINGS
Change of Control Related Litigation. An action was commenced on October
19, 1994 in the Court of Chancery of the State of Delaware (New Castle County)
against the Company as a nominal defendant. The action names Maurice A.
Halperin, Barry S. Halperin, Carol A. Minkin, Halco Industries, Inc., Jeffrey
Swersky, Carl Derman and Steven Geller as defendants. The complaint in the
action, which includes class and derivative claims, alleges, among other things,
that the redemption of the Halperin Group's Common Stock in connection with the
Change of Control occurred at a substantial premium; that the transfer of
control from the Halperin Group to Mr. Geller was inequitable; that the Halperin
Group exercised its control of the Company to appropriate its assets for its own
benefit to the detriment of the plaintiffs; and that certain loans between the
Company and Halco were on terms unfavorable to the Company. The Company is only
a nominal defendant in the derivative claims, but the Company has agreed to
indemnify the Halperin Group to the extent permitted by law, with certain
exceptions. A motion to dismiss the claims was granted on February 5, 1996. The
plaintiff filed a notice of appeal, and on May 2, 1996 filed a voluntary
dismissal of his appeal. If the indemnification obligations of the Company to
the Halperin Group discussed above were triggered, substantial liabilities by
the Company could result. The Company is unable at this time to determine if the
indemnification agreement will be triggered, and, if so, the extent of financial
exposure on the part of the Company to the Halperin Group.
Intellectual Property Litigation. George Delaney and Rehkemper I.D., Inc.
v. Marchon, Inc., is an action pending in the Circuit Court of Cook County,
Illinois which was commenced on December 3, 1990, arising from a business
arrangement between the plaintiffs and Marchon alleging an interest in one of
Marchon's products. On November 22, 1991, the trial court judge issued an
opinion and dismissed plaintiff's complaint with prejudice. Plaintiffs appealed
and, on September 23, 1993, the Appellate Court reversed the dismissal and
remanded the case for further proceedings. To date, the plaintiffs have not
initiated any further proceedings in the trial court.
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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.
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
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<PAGE> 39
series of claims exceeding any insurance coverage, could have a material adverse
effect on the Company's business, financial condition and results of operations.
It is also likely that, due to deductible and self-retention levels under the
Company's insurance policies, the assertion in any given year of a large number
of claims against the Company could have a similar effect on the Company. See
"Risk Factors -- Product Liability and Regulation."
Routine Matters. In addition, the Company is involved from time to time in
routine litigation incidental to its business. Although no assurance can be
given as to the outcome or expense associated with any of these routine
proceedings, the Company believes that none of such proceedings, either
individually or in the aggregate, will have a material adverse effect on the
financial condition of the Company.
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MANAGEMENT
The following table sets forth certain information concerning each of the
Company's directors and executive officers and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------- --- -------------------------------------------------------
<S> <C> <C>
Steven E. Geller............ 54 Chairman of the Board of Directors and Chief
Executive Officer
Marvin Smollar.............. 51 President and Chief Operating Officer; Director
Michael S. Bauer............ 55 Executive Vice President - Sales and Marketing of EII
Stuart J. Drell............. 55 Executive Vice President - Operations of EII
Steven Rosenthal............ 48 Senior Vice President - Sales of EII
Roy M. Cohen................ 44 Senior Vice President of EII; General Manager -
Outdoor Activities and Games
Harvey A. Katz.............. 44 Senior Vice President of EII; General Manager -
Holiday Products
Bradley D. Kurtz............ 38 Senior Vice President of EII; General Manager - Ride-on
Toys
Thomas W. Prichard.......... 37 Senior Vice President of EII; General Manager -
Girls and Boys Toys
J. Artie Rogers............. 36 Senior Vice President - Finance and Assistant Secretary
Kar Ye Yeung................ 53 Vice President and Managing Director of Marchon Toys
(Hong Kong) Ltd.
Robert A. Mistron........... 53 Senior Vice President - Operations of EII
Lawrence A. Geller.......... 32 Secretary and Counsel
Leonard E. Greenberg........ 68 Director
Steven N. Hutchinson........ 45 Director
Eugene M. Matalene, Jr. .... 48 Director
Peter B. Pfister............ 36 Director
</TABLE>
Steven E. Geller has 34 years experience in the toy industry. Mr. Geller
has served as Chairman of the Board and Chief Executive Officer of the Company
since September 1994, and as Chairman of the Board and Chief Executive Officer
of EII since July 1994. Prior to joining the Company, Mr. Geller served as
President of Arco Toys, Inc., a wholly owned subsidiary of Mattel from December
1986 through December 1991 and as a consultant for Mattel from January 1991
through December 1993. From January 1994 to July 1994, Mr. Geller was
self-employed, engaged in structuring, negotiating and financing the acquisition
of the Company. See "Certain Transactions."
Marvin Smollar has 18 years experience in the toy industry. Mr. Smollar has
been President and Chief Operating Officer of the Company since October 1994. He
founded Marchon, Inc. in 1983 and served as President of Marchon until its
acquisition by the Company in October 1994. From 1978 to 1983, Mr. Smollar was a
co-founder and President of Kidco, Inc., a toy manufacturer and marketing
company. Mr. Smollar is an attorney and prior to entering the toy industry in
1978, he practiced patent, trademark and copyright law. See "Certain
Transactions."
Michael S. Bauer has 30 years experience in the toy industry. Mr. Bauer has
served as a consultant to the Company since February 1996, and as of May 1,
1996, will serve as Executive Vice President -- Sales and Marketing of EII. From
1988 to 1996, Mr. Bauer owned and managed MSB, Inc., a management consulting
firm specializing in toy sales and marketing. Mr. Bauer served as Executive Vice
President of Sales of Coleco Industries (toy company) from 1985 to 1988.
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<PAGE> 41
Stuart J. Drell has 35 years experience in the toy industry. Mr. Drell has
served as Executive Vice President of EII since November 1994. Prior to joining
the Company, he served as an Executive Vice President of Grand Toys from 1993 to
1994, as a Vice President of Tyco from 1991 to 1992 and as President of Matchbox
USA (toy company) from 1989 to 1991.
Steven Rosenthal has 20 years experience in the toy industry. Mr. Rosenthal
has served as Senior Vice President -- Sales of EII since 1995. Prior to joining
the Company, Mr. Rosenthal served in various positions at Remco Toys for more
than five years, most recently as Senior Vice President of Marketing.
Roy M. Cohen has 20 years experience in the toy industry. Mr. Cohen has
served as Senior Vice President of EII and General Manager -- Outdoor Activities
and Games since July 1995. Prior to joining the Company, Mr. Cohen founded
KidSource, Inc. in 1993 and served as its President and Chief Executive Officer.
From 1987 to 1993, Mr. Cohen was a founding executive of Sports Authority Inc.
(sporting goods retailer) and served as its Senior Vice President of
Merchandising and Marketing. Mr. Cohen served as Vice President and General
Merchandise Manager of Child World Stores from 1983 to 1987.
Harvey A. Katz has 22 years experience in the toy industry. Mr. Katz has
served as Senior Vice President of EII and General Manager -- Holiday Products
since December 1994. He was Senior Vice President of Sales and Marketing for
Marchon from 1989 until the acquisition of Marchon by the Company in 1994. Mr.
Katz has also served in senior sales and marketing positions with Arco Toys,
Inc., LJN Toys, Knickerbocker Toys, and as a toy buyer with J.C. Penney Co.
Bradley D. Kurtz has four years experience in the toy industry. Mr. Kurtz
has served as Senior Vice President of EII and General Manager -- Ride-on Toys
since December 1995. Prior to joining the Company, Mr. Kurtz served as the Vice
President of Marketing for Power Wheels, a line of ride-on toys at Mattel, from
1994 to 1995 and at Kransco (toy company) from 1992 until its acquisition by
Mattel in 1994. Before entering the toy business in 1992, Mr. Kurtz, held
various positions in both packaged goods marketing and retailing.
Thomas W. Prichard has 16 years experience in the toy industry. Mr.
Prichard has served as Senior Vice President of EII and General Manager -- Girls
and Boys Toys since 1995. Prior to joining the Company, Mr. Prichard served as
Vice President of Marketing and New Product Development for Original Appalachian
Artworks, Inc., the creator and licensor of Cabbage Patch dolls, in 1995. From
1989 to 1994, he served as Vice President of Marketing for Girls Toys, Activity
Toys and Tonka Vehicles at Hasbro, and from 1979 to 1989 he served as a Senior
Buyer for Wal-Mart.
J. Artie Rogers has 10 years experience in the toy industry. Mr. Rogers has
served as Senior Vice President -- Finance of the Company since December 1994.
From 1987 to December 1994, Mr. Rogers served as Vice President -- Finance of
the Company. From 1987 to December 1995, Mr. Rogers served as Secretary of the
Company, and has served as Assistant Secretary since December 1995. Mr. Rogers
is a certified public accountant, and prior to joining the Company in 1986, he
worked for Deloitte Haskins & Sells, predecessor to the Company's current
independent public accountants, for six years.
Kar Ye Yeung has 26 years experience in the toy industry. Mr. Yeung has
served as Vice President and Managing Director of Marchon Toys Ltd. (Hong Kong)
since 1984.
Robert A. Mistron has 28 years experience in the toy industry. Mr. Mistron
has served as Senior Vice President -- Operations of EII since March 1996 and as
Executive Vice President -- Operations of Empire Manufacturing, Inc. from
September 1995 to March 1996. Mr. Mistron was Executive Vice President of
Operations for Buddy L Inc. from 1994 until its acquisition by the Company in
July 1995. Prior to joining Buddy L, Mr. Mistron served as a Vice President for
Fisher Price (toy company) from 1991 to 1994.
Lawrence A. Geller has served as Secretary of the Company since December
1995. Mr. Geller joined the Company in April 1995 as corporate counsel. Prior to
joining the Company, Mr. Geller was engaged in the practice of law with an
emphasis on litigation as a partner with the firm of Imhoff & Geller in Norwalk,
Connecticut from 1993 to 1995. During 1991 and 1992, Mr. Geller was an associate
with the law offices of John W. Imhoff, Jr. and from 1989 to 1991 he was an
associate with the law offices of Francis J. Discala. Mr. Geller is the son of
Steven Geller, the Chairman and Chief Executive Officer of the Company.
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<PAGE> 42
Leonard E. Greenberg has served as a director of the Company since 1995.
Since 1986, Mr. Greenberg has served as Chairman of the Board and Chief
Executive Officer of the Resort at Indian Springs, a real estate development
company and home builder.
Stephen N. Hutchinson has served as a director of the Company since 1995.
Mr. Hutchinson has been a Principal of Weiss Peck & Greer, L.L.C. (investment
management) since July 1993. From September 1978 to June 1993, he served as a
Vice President and Director of The Hillman Company (investment management). Mr.
Hutchinson is a member of the board of directors of Core Source, Inc. and Dollar
Financial Corporation. See "Certain Transactions."
Eugene M. Matalene, Jr. has served as a director of the Company since 1995.
Mr. Matalene has 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
Transactions."
Peter B. Pfister has served as a director of the Company since 1995. Mr.
Pfister has been a Principal of Weiss Peck & Greer, L.L.C. or its predecessor,
since January 1987. Mr. Pfister is a member of the board of directors of Core
Source, Inc., MAC Acquisition, L.P. and Sunbelt Beverage Corporation. See
"Certain Transactions."
COMPENSATION OF DIRECTORS
The Company has agreed to pay each person who is not an affiliate of the
Company or any party to the Shareholders' Agreement (the "Independent
Directors") a retainer of $4,000 per quarter for serving on the Board of
Directors. Messrs. Matalene and Greenberg are currently the only two Independent
Directors. None of the other directors of the Company is paid directors' fees
for serving on the Board of Directors or its committees. All directors are
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings of the Board of Directors and meetings of committees of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees: an Executive
Committee, a Compensation Committee and an Audit Committee. Each such committee
has two or more members, who serve at the pleasure of the Board of Directors.
The Executive Committee is authorized to exercise all of the authority of
the Board of Directors that may be delegated to a committee of the Board under
Delaware law, other than the authority to authorize dividends and other
distributions, to fill vacancies on the Board or its committees, to amend, adopt
or repeal certificate of incorporation or by-law provisions, to approve mergers
or matters requiring stockholder approval, or (except within certain prescribed
limits) to authorize or approve the issuance or reacquisition of shares and
related matters. Currently, all members of the Board of Directors serve on the
Executive Committee.
The Compensation Committee is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Company's
equity benefit plans. Currently, Messrs. Matalene and Hutchinson serve on the
Compensation Committee.
The Audit Committee is responsible for reviewing the Company's financial
statements, audit reports, internal financial controls and the services
performed by the Company's independent public accountants, and for making
recommendations with respect to those matters to the Board of Directors.
Currently, Messrs. Greenberg, Matalene and Pfister serve on the Audit Committee.
40
<PAGE> 43
TERMS OF DIRECTORS AND OFFICERS
Directors are nominated and placed for election at the annual meeting of
stockholders to hold office for a one-year term and until their successors are
duly elected and qualified. The Shareholders' Agreement and the Marchon
Stockholders' Agreement contain provisions regarding the composition of the
Board of Directors and certain committees of the Board of Directors. See
"Certain Transactions -- The Marchon Transaction" and "-- Shareholders'
Agreement."
Officers are appointed by the Board of Directors and serve at the pleasure
of the Board, except that Steven Geller, Chairman and Chief Executive Officer of
the Company, and Marvin Smollar, President and Chief Operating Officer of the
Company, are parties to employment agreements with the Company. See "Management
- -- Employment Agreements."
EXECUTIVE COMPENSATION
The following summary compensation table (the "Compensation Table")
summarizes compensation information with respect to the President and Chief
Executive Officer of the Company and each of the Company's most highly
compensated executive officers who earned more than $100,000 for services
rendered during the year ended December 31, 1995 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------------ UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS OTHER ANNUAL OPTIONS COMPENSATION
PRINCIPAL POSITION(S) YEAR ($) ($) COMPENSATION (#) ($)
- ------------------------------- ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller............... 1995 $324,519 -- $ 83,028(1) 200,000(2) $508,075(3)
(Chairman of the Board 1994(4) 132,692 $150,000 -- 500,000(5) --
and Chief Executive Officer) 325,000(6)
Marvin Smollar................. 1995 318,750 -- -- 200,000(2) 290,338(7)
(President and Chief 1994(8) 69,230 32,699 -- -- --
Operating Officer)
J. Artie Rogers................ 1995 132,211 15,000 -- -- --
(Senior Vice President -- 1994 95,385 35,000 -- 35,000(2) 1,190(9)
Finance) 1993 90,000 25,000 -- -- 1,009(9)
Neil B. Saul................... 1995(10) 262,019 -- 29,153(11) -- 69,175(12)
(Former President of 1994(13) 132,692 150,000 -- 500,000(5) --
Empire Industries, Inc.) 475,000(6)
</TABLE>
- ------------------------------
(1) Includes $70,000 paid to Mr. Geller in lieu of reimbursement of expenses
incurred for the benefit of the Company and allowances of $13,028 for
automobile expenses and club dues.
(2) Options granted pursuant to the Company's 1994 Employee Stock Option Plan.
(3) Relocation expenses including a gross-up for individual income taxes.
(4) Includes compensation paid to Mr. Geller from July 15, 1994 through
September 30, 1994.
(5) Includes 60,376 incentive stock options and 439,624 non-qualified stock
options granted pursuant to the Company's 1994 Employee Stock Option Plan.
(6) Represents warrants granted in connection with services rendered with
respect to the Debenture Purchase Agreement.
(7) Includes $287,908 of relocation expenses grossed up for individual income
taxes and $2,430 of life insurance premiums. Excludes $122,265 paid to Mr.
Smollar in 1995 which he earned at Marchon, Inc. prior to its acquisition
by the Company on October 13, 1994, which amount was paid by the Company in
1995.
(8) Includes compensation paid to Mr. Smollar as Chief Operating Officer of the
Company from October 13, 1994 through December 31, 1994.
(9) Includes Company contributions to the Carolina Employee Stock Bonus Plan.
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<PAGE> 44
(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 $6,675 of life insurance premiums.
(13) Includes compensation paid to Mr. Saul as President of EII from July 15,
1994 through December 31, 1994.
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
SHARES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM($)(2)
OPTIONS EMPLOYEES PRICE(1) EXPIRATION --------------------
NAME GRANTED IN 1995 ($/SHARE) DATE 5% 10%
- --------------------------------- ---------- ------------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller................. 200,000(3) 40% 6.75 12/13/2005 849,008 2,151,552
Marvin Smollar................... 200,000(3) 40% 6.75 12/13/2005 849,008 2,151,552
J. Artie Rogers.................. -- -- -- -- -- --
Neil B. Saul..................... -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Based on the closing price of the Common Stock on the American Stock
Exchange on the date of grant.
(2) The amounts shown as potential realizable values are based on assumed
annualized rates of appreciation in the price of the Common Stock of five
percent and ten percent over the term of the options, as set forth in the
rules of the Securities and Exchange Commission. Actual gains, if any, on
stock option exercises are dependent upon the future performance of the
Common Stock. There can be no assurance that the potential realizable values
reflected in this table will be achieved.
(3) Options granted on December 13, 1995. Options to acquire 50,000 shares vest
on December 13, 1996 with like annual vesting thereafter through December
13, 1999.
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers that were outstanding at
December 31, 1995:
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(2)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME UPON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ---------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller.......... -- -- 208,338 491,662 $ 100,395 $ 192,058
Marvin Smollar............ -- -- -- 200,000 -- 50,000
J. Artie Rogers........... -- -- -- 35,000 -- 39,375
Neil B. Saul(3)........... 9,940 $21,123 -- -- -- --
</TABLE>
- ------------------------------
(1) Does not include warrants to acquire shares of Common Stock. See "Certain
Transactions."
(2) Based on the $7 per share closing price of the Company's Common Stock on the
American Stock Exchange on December 29, 1995.
(3) In connection with Mr. Saul's settlement and termination agreement, 500,000
options existing at December 31, 1995 were due to expire on February 7,
1996. On that date, Mr. Saul exercised options to acquire 9,940 shares, and
the remaining 490,060 options expired.
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<PAGE> 45
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 from January 1, 1996 to July 15, 1998 plus fringe
benefits (which benefits are subject to reduction if Mr. Saul obtains employment
with an entity not affiliated with the Company).
CERTAIN TRANSACTIONS
TRANSACTIONS RELATING TO FORMER MANAGEMENT
Prior to September 30, 1994, the Halperin Group collectively owned over 90%
of the then-outstanding shares of Common Stock.
During the first quarter of 1993, the Company repaid borrowings from Halco
of $15 million. On April 7, 1993, Halco notified the Company that it had elected
to exercise its option to convert the remaining $18 million owed by the Company
to Halco into 5,760,000 shares of the Common Stock at the stated conversion
price of $3.125 per share. Halco assigned its rights to acquire the 5,760,000
shares to the following persons in the amounts indicated: Maurice A. Halperin
(2,327,700 shares); Barry S. Halperin (1,851,200 shares); Carol A. Minkin
(1,473,300 shares); and other immediate family members of such persons (107,800
shares). The closing sales price per share of the Common Stock on April 7, 1993
was $6.625.
During 1993, the Company loaned Halco $22 million. The Board of Directors
of the Company at that time had approved the loan to Halco of up to $27 million.
The interest rate on the loan was the prime rate plus 1% with interest paid
monthly. The loan was due on demand but no later than December 15, 1994 and was
43
<PAGE> 46
secured by the 5,743,887 shares of the Common Stock owned by Halco. Subsequent
to December 31, 1993, an additional $3.8 million was loaned to Halco. On March
29, 1994, Halco repaid the $25.8 million outstanding balance of such loan. The
Company does not intend to loan any funds to Halco in the future.
During 1993, the Company contributed $2 million to the Empire Foundation, a
Florida charitable trust whose trustees were at that time three directors of the
Company, two of whom were also officers of the Company. None of such persons is
currently an officer or director of the Company. In September 1994, the Company
contributed $275,000 to the Empire Foundation. Effective September 30, 1994, the
Empire Foundation changed its name to the Halco Foundation and the Halperin
Group agreed to become responsible for the management of the Foundation.
GELLER TRANSACTION AND RELATED MATTERS
During the first half of 1994, Steven Geller, the current Chairman of the
Board and the Chief Executive Officer of the Company, began discussions with the
Halperin Group, which ultimately led, in the second half of 1994, to the Change
of Control of the Company. The Board of Directors of the Company delegated to a
special committee comprised of the independent members of the Board of Directors
(the "Special Committee") the principal authority to make decisions for and on
behalf of the Company with respect to certain proposed transactions involving
the Company and members of the Halperin Group.
On July 15, 1994, Mr. Geller acquired 200,040 shares of Common Stock of the
Company from the Halperin Group pursuant to a Stock Purchase Agreement between
Mr. Geller and the Halperin Group (the "Stock Purchase Agreement"), at a
purchase price of $6.50 per share. On that date, Mr. Geller also acquired from
Halco, pursuant to a Stock Option Agreement between Mr. Geller and Halco, an
option to purchase an additional 500,000 shares of Common Stock from Halco over
a period of three years at exercise prices ranging from $6.50 per share to $7.78
per share (the "Halco Option"). On the same date, Mr. Geller and Neil B. Saul
entered into separate three year employment agreements pursuant to which Mr.
Geller became Chairman of the Board and Chief Executive Officer of Carolina
Enterprises, Inc., a subsidiary of the Company (which subsequently changed its
name to EII), and Mr. Saul became President of EII. In connection with such
employment, the Company granted employee stock options for 500,000 shares to
each of Messrs. Geller and Saul. Such options vest over a three year period, and
of the 500,000 options granted to each, 60,376 were incentive stock options with
an exercise price of $6.625 per share and the remaining 439,624 were non-
qualified stock options with an exercise price of $6.50 per share.
On September 30, 1994, and in connection with the Change of Control, the
Company redeemed 11,766,634 shares of Common Stock from the Halperin Group for
$6.50 per share ($76.5 million in the aggregate), the Halperin Group sold an
additional 299,960 shares of Common Stock to Mr. Geller for $6.50 per share
($1.9 million in the aggregate), and Maurice A. Halperin agreed to extend a
three-year secured subordinated $15 million line of credit to the Company at 3%
over prime (which was fully funded on October 13, 1994 and repaid on December
22, 1994) and resigned his positions as officer and director of the Company, as
did Barry S. Halperin and Carol A. Minkin. The Company redeemed such shares
because the Special Committee determined that such redemption was in the best
interests of the Company and its stockholders. In connection with these
transactions, Halco entered into a ten-year voting agreement with Steven Geller
(the "Halco Voting Agreement"), pursuant to which Mr. Geller was granted the
right to vote 1,499,872 shares of Common Stock owned by Halco, and a right of
first refusal with respect to any sale by Halco in an aggregate amount at any
one time in excess of 18,000 shares of Common Stock. Mr. Geller's right to vote
such shares of Common Stock terminates on Halco's sale thereof to a person other
than Mr. Geller. Mr. Geller purchased all of the shares of Common Stock from the
Halperin Group with personal funds and a loan from Wachovia Bank of North
Carolina, N.A. ("Wachovia"). WPG Corporate Development Associates IV, L.P. ("WPG
IV") agreed to purchase Mr. Geller's loan from Wachovia in the event of Mr.
Geller's default.
After the redemption and the resignations of the members of the Halperin
Group from their respective board and officer positions, the two remaining
directors, Jeffrey Swersky and Carl Derman, appointed Mr. Geller to the
Company's Board of Directors, and Mr. Geller was elected Chairman of the Board
of
44
<PAGE> 47
Directors and appointed Chief Executive Officer of the Company. Messrs. Swersky
and Derman resigned their positions in March 1995.
In connection with the foregoing transactions, in September 1994 the
Company entered into indemnification agreements with the members of the Halperin
Group, individually and as custodians for certain of their minor children
(together, the "Halperin Indemnitees"). Pursuant to the terms of the agreements,
the Company agreed subject to certain exceptions to indemnify and hold harmless,
to the fullest extent from time to time permitted by law, each Halperin
Indemnitee who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (hereinafter, a
"proceeding") by reason of the fact that he or she is or was a director,
officer, employee, stockholder, agent or other representative of the Company, or
is or was serving at the request of the Company as a director, officer,
employee, trustee or agent of another enterprise, against any and all costs or
losses (collectively, "Losses") whatsoever, including but not limited to
expenses (including attorneys' and other fees), judgments, fines and amounts
paid in settlement, incurred by the Halperin Indemnitee in connection with such
proceeding. The agreements also require the Company to pay expenses incurred by
each Halperin Indemnitee in defending any proceeding in advance of the final
disposition of such proceeding.
On September 20, 1994, the Company also entered into an indemnification
agreement with Jeffrey Swersky and Carl Derman, each of whom served as a
director of the Company and a member of the Special Committee, pursuant to which
the Company agreed to indemnify, and advance expenses to, Messrs. Swersky and
Derman to the same extent as the Halperin Indemnitees, and in addition, with
respect to any action, suit or proceeding arising out of any actions or
omissions by the Special Committee. In addition, Maurice A. Halperin
individually agreed to indemnify Messrs. Swersky and Derman with respect to any
action, suit or proceeding arising out of any actions or omissions by the
Special Committee. A suit challenging matters related to the redemption, was
commenced on October 19, 1994, in Delaware chancery court against Maurice A.
Halperin, Barry S. Halperin, Carol A. Minkin, Jeffrey Swersky, Carl Derman,
Steven Geller and Halco, and included the Company as a nominal defendant. The
Company has paid the legal fees of those persons under the indemnity agreements.
See "Business -- Legal Proceedings."
THE MARCHON TRANSACTION
On October 13, 1994, the Company acquired Marchon for 1,076,329 shares of
Common Stock (valued at $6.6 million based on the closing price of the Common
Stock on the American Stock Exchange on the closing date, October 13, 1994),
$3.25 million in cash and $3.25 million in one-year purchase money notes. Marvin
Smollar, the former President and principal stockholder of Marchon, received 90%
of the stock, cash and notes, became a director of the Company and its President
and Chief Operating Officer. The amount and allocation of the consideration paid
by the Company in connection with the Marchon transaction was determined on the
basis of arm's length negotiation after consultation with the Company's
financial advisor. The Company and the former Marchon stockholders ("Marchon
Stockholders") also entered into a Registration Rights Agreement pursuant to
which a majority in interest of the Marchon Stockholders have two rights to
require the Company to register the shares so received as well as unlimited
"piggyback" rights to register Common Stock upon certain public offerings by the
Company of Common Stock or other securities.
In connection with the Marchon acquisition, on October 13, 1994, Messrs.
Geller, Saul and Smollar entered into the Marchon Stockholders' Agreement which,
in addition to restricting the transfer of their shares of Common Stock, set
forth a voting agreement among the parties thereto. However, so long as the
Shareholders' Agreement remains in effect, the Shareholders' Agreement takes
precedence over the Marchon Stockholders' Agreement. See "Certain Transactions
- -- Shareholders' Agreement." Pursuant to the Marchon Stockholders' Agreement,
the parties to such agreement agreed to take whatever action is necessary to
elect to the Board of Directors of the Company each party thereto that is then
employed by the Company or any of its subsidiaries as an executive officer. In
addition, Messrs. Geller and Saul agreed to vote their shares of Common Stock to
elect Marvin Smollar or his designee to the Board of Directors until such time
as Mr. Smollar and his affiliates collectively own less than 5% of any class of
voting securities of the Company, and Mr. Smollar agreed to a parallel provision
for Mr. Geller.
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<PAGE> 48
On December 7, 1994, Mr. Smollar transferred all of his shares of Common
Stock in the Company to Champ Enterprises Limited Partnership, an Illinois
limited partnership ("Champ") of which Mr. Smollar is a general partner. See
note 7 to "Principal and Selling Stockholders."
THE WPG GROUP INVESTMENT
On December 22, 1994, WPG IV, WPG Corporate Development Associates IV
(Overseas), Ltd. ("WPG Overseas") and certain of their affiliates, including
Peter B. Pfister, a director of the Company (collectively the "WPG Group"),
purchased 300,000 shares (the "WPG Shares") of Common Stock from Mr. Geller for
$1.95 million ($6.50 per share). On that date, the Company issued $15 million
principal amount of debentures. The WPG Group purchased $14.9 million principal
amount of the debentures and Eugene Matalene, Jr., a director of the Company,
and another individual each purchased $50,000 principal amount of the
debentures. The debentures are convertible into an aggregate of 2,000,000 shares
at a conversion price of $7.50 per share (subject to adjustment upon the
occurrence of certain anti-dilution events), bear interest at a rate of 9% per
annum, are payable quarterly and mature on December 22, 1999. These debentures
are subordinate to the bank lender's right of payment under its credit agreement
with EII and certain other debt of the Company. Proceeds from the sale of the
debentures were used by the Company to repay its loan from Mr. Halperin. In
connection with the purchase of Common Stock and debentures, the WPG Group and
the Company entered into a Registration Rights Agreement dated as of December
22, 1994 (the "Registration Rights Agreement"). Pursuant to the Registration
Rights Agreement, the WPG Group has two rights to require the Company to
register the Common Stock held by such persons as well as unlimited "piggyback"
rights to register shares of Common Stock upon certain public offerings by the
Company of its Common Stock.
In consideration for services rendered in connection with the December 1994
debenture financing, the Company issued warrants to purchase 1,000,000 shares of
Common Stock at an exercise price of $7.50 per share, of which 325,000 were
issued to Mr. Geller, 475,000 were issued to Mr. Saul, 75,000 were issued to
each of Irwin J. Goldsmith and Charles E. Emby, senior managers of a subsidiary
of the Company and son-in-laws of Mr. Geller, and 50,000 were issued to an
investment affiliate of former corporate counsel to the Company. Mr. Saul
assigned the 475,000 of the warrants issued to him to Leonard E. Greenberg, a
director of the Company, in January 1996. Pursuant to such warrants, Messrs.
Geller and the other warrant holders referred to above have registration rights
substantially identical to those set forth in the Registration Rights Agreement.
SHAREHOLDERS' AGREEMENT
In connection with the purchase of Common Stock and convertible debentures
by the WPG Group, on December 22, 1994, the WPG Group, Mr. Geller, Mr. Saul, Mr.
Smollar and Champ entered into the Shareholders' Agreement. Subsequent to
entering into the Shareholders' Agreement, Champ transferred its shares of
Common Stock to The Autumn Glory Trust, a Cook Islands Registered International
Trust (the "Trust"). See note 7 to "Principal and Selling Stockholders."
(Messrs. Geller, Smollar and Saul, and their permitted transferees (including
the Trust) are hereinafter referred to collectively as the "Geller Group"). The
Trust agreed to be bound by all the terms and conditions of the Shareholders'
Agreement.
So long as it is in effect, the Shareholders' Agreement takes precedence
over the Marchon Stockholders' Agreement. Under the Shareholders' Agreement, the
parties have been granted rights of first refusal and co-sale rights upon
certain transfers of shares of Common Stock and the Geller Group granted a put
right to WPG Group, which put option has expired because the market value of the
Company's Common Stock reached specified levels.
The parties to the Shareholders' Agreement agreed to take all action
(including voting their shares) at the 1995 Annual Meeting of Stockholders to
approve an amendment to the Company's Charter which would, among other things,
provide for the election of a Board of Directors consisting of eight persons, of
which only six were elected and qualified at that Annual Meeting, and which
would include the supermajority provisions contained in the Shareholders'
Agreement. See "Description of Capital Stock." The stockholders of the
46
<PAGE> 49
Company adopted an amendment to the Charter at the Annual Meeting of
Stockholders held on June 21, 1995.
The Shareholders' Agreement also contains provisions regarding the
composition of the Board of Directors of the Company. The parties agreed that
after the 1995 Annual Meeting, they would vote all their shares of Common Stock
for a Board of Directors comprised of three persons designated by the Geller
Group, two persons designated by the WPG Group and two persons who are not an
affiliate of the parties to the Shareholders' Agreement or the Company (the
"Independent Directors") jointly designated by the WPG Group and the Geller
Group, with the remaining director to be designated by the Board at such time as
it so determines. In addition, the parties agreed to use their best efforts to
ensure that certain directors designated by the WPG Group are named as members
of the Compensation Committee and the Audit Committee of the Board of Directors.
The Board of Directors is currently comprised of Messrs. Geller, Smollar,
Pfister, Hutchinson, Greenberg and Matalene. Mr. Pfister and Mr. Hutchinson are
the designees of the WPG Group and Messrs. Matalene and Greenberg are the
Independent Directors. See "Management."
If, at any time, the percentage of shares of Common Stock held by the WPG
Group and certain of their transferees declines below 10% of the shares of
Common Stock on a fully diluted basis, the WPG Group would have the right to
designate only one director and the other members of the Board of Directors
previously designated by the WPG Group would be replaced by a person selected by
all of the other members of the Board of Directors. If, at any time, the
percentage of shares of Common Stock held by the WPG Group and certain of their
transferees declines below 5% of the shares of Common Stock on a fully diluted
basis, the WPG Group would have no right to designate members of the Board of
Directors, Audit Committee or Compensation Committee.
The Shareholders' Agreement includes certain supermajority provisions which
effectively give to each of the WPG Group and the Geller Group veto power over
certain corporate transactions. These include a merger or similar business
combination, sales of assets of the Company or its subsidiaries outside of the
ordinary course of business, amendment to the Charter or By-laws, any payment,
other than employment compensation, to any director, officer or stockholder or
affiliate of the Company or to their family members, any declaration or payment
of dividends, any public or private offering of debt or equity (with some
limited exceptions), incurrence of certain indebtedness, adoption of a plan of
liquidation, and acquisition of stock or assets, other than in the ordinary
course of business, for more than $10 million in any calendar year. The
Shareholders' Agreement also includes provisions which give the WPG Group the
right to designate all of the directors if the Company experiences specified
financial difficulties or Messrs. Geller and Saul collectively fail to purchase
(including pursuant to the exercise of options or warrants) at least 500,000
shares of Common Stock by December 22, 1997. However, the WPG Group has agreed
that it will designate Mr. Smollar as one of the directors if he and his
affiliates own at least 5% of the shares of Common Stock of the Company. These
provisions terminate on December 22, 2000, or earlier if (i) the percentage of
shares of Common Stock held by the WPG Group and certain of their transferees on
a fully-diluted basis declines below 19.59% and the market capitalization of the
Company, on a fully diluted basis (as defined in the Shareholders' Agreement)
exceeds $125 million, or (ii) the percentage of shares of Common Stock held by
the WPG Group and certain of their transferees on a fully-diluted basis declines
below 14.69%.
As required by the Shareholders' Agreement, the parties to the
Shareholders' Agreement and their permitted transferees are subject to a voting
agreement under which they and their permitted transferees agree to vote their
shares of Common Stock in order to carry out the corporate governance provisions
contained in the Shareholders' Agreement. In addition, Mr. Pfister and certain
other parties affiliated with WPG (collectively, the "Individual Purchasers")
granted a proxy to WPG IV to vote all shares owned by them on all matters
requiring a vote of stockholders of the Company, and granted WPG IV full power
and authority to take such actions and refrain from taking such actions under
the Shareholders' Agreement as WPG IV deems necessary or appropriate.
47
<PAGE> 50
THE BUDDY L TRANSACTION
On July 7, 1995, two subsidiaries of the Company, Empire Acquisition Corp.,
now known as Empire Manufacturing, Inc. ("Empire Manufacturing"), and Carnichi
Limited, acquired substantially all of the toy business assets and assumed
certain liabilities of Buddy L, Inc., a debtor-in-possession, and wholly-owned
subsidiary of SLM International, Inc., and Buddy L (Hong Kong) Limited, a
subsidiary of Buddy L, Inc. The purchased assets comprise substantially all of
the former toy manufacturing, design and marketing business of Buddy L. The 1994
toy sales of Buddy L were approximately $118.7 million.
The amount and allocation of the consideration paid by the Company in
connection with the Buddy L transaction was determined on the basis of arm's
length negotiation after consultation with the Company's financial advisor. 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 lapse if such notes are repaid by the
Company on the first or second anniversary of the issuance thereof. See "Use of
Proceeds." Mr. Geller and Mr. Matalene acquired $500,000 and $100,000 principal
amount of these senior subordinated notes, respectively. In addition, Mr.
Matalene serves as a non-employee director of American Bankers Insurance Company
of Florida, which together with one of its affiliates, acquired an aggregate of
$5 million principal amount of these senior subordinated notes.
Also in connection with the 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 of Notes to Consolidated Financial Statements. Two principals of WPG,
Messrs. Hutchinson and Pfister, are members of the Company's Board of Directors.
See "Management."
TRANSACTIONS WITH AFFILIATES
Effective June 12, 1995, the Company terminated the lease of a facility
located at 555 Corporate Woods Parkway, Vernon Hills, Illinois formerly occupied
by Marchon. The owner of this property was indebted to Marchon for costs
incurred during the construction of the facility in the principal amount of
$506,000 as of December 31, 1995. The loan bears interest at 7.5% per annum, and
principal and interest are due and payable on December 31, 1998. Mr. Smollar is
a guarantor of this debt.
1431 Kingsland Avenue Limited Partnership, of which Mr. Smollar is a
limited partner, owns a facility located at 1431 Kingsland Avenue, St. Louis,
Missouri, which is leased to Marchon Manufacturing, Inc. under a lease
commencing December 15, 1992 and continuing through June 30, 2013. The lease was
assumed
48
<PAGE> 51
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.
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.
49
<PAGE> 52
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996, before and after
giving effect to the sale of the shares of Common Stock offered hereby, by (i)
each person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each Selling Stockholder, (iii) each
director of the Company, (iv) each of the Named Executive Officers and (v) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)
NAME AND ADDRESS OF ----------------------- SHARES BEING -----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT(4)
- ---------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Steven E. Geller (5)(6)(25)............. 2,316,669 39.8 333,333 1,483,336 19.1
Marvin Smollar (6)(7)(25)............... 969,283 18.6 -- 969,283 13.6
Neil B. Saul (6)(8)..................... 0 -- -- 0 --
Steven N. Hutchinson (9)................ 2,684,057 36.8 2,384,057 25.8
One New York Plaza
New York, NY 10004
Eugene M. Matalene, Jr.(10)............. 7,667 * -- 7,667 *
Leonard E. Greenberg (6)(11)............ 477,000 8.4 -- 477,000 6.3
11500 El Clair Ranch Road
Boynton Beach, FL 33437
Peter B. Pfister (6)(12)................ 2,041 * -- 2,041 *
J. Artie Rogers......................... 0 -- -- 0 --
Halco Industries, Inc. (13)............. 1,499,872 28.8 500,000 666,539 9.3
441 South Federal Highway
Deerfield Beach, FL 33441
The Autumn Glory Trust (6)(7)(25)....... 819,283 15.7 -- 819,283 11.5
P.O. Box 11
Avarua, Rarotonga
Cook Islands
The Iridium Trust (6)(7)(25)............ 150,000 2.9 -- 150,000 2.1
WPG Corporate Development Associates IV,
L.P. (6)(14).......................... 2,184,294 31.6 231,800 1,952,494 22.1
One New York Plaza
New York, NY 10004
WPG Corporate Development Associates IV
(Overseas), L.P. (6)(15).............. 480,334 8.6 55,900 424,434 5.7
One New York Plaza
New York, NY 10004
Westpool Investment Trust PLC (6)(16)... 67,902 1.3 7,900 60,002 *
Glenbrook Partners, L.P. (6)(17)........ 37,723 * 4,400 33,323 *
Olin Corporation (18)................... 396,000 7.3 396,000 0 --
501 Merritt Seven
Norwalk, CT 06851
Smedley Industries, Inc. (19)........... 756,667 14.5 378,000 378,667 5.3
(formerly Buddy L Inc.)
30 Rockefeller Plaza Suite 4314
New York, NY 10112
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)
NAME AND ADDRESS OF ----------------------- SHARES BEING -----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT(4)
- ---------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Jericho State Capital Corp. (20)........ 13,800 * 13,800 0 --
Harvey Klaris (20)...................... 18,400 * 18,400 0 --
Glenn Chwatt (20)....................... 18,400 * 18,400 0 --
Richard Chwatt (20)..................... 18,400 * 18,400 0 --
William Forster (21).................... 5,000 * 5,000 0 --
Alfred A. LaSorte, Jr. (21)............. 5,000 * 5,000 0 --
SBK Investment Partners (22)............ 50,000 * 50,000 0 --
Charles E. Emby (23).................... 75,000 1.4 37,500 37,500 *
Irwin J. Goldsmith (23)................. 75,000 1.4 37,500 37,500 *
Kar Ye Yeung(24)........................ 43,056 * 4,306 38,750 *
c/o Marchon Toys
Unit 3804-5, 38/F
Wharf Cable Tower
9 Hoi Shing Road
Tsuen Wan, N.T., Hong Kong
Tyler Bulkley........................... 43,056 * 20,000 23,056 *
Harvey Katz............................. 21,528 * 15,000 6,528 *
All directors and executive officers as
a group (7 persons) (25)(26).......... 6,454,675 76.9 333,333 5,321,342 51.5
</TABLE>
- ------------------------------
* Less than 1%.
(1) Unless otherwise indicated, the business address of the 5% beneficial
owners named in the above table is care of Empire of Carolina, Inc., 5150
Linton Boulevard, Delray Beach, Florida 33484.
(2) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares listed in the table, subject to community
property laws, where applicable. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares
which such person has the right to acquire within 60 days. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above, any security which such person or group of persons
has the right to acquire within 60 days is deemed to be outstanding for the
purpose of computing the percentage ownership for such person or persons,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Based upon 5,205,200 shares of Common Stock outstanding plus shares
issuable upon exercise of options, warrants and convertible securities
which are included in the number of shares beneficially owned by such
person.
(4) Based upon 7,149,200 shares of Common Stock to be outstanding upon the
completion of this Offering, plus shares issuable upon exercise of options,
warrants and convertible securities which are included in the number of
shares beneficially owned by such person.
(5) Includes 1,499,872 shares of Common Stock with respect to which Steven
Geller has held voting power pursuant to the Halco Voting Agreement.
500,000 shares subject to the Halco Voting Agreement are anticipated to be
sold by Halco in this Offering. Such 1,499,872 shares include 333,333
shares of Common Stock with respect to which Steven Geller has an option to
purchase from Halco over a period of three years at prices ranging from
$6.50 per share to $7.78 per share (the "Halco Option"). Notwithstanding
the above, Mr. Saul has claimed a one-half interest in the Halco Option.
Mr. Geller has agreed to sell the Halco Option to the Underwriters in
connection with this Offering, and Mr. Geller and Mr. Saul have agreed to
settle Mr. Saul's claim through the payment by Mr. Geller to Mr. Saul of a
portion of the proceeds from the sale of the Halco Option. Includes 291,669
shares of Common Stock
51
<PAGE> 54
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.
(6) 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. See "Certain Transactions -- Shareholders'
Agreement." 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. Upon the completion of this Offering,
persons subject to the Shareholders' Agreement will beneficially own
approximately 29.9% (25.3% if the over-allotment option is exercised in
full) of the issued and outstanding shares of Common Stock and
approximately 52.6% of the issued and outstanding Common Stock on a fully
diluted basis. See "Risk Factors -- Control by Existing Stockholders" and
"Certain Transactions -- Shareholders' Agreement."
(7) Mr. Smollar disclaims beneficial ownership of all of these shares. The
beneficial and direct owner of such shares are The Autumn Glory Trust, a
Cook Islands trust, and the Iridium Trust, a Bahamian trust (collectively,
the "Trusts"). The discretionary beneficiaries of the Trusts are Champ
Enterprises Limited Partnership, an Illinois limited partnership ("Champ"),
of which Mr. Smollar is a general partner, as well as the limited partners
of Champ individually, including Mr. Smollar and members of his family.
Champ irrevocably transferred shares to The Autumn Glory Trust subject to
the terms of the Shareholders' Agreement and the Marchon Stockholders'
Agreement, and The Autumn Glory Trust irrevocably shares to the Iridium
Trust, subject to the terms of the Shareholders' Agreement and the Marchon
Stockholders' Agreement. Pursuant to such agreements, Mr. Smollar is to be
designated a director for such time as the Trusts and certain permitted
transferees own 5% of the outstanding Common Stock. The Trusts, through
their respective independent trustees (the "Trustees"), possess all voting
rights with respect to the shares of the Common Stock, subject to the
Shareholders' Agreement and the Marchon Stockholders' Agreement. However,
the Trustees require the confirmation of the respective Protectors of the
Trusts (the "Protector"), in connection with certain activities, including
the exercise of dispositive powers with respect to such shares. Mr. Kar Ye
Yeung, an officer of a subsidiary of the Company, is the Protector of each
of the Trusts, and cannot be removed by any third party. The Protector has
the sole right to appoint his successor, as well as the right to remove the
Trustee at any time. Mr. Smollar does not directly or indirectly have the
legal right to vote or dispose of the shares.
(8) Does not include a right to 50% of the remaining portion of the Halco
Grant, with respect to which Mr. Saul claims beneficial ownership (see note
5 above).
(9) Solely in his capacity as one of two managing general partners of WPG
Private Equity Partners L.P., the general partner of WPG Corporate
Development Associates IV, L.P., and in his capacity as one of the two
managing general partners of WPG Private Equity Partners (Overseas) L.P.
and in his capacity as a director of WPG CDA IV (Overseas), Ltd., the
general partners of WPG Corporate Development Associates IV, L.P. and WPG
Corporate Development Associates IV (Overseas), L.P. Mr. Hutchinson does
not directly own any shares of Common Stock. The number of shares deemed to
be beneficially owned by Mr. Hutchinson after this Offering will be reduced
as a result of sales by certain of such entities.
(10) Represents 6,667 shares of Common Stock which Mr. Matalene has the right to
acquire upon the conversion of the Convertible Debentures and 1,000 shares
held for the benefit of Mr. Matalene's child. Excludes warrants held by
PaineWebber Incorporated to purchase 63,000 shares of Common Stock at $7.50
per share, expiring December 27, 1997, which were received in connection
with its performance of investment banking services for the Company for the
one year period ending December 27, 1995, as to which Mr. Matalene
disclaims beneficial ownership.
(11) Includes 475,000 shares of Common Stock which Mr. Greenberg has the right
to acquire upon exercise of warrants at an exercise price of $7.50 per
share. Mr. Greenberg purchased these warrants from Neil Saul.
52
<PAGE> 55
(12) Includes 1,735 shares of Common Stock which may be acquired upon conversion
of the Convertible Debentures and 306 shares directly owned by him which
are subject to the Shareholders' Agreement pursuant to which WPG Corporate
Development Associates, IV, L.P. has the right to vote such shares and
certain other rights. Does not include shares owned by WPG Private Equity
Partners, L.P. and WPG Private Equity Partners (Overseas), L.P. Mr. Pfister
is a general partner of each of these partnerships.
(13) All of these shares are directly owned by Halco, subject to the Halco
Option covering 333,333 shares, which will be exercised by the Underwriters
in connection with this Offering. 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.
(14) Voting and dispositive powers are exercised through its sole general
partner, WPG Private Equity Partners, L.P. Voting and dispositive powers of
WPG Private Equity Partners, L.P., which does not directly own any shares
of Common Stock, are exercised through its two managing general partners,
Steven N. Hutchinson and Wesley W. Lang, Jr. Includes (a) 1,531,252 shares
of Common Stock which WPG Corporate Development Associates IV, L.P. has the
right to acquire upon conversion of the Convertible Debentures; (b) 25,573
shares owned in the aggregate by Mr. Pfister, Mr. Whiting, Ms. Kerppola,
Glenbrook and Westpool which are subject to the Shareholders' Agreement
pursuant to which WPG Corporate Development Associates IV, L.P. has the
right to vote such shares, and certain other rights, (c) 86,175 shares of
Common Stock which such persons have the right to acquire upon conversion
of the Convertible Debentures and (d) warrants held by WPG Corporate
Development Associates IV, L.P. to purchase an additional 80,571 shares of
Common Stock at an exercise price of $7.50 per share which were received as
consideration for agreeing to provide certain managerial services to the
Company for the period ending December 31, 1995. However, does not include
shares of Common Stock currently owned by Halco Industries, Inc. which WPG
Corporate Development Associates IV, L.P. may have the right to purchase
pursuant to the terms of a certain stock purchase agreement with Mr.
Geller. Pursuant to Rule 13d-4, WPG Corporate Development Associates IV,
L.P. disclaims beneficial ownership of all such shares. WPG Corporate
Development Associates IV, L.P. directly owns 460,723 shares of Common
Stock. Does not include shares of Common Stock issuable upon conversion of
the Class A Preferred Stock, of which 341,372 are held by WPG Corporate
Development Associates IV, L.P., 82,317 are held by WPG Corporate
Development Associates IV (Overseas), L.P., and 18,575 are held in the
aggregate by Westpool and Glenbrook.
(15) Voting and dispositive powers may be deemed to be shared with its two
general partners, WPG Private Equity Partners (Overseas), L.P. and WPG CDA
IV (Overseas), Ltd. Steven N. Hutchinson and Wesley W. Lang, Jr. serve as
managing general partners of each of WPG Private Equity Partners
(Overseas), L.P. and WPG CDA IV (Overseas), Ltd. Includes 369,238 shares of
Common Stock which it has the right to acquire upon conversion of
Convertible Debentures. Does not include shares of Common Stock issuable
upon conversion of the Class A Preferred Stock, of which 341,372 are held
by WPG Corporate Development Associates IV, L.P., 82,317 are held by WPG
Corporate Development Associates IV (Overseas), L.P., and 18,575 are held
in the aggregate by Westpool and Glenbrook. In addition to shares owned of
record by WPG Corporate Development Associates IV (Overseas), L.P., WPG
Private Equity Partners (Overseas), L.P. beneficially owns warrants to
purchase 19,429 shares of Common Stock.
(16) Includes 52,052 shares subject to convertible debentures.
(17) Includes 28,918 shares subject to convertible debentures.
(18) Includes 240,000 shares issuable upon exercise of an option exercisable at
$8.50 per share, which option will be exercised in full by the Selling
Stockholder in connection with this Offering.
(19) Does not include a maximum of 454,000 additional shares of Common Stock
which may be issued for price protection related to the Buddy L
acquisition. The proposed sale of 378,000 shares in this Offering
53
<PAGE> 56
is subject to the approval of the bankruptcy court overseeing the affairs of the
Selling Stockholder, a debtor in possession.
(20) All of such shares are issuable upon the exercise of currently exercisable
warrants, which warrants will be exercised in full by the Selling
Stockholder in connection with this Offering.
(21) All of these shares are issuable upon the exercise of currently exercisable
warrants, which warrants will be exercised in full by the Selling
Stockholder in connection with this Offering.
(22) All of these shares are issuable upon the exercise of currently exercisable
warrants, which warrants will be exercised in full by the Selling
Stockholder in connection with this Offering.
(23) All of these shares are issuable upon exercise of currently exercisable
warrants. Warrants to acquire 37,800 shares will be exercised by the
Selling Stockholder in connection with this Offering. Mr. Emby and Mr.
Goldsmith are senior managers of a subsidiary of the Company and
sons-in-law of Steven Geller.
(24) Does not include shares owned by The Autumn Glory Trust or The Iridium
Trust. See note 7 above.
(25) These stockholders have granted the options to the Underwriters to purchase
shares of Common Stock to cover over-allotments, if any. Such shares will
not be sold unless the Underwriters exercise the over-allotment option, and
the above table assumes that such over-allotment option will not be
exercised. If the over-allotment option is exercised in full, Mr. Geller
and the Company will sell 100,000 and 297,595, respectively, additional
shares of Common Stock and the Iridium Trust will sell 150,000 shares of
Common Stock.
(26) Where more than one person or entity is the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) of the same shares listed in the table,
such shares are counted only once in determining the totals listed in the
table. Includes the shares of Common Stock attributable to Mr. Smollar as
to which he disclaims beneficial ownership. See note 7 above. Such shares
are directly owned and voted by the Trusts, even though they may be voted
on certain occasions with the Geller Group and the WPG Group pursuant to
the Shareholders' Agreement.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.10 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share, issuable in series (the "Preferred Stock"). The
Board of Directors has designated 442,264 shares of Preferred Stock as Series A
Cumulative Convertible Preferred Stock, $.01 par value (the "Series A Preferred
Stock") and all of such shares of Series A Preferred Stock are outstanding as of
the date of this Prospectus. As of June 14, 1996, there were 5,205,200 shares of
Common Stock outstanding held of record by approximately 2,000 stockholders.
Upon the completion of this Offering, there will be 7,149,200 shares (7,446,795
shares if the over-allotment option is exercised in full) of Common Stock
outstanding.
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Charter and By-laws.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and to not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares
54
<PAGE> 57
of Common Stock are, and the shares offered by the Company in this Offering will
be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
The Company's Charter provides that the Board of Directors is authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, to issue from time to time up to an aggregate of 5,000,000 shares of
Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future. The Company has
no present plans to issue any additional shares of Preferred Stock.
TERMS OF SERIES A PREFERRED STOCK
The Board of Directors has designated 442,264 shares of Series A Preferred
Stock. The number of authorized shares of Series A Preferred Stock may be
increased or decreased from time to time by resolution of the Board of
Directors, but in no event shall the number of shares be decreased below the
number of shares of Series A Preferred Stock then outstanding.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of the Series A Preferred Stock are
entitled to receive an amount equal to $7.25 per share, for each share of Series
A Preferred Stock then held by them, as adjusted for any stock split, stock
dividend, merger, reorganization, reclassification or other recapitalization of
the Company, less any distributions previously made to such holders pursuant to
the events described in this paragraph (the "Stated Liquidation Value"). In
setting the terms of the Series A Preferred Stock, the Board of Directors
established $7.25 per share as the initial Stated Liquidation Value because such
amount was equal to the per share price to be paid by the purchasers of such
stock. A consolidation or merger of the Company with or into any other company
or companies, or a sale of all or substantially all of the assets of the Company
shall not be deemed to be a liquidation, dilution or winding up for purposes of
the provision described in the foregoing sentence. Such payment shall be made on
a pro-rata basis, if the assets distributable to holders of the Series A
Preferred Stock are insufficient to pay such amounts in full. Such dividends
shall be payable from the Company's net profits or surplus when determined by
the Board of Directors in its discretion. The Series A Preferred Stock shall not
be entitled to participate in any other or additional surplus or net profits of
the Company prior to the conversion of the Series A Preferred Stock into Common
Stock.
In no event while the Series A Preferred Stock is outstanding may the
Company redeem any shares of Common Stock without the approval of the majority
in interest of the holders of the Series A Preferred Stock. The holders of the
Series A Preferred Stock do not have the right to convert such shares into
shares of Common Stock. Notwithstanding such provision, the shares of Series A
Preferred Stock shall automatically convert into shares of Common Stock on a
share-for-share basis, as adjusted for any stock split, reverse stock split,
stock dividend, merger, reorganization, reclassification or other
recapitalization of the Company, upon the affirmative vote of a majority of the
shares of Common Stock represented at the 1996 Annual Meeting or upon compliance
with Section 228 of the Delaware General Corporate Law (the "DGCL") prior to the
1996 Annual Meeting. On or after such conversion of the Series A Preferred Stock
into Common Stock, all rights to any accrued and unpaid dividends shall lapse.
The WPG Group and the Geller Group have agreed to vote the shares of Common
Stock beneficially owned by them to approve such conversion, and the Company
expects that such conversion will be approved at the 1996 Annual Meeting. After
giving effect to the sale of shares on the date of this Prospectus, the WPG
Group and the Geller Group will beneficially own (determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934) 25.8% and 35.6%,
respectively, of the outstanding Common Stock, and will hold the power to vote
4.2% and 25.7%, respectively, of the outstanding voting stock.
55
<PAGE> 58
In the event that the Series A Preferred Stock is not automatically
converted into Common Stock on the day after the 1996 Annual Meeting, dividends
shall be payable quarterly at a preferential return equal to 15% per annum of
the Stated Liquidation Value out of funds legally available therefor, such
dividend shall commence on the first day of the third month after the date of
the 1996 Annual Meeting. Such right to return shall be cumulative until such
dividend is paid by the Company. To the extent that dividends are declared and
unpaid, additional dividends or interest shall accumulate on such unpaid
dividends.
Except as required by law or provided as described below, the holders of
the Series A Preferred Stock shall not be entitled to vote such shares of Series
A Preferred Stock. So long as the Series A shall remain outstanding, the Company
shall not, without first obtaining the approval (by vote or written consent), as
provided by law, of the holders of the majority of the outstanding number of
shares of Series A Preferred Stock: (i) alter or change the rights, preferences,
or privileges of the Series A Preferred Stock so as to materially adversely
affect the holders of the Series A Preferred Stock; (ii) increase the authorized
number of shares of the Series A Preferred Stock; or (iii) create any new class
or series of shares having preferences over any outstanding Series A Preferred
Stock as to dividends or assets.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The provisions of the Company's Charter, By-laws and Delaware statutory law
described in this section may delay or make more difficult acquisitions or
changes in control of the Company that are not approved by the Board of
Directors.
The Company is subject to the provisions of Section 203 of the DGCL.
Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Company's Charter provides for eight directors, subject to an increase
by the Board of Directors upon the affirmative vote of more than 80% of the
directors then in office. The Charter provides that the Company will not take
nor permit any of its subsidiaries to take corporate action with respect to the
following matters, except upon the affirmative vote of more than 80% of the
directors then in office: (a) any merger, consolidation or other business
combination of the Company or any of its subsidiaries; (b) sales of assets
(other than the sales of inventory in the ordinary course of business) of the
Company or its subsidiaries (including assets consisting of shares of stock of a
subsidiary) where the gross proceeds of the sale (exclusive of assumptions of
liabilities) are, in the aggregate in excess of $7 million in any calendar year;
(c) any amendment to the Certificate of Incorporation or By-laws of the
Corporation or the subsidiaries; (d) any payment (other than employee
compensation and other ordinary incidents of employment) to any director,
officer, stockholder or affiliate of the Corporation or any of its subsidiaries
or any present or former known spouse, ancestor or descendant of the
aforementioned persons or a trust or other similar entity for the benefit of the
foregoing persons; (e) any declaration or payment of dividends or similar
distributions on securities of the Company; (f) any public or private offering
of convertible debt or other equity securities of the Company or the
subsidiaries, other than (i) the offering of the Shares pursuant to an employee
stock option plan for the benefit of the Company or the subsidiaries and (ii)
certain other issuances of securities; (g) incurrence of indebtedness (other
than indebtedness under the Company's bank credit facility and the purchase
agreement relating to the 1994 debenture financing) by the Company and its
subsidiaries where such indebtedness incurred, together with other indebtedness
then outstanding (other than the Company's bank credit facility, the purchase
agreement relating to the 1994 debenture financing and indebtedness attributable
to amounts owed under the Marchon Stockholders as a result of the exchange of
their shares in Marchon for Common Stock) aggregates $10 million or more; (h)
any adoption of a plan of liquidation of the Company; or (i) any acquisition of
assets and/or stock or related series of acquisitions of assets and/or stock
(other than purchases
56
<PAGE> 59
of inventory and capital expenditures in the ordinary course of business) which
would cause the amount expended (or committed to be expended) by the Company and
its subsidiaries for the acquisition of such assets and/or stock during a
calendar year to exceed $10 million. See "Certain Transactions -- Shareholders'
Agreement."
As permitted by DGCL, the Charter and By-laws provide that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director by reason of any act
or omission occurring on or after July 18, 1988, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
(iv) for any transaction from which the director shall derive an improper
personal benefit or (v) to any extent that such liability shall not be limited
or eliminated by virtue of the provisions of Section 102(b)(7) of the DGCL or
any successor thereof. In addition, the Charter provides that the Company shall,
to the fullest extent authorized by the DGCL, as amended from time to time,
indemnify and hold harmless all directors and officers against all expense,
liability and loss reasonably incurred or suffered by such indemnitee in
connection therewith. Such indemnification shall continue as to an indemnitee
who has ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators. The right to indemnification
includes the right to be advanced funds from the Company for expenses incurred
in defending any proceeding for which a right to indemnification is applicable.
The Company's By-laws provide that special meetings of the stockholders may
be called at any time by resolution of the Board of Directors, the Chairman of
the Board, the Chief Executive Officer, the Chief Operating Officer or the
President, but may not be called by other persons.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
57
<PAGE> 60
UNDERWRITING
The several underwriters named below (the "Underwriters"), for whom William
Blair & Company, L.L.C. and Gerard Klauer Mattison & Co., LLC ("GKM") are acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions set forth in the underwriting agreement by and among
the Company, the Selling Stockholders and the Representatives (the "Underwriting
Agreement"), to purchase from the Company and the Selling Stockholders, and the
Company and the Selling Stockholders have agreed to sell to the Underwriters,
the respective number of shares of Common Stock (including 333,333 outstanding
shares obtainable upon exercise of the Halco Option, which is being sold to the
Underwriters by a Selling Stockholder, but excluding the over-allotment shares)
set forth opposite each Underwriter's name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------- ---------
<S> <C>
William Blair & Company, L.L.C.....................................
Gerard Klauer Mattison & Co., LLC..................................
---------
Total......................................................... 3,650,639
=========
</TABLE>
The nature of the Underwriters' obligations under the Underwriting
Agreement is such that all shares of Common Stock being offered, excluding
shares covered by the over-allotment option granted to the Underwriters, must be
purchased if any are purchased. In the event of a default by any Underwriter,
the Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters pertaining to the Underwriting
Agreement may be increased or such Underwriting Agreement may be terminated.
The Representatives have advised the Company and the Selling Stockholders
that they propose to offer the shares of Common Stock directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to selected dealers at such price less a concession of not more
than $ per share. Additionally, the Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
other dealers. After the public offering of the Common Stock, the public
offering price and other selling terms may be changed by the Representatives.
The Company and certain Selling Stockholders have granted the Underwriters
an option, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 547,595 shares of Common Stock at the same price
per share to be paid by the Underwriters for the other shares offered hereby. If
the Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
overallotments, if any, made in connection with the distribution of the shares
of Common Stock offered hereby.
The Company, the Company's directors and officers and certain stockholders
of the Company have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into Common
Stock for a period of 180 days, and certain Selling Stockholders have agreed not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into Common Stock for a period of 90 days,
in each case after the effective date of the Registration Statement of which
this Prospectus is a part without the written consent of the Representatives,
except for the shares of Common Stock offered hereby and the sale of shares
pursuant to the over-allotment option.
58
<PAGE> 61
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
GKM has provided various investment banking services to Marchon and the
Company since 1994. In 1994, Marchon paid GKM fees in an aggregate amount of
$237,500 relating to general investment banking services and in connection with
the Company's acquisition of Marchon, and the Company paid GKM fees in an
aggregate amount of $150,000 in connection with the December 1994 placement of
the convertible debentures. In 1995, the Company paid GKM fees in an aggregate
amount of $245,000 and issued three-year warrants to purchase up to 79,000
shares of common stock of the Company at $7.50 per share to GKM for investment
banking services provided in connection with the Buddy L transaction.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Schwartz & Freeman, Chicago, Illinois. Certain legal matters with
respect to the Offering will be passed upon for the Company by Sonnenschein Nath
& Rosenthal, Chicago, Illinois. Certain legal matters with respect to the
Offering will be passed upon for the Underwriters by Kirkland & Ellis, Chicago,
Illinois.
EXPERTS
The consolidated financial statements included in this Prospectus, the
related consolidated financial statement schedules included elsewhere in the
Registration Statement of which this Prospectus is a part, and the consolidated
financial statements as of and for each of the years in the five-year period
ended December 31, 1995, from which the Statement of Operations Data and the
Balance Sheet Data appearing on pages 5 and 15 of this Prospectus have been
derived, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in this Registration
Statement. Such consolidated financial statements, consolidated financial
statement schedules and Statement of Operations and Balance Sheet Data have been
included herein and elsewhere in this Registration Statement in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The audited schedules of the toy business of Buddy L Inc. and subsidiaries
for the years ended December 31, 1993 and 1994 appearing in this Prospectus and
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report appearing herein and
elsewhere in the Registration Statement, and have been so included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Marchon, Inc. and subsidiaries at
December 31, 1993 and for the year then ended appearing in this Prospectus and
the Registration Statement have been audited by Coopers & Lybrand, LLP,
independent auditors, as set forth in their report appearing herein and
elsewhere in the Registration Statement which, as to Marchon Toys Ltd. (Hong
Kong), are based in part on the report of other auditors, and have been so
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Marchon Toys Ltd. (Hong Kong) at
December 31, 1993 and for the year then ended, not separately presented herein,
have been audited by Wong Brothers & Co., independent public accountants, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
59
<PAGE> 62
AVAILABLE INFORMATION
The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "Commission") on Form S-1 under the Securities Act of
1933, as amended, with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by rules of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. With
respect to each such contract or other document filed as a part of or otherwise
incorporated in the Registration Statement, reference is made to the exhibit for
a more complete description of the matters involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Commission. The Registration
Statement, including the schedules and exhibits thereto, as well as such
reports, proxy statements and other information filed by the Company can be
inspected, without charge, and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices maintained by the
Commission at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such materials can also be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on the
American Stock Exchange and copies of such materials may also be inspected and
copied at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006.
60
<PAGE> 63
EMPIRE OF CAROLINA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Empire of Carolina, Inc. and Subsidiaries:
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994, December 31, 1995 and March 31,
1996 (unaudited).................................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996 (unaudited)......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements........................................... F-8
Buddy L Inc. and Subsidiaries:
Independent Auditors' Report......................................................... F-28
Schedules of Net Sales, Cost of Sales and Direct Expenses for the Toy Business of
Buddy L Inc. and subsidiaries for the years ended December 31, 1993 and 1994...... F-29
Unaudited Schedule of Net Sales, Cost of Sales and Direct Expenses for the Toy
Business of Buddy L Inc. and subsidiaries for the period ended July 7, 1995....... F-30
Notes to Schedules of Net Sales, Cost of Sales and Direct Expenses for the Toy
Business of Buddy L Inc. and subsidiaries for the years ended December 31, 1993
and 1994 and the unaudited period ended July 7, 1995.............................. F-31
Marchon, Inc. and Subsidiaries:
Reports of Independent Accountants................................................... F-33
Consolidated Balance Sheet as of December 31, 1993................................... F-35
Consolidated Statement of Operations for the year ended December 31, 1993............ F-36
Consolidated Statement of Changes in Stockholders' Equity for the year ended December
31, 1993.......................................................................... F-37
Consolidated Statement of Cash Flows for the year ended December 31, 1993............ F-38
Notes to Consolidated Financial Statements........................................... F-39
Unaudited Consolidated Condensed Statements of Operations and Retained Earnings
(Deficit) and Cash Flows for the nine months ended September 30, 1994............. F-44
Notes to Unaudited Consolidated Condensed Statements of Operations and Retained
Earnings (Deficit) and of Cash Flows.............................................. F-46
Empire of Carolina, Inc. and Subsidiaries Unaudited Pro Forma Statement of Operations:
Introduction to Unaudited Pro Forma Consolidated Condensed Statement of Operations... F-47
Unaudited Pro Forma Consolidated Condensed Statement of Operations for the year ended
December 31, 1995................................................................. F-48
Notes to Unaudited Pro Forma Consolidated Condensed Statement of Operations.......... F-49
</TABLE>
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Empire of Carolina, Inc.
We have audited the accompanying consolidated balance sheets of Empire of
Carolina, Inc. and its subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Empire of Carolina, Inc. and
its subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in accordance with generally accepted accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective January 1,
1993 to conform with Statement of Financial Accounting Standards No. 109.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets as of December 31, 1991,
1992 and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1991 and
1992 (none of which are presented herein); and we expressed unqualified opinions
on those consolidated financial statements. In our opinion, the information set
forth in the statement of operations data and the balance sheet data for each of
the five years in the period ended December 31, 1995, appearing on pages 5 and
15, is fairly stated in all material respects in relation to the consolidated
financial statements from which it has been derived.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 29, 1996
(April 8, 1996 as to Note 17)
F-2
<PAGE> 65
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 2,738 $ 2,568 $ 339
Marketable securities................................... 2,305 189 173
Accounts receivable, less allowances and other
deductions
(1994 -- $3,770; 1995 -- $4,290; 1996 -- $4,560)..... 15,260 48,957 29,336
Inventories, net........................................ 11,775 30,178 39,367
Prepaid expenses and other current assets............... 1,735 2,046 4,174
Deferred income taxes................................... 4,464 5,596 4,503
------- -------- --------
Total current assets................................. 38,277 89,534 77,892
Property, plant and equipment, net........................ 11,171 23,640 22,894
Excess cost over fair value of net assets acquired........ 9,970 15,174 14,965
Trademarks, patents, tradenames and licenses.............. 7,044 10,253 10,052
Other noncurrent assets................................... 1,494 1,552 1,664
------- -------- --------
Total................................................ $ 67,956 $140,153 $ 127,467
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt..... $ 8,686 $ 49,206 $ 46,510
Accounts payable -- trade............................... 6,080 17,516 13,828
Accrued income taxes.................................... 3,066 1,575 --
Accrued employee compensation........................... 1,830 1,293 641
Accrued royalties....................................... 1,576 3,705 2,026
Accrued nonrecurring restructuring and relocation
expenses............................................. -- 3,227 1,727
Indemnification obligations related to sales of
subsidiaries......................................... 3,363 1,926 1,117
Other accrued liabilities............................... 4,761 4,249 6,065
------- -------- --------
Total current liabilities............................ 29,362 82,697 71,914
------- -------- --------
Long-term liabilities:
Convertible subordinated debentures..................... 13,563 13,851 13,923
Senior subordinated notes............................... -- 7,959 8,148
Deferred income taxes................................... 2,894 2,083 2,057
Other noncurrent liabilities............................ 1,560 3,101 3,054
------- -------- --------
Total long-term liabilities.......................... 18,017 26,994 27,182
------- -------- --------
Total liabilities.................................... 47,379 109,691 99,096
------- -------- --------
Commitments and contingencies (See Note 12)
Stockholders' equity:
Common stock, $.10 par value, 30,000,000 shares
authorized, shares issued and outstanding: 1994 --
4,191,000;
1995 -- 5,195,000; 1996 -- 5,205,000................. 419 519 521
Preferred stock, $.01 par value, 5,000,000 shares
authorized, shares of series A cumulative convertible
preferred stock authorized, issued and outstanding:
1994 -- 0; 1995 and 1996 -- 442,264 ($3,206,000
involuntary liquidation preference).................. -- 4 4
Additional paid-in capital.............................. 18,972 33,193 33,256
Retained earnings (deficit)............................. 1,842 (2,659) (4,815)
Stockholders' loans..................................... (656) (595) (595)
------- -------- --------
Total stockholders' equity........................... 20,577 30,462 28,371
------- -------- --------
Total..................................................... $ 67,956 $140,153 $ 127,467
======= ======== ========
</TABLE>
See notes to the consolidated financial statements
F-3
<PAGE> 66
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $41,354 $57,964 $153,744 $19,088 $22,186
Cost of sales.................................. 29,733 40,557 111,905 12,937 16,217
------- ------- -------- ------- -------
Gross profit................................... 11,621 17,407 41,839 6,151 5,969
Selling and administrative..................... 15,086 16,442 36,183 6,804 7,298
Nonrecurring restructuring and relocation
charges...................................... -- -- 7,550 150 --
------- ------- -------- ------- -------
Operating income (loss)........................ (3,465) 965 (1,894) (803) (1,329)
Other income (expenses):
Interest income, dividends and net realized
gains..................................... 3,027 2,612 514 54 13
Unrealized loss on marketable securities..... -- (773) -- -- --
Interest expense............................. (2,937) (1,407) (5,996) (667) (2,132)
Gain on settlement of Connecticut tax
assessment................................ 2,925 -- -- -- --
------- ------- -------- ------- -------
Total other income (expenses)........... 3,015 432 (5,482) (613) (2,119)
------- ------- -------- ------- -------
Income (loss) from continuing operations before
income taxes and cumulative effect of an
accounting change............................ (450) 1,397 (7,376) (1,416) (3,448)
Income tax expense (benefit)................... 1,066 808 (2,875) (410) (1,292)
------- ------- -------- ------- -------
Income (loss) from continuing operations before
cumulative effect of an accounting change.... (1,516) 589 (4,501) (1,006) (2,156)
Income from discontinued operations, net of
tax.......................................... 25,729 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before cumulative effect of an
accounting change............................ 24,213 589 (4,501) (1,006) (2,156)
Cumulative effect of change in accounting for
income taxes................................. 114 -- -- -- --
------- ------- -------- ------- -------
Net income (loss).............................. $24,327 $ 589 $ (4,501) $(1,006) $(2,156)
======= ======= ======== ======= =======
Income (loss) per common share:
Primary earnings per share --
Income (loss) from continuing operations
before cumulative effect of an accounting
change.................................... $ (0.10) $ 0.05 $ (0.96) $ (0.24) $ (0.41)
Income from discontinued operations.......... 1.75 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before cumulative effect of an
accounting change......................... 1.65 0.05 (0.96) (0.24) (0.41)
Cumulative effect of change in accounting for
income taxes.............................. 0.01 -- -- -- --
------- ------- -------- ------- -------
Net income (loss).............................. $ 1.66 $ 0.05 $ (0.96) $ (0.24) $ (0.41)
======= ======= ======== ======= =======
Fully diluted earnings per share --
Income (loss) from continuing operations
before cumulative effect of an accounting
change.................................... $ (0.07) $ 0.05 $ (0.96) $ (0.24) $ (0.41)
Income from discontinued operations.......... 1.58 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before cumulative effect of an
accounting change......................... 1.51 0.05 (0.96) (0.24) (0.41)
Cumulative effect of change in accounting for
income taxes.............................. 0.01 -- -- -- --
------- ------- -------- ------- -------
Net income (loss).............................. $ 1.52 $ 0.05 $ (0.96) $ (0.24) $ (0.41)
======= ======= ======== ======= =======
Dividends per common share..................... $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======== ======= =======
</TABLE>
See notes to the consolidated financial statements
F-4
<PAGE> 67
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CUMULATIVE
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL RETAINED TREASURY STOCK FOREIGN
----------------- --------------- PAID-IN EARNINGS ------------------ CURRENCY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TRANSLATION LOANS
------- ------- ------ ------ ---------- -------- ------- -------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993.............. 10,640 $ 1,064 -- $-- $ 39,157 $ 16,660 (105) $ (789) $(1,560) -$-
Net income.......... -- -- -- -- -- 24,327 -- -- -- --
Conversion of debt
into common
stock............. 5,760 576 -- -- 17,424 -- -- -- -- --
Sale of assets of
foreign
subsidiary........ -- -- -- -- -- -- -- -- 1,560 --
------- ------- --- ---- -------- ------- -------- ------- ------ -----
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............. -- -- -- -- -- -- -- -- -- (656)
Issuance of common
stock warrants.... -- -- -- -- 1,740 -- -- -- -- --
------- ------- --- ---- -------- ------- -------- ------- ------ -----
Balance, December
31, 1994.......... 4,191 419 -- -- 18,972 1,842 -- -- -- (656)
Net loss............ -- -- -- -- -- (4,501) -- -- -- --
Issuance of common
stock in Buddy L
acquisition....... 757 76 -- -- 9,004 -- -- -- -- --
Issuance of common
stock............. 247 24 -- -- 1,770 -- -- -- -- --
Issuance of
preferred stock... -- -- 442 4 3,202 -- -- -- -- --
Collections on
stockholders'
loans............. -- -- -- -- -- -- -- -- -- 61
Other capital
transactions...... -- -- -- -- 245 -- -- -- -- --
------- ------- --- ---- -------- ------- -------- ------- ------ -----
Balance, December
31, 1995.......... 5,195 519 442 4 33,193 (2,659) -- -- -- (595)
Net loss
(unaudited)....... -- -- -- -- -- (2,156) -- -- -- --
Issuance of common
stock
(unaudited)....... 10 2 -- -- 63 -- -- -- -- --
------- ------- --- ---- -------- ------- -------- ------- ------ -----
Balance, March 31,
1996
(unaudited)....... 5,205 $ 521 442 $ 4 $ 33,256 $ (4,815) -- $ -- $-- $(595)
======= ======= === ==== ======== ======= ======== ======= ====== =====
<CAPTION>
TOTAL
--------
<S> <C>
Balance, January 1,
1993.............. $ 54,532
Net income.......... 24,327
Conversion of debt
into common
stock............. 18,000
Sale of assets of
foreign
subsidiary........ 1,560
--------
Balance, December
31, 1993.......... 98,419
Net income.......... 589
Purchase of treasury
stock............. (86,111)
Cancellation of
treasury stock.... --
Issuance of common
stock in Marchon
acquisition....... 6,596
Net stockholders'
loans............. (656)
Issuance of common
stock warrants.... 1,740
--------
Balance, December
31, 1994.......... 20,577
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
stockholders'
loans............. 61
Other capital
transactions...... 245
--------
Balance, December
31, 1995.......... 30,462
Net loss
(unaudited)....... (2,156)
Issuance of common
stock
(unaudited)....... 65
--------
Balance, March 31,
1996
(unaudited)....... $ 28,371
========
</TABLE>
See notes to the consolidated financial statements
F-5
<PAGE> 68
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------
1993 1994 1995 1995 1996
--------- -------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 24,327 $ 589 $ (4,501) $(1,006) $(2,156)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Cumulative effect of change in accounting for
income taxes.................................... (114) -- -- -- --
Depreciation and amortization..................... 1,796 2,283 7,211 1,200 2,273
Changes in allowances for losses on assets........ 492 1,444 703 178 224
Losses (gains) on sales of securities ............ (2) 141 3 -- 16
Income from discontinued operations............... (25,729) -- -- -- --
Writedown of assets............................... -- 773 17 -- --
Other............................................. 1,067 163 -- -- (800)
Changes in assets and liabilities, net of
acquisitions and dispositions of businesses:
Accounts receivable............................. 590 6,294 (31,422) 231 19,497
Inventories..................................... (492) (1,312) (5,095) (5,435) (9,289)
Prepaid expenses and other current assets....... 122 84 135 (1,218) (2,128)
Increase in other noncurrent assets............. -- (749) (58) 464 (187)
Accounts payable -- trade....................... 386 (8,754) 11,436 3,026 (3,688)
Accrued and other liabilities................... (1,305) 589 (1,368) (1,294) (2,024)
Accrued and deferred income taxes............... (1,540) (1,528) (3,434) (520) (508)
Other noncurrent liabilities.................... (424) (352) 1,541 88 142
-------- ------- -------- ------- -------
Net cash provided by (used in) operating
activities................................. (826) (335) (24,832) (4,286) 1,372
-------- ------- -------- ------- -------
Cash flows from investing activities:
Capital expenditures................................ (1,423) (4,453) (5,750) (1,118) (970)
Acquisition of Marchon, net of cash acquired........ -- (2,618) -- -- --
Acquisition of Buddy L.............................. -- -- (20,092) -- --
Loans to Halco Industries, Inc...................... (22,000) (3,825) -- -- --
Repayment of loan by Halco Industries, Inc.......... -- 25,825 -- -- --
Proceeds from sales of property and equipment....... 575 139 -- -- --
Proceeds from sales of marketable securities........ 529 68,538 2,096 2,099 --
Collections on stockholders' loans.................. 61 -- --
Net proceeds from the sales of subsidiaries......... 103,376 -- -- -- --
Purchase of marketable securities................... (71,841) -- -- -- --
Net cash provided by discontinued operations........ 446 -- -- -- --
-------- ------- -------- ------- -------
Net cash provided by (used in) investing
activities................................. 9,662 83,606 (23,685) 981 (970)
-------- ------- -------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) under lines-of-credit... 8,912 (11,538) 35,767 7,178 (1,428)
Proceeds from issuance of common stock.............. -- -- 1,794 -- 65
Proceeds from issuance of preferred stock........... -- -- 3,206 -- --
Repayments of long-term debt........................ (16,753) (204) -- (2,925) (1,268)
Proceeds from issuance of long-term debt............ -- 15,000 7,580 -- --
Purchase of treasury stock.......................... -- (86,111) -- --
Sale of minority interest in CLR 25 -- -- -- --
-------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities:................................ (7,816) (82,853) 48,347 4,253 (2,631)
-------- ------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents......................................... 1,020 418 (170) 948 (2,229)
Cash and cash equivalents, beginning of period........ 1,300 2,320 2,738 2,738 2,568
-------- ------- -------- ------- -------
Cash and cash equivalents, end of period.............. $ 2,320 $ 2,738 $ 2,568 $ 3,686 $ 339
======== ======= ======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................... $ 2,897 $ 1,413 $ 4,246 $ 611 $ 1,554
Income taxes, net of refunds...................... 35,209 3,310 163 110 43
</TABLE>
See notes to the consolidated financial statements
F-6
<PAGE> 69
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
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 purchase.
Components of cash used for the acquisition as reflected in the consolidated
statements of cash flows are summarized as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, net of cash acquired....................... $ 37,371
Liabilities assumed....................................................... (24,907)
One-year notes issued..................................................... (3,250)
Common stock issued (1,076,923 shares).................................... (6,596)
--------
Cash paid in acquisition, net of cash acquired............................ $ 2,618
========
</TABLE>
During 1995, the Company finalized its allocation of the purchase price of
Marchon by decreasing assets acquired and increasing liabilities assumed by
$65,000 and $461,000, respectively, and increasing excess cost over fair value
of net assets acquired by $526,000.
During 1994, the Company issued warrants to Steve Geller, Neil Saul and
their designees who assisted them in connection with debenture financing and to
certain investment bankers to purchase 1,242,000 shares of the Company's common
stock. As a result, paid in capital increased $1,740,000, prepaid assets
increased $303,000, and debt decreased $1,437,000.
During 1994, the Company cancelled all shares held in treasury at September
30, 1994. The result of the cancellation was a reduction in common stock of
$1,329,000, a reduction in paid in capital of $45,837,000, a reduction in
retained earnings of $39,734,000, and a reduction in treasury stock of
$86,900,000.
During 1993, Halco Industries, Inc. converted $18,000,000 of debt owed by
the Company into an aggregate of 5,760,000 shares of the Company's common stock.
As a result, common stock increased $576,000 and additional paid-in capital
increased $17,424,000.
See notes to the consolidated financial statements
F-7
<PAGE> 70
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION)
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business Operations -- Empire of Carolina, Inc. ("Empire" or the "Company")
is engaged in the design, manufacture and marketing of toys, plastic decorative
holiday products and buttons through its wholly-owned subsidiaries Empire
Industries, Inc. ("Empire Industries"), Marchon, Inc. ("Marchon") and Empire
Manufacturing, Inc. ("Empire Manufacturing").
On July 7, 1995, two wholly-owned subsidiaries of Empire, Empire
Acquisition Corp., now known as Empire Manufacturing, Inc., a Delaware
corporation, and Carnichi Limited acquired the toy business assets and assumed
certain liabilities of Buddy L Inc., a Delaware corporation and a wholly-owned
subsidiary of SLM International, Inc., and Buddy L (Hong Kong) Limited, a Hong
Kong corporation and a subsidiary of Buddy L Inc. (the toy business of Buddy L
Inc. and Buddy L (Hong Kong) Limited, collectively referred to as "Buddy L").
The 1995 acquisition of Buddy L and the 1994 acquisition of Marchon are
discussed in Note 3.
From 1989 through early 1993, the Company was engaged in additional
businesses through other subsidiaries. See Note 15.
See Note 2 concerning a change in control of the Company during 1994.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and all of its majority-owned subsidiaries
after elimination of intercompany accounts and transactions. See Notes 3 and 15.
Unaudited Financial Statements -- In the opinion of management, the
consolidated statements of earnings and the consolidated statements of cash
flows for the three months ended March 31, 1995 and 1996 and the consolidated
balance sheet as of March 31, 1996 include all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
and results of operations and cash flows for the periods then ended in
accordance with generally accepted accounting principles.
Cash and Cash Equivalents -- Cash and cash equivalents include all highly
liquid investments having an original maturity of three months or less.
Marketable Securities -- Marketable securities are classified as available
for sale and consist of liquid equity securities. The specific identification
method is used to determine gains or losses when securities are sold.
Inventories -- Inventories are stated at the lower of cost or net
realizable value. Cost is determined on a first-in, first-out ("FIFO") basis.
Property -- Property is stated at original cost, reduced for any identified
long-term impairments, and includes expenditures for major betterment's and
renewals. Depreciation is recorded over the estimated useful lives of the assets
using straight-line or accelerated methods. Assets lives by property types are
as follows:
<TABLE>
<S> <C>
Building and improvements........................................ 10-35 years
Machinery and equipment.......................................... 5-10 years
Molds............................................................ 3 years
Furniture and fixtures........................................... 7-10 years
Computer equipment............................................... 3-5 years
</TABLE>
F-8
<PAGE> 71
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 (1993 -- $311,000; 1994 -- $1,112,000; 1995
- -- $2,984,000; three months ended March 31, 1996 -- $837,000), are expensed as
incurred.
Deferred Income Taxes -- Deferred income taxes are accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes
(benefits) are provided on temporary differences between the financial statement
carrying values and the tax bases of assets and liabilities. See Note 8.
Identifiable and Unidentifiable Intangible Assets -- Excess of cost over
fair value of net assets acquired relating to the Company's acquisitions of
Marchon and Buddy L are being amortized on a straight-line basis over a period
of twenty years. Amortization expense for 1993, 1994 and 1995 was $0, $104,000
and $641,000, respectively. Accumulated amortization at December 31, 1995 was
$745,000. 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 1993, 1994 and 1995 was $0, $200,000 and $1,091,000,
respectively. Accumulated amortization at December 31, 1995 was $1,291,000.
The Company assesses the recoverability of identifiable and unidentifiable
intangible assets based on management's projections of future cash flows of
acquired businesses, including the related product lines, as appropriate. If an
impairment is indicated, based on a comparison 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 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.
F-9
<PAGE> 72
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 and will disclose the required pro forma effect on net income and
earnings per share for the year ending December 31, 1996.
Reclassifications -- Certain amounts for 1993 and 1994 have been
reclassified to conform to 1995 presentation.
2. CHANGE IN CONTROL
Prior to the 1994 change in control, Maurice A. Halperin, Barry S.
Halperin, and Carol A. Minkin, officers and/or directors of the Company, and
Halco Industries, Inc. ("Halco"), a corporation whose stock was held principally
by Barry S. Halperin, owned, in the aggregate, approximately 91% or 13,566,000
shares of the outstanding shares of common stock of the Company after the
purchase by the Company of the shares tendered under the tender offer that
expired on January 11, 1994. See Note 10.
On September 30, 1994 the Company redeemed 11,766,634 shares of its common
stock for $6.50 per share from Maurice A. Halperin, Barry S. Halperin, Carol A.
Minkin, members of their families and Halco (collectively, the "Halperin
Group"). Subsequent to the redemption on September 30, 1994, Maurice A. Halperin
and Barry S. Halperin resigned as directors and officers of Empire and its
subsidiaries, and Carol A. Minkin resigned as a director of Empire. Thereafter,
on September 30, 1994, Steven Geller ("Geller") was elected Chairman of the
Board and Chief Executive Officer of Empire.
Geller, under separate agreements with the Halperin Group, (a) purchased
500,000 shares of common stock of the Company from the Halperin Group at $6.50
per share, (b) acquired an option to purchase up to 500,000 shares of common
stock of the Company from Halco at prices between $6.50 and $7.78 per share over
a three-year period and (c) acquired the right to vote Halco's remaining
1,499,872 shares of common stock of the Company (which shares include the shares
Geller has the option to purchase referred to in (b) above). Geller's right to
vote such shares terminates upon the Halperin Group's disposal thereof. Geller
has certain rights of first refusal relative to the Halperin Group's disposal of
their remaining shares.
Effective July 15, 1994, Geller and Neil Saul ("Saul") entered into
employment agreements with minimum terms of three years, pursuant to which
Geller became Chairman and Chief Executive Officer of Empire Industries, and
Saul became President of Empire Industries. In connection with such employment,
on July 18, 1994, each of Messrs. Geller and Saul were granted options to
purchase an aggregate of 500,000 shares of common stock pursuant to the
Company's 1994 Stock Option Plan. Options to acquire 60,376 shares of common
stock vest over a three-year period and are exercisable at $6.625 per share and
options to acquire
F-10
<PAGE> 73
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
2. CHANGE IN CONTROL (CONTINUED)
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 on the fifth anniversary of the date of the
Shareholders' Agreement, have one-right (the "Put Right"), subject to certain
conditions, to cause the Geller Group, at the option of the Geller Group, to
either (i) purchase the Company's common stock or cause third parties to
purchase the Company's common stock that would result from the conversion by the
debenture holders and certain other shares at either an agreed to or appraised
value or (ii) use their best efforts (including, but not limited to, voting
their shares) to effectuate a sale of the Company's stock or assets on terms
reasonably acceptable to the debenture holders and the Geller Group. The Put
Right shall terminate at such time, if ever, as the Company's trading market
value (determined on a fully-diluted basis) is in excess of $125,000,000 or the
Company has sold either $30,000,000 in shares or 2,000,000 shares at $7.50 per
share, pursuant to one or more registration statements solely for cash.
The Shareholders' Agreement also contains provisions regarding the
composition of the Board of Directors of the Company (the "Board of Directors").
The Shareholders' Agreement provides that more than 80% of the members of the
Board of Directors are required to approve certain major transactions. Upon the
occurrence of certain unfavorable events, the debenture holders would have the
right commencing in 1996 to designate all of the members of the Board of
Directors.
At December 31, 1995, Geller, Saul, the Trust and the debenture holders
collectively owned, assuming conversion of exercisable options, warrants, and
convertible debentures, or have voting power with respect, to approximately
6,583,000 shares or 77% of the Company's common stock.
3. ACQUISITION OF MARCHON, INC. AND BUDDY L
Marchon, Inc. -- On October 13, 1994, Marchon, Inc. was merged into a
newly-created wholly-owned subsidiary of the Company, which then changed its
name to Marchon, Inc. The stockholders of the former
F-11
<PAGE> 74
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
3. ACQUISITION OF MARCHON, INC. AND BUDDY L (CONTINUED)
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 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).
F-12
<PAGE> 75
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
3. ACQUISITION OF MARCHON, INC. AND BUDDY L (CONTINUED)
The following unaudited proforma results of continuing operations assume
the transactions described above occurred as of January 1, 1994 after giving
effect to certain adjustments, including amortization of the excess of cost over
underlying net assets (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Net sales.................................................... $215,102 $187,193
Loss from continuing operations before income taxes and
cumulative effect of an accounting change.................. (73,212) (22,818)
Net loss..................................................... (48,647) (14,693)
Loss per share:
Primary and fully diluted............................... (9.27) (2.83)
</TABLE>
The unaudited pro forma financial information does not purport to be
indicative of the results of operations that would have occurred had the
transactions taken place at the beginning of the periods presented or of future
results of operations.
4. INVESTMENTS
Marketable Securities -- Effective January 1, 1994, the Company adopted
SFAS No. 115. In accordance with SFAS No. 115, the Company records its
investments in marketable equity securities, which are classified as available
for sale, at fair value. The effect of the adoption of SFAS No. 115 was not
material to the Company's financial statements.
At December 31, 1994, the Company determined that the decline in fair value
for all of their securities was other than temporary. In accordance with SFAS
No. 115, the Company recorded a $773,000 writedown to reflect its securities at
net realizable value and included such writedown in the consolidated statement
of operations for the year ended December 31, 1994. Included in interest income,
dividends and net realized gains are net realized gains (losses) on sales of
marketable securities of $2,000, $(140,000) and $(3,000) for the three years
ended December 31, 1993, 1994 and 1995, respectively.
The Company's and its subsidiaries' investments consist of the following:
<TABLE>
<CAPTION>
MARKET VALUE CARRYING VALUE
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1994:
Investment in common stocks........................... $1,734 $1,734
Investment in preferred stocks........................ 399 399
Investments in limited partnerships................... 172 172
------ ------
Total................................................. $2,305 $2,305
====== ======
December 31, 1995:
Investments in preferred stocks....................... $ 189 $ 189
====== ======
March 31, 1996:
Investments in preferred stocks....................... $ 173 $ 173
====== ======
</TABLE>
F-13
<PAGE> 76
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
5. INVENTORIES
A summary of inventories, by major classification, at December 31, 1994 and
1995 and March 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Raw materials................................. $ 4,393 $ 13,591 $10,980
Work-in-process............................... 980 2,169 7,183
Finished goods................................ 6,402 14,418 21,204
------- ------- -------
$ 11,775 $ 30,178 $39,367
======= ======= =======
</TABLE>
Inventories are net of writedowns for lower of cost or market reserves of
$1,283,000, $3,141,000 and $3,332,000 at December 31, 1994 and 1995 and March
31, 1996, respectively.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at December 31, 1994 and 1995 and March 31,
1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Land....................................................... $ 223 $ 223 $ 223
Buildings and improvements................................. 10,371 11,393 11,443
Machinery and equipment.................................... 13,046 21,683 22,150
Molds...................................................... 7,706 15,472 15,904
Furniture and fixtures..................................... 853 709 730
------- ------- -------
Total.................................................... 32,199 49,480 50,450
Less accumulated depreciation.............................. 21,028 25,840 27,556
------- ------- -------
Property, plant and equipment, net......................... $ 11,171 $ 23,640 $22,894
======= ======= =======
</TABLE>
No interest was capitalized during 1994 and 1995.
F-14
<PAGE> 77
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
7. NOTES PAYABLE AND LONG-TERM DEBT
The following table summarizes notes payable and long-term debt as of
December 31, 1994 and 1995 and March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Lines of Credit(a)........................................ $ 4,559 $ 45,612 $ 44,578
One-year notes issued in Marchon acquisition(b)........... 3,250 166 16
Hong Kong facilities(c)................................... 877 600 206
9% convertible subordinated debentures(d)................. 13,563 13,851 13,923
12% senior subordinated notes(e).......................... -- 7,959 8,148
One-year notes issued in Buddy L acquisition(f)........... -- 2,828 1,710
------- ------- --------
22,249 71,016 68,581
Less notes payable and current portion of long-term
debt.................................................... 8,686 49,206 (46,510)
------- ------- --------
Total long-term debt...................................... $ 13,563 $ 21,810 $ 22,071
======= ======= ========
</TABLE>
(a) Empire Industries has a credit facility, expiring May 15, 1996, under
which Empire Industries can borrow up to $25,000,000 at an interest rate ranging
from LIBOR plus 3.75% to LIBOR plus 4.25% (9.78% at December 31, 1995). The
availability of borrowings under the loan agreement is based on Empire
Industries' eligible domestic accounts receivable and inventory balances, as
defined. In addition, Empire Industries may borrow up to an additional
$5,000,000 subject to the total facility limit of $25,000,000. The collateral
under the loan agreement is Empire Industries' accounts receivable, inventories,
and machinery and equipment. The loan is due on demand.
Empire Manufacturing has a revolving credit loan, expiring July 7, 1996,
under which Empire Manufacturing can borrow up to a maximum principal balance of
$25,000,000 at an interest rate of prime plus 1% (9.50% at December 31, 1995).
The availability of borrowings under the credit loan is based on Empire
Manufacturing's eligible accounts receivable, inventory, equipment and the face
amount of Commercial Letters of Credit issued by the bank for the purpose of
purchasing inventory. The revolving credit loan is payable on demand and is
collateralized by substantially all the assets of Empire Manufacturing. Empire
has provided to the bank a guaranty securing payment of the loan with respect to
principal amounts up to $5,000,000 outstanding from time to time together with
interest on such outstanding principal amounts. Empire has also agreed to
subordinate any amounts payable to Empire from Empire Manufacturing in
connection with up to $9,500,000 of loans made by Empire to Empire Manufacturing
in connection with the Buddy L acquisition.
See Note 17 for information concerning a new credit facility.
(b) On October 13, 1994 and in connection with the Marchon acquisition as
described in Note 3, the Company issued $3,250,000 one-year notes. The notes
bear interest at prime (8.50% at December 31, 1995).
(c) Marchon Toys meets its working capital needs through two bank credit
facilities which are due on demand. Under the loan agreements, Marchon Toys can
borrow up to $2,468,000 at interest rates ranging from .5% to 1.75% over the
banks' prime lending rates (9.25% and 10.5% at December 31, 1995). The
availability of borrowings under the loan agreements is based on Marchon Toys'
eligible accounts receivable and inventory balances, as defined. All of Marchon
Toys' assets are collateral under the loan agreements.
(d) On December 22, 1994, the Company issued 9%, five-year subordinated
debentures in the aggregate principal amount of $15,000,000, convertible into an
aggregate of up to 2,000,000 shares of the Company's
F-15
<PAGE> 78
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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.
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.
F-16
<PAGE> 79
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
8. INCOME TAXES (CONTINUED)
The balances of deferred income tax assets and liabilities at December 31,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Current deferred income tax assets relate to:
Reserves for indemnification obligations and accrued expenses of companies
sold.................................................................... $ 1,039 $ 517
Accruals to related parties............................................... 187 260
Other accruals not currently deductible................................... 1,305 3,078
Inventory capitalization.................................................. 386 812
Allowance for bad debts................................................... 1,650 711
Allowance for marketable securities....................................... 301 147
Prepaid assets relating to common stock warrants.......................... -- 116
Other..................................................................... 230 150
------- -------
5,098 5,791
Less valuation allowance.................................................. 634 195
------- -------
Net current deferred tax assets...................................... $ 4,464 $ 5,596
======= =======
Noncurrent deferred income taxes assets (liabilities) relate to:
Basis in the stock of a majority-owned subsidiary......................... $ 3,472 $ 3,472
Accruals and reserves not currently deductible............................ 786 594
Operating loss carryforwards.............................................. -- 792
Basis and depreciation differences........................................ (3,521) (3,433)
Other..................................................................... 28 (36)
------- -------
765 1,389
Less valuation allowance.................................................. 3,659 3,472
------- -------
Net noncurrent deferred tax liability................................ $(2,894) $(2,083)
======= =======
</TABLE>
The components of income tax expense (benefit) for the years ended December
31, 1993, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ---- -------
<S> <C> <C> <C>
Current income taxes (benefits):
Federal.................................................... $ 425 $570 $(1,792)
State...................................................... (342) 143 (260)
------ ---- -------
Total current income taxes (benefits)...................... 83 713 (2,052)
Deferred income taxes (benefit)............................ 983 95 (823)
------ ---- -------
Total...................................................... $1,066 $808 $(2,875)
====== ==== =======
</TABLE>
The following is a reconciliation of income tax expense (benefit) to that
computed by applying the federal statutory rate of 35%, 34%, and 34% to income
(loss) from continuing operations before income taxes
F-17
<PAGE> 80
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
8. INCOME TAXES (CONTINUED)
and cumulative effect of an accounting change for the years ended December 31,
1993, 1994 and 1995, respectively (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ---- -------
<S> <C> <C> <C>
Federal tax (benefit) at the statutory rate.................. $ (158) $475 $(2,508)
Equity earnings (loss) of foreign subsidiary................. -- 30 (230)
Amortization of goodwill..................................... -- -- 187
Equity losses of subsidiary excluded from consolidated
federal income tax return.................................. -- 92 --
Settlement of income tax audit............................... 1,173 -- --
Tax exempt interest income................................... (343) -- --
State income taxes, net of federal tax benefit............... 110 93 (369)
Other........................................................ 284 118 18
------ ---- -------
Total........................................................ $1,066 $808 $(2,875)
====== ==== =======
</TABLE>
The Company files a consolidated federal income tax return with its
subsidiaries for any period that it possesses the required ownership. On
December 30, 1993, the Company sold 25% of the common stock of CLR Corporation
("CLR"), previously a wholly-owned subsidiary of the company. Effective on this
date, CLR was no longer included in the Company's consolidated federal income
tax return.
Management has determined, based on CLR's history of prior earnings and
alternative tax strategies, that CLR's earnings will not be sufficient to
recognize its net deferred tax assets. Accordingly, the Company has provided
allowances at December 31, 1994 and 1995 for CLR's net deferred tax assets.
During the year ended December 31, 1994, the Company reduced its deferred
tax assets and valuation allowance by approximately $3,500,000, principally for
the expiration of unused capital loss carryforwards.
During 1993, the Company recorded a deferred tax asset and increased its
valuation allowance by approximately $3,472,000 for the basis in the stock of a
majority-owned subsidiary, and reduced its deferred tax assets and valuation
allowance by approximately $6,591,000 for the utilization of capital loss
carryforwards. Also during 1993, the Company reduced its deferred tax assets and
valuation allowance by approximately $35,000,000, principally for the expiration
of unused capital loss carryforwards.
Due to the change in control of the Company during 1994, CLR will be unable
to utilize approximately $35,000,000 of operating loss carryforwards. As a
result, the deferred tax asset and offsetting valuation allowance for these
operating loss carryforwards have been eliminated with no effect on the
Company's 1994 results of operations.
During 1993, CLR settled a Connecticut state tax and interest assessment
totaling $3,525,000 for $600,000. As a result of the settlement, the Company
recorded a gain on the settlement of $2,925,000.
During 1993, the Company agreed to pay approximately $8,900,000 to settle
an income tax audit of the Company's 1990 and 1991 federal income tax returns.
As a result of the settlement, income tax and interest expense were increased by
$1,173,000 and $1,460,000, respectively.
The Company is currently involved in a federal and various state income tax
audits. The Company believes it has adequate reserves for the potential impact
of such audits.
F-18
<PAGE> 81
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
9. EMPLOYEE BENEFIT PLANS
Empire Industries had a contributory profit sharing plan covering
substantially all employees of Empire Industries. Profit sharing contributions
expensed for 1993, 1994 and 1995 were $83,000, $100,000, and $0, respectively.
During the fourth quarter of 1995 this plan was converted into a 401(k) plan.
This plan allows for voluntary contributions by employees as well as an employer
matching contribution of up to 10% of the participants' contribution. The
employers' contribution is determined each year by the board of directors.
Participants are 100% vested in their tax-deferred, rollover, and after-tax
accounts. Employer contributions are subject to a vesting schedule by which
employees are 100% vested after five years of participation in the plan.
In connection with the Marchon acquisition, the Company assumed the
liability of a defined contribution employee benefit plan under Section 401(k)
of the Internal Revenue Code. The Company is in the process of winding up this
plan which was effectively terminated during 1994. In addition, Marchon Toys has
a similar plan under which the subsidiary is required to make annual
contributions equal to 5% or 7.5% of each employee's individual annual
contributions based on employee compensation.
The Company assumed the liability of a defined benefit plan of a former CLR
subsidiary. The plan benefits 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 1993, 1994 and 1995
was $(176,000), $0 and $0, respectively.
With respect to discontinued operations, the Company retained sponsorship
of The Isaly Klondike Company 401(k) Plan and Popsicle Industries Ltd. pension
plan, both of which were effectively terminated at the closing of the sale of
Isaly Klondike Company and Popsicle Industries Ltd. The Company is responsible
for winding up these plans. During 1993, assets of The Isaly Klondike Company
401(k) Plan were distributed to participants. The Company is awaiting approval
from the Canadian government to terminate the Popsicle Industries Ltd. pension
plan.
In connection with the sale of the assets of The Isaly Klondike Company
("Isaly Klondike"), Thomas J. Lipton and its affiliates ("Lipton") assumed
sponsorship of the pension plan for the Isaly Klondike employees. The plan
benefits were frozen as of October 2, 1992, and the Company recorded a gain from
curtailment of $243,000 during 1992. Under the terms of the sales agreement, the
Company agreed to indemnify Lipton for any shortfall of plan assets necessary to
satisfy the plan's benefits. See Note 15.
The Company has assumed the liability for postretirement health care and
life insurance benefits to former employees of a CLR subsidiary. The benefits
will be funded as they are paid. The present value of the projected benefits due
these former employees has been accrued, using a discount rate of 8.5% for 1994
and 1995, in the consolidated financial statements in accordance with SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The
Company has accrued $991,000 and $911,000 as of December 31, 1994 and 1995,
respectively, for these benefits. The net postretirement benefit cost for each
of the three years ended December 31, 1995 is not material to the consolidated
financial statements.
10. STOCKHOLDERS' EQUITY
Capital Stock -- The Company has 35,000,000 shares of capital stock
authorized, comprised of (i) 30,000,000 shares of common stock, $.10 par value
and (ii) 5,000,000 shares of preferred stock, $.01 par
F-19
<PAGE> 82
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
10. STOCKHOLDERS' EQUITY (CONTINUED)
value. The Board of Directors has designated 442,264 shares of preferred stock
as Series A cumulative convertible preferred stock and, as of December 31, 1995,
442,264 shares of such Series A cumulative preferred stock were issued and
outstanding.
The Series A preferred stock automatically converts into shares of common
stock on a share for share basis upon the affirmative vote of a majority of the
shares of common stock represented at the 1996 annual meeting. In the event the
Series A preferred stock is automatically converted, the holders of Series A
preferred stock shall not be entitled to receive any dividend. In the event the
preferred stock is not converted, then commencing on the third month after the
date of the 1996 annual meeting, the holders will be paid a quarterly dividend
of 15% per annum of the stated liquidation value per share. The stated
liquidation value is $7.25 per share.
Paid-In Capital -- During 1995, paid-in capital was increased by
$10,774,000 and $3,202,000 for the issuance of 1,004,059 shares of common stock
and 442,264 shares of Series A cumulative convertible preferred stock,
respectively, related to the Buddy L acquisition described in Note 3.
During 1994, paid in capital was increased by $6,488,000 due to the
issuance of 1,076,923 shares of common stock in the Marchon acquisition
described in Note 3. Also during 1994, paid-in capital was increased by
$1,740,000 due to the issuance of certain warrants as described below. The
Company reduced paid-in capital during 1994 by $45,837,000 due to the retirement
of treasury shares.
Treasury Stock -- At December 31, 1994 and 1995, there are no shares of
common stock held in treasury. As described in Note 2, the Company redeemed
11,766,634 shares of the Company's stock from the Halperin Group at $6.50 per
share on September 30, 1994. The total cost of the redemption, including
expenses, was $76,863,000. The shares so redeemed were retired as of September
30, 1994.
During 1993, the Company made a tender offer to purchase up to 14,000,000
shares of its common stock at the price of $6.50 per share. The offer expired on
January 11, 1994. In this tender offer, 1,414,268 shares were tendered and
purchased by the Company at a total purchase price of approximately $9,193,000
during the first quarter of 1994. The shares repurchased under the tender offer
were retired as of September 30, 1994.
Stock Options -- During 1994, the Company granted to certain of its
employees, including Geller as discussed in Note 2, options to purchase shares
of its common stock. At December 31, 1995, there were options outstanding to
purchase 1,842,500 shares of common stock at exercise prices ranging from $5.875
to $8.625 per share, which approximated the closing price of the stock on the
date of issuance, and which expire 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
F-20
<PAGE> 83
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
10. STOCKHOLDERS' EQUITY (CONTINUED)
per share. If the notes are so redeemed, the warrants lapse. The warrantholders
are also entitled to one demand and certain "piggyback" registration rights,
commencing on the second anniversary of issuance and certain anti-dilution and
price-protection rights.
During 1994 and 1995, the Company issued warrants to certain investment
bankers and consultants to purchase 321,000 shares of common stock at $7.50 per
share in exchange for future services. The warrants expire as follows: 79,000 on
November 3, 1997; 163,000 on December 27, 1997; and 79,000 on January 3, 1998.
As discussed in Note 7, the Company issued warrants to Geller, Saul and
their designees that assisted them in connection with the debenture financing,
to purchase 1,000,000 shares of common stock at $7.50 per share. Fifty percent
of the warrants expire on December 22, 1996 with the balance on December 22,
1997.
11. EARNINGS PER SHARE
Earnings per share are based on the weighted-average shares of common stock
and dilutive common stock equivalents outstanding during the period.
Weighted-average shares for the years ended December 31, 1993, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Primary........................................... 14,669,773 12,158,548 4,680,852
Fully diluted..................................... 16,295,198 12,158,548 4,680,852
</TABLE>
In the calculation of fully diluted earnings per share, net income was
increased by $429,000 for the year ended December 31, 1993 for interest expense,
net of tax, due to the assumed conversion of debt into common stock. See Note
16.
All of the various outstanding stock options and warrants during 1994 and
1995 are excluded from primary and fully diluted earnings per share because they
are anti-dilutive. See Note 10. Common stock contingently issuable as price
protection related to the Buddy L acquisition is included in primary and fully
diluted earnings per share.
12. COMMITMENTS AND CONTINGENCIES
Letters of credit -- At December 31, 1995 and March 31, 1996, the Company
had outstanding commitments under letters of credit totaling $1,246,000 and
$1,184,000, respectively.
Leases -- The Company is committed under various noncancelable operating
leases. Future minimum lease obligations under these operating leases by year
are as follows: 1996 -- $1,122,000; 1997 -- $638,000; 1998 -- $439,000; 1999 --
$443,000; 2000 -- $355,000; thereafter -- $531,000.
The net rental expense for operating leases was approximately $416,000 in
1993, $589,000 in 1994, and $1,196,000 in 1995.
Subsequent to March 31, 1996, the Company entered into an operating lease
with a commencement date of June 15, 1996 for new molding machines having
monthly lease payments of $25,000 for 120 months.
Indemnifications -- See Note 15 for a description of the terms of
indemnifications relating to the sale of Wilbur Chocolate Co., Inc., The Isaly
Klondike Company and Popsicle Industries Ltd.
F-21
<PAGE> 84
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1995, the Company and its majority-owned subsidiary, CLR, were
released from substantially all indemnification obligations including certain
tax matters arising from the December 23, 1988 sale of General Defense
Corporation ("GDC") to Olin Corporation by CLR's predecessor, Clabir
Corporation. In exchange for the release, the Company paid $475,000 and extended
the expiration date of the options granted to Olin Corporation from September
30, 1996 to September 30, 1997. The Company believes future obligations, if any,
related to the indemnification will not have a material adverse effect on its
consolidated financial statements.
Litigation -- An action was commenced on October 19, 1994 in the Court of
Chancery of the State of Delaware (New Castle County) against the Company as a
nominal defendant. The action names Maurice A. Halperin, Barry S. Halperin,
Carol A. Minkin, Jeffrey Swersky, Carl Derman, Steven Geller and Halco
Industries, Inc. as defendants. The complaint includes class and derivative
claims. The Company is only a nominal defendant in the derivative claims, but
the Company has agreed to indemnify the Halperin Group to the extent permitted
by law, with certain exceptions. Certain defendants in interest (the Halperin
Group and Messrs. Swersky and Derman) have stated that they intend to defend the
claims vigorously. A motion to dismiss the claims was filed on behalf of the
Company and Mr. Geller. The court granted the motion on February 5, 1996,
dismissing the claims against each named defendant. The plaintiff filed a notice
of appeal, and on May 2, 1996 filed a voluntary dismissal of his appeal. If the
indemnification obligations of the Company to the Halperin Group discussed above
were triggered, substantial liabilities by the Company could result. The Company
is unable at this time to determine if the indemnification agreement will be
triggered, and, if so, the extent of financial exposure on the part of the
Company to the Halperin Group.
There are two suits claiming infringement of various intellectual property
rights which have been filed against Marchon. These claims are in various stages
of litigation. The Company believes that it has meritorious defenses to the open
claims and has provided reserves for its estimated costs to settle these
matters. The Company does not believe that any additional amounts required to
ultimately resolve these matters will have a material adverse effect on the
consolidated financial statements.
The Company's operating subsidiaries and its former operating subsidiaries
are subject to various types of consumer claims for personal injury from their
products. The Company's subsidiaries maintain product liability insurance.
Various product liability claims, each of which management believes is
adequately covered by insurance and/or reserves, are currently pending. The
Company does not believe the outcome of any of this litigation either
individually or in the aggregate would have a material adverse effect on the
Company's consolidated financial statements.
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 and March 31,
1996, the Company had reserves for environmental liabilities of $600,000 and
$400,000, respectively. 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
F-22
<PAGE> 85
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company believes that its share of the costs of cleanup for its current
remediation sites will not, in the aggregate, have a material adverse impact on
its consolidated financial statements.
13. SEGMENT INFORMATION
The Company's consolidated operations are concentrated in the following
segments: (1) toys and buttons ("toys") and (2) holiday products. Information by
industry segment is shown below (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Net sales:
Toys......................................................... $ 21,143 $33,003 $121,573
Holiday products............................................. 20,211 24,961 32,171
-------- ------- --------
Net sales...................................................... $ 41,354 $57,964 $153,744
======== ======= ========
Operating income (loss)(1):
Toys......................................................... $ 693 $ 127 $ 1,869
Holiday products............................................. 3,598 3,335 4,910
Nonrecurring restructuring and relocation charges............ -- -- (8,673)
Corporate.................................................... (7,756) (2,497) --
-------- ------- --------
Operating income (loss)........................................ $ (3,465) $ 965 $ (1,894)
======== ======= ========
Identifiable assets(2):
Toys......................................................... $ 12,551 $49,913 $114,743
Holiday Products............................................. 12,365 12,303 21,610
Corporate.................................................... 98,324 5,740 3,800
-------- ------- --------
Total assets................................................... $123,240 $67,956 $140,153
======== ======= ========
Capital expenditures:
Toys......................................................... $ 685 $ 1,906 $ 4,855
Holiday Products............................................. 713 2,547 895
Corporate.................................................... 25 -- --
-------- ------- --------
Total.......................................................... $ 1,423 $ 4,453 $ 5,750
======== ======= ========
Depreciation and amortization:
Toys......................................................... $ 881 $ 1,277 $ 5,925
Holiday Products............................................. 842 994 1,286
Corporate.................................................... 73 12 --
-------- ------- --------
Total.......................................................... $ 1,796 $ 2,283 $ 7,211
======== ======= ========
</TABLE>
- ------------------------------
(1) Corporate expenses for 1993 and 1994 related primarily to executive
compensation of the prior management group and contributions not directly
attributable to the Company's toy and holiday product segments. For 1995,
nonrecurring restructuring and relocation charges have not been allocated to
a segment.
(2) The identifiable assets of each industry segment include: (i) assets that
are used exclusively by that industry segment and (ii) an allocated portion
of assets used jointly by more than one industry segment. Corporate assets
consist principally of cash, marketable securities, note receivable from
Halco, and other assets.
The Company has a Hong Kong based subsidiary, acquired in the Marchon
acquisition, which oversees the sourcing of products from manufacturers in the
Far East. Sales sourced through Marchon's Hong Kong based subsidiary for the
year ended December 31, 1995 were $34,455,000 to U.S. based customers and
$7,390,000 to foreign customers. For the period from the acquisition date,
October 13, 1994, to December 31,
F-23
<PAGE> 86
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
13. SEGMENT INFORMATION (CONTINUED)
1994, sales were $9,012,000 to U.S. based customers and $2,728,000 to foreign
customers. Gross profit for the period October 13 to December 31, 1994 and for
the year ended December 31, 1995 was $5,088,000 and $13,844,000, respectively.
Total assets as of December 31, 1994 and 1995 were $7,981,000 and $6,697,000,
respectively.
Intercompany sales between the Company's foreign and domestic operations
for the period October 13 to December 31, 1994 and for the year ended December
31, 1995 were $1,299,000 and $11,557,000, respectively.
For the toy segment, sales to significant customers, individually, were
14%, 8%, and 17% of toy sales, respectively, in 1993; 17%, 11%, and 18% of toy
sales, respectively, in 1994; and 15%, 13%, and 23% of toy sales, respectively,
in 1995. No other customer accounted for more than 10% of the Company's toy
sales in those years.
For the holiday products segment, sales to significant customers,
individually, were 34% and 3% of holiday products sales, respectively, in 1993;
34% and 6% of holiday products sales, respectively, in 1994; and 29% and 13% of
holiday products sales, respectively, in 1995. No other customer accounted for
more than 10% of the Company's holiday products sales in those years.
14. NONRECURRING RESTRUCTURING AND RELOCATION CHARGES
During 1995, the Company recorded nonrecurring restructuring and relocation
charges of $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 the December 31, 1995 will
be expended during 1996.
15. DISCONTINUED OPERATIONS
From 1989 through early 1993, the Company was engaged in additional
businesses through other subsidiaries. Control of these businesses was acquired
through stock acquisitions during 1989 and through the December 29, 1989 merger
of AmBrit, Inc. into the Company and the December 29, 1989 merger of Clabir
Corporation into the Company's newly formed subsidiary, CLR. As a result of
these acquisitions, the Company manufactured, marketed and distributed frozen
novelty products through The Isaly Klondike Company ("Isaly Klondike");
manufactured a variety of chocolate and confectionery products through Wilbur
Chocolate Co., Inc. ("Wilbur"); and sold proprietary flavoring systems and
packaging to licensees 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.
F-24
<PAGE> 87
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
15. DISCONTINUED OPERATIONS (CONTINUED)
Income from discontinued operations for the year ended December 31, 1993
consists of the following (in thousands):
<TABLE>
<S> <C>
Net loss of Isaly Klondike................................................. $ (319)
Net loss of Popsicle Canada................................................ (57)
Gain on sale of Isaly Klondike and Popsicle Canada, net of tax............. 27,129
Cumulative effect of change in accounting for income taxes (See Note 8).... (1,024)
-------
Total...................................................................... $25,729
=======
</TABLE>
Sale of Isaly Klondike and Popsicle Canada -- On February 1, 1993, the
Company sold the assets used in the businesses of its wholly-owned subsidiaries,
Isaly Klondike and Popsicle Canada, to Lipton for approximately $154 million in
cash plus the assumption of certain trade and other short-term liabilities. The
Company agreed to a five-year covenant not to compete in businesses similar to
Isaly Klondike's and Popsicle Canada's businesses. The long-term debt of Isaly
Klondike and Popsicle Canada remained an obligation of the Company and was
repaid at closing. The Company also retained the liability for certain contracts
including the responsibility to wind up certain employee benefit plans (see Note
9). The Company indemnified Lipton for breaches of representations and
warranties and certain claims and contracts arising before the businesses were
sold. The Company's indemnification obligations for income taxes for preclosing
periods, certain contracts, and certain other preclosing matters are unlimited.
The Company's remaining indemnification obligations were subject to a limit of
$8.5 million. Certain of the Company's expenses in winding up the operations of
Isaly Klondike and Popsicle Canada will be applied against and reduce this
limitation. The Company's indemnification obligations are subject to time
limitations ranging from fourteen months to three years, except for income tax
matters and breaches of environmental representations for which Lipton may
assert claims until 90 days after the expiration of the applicable statute of
limitations. The Company has established reserves for all claims known to it and
for other contingencies in connection with the sale. During the quarter ended
March 31, 1996, the Company reduced the reserves by $600,000 due to the
expiration of certain time limitations. Although there can be no assurance that
claims and other contingencies related to the sale will not exceed established
reserves, the Company believes that additional exposure related to the
indemnification obligations will not be material to the consolidated financial
statements.
During 1993, the Company recorded a gain from the sale of Isaly Klondike
and Popsicle Canada of $27,129,000, net of taxes of $37,644,000.
Due to the sale of Isaly Klondike and Popsicle Canada, which comprised the
frozen novelty products segment and proprietary flavoring systems and packaging
segment, respectively, these segments are reported in discontinued operations in
the consolidated statements of operations.
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>
F-25
<PAGE> 88
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
15. DISCONTINUED OPERATIONS (CONTINUED)
For 1993, discontinued operations of Isaly Klondike and Popsicle Canada
include results of operations through the date of sale, February 1, 1993.
16. RELATED PARTIES
During 1995 and in connection with the Company's acquisition of Buddy L,
affiliates of Weiss, Peck & Greer L.L.C. (collectively referred to as "WP&G"),
an investment firm, purchased 247,392 shares of common stock at $7.25 per share
and 442,264 shares of Series A cumulative convertible preferred stock at $7.25
per share for an aggregate purchase price of $5,000,006. See Note 3. At December
1, 1995, WP&G is the holder of 597,392 shares of common stock and 442,264 shares
of Series A cumulative convertible preferred stock. Two principals of WP&G are
also members of the Company's Board of Directors.
WP&G, on behalf of investment funds for which they are managers, is the
holder of approximately $14,900,000 of the Company's 9%, five-year, subordinated
convertible debentures and a party to the Shareholders' Agreement dated December
22, 1994. See Notes 2 and 7. Concurrent with the closing of this debenture
financing in December 1994, WP&G was issued warrants to purchase 100,000 shares
of common stock at the exercise price of $7.50 per share.
At December 31, 1994 and 1995, the Company had an unsecured receivable from
the owner of its facility in Vernon Hills, Illinois of $472,000 and $506,000,
respectively, related to costs incurred during its construction, which
receivable is guaranteed by the Company's President and Chief Operating Officer.
This receivable bears interest at an annual rate of 7.5% and is due on December
31, 1998. Subsequent to December 31, 1994, the operations of Marchon were moved
to the Company's facilities in Tarboro, North Carolina. Marchon sent notice to
terminate the lease on the Illinois facility effective June 1995. The Company
also had an unsecured receivable of $82,000 and $55,000 at December 31, 1994 and
1995, respectively, from an entity of which the Company's President and Chief
Operating Officer is a principal, related to Marchon's Pagedale, Missouri
facility. This borrowing is due December 31, 1998 and is non-interest bearing.
The Company is seeking to sublease the Missouri facility but until such time,
the Company remains liable on the lease. These receivables are included in the
consolidated financial statements as a reduction of consolidated stockholders'
equity.
During 1993 and 1994, the Company expensed $2,000,000 and $275,000,
respectively, for contributions made to the Empire Foundation (the
"Foundation"), a Florida trust whose trustees were three directors of the
Company, two of which were also officers of the Company, prior to the change in
control discussed in Note 2. The Company does not intend to make any further
contributions to the Foundation. On September 30, 1994, the Halperin Group
agreed to become responsible for the management of the Foundation.
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
F-26
<PAGE> 89
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(UNAUDITED AS TO MARCH 31, 1996 INFORMATION), CONTINUED
16. RELATED PARTIES (CONTINUED)
interest rate of 15.6% per annum. $18,000,000 of the principal amount of the
loan was convertible into shares of the Company's common stock at the conversion
price of one share for each $3.125 principal amount converted. During the first
quarter of 1993, the Company repaid borrowings of $15,000,000. On April 7, 1993,
Halco notified the Company that it had elected to exercise its option to convert
the remaining $18,000,000 owed by the Company to Halco into 5,760,000 shares of
the Company's common stock at the stated conversion price of $3.125 per share.
Halco assigned its rights to acquire these shares to certain officers and/or
directors of the Company.
During 1993, the Company expensed $3,620,000 related to a $2,750,000
retirement pay package for the Chairman and Chief Executive Officer of the
Company and a $870,000 retirement pay package for an executive of the Company.
17. SUBSEQUENT EVENTS
On April 8, 1996, a bank issued a commitment to the Company to provide up
to $85,000,000 in financing subject to documentation. The financing is for a
three-year term at an interest rate of prime plus 1% or LIBOR plus 275 basis
points. Of the $85,000,000, $12,000,000 will be in the form of a three-year term
loan secured by the Company's domestic machinery, equipment and real property.
The balance of the availability of borrowings under the proposed loan agreement
is based on 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 operating assets of the Company. The
facility will replace two existing domestic facilities of $25,000,000 each. See
Note 13.
F-27
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Empire of Carolina, Inc.
We have audited the accompanying schedules of net sales, cost of sales and
direct expenses of the Toy Business of Buddy L Inc. and subsidiaries for the
years ended December 31, 1993 and 1994. These schedules are the responsibility
of Buddy L Inc.'s management. Our responsibility is to express an opinion on
these schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the schedules are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the schedules. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the schedules. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such schedules present fairly, in all material respects,
the net sales, cost of sales and direct expenses of the Toy Business of Buddy L
Inc. and subsidiaries for the years ended December 31, 1993 and 1994 in
accordance with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
December 22, 1995
F-28
<PAGE> 91
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
SCHEDULES OF NET SALES, COST OF SALES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1993 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................................... $116,446 $118,678
Cost of sales........................................................... 87,698 119,524
-------- --------
Gross profit (loss)..................................................... 28,748 (846)
Direct expenses......................................................... 15,743 32,651
-------- --------
Contribution (loss) before indirect expenses............................ $ 13,005 $(33,497)
======== ========
</TABLE>
See notes to schedules of net sales, cost of sales and direct expenses.
F-29
<PAGE> 92
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
UNAUDITED SCHEDULE OF NET SALES, COST OF SALES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JULY 7, 1995
------------
<S> <C>
Net sales........................................................................ $ 33,449
Cost of sales.................................................................... 30,715
-------
Gross profit..................................................................... 2,734
Direct expenses.................................................................. 1,617
-------
Contribution before indirect expenses............................................ $ 1,117
=======
</TABLE>
See notes to schedules of net sales, cost of sales and direct expenses.
F-30
<PAGE> 93
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
NOTES TO SCHEDULES OF NET SALES, COST
OF SALES AND DIRECT EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE UNAUDITED PERIOD ENDED JULY 7, 1995
1. DESCRIPTION OF BUSINESS ACQUIRED AND BASIS OF PRESENTATION
On July 7, 1995, two subsidiaries of Empire of Carolina, Inc. (the
"Company"), Empire Acquisition Corp., now known as Empire Manufacturing, Inc.
("EAC"), a Delaware corporation, and Carnichi Limited, a Hong Kong corporation
(Carnichi Limited and EAC together, the "Buyers"), acquired the toy business
assets and assumed certain liabilities of Buddy L Inc., debtor in possession, a
Delaware corporation ("Buddy L") and wholly-owned subsidiary of SLM
International, Inc. ("SLM") and Buddy L (Hong Kong) Limited, a Hong Kong
Corporation ("Buddy L Hong Kong") and a subsidiary of Buddy L. The purchased
assets comprise the former toy manufacturing, design and marketing business (the
"Business") of Buddy L and Buddy L Hong Kong. The Buyers will continue to
operate the Business using the trademark "Buddy L" in order to take advantage of
Buddy L brand recognition.
The accompanying schedules present the net sales, cost of sales and direct
expenses for the years ended December 31, 1993 and 1994 and the unaudited period
ended July 7, 1995 for the Business.
Buddy L did not account for the Business as a separate entity or operation.
Accordingly, the information included in the accompanying schedules of net
sales, cost of sales and direct expenses has been obtained from Buddy L's
accounting records and does not purport to represent the net sales, cost of
sales and direct expenses for Buddy L or for SLM.
The accompanying schedules of net sales, cost of sales and direct expenses
are presented in accordance with generally accepted accounting principles. Sales
are recorded net of all discounts, returns and other allowances.
2. DIRECT EXPENSES
Direct expenses represent selling, general and administrative costs
directly related to the toy operations of Buddy L and consist of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD
------------------ ENDED
1993 1994 JULY 7, 1995
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Advertising............................................ $ 5,866 $11,169 $ 2
Obsolete tooling write-off............................. -- 6,023 --
Royalties.............................................. 4,529 6,454 404
Commissions............................................ 1,849 1,959 340
Product Development.................................... 969 2,590 199
Other Sales and Marketing.............................. 1,071 1,809 --
Other General and Administrative....................... 1,459 2,647 672
------- ------- ------
Total............................................. $15,743 $32,651 $1,617
======= ======= ======
</TABLE>
3. OTHER EXPENSES (UNAUDITED)
The accompanying schedules of net sales, cost of sales and direct expenses
do not include an allocation of certain other historical operating costs
incurred by Buddy L during the period ended July 7, 1995 and for the years ended
December 31, 1993 and 1994. Such costs include accounting and finance, credit
and collection costs, bad debt expense, warehousing costs, insurance, SLM
management fees and other general and administrative expenses not directly
related to production. Such costs have not been allocated to the toy
F-31
<PAGE> 94
TOY BUSINESS OF BUDDY L INC. AND SUBSIDIARIES
NOTES TO SCHEDULES OF NET SALES, COST
OF SALES AND DIRECT EXPENSES, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE UNAUDITED PERIOD ENDED JULY 7, 1995
3. OTHER EXPENSES (UNAUDITED) (CONTINUED)
operations because such costs are generally fixed in that they do not vary with
sales or production levels, and Buddy L has not maintained records that would
facilitate allocation of such costs to its business lines.
Total amounts of such indirect expenses for Buddy L are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD
------------------ ENDED
1993 1994 JULY 7, 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Sales and marketing................................... $ 9,752 $12,091 $ 2,414
General and administrative............................ 10,469 16,678 13,131
Warehouse expenses.................................... 3,532 6,023 1,668
Interest expense -- net............................... 1,712 6,637 1,564
------- ------- -------
Total indirect expenses.......................... $25,465 $41,429 $18,777
======= ======= =======
</TABLE>
Interest expense is net of interest income and includes interest on direct
Buddy L borrowings, as well as an allocation of financing costs from Buddy L's
parent, SLM.
F-32
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Marchon, Inc.
We have audited the accompanying consolidated balance sheet of Marchon,
Inc. and Subsidiaries as of December 31, 1993 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. We did not audit the
financial statements of Marchon Toys, Ltd. a 99.9% owned subsidiary, which
statements reflect total assets of $5,341,115 as of December 31, 1993, and total
revenues of $14,779,736 for the year then ended. These statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Marchon Toys, Ltd., is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Marchon, Inc. and
Subsidiaries as of December 31, 1993, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company was required to change its method of accounting for
income taxes.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 20, 1994, except for
Note 4 for which the date
is September 8, 1994
F-33
<PAGE> 96
REPORT OF THE AUDITORS
To the Members of Marchon Toys Limited
We have audited the financial statements on pages 4 to 12 in accordance
with Auditing Standards.
In our opinion the financial statements give a true and fair view of the
state of affairs of the Company at 31 December 1993 and of its profit and cash
flows for the year then ended and have been properly prepared in accordance with
the Companies Ordinance.
WONG BROTHERS & CO.
Certified Public Accountants
Hong Kong
March 29, 1994
F-34
<PAGE> 97
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 317,854
Accounts receivable, less allowance for doubtful accounts of $1,665,000...... 6,552,493
Inventories.................................................................. 4,498,454
Prepaid expenses............................................................. 971,353
Refundable income taxes...................................................... 42,835
-----------
Total current assets...................................................... 12,382,989
-----------
Property and equipment:
Office furniture and equipment............................................... 1,477,254
Product tooling.............................................................. 4,674,272
-----------
6,151,526
Less accumulated depreciation.................................................. 3,701,190
-----------
Net property and equipment................................................ 2,450,336
Other assets................................................................... 1,259,659
-----------
Total assets.............................................................. $16,092,984
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................................... $ 36,878
Current portion of long-term debt............................................ 9,876,760
Accounts payable............................................................. 3,691,989
Accrued liabilities.......................................................... 2,232,764
Income taxes payable......................................................... 32,448
-----------
Total current liabilities................................................. 15,870,839
Long-term debt, net of current portion......................................... 65,638
-----------
Total liabilities......................................................... 15,936,477
-----------
Stockholders' equity:
Common stock, $.01 par value, 20,000 shares authorized, 17,257 shares issued;
14,167 shares outstanding................................................. 173
Additional paid-in capital................................................... 1,157,242
Accumulated deficit.......................................................... (44,497)
-----------
1,112,918
Due from affiliates.......................................................... (842,941)
Common stock, 3,090 shares, held in treasury at cost......................... (113,470)
-----------
Total stockholders' equity................................................ 156,507
-----------
Total liabilities and stockholders' equity................................ $16,092,984
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
<PAGE> 98
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Net sales...................................................................... $33,300,944
Cost of sales.................................................................. 20,145,704
-----------
Gross profit.............................................................. 13,155,240
-----------
Operating expenses:
Sales and marketing.......................................................... 6,940,033
General and administrative................................................... 5,346,346
Research and development..................................................... 1,429,928
-----------
Operating loss............................................................ (561,067)
Other income (expense):
Interest expense............................................................. (1,123,435)
Interest income.............................................................. 36,434
Other........................................................................ 107,869
-----------
Loss before income taxes and cumulative effect of a change in accounting
principle.................................................................... (1,540,199)
Income tax provision........................................................... (127,438)
-----------
Loss before cumulative effect of change in accounting principle................ (1,667,637)
Cumulative effect of change in accounting principle related to income taxes.... (95,500)
-----------
Net loss....................................................................... $(1,763,137)
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
<PAGE> 99
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS DUE FROM TREASURY
STOCK CAPITAL (DEFICIT) AFFILIATES STOCK TOTAL
------ ---------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993.... $173 $ 232,632 $ 1,718,640 $(359,269) $(113,470) $ 1,478,706
Forgiveness of subordinated
notes payable
Stockholder............ 808,084 808,084
Officer................ 116,526 116,526
Net advance to affiliate.... (483,672) (483,672)
Net loss.................... (1,763,137) (1,763,137)
---- ---------- ----------- ----------- --------- -----------
Balance, December 31,
1993...................... $173 $1,157,242 $ (44,497) $(842,941) $(113,470) $ 156,507
==== ========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE> 100
MARCHON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (1,763,137)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................ 605,484
Provision for uncollectible accounts..................................... 1,117,905
Interest income added to due from affiliate.............................. (46,163)
Cumulative effect of accounting change................................... 95,500
Changes in operating assets and liabilities:
Accounts receivable.................................................... (1,003,456)
Inventories............................................................ 822,514
Prepaid expenses....................................................... (41,549)
Refundable income taxes................................................ 461,649
Other assets........................................................... (919,868)
Accounts payable....................................................... 1,197,597
Accrued liabilities.................................................... 1,662,278
Income taxes payable................................................... (136,084)
------------
Net cash provided by operating activities................................ 2,052,670
Cash flows from financing activities:
Net advances to affiliate................................................... (437,509)
Purchases of property, plant and equipment.................................. (985,063)
------------
Net cash used in investing activities.................................... (1,422,572)
------------
Cash flows from financing activities:
Borrowings under bank line of credit agreements............................. 17,075,362
Payments under bank line of credit agreements............................... (17,195,261)
Proceeds of notes payable and capital lease obligations..................... 94,969
Increase in sight drafts.................................................... 233,531
Decrease in cash overdraft.................................................. (577,189)
------------
Net cash used in financing activities.................................... (368,588)
------------
Net increase in cash and cash equivalents..................................... 261,510
Cash and cash equivalents:
Beginning of year........................................................... 56,344
------------
End of year................................................................. $ 317,854
============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................. $ 1,169,809
============
Income taxes............................................................. $ 76,461
============
Supplemental disclosure of noncash investing and financing activities:
Forgiveness of subordinated notes payable to stockholders and officers
contributed to additional paid-in capital................................ $ 924,610
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-38
<PAGE> 101
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation and Nature of Business
The consolidated financial statements include the accounts of Marchon,
Inc., Marchon Manufacturing, Inc. and a 99.9% owned Hong Kong subsidiary,
Marchon Toys, Ltd., (collectively, the "Company"). The Company is engaged in the
design, development, marketing and distribution of toy products to mass
merchandisers and other retailers. Significant intercompany balances and
transactions have been eliminated in consolidation.
Translation of Foreign Currencies
The financial position and results of operations of the Hong Kong
subsidiary are measured using local currency as the functional currency. Assets
and liabilities of these operations are translated into U.S. dollars at the
exchange rate in effect at year-end. Income statement accounts are translated at
the average rate of exchange prevailing during the year.
Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine the cost of domestic purchased or
produced inventories. Inventories purchased or produced outside the United
States are valued by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed principally by the straight-line method over the estimated useful
lives of the related assets or terms of the related leases.
Amounts incurred for maintenance and repairs are charged to operations as
incurred. Expenditures for improvements are capitalized. Upon sale or
retirement, the related cost and accumulated depreciation are removed from the
respective accounts and any resulting gain or loss is included in the
consolidated statement of operations.
Prepaid Expenses
Costs incurred in producing television commercials are deferred and
amortized on the straight-line method over their estimated useful lives, two to
three years.
Other Assets
The cost of patents, including costs to maintain the patents, are
capitalized and amortized on the straight-line method over the shorter of the
remaining life of the patents or estimated lives of the related products.
Income Taxes
Effective January 1, 1993, the Company was required to adopt Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
Prior to this date, the Company accounted for income taxes in accordance with
Accounting Principles Board Opinion No. 11 (APB 11). The cumulative
F-39
<PAGE> 102
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
effect of adopting FAS 109, as of the beginning of 1993, is reported separately
in the accompanying consolidated statement of operations.
Under FAS 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable earnings. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
2. CHANGE IN ACCOUNTING ESTIMATE:
Effective January 1, 1993, the Company revised the estimated useful lives
of product tooling from three to five years to more closely approximate
historical experience. The effect of this change was to decrease 1993
depreciation expense and net loss by approximately $335,000.
3. INVENTORIES:
Inventories totaling $3,515,979 at December 31, 1993 were determined by the
LIFO method. The major classes of inventories at December 31, 1993 are as
follows:
Current cost:
<TABLE>
<S> <C>
Finished products..................................................... $2,125,685
Raw Materials......................................................... 2,447,503
----------
4,573,188
Current cost over LIFO method........................................... (74,734)
----------
Total at LIFO cost................................................. $4,498,454
==========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1993:
<TABLE>
<S> <C>
Revolving Credit Agreement.............................................. $7,778,323
Banking Facility........................................................ 211,358
Other bank borrowings, due on demand, bearing interest at 1.75% over the
prime rate (6.0% at December 31, 1993)................................ 245,596
Sight drafts............................................................ 1,513,000
Note payable to former stockholder, due May 1995, interest due
semiannually
at 8.63%.............................................................. 23,665
Capitalized lease obligations........................................... 170,456
----------
9,942,398
Less current portion.................................................... 9,876,760
----------
Total long-term debt............................................... $ 65,638
==========
</TABLE>
The Revolving Credit Agreement (the "Agreement"), as amended March 18,
1994, expires January 31, 1995 and provides maximum borrowings and outstanding
letters of credit of $12,000,000 through October 31, 1994, and $8,000,000 from
November 1, 1994 until maturity January 31, 1995. Interest on outstanding
borrowings, as amended, is at 3% above the bank's prime rate (6.0% at December
31, 1993). Maximum
F-40
<PAGE> 103
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LONG-TERM DEBT: (CONTINUED)
borrowings under the Agreement are limited principally to certain percentages of
eligible accounts receivable, inventories and letters of credit. Letters of
credit outstanding under the Agreement were approximately $701,000 at December
31, 1993.
The Company also has certain term loan and seasonal borrowings available
under the Agreement. The seasonal borrowings are due in equal monthly
installments of $30,000 from April 30, 1994 through October 31, 1994, $50,000 on
November 30, 1994 and December 31, 1994 with the balance, $1,440,000 due at
maturity January 31, 1995. The term loan is due in equal installments of
$600,000 on October 15 and October 31, 1994.
Borrowings under the Agreement are collateralized by substantially all of
the Company's assets. The Agreement requires the Company to maintain certain
financial ratios, restricts the redemption of the Company's common stock and
additional indebtedness, as defined, and limits capital expenditures and
dividends. The Company was not in compliance with certain covenants at December
31, 1993 and obtained a waiver for these violations as of September 1, 1994.
Repayment of outstanding borrowings of up to $5,000,000 are personally
guaranteed by the Company's principal stockholder.
The Banking Facility expires on December 31, 1995 and provides Marchon
Toys, Ltd. maximum borrowings of $1,818,000 at December 31, 1993. Borrowings are
limited principally to certain percentages of Marchon Toys, Ltd. eligible
accounts receivable and inventories. Interest on outstanding borrowings is at
1.5% over the prevailing market rate (6% at December 31, 1993). Borrowings under
the banking facility are collateralized by substantially all of Marchon Toys,
Ltd.'s assets and are guaranteed by the Company and its principal stockholder
have also guaranteed repayment of borrowings up to $1,818,000. The facility also
requires Marchon Toys, Ltd. to maintain a minimum net worth and restricts
dividends. The bank also holds one of the standby letters of credit for which
the Company is contingently liable.
5. FORGIVENESS OF DEBT:
During 1993, the Company's principal stockholder contributed $808,084 to
additional paid-in capital by forgiveness of a subordinated note payable to
stockholder. In addition, an officer contributed $116,526 to additional paid-in
capital by forgiveness of a subordinated note payable to officer.
6. LEASES AND DUE FROM AFFILIATES:
The Company leases its warehouse and office facilities from entities owned
by the Company's principal stockholder. Rentals range from $195,000 to $270,000
per year through July 2001 for the Vernon Hills facility and the rental is
$60,000 per year through June 2013 for the St. Louis facility.
Future minimum lease payments under operating leases as of December 31,
1993 are approximately:
<TABLE>
<S> <C>
1994.............................................................. $ 346,200
1995.............................................................. 471,200
1996.............................................................. 413,850
1997.............................................................. 417,037
1998.............................................................. 421,500
Thereafter........................................................ 1,903,475
----------
$3,973,262
==========
</TABLE>
Total rent expense was $543,000 in 1993.
F-41
<PAGE> 104
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LEASES AND DUE FROM AFFILIATES: (CONTINUED)
The Company has a due from affiliate for costs incurred during the
construction of the Vernon Hills, Illinois warehouse and office facility. At
December 31, 1993, the due from affiliate related to this facility totals
approximately $440,000 and bears interest at an annual rate of 7.5%, due on
December 31, 1998.
The Company also has approximately $403,000 due from affiliate related to
the Pagedale, Missouri facility for various advances to/from the affiliate.
These borrowings are due December 31, 1998 and are non-interest bearing.
The amounts due from affiliates are guaranteed by the Company's principal
stockholder.
7. DEFINED CONTRIBUTION PLAN:
The Company has a defined contribution employee benefit plan (the "Plan")
under Section 401(k) of the Internal Revenue Code, which covers all employees
meeting the service criteria for participation as set forth in the Plan. The
Company is required to make annual contributions equal to 25% of each
participating employee's individual annual contributions. Company contributions
were approximately $5,000 for 1993.
Marchon Toys, Ltd. has a similar plan under which the subsidiary is
required to make annual contributions equal to 5% or 7.5% of each employee's
individual annual contributions based on employee compensation. Contributions
were approximately $2,000 for 1993.
8. CONCENTRATIONS OF RISK:
The Company sells a substantial portion of its products to three customers.
Sales to those customers aggregated approximately $16,700,000 in 1993. At
December 31, 1993, amounts due from those customers, included in accounts
receivable, were approximately $4,300,000.
9. INCOME TAXES:
The Company files a consolidated United States (domestic) federal income
tax return. Marchon Toys, Ltd. files a separate income tax return in Hong Kong.
The components of loss before income taxes and cumulative effect of change
in accounting principle consist of the following:
<TABLE>
<S> <C>
Domestic......................................................... $(1,928,381)
Foreign.......................................................... 388,182
-----------
$(1,540,199)
===========
</TABLE>
The income tax provision consists of the following:
<TABLE>
<S> <C>
Current:
Foreign.......................................................... $ 63,636
Domestic federal................................................. 63,802
--------
Income tax provision............................................... $127,438
========
</TABLE>
The 1993 provision for domestic federal income taxes consists of additional
taxes due upon settlement of an Internal Revenue Service audit for prior years.
F-42
<PAGE> 105
MARCHON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES: (CONTINUED)
The income tax effects of temporary differences between financial and
income tax reporting are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward (NOL).............................. $ 306,999
Allowance for doubtful accounts.................................... 647,459
Expenses not deductible for tax purposes in the year accrued....... 91,960
Other.............................................................. 39,186
Valuation allowance................................................ (915,435)
---------
Total deferred tax asset......................................... 170,169
---------
Property and equipment............................................. (170,169)
---------
Total deferred tax liability..................................... (170,169)
---------
Net................................................................ $ --
=========
</TABLE>
The NOL expires in 2008.
The Company has provided a valuation allowance for the entire net deferred
tax asset at December 31, 1993 due to uncertainty as to future realization of
the related tax benefits.
F-43
<PAGE> 106
MARCHON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $35,006
Cost of sales...................................................................... 20,508
-------
Gross profit....................................................................... 14,498
Operating expenses................................................................. 11,296
-------
Income from operations............................................................. 3,202
Interest expense................................................................... 945
-------
Income before income taxes......................................................... 2,257
Income tax expense................................................................. 260
-------
Net income......................................................................... 1,997
Deficit, beginning of year......................................................... (45)
-------
Retained earnings, end of period................................................... $ 1,952
=======
</TABLE>
F-44
<PAGE> 107
MARCHON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Net cash provided by operating activities.................................. $ 605
-------
Cash flows from financing activities:
Increase in cash overdraft............................................... 667
Net payments under notes payable......................................... (1,524)
Repayments of long-term debt............................................. (66)
-------
Net cash used in financing activities...................................... (923)
-------
Net decrease in cash and cash equivalents.................................. (318)
Cash and cash equivalents, beginning of year............................... 318
-------
Cash and cash equivalents, end of period................................... $ --
=======
</TABLE>
F-45
<PAGE> 108
MARCHON, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (DEFICIT) AND OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994
1. BASIS OF PRESENTATION
The unaudited consolidated condensed Statements of Operations and Retained
Earnings (Deficit) and of Cash Flows reflect all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of management, necessary
to a fair presentation of the results of operations and cash flows for the nine
months ended September 30, 1994.
2. CONTINGENCIES
There are two suits claiming infringement of various intellectual property
rights which have been filed against the Company. These claims are in various
stages of litigation. The Company believes that it has meritorious defenses to
the open claims and has provided reserves for its estimated costs to settle
these matters. The Company does not believe that any additional amounts required
to ultimately resolve these matters will be material.
The Company's operating subsidiaries are subject to various types of
consumer claims for personal injury from their products. The Company's
subsidiaries maintain product liability insurance. Various product liability
claims, each of which management believes is adequately covered by insurance
and/or reserves, are currently pending. The Company does not believe the outcome
of any of this litigation would have a material adverse effect on the Company's
consolidated financial statements.
3. INCOME TAXES
During the nine months ended September 30, 1994, the Company utilized net
operating loss carryforwards to partially offset taxable income.
F-46
<PAGE> 109
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Consolidated Condensed Statement of
Operations gives effect to Empire of Carolina, Inc.'s ("Empire") July 7, 1995
acquisition of the toy business assets and assumption of certain liabilities of
Buddy L Inc., a wholly-owned subsidiary of SLM International, Inc., and Buddy L
(Hong Kong) Limited, a subsidiary of Buddy L Inc. (the toy business of Buddy L
Inc. and Buddy L (Hong Kong) Limited collectively referred to as "Buddy L"). The
Unaudited Pro Forma Consolidated Condensed Statement of Operations is based on
the estimates and assumptions set forth herein and in the notes to such
statements. This pro forma information has been prepared utilizing the
historical consolidated financial statements of Empire and the historical
financial information of Buddy L appearing elsewhere herein. The pro forma
financial data is provided for comparative purposes only and does not purport to
be indicative of the results which actually would have been obtained if the
events had been effected on the date indicated or of those results which may be
obtained in the future.
The pro forma adjustments are described in the accompanying Notes to the
Unaudited Pro Forma Consolidated Condensed Statement of Operations. The
Unaudited Pro Forma Consolidated Condensed Statement of Operations for the year
ended December 31, 1995 assumes that the acquisition of Buddy L occurred as of
January 1, 1995.
PURCHASE PRICE ALLOCATION
An estimate of the purchase price allocation to individual assets and
liabilities has been made on the basis of currently available information.
However, adjustments to these allocations could occur during the allocation
period which could alter the ultimate determination of fair value.
For purposes of pro forma presentations, the excess purchase price over the
net assets acquired is being amortized over twenty years. Trademarks and trade
names are being amortized over fifteen years.
F-47
<PAGE> 110
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
BUDDY L PRO FORMA
EMPIRE TOY BUSINESS ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales................................ $ 153,744 $ 33,449 $ -- $ 187,193
Cost of goods sold....................... 111,905 30,715 -- 142,620
---------- ------- ------- ----------
Gross profit............................. 41,839 2,734 -- 44,573
Selling and administrative expenses...... 36,183 1,617 14,212(1)(4) 52,012
Nonrecurring restructuring and relocation
charges................................ 7,550 -- -- 7,550
---------- ------- ------- ----------
Operating income (loss).................. (1,894) 1,117 (14,212) (14,989)
Other income (expense):
Interest, dividends and net realized
gains............................... 514 -- 514
Interest expense....................... (5,996) -- (2,347)(2)(4) (8,343)
---------- ------- ------- ----------
Total other income (expense)........... (5,482) -- (2,347) (7,829)
---------- ------- ------- ----------
Income (loss) from continuing operations
before income tax benefits............. (7,376) 1,117 (16,559) (22,818)
Income tax benefits...................... (2,875) -- (5,250)(3) (8,125)
---------- ------- ------- ----------
Income (loss) from continuing
operations............................. $ (4,501) $ 1,117 $ (11,309) $ (14,693)
---------- ------- ------- ----------
Primary loss per share(5)................ $ (0.96) $ (2.83)
Fully diluted loss per share(5).......... $ (0.96) $ (2.83)
---------- ----------
Weighted-average shares -- primary and
fully diluted.......................... 4,680,852 5,195,260(5)
========== ==========
</TABLE>
F-48
<PAGE> 111
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS (IN THOUSANDS)
1. Adjustment includes:
<TABLE>
<S> <C>
Amortization of excess cost over fair value of net assets acquired over
twenty years......................................................... $144
Amortization of trademarks acquired over fifteen years................. 143
----
Total.................................................................. $287
====
</TABLE>
2. Adjustment includes increase in interest expense from debt issued in
connection with the Buddy L acquisition ($1,082).
3. Reflects the income tax benefit from the carryback of operating losses
resulting from the pro forma combination and adjustments to offset Empire's
taxable income in previous years. Tax benefits have been computed at the
Federal statutory rate.
4. Includes an allocation of other selling, general and administrative expenses
and interest expense based upon the pro rata percentage of Toy Business sales
to total Buddy L sales.
5. The calculation of pro forma earnings per share for the Unaudited Pro Forma
Consolidated Condensed Statement of Operations for the year ended December
31, 1995 assumes the issuance of 756,667 shares of the Company's common stock
for the Buddy L acquisition and the issuance of 247,392 shares of common
stock used to provide a portion of the funding for the Buddy L acquisition.
F-49
<PAGE> 112
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY UNDERWRITER OR ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY COMMON
STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Recent Events......................... 12
Common Stock Price Range and Dividend
Policy.............................. 13
Use of Proceeds....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 24
Management............................ 38
Certain Transactions.................. 43
Principal and Selling Stockholders.... 50
Description of Capital Stock.......... 54
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Available Information................. 60
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,650,639 SHARES
[EMPIRE LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
, 1996
---------------------------
WILLIAM BLAIR & COMPANY
GERARD KLAUER MATTISON
& CO., LLC
------------------------------------------------------
------------------------------------------------------
<PAGE> 113
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
Offering described in this Registration Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 18,659
NASD Examination Fee...................................................... $ 5,911
American Stock Exchange Listing Fee....................................... $ 17,500
Accounting Fees and Expenses.............................................. $100,000
Printing and Engraving Expenses........................................... $100,000
Legal Fees and Expenses................................................... $350,000
Blue Sky Fees and Expenses................................................ $ 12,000
Miscellaneous............................................................. $ 45,930
-------
Total................................................................... $650,000
=======
</TABLE>
The foregoing items, except for the Securities and Exchange Commission and
NASD fees, are estimated. All expenses, except certain incremental expenses to
be borne by a Selling Stockholder, will be borne by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Similar indemnity is
authorized for such persons against expenses (including attorneys' fees) actual
and reasonably incurred in connection with the defense or settlement of any such
threatened, pending or completed action or suit by or in the right of the
corporation if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the corporation.
Any such indemnification may be made only as authorized in each specific case
upon a determination by the shareholders or disinterested directors or by
independent legal counsel in a written opinion that indemnification is proper
because the indemnitee has met the applicable standard of conduct. The
Certificate of Incorporation of the Company provides that directors and officers
shall be indemnified as described above in this paragraph to the fullest extent
permitted by the DGCL; provided, however, that any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person shall be indemnified only if such proceeding (or part thereof) was
authorized by the board of directors of the Company.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in such capacity,
or arising out of his status as such, whether or not the corporation would
otherwise have the power to indemnify him under Section 145.
The Charter provides that, to the fullest extent permitted by the DGCL, no
director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary as a
II-1
<PAGE> 114
director. Section 102(b)(7) of the DGCL currently provides that such provisions
do not eliminate the liability of a director (i) for a breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (relating to the declaration of
dividends and purchase or redemption of shares in violation of the DGCL), or
(iv) for any transaction from which the director derived an improper personal
benefit. Reference is made to the Company's Charter and By-laws filed as
Exhibits 3.1 and 3.2 hereto, respectively.
The Company maintains directors' and officers' liability insurance policies
covering certain liabilities of persons serving as officers and directors and
providing reimbursement to the Company for its indemnification of such persons.
Pursuant to the Underwriting Agreement to be entered into among the
Company, the Selling Stockholders and the Underwriters, officers and directors
of the Company are indemnified for certain liabilities, including liabilities
incurred under the Securities Act of 1933, as amended. Reference is made to the
form of Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company has issued the following securities that were not registered under the
Securities Act:
(a) On July 18, 1994, the Company granted to each of Messrs. Steven Geller
and Neil B. Saul, in conjunction with their employment agreements with a
subsidiary of the Company, options to purchase 500,000 shares of Common Stock
under the Company's Amended 1994 Stock Option Plan, which options vest over a
three year period. Each received incentive stock options to purchase 60,376
shares of Common Stock which are exercisable at $6.625 per share and
non-qualified options to purchase 439,624 shares of Common Stock which are
exercisable at $6.50 per share.
(b) On October 13, 1994, the Company issued, as part of the consideration
for the acquisition of Marchon, Inc., an aggregate of 1,076,323 shares of Common
Stock to the Marchon Stockholders. See "Certain Transactions -- The Marchon
Transaction."
(c) On November 2, 1994, in consideration for services, the Company issued
warrants to purchase an aggregate of 79,000 shares at $7.50 per share, to Harvey
Klaris (21,067 warrants), Glen Chwatt (21,067 warrants), Richard Chwatt (21,067
warrants) and Jerico State Capital Corp. (15,800 warrants), expiring on November
2, 1997.
(d) On December 22, 1994, the Company issued, for an aggregate cash
consideration of $15 million, convertible debentures in such principal amount to
the WPG Group, Eugene M. Matalene, Jr. and Richard Hochman. The convertible
debentures are convertible at any time into newly issued shares of Common Stock
at a conversion price of $7.50 per share. See "Certain Transactions -- The WPG
Group Investment."
(e) On December 22, 1994, in consideration for services, the Company issued
warrants to acquire an aggregate of 1,000,000 shares of Common Stock at an
exercise price of $7.50 per share of which 325,000 were issued to Mr. Geller,
475,000 were issued to Mr. Saul, 75,000 to each of Irwin J. Goldsmith and
Charles Emby, senior managers of a subsidiary of the Company, and 50,000 to SBK
Investment Partners, an affiliate of the former corporate counsel to the
Company. See "Certain Transactions -- The WPG Group Investment."
(f) On December 27, 1994, in consideration for services, the Company issued
to PaineWebber Incorporated, a warrant to purchase 63,000 shares of Common Stock
for $7.50 per share, expiring on December 27, 1997. See "Certain Transactions --
Transactions with Affiliates."
(g) On December 28, 1994, in consideration for services, the Company issued
warrants to purchase 80,571 and 19,429 shares of Common Stock at $7.50 per
share, expiring December 27, 1997, to WPG IV and the general partner of WPG
Overseas, respectively. See "Certain Transactions -- Transactions with
Affiliates."
II-2
<PAGE> 115
(h) On January 3, 1995, in consideration for services, the Company issued
to Gerard Klauer Mattison & Co., Inc., a warrant to purchase 79,000 shares of
Common Stock for $7.50 per share expiring January 3, 1998. See "Underwriting."
(i) On July 7, 1995, the Company issued to Buddy L Inc. as part of the
consideration for the acquisition by the Company of the Toy Business of Buddy L,
an aggregate of 756,667 shares of the Company's common stock (and up to 454,000
additional shares of common stock as price protection in the event Buddy L sells
the aforementioned received common stock under certain circumstances between
July 7, 1996 and December 31, 1997 for less than $12 per share). Under the
acquisition agreement, the Company also agreed to pay to Buddy L Inc. a
five-year earnout based upon an amount equal to either 1.5% of the consolidated
net revenues of the Company's and Buddy L's products or, at the Buddy L's
option, a percentage of the Company's consolidated earnings before interest and
income taxes based on the sales of Buddy L products, but in no event will the
earnout be (x) less than $3.25 million, including $1.25 million in cash paid at
closing (which sum was included in (ii) above), with the excess over $3.25
million subject to certain offsets that are not to exceed $10 million or (y)
more than $20 million; provided that if the earnout payments under certain
circumstances would have exceeded $25 million, the Company shall make an
additional payment equal to such amount in excess of $25 million. See "Certain
Transactions -- The Buddy L Transaction."
(j) On July 7, 1995, the Company issued, for an aggregate cash
consideration of $7.6 million three-year 12% senior subordinated notes in the
principal amount of $7.58 million and 758,000 of detachable four-year warrants
exercisable commencing July 7, 1997 at $9.00 per share, to American Bankers
Insurance Company of Florida ($2.5 million principal amount of notes and 250,000
warrants), American Bankers Life Assurance Company of Florida ($2.5 million of
notes and 250,000 warrants), Regent Capital Partners L.P. ($1.5 million of notes
and 150,000 warrants), Eugene M. Matalene, Jr. ($100,000 of notes and 10,000
warrants), Robert W. Pangia ($100,000 of notes and 10,000 warrants), Steven
Geller ($500,000 of notes and 50,000 warrants), Roger Schneier ($250,000 of
notes and 25,000 warrants), Peter B. Pfister ($10,000 of notes and 1,000
warrants), Craig S. Whiting, through his self-directed IRA ($10,000 of notes and
1,000 warrants), Nora E. Kerppola ($10,000 of notes and 1,000 warrants) and Paul
M. Higbee ($100,000 of notes and 1,000 warrants). See "Certain Transactions --
The Buddy L Transaction."
(k) On July 7, 1995, the Company issued, for an aggregate cash
consideration of $1.8 million, 247,392 shares of Common Stock at $7.25 per
share, of which 190,000 shares were issued to WPG IV, 46,046 were issued to WPG
Overseas, 3,711 were issued to Glenbrook and 6,680 were issued to Westpool. See
"Certain Transactions -- The WPG Group Investment."
(l) On July 7, 1995, the Company issued, for an aggregate cash
consideration of $3.2 million, 442,264 shares of $.01 par value Series A
Cumulative Convertible Preferred Stock. Such securities were issued as follows:
341,372 shares to WPG IV, 82,317 shares to WPG Overseas, 6,634 shares to
Glenbrook and 11,941 shares to Westpool. See "Certain Transactions -- The Buddy
L Transaction."
(m) On August 31, 1995, the Company extended the term of an option for an
aggregate of 240,000 shares of Common Stock to September 30, 1997, from
September 30, 1996. The option is exercisable at $8.50 per share. See Note 12 of
Notes to Consolidated Financial Statements.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering.
II-3
<PAGE> 116
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
2.1 -- Stock Purchase Agreement, dated July 29, 1988, by and among Clabir, Clabir
Corporation (California), HMW Industries, Inc. and Olin Corporation.(2)
2.2 -- Agreement and Plan of Merger, dated as of November 14, 1989, between AmBrit,
Inc. and the Company, including amendment thereto, dated as of December 4,
1989.(3)
2.3 -- Agreement and Plan of Merger, dated as of November 14, 1989, by and among the
Company, Clabir Corporation ("Clabir") and CLR Corporation, including amendment
thereto, dated as of December 4, 1989.(3)
2.4 -- Sale and Purchase Agreement between the Company and Cargill, Incorporated, dated
September 30, 1992.(5)
2.5 -- Purchase Agreement among Conopco, Inc., the Company, The Isaly Klondike Company,
Inc., The Isaly Company, Popsicle Industries, Ltd., Ice Cream Novelties, Inc.
and Smith & O'Flaherty Limited, dated as of January 27, 1993.(7)
2.6 -- Agreement and Plan of Reorganization, dated October 13, 1994, by and among the
Company, Marchon, and the stockholders of Marchon.(11)
2.7 -- Amended and Restated Asset Purchase Agreement (the "Asset Purchase Agreement")
dated as of May 19, 1995 by and among the Company, Buddy L, and Buddy L (Hong
Kong) Limited ("BLHK").(16)
2.8 -- Agreement dated June 2, 1995 amending the Asset Purchase Agreement, by and among
the Company and Buddy L and acknowledged and agreed to by BLHK.(4)
2.9 -- Second Amendment dated June 30, 1995 further amending the Asset Purchase
Agreement.(4)
2.10 -- Third Amendment, dated July 7, 1995 further amending the Asset Purchase
Agreement.(4)
2.11 -- Agreement dated August 31, 1995, among the Company, CLR Corporation, Clabir,
Olin Corporation and General Defense Corporation.(18)
3.1 -- Restated Certificate of Incorporation of the Company.(4)
3.2 -- Amended and Restated By-Laws of the Company.(15)
3.3 -- Certificate of Designation, Preference and Rights of the Company filed June 30,
1995.(4)
4.1 -- Form of specimen certificate representing the Company's Common Stock.(1)
4.2 -- Excerpts from the Company's amended By-Laws and the Company's amended
Certificate of Incorporation relating to rights of holders of the Company's
Common Stock.(3)
4.3 -- Form of 9% Convertible Debentures, issued December 22, 1994.(14)
4.4 -- Form of Warrant Certificate to purchase common stock of the Company, issued
December 22, 1994.(12)
5.1 -- Opinion of Schwartz & Freeman
9.1 -- Voting Agreement, dated September 30, 1994, by and between Halco Industries,
Inc. ("Halco") and Steven Geller.(11)
10.1 -- EII Incentive Plan for 1993.(6)
10.2 -- Corporate Incentive Plan for 1993.(6)
10.3 -- Promissory Note, dated July 31, 1993, from Halco to the Company.(8)
10.4 -- Modification Agreement, dated September 29, 1993, to the Promissory Note from
Halco to the Company.(8)
</TABLE>
II-4
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.5 -- Modification Agreement, dated December 7, 1993, to the Promissory Note from
Halco to the Company.(9)
10.6 -- Pledge Agreement, dated December 7, 1993, between Halco and the Company.(9)
10.7 -- Stock Purchase Agreement, dated December 30, 1993, between the Company and Rhoda
Kleinman.(9)
10.8 -- Employment Agreement, dated July 15, 1994, by and among the Company, EII and
Steven Geller.(10) 10.9
10.10 -- Stock Purchase Agreement, dated July 15, 1994, among Steven Geller and the
Halperin Group.(11)
10.11 -- Stock Option Agreement, dated July 15, 1994, between Steven Geller and the
Halperin Group.(11)
10.12 -- Stock Option Agreement, dated July 18, 1994, between the Company and Steven
Geller.(10)
10.13 -- Stock Option Agreement, dated July 18, 1994, between the Company and Neil
Saul.(10)
10.14 -- Amended and Restated 1994 Stock Option Plan of the Company.(15)
10.15 -- Financing Agreement and supplements thereto, between EII and Wachovia Bank of
North Carolina, N.A. ("Wachovia") and related Promissory Note, Acknowledgment of
Security Interest in Inventory, Agreement of Licensor and Guaranty Agreement
between the Company and Wachovia, all dated September 30, 1994.(14)
10.16 -- Redemption Agreement, dated September 30, 1994, between the Company and the
Halperin Group.(14)
10.17 -- Omnibus Agreement, dated September 30, 1994, by and among the Halperin Group,
Steven Geller, the Company and EII.(11)
10.18 -- Subordinated Promissory Note, dated September 30, 1994, between Maurice Halperin
and the Company.(14)
10.19 -- Loan and Subordination Agreement, dated September 30, 1994, between the Company
and Maurice Halperin.(14)
10.20 -- Stockholder's Agreement, dated October 13, 1994, by and among Steven Geller,
Marvin Smollar and Neil Saul.(11)
10.21 -- Investor's Rights Agreement, dated October 13, 1994, by and among the Company,
Marvin Smollar, Kar Ye Yeung, Tyler Bulkley and Harvey Katz.(11)
10.22 -- Employment Agreement, dated October 13, 1994, between the Company and Marvin
Smollar.(11)
10.23 -- Stockholders Agreement dated October 13, 1994, among Steven Geller, Marvin
Smollar and Neil Saul.(11)
10.24 -- Debenture Purchase Agreement, dated as of December 2, 1994, among the Company
and the WPG Group.(13)
10.25 -- Registration Rights Agreement, dated as of December 22, 1994, by and between the
Company and the WPG Group.(13)
10.26 -- Shareholders' Agreement, dated December 22, 1994, by and among the WPG Group,
Steven Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited
Partnership.(13)
10.27 -- Intercreditor Agreement, dated December 22, 1994, by and among Wachovia, the
Company, EII and the WPG Group.(13)
10.28 -- Subsidiary Guaranty, dated as of December 22, 1994, between EII and Marchon.(14)
</TABLE>
II-5
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.29 -- Stock Purchase Agreement, dated as of December 22, 1994, between WPG Corporate
Development Associates IV (Overseas), Ltd. and Steven Geller.(13)
10.30 -- Modification to Financing Agreement, dated January 30, 1995, between EII and
Wachovia.(14)
10.31 -- Asset Purchase Agreement, dated as of March 3, 1995, by and among the Company,
Buddy L and Buddy L (Hong Kong) Limited.(14)
10.32 -- Bid Protection Agreement, dated as of March 3, 1995, between the Company and
Buddy L.(14)
10.33 -- Assignment and Assumption Agreement dated as of June 21, 1995 between the
Company and EAC.(4)
10.34 -- Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(4)
10.35 -- Lease dated July 7, 1995 between Buddy L and EAC.(4)
10.36 -- Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy
L Canada Inc., and EAC.(4)
10.37 -- Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy
L Canada Inc., and EAC.(4)
10.38 -- Assignment and Assumption of Lease dated as of July 7, 1995 between Buddy L and
EAC.(4)
10.39 -- Loan and Security Agreement dated as of June 30, 1995 between LaSalle National
Bank, N.A. ("LaSalle") and EAC.(4)
10.40 -- Guaranty dated as of June 30, 1995 between LaSalle and the Company.(4)
10.41 -- Subordination Agreement dated as of June 30, 1995 between LaSalle and the
Company.(4)
10.42 -- $7,580,000 Senior/Subordinated Term Loan Agreement dated July 7, 1995 among the
Company as Borrower and the Lenders Listed therein ("Lenders").(4)
10.43 -- Form of the Company's 12% Senior/Subordinated Note due July 7, 1998.(4)
10.44 -- Form of Warrant to Purchase Common Stock of the Company issued to the
Lenders.(4)
10.45 -- Amended and Restated Intercreditor Agreement dated July 7, 1995 by and among the
Company, EII, Wachovia, the Lenders and the holders of certain debentures dated
December 22, 1994 issued by the Company.(4)
10.46 -- Registration Rights Agreement dated July 7, 1995 by and between the Company and
the Lenders.(4)
10.47 -- Form of Subscription Agreement executed in connection with subscription of
Common Stock and Preferred Stock by WPG Corporate Development Associates IV
(Overseas), L.P., Westpool Investment Trust PLC, Glenbrook Partners, L.P., and
WPG Corporate Development Associates IV, L.P.(4)
10.48 -- Shareholders' agreement ("Shareholders' Agreement") dated December 22, 1994
among WPG Corporate Development Associates IV, L.P., WPG Corporate Development
Associates IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee of Craig S.
Whiting IRA, Peter Pfister, Weiss, Peck & Greer, as Trustee of Nora E. Kerppola
IRA Westpool Investment Trust, PLC, Glenbrook Partners, L.P., Steve Geller, Neil
Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(17)
</TABLE>
II-6
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <C> <S>
10.49 -- Amendment No. 2 to Shareholders Agreement dated as of June 29, 1995 among WPG
Corporate Development Associates IV, L.P., WPG Corporate Development Associates
IV (Overseas), Ltd., as the exempt transferee of WPG Corporate Development
Associates IV (Overseas), Ltd., certain persons identified on Schedule I of
Amendment No. 2 to the Shareholders' Agreement, Steven E. Geller ("Geller"),
Neil B. Saul ("Saul") and The Autumn Glory Trust, a Cook Islands Registered
International Trust ("Trust") as the permitted transferee of Champ Enterprises
Limited Partnership.(4)
10.50 -- Registration Rights Agreement ("Registration Rights Agreement") dated as of
December 22, 1994 by and between Empire of Carolina, Inc., WPG Corporate
Development Associates IV, L.P. WPG Corporate Development Associates IV
(Overseas), Ltd., Weiss Peck & Greer, as Trustee under Craig Whiting IRA, Peter
B. Pfister, Weiss, Peck & Greer, as Trustee under Nora Kerppola IRA, Westpool
Investment Trust PLC and Glenbrook Partners, L.P.(17)
10.51 -- Amendment No. 1 to Registration Rights Agreement.(4)
10.52 -- Settlement and Termination Agreement with Neil Saul.(18)
10.53 -- Extension to Financing Agreement, dated February 12, 1996 between Empire and
Wachovia.(18)
10.54 -- Loan and Security Agreement between LaSalle National Bank and BT Commercial
Corporation to Empire Industries, Inc., with exhibits and security instruments.
21 -- Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche LLP
23.2+ -- Consent of Coopers & Lybrand LLP
23.3+ -- Consent of Wong Brothers & Co.
23.4 -- Consent of Schwartz & Freeman (to be included in Exhibit 5.1)
24.1+ -- Powers of Attorney (included on signature page)
</TABLE>
- ------------------------------
* To be filed by amendment
+ Previously filed
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by
reference herein.
(2) Previously filed as an exhibit to Clabir's Current Report on Form 8-K,
dated December 23, 1988 (File No. 1-7769) and incorporated by reference
herein.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-32186), dated November 17, 1989 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated July 21, 1995, and incorporated by reference herein.
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated October 6, 1992 and incorporated by reference herein.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated by reference herein.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated February 1, 1993 and incorporated by reference herein.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993 and incorporated by reference
herein.
(9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated by reference herein.
II-7
<PAGE> 120
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated by reference
herein.
(11) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for September 30, 1994 and incorporated by reference herein.
(12) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for December 22, 1994 and incorporated by reference herein.
(13) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
the WPG Group, dated December 23, 1994 and incorporated by reference
herein.
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated by reference herein.
(15) Previously filed as an exhibit to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(16) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for May 19, 1995 and hereby incorporated by reference herein.
(17) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
WPG Corporate Development Associates IV, L.P., WPG Private Equity Partners,
L.P., WPG Corporate Development Associates IV (Overseas), L.P., WPG Private
Equity Partners (Overseas), L.P., Steven Hutchinson, Wesley Lang, Peter
Pfister, Craig Whiting, Nora Kerppola, Glenbrook Partners, L.P., Prim
Ventures, Inc., Westpool Investment Trust PLC and Weiss, Peck & Greer with
the Securities and Exchange Commission on December 23, 1994.
(18) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated by reference herein.
(b) Financial Statement Schedules
The following financial statement schedule of the Company is filed as part
of this Registration Statement and should be read in conjunction with the
Consolidated Financial Statements of the Company:
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Schedules other than those listed above have been omitted for the reason
that they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) It will provide to the Underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-8
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Delray Beach, Florida on
June 14, 1996.
EMPIRE OF CAROLINA, INC.
By: /s/ MARVIN SMOLLAR
---------------------------------
Marvin Smollar,
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
* Chairman of the Board of Directors June 14, 1996
- ------------------------------------------ and Chief Executive Officer
Steven Geller (Principal Executive Officer)
/s/ MARVIN SMOLLAR President, Chief Operating Officer June 14, 1996
- ------------------------------------------ and Director
Marvin Smollar
/s/ J. ARTIE ROGERS Senior Vice President-Finance and June 14, 1996
- ------------------------------------------ Assistant Secretary (Principal
J. Artie Rogers Financial and Accounting Officer)
* Director June 14, 1996
- ------------------------------------------
Leonard E. Greenberg
* Director June 14, 1996
- ------------------------------------------
Steven N. Hutchinson
* Director June 14, 1996
- ------------------------------------------
Eugene M. Matalene
* Director June 14, 1996
- ------------------------------------------
Peter B. Pfister
*By: /s/ MARVIN SMOLLAR
- ------------------------------------------
(Marvin Smollar,
Attorney-in-Fact)
</TABLE>
II-9
<PAGE> 122
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Empire of Carolina, Inc.
We have audited the consolidated financial statements of Empire of
Carolina, Inc. and its subsidiaries as of December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995, and have issued
our report thereon dated March 29, 1996 (April 8, 1996 as to Note 17 to the
Consolidated Financial Statements); such report is included elsewhere in this
Registration Statement. Our audits also included the consolidated financial
statement schedule of Empire of Carolina, Inc. and its subsidiaries, listed in
Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 29, 1996
(April 8, 1996 as to Note 17 to the Consolidated Financial Statements)
S-1
<PAGE> 123
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ADMINISTRATIVE EXPENSES................................................... $(2,243) $ (710)
------- -------
OTHER INCOME (EXPENSES):
Interest income, dividends and net realized gains....................... 2,459 1,241
Unrealized loss on marketable securities................................ (670) --
Interest expense........................................................ (61) (1,912)
Equity in earnings of subsidiaries...................................... 310 (5,621)
Management fee income................................................... 1,100 3,060
------- -------
Total other income (expenses)........................................ 3,138 (3,232)
------- -------
INCOME (LOSS) BEFORE TAXES................................................ 895 (3,942)
INCOME TAX EXPENSE........................................................ 306 559
------- -------
NET INCOME (LOSS)......................................................... $ 589 $(4,501)
======= =======
</TABLE>
S-2
<PAGE> 124
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, CONTINUED
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ -- $ 1,416
Marketable securities................................................... 1,861 189
Receivables from subsidiaries........................................... 11,706 23,952
Prepaid expenses and other current assets............................... 1,626 920
------- -------
Total current assets................................................. 15,193 26,477
NOTE RECEIVABLE FROM SUBSIDIARY........................................... -- 9,580
INVESTMENT IN SUBSIDIARIES................................................ 28,574 21,947
OTHER NONCURRENT ASSETS................................................... 718 1,695
------- -------
TOTAL ASSETS.............................................................. $44,485 $59,699
======= =======
</TABLE>
The note receivable from subsidiary is subordinated to the subsidiary's
bank facility and bears interest at the prime rate.
S-3
<PAGE> 125
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, CONCLUDED
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................................................... $ 3,250 $ --
Accounts payable and accrued expenses................................... 1,496 1,040
Federal and state taxes payable......................................... 2,532 3,685
Indemnification obligations related to sales of subsidiaries............ 1,541 1,326
------- -------
Total current liabilities............................................ 8,819 6,051
CONVERTIBLE SUBORDINATED DEBENTURES....................................... 13,563 13,851
SENIOR SUBORDINATED NOTES................................................. -- 7,959
OTHER NONCURRENT LIABILITIES.............................................. 905 781
------- -------
Total liabilities....................................................... 23,287 28,642
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000 shares authorized; shares
issued and outstanding: 1994 -- 4,191,000; 1995 -- 5,195,000......... 419 519
Series A cumulative convertible preferred stock, $.01 par value,
5,000,000 shares authorized; shares issued and outstanding: 1994 --
0; 1995 -- 442,264 ($3,206,000 involuntary liquidation preference)... -- 4
Additional paid-in capital................................................ 18,972 33,193
Retained earnings (deficit)............................................... 1,842 (2,659)
Stockholders' loans....................................................... (35) --
------- -------
Total stockholders' equity.............................................. 21,198 31,057
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................ $44,485 $59,699
======= =======
</TABLE>
Note: The Parent accounts for its investment in its majority-owned
subsidiaries using the equity method of accounting. Under the equity method,
original investments are recorded at cost and adjusted by the Parent's share of
undistributed earnings or losses of these components.
S-4
<PAGE> 126
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995, CONTINUED
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 589 $(4,501)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Non-cash adjustments............................................... 556 6,305
Changes in assets and liabilities.................................. (1,887) 87
------- -------
Net cash provided by (used in) operating activities............. (742) 1,891
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Marchon.................................................. (3,818) --
Loans to Halco Industries, Inc.......................................... (3,825) --
Repayment of loan by Halco Industries, Inc.............................. 25,825 --
------- -------
Proceeds from sales of property and equipment........................... 125 --
Proceeds from sales of marketable securities............................ 66,606 1,655
Note receivable from subsidiary......................................... -- (9,580)
Net advances to subsidiaries............................................ (7,524) (5,220)
Management fees received from subsidiaries.............................. 1,050 3,060
Collections from (advances to) stockholder.............................. (35) 35
------- -------
Net cash provided by (used in) investing activities.................. 78,404 (10,050)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Marchon long-term debt..................................... (6,639) --
Repayments of notes payable............................................. -- (3,250)
Proceeds from issuance of convertible subordinated debentures........... 15,000 --
Purchase of treasury stock.............................................. (86,111) --
Proceeds from issuance of common stock.................................. -- 1,794
Proceeds from issuance of preferred stock............................... -- 3,206
Proceeds from issuance of senior subordinated notes..................... -- 7,580
Other................................................................... -- 245
------- -------
Net cash provided by (used in) financing activities.................. (77,750) 9,575
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (88) 1,416
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 88 --
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................. $ -- $ 1,416
======= =======
</TABLE>
S-5
<PAGE> 127
EMPIRE OF CAROLINA, INC. (PARENT)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995, CONCLUDED
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Cash paid during the year for:
Interest................................................................ $ 316 $1,046
Income taxes, net of refunds............................................ 2,027 97
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
On July 7, 1995, two subsidiaries of the Company acquired the toy business
assets and assumed certain liabilities of Buddy L Inc. and its affiliate, Buddy
L (Hong Kong) Limited, for an aggregate purchase price, including expenses, of
$33,925,000, including (i) the issuance of $4,753,000 one-year notes and (ii)
the issuance of 756,667 shares of common stock. Funding for the acquisition
included (i) issuance of 247,392 shares of common stock (ii) issuance of 442,264
shares of Series A cumulative convertible preferred stock and (iii) borrowings
under senior subordinated notes ($7,580,000).
During 1994, the Company acquired all of the common stock of Marchon, Inc.
for approximately $13,664,000, 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 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> 128
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Stock Purchase Agreement, dated July 29, 1988, by and among Clabir, Clabir
Corporation (California), HMW Industries, Inc. and Olin Corporation.(2)
2.2 Agreement and Plan of Merger, dated as of November 14, 1989, between AmBrit, Inc.
and the Company, including amendment thereto, dated as of December 4, 1989.(3)
2.3 Agreement and Plan of Merger, dated as of November 14, 1989, by and among the
Company, Clabir Corporation ("Clabir") and CLR Corporation, including amendment
thereto, dated as of December 4, 1989.(3)
2.4 Sale and Purchase Agreement between the Company and Cargill, Incorporated, dated
September 30, 1992.(5)
2.5 Purchase Agreement among Conopco, Inc., the Company, The Isaly Klondike Company,
Inc., The Isaly Company, Popsicle Industries, Ltd., Ice Cream Novelties, Inc. and
Smith & O'Flaherty Limited, dated as of January 27, 1993.(7)
2.6 Agreement and Plan of Reorganization, dated October 13, 1994, by and among the
Company, Marchon, and the stockholders of Marchon.(11)
2.7 Amended and Restated Asset Purchase Agreement (the "Asset Purchase Agreement") dated
as of May 19, 1995 by and among the Company, Buddy L, and Buddy L (Hong Kong)
Limited ("BLHK").(16)
2.8 Agreement dated June 2, 1995 amending the Asset Purchase Agreement, by and among the
Company and Buddy L and acknowledged and agreed to by BLHK.(4)
2.9 Second Amendment dated June 30, 1995 further amending the Asset Purchase
Agreement.(4)
2.10 Third Amendment, dated July 7, 1995 further amending the Asset Purchase
Agreement.(4)
2.11 Agreement dated August 31, 1995, among the Company, CLR Corporation, Clabir, Olin
Corporation and General Defense Corporation.(18)
3.1 Restated Certificate of Incorporation of the Company.(4)
3.2 Amended and Restated By-Laws of the Company.(15)
3.3 Certificate of Designation, Preference and Rights of the Company filed June 30,
1995.(4)
4.1 Form of specimen certificate representing the Company's Common Stock.(1)
4.2 Excerpts from the Company's amended By-Laws and the Company's amended Certificate of
Incorporation relating to rights of holders of the Company's Common Stock.(3)
4.3 Form of 9% Convertible Debentures, issued December 22, 1994.(14)
4.4 Form of Warrant Certificate to purchase common stock of the Company, issued December
22, 1994.(12)
5.1 Opinion of Schwartz & Freeman
9.1 Voting Agreement, dated September 30, 1994, by and between Halco Industries, Inc.
("Halco") and Steven Geller.(11)
10.1 EII Incentive Plan for 1993.(6)
10.2 Corporate Incentive Plan for 1993.(6)
10.3 Promissory Note, dated July 31, 1993, from Halco to the Company.(8)
10.4 Modification Agreement, dated September 29, 1993, to the Promissory Note from Halco
to the Company.(8)
10.5 Modification Agreement, dated December 7, 1993, to the Promissory Note from Halco to
the Company.(9)
10.6 Pledge Agreement, dated December 7, 1993, between Halco and the Company.(9)
</TABLE>
i
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.7 Stock Purchase Agreement, dated December 30, 1993, between the Company and Rhoda
Kleinman.(9)
10.8 Employment Agreement, dated July 15, 1994, by and among the Company, EII and Steven
Geller.(10)
10.9 Employment Agreement, dated July 15, 1994, by and among the Company, EII and Neil
Saul.(10)
10.10 Stock Purchase Agreement, dated July 15, 1994, among Steven Geller and the Halperin
Group.(11)
10.11 Stock Option Agreement, dated July 15, 1994, between Steven Geller and the Halperin
Group.(11)
10.12 Stock Option Agreement, dated July 18, 1994, between the Company and Steven
Geller.(10)
10.13 Stock Option Agreement, dated July 18, 1994, between the Company and Neil Saul.(10)
10.14 Amended and Restated 1994 Stock Option Plan of the Company.(15)
10.15 Financing Agreement and supplements thereto, between EII and Wachovia Bank of North
Carolina, N. A. ("Wachovia") and related Promissory Note, Acknowledgment of Security
Interest in Inventory, Agreement of Licensor and Guaranty Agreement between the
Company and Wachovia, all dated September 30, 1994.(14)
10.16 Redemption Agreement, dated September 30, 1994, between the Company and the Halperin
Group.(14)
10.17 Omnibus Agreement, dated September 30, 1994, by and among the Halperin Group, Steven
Geller, the Company and EII.(11)
10.18 Subordinated Promissory Note, dated September 30, 1994, between Maurice Halperin and
the Company.(14)
10.19 Loan and Subordination Agreement, dated September 30, 1994, between the Company and
Maurice Halperin.(14)
10.20 Stockholder's Agreement, dated October 13, 1994, by and among Steven Geller, Marvin
Smollar and Neil Saul.(11)
10.21 Investor's Rights Agreement, dated October 13, 1994, by and among the Company,
Marvin Smollar, Kar Ye Yeung, Tyler Bulkley and Harvey Katz.(11)
10.22 Employment Agreement, dated October 13, 1994, between the Company and Marvin
Smollar.(11)
10.23 Stockholders' Agreement dated October 13, 1994, among Steven Geller, Marvin Smollar
and Neil Saul.(11)
10.24 Debenture Purchase Agreement, dated as of December 2, 1994, among the Company and
the WPG Group.(13)
10.25 Registration Rights Agreement, dated as of December 22, 1994, by and between the
Company and the WPG Group.(13)
10.26 Shareholders' Agreement, dated December 22, 1994, by and among the WPG Group, Steven
Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(13)
10.27 Intercreditor Agreement, dated December 22, 1994, by and among Wachovia, the
Company, EII and the WPG Group.(13)
10.28 Subsidiary Guaranty, dated as of December 22, 1994, between EII and Marchon.(14)
10.29 Stock Purchase Agreement, dated as of December 22, 1994, between WPG Corporate
Development Associates IV (Overseas), Ltd. and Steven Geller.(13)
10.30 Modification to Financing Agreement, dated January 30, 1995, between EII and
Wachovia.(14)
</TABLE>
ii
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.31 Asset Purchase Agreement, dated as of March 3, 1995, by and among the Company, Buddy
L and Buddy L (Hong Kong) Limited.(14)
10.32 Bid Protection Agreement, dated as of March 3, 1995, between the Company and Buddy
L.(14)
10.33 Assignment and Assumption Agreement dated as of June 21, 1995 between the Company
and EAC.(4)
10.34 Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(4)
10.35 Lease dated July 7, 1995 between Buddy L and EAC.(4)
10.36 Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy L
Canada Inc., and EAC.(4)
10.37 Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy L
Canada Inc., and EAC.(4)
10.38 Assignment and Assumption of Lease dated as of July 7, 1995 between Buddy L and
EAC.(4)
10.39 Loan and Security Agreement dated as of June 30, 1995 between LaSalle National Bank,
N. A. ("LaSalle") and EAC.(4)
10.40 Guaranty dated as of June 30, 1995 between LaSalle and the Company.(4)
10.41 Subordination Agreement dated as of June 30, 1995 between LaSalle and the
Company.(4)
10.42 $7,580,000 Senior/Subordinated Term Loan Agreement dated July 7, 1995 among the
Company as Borrower and the Lenders Listed therein ("Lenders").(4)
10.43 Form of the Company's 12% Senior/Subordinated Note due July 7, 1998.(4)
10.44 Form of Warrant to Purchase Common Stock of the Company issued to the Lenders.(4)
10.45 Amended and Restated Intercreditor Agreement dated July 7, 1995 by and among the
Company, EII, Wachovia, the Lenders and the holders of certain debentures dated
December 22, 1994 issued by the Company.(4)
10.46 Registration Rights Agreement dated July 7, 1995 by and between the Company and the
Lenders.(4)
10.47 Form of Subscription Agreement executed in connection with subscription of Common
Stock and Preferred Stock by WPG Corporate Development Associates IV (Overseas),
L.P., Westpool Investment Trust PLC, Glenbrook Partners, L.P., and WPG Corporate
Development Associates IV, L.P.(4)
10.48 Shareholders' agreement ("Shareholders' Agreement") dated December 22, 1994 among
WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates
IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee of Craig S. Whiting IRA, Peter
Pfister, Weiss, Peck & Greer, as Trustee of Nora E. Kerppola IRA Westpool Investment
Trust, PLC, Glenbrook Partners, L. P., Steve Geller, Neil Saul, Marvin Smollar and
Champ Enterprises Limited Partnership.(17)
10.49 Amendment No. 2 to Shareholders Agreement dated as of June 29, 1995 among WPG
Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV
(Overseas), Ltd., as the exempt transferee of WPG Corporate Development Associates
IV (Overseas), Ltd., certain persons identified on Schedule I of Amendment No. 2 to
the Shareholders' Agreement, Steven E. Geller ("Geller"), Neil B. Saul ("Saul") and
The Autumn Glory Trust, a Cook Islands Registered International Trust ("Trust") as
the permitted transferee of Champ Enterprises Limited Partnership.(4)
10.50 Registration Rights Agreement ("Registration Rights Agreement") dated as of December
22, 1994 by and between Empire of Carolina, Inc., WPG Corporate Development
Associates IV, L.P. WPG Corporate Development Associates IV (Overseas), Ltd., Weiss
Peck & Greer, as Trustee under Craig Whiting IRA, Peter B. Pfister, Weiss, Peck &
Greer, as Trustee under Nora Kerppola IRA, Westpool Investment Trust PLC and
Glenbrook Partners, L. P.(17)
10.51 Amendment No. 1 to Registration Rights Agreement.(4)
</TABLE>
iii
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.52 Settlement and Termination Agreement with Neil Saul.(18)
10.53 Extension to Financing Agreement, dated February 12, 1996 between Empire and
Wachovia.(18)
10.54 Loan and Security Agreement between LaSalle National Bank and BT Commercial
Corporation to Empire Industries, Inc., with exhibits and security instruments.
21 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2+ Consent of Coopers & Lybrand LLP
23.3+ Consent of Wong Brothers & Co.
23.4 Consent of Schwartz & Freeman (to be included in Exhibit 5.1)
24.1+ Powers of Attorney (included on signature page)
</TABLE>
- ------------------------------
* To be filed by amendment
+ Previously filed
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by
reference herein.
(2) Previously filed as an exhibit to Clabir's Current Report on Form 8-K,
dated December 23, 1988 (File No. 1-7769) and incorporated by reference
herein.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-32186), dated November 17, 1989 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to the Company's Current Report on Form 8-K
dated July 21, 1995, and incorporated by reference herein.
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated October 6, 1992 and incorporated by reference herein.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated by reference herein.
(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
dated February 1, 1993 and incorporated by reference herein.
(8) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993 and incorporated by reference
herein.
(9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated by reference herein.
(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated by reference
herein.
(11) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for September 30, 1994 and incorporated by reference herein.
(12) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for December 22, 1994 and incorporated by reference herein.
(13) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
the WPG Group, dated December 23, 1994 and incorporated by reference
herein.
(14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 and incorporated by reference herein.
(15) Previously filed as an exhibit to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
iv
<PAGE> 132
(16) Previously filed as an exhibit to the Company's Current Report on Form 8-K
for May 19, 1995 and hereby incorporated by reference herein.
(17) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by
WPG Corporate Development Associates IV, L.P., WPG Private Equity Partners,
L. P., WPG Corporate Development Associates IV (Overseas), L.P., WPG
Private Equity Partners (Overseas), L.P., Steven Hutchinson, Wesley Lang,
Peter Pfister, Craig Whiting, Nora Kerppola, Glenbrook Partners, L.P., Prim
Ventures, Inc., Westpool Investment Trust PLC and Weiss, Peck & Greer with
the Securities and Exchange Commission on December 23, 1994.
(18) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated by reference herein
v
<PAGE> 1
EXHIBIT 1.1
Empire of Carolina, Inc.
3,650,639 Shares Common Stock(1)
UNDERWRITING AGREEMENT
June___, 1996
William Blair & Company, L.L.C.
Gerard Klauer Mattison & Co., L.L.C.
As Representatives of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
SECTION 1. Introductory. Empire of Carolina, Inc. ("Company"), a Delaware
corporation, has an authorized capital stock consisting of 5,000,000 shares of
preferred stock, $.01 par value, issuable in series, of which 442,264 shares
have been designated Series A Cumulative Convertible Preferred Stock and all of
which shares are outstanding as of the date hereof, and 30,000,000 shares, $.10
par value, of Common Stock ("Common Stock"), of which 5,205,200 shares were
outstanding as of May 31, 1996. The Company proposes to issue and sell
1,500,000 shares of its authorized but unissued Common Stock (the "Company Firm
Shares"), and certain stockholders of the Company named in Schedule B
(collectively referred to as the "Selling Stockholders") propose to sell
1,413,639 shares of the Company's currently issued and outstanding Common
Stock, 444,000 shares of the Company's Common Stock that will be issued to the
Selling Stockholders on the First Closing Date (as hereinafter defined) upon
exercise of currently outstanding options and warrants (collectively, the
"Selling Stockholder Firm Shares") and an outstanding option (the "Halco
Option") to purchase an aggregate of 333,000 shares from another Selling
Stockholder (the "Halco Option Firm Shares") to the several underwriters named
in Schedule A as it may be amended by the Pricing Agreement hereinafter defined
("Underwriters"), who are acting severally and not jointly. Collectively, such
total of 3,650,639 shares of Common Stock represented by the Company Firm
Shares, the Selling Stockholder Firm Shares and the Halco Option Firm Shares is
hereinafter referred to as the "Firm Shares." In addition, the Company and
certain Selling Stockholders propose to grant to the Underwriters an option to
purchase up to an aggregate of 547,595 additional shares of Common Stock
("Option Shares") as provided in Section 5 hereof. The Firm Shares and, to the
- ---------------
(1) Plus an option to acquire up to 547,595 additional shares to cover
overallotments.
<PAGE> 2
2
extent such option is exercised, the Option Shares, are hereinafter
collectively referred to as the "Shares."
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon as you deem advisable after the registration statement
hereinafter referred to becomes effective, if it has not yet become effective,
and the Pricing Agreement hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company, the Selling Stockholders and the Representatives,
acting on behalf of the several Underwriters, shall enter into an agreement
substantially in the form of Exhibit A hereto ("Pricing Agreement"). The
Pricing Agreement may take the form of an exchange of any standard form of
written telecommunication between the Company, the Selling Stockholders and the
Representatives and shall specify such applicable information as is indicated
in Exhibit A hereto. The offering of the Shares will be governed by this
Agreement, as supplemented by the Pricing Agreement. From and after the date
of the execution and delivery of the Pricing Agreement, this Agreement shall be
deemed to incorporate the Pricing Agreement.
The Company and each of the Selling Stockholders hereby confirm their
agreements with the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-4440) with
respect to the Shares has been prepared and filed with the Securities and
Exchange Commission ("Commission") by the Company in conformity with the
requirements of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "1933 Act;"
unless indicated to the contrary, all references herein to specific rules
are rules promulgated under the 1933 Act); and the Company has so
prepared and has filed such amendments thereto, if any, as may have been
required to the date hereof and will file such additional amendments
thereto as may hereafter be required. There have been or will promptly
be delivered to you three signed copies of such registration statement
and amendments, three copies of each exhibit filed therewith, and
conformed copies of such registration statement and amendments (but
without exhibits) and final forms of prospectus for each of the
Underwriters.
Such registration statement (as amended, if applicable) at the time
it becomes effective and the prospectus constituting a part thereof
(including the information, if any, deemed to be part thereof pursuant to
Rule 430A(b) and/or Rule 434), as from time to time amended or
supplemented, are hereinafter referred to as the "Registration
Statement," and
<PAGE> 3
3
the "Prospectus," respectively, except that if any revised prospectus
shall be provided to the Underwriters by the Company for use in
connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration
Statement became or becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule
424(b)), the term Prospectus shall refer to such revised prospectus from
and after the time it was provided to the Underwriters for such use. If
the Company elects to rely on Rule 434 of the 1933 Act, all references to
"Prospectus" shall be deemed to include, without limitation, the form of
prospectus and the term sheet, taken together, provided to the
Underwriters by the Company in accordance with Rule 434 of the 1933 Act
("Rule 434 Prospectus"). Any registration statement (including any
amendment or supplement thereto or information which is deemed part
thereof) filed by the Company under Rule 462(b) ("Rule 462(b)
Registration Statement") shall be deemed to be part of the "Registration
Statement" as defined herein, and any prospectus (including any amendment
or supplement thereto or information which is deemed part thereof)
included in such registration statement shall be deemed to be part of the
"Prospectus", as defined herein, as appropriate. The Securities Exchange
Act of 1934, as amended, and the rules and regulations of the Commission
thereunder are hereinafter collectively referred to as the "Exchange
Act."
(b) When the Registration Statement became or becomes effective, and
at all times subsequent thereto, up to the First Closing Date or the
Second Closing Date hereinafter defined, as the case may be, the
Registration Statement, including the information deemed to be part of
the Registration Statement at the time of effectiveness pursuant to Rule
430A(b), if applicable, and the Prospectus and any amendments or
supplements thereto, contained or will contain all statements that are
required to be stated therein in accordance with the 1933 Act and in all
material respects conformed or will in all material respects conform to
the requirements of the 1933 Act, and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, included or
will include any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, that
the Company makes no representation or warranty as to information
contained in or omitted from the Registration Statement, the Prospectus
or any such amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through the Representatives specifically for use in the
preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its state of incorporation, with corporate power and
authority to own its properties and conduct its business as described in
the Prospectus; each of the Company and its subsidiaries is duly
qualified to do business as a foreign corporation under the corporation
law of, and is in good standing as such in, each jurisdiction in which it
owns or leases substantial properties, has
<PAGE> 4
4
an office, or in which substantial business is conducted and such
qualification is required except in any such case where the failure to so
qualify or be in good standing would not have a material adverse effect
upon the Company and its subsidiaries taken as a whole; and no proceeding
of which the Company has knowledge has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) Except as disclosed in the Registration Statement, the Company
owns directly or indirectly 100 percent of the issued and outstanding
capital stock of each of its subsidiaries, free and clear of any claims,
liens, encumbrances or security interests and all of such capital stock
has been duly authorized and validly issued and is fully paid and
nonassessable.
(e) The issued and outstanding shares of capital stock of the
Company as set forth in the Prospectus have been duly authorized and
validly issued, are fully paid and nonassessable, and conform to the
description thereof contained in the Prospectus. The Shares to be sold
by the Company to the Selling Stockholders upon the exercise of
outstanding options and warrants on the First Closing Date have been duly
authorized and, when issued, delivered and paid for pursuant to the terms
of the related option or warrant agreement, will be validly issued, fully
paid and nonassessable and will conform to the description thereof
contained in the Prospectus.
(f) The Shares to be sold by the Company to the Underwriters have
been duly authorized and, when issued, delivered and paid for pursuant to
this Agreement, will be validly issued, fully paid and nonassessable, and
will conform to the description thereof contained in the Prospectus.
(g) The making and performance by the Company of this Agreement and
the Pricing Agreement have been duly authorized by all necessary
corporate action and will not violate any provision of the Company's
charter or bylaws and will not result in the breach, or be in
contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust, or other instrument to which the
Company or any subsidiary is a party or by which the Company, any
subsidiary or the property of any of them may be bound or affected, or
any order, rule or regulation applicable to the Company or any subsidiary
of any court or regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any subsidiary
or any of their respective properties, or any order of any court or
governmental agency or authority entered in any proceeding to which the
Company or any subsidiary was or is now a party or by which it is bound.
No consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body is
required for the execution and delivery of this Agreement or the Pricing
Agreement or the consummation of the transactions
<PAGE> 5
5
contemplated herein or therein, except for compliance with the 1933 Act
and blue sky laws applicable to the public offering of the Shares by the
several Underwriters and clearance of such offering with the National
Association of Securities Dealers, Inc. ("NASD"). This Agreement has
been duly executed and delivered by the Company.
(h) The accountants who have expressed their opinions with respect
to certain of the financial statements and schedules included in the
Registration Statement are independent accountants as required by the
1933 Act.
(i) The consolidated financial statements and schedules of the
Company included in the Registration Statement present fairly the
consolidated financial position of the Company as of the respective dates
of such financial statements, and the consolidated results of operations
and cash flows of the Company for the respective periods covered thereby,
all in conformity with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
in the Prospectus; and the supporting schedules included in the
Registration Statement present fairly the information required to be
stated therein. The financial information set forth in the Prospectus
under "Selected Consolidated Financial Data" presents fairly on the basis
stated in the Prospectus, the information set forth therein.
The pro forma financial statements and other pro forma information
included in the Prospectus present fairly the information shown therein,
have been prepared in accordance with generally accepted accounting
principles and the Commission's rules and guidelines with respect to pro
forma financial statements and other pro forma information, have been
properly compiled on the pro forma basis described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate under the
circumstances.
(j) Neither the Company nor any subsidiary is in violation of its
charter or in default under any consent decree, or in default with
respect to any material provision of any lease, loan agreement,
franchise, license, permit or other contract obligation to which it is a
party; and there does not exist any state of facts which constitutes an
event of default as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default, in each
case, except for defaults which neither singly nor in the aggregate are
material to the Company and its subsidiaries taken as a whole.
(k) There are no material legal or governmental proceedings pending,
or to the Company's knowledge, threatened to which the Company or any
subsidiary is or may be a party or of which material property owned or
leased by the Company or any subsidiary is or may be the subject, or
related to environmental or discrimination matters which are not
<PAGE> 6
6
disclosed in the Prospectus, or which question the validity of this
Agreement or the Pricing Agreement or any action taken or to be taken
pursuant hereto or thereto.
(l) There are no holders of securities of the Company having rights
to registration thereof or preemptive rights to purchase Common Stock
except as disclosed in the Prospectus. Holders of registration rights
who are not Selling Stockholders (or who are Selling Stockholders, but
who are not selling in accordance with such rights) have waived such
rights with respect to the offering being made by the Prospectus.
(m) The Company and each of its subsidiaries have good and
marketable title to all the properties and assets reflected as owned in
the financial statements hereinabove described (or elsewhere in the
Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance
of any kind except those, if any, reflected in such financial statements
(or elsewhere in the Prospectus) or which are not material to the Company
and its subsidiaries taken as a whole. The Company and each of its
subsidiaries hold their respective leased properties which are material
to the Company and its subsidiaries taken as a whole under valid and
binding leases.
(n) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result, under the Exchange Act
or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(o) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
contemplated by the Prospectus, the Company and its subsidiaries, taken
as a whole, have not incurred any material liabilities or obligations,
direct or contingent, nor entered into any material transactions not in
the ordinary course of business and there has not been any material
adverse change in their condition (financial or otherwise) or results of
operations nor any material change in their capital stock, short-term
debt or long-term debt.
(p) The Company agrees not to sell, contract to sell or otherwise
dispose of any Common Stock or securities convertible into Common Stock
(except Common Stock issued upon exercise of currently outstanding
options, warrants or convertible securities in accordance with their
terms) for a period of 180 days after this Agreement becomes effective
without the prior written consent of the Representatives. The Company
has obtained similar agreements from each of its officers and directors.
(q) There is no document of a character required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement which is not described or filed as
required.
<PAGE> 7
7
(r) The Company together with its subsidiaries owns and possesses
all right, title and interest in and to, or has duly licensed from third
parties, all patents, patent rights, trade secrets, inventions, know-how,
trademarks, trade names, copyrights, service marks and other proprietary
rights ("Trade Rights") material to the business of the Company and each
of its subsidiaries taken as a whole. Neither the Company nor any of its
subsidiaries has received any notice of infringement, misappropriation or
conflict from any third party as to such material Trade Rights which has
not been resolved or disposed of and neither the Company nor any of its
subsidiaries has infringed, misappropriated or otherwise conflicted with
material Trade Rights of any third parties, which infringement,
misappropriation or conflict would have a material adverse effect upon
the condition (financial or otherwise) or results of operations of the
Company and its subsidiaries taken as a whole.
(s) The conduct of the business of the Company and each of its
subsidiaries is in compliance in all respects with applicable federal,
state, local and foreign laws and regulations, except where the failure
to be in compliance would not have a material adverse effect upon the
condition (financial or otherwise) or results of operations of the
Company and its subsidiaries taken as a whole.
(t) All offers and sales of the Company's capital stock prior to the
date hereof were duly registered with or the subject of an available
exemption from the registration requirements of the 1933 Act and the
applicable state securities or blue sky laws.
(u) The Company has filed all necessary federal and state income and
franchise tax returns and has paid all taxes shown as due thereon, and
there is no tax deficiency that has been, or to the knowledge of the
Company might be, asserted against the Company or any of its properties
or assets that would or could be expected to have a material adverse
affect upon the condition (financial or otherwise) or results of
operations of the Company and its subsidiaries taken as a whole.
(v) A registration statement relating to the Common Stock has been
declared effective by the Commission pursuant to the Exchange Act and the
Common Stock is duly registered thereunder.
(w) The Company is not, and does not intend to conduct its business
in a manner in which it would become, an "investment company" as defined
in Section 3(a) of the Investment Company Act of 1940, as amended
("Investment Company Act").
(x) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and
the Company further agrees that if it
<PAGE> 8
8
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance ("Department"), whichever date
is later, or if the information reported in the Prospectus, if any,
concerning the Company's business with Cuba or with any person or
affiliate located in Cuba changes in any material way, the Company will
provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(y) The Company's board of directors has approved the proposed
conversion of all outstanding shares Series A Cumulative Convertible
Preferred Stock into shares Common Stock on a share-for-share basis at
the next annual meeting of the Company and has authorized the Company's
officers to take all other steps required to complete such conversion.
SECTION 3. Representations, Warranties and Covenants of the Selling
Stockholders.
(a) Each Selling Stockholder severally and not jointly represents
and warrants to, and agrees with, the Company and the Underwriters that:
(i) Such Selling Stockholder (other than Jericho State Capital
Corp., SBK Investment Partners and Messrs. H. Klaris, G. Chwatt, R.
Chwatt, W. Forster, A. LaSorte, C. Emby and I. Goldsmith, who as of
the date of this Agreement have good and valid title to the
warrants exercisable for Shares to be sold by them, other than Olin
Corporation, in respect of Shares to be sold by it subject to
option, which as of the date of this Agreement has good and valid
title to the option exercisable for such Shares and other than
Steven E. Geller, in respect of the Shares underlying the Halco
Option) has, and on the First Closing Date or the Second Closing
Date hereinafter defined, as the case may be, will have, good and
valid title to the Shares proposed to be sold by such Selling
Stockholder hereunder on such date, free and clear of all voting
trust arrangements, liens, encumbrances, equities, claims and
community property rights (other than any created by the Custody
Agreement and Power of Attorney (as defined)) and full right, power
and authority to enter into this Agreement and the Pricing
Agreement and to sell, assign, transfer and deliver such Shares
hereunder, and upon delivery of and payment for such Shares
hereunder, the Underwriters will acquire good and valid title
thereto, free and clear of all voting trust arrangements, liens,
encumbrances, equities, claims and community property rights
(assuming the Underwriters are bona fide purchasers) other than any
arising as a result of the Underwriters' actions.
<PAGE> 9
9
(ii) The making and performance by such Selling
Stockholder, if it is not an individual, of this Agreement have
been duly authorized by all necessary action (corporate or
otherwise) and (A) will not violate any provision of such Selling
Stockholder's charter, bylaws, partnership agreement, or trust
agreement, as the case may be, and (B) will not result in the
breach, or be in contravention, of any provision of any agreement,
franchise, license, indenture, mortgage, deed of trust, or other
instrument to which such Selling Stockholder or any subsidiary
thereof is a party or by which such Selling Stockholder, any
subsidiary thereof or the property of any of them may be bound or
affected, or any order, rule or regulation applicable to such
Selling Stockholder or any such subsidiary of any court or
regulatory body, administrative agency or other governmental body
having jurisdiction over such Selling Stockholder or any such
subsidiary or any of their respective properties, or any order of
any court or governmental agency or authority entered in any
proceeding to which such Selling Stockholder or any such subsidiary
was or is now a party or by which it is bound, and which, in the
case of clause (B) above, would have a material adverse effect on
such Selling Stockholder's ability to perform its obligations under
this Agreement. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of
this Agreement or the Pricing Agreement by such Selling Stockholder
or the consummation of the transactions contemplated herein or
therein by such Selling Stockholder, except for compliance with the
1933 Act and blue sky laws applicable to the public offering of the
Shares by the several Underwriters and clearance of such offering
with the NASD. This Agreement has been duly executed and delivered
by such Selling Stockholder.
(iii) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or which might
be reasonably expected to cause or result, under the Exchange Act
or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares.
(iv) Such Selling Stockholder has executed and delivered a
Custody Agreement and Power of Attorney ("Custody Agreement and
Power of Attorney") among the Selling Stockholder, American Stock
Transfer & Trust Company, as custodian ("Custodian"), Steven E.
Geller, and Marvin Smollar (collectively, the "Agents"), naming
the Agents as such Selling Stockholder's attorneys-in-fact (and, by
the execution by any Agent of this Agreement, such Agent hereby
represents and warrants that he has been duly appointed as
attorney-in-fact by the Selling Stockholders pursuant to the
Custody Agreement and Power of Attorney) for the purpose of
entering into and carrying out this Agreement and the Pricing
Agreement, and the Custody Agreement and Power of Attorney has been
duly executed by such Selling Stockholder and a copy thereof has
been delivered to you.
<PAGE> 10
10
(v) Such Selling Stockholder (other than Jericho State Capital
Corp., SBK Investment Partners and Messrs. H. Klaris, G. Chwatt, R.
Chwatt, W. Forster, A. LaSorte, C. Emby and I. Goldsmith, and other
than Olin Corporation, in respect of Shares to be sold by it
subject to option) further represents, warrants and agrees that
such Selling Stockholder has deposited in custody with the
Custodian under the Custody Agreement and Power of Attorney
certificates in negotiable form for the Shares to be sold hereunder
by such Selling Stockholder, and additionally, in the case of Halco
Industries, Inc., certificates in negotiable form for the Shares
underlying the Halco Option, in each case for the purpose of
further delivery pursuant to this Agreement and the agreement
regarding exercise of the Halco Option. Each of Olin Corporation,
in respect of Shares to be sold by it subject to option, and
Jericho State Capital Corp., SBK Investment Partners and Messrs. H.
Klaris, G. Chwatt, R. Chwatt, W. Forster, A. LaSorte, C. Emby and
I. Goldsmith further represents, warrants and agrees that it has
delivered to the Company an irrevocable exercise notice to
subscribe for the full number of Shares subject to the option or
warrant (as the case may be) currently owned by such person to
acquire Shares from the Company (or, if less, the total number of
Shares to be sold by such person to the Underwriters as set forth
on Schedule B), with such subscription to be effective on the First
Closing Date immediately prior to the purchase of the Firm Shares
by the Underwriters hereunder, and each such person has deposited
in custody with the Custodian under the Custody Agreement and Power
of Attorney certificates in negotiable form for the warrants so
exercised by it, for the purpose of further delivery pursuant to
this Agreement. Such Selling Stockholder agrees that the Shares to
be sold by such Selling Stockholder on deposit with the Custodian
(or issuable upon exercise of the warrants on deposit with the
Custodian), including the Shares underlying the Halco Option, are
subject to the interests of the Company, the Underwriters and the
other Selling Stockholders, that the arrangements made for such
custody, and the appointment of the Agents pursuant to the Custody
Agreement and Power of Attorney, are to that extent irrevocable,
and that the obligations of such Selling Stockholder hereunder and
under the Custody Agreement and Power of Attorney shall not be
terminated except as provided in this Agreement or the Custody
Agreement and Power of Attorney by any act of such Selling
Stockholder, by operation of law, whether, in the case of an
individual Selling Stockholder, by the death or incapacity of such
Selling Stockholder or, in the case of a trust or estate, by the
death of the trustee or trustees or the executor or executors or
the termination of such trust or estate, or, in the case of a
partnership or corporation, by the dissolution, winding-up or other
event affecting the legal life of such entity, or by the occurrence
of any other event. If any individual Selling Stockholder, trustee
or executor should die or become incapacitated, or any such trust,
estate, partnership or corporation should be terminated, or if any
other event should occur before the delivery of the Shares
hereunder, the documents evidencing Shares then on deposit with the
<PAGE> 11
11
Custodian (or issuable upon exercise of the option or warrants on
deposit with the Custodian) shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if
such death, incapacity, termination or other event had not
occurred, regardless of whether or not the Custodian shall have
received notice thereof. Each Agent has been authorized by such
Selling Stockholder to execute and deliver this Agreement and the
Pricing Agreement and the Custodian has been authorized to receive
and acknowledge receipt of the proceeds of sale of the Shares to be
sold by such Selling Stockholder against delivery thereof and
otherwise act on behalf of such Selling Stockholder as provided in
the Custody Agreement and Power of Attorney.
(vi) Such Selling Stockholder agrees with the Company and the
Underwriters not to sell, contract to sell or otherwise dispose of
any Common Stock for a period of 180 days after this Agreement
becomes effective without the prior written consent of the
Representatives, except that Smedley Industries, Inc. may transfer,
pursuant to a plan of reorganization under the United States
Bankruptcy Code, all Common Stock held by it to a liquidating trust
which agrees to be bound by the terms of this Section 3(a)(vi).
(b) Each Selling Stockholder listed on Schedule B-1 severally
represents and warrants to, and agrees with, the Company and the
Underwriters that at the time of effectiveness, and at all times
subsequent thereto, up to the First Closing Date or the Second Closing
Date hereinafter defined, as the case may be, (i) such parts of the
Registration Statement and the Prospectus and any amendments or
supplements thereto as relate to such Selling Stockholder, and the
Registration Statement and the Prospectus and any amendments or
supplements thereto, to the knowledge of such Selling Stockholder in all
other respects, contained or will contain all statements that are
required to be stated therein in accordance with the 1933 Act and in all
material respects conformed or will in all material respects conform to
the requirements of the 1933 Act, and (ii) neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, as
it relates to such Selling Stockholder, and, to the knowledge of such
Selling Stockholder in all other respects, included or will include any
untrue statement of a material fact or omitted or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that neither clause (i) nor
(ii) shall have any effect if information has been given by such Selling
Stockholder to the Company and the Representatives in writing which would
eliminate or remedy any such untrue statement or omission.
(c) Each Selling Stockholder listed on Schedule B-2 severally
represents and warrants to, and agrees with, the Company and the
Underwriters that at the time of effectiveness, and at all times
subsequent thereto, up to the First Closing Date or the Second
<PAGE> 12
12
Closing Date hereinafter defined, as the case may be, (i) that the
information contained in the Registration Statement and the Prospectus
and any amendments or supplements thereto which relates solely to such
Selling Stockholder contained or will contain all statements that are
required to be stated therein in accordance with the 1933 Act and in all
material respects conformed or will in all material respects conform to
the requirements of the 1933 Act, and (ii) neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, as
it relates solely to such Selling Stockholder, included or will include
any untrue statement of a material fact or omitted or will omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that neither clause (i) nor
(ii) shall have any effect if information has been given by such Selling
Stockholder to the Company and the Representatives in writing which would
eliminate or remedy any such untrue statement or omission.
(d) Steven Geller represents and warrants to, and agrees with, the
Underwriters that he has, and on the First Closing Date will have, good
and valid title to the Halco Option proposed to be sold by such Selling
Stockholder hereunder on such date, free and clear of all voting trust
arrangements, liens, encumbrances, equities, claims and community
property rights (other than any created by the Custody Agreement and
Power of Attorney) and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Halco Option
hereunder, and upon delivery of and payment for the Halco Option
hereunder, the Underwriters will acquire good and valid title thereto,
free and clear of all voting trust arrangements, liens, encumbrances,
equities, claims and community property rights (assuming the Underwriters
are bona fide purchasers) other than any arising as a result of the
Underwriters' actions.
(e) Halco Industries, Inc. represents and warrants to, and agrees
with, the Underwriters that as of the date of this Agreement such person
has, and on the First Closing Date will have, good and valid title to the
Halco Option Firm Shares proposed to be sold by such Selling Stockholder
on such date, free and clear of all voting trust arrangements, liens,
encumbrances, equities, claims and community property rights (other than
any created by the Custody Agreement and Power of Attorney) and full
right, power and authority to sell, assign, transfer and deliver the
Halco Option Firm Shares pursuant to the Halco Option, and upon delivery
of and payment for such Halco Option Firm Shares, the Underwriters will
acquire good and valid title thereto, free and clear of all voting trust
arrangements, liens, encumbrances, equities, claims and community
property rights (assuming the Underwriters are bona fide purchasers)
other than any arising as a result of the Underwriters' actions.
(f) To the best of his or its knowledge, each of Steven Geller and
The Iridium Trust severally represents and warrants to the Underwriters
to the same effect as the representations and warranties of the Company
set forth in Section 2 of this Agreement.
<PAGE> 13
13
(g) To the best of his knowledge, Marvin Smollar represents and
warrants to the Underwriters to the same effect as the representations
and warranties of the Company set forth in Section 2 of this Agreement
and to the same effect as the representations and warranties of The
Iridium Trust set forth in Section 3 of this Agreement.
In order to document the Underwriter's compliance with the reporting and
withholding provisions of the Internal Revenue Code of 1986, as amended, with
respect to the transactions herein contemplated, each of the Selling
Stockholders agrees to deliver to you prior to or on the First Closing Date, as
hereinafter defined, a properly completed and executed United States Treasury
Department Form W-8 or W-9 (or other applicable form of statement specified by
Treasury Department regulations in lieu thereof).
SECTION 4. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant
to the Company and the Selling Stockholders that the information set forth (a)
on the cover page of the Prospectus with respect to price, underwriting
discount and terms of the offering and (b) under "Underwriting" in the
Prospectus was furnished to the Company by and on behalf of the Underwriters
for use in connection with the preparation of the Registration Statement and is
correct and complete in all material respects.
SECTION 5. Purchase, Sale and Delivery of Shares and Halco Option. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and the
Selling Stockholders, severally and not jointly, agree to sell to the
Underwriters named in Schedule A hereto, and the Underwriters agree, severally
and not jointly, to purchase from the Company and the Selling Stockholders,
respectively, 1,500,000 Firm Shares from the Company and the respective number
of Firm Shares and the Halco Option to purchase the number of Halco Option Firm
Shares set forth opposite the names of the Selling Stockholders in Schedule B
hereto at the price per Share set forth in the Pricing Agreement or the price
per Halco Option Firm Share (in the case of the Halco Option) set forth in the
Pricing Agreement, as the case may be. The obligation of each Underwriter to
the Company shall be to purchase from the Company that number of full Shares
and Halco Option Firm Shares (in the case of the Halco Option) which (as nearly
as practicable, as determined by you) bears to 1,500,000, the same proportion
as the number of Shares set forth opposite the name of such Underwriter in
Schedule A hereto bears to the total number of Firm Shares to be purchased by
all Underwriters under this Agreement. The obligation of each Underwriter to
each Selling Stockholder shall be to purchase from such Selling Stockholder the
number of full shares which (as nearly as practicable, as determined by you)
bears to that number of Firm Shares set forth opposite the name of such Selling
Stockholder in Schedule B hereto, the same proportion as the number of Shares
set forth opposite the name of such Underwriter in Schedule A hereto bears to
the total number of Firm Shares to be purchased by all Underwriters under this
Agreement. The initial public offering price and the purchase price shall be
set forth in the Pricing Agreement.
<PAGE> 14
14
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under
Rule 15c6-1 under the Exchange Act, (or the third business day if required
under Rule 15c6-1 under the Exchange Act or unless postponed in accordance with
the provisions of Section 12) following the date the Registration Statement
becomes effective (or, if the Company has elected to rely upon Rule 430A, the
fourth business day, if permitted under Rule 15c6-1 under the Exchange Act, (or
the third business day if required under Rule 15c6-1 under the Exchange Act)
after execution of the Pricing Agreement), or such other time not later than
ten business days after such date as shall be agreed upon by the
Representatives and the Company, the Company and the Custodian will deliver to
you at the offices of counsel for the Underwriters or through the facilities of
The Depository Trust Company for the accounts of the several Underwriters,
certificates representing the Firm Shares to be sold by the Company, the Firm
Shares to be sold by the Selling Stockholders and the Halco Option Firm Shares,
against payment of the purchase price therefor (including in the case of the
Halco Option Firm Shares, the exercise price for the Halco Option) by delivery
of federal or other immediately available funds, by wire transfer or otherwise,
to the Company and the Custodian. Such time of delivery and payment is herein
referred to as the "First Closing Date." The certificates for the Firm Shares
(including the Halco Option Firm Shares) so to be delivered will be in such
denominations and registered in such names as you request by notice to the
Company and the Custodian prior to 10:00 A.M., Chicago Time, on the second
business day preceding the First Closing Date, and will be made available at
the Company's expense for checking and packaging by the Representatives at
10:00 A.M., Chicago Time, on the business day preceding the First Closing Date.
Payment for the Firm Shares so to be delivered shall be made at the time and
in the manner described above at the offices of counsel for the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and certain of the Selling Stockholders hereby grant an
option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 297,595 Option Shares and 250,000 Option Shares,
respectively, at the same purchase price per share to be paid for the Firm
Shares, for use solely in covering any overallotments made by the Underwriters
in the sale and distribution of the Firm Shares. The option granted hereunder
may be exercised at any time (but not more than once) within 30 days after the
date of the initial public offering upon notice by you to the Company and the
Agents setting forth the aggregate number of Option Shares as to which the
Underwriters are exercising the option, the names and denominations in which
the certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may
not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by you, but if at any time other
than the First Closing Date, shall not be earlier than three nor later than 10
full business days after delivery of such notice of exercise. The number of
Option Shares to be purchased from each such Selling Stockholder is set forth
in Schedule B hereto. The total number of Option Shares to be purchased by the
Underwriters from the Company and each Selling Stockholder as set forth on
Schedule B, if less than all Option Shares are purchased, shall be in the same
proportion that the total number of Option Shares proposed to be sold by such
person
<PAGE> 15
15
bears to the total number of Option Shares. The number of Option Shares to be
purchased by each Underwriter shall be determined by multiplying the number of
Option Shares to be sold by the Company and the Selling Stockholders pursuant
to such notice of exercise by a fraction, the numerator of which is the number
of Firm Shares to be purchased by such Underwriter as set forth opposite its
name in Schedule A and the denominator of which is the total number of Firm
Shares (subject to such adjustments to eliminate any fractional share purchases
as you in your absolute discretion may make). Certificates for the Option
Shares will be made available at the Company's expense for checking and
packaging at 10:00 A.M., Chicago Time, on the business day preceding the Second
Closing Date. The manner of payment for and delivery of the Option Shares
shall be the same as for the Firm Shares as specified in the preceding
paragraph.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Shares, to make
payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may make payment for any Shares to be
purchased by any Underwriter whose funds shall not have been received by you by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any obligation hereunder.
SECTION 6. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will advise you and the Selling Stockholders
promptly of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or of the institution of
any proceedings for that purpose, or of any notification of the
suspension of qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceedings for that purpose, and
will also advise you and the Selling Stockholders promptly of any request
of the Commission for amendment or supplement of the Registration
Statement or of the Prospectus, or for additional information.
(b) The Company will give you and the Selling Stockholders notice of
its intention to file or prepare any amendment to the Registration
Statement (including any post-effective amendment) or any Rule 462(b)
Registration Statement or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by
the Underwriters in connection with the offering of the Shares which
differs from the prospectus on file at the Commission at the time the
Registration Statement became or becomes effective, whether or not such
revised prospectus is required to be filed pursuant to Rule 424(b) and
any term sheet as contemplated by Rule 434) and will furnish you and the
Selling Stockholders with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the
case may be, and will not file any such amendment or supplement or use
any such prospectus to which you or counsel for the Underwriters shall
reasonably object.
<PAGE> 16
16
(c) If the Company elects to rely on Rule 434 of the 1933 Act, the
Company will prepare a term sheet that complies with the requirements of
Rule 434. If the Company elects not to rely on Rule 434, the Company
will provide the Underwriters with copies of the form of prospectus, in
such numbers as the Underwriters may reasonably request, and file with
the Commission such prospectus in accordance with Rule 424(b) of the 1933
Act by the close of business in New York City on the second business day
immediately succeeding the date of the Pricing Agreement. If the Company
elects to rely on Rule 434, the Company will provide the Underwriters
with copies of the form of Rule 434 Prospectus, in such numbers as the
Underwriters may reasonably request, by the close of business in New York
on the business day immediately succeeding the date of the Pricing
Agreement.
(d) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result
of which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements thereto and including
any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs
from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with
the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance; and, in case any Underwriter is required to
deliver a prospectus nine months or more after the effective date of the
Registration Statement, the Company upon request, but at the expense of
such Underwriter, will prepare promptly such prospectus or prospectuses
as may be necessary to permit compliance with the requirements of Section
10(a)(3) of the 1933 Act.
(e) Neither the Company nor any of its subsidiaries will, prior to
the earlier of the Second Closing Date or termination or expiration of
the related option, incur any liability or obligation, direct or
contingent, or enter into any material transaction, other than in the
ordinary course of business, except as contemplated by the Prospectus.
(f) Neither the Company nor any of its subsidiaries will acquire any
capital stock of the Company prior to the earlier of the Second Closing
Date or termination or expiration of the related option nor will the
Company declare or pay any dividend or make any other distribution upon
the Common Stock payable to stockholders of record on a date prior to the
earlier of the Second Closing Date or termination or expiration of the
related option, except in either case as contemplated by the Prospectus.
<PAGE> 17
17
(g) As soon as practicable, the Company will make generally
available to its security holders an earnings statement (which need not
be audited) covering a period of at least 12 months beginning after the
effective date of the Registration Statement, which will satisfy the
provisions of the last paragraph of Section 11(a) of the 1933 Act.
(h) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (d) hereof, copies of the
Registration Statement, the Prospectus and all amendments and supplements
to any such documents in each case as soon as available and in such
quantities as you may reasonably request, for the purposes contemplated
by the 1933 Act.
(i) The Company will cooperate with the Underwriters in qualifying
or registering the Shares for sale under the blue sky laws of such
jurisdictions as you designate, and will continue such qualifications in
effect so long as reasonably required for the distribution of the Shares.
The Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any such jurisdiction
where it is not currently qualified or where it would be subject to
taxation as a foreign corporation.
(j) During the period of five years hereafter, the Company will
furnish you, as representatives of the Underwriters, with a copy (i) as
soon as practicable after the filing thereof, of each report filed by the
Company with the Commission; (ii) as soon as practicable after the
release thereof, of each material press release in respect of the
Company; and (iii) as soon as available, of each report of the Company
mailed to stockholders.
(k) The Company will use the net proceeds received by it from the
sale of the Shares being sold by it in the manner specified in the
Prospectus.
(l) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule
430A and/or Rule 434, then immediately following the execution of the
Pricing Agreement, the Company will prepare, and file or transmit for
filing with the Commission in accordance with such Rule 430A, Rule 424(b)
and/or Rule 434, copies of an amended Prospectus, or, if required by such
Rule 430A and/or Rule 434, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information
so omitted. If required, the Company will prepare and file, or transmit
for filing, a Rule 462(b) Registration Statement not later than the date
of the execution of the Pricing Agreement. If a Rule 462(b) Registration
Statement is filed, the Company shall make payment of, or arrange for
payment of, the additional registration fee owing to the Commission
required by Rule 111.
<PAGE> 18
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(m) The Company will comply with all registration, filing and
reporting requirements of the American Stock Exchange or any other
exchange or market on which the Shares are listed for trading.
(n) The Company will use its best efforts to cause the conversion of
the outstanding shares of its Series A Cumulative Convertible Preferred
Stock into shares of Common Stock on a share-for-share basis at the next
annual meeting of the Company.
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as
to all of its provisions or is terminated, the Company agrees to pay (i) all
costs, fees and expenses (other than legal fees and disbursements of counsel
for the Underwriters and the expenses incurred by the Underwriters) incurred in
connection with the performance of the Company's obligations hereunder,
including without limiting the generality of the foregoing, all fees and
expenses of legal counsel for the Company and of the Company's independent
accountants, all costs and expenses incurred in connection with the
preparation, printing, filing and distribution of the Registration Statement
and the Prospectus (including all exhibits and financial statements) and all
amendments and supplements provided for herein, this Agreement, the Pricing
Agreement and the Blue Sky Memorandum, (ii) all costs, fees and expenses
(including legal fees not to exceed $15,000 and disbursements of counsel for
the Underwriters) incurred by the Underwriters in connection with qualifying or
registering all or any part of the Shares for offer and sale under blue sky
laws, including the preparation of a blue sky memorandum relating to the Shares
and clearance of such offering with the NASD; and (iii) all fees and expenses
of the Company's transfer agent, printing of the certificates for the Shares
and all transfer taxes, if any, with respect to the sale and delivery of the
Shares to the several Underwriters.
The provisions of this Section shall not affect any agreement which the
Company and the Selling Stockholders may make for the allocation or sharing of
such expenses and costs.
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
and the Halco Option on the First Closing Date and the Option Shares on the
Second Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of officers
of the Company made pursuant to the provisions hereof, to the performance by
the Company and the Selling Stockholders of their respective obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M.,
Chicago Time, on the first full business day after the date of this
Agreement, or such later time as shall have been consented to by you but
in no event later than 1:00 P.M., Chicago Time, on the third full
business day
<PAGE> 19
19
following the date hereof; and prior to the First Closing Date or the
Second Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be
pending or, to the knowledge of the Company, the Selling Stockholders or
you, shall be contemplated by the Commission. If the Company has elected
to rely upon Rule 430A and/or Rule 434, the information concerning the
initial public offering price of the Shares and price-related information
shall have been transmitted to the Commission for filing pursuant to Rule
424(b) within the prescribed period and the Company will provide evidence
satisfactory to the Representatives of such timely filing (or a
post-effective amendment providing such information shall have been filed
and declared effective in accordance with the requirements of Rules 430A
and 424(b)). If a Rule 462(b) Registration Statement is required, such
Registration Statement shall have been transmitted to the Commission for
filing and become effective within the prescribed time period and, prior
to the First Closing Date, the Company shall have provided evidence of
such filing and effectiveness in accordance with Rule 462(b).
(b) The Shares shall have been qualified for sale under the blue sky
laws of such states as shall have been specified by the Representatives.
(c) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form
of the certificates representing the Shares, the execution and delivery
of this Agreement and the Pricing Agreement, and all corporate
proceedings and other legal matters incident thereto, and the form of the
Registration Statement and the Prospectus (except financial statements)
shall have been approved by counsel for the Underwriters exercising
reasonable judgment.
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the opinion of counsel
for the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or necessary to make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred any change, or any development involving a
prospective change, in or affecting particularly the business or
properties of the Company or its subsidiaries, whether or not arising in
the ordinary course of business, which, in the judgment of the
Representatives, makes it impractical or inadvisable to proceed with the
public offering or purchase of the Shares as contemplated hereby.
<PAGE> 20
20
(f) There shall have been furnished to you, as Representatives of the
Underwriters, on the First Closing Date or the Second Closing Date, as
the case may be, except as otherwise expressly provided below:
(i) An opinion of Schwartz & Freeman, counsel for the Company
and for Messrs. Geller, Emby, Goldsmith, Young, Bulkley and Katz,
addressed to the Underwriters and dated the First Closing Date or
the Second Closing Date, as the case may be, to the effect that:
(1) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware with corporate power and
authority to own its properties and conduct its business as
described in the Prospectus; and the Company has been duly
qualified to do business as a foreign corporation under the
corporation law of, and is in good standing as such in, every
jurisdiction where the ownership or leasing of property, or
the conduct of its business requires such qualification
except where the failure so to qualify would not have a
material adverse effect upon the condition (financial or
otherwise) or results of operations of the Company and its
subsidiaries taken as a whole;
(2) an opinion to the same general effect as clause (1)
of this subparagraph (i) in respect of each significant
subsidiary of the Company (other than Marchon Toys Limited,
as to which no opinion need be given);
(3) all of the issued and outstanding capital stock of
each significant subsidiary of the Company (other than
Marchon Toys Limited, as to which no opinion need be given)
has been duly authorized, validly issued and is fully paid
and nonassessable, and, except as disclosed in the
Registration Statement, the Company owns directly or
indirectly 100 percent of the outstanding capital stock of
each subsidiary, and to the best knowledge of such counsel,
such stock is owned free and clear of any claims, liens,
encumbrances or security interests;
(4) the authorized capital stock of the Company, of
which there is outstanding the amount set forth in the
Registration Statement and Prospectus (except for subsequent
issuances, if any, pursuant to stock options or other rights
referred to in the Prospectus), conforms as to legal matters
in all material respects to the description thereof in the
Registration Statement and Prospectus;
<PAGE> 21
21
(5) the issued and outstanding capital stock of the
Company (including the Shares acquired by the Selling
Stockholders on the First Closing Date upon exercise of
outstanding options or warrants and including the Halco
Option Firm Shares) has been duly authorized and validly
issued and is fully paid and nonassessable;
(6) the certificates for the Shares to be delivered
hereunder and the Halco Option Firm Shares are in due and
proper form, and when duly countersigned by the Company's
transfer agent and delivered to you or upon your order
against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement and the
Pricing Agreement, the Shares represented thereby will be
duly authorized and validly issued, fully paid and
nonassessable;
(7) the Registration Statement has become effective
under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose are pending or threatened under the 1933 Act,
and the Registration Statement (including the information
deemed to be part of the Registration Statement at the time
of effectiveness pursuant to Rule 430A(b) and/or Rule 434,
if applicable), the Prospectus and each amendment or
supplement thereto (except for the financial statements and
other statistical or financial data included therein as to
which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the 1933
Act; such counsel have no reason to believe that either the
Registration Statement (including the information deemed to
be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) and/or Rule 434, if
applicable) or the Prospectus, or the Registration Statement
or the Prospectus as amended or supplemented (except as
aforesaid), as of their respective effective or issue dates,
contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
that the Prospectus as amended or supplemented, if
applicable, as of the First Closing Date or the Second
Closing Date, as the case may be, contained any untrue
statement of a material fact or omitted to state any material
fact necessary to make the statements therein not misleading
in light of the circumstances under which they were made;
<PAGE> 22
22
and such counsel does not know of any legal or
governmental proceedings pending or threatened required to be
described in the Prospectus which are not described as
required, nor of any contracts or documents of a character
required to be described in the Registration Statement or
Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed, as required;
(8) the statements in the Registration Statement and
the Prospectus summarizing statutes, rules and regulations
are accurate and fairly and correctly present the information
required to be presented by the 1933 Act or the rules
and regulations thereunder, in all material respects and such
counsel does not know of any statutes, rules and regulations
required to be described or referred to in the Registration
Statement or the Prospectus that are not described or
referred to there in as required; and the statements under the
captions "Management - Executive Compensation," "Certain
Transactions," "Principal and Selling Stockholders,"
"Description of Capital Stock" and "Shares Eligible for
Future Sale" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or
matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information
called for with respect to such documents and matters;
(9) this Agreement and the Pricing Agreement and the
performance of the Company's obligations hereunder have been
duly authorized by all necessary corporate action and this
Agreement and the Pricing Agreement have been duly executed
and delivered by and on behalf of the Company, and are legal,
valid and binding agreements of the Company, except as
enforceability of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditor's rights and by the exercise of judicial
discretion in accordance with general principles applicable
to equitable and similar remedies and except as to those
provisions relating to indemnities for liabilities arising
under the 1933 Act as to which no opinion need be expressed;
and no approval, authorization or consent of any public
board, agency, or instrumentality of the United States or of
any state or other jurisdiction is necessary in connection
with the issue or sale of the Shares by the Company pursuant
to this Agreement (other than under the 1933 Act, applicable
blue sky laws and the rules of the NASD) or the consummation
by the Company of any other transactions contemplated hereby;
(10) the execution and performance of this Agreement
will not contravene any of the provisions of, or result in a
default under, any agreement, franchise, license, indenture,
mortgage, deed of trust, or other instrument known to such
counsel, of the Company or any of its subsidiaries or by
which the property of any of them is bound and which
contravention or default would be material to the Company and
its subsidiaries taken as a
<PAGE> 23
23
whole; or violate any of the provisions of the charter or
bylaws of the Company or any of its subsidiaries or, so far
as is known to such counsel, violate any statute, order, rule
or regulation of any regulatory or governmental body having
jurisdiction over the Company or any of its subsidiaries;
(11) to such counsel's knowledge, all offers and sales
of the Company's capital stock since September 30, 1994 were
at all relevant times duly registered or the subject of an
available exemption from the registration requirements of the
1933 Act and the applicable state securities or blue sky
laws;
(12) to such counsel's knowledge, no Stockholders of the
Company have rights to registration with respect to Common
Stock or preemptive rights to purchase Common Stock except as
disclosed in the Prospectus, and holders of registration
rights who are not Selling Stockholders (or who are Selling
Stockholders, but who are not selling in accordance with such
rights) have waived such rights with respect to the offering
being made by the Prospectus;
(13) the Company is not an "investment company" or a
person "controlled by" an "investment company" within the
meaning of the Investment Company Act.
(14) with respect to each Selling Stockholder, this
Agreement and the Pricing Agreement have been duly
authorized, executed and delivered by or on behalf of each
such Selling Stockholder; the Agents and the Custodian for
each such Selling Stockholder have been duly and validly
authorized to carry out all transactions contemplated herein
on behalf of each such Selling Stockholder; and the
performance of this Agreement and the Pricing Agreement and
the consummation of the transactions herein contemplated by
such Selling Stockholders will not result in a breach or
violation of any of the terms and provisions of, or
constitute a default under, any statute, any indenture,
mortgage, deed of trust, note agreement or other agreement or
instrument known to such counsel to which any of such Selling
Stockholders is a party or by which any are bound or to which
any of the property of such Selling Stockholders is subject,
or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over
any of such Selling Stockholders or any of their properties;
and no consent, approval, authorization or order of any court
or governmental agency or body is required for the
consummation of the
<PAGE> 24
24
transactions contemplated by this Agreement and the Pricing
Agreement in connection with the sale of Shares to be sold by
such Selling Stockholders hereunder, except such as have been
obtained under the 1933 Act and such as may be required under
applicable blue sky laws in connection with the purchase and
distribution of such Shares by the Underwriters and the
clearance of such offering with the NASD;
(15) each Selling Stockholder has full right, power and
authority to enter into this Agreement and the Pricing
Agreement and to sell, transfer and deliver the Shares or the
Halco Option to be sold on the First Closing Date or the
Second Closing Date, as the case may be, by such Selling
Stockholder hereunder and good and valid title to such
Shares or Halco Option so sold, free and clear of all voting
trust arrangements, liens, encumbrances, equities, claims and
community property rights whatsoever, has been transferred to
the Underwriters (who counsel may assume to be bona fide
purchasers) who have purchased such Shares or Halco Option
hereunder; and
(16) this Agreement and the Pricing Agreement are
legal, valid and binding agreements of each Selling
Stockholder except as enforceability of the same may be
limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditor's rights
and by the exercise of judicial discretion in accordance with
general principles applicable to equitable and similar
remedies and except with respect to those provisions relating
to indemnities for liabilities arising under the 1933 Act, as
to which no opinion need be expressed.
(ii) An opinion of Sonnenschein Nath & Rosenthal, special
transaction counsel for the Company, addressed to the Underwriters
and dated the First Closing Date or the Second Closing Date, as the
case may be, to the effect set forth in clauses (6), (7) and (9) of
Section 8(f)(i) above.
(iii) An opinion of [ ], counsel for Halco
Industries, Inc., addressed to the Underwriters and dated the First
Closing Date to the effect set forth in clauses (14) through (16)
of Section 8(f)(i) above, including in the case of clause (15) the
shares of Common Stock to be sold upon exercise of the Halco
Option.
(iv) An opinion of Altheimer & Grey, counsel for WPG Corporate
Development Associates IV, L.P., WPG Corporate Development
Associates IV (Overseas), L.P., Westpool Investment Trust PLC, and
Glenbrook Partners, L.P.,
<PAGE> 25
25
addressed to the Underwriters and dated the First Closing Date to
the effect set forth in clauses (14) through (16) of Section
8(f)(i) above.
(v) An opinion of the Chief Counsel of Olin Corporation,
counsel for Olin Corporation, addressed to the Underwriters and
dated the First Closing Date to the effect set forth in clauses
(14) through (16) of Section 8(f)(i) above.
(vi) An opinion of [ ], counsel for Smedley
Industries, Inc., addressed to the Underwriters and dated the First
Closing Date to the effect set forth in clauses (14) through (16)
of Section 8(f)(i) above.
(vii) An opinion of Snow Becker Krauss, counsel for Jericho
State Capital Corp., Harvey Klaris, Glenn Chwatt and Richard
Chwatt, addressed to the Underwriters and dated the First Closing
Date to the effect set forth in clauses (14) through (16) of
Section 8(f)(i) above.
(viii) An opinion of [ ], counsel for
William Forster and Alfred A. LaSorte, Jr., addressed to the
Underwriters and dated the First Closing Date to the effect set
forth in clauses (14) through (16) of Section 8(f)(i) above.
(ix) An opinion of Snow Becker Krauss, counsel for SBK
Investment Partners, addressed to the Underwriters and dated the
First Closing Date to the effect set forth in clauses (14) through
(16) of Section 8(f)(i) above.
(x) An opinion of Jeffrey L. Goldberg & Associates, counsel
for The Iridium Trust, addressed to the Underwriters and dated the
Second Closing Date to the effect set forth in clauses (14) through
(16) of Section 8(f)(i) above.
In rendering such opinions, such counsel may, if applicable,
state that they are relying upon the certificate of American Stock
Transfer & Trust Company, the transfer agent for the Common Stock,
as to the number of shares of Common Stock at any time or times
outstanding, and that insofar as their opinion under clause (7)
above relates to the accuracy and completeness of the Prospectus
and Registration Statement, it is based upon a general review with
the Company's representatives and independent accountants of the
information contained therein, without independent verification by
such counsel of the accuracy or completeness of such information.
Such counsel may also rely upon the opinions of other competent
counsel and, as to factual matters, on certificates of the Selling
Stockholders and of officers of the Company and of state officials,
in which case their opinion is to state that they are so doing and
copies of said opinions or certificates are to be attached to the
opinion
<PAGE> 26
26
unless said opinions or certificates (or, in the case of
certificates, the information therein) have been otherwise
furnished to the Representatives.
(xi) Such opinion or opinions of Kirkland & Ellis, counsel for
the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation
of the Company, the validity of the Shares to be sold by the
Company, the Registration Statement and the Prospectus and other
related matters as you may reasonably require, and the Company
shall have furnished to such counsel such documents and shall have
exhibited to them such papers and records as they request for the
purpose of enabling them to pass upon such matters.
(xii) A certificate of the chief executive officer and the
principal financial officer of the Company, dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) the representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct
as of the date of this Agreement and as of the First Closing
Date or the Second Closing Date, as the case may be, and the
Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied
at or prior to such Closing Date; and
(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best
knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated
under the 1933 Act.
The delivery of the certificate provided for in this
subparagraph shall be and constitute a representation and warranty
of the Company as to the facts required in the immediately
foregoing clauses (1) and (2) of this subparagraph to be set forth
in said certificate.
(xiii) A certificate of each Selling Stockholder dated the
First Closing Date or the Second Closing Date, as the case may be,
to the effect that the representations and warranties of such
Selling Stockholder set forth in Section 3 of this Agreement are
true and correct as of such date and the Selling Stockholder has
complied with all the agreements and satisfied all the conditions
on the part of such Selling Stockholder to be performed or
satisfied at or prior to such date.
<PAGE> 27
27
(xiv) At the time the Pricing Agreement is executed and
also on the First Closing Date or the Second Closing Date, as the
case may be, there shall be delivered to you a letter addressed
to you, as Representatives of the Underwriters, from Deloitte &
Touche LLP, independent auditors, the first one to be dated the
date of the Pricing Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a second closing)
to be dated the Second Closing Date, to the effect set forth in
Schedule C. There shall not have been any change or decrease
specified in the letters referred to in this subparagraph which
makes it impractical or inadvisable in the judgment of the
Representatives to proceed with the public offering or purchase of
the Shares as contemplated hereby.
(xv) At the time the Pricing Agreement is executed, there
shall be delivered to you a letter addressed to you, as
Representatives of the Underwriters, from Coopers & Lybrand, LLP,
independent auditors, to the effect set forth in Schedule D.
(xvi) Such further certificates and documents as you may
reasonably request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Kirkland & Ellis, counsel for the Underwriters, which approval shall not be
unreasonably withheld. The Company shall furnish you with such manually signed
or conformed copies of such opinions, certificates, letters and documents as
you request.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification to the Company and
the Selling Stockholders without liability on the part of any Underwriter or
the Company or any Selling Stockholder, except for the expenses to be paid or
reimbursed by the Company pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
any condition of the Underwriters' obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company or the
Selling Stockholders to perform any agreement herein or to comply with any
provision hereof, unless such failure to satisfy such condition or to comply
with any provision hereof is due to the default or omission of any Underwriter,
the Company agrees to reimburse you and the other Underwriters upon demand for
all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Shares. Any such termination
<PAGE> 28
28
shall be without liability of any party to any other party except that the
provisions of this Section, Section 7 and Section 11 shall at all times be
effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. You, the Company and
the Selling Stockholders listed on Schedule B-1 will use your, its and their
best efforts to cause the Registration Statement to become effective, if it has
not yet become effective, and to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification. (a) The Company and each Selling Stockholder
listed on Schedule B-1, jointly and severally, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the 1933 Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the 1933 Act, the Exchange Act
or other federal or state statutory law or regulation, at common law or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company and/or such Selling
Stockholders, as the case may be), insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A
and/or Rule 434, if applicable, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse each Underwriter
and each such controlling person for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that neither the Company nor any Selling Stockholder will be
liable in any such case to the extent that (i) any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives, specifically for use therein or
(ii) such statement or omission was contained or made in any preliminary
prospectus and corrected in the Prospectus and (1) any such loss, claim, damage
or liability suffered or incurred by any Underwriter (or any person who
controls any Underwriter) resulted from an action, claim or suit by any person
who purchased Shares which are the subject thereof from such Underwriter in the
offering and (2) such Underwriter failed to deliver or provide a copy of the
Prospectus to such person at or prior to the confirmation of the sale of such
Shares in any case where such delivery is required by the 1933 Act. In
addition to their other obligations under this Section 11(a), the Company and
the Selling Stockholders agree that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising out of
or based upon any statement or omission, or any alleged statement or omission,
described in
<PAGE> 29
29
this Section 11(a), they will reimburse the Underwriters on a monthly basis for
all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's and the Selling Stockholders'
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. This indemnity agreement will be in addition to any
liability which the Company and the Selling Stockholders may otherwise have.
Each Selling Stockholder listed on Schedule B-2 severally and not jointly
agrees to indemnify and hold harmless each Underwriter and each person, if any,
who controls any Underwriter within the meaning of the 1933 Act or the Exchange
Act, to the same extent as the foregoing indemnity to each Underwriter set
forth in the immediately preceding paragraph, but only with reference to
information relating to such Selling Stockholder furnished in writing to the
Company or such Underwriter by such Selling Stockholder or by its agents or
attorneys on behalf of such Selling Stockholder specifically for use in the
preparation of the Registration Statement, the Prospectus or any amendment or
supplement thereto referred to in the foregoing indemnity.
Without limiting the full extent of the Company's agreement to indemnify
each Underwriter, as herein provided, each Selling Stockholder shall be liable
under the indemnity agreements contained in paragraph (a) of this Section only
for an amount not exceeding the proceeds received by such Selling Stockholder
from the sale of Shares hereunder; provided that the amount of such proceeds
received by Steven Geller shall be deemed to include for this purpose the
purchase price payable to him for the Halco Option and the exercise price
payable by the Underwriters to Halco Industries, Inc. upon exercise of the
Halco Option; and, provided further, that the amount of such proceeds received
by Halco Industries, Inc. shall not be deemed to include for this purpose the
exercise price payable by the Underwriters to it upon exercise of the Halco
Option.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement, and each Selling Stockholder and each person, if any,
who controls the Company within the meaning of the 1933 Act or the Exchange
Act, against any losses, claims, damages or liabilities to which the Company,
or any such director, officer, Selling Stockholder or controlling person may
become subject under the 1933 Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, the Prospectus, or any
<PAGE> 30
30
amendment or supplement thereto in reliance upon and in conformity with Section
4 of this Agreement or any other written information furnished to the Company
by such Underwriter through the Representatives specifically for use in the
preparation thereof; and will reimburse any legal or other expenses reasonably
incurred by the Company, or any such director, officer, Selling Stockholder or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action. In addition to their other obligations
under this Section 11(b), the Underwriters agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 11(b), they will
reimburse the Company and the Selling Stockholders on a monthly basis for all
reasonable legal and other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Underwriters' obligation to reimburse the
Company and the Selling Stockholders for such expenses and the possibility that
such payments might later be held to have been improper by a court of competent
jurisdiction. This indemnity agreement will be in addition to any liability
which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent that
the indemnifying party was prejudiced by such failure to notify. In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
all other indemnifying parties similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, or the indemnified and indemnifying
parties may have conflicting interests which would make it inappropriate for
the same counsel to represent both of them, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defense
and otherwise to participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the indemnifying
party will not be liable to such indemnified party under this Section for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall have
employed such counsel in connection with the assumption of legal defense in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel, approved
<PAGE> 31
31
by the Representatives in the case of paragraph (a) representing all
indemnified parties not having different or additional defenses or potential
conflicting interest among themselves who are parties to such action), (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense
of the indemnifying party. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company, the
Selling Stockholders and the Underwriters from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company, the Selling Stockholders and the Underwriters in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company, the Selling Stockholders
and the Underwriters shall be deemed to be in the same proportion in the case
of the Company and the Selling Stockholders, as the total price paid to the
Company and the Selling Stockholders for the Shares by the Underwriters (net of
underwriting discount but before deducting expenses), and in the case of the
Underwriters as the underwriting discount received by them bears to the total
of such amounts paid to the Company and the Selling Stockholders and received
by the Underwriters as underwriting discount in each case as contemplated by
the Prospectus. The relative fault of the Company and the Selling Stockholders
and the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company or by the Selling Stockholders or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above shall
be deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation
<PAGE> 32
32
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section are several in proportion to their respective
underwriting commitments and not joint. The obligations of the Selling
Stockholders listed in Schedule B-2 to contribute pursuant to this Section are
several and not joint.
Without limiting the full extent of the Company's agreement to contribute
to amount required to be paid by any Underwriter, as herein provided, each
Selling Stockholder shall be liable under the contribution agreements contained
in paragraph (d) of this Section only for an amount not exceeding the proceeds
received by such Selling Stockholder from the sale of Shares hereunder;
provided that the amount of such proceeds received by Steven Geller shall be
deemed to include for this purpose the purchase price payable to him for the
Halco Option and the exercise price payable by the Underwriters to Halco
Industries, Inc. upon exercise of the Halco Option; and, provided further, that
the amount of such proceeds received by Halco Industries, Inc. shall not be
deemed to include for this purpose the exercise price payable by the
Underwriters to it upon exercise of the Halco Option.
(e) The provisions of this Section shall survive any termination of this
Agreement.
(f) Marvin Smollar agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of the
1933 Act or the Exchange Act (or to contribute to any amounts paid or payable
by each Underwriter and such controlling persons) to the same extent that The
Iridium Trust is obligated to indemnify and hold harmless (or to contribute to
amounts paid or payable to) such persons under this Section 11; provided,
however, that Marvin Smollar and The Iridium Trust will in no event
collectively pay or contribute under this Section 11 any amount exceeding the
proceeds received by The Iridium Trust from the sale of Shares hereunder.
Section 12. Default of Underwriters. It shall be a condition to the
agreement and obligation of the Company and the Selling Stockholders to sell
and deliver the Shares and Halco Option hereunder, and of each Underwriter to
purchase the Shares hereunder, that, except as hereinafter in this paragraph
provided, each of the Underwriters shall purchase and pay for all Shares agreed
to be purchased by such Underwriter hereunder upon tender to the
Representatives of all such Shares in accordance with the terms hereof. If any
Underwriter or Underwriters default in their
<PAGE> 33
33
obligations to purchase Shares hereunder on the First Closing Date and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10 percent of the total number of
Shares which the Underwriters are obligated to purchase on the First Closing
Date, the Representatives may make arrangements satisfactory to the Company and
the Selling Stockholders for the purchase of such Shares by other persons,
including any of the Underwriters, but if no such arrangements are made by such
date the nondefaulting Underwriters shall be obligated severally, in proportion
to their respective commitments hereunder, to purchase the Shares which such
defaulting Underwriters agreed but failed to purchase on such date. If any
Underwriter or Underwriters so default and the aggregate number of Shares with
respect to which such default or defaults occur is more than the above
percentage and arrangements satisfactory to the Representatives and the Company
and the Selling Stockholders for the purchase of such Shares by other persons
are not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any nondefaulting Underwriter or the Company
or the Selling Stockholders, except for the expenses to be paid by the Company
pursuant to Section 7 hereof and except to the extent provided in Section 11
hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section. Nothing herein will relieve a defaulting Underwriter from
liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11 and 14 and as to all other provisions at
10:00 A.M., Chicago Time, on the day following the date upon which the Pricing
Agreement is executed and delivered, unless such a day is a Saturday, Sunday or
holiday (and in that event this Agreement shall become effective at such hour
on the business day next succeeding such Saturday, Sunday or holiday); but this
Agreement shall nevertheless become effective at such earlier time after the
Pricing Agreement is executed and delivered as you may determine on and by
notice to the Company and the Selling Stockholders or by release of any Shares
for sale to the public. For the purposes of this Section, the Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Shares or upon the release by you of
telegrams (i) advising Underwriters that the Shares are released for public
offering, or (ii) offering the Shares for sale to securities dealers, whichever
may occur first.
SECTION 14. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
<PAGE> 34
34
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholders or by you by notice to the Company and the
Selling Stockholders at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling
Stockholders to any Underwriter (except for the expenses to be paid or
reimbursed pursuant to Section 7 hereof and except to the extent provided
in Section 11 hereof) or of any Underwriter to the Company or the Selling
Stockholders.
(b) This Agreement may also be terminated by you prior to the First
Closing Date, and the option referred to in Section 5, if exercised, may
be canceled at any time prior to the Second Closing Date, if (i) trading
in securities on the New York Stock Exchange shall have been suspended or
minimum prices shall have been established on such exchange, or (ii) a
banking moratorium shall have been declared by Illinois, New York, or
United States authorities, or (iii) there shall have been any change in
financial markets or in political, economic or financial conditions
which, in the opinion of the Representatives, either renders it
impracticable or inadvisable to proceed with the offering and sale of the
Shares on the terms set forth in the Prospectus or materially and
adversely affects the market for the Shares, or (iv) there shall have
been an outbreak of major armed hostilities between the United States and
any foreign power which in the opinion of the Representatives makes it
impractical or inadvisable to offer or sell the Shares. Any termination
pursuant to this paragraph (b) shall be without liability on the part of
any Underwriter to the Company or the Selling Stockholders or on the part
of the Company to any Underwriter or the Selling Stockholders (except for
expenses to be paid or reimbursed pursuant to Section 7 hereof and except
to the extent provided in Section 11 hereof).
SECTION 15. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
principals, members, officers or directors or any controlling person, or the
Selling Stockholders as the case may be, and will survive delivery of and
payment for the Shares sold hereunder.
SECTION 16. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters will be mailed, delivered or telegraphed and
confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606, Attn: John L. Carton, with a copy to Kirkland & Ellis,
200 East Randolph Street, Chicago, Illinois 60601, Attn: Alan G. Berkshire,
Esq.; if sent to the Company will be mailed, delivered or telegraphed and
confirmed to the Company at its corporate headquarters with copies to
Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606, Attn:
Michael M. Froy, Esq., and to Schwartz & Freeman, 401 North Michigan Avenue,
Suite 1900, Chicago, Illinois 60611, Attn: Kenneth G. Kolmin, Esq.; and
<PAGE> 35
35
if sent to the Selling Stockholders will be mailed, delivered or telegraphed
and confirmed to the Agents and the Custodian at such address as they have
previously furnished to the Company and the Representatives.
SECTION 17. Successors. This Agreement and the Pricing Agreement will
inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section
11, and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any of
the Underwriters merely by reason of such purchase.
SECTION 18. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with this financing,
and any action under or in respect of this Agreement taken by you will be
binding upon all the Underwriters.
SECTION 19. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
SECTION 20. Applicable Law. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State of
Illinois.
* * * * * * * * *
<PAGE> 36
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters including you, all in accordance with
its terms.
Very truly yours,
Empire of Carolina, Inc.
By____________________________
Chief Executive Officer
The Selling Stockholders named in
Schedule B
By____________________________
Agent and Attorney-in-Fact
____________________________
Marvin Smollar
The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.
William Blair & Company, L.L.C.
Gerard Klauer Mattison & Co., L.L.C.
Acting as Representatives of the
several Underwriters named in
Schedule A.
By William Blair & Company, L.L.C.
By__________________________________
Principal
<PAGE> 37
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter to be Purchased
- ----------- ---------------
<S> <C>
William Blair & Company, L.L.C.
Gerard Klauer Mattison & Co., L.L.C.
[Other Underwriters]
---------------
Total
===============
</TABLE>
<PAGE> 38
SCHEDULE B
<TABLE>
<CAPTION>
SCHEDULE B-1 Number of Firm Number of Option
SELLING STOCKHOLDERS: Shares to be Sold Shares to be Sold
----------------- -----------------
<S> <C> <C>
Steven E. Geller 333,333 (1) 100,000
WPG Corporate Development Associates
IV, L.P. 231,800 --
WPG Corporate Development Associates
IV (Overseas), L.P. 55,900 --
Westpool plc 7,900 --
Glenbrook Partners 4,400 --
Charles Emby 37,500 --
Irwin J. Goldsmith 37,500 --
Harvey Katz 15,000 --
Tyler Bulkley 10,000 --
Kar Ye Yeung 4,306 --
The Iridium Trust -- 150,000
</TABLE>
(1) Represents the Halco Option Firm Shares underlying the Halco Option, which
option will be sold by such Selling Stockholder
<TABLE>
<CAPTION>
SCHEDULE B-2 Number of Firm Number of Option
SELLING STOCKHOLDERS: Shares to be Sold Shares to be Sold
----------------- -----------------
<S> <C> <C>
Halco Industries, Inc. 500,000 --
Olin Corporation 396,000 --
Smedley Industries, Inc. 378,000 --
Jericho State Capital Corp. 13,800 --
Glenn Chwatt 18,400 --
Richard Chwatt 18,400 --
Harvey Klaris 18,400 --
William Forster 5,000 --
Alfred LaSorte, Jr. 5,000 --
SBK Investment Partners 50,000 --
</TABLE>
<PAGE> 39
SCHEDULE C
Comfort Letter of Deloitte & Touche LLP
(1) They are independent public accountants with respect to the Company
and its subsidiaries within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and schedules
of the Company and its subsidiaries included in the Registration Statement and
the consolidated financial statements of the Company from which the information
presented under the captions "Summary Consolidated Financial Data" and
"Selected Consolidated Financial Data" has been derived which are stated
therein to have been examined by them comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an audit conducted in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and its subsidiaries responsible for financial
and accounting matters as to transactions and events subsequent to December 31,
1995, a reading of minutes of meetings of the stockholders and directors of the
Company and its subsidiaries since December 31, 1995, a reading of the latest
available interim unaudited consolidated financial statements of the Company
and its subsidiaries (with an indication of the date thereof) and other
procedures as specified in such letter, nothing came to their attention which
caused them to believe that (i) the unaudited financial statements of the
Company and its subsidiaries included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act or that such unaudited financial statements are
not fairly presented in accordance with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement, (ii) any unaudited
pro forma financial statements included in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act or the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements, and (iii) at a
specified date not more than five days prior to the date thereof in the case of
the first letter and not more than two business days prior to the date thereof
in the case of the second and third letters, there was any change in the
capital stock or long-term debt or short-term debt (other than normal payments)
of the Company and its subsidiaries on a consolidated basis or any decrease in
consolidated net current assets or consolidated Stockholders' equity as
compared with amounts shown on the latest unaudited balance sheet of the
Company included in the Registration Statement or for the period from the date
of such balance sheet to a date not more than five days prior to the date
thereof in the case of the first letter and not more than two business days
prior to the date thereof in the case of the second and third letters, there
were any decreases, as compared with the corresponding period of the prior
year, in consolidated net sales, consolidated income before income taxes or in
the total
<PAGE> 40
2
or per share amounts of consolidated net income except, in all instances, for
changes or decreases which the Prospectus discloses have occurred or may occur
or which are set forth in such letter.
(4) They have carried out specified procedures, which have been agreed to
by the Representatives, with respect to certain information in the Prospectus,
or in Part II of, or in exhibits or schedules to, the Registration Statement
specified by the Representatives, and on the basis of such procedures, they
have found such information to be in agreement with the consolidated financial
statements or the general accounting records of the Company and its
subsidiaries.
<PAGE> 41
SCHEDULE D
Comfort Letter of Coopers & Lybrand, LLP
(1) They are independent public accountants with respect to Marchon and
its subsidiaries within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and schedules
of Marchon and its subsidiaries included in the Registration Statement which
are stated therein to have been examined by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an audit conducted in
accordance with generally accepted auditing standards), including inquiries of
certain officers of Marchon and its subsidiaries responsible for financial and
accounting matters as to transactions and events subsequent to December 31,
1993, a reading of minutes of meetings of the stockholders and directors of
Marchon and its subsidiaries since December 31, 1993, a reading of the latest
available interim unaudited consolidated financial statements of Marchon and
its subsidiaries (with an indication of the date thereof) and other procedures
as specified in such letter, nothing came to their attention which caused them
to believe that the unaudited financial statements of Marchon and its
subsidiaries included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the 1933
Act or that such unaudited financial statements are not fairly presented in
accordance with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement.
(4) They have carried out specified procedures, which have been agreed to
by the Representatives, with respect to certain information in the Prospectus
specified by the Representatives, and on the basis of such procedures, they
have found such information to be in agreement with the consolidated financial
statements of Marchon and its subsidiaries.
<PAGE> 42
Exhibit A
Empire of Carolina, Inc.
3,650,639 Shares Common Stock(1)
PRICING AGREEMENT
June __, 1996
William Blair & Company, L.L.C.
Gerard Klauer Mattison & Co. L.L.C.
As Representatives of the Several
Underwriters
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated June__, 1996 (the
"Underwriting Agreement") relating to the sale by the Company and the Selling
Stockholders and the purchase by the several Underwriters for whom William
Blair & Company, L.L.C. and Gerard Klauer Mattison & Co., L.L.C. are acting as
representatives (the "Representatives"), of the above Shares. All terms herein
shall have the definitions contained in the Underwriting Agreement except as
otherwise defined herein.
Pursuant to Section 5 of the Underwriting Agreement, the Company and each
of the Selling Stockholders agree with the Representatives as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
- ---------------
(1)Plus an option to acquire up to 547,595 additional shares to cover
overallotments
<PAGE> 43
2
2. The purchase price per share for the Company Firm Shares, the Selling
Stockholder Firm Shares and the Option Shares to be paid by the several
Underwriters shall be $_____________, being an amount equal to the initial
public offering price set forth above less $____________ per share.
3. The purchase price for the Halco Option shall be $_________ per
underlying Share, being an amount equal to the purchase price per share for the
Company Firm Shares, the Selling Stockholder Firm Shares and the Option Shares
set forth above less the Halco Option exercise price of $7.18 per share.
Schedule A is amended as follows:
<PAGE> 44
3
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters, including you, all in accordance
with its terms.
Very truly yours,
Empire of Carolina, Inc.
By____________________________
Chief Executive Officer
The Selling Stockholders
By____________________________
Agent and Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
William Blair & Company, L.L.C.
Gerard Klauer Mattison & Co., L.L.C.
Acting as Representatives of the
several Underwriters
By William Blair & Company, L.L.C.
By_______________________________
Principal
<PAGE> 1
SCHWARTZ & FREEMAN EXHIBIT 5.1
LAW OFFICES
401 N. Michigan Ave.
Suite 1900
Chicago, Illinois 60611-4206
(312) 222-0800
June 17, 1996
Empire of Carolina, Inc.
5150 Linton Boulevard
Delray Beach, Florida 33433
Gentlemen:
We have been engaged as counsel to Empire of Carolina, Inc. (the
"Company") in connection with its registration statement on Form S-1
(the "Registration Statement"), of an aggregate of 4,198,234 shares of
common stock, $0.10 par value (the "Common Stock"), of which a maximum
of 1,797,595 shares are proposed to be sold by the Company, 444,000 are
covered by exercisable options and warrants and the remaining 1,956,639
shares are now issued and outstanding.
We have examined the Certificate of Incorporation of the Company and
all amendments thereto to date; the By-Laws of the Company as presently
in effect; the minutes of meetings of directors of the Company relating
to the issuance of the shares of Common Stock; and such other corporate
records and documents as we have deemed necessary in order to enable us
to express the opinion set forth below.
Based on the foregoing examination and assumptions, it is our opinion
that the 1,956,639 shares of Common Stock covered by the Registration
Statement which are now issued and outstanding have been duly and
validly issued, and are fully paid and non-assessable, the 444,000
shares included in the Registration Statement which are now subject to
exercisable options and warrants will be, upon exercise of such options
and warrants in accordance with their terms, including the receipt by
the Company of the option or warrant exercise price, as the case may
be, all as provided in the Registration Statement, will be, duly and
validly issued, fully paid and non-assessable, and upon receipt by the
Company of the net proceeds from the sale by the Company of the
1,797,595 shares as provided in the Registration Statement, will be
duly and validly issued, fully paid and non-assessable.
We understand that you may file this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. We
consent to that filing and to the use of our firm name in the
Registration Statement.
Very truly yours,
SCHWARTZ & FREEMAN
Stephen E. Goodman
SEG:bg
<PAGE> 1
EXHIBIT 10.54
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") made this 29th day of
May, 1996 by and among BT COMMERCIAL CORPORATION ("BTCC"), as a lender, and as
administrative agent ("Administrative Agent") for all "Lenders" (as hereinafter
defined), with an office at 233 South Wacker Drive, Chicago, Illinois 60606,
LASALLE NATIONAL BANK, a national banking association, as a lender ("LaSalle")
and as collateral agent ("Collateral Agent") for all Lenders with an address at
135 South LaSalle Street, Chicago, Illinois 60674, and EMPIRE INDUSTRIES, INC.,
a North Carolina corporation ("Borrower").
W I T N E S S E T H
WHEREAS, Borrower has requested that LaSalle provide a loan facility to
Borrower;
WHEREAS, in connection therewith LaSalle has agreed to assign, and BTCC
has agreed to accept, a portion of LaSalle's interests in the loan facilities;
and
WHEREAS, Borrower may, from time to time, request Loans from Agents and
Lenders, and the parties wish to provide for the terms and conditions upon
which such Loans, if made by Agents and Lenders, shall be made;
NOW, THEREFORE, in consideration of any Loan (including any Loan by
renewal or extension) heretofore, now or hereafter made to Borrower by either
Agent or any Lender, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by Borrower, the parties agree
as follows:
1. DEFINITIONS.
(a) "ACCOUNT," "ACCOUNT DEBTOR," "CHATTEL PAPER," "DOCUMENTS,"
"EQUIPMENT," "GENERAL INTANGIBLES," "GOODS," "INSTRUMENTS," "INVENTORY," and
"INVESTMENT PROPERTY," shall have the respective meanings assigned to such
terms, as of the date of this Agreement, in the Illinois Uniform Commercial
Code.
(b) "ADMINISTRATIVE AGENT" shall mean BTCC or its successor appointed
pursuant to Paragraph (10) of Exhibit A, acting in its capacity as agent for,
and on behalf of all Lenders.
(c) "AFFILIATE" shall mean any Person directly or indirectly controlling,
controlled by or under common control with Borrower.
(d) "AGENTS" shall mean Collateral Agent and Administrative Agent,
collectively.
(e) "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or
(i) with respect to all notices, determinations, fundings and payments in
connection with LIBOR Rate Loans, any day that banks in London or Chicago are
required or permitted to close, and (ii) with respect to all other matters, any
day that banks in the Chicago area are required or permitted to close.
(f) "COLLATERAL" shall mean all of the property of Borrower described in
Paragraph 4 hereof, together with all other real or personal property of any
Obligor or any other Person now or hereafter pledged to Collateral Agent, for
the benefit of Agents and Lenders, to secure, either directly or indirectly,
repayment of any of the Liabilities.
(g) "COLLATERAL AGENT" shall mean LaSalle or its successor appointed
pursuant to Paragraph (10) of Exhibit A, acting in its capacity as agent for,
and on behalf of all Lenders.
(h) "ELIGIBLE ACCOUNT" shall mean an Account owing to Borrower which is
acceptable to Collateral Agent in its reasonable discretion for lending
purposes. Without limiting Collateral Agent's discretion, Collateral Agent
shall, in general, consider an Account to be an Eligible Account if it meets,
and so long as it continues to meet, the following requirements:
<PAGE> 2
(i) it is genuine and in all respects what it purports to be;
(ii) it is owned by Borrower, Borrower has the right to
subject it to a security interest in favor of Collateral Agent, or
assign it to Collateral Agent, and it is subject to a first
priority perfected security interest in favor of Collateral Agent,
and to no other claim, lien, security interest or encumbrance
whatsoever, other than Permitted Liens;
(iii) it arises from (A) the performance of services by
Borrower and such services have been fully performed and
acknowledged and accepted by the Account Debtor thereunder (or, if
title passes to the Account Debtor upon delivery by Borrower to a
common carrier, such carrier has received the goods and
acknowledged such receipt in writing); or (B) the sale or lease of
Goods by Borrower, and such Goods have been completed in
accordance with the Account Debtor's specifications (if any) and
delivered to and accepted by the Account Debtor (or, if title
passes to the Account Debtor upon delivery by Borrower to a common
carrier, such carrier has received the goods and acknowledged such
receipt in writing), such Account Debtor has not refused to accept
any of the Goods, returned or offered to return any of the Goods,
or refused to accept any of the services which are the subject of
such Account, and Borrower has possession of, or Borrower has
delivered to Collateral Agent (at Collateral Agent's request)
shipping and delivery receipts evidencing delivery of such Goods
to the Account Debtor or commercial carrier, as applicable;
(iv) it is evidenced by an invoice rendered to the Account
Debtor thereunder, and either (a) is due and payable within sixty
(60) days after the date of the invoice and does not remain unpaid
ninety (90) days past the date thereof, (b) with respect to
"datings" (including Accounts payable ninety (90) days past the
invoice date thereof), is due and payable within one hundred
eighty (180) days after the date of invoice and does not remain
unpaid thirty (30) days past the due date thereof or (c) with
respect to datings having longer than one hundred eighty (180) day
terms, is due and payable within two hundred ten (210) days of the
invoice date thereof and does not remain unpaid two hundred ten
(210) days past the invoice date thereof; provided, however, that
if more than twenty-five percent (25%) of the aggregate dollar
amount of invoices owing by a particular Account Debtor remain
unpaid (a) ninety (90) days after the invoice date thereof, with
respect to Accounts other than datings, (b) thirty (30) days past
the due date thereof with respect to datings of one hundred eighty
(180) days or less or (c) two hundred ten (210) days after the
invoice date thereof with respect to datings having more than one
hundred eighty (180) day terms, up to two hundred ten (210) day
terms, then all Accounts owing by that Account Debtor shall be
deemed ineligible;
(v) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor thereunder, and is not subject to
setoff, counterclaim, credit, allowance or adjustment by such
Account Debtor, or to any claim by such Account Debtor denying
liability thereunder in whole or in part; provided, that
Collateral Agent may from time to time, in its sole discretion,
deem such Account to be an Eligible Account to the extent that the
face amount of such Account exceeds the amount of the setoff,
counter-claim, credit, allowance, adjustment or other claim by
such Account Debtor;
(vi) it does not arise out of a contract or order which fails
in any material respect to comply with the requirements of
applicable law;
(vii) the Account Debtor thereunder is not a director,
officer, employee or agent of Borrower, or a Subsidiary, Parent or
Affiliate;
(viii) it is not an Account having a face amount in excess of
$100,000, with respect to which the Account Debtor is the United
States of America or any department, agency or instrumentality
thereof, or which, when added to all other Accounts owing by the
United Stated of America or any department, agency or
instrumentality thereof, exceeds $500,000, unless Borrower assigns
its right to payment of such Account to Collateral Agent pursuant
to, and in full compliance with, the Assignment of Claims Act of
1940, as amended;
-2-
<PAGE> 3
(ix) it is not an Account with respect to which the Account
Debtor is located in a state which requires Borrower, as a
precondition to commencing or maintaining an action in the courts
of that state, either to (A) receive a certificate of authority to
do business and be in good standing in such state, or (B) file a
notice of business activities report or similar report with such
state's taxing authority, unless (x) Borrower has taken one of the
actions described in clauses (A) or (B), (y) the failure to take
one of the actions described in either clause (A) or (B) may be
cured retroactively by Borrower at its election, or (z) Borrower
has proven, to Collateral Agent's satisfaction, that it is exempt
from any such requirements under any such state's laws;
(x) it is an Account which arises out of a sale made in the
ordinary course of Borrower's business;
(xi) the Account Debtor is a resident or citizen of, and is
located within, the United States of America or the provinces of
British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and New
Brunswick, Canada or a resident or citizen of a foreign country
(other than those provinces of Canada listed above) and (a) the
Account is payable in U.S. Dollars and (b) with respect to foreign
Account Debtors (other than those from the provinces of Canada
listed above), such Account is supported by a letter of credit
which is in form and substance satisfactory to Collateral Agent,
issued by a financial institution acceptable to Collateral Agent
and assigned to Collateral Agent in a manner acceptable to
Collateral Agent;
(xii) it is not an Account with respect to which the Account
Debtor's obligation to pay is conditional upon the Account
Debtor's approval of the Goods or services or is otherwise subject
to any repurchase obligation or return right, as with sales made
on a bill-and-hold, guaranteed sale, sale on approval, sale or
return or consignment basis;
(xiii) it is not an Account (A) with respect to which any
representation or warranty contained in this Agreement is untrue
or (B) which violates any of the covenants of Borrower contained
in this Agreement;
(xiv) it is not an Account which, when added to a particular
Account Debtor's other indebtedness to Borrower, exceeds a credit
limit determined by Collateral Agent in its reasonable discretion
for that Account Debtor (except that Accounts excluded from
Eligible Accounts solely by reason of this Paragraph 1(d)(xiv)
shall be Eligible Accounts to the extent of such credit limit);
and
(xv) it is not an Account with respect to which the prospect
of payment or performance by the Account Debtor is or will be
impaired, as determined by Collateral Agent in its reasonable
discretion.
; provided, that in the event that Collateral Agent (a) creates eligibility
criteria not set forth above, (b) sets or decreases any credit limit with
respect to any Account Debtor as described in clause (xiv) or (c) determines
that the payment or performance by an Account Debtor is impaired in accordance
with clause (xv) above, which results in currently existing Accounts which had
been included in Eligible Accounts to no longer satisfy the criteria to be an
Eligible Account, then such Account shall remain an Eligible Account until such
Account becomes past due.
(i) "ELIGIBLE INVENTORY" shall mean Inventory of Borrower consisting of
raw materials less than one year old, finished goods and work-in-process, which
is acceptable to Collateral Agent in its reasonable discretion for lending
purposes. Without limiting Collateral Agent's discretion, Collateral Agent
shall, in general, consider Inventory to be Eligible Inventory if it meets, and
so long as it continues to meet, the following requirements:
(i) it is owned by Borrower, Borrower has the right to
subject it to a security interest in favor of Collateral Agent,
and it is subject to a first priority perfected security interest
in favor of Collateral Agent, and to no other claim, lien,
security interest or encumbrance whatsoever, other than Permitted
Liens;
-3-
<PAGE> 4
(ii) it is located on the premises listed on Exhibit B and is
not in transit, or, if it is in transit, it consists solely of
finished goods or finished components of goods, it is insured on
terms and with such endorsements as Collateral Agent shall require
and, if requested by Collateral Agent, Collateral Agent has
received copies or the original bills of lading with respect to
such Inventory;
(iii) if held for sale or lease or furnishing under contracts
of service, it is (except as Collateral Agent may otherwise
consent in writing) new and unused and free from defects which
would, in Collateral Agent's reasonable determination, affect its
market value;
(iv) it is not stored with a bailee, consignee, warehouseman,
processor or similar party unless Collateral Agent has given its
prior written approval and Borrower has caused any such bailee,
consignee, warehouseman, processor or similar party to issue and
deliver to Collateral Agent, in form and substance acceptable to
Collateral Agent, such UCC financing statements, warehouse
receipts, waivers and other documents as Collateral Agent shall
require;
(v) Collateral Agent has determined in accordance with
Collateral Agent's customary business practices that it is not
unacceptable due to age, seasonality, type, category or quantity;
and
(vi) it is not Inventory (A) with respect to which any of the
representations and warranties contained in this Agreement are
untrue or (B) which violates any of the covenants of Borrower
contained in this Agreement.
(j) "ENVIRONMENTAL LAWS" shall mean all federal, state, district, local
and foreign laws, rules, regulations, ordinances, and consent decrees relating
to health, safety, hazardous substances, pollution and environmental matters,
as now or at any time hereafter in effect, applicable to Borrower's business or
facilities owned or operated by Borrower, including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contamination,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes
into the environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata) or otherwise relating
to the generation.
(k) "EVENT OF DEFAULT" shall have the meaning specified in Paragraph 13
hereof.
(l) "EXHIBIT A" shall mean the exhibit entitled Exhibit A - Special
Provisions which is attached hereto and made a part hereof.
(m) "EXHIBIT B" shall mean the exhibit entitled Exhibit B - Business and
Collateral Locations which is attached hereto and made a part hereof.
(n) "EXHIBIT C" shall mean the exhibit entitled Exhibit C - Form of
Assignment and Acceptance Agreement.
(o) "HAZARDOUS MATERIALS" shall mean any hazardous, toxic or dangerous
substance, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenlys, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous
constituents), sewage, sludge, industrial slag, solvents and/or any other
similar substances, materials, or wastes and including any other substances,
materials or wastes that are or become regulated under any Environmental Law
(including, without limitation, any that are or become classified as hazardous
or toxic under any Environmental Law).
(p) "INDEMNIFIED PARTY" shall have the meaning specified in Paragraph 15
hereof.
(q) "INTEREST EXPENSE" shall mean, for any period, the aggregate amount of
interest (but excluding interest on that certain Subordinated Promissory Note
in the original principal amount of $21,095,000 owing to Borrower's parent,
which interest accrues but is not payable), including fees payable in
connection with this Agreement (except to the extent such fees are amortized by
Borrower in accordance with generally accepted
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accounting principles consistently applied ("GAAP")), which fees are treated as
interest in accordance with GAAP, whether accrued or paid (without duplication)
by Borrower during such period, minus the aggregate amount of cash interest
income of Borrower during such period.
(r) "ISSUING BANK" shall mean LaSalle or any other financial institution
reasonably acceptable to Agents.
(s) "LENDER" shall mean at any time any Person having an interest as a
lender under this Agreement at such time, whether by executing this Agreement
or an assignment pursuant to Paragraph (11) of Exhibit A. All references to
Lenders shall mean each and all of them and their respective successors and
assigns.
(t) "LETTER OF CREDIT" shall have the meaning specified in Paragraph (2)
of Exhibit A.
(u) "LIABILITIES" shall mean any and all obligations, liabilities and
indebtedness of Borrower to Lenders and/or Agents or to any parent, affiliate
or subsidiary of any Lender and/or Agent of any and every kind and nature,
howsoever created, arising or evidenced and howsoever owned, held or acquired,
whether now or hereafter existing, whether now due or to become due, whether
primary, secondary, direct, indirect, absolute, contingent or otherwise
(including, without limitation, obligations of performance), whether several,
joint or joint and several, and whether arising or existing under written or
oral agreement or by operation of law.
(v) "LIBOR RATE LOANS" shall mean the Loans bearing interest at the rates
set forth in Paragraph (4)(b) of Exhibit A.
(w) "LOANS" shall mean all advances made by or on behalf of Lenders to
Borrower pursuant to Paragraph 2 hereof and all other loans, advances and
financial accommodations made by or on behalf of Lenders to or on behalf of
Borrower hereunder.
(x) "LOAN LIMIT" shall have the meaning specified in Paragraph (1) of
Exhibit A.
(y) "LOCK BOX" and "LOCK BOX ACCOUNT" shall have the meanings specified in
Paragraph 8 hereof.
(z) "MAXIMUM LOAN AMOUNT" shall mean, with respect to any Lender, the
maximum amount of Loans which such Lender has agreed, pursuant to the terms and
conditions of this Agreement, to make available to Borrower, as set forth on
the signature page hereto or in an Assignment and Acceptance Agreement executed
by such Lender.
(aa) "NET INCOME" shall mean, for any period, Borrower's net income (or
loss) for such period, excluding (i) gains or losses from the disposition of
assets, (ii) any extraordinary items, and (iii) other nonrecurring items not
related to operations.
(bb) "OBLIGOR" shall mean Borrower and each Person who is or shall become
primarily or secondarily liable for any of the Liabilities.
(cc) "ORIGINAL TERM" shall have the meaning specified in Paragraph 10
hereof.
(dd) "OTHER AGREEMENTS" shall mean all agreements, instruments and
documents, other than this Agreement, including, without limitation,
guaranties, mortgages, trust deeds, pledges, powers of attorney, consents,
assignments, contracts, notices, security agreements, leases, financing
statements and all other writings heretofore, now or from time to time
hereafter executed by or on behalf of Borrower or any other Person and
delivered to any Agents and/or any Lender or to any parent, affiliate or
subsidiary of any Agent and/or any Lender in connection with the Liabilities or
the transactions contemplated hereby.
(ee) "PARENT" shall mean any Person now or at any time or times hereafter
owning or controlling (alone or with any other Person) at least a majority of
the issued and outstanding equity of Borrower.
(ff) "PERMITTED LIENS" shall mean (i) statutory liens of landlords,
carriers, warehousemen, processors mechanics, materialmen or suppliers incurred
in the ordinary course of business and securing amounts
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not yet due or declared to be due by the claimant thereunder, (ii) liens or
security interests in favor of Collateral Agent, for the benefit of Agents and
Lenders, (iii) zoning restrictions and easements, licenses, covenants and other
restrictions affecting the use of real property that do not individually or in
the aggregate have a material adverse effect on Borrower's ability to use such
real property for its intended purpose in connection with Borrower's business,
(iv) purchase money liens to secure purchase money indebtedness to the extent
permitted herein, provided, that each such purchase money lien is limited to the
specific Equipment being financed, (v) pledges or deposits in connection with
worker's compensation, unemployment insurance and other social security
legislation, (vi) deposits to secure the performance of goods, trade contracts,
leases, statutory obligations and other obligations of like nature incurred in
the ordinary course of business (vii) liens described on Schedule 1 hereto and
(viii) liens specifically permitted by Collateral Agent in writing.
(gg) "PERSON" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, entity, party or foreign or United States government (whether
federal, state, county, city, municipal or otherwise), including, without
limitation, any instrumentality, division, agency, body or department thereof.
(hh) "PRIME RATE LOANS" shall mean the Loans bearing interest at the rates
set forth in Paragraph (4)(a) of Exhibit A.
(ii) "PRO RATA SHARE" shall mean at any time, with respect to any Lender,
a fraction (expressed as a percentage in no more than four (4) decimal places),
the numerator of which shall be the Maximum Loan Amount of such Lender at such
time and the denominator of which shall be the aggregate amount of the Maximum
Loan Amounts of all Lenders at such time.
(jj) "RENEWAL TERM" shall have the meaning specified in Paragraph 10
hereof.
(kk) "REQUISITE LENDERS" shall mean at any time Lenders having, in the
aggregate, Pro Rata Shares of more than fifty percent (50%) at such time.
(ll) "SUBSIDIARY" shall mean any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time stock of any other class of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at
the time, directly or indirectly, owned by Borrower or any partnership, joint
venture or limited liability company of which more than fifty percent (50%) of
the outstanding equity interests are at the time, directly or indirectly, owned
by Borrower or of which Borrower is a general partner.
(mm) "TANGIBLE NET WORTH" shall have the meaning specified in Paragraph
12(o) hereof.
2. LOANS. Subject to the terms and conditions of this Agreement
(including Exhibit A) and the Other Agreements, during the Original Term and any
Renewal Term, each Lender, severally and not jointly, agrees to make its Pro
Rata Share of such Loans to Borrower up to such Lender's Maximum Loan Amount as
Borrower shall from time to time request; provided, that Collateral Agent may,
but shall not be obligated to, make such Loans to Borrower on behalf of Lenders
as a "Disproportionate Advance" (as defined below). The aggregate unpaid
principal of all Loans outstanding at any one time shall not exceed the Loan
Limit set forth in Exhibit A and shall bear interest at the rates set forth in
Exhibit A. It is expressly understood and agreed that, subject to the preceding
sentences, each Lender shall be obligated to make its Pro Rata Share of any Loan
requested by Borrower. Loans shall be repaid as provided elsewhere in this
Agreement. If at any time the outstanding principal balance of the Loans
exceeds the Loan Limit, or any portion of the Loans exceeds any applicable
sublimit set forth in Exhibit A, Borrower shall immediately, and without the
necessity of a demand by Collateral Agent, pay to Collateral Agent such amount
as may be necessary to eliminate such excess and Collateral Agent shall apply
such payment to the Liabilities in such order as Collateral Agent shall
determine in its sole discretion; provided, that if the outstanding principal
balance of the Loans exceeds the Loan Limit or any portion of the Loans exceeds
any applicable sublimit set forth in Exhibit A (an "Interim Advance"), the
Collateral Agent may, in its sole discretion, permit such Interim Advance to
remain outstanding and continue to advance Loans to Borrower on behalf of
Lenders without the consent of any Lender for a period of up to seven (7)
calendar days, so long as (i) the amount of the Interim Advance does not at any
time exceed $3,000,000, (ii) the aggregate outstanding principal balance of the
Loans does not exceed the aggregate Maximum Loan Amounts of all Lenders and
(iii) Collateral Agent has not been notified by
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<PAGE> 7
Requisite Lenders to cease making such advances. If the Interim Advance is not
repaid in full within seven (7) days of the initial occurrence of the Interim
Advance, no further advances may be made to Borrower without the consent of all
Lenders until the Interim Advance is repaid in full. Borrower hereby authorizes
Collateral Agent, in its sole discretion, to charge any of Borrower's accounts
or advance Loans to make any payments of principal, interest, fees, costs or
expenses required by this Agreement. Borrower shall receive a monthly statement
of all such charges. All Loans shall, in Collateral Agent's sole discretion, be
evidenced by one or more promissory notes delivered to each Lender in the amount
of the maximum amount of loans that such Lender may make at any time pursuant to
this Agreement in form and substance satisfactory to Collateral Agent. However,
if such Loans are not so evidenced, such Loans may be evidenced solely by
entries upon the books and records maintained by Administrative Agent. Neither
Agent nor any Lender shall be responsible for any failure by any other Lender to
perform its obligations to make advances hereunder, and the failure of any
Lender to make its Pro Rata Share of any advance hereunder shall not relieve any
other Lender of its obligation, if any, to make its Pro Rata Share of Loans
hereunder nor require such other Lender to make more than its Pro Rata Share of
any Loans hereunder. If Borrower makes a request for a Loan as provided herein
Collateral Agent, at its option and in its sole discretion, shall do either of
the following:
(a) Advance the amount of the proposed Loan to Borrower disproportionately
(a "DISPROPORTIONATE ADVANCE") out of Collateral Agent's own funds on behalf of
Lenders, which advance shall be on the same day as Borrower's request therefor
if Borrower notifies Collateral Agent of such request by three o'clock p.m.
Chicago time on such day, and request settlement in accordance with Paragraph
(7) of Exhibit A such that upon such settlement each Lender's share of the
outstanding Loans (including, without limitation, the amount of any
Disproportionate Advance) equals its Pro Rata Share; or
(b) Notify each Lender by telecopy or other similar form of
teletransmission of the proposed advance on the same day Collateral Agent is
notified or deemed notified by Borrower of Borrower's request for an advance
pursuant to Paragraph 2 of this Agreement. Each Lender shall remit, to the
demand deposit account designated by Borrower (i) with respect to Prime Rate
Loans, at or prior to three o'clock p.m., Chicago time, on the date of
notification, if such notification is made before twelve o'clock noon, Chicago
time, or by ten o'clock a.m., Chicago time, on the business day immediately
succeeding the date of such notification, if such notification is made after
twelve o'clock noon, Chicago time, and (ii) with respect to LIBOR Rate Loans,
at or prior to twelve o'clock noon, Chicago time, on the date such LIBOR Rate
Loans are to be advanced, immediately available funds in an amount equal to
such Lender's Pro Rata Share of such proposed advance.
If and to the extent that a Lender does not settle with Collateral Agent as
required under clause (a), Borrower agrees to repay to Collateral Agent
forthwith on demand such amount required to be paid by such Lender to
Collateral Agent, together with interest thereon, for each day from the date
such amount is made available to Borrower until the date such amount is repaid
to Collateral Agent, at the interest rate applicable at such time
for such Loans; provided, that Borrower's obligation to repay such advance to
Collateral Agent shall not relieve Lender of its liability to Collateral Agent
for failure to settle as provided in clause (a).
3. FEES AND CHARGES. Borrower shall pay to Collateral Agent, for the
benefit of Agents and Lenders as described in Exhibit A, in addition to all
other amounts payable hereunder, the fees and charges set forth in Exhibit A.
It is the intent of the parties that the rate of interest and the other charges
to Borrower under this Agreement shall be lawful; therefore, if for any reason
the interest or other charges payable under this Agreement are found by a court
of competent jurisdiction, in a final determination, to exceed the limit which
Agent or Lenders may lawfully charge Borrower, then the obligation to pay
interest and other charges shall automatically be reduced to such limit and, if
any amount in excess of such limit shall have been paid, then such amount shall
be refunded to Borrower.
4. GRANT OF SECURITY INTEREST TO COLLATERAL AGENT. As security for the
payment of all Loans now or in the future made by Agents or Lenders to Borrower
hereunder and for the payment or other satisfaction of all other Liabilities,
Borrower hereby assigns to Collateral Agent, for the benefit of Agents and
Lenders, and grants to Collateral Agent, for the benefit of Agents and Lenders,
a continuing security interest in the following property of Borrower, whether
now or hereafter owned, existing, acquired or arising and wherever now or
hereafter located: (a) all Accounts (whether or not Eligible Accounts) and all
Goods whose sale, lease or other disposition by Borrower has given rise to
Accounts and have been returned to, or repossessed or stopped in transit by,
Borrower; (b) all Chattel Paper, Instruments, Documents and General Intangibles
(including, without limitation, all patents, patent applications, trademarks,
trademark applications, tradenames, trade secrets, goodwill, copyrights,
copyright applications, registrations, licenses (other than those licenses with
respect to which
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<PAGE> 8
the grant of a security interest by Borrower would constitute a breach of such
license), franchises, customer lists, tax refund claims, claims against carriers
and shippers, guarantee claims, contracts rights, security interests, security
deposits and any rights to indemnification); (c) all Inventory (whether or not
Eligible Inventory); (d) all Goods (other than Inventory), including, without
limitation, Equipment, vehicles and fixtures; (e) all Investment Property; (f)
all deposits and cash; (g) any other property of Borrower now or hereafter in
the possession, custody or control of either Agent, any Lender or any agent or
any parent, affiliate or subsidiary of either Agent or any Lender or any
participant with any Lender in the Loans for any purpose (whether for
safekeeping, deposit, collection, custody, pledge, transmission or otherwise);
and (h) all additions and accessions to, substitutions for, and replacements,
products and proceeds of the foregoing property, including, without limitation,
proceeds of all insurance policies insuring the foregoing property, and all of
Borrower's books and records relating to any of the foregoing and to Borrower's
business.
5. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THEREIN. Borrower shall, at Collateral Agent's request, at any time and from
time to time, execute and deliver to Collateral Agent such financing statements,
documents and other agreements and instruments (and pay the cost of filing or
recording the same in all public offices deemed necessary or desirable by
Collateral Agent) and do such other acts and things as Collateral Agent may deem
necessary or desirable in its sole discretion in order to establish and maintain
a valid, attached and perfected security interest in the Collateral in favor of
Collateral Agent, for the benefit of Agents and Lenders, (free and clear of all
other liens, claims, encumbrances and rights of third parties whatsoever,
whether voluntarily or involuntarily created, except Permitted Liens) to secure
payment of the Liabilities, and in order to facilitate the collection of the
Collateral. Borrower irrevocably hereby makes, constitutes and appoints
Collateral Agent (and all Persons designated by Collateral Agent for that
purpose) as Borrower's true and lawful attorney and agent-in-fact to execute
such financing statements, documents and other agreements and instruments and do
such other acts and things as may be necessary to preserve and perfect Agent's
security interest in the Collateral; provided, that Collateral Agent will
reasonably attempt, to the extent practicable, to have Borrower execute such
financing statements, documents and other agreements and instruments and perform
such acts prior to exercising its rights as attorney and agent-in-fact. In the
event that Collateral Agent executes any such financing statements, documents or
other agreements or instruments, Collateral Agent will promptly provide copies
to Borrower. Borrower further agrees that a carbon, photographic, photostatic
or other reproduction of this Agreement or of a financing statement shall be
sufficient as a financing statement.
6. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until an "Event of
Default" (as hereinafter defined) has occurred, Borrower shall have the right,
except as otherwise provided in this Agreement, in the ordinary course of
Borrower's business, to (a) sell, lease or furnish under contracts of service
any of Borrower's Inventory normally held by Borrower for any such purpose, (b)
use and consume any raw materials, work in process or other materials normally
held by Borrower for such purpose, (c) sell and replace any obsolete equipment
up to $50,000 with respect to any individual item of Equipment or $75,000 in
the aggregate during any fiscal year of Borrower (so long as (i) Borrower has
notified Collateral Agent of such sale or replacement, (ii) any such sale is
made for a purchase price of not less than the fair market value for such
Equipment and (iii) the proceeds thereof are delivered to Collateral Agent for
application to the Liabilities), (d) sell any Equipment which is replaced by
Equipment of a like nature, which has substantially the same value as the
equipment sold, is subject to the security interest in favor of Collateral
Agent hereunder, and subject to the limitation set forth in Paragraph 12(r)
hereof to the extent of funds expended in excess of said sale price and (e)
sell its real property consisting of the button plant located at 710 Popular
Street, Tarboro, North Carolina and the Equipment at such location, so long as
(i) Borrower has notified Collateral Agent of such sale, (ii) such sale is made
for a purchase price of not less than the fair market value for such real
property and Equipment and (iii) the proceeds thereof are delivered to
Collateral Agent for application to the Liabilities; provided, however, that a
sale in the ordinary course of business shall not include any transfer or sale
in satisfaction, partial or complete, of a debt owed by Borrower.
7. COLLATERAL FOR THE BENEFIT OF AGENTS AND LENDERS. All liens and
security interests granted to Collateral Agent hereunder and under the Other
Agreements and all Collateral delivered to Collateral Agent hereunder and under
the Other Agreements shall be deemed to have been granted and delivered to
Collateral Agent, for the benefit of Agents and Lenders, to secure the
Liabilities.
8. COLLECTIONS.
(a) Borrower shall direct all of its Account Debtors to make all payments
on the Accounts directly to a post office box (the "Lock Box") designated by,
and under the exclusive control of, LaSalle or another
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financial institution acceptable to Collateral Agent and Borrower. Borrower
shall establish an account (the "Lock Box Account") in Collateral Agent's name
with LaSalle or such other financial institution acceptable to Collateral Agent,
into which all payments received in the Lock Box shall be deposited, and into
which Borrower will immediately deposit all payments received by Borrower for
Inventory or services in the identical form in which such payments were
received, whether by cash or check. If Borrower, any Affiliate or Subsidiary,
or any shareholder, officer, director, employee or agent of Borrower or any
Affiliate or Subsidiary, or any other Person acting for or in concert with
Borrower shall receive any monies, checks, notes, drafts or other payments
relating to or as proceeds of Accounts or other Collateral, Borrower and each
such Person shall receive all such items in trust for, and as the sole and
exclusive property of Collateral Agent, for the benefit of Agents and Lenders
and, immediately upon receipt thereof, shall remit the same (or cause the same
to be remitted) in kind to the Lock Box Account. If the Lock Box Account is not
established with LaSalle, the financial institution with which the Lock Box
Account is established shall acknowledge and agree, in a manner satisfactory to
Collateral Agent, that the amounts on deposit in such Lock Box Account are the
sole and exclusive property of Collateral Agent, for the benefit of Agents and
Lenders, that such financial institution has no right to setoff against the Lock
BoxAccount or against any other account maintained by such financial institution
into which the contents of the Lock Box Account are transferred, and that such
financial institution shall wire, or otherwise transfer in immediately available
funds in a manner satisfactory to Collateral Agent, funds deposited in the Lock
Box Account on a daily basis as such funds are collected. Borrower agrees that
all payments made to such Lock Box Account or otherwise received by Collateral
Agent, whether in respect of the Accounts or as proceeds of other Collateral or
otherwise, will be applied on account of the Liabilities in accordance with the
terms of this Agreement; provided, that so long as no Event of Default is then
in existence, payments received by Collateral Agent shall not be applied to the
unmatured portion of LIBOR Rate Loans, but shall be held in an interest bearing
cash collateral account maintained by LaSalle until the earlier of (i) the last
day of the Interest Period applicable to such LIBOR Rate Loan and (ii) the
occurrence of an Event of Default; provided further, that so long as no Event of
Default is in existence, the immediately available funds held in such cash
collateral account may be disbursed to Borrower in whole or in part, so long as
after giving effect to such disbursement, Borrower's loan availability under
Paragraph 1 of Exhibit A at such time equals or exceeds the outstanding
Liabilities at such time. If the Lock Box Account is established with LaSalle,
Borrower agrees to pay all fees, costs and expenses which LaSalle incurs in
connection with opening and maintaining the Lock Box Account and depositing for
collection by LaSalle any check or other item of payment received by Collateral
Agent on account of the Liabilities in accordance with LaSalle's fee schedule in
effect from time to time. All of such fees, costs and expenses shall constitute
Loans hereunder, shall be payable to Collateral Agent by Borrower upon demand,
and, until paid, shall bear interest at the highest rate then applicable to
Loans hereunder. All checks, drafts, instruments and other items of payment or
proceeds of Collateral shall be endorsed by Borrower to Collateral Agent, and,
if endorsement of any such item shall not be made for any reason, Collateral
Agent is hereby irrevocably authorized to endorse the same on Borrower's behalf.
For the purpose of this Paragraph, Borrower irrevocably hereby makes,
constitutes and appoints Collateral Agent (and all Persons designated by
Collateral Agent for that purpose) as Borrower's true and lawful attorney and
agent-in-fact (i) to endorse Borrower's name upon said items of payment and/or
proceeds of Collateral and upon any Chattel Paper, document, instrument, invoice
or similar document or agreement relating to any Account of Borrower or goods
pertaining thereto; (ii) to take control in any manner of any item of payment or
proceeds thereof; and (iii) to have access to any lock box or postal box into
which any of Borrower's mail is deposited, and open and process all mail
addressed to Borrower and deposited therein; provided, that all mail not
involving items for collection shall be promptly returned to Borrower.
(b) Collateral Agent may, at any time and from time to time, after the
occurrence of an Event of Default, whether before or after notification to any
Account Debtor and whether before or after the maturity of any of the
Liabilities, (i) enforce collection of any of Borrower's Accounts or contract
rights by suit or otherwise; (ii) exercise all of Borrower's rights and
remedies with respect to proceedings brought to collect any Accounts; (iii)
surrender, release or exchange all or any part of any Accounts, or compromise
or extend or renew for any period (whether or not longer than the original
period) any indebtedness thereunder; (iv) sell or assign any Account of
Borrower upon such terms, for such amount and at such time or times as
Collateral Agent deems advisable; (v) prepare, file and sign Borrower's name on
any proof of claim in bankruptcy or other similar document against any Account
Debtor; and (vi) do all other acts and things which are necessary, in
Collateral Agent's sole discretion, to fulfill Borrower's obligations under
this Agreement and to allow Collateral Agent to collect the Accounts. In
addition to any other provision hereof, Collateral Agent may at any time, after
the occurrence of an Event of Default, at Borrower's expense, notify any
parties obligated on any of the Accounts to make payment directly to Collateral
Agent of any amounts due or to become due thereunder.
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(c) For purposes of calculating interest, Collateral Agent shall, within
two (2) business days after receipt by Collateral Agent at its office in
Chicago, Illinois of checks and other negotiable instruments and on the date of
receipt of cash or other immediately available funds from collections of
items of payment and proceeds of any Collateral, apply the whole or any part of
such collections or proceeds against the Liabilities in such order as
Collateral Agent shall determine in its sole discretion. For purposes of
determining the amount of Loans available for borrowing purposes, checks and
cash or other immediately available funds from collections of items of payment
and proceeds of any Collateral shall be applied in whole or in part against the
Liabilities, in such order as Collateral Agent shall determine in its sole
discretion, on the day of receipt, subject to actual collection.
(d) Collateral Agent, in its sole discretion, without waiving or releasing
any obligation, liability or duty of Borrower under this Agreement or the Other
Agreements or any Event of Default, may at any time or times hereafter, but
shall not be obligated to, pay, acquire or accept an assignment of any security
interest, lien, encumbrance or claim asserted by any Person in, upon or against
the Collateral. All sums paid by Agents or any Lender in respect thereof and
all costs, fees and expenses including, without limitation, reasonable attorney
fees, all court costs and all other charges relating thereto incurred by Agents
or any Lender shall constitute Loans, payable by Borrower to Collateral Agent
on demand and, until paid, shall bear interest at the highest rate then
applicable to Loans hereunder.
(e) Immediately upon Borrower's receipt of any portion of the Collateral
evidenced by an agreement, Instrument or Document, including, without
limitation, any Chattel Paper, Borrower shall deliver the original thereof to
Collateral Agent together with an appropriate endorsement or other specific
evidence of assignment thereof to Collateral Agent, for the benefit of Agents
and Lenders (in form and substance acceptable to Collateral Agent); provided,
that with respect to the pledge of collateral from Centre International,
Collateral Agent shall return such collateral to Borrower upon payment in full
by Centre International of all of its obligations to Borrower. If an
endorsement or assignment of any such items shall not be made for any reason,
Collateral Agent is hereby irrevocably authorized, as Borrower's attorney and
agent-in-fact, to endorse or assign the same on Borrower's behalf.
9. SCHEDULES AND REPORTS.
(a) Within ten (10) days after the close of each calendar month, and at
such other times as may be requested by Collateral Agent from time to time
hereafter, Borrower shall deliver to Collateral Agent (i) a schedule
identifying each Account and which Accounts constitute Eligible Accounts,
together with copies of the invoices when requested by Collateral Agent (with
evidence of shipment attached) pertaining to each such Eligible Account, for
the month (or other applicable period) immediately preceding; (ii) such
additional schedules, certificates, reports and information with respect to the
Collateral as Collateral Agent may from time to time require; and (iii) an
assignment of any or all items of Collateral to Collateral Agent, for the
benefit of Agents and Lenders. Collateral Agent, through its officers,
employees or agents, shall have the right, at any time and from time to time in
Collateral Agent's name, in the name of a nominee of Collateral Agent or in
Borrower's name, to verify the validity, amount or any other matter relating to
any of Borrower's Accounts, by mail, telephone, telegraph or otherwise.
Borrower shall reimburse Collateral Agent, on demand, for all costs, fees and
expenses incurred by Collateral Agent in this regard.
(b) Without limiting the generality of the foregoing, Borrower shall
deliver to Collateral Agent, at least once a month (or more frequently when
requested by Collateral Agent), a report with respect to Borrower's Inventory.
Borrower shall immediately notify Agent of any event causing loss or
depreciation in value of Borrower's Inventory (other than normal depreciation
occurring in the ordinary course of business).
(c) All schedules, certificates, reports, assignments and other items
delivered by Borrower to Collateral Agent hereunder shall be executed by an
authorized representative of Borrower and shall be in such form and contain
such information as Collateral Agent shall reasonably specify.
10. TERMINATION. This Agreement shall be in effect from the date hereof
until May 29, 1999 (the "Original Term") and shall automatically renew itself
from year to year thereafter (each such one-year renewal being referred to
herein as a "Renewal Term") unless (a) any Lender notifies Agents and Borrower
of its election to terminate this Agreement as of the end of the Original Term
or the then-current Renewal Term, at least ninety (90) days prior to the end of
such Original Term or Renewal Term; (b) the due date of the Liabilities is
accelerated pursuant to Paragraph 14 hereof; or (c) Borrower elects to
terminate this Agreement at the end of the
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<PAGE> 11
Original Term or at the end of any Renewal Term by giving Agents written notice
of such election at least ninety (90) days prior to the end of the Original Term
or the then-current Renewal Term and by paying all of the Liabilities in full on
the last day of such term. If one or more of the events specified in clauses
(a), (b) and (c) occurs, then (i) Agents and Lenders shall not make any
additional Loans on or after the date identified as the date on which the
Liabilities are to be repaid and (ii) this Agreement shall terminate on the date
thereafter that the Liabilities are paid in full. At such time as Borrower has
repaid all of the Liabilities and this Agreement has terminated, Borrower shall
deliver to each Agent and each Lender a release, in form and substance
satisfactory to such Agent or such Lender, as applicable, of all obligations and
liabilities of such Agent or such Lender, as applicable, and its officers,
directors, employees, agents, parents, subsidiaries and affiliates to Borrower
other than those arising form such party's gross negligence or willful
misconduct, and if Borrower is obtaining new financing from another lender,
Borrower shall deliver such lender's indemnification of Collateral Agent, in
form and substance satisfactory to Collateral Agent, for checks which Collateral
Agent has credited to Borrower's account, but which subsequently are dishonored
for any reason. If, during the term of this Agreement, Borrower prepays all of
the Liabilities and terminates this Agreement, Borrower agrees to pay to
Collateral Agent, for the benefit of Lenders, as a prepayment fee, in addition
to the payment of all other Liabilities, an amount equal to (i) three percent
(3%) of the Maximum Loan Amount if such event occurs on or before the first
anniversary of the date hereof, (ii) two percent (2%) of the Maximum Loan Amount
if such event occurs after the first anniversary of the date hereof and on or
before the second anniversary of the date hereof, and (iii) one percent (1%) of
the Maximum Loan Amount if such event occurs after the second anniversary of the
date hereof, but before the end of the Original Term or any Renewal Term.
11. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower hereby
represents, warrants and covenants that:
(a) the financial statements delivered or to be delivered by Borrower to
Agents and Lenders at or prior to the date of this Agreement and at all times
subsequent thereto accurately reflect the financial condition of Borrower in
all material respects, and there has been no material adverse change in the
financial condition, the operations or any other status of Borrower since the
date of the financial statements delivered to Agents and Lenders most recently
prior to the date of this Agreement;
(b) the office where Borrower keeps its books, records and accounts (or
copies thereof) concerning the Collateral, Borrower's principal place of
business and all of Borrower's other places of business, locations of
Collateral and post office boxes are as set forth in Exhibit B; Borrower shall
promptly (but in no event less than ten (10) days prior thereto) advise
Collateral Agent in writing of the proposed opening of any new place of
business or new location of Collateral, the closing of any existing place of
business or location of Collateral, any change in the location of Borrower's
books, records and accounts (or copies thereof) or the opening or closing of
any post office box of Borrower;
(c) the Collateral, including, without limitation, the Equipment (except
any part thereof which Borrower shall have advised Collateral Agent in writing
consists of Collateral normally used in more than one state) is and shall be
kept, or, in the case of vehicles, based, only at the addresses set forth on
Exhibit B, and at other locations within the continental United States of which
Collateral Agent has been advised by Borrower in writing;
(d) if any of the Collateral consists of Goods of a type normally used in
more than one state, whether or not actually so used, (i) Borrower shall within
twenty (20) days of the occurrence thereof, give written notice to Collateral
Agent of any use of any such Goods in any state other than a state in which
Borrower has previously advised Collateral Agent such Goods shall be used, and
such (ii) Goods shall not, unless Collateral Agent shall otherwise consent in
writing, be used outside of the continental United States, which consent shall
not be unreasonably withheld or delayed (though Collateral Agent is under no
obligations to make any Loans with respect to such Goods) ;
(e) Except as set forth on Schedule 11(e), Borrower has not made, and
shall not make, any loans or advances to any Affiliate or other Person except
for (i) advances to employees, officers and directors of Borrower for travel
and other expenses arising in the ordinary course of Borrower's business (ii)
loans to employees for relocation expenses (including the acquisition of
housing ) so long as the aggregate outstanding principal amount of such loans
for relocation expenses do not exceed $500,000 at any time and (iii) provided,
that (x) no Event of Default is then in existence or would be caused thereby,
(y) Borrower's Parent has not received the proceeds of a stock offering
sufficient to repay all of Borrower's Parent's obligations owing with respect
to its 12%
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<PAGE> 12
Senior Subordinated Notes (the "Senior Notes") and (z) the proceeds of such loan
are used solely by Parent to repay the Senior Notes, Borrower may make a one
time loan to its Parent of up to $2,000,000 on or about July 7, 1996, which loan
shall be evidence by a note (which will be delivered to Collateral Agent upon
request therefor) and shall be repaid by Parent within one hundred twenty (120)
days of the date of such loan;
(f) each Account or item of Inventory which Borrower shall, expressly or
by implication, request Collateral Agent to classify as an Eligible Account or
as Eligible Inventory, respectively, shall, as of the time when such request is
made, conform in all respects to the requirements of such classification as set
forth in the respective definitions of "Eligible Account" and "Eligible
Inventory" as set forth herein and as otherwise established by Collateral Agent
from time to time, and Borrower shall promptly notify Collateral Agent in
writing if any such Eligible Account or Eligible Inventory shall subsequently
become ineligible;
(g) Borrower is and shall at all times during the Original Term or any
Renewal Term be the lawful owner of all Collateral now purportedly owned or
hereafter purportedly acquired by Borrower, free from all liens, claims,
security interests and encumbrances whatsoever, whether voluntarily or
involuntarily created and whether or not perfected, other than the Permitted
Liens and involuntarily created liens (other than Permitted Liens) securing
indebtedness of less than $100,000 which are being contested in good faith by
Borrower, provided that a reserve against Borrower's availability to borrow
under Paragraph (1) of Exhibit A is maintained in an amount necessary to
satisfy such lien if not paid or released;
(h) Borrower has the right and power and is duly authorized and empowered
to enter into, execute and deliver this Agreement and the Other Agreements and
perform its obligations hereunder and thereunder; Borrower's execution, delivery
and performance of this Agreement and the Other Agreements does not and shall
not conflict with the provisions of any statute, regulation, ordinance or rule
of law, or any agreement, contract or other document which may now or hereafter
be binding on Borrower, and Borrower's execution, delivery and performance of
this Agreement and the Other Agreements shall not result in the imposition of
any lien or other encumbrance upon any of Borrower's property under any existing
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument by which Borrower or any of its property may be bound or affected;
(i) there are no actions or proceedings which are pending or threatened
against Borrower which might result in any material adverse change in its
financial condition or materially adversely affect the Collateral and Borrower
shall, promptly upon becoming aware of any such pending or threatened action or
proceeding, give written notice thereof to Agents and Lenders;
(j) Borrower has obtained and shall maintain all licenses, authorizations,
approvals and permits the lack of which would have a material adverse effect on
the operation of its business, and Borrower is and shall remain in compliance
in all material respects with all applicable federal, state, local and foreign
statutes, orders, regulations, rules and ordinances (including, without
limitation, Environmental Laws and statutes, orders, regulations, rules and
ordinances relating to taxes, employer and employee contributions and similar
items, securities, ERISA and employee health and safety) the failure to comply
with which would have a material adverse effect on its business, property,
assets, operations or condition, financial or otherwise;
(k) all written information now, heretofore or hereafter furnished by
Borrower to either Agent or any Lender is and shall be true and correct in all
material respects as of the date with respect to which such information was or
is furnished;
(l) Except as set forth on Schedule 11(l) hereto, Borrower is not
conducting, permitting or suffering to be conducted, nor shall it conduct,
permit or suffer to be conducted, any activities pursuant to or in connection
with which any of the Collateral is now, or will (while any Liabilities remain
outstanding) be owned by any Affiliate; provided, however, that (i) Borrower
may enter into transactions with Affiliates for the purchase or sale of
Inventory, lease of Equipment or real property, or services in the ordinary
course of business pursuant to terms that are no less favorable to Borrower
than the terms upon which such transfers or transactions would have been made
had they been made to or with a Person that is not an Affiliate and, in
connection therewith, may transfer cash or property to Affiliates for fair
value, and (ii) in the event that Borrower enters into any transaction with
Carnichi Limited, a company organized under the laws of Hong Kong ("Carnichi"),
which results in Carnichi becoming indebted or otherwise obligated to Borrower
in an amount exceeding $500,000, all of Carnichi's indebtedness to Borrower
must be secured by a valid enforceable and perfected security interest in favor
of Borrower in substantially
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<PAGE> 13
all of Carnichi's assets, and such security interest must be collateraly
assigned to Collateral Agent, for the benefit of Agents and Lenders, as
Collateral for the Liabilities, all pursuant to documentation satisfactory to
Collateral Agent in its sole discretion;
(m) Except as set forth on Schedule 11(m) hereto, Borrower's name has
always been as set forth on the first page of this Agreement and Borrower uses
no tradenames or division names in the operation of its business, except as
otherwise disclosed in writing to Collateral Agent; Borrower shall notify
Collateral Agent in writing within ten (10) days of the change of its name or
the use of any tradenames or division names not previously disclosed to
Collateral Agent in writing;
(n) with respect to Borrower's Equipment: (i) Borrower has good and
indefeasible and merchantable title to and ownership of all Equipment; (ii)
Borrower shall keep and maintain the Equipment in good operating condition and
repair, subject to normal wear and tear, depreciation and obsolescence and shall
make all necessary replacements thereof and repairs thereto so that the value
and operating efficiency thereof shall at all times be preserved and maintained;
(iii) Borrower shall not permit any such items to become a fixture to real
estate or an accession to other personal property which is not Collateral or
otherwise pledged to Collateral Agent to secure the Liabilities; and (iv)
Borrower, immediately on demand by Collateral Agent, shall deliver to Collateral
Agent any and all evidence of ownership of, including, without limitation,
certificates of title and applications of title to, any of the Equipment;
(o) this Agreement and the Other Agreements to which Borrower is a party
are the legal, valid and binding obligations of Borrower and are enforceable
against Borrower in accordance with their respective terms;
(p) Borrower is and shall remain solvent, is and shall be able to pay its
debts as they become due, has and shall continue to have capital sufficient to
carry on its business, now owns and shall continue to own property having a
value both at fair valuation and at present fair saleable value greater than
the amount required to pay its debts, and will not be rendered insolvent by the
execution and delivery of this Agreement or any of the Other Agreements or by
completion of the transactions contemplated hereunder or thereunder;
(q) Borrower is not now obligated, nor shall it create, incur, assume or
become obligated (directly or indirectly), except as allowed under Paragraph
12(j) hereof, for any loans or other indebtedness for borrowed money other than
the Loans, except that Borrower may (i) borrow money from a Person other than
Agents and Lenders on an unsecured and subordinated basis if a subordination
agreement in favor of Agents and Lenders and in form and substance satisfactory
to Collateral Agent is executed and delivered to Collateral Agent relative
thereto; (ii) maintain the indebtedness described on Schedule 11(q) hereto;
(iii) incur unsecured indebtedness to trade creditors in the ordinary course of
Borrower's business, (iv) incur purchase money indebtedness or capitalized
lease obligations in connection with capital expenditures pursuant to
subparagraph 12(r) of this Agreement, (v) incur other lease obligations
requiring payments not to exceed $1,750,000 during any fiscal year of Borrower
and (vi) incur indebtedness to refinance the Loans outstanding with respect to
the availability described in Paragraph (1)(h) of Exhibit A hereto, provided,
that all documentation with respect to such refinance is reasonably
satisfactory to Lenders, including, without limitation a Mortgagee' Waiver
executed by such new lender in favor of Collateral Agent, and in connection
with such refinancing, Collateral Agent shall provide all necessary mortgage
releases;
(r) Borrower does not own any margin securities, and none of the proceeds
of the Loans hereunder shall be used for the purpose of purchasing or carrying
any margin securities or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase any margin securities or
for any other purpose not permitted by Regulation G or Regulation U of the
Board of Governors of the Federal Reserve System as in effect from time to
time;
(s) except as otherwise disclosed on Schedule 11(s), Borrower has no
Parents, Subsidiaries or other Affiliates or divisions, nor is Borrower engaged
in any joint venture or partnership with any other Person;
(t) if Borrower is a corporation, limited liability company or
partnership, Borrower is duly organized, validly existing and in good standing
in its state of organization and Borrower is duly qualified and in good
standing in all states where the nature and extent of the business transacted
by it or the ownership of its assets
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<PAGE> 14
makes such qualification necessary, except in such states where the failure to
qualify would not materially adversely affect Borrower;
(u) Borrower is not in default under any material contract, lease or
commitment to which it is a party or by which it is bound, nor does Borrower
know of any dispute regarding any contract, lease or commitment which is
material to the continued financial success and well-being of Borrower;
(v) there are no controversies pending or, to the best of Borrower's
knowledge, threatened between Borrower and any of its employees, other than
employee grievances arising in the ordinary course of business which are not,
in the aggregate, material to the continued financial success and well-being of
Borrower, and Borrower is in compliance in all material respects with all
federal and state laws respecting employment and employment terms, conditions
and practices; and
(w) Borrower possesses, and shall continue to possess, adequate licenses,
patents, patent applications, copyrights, service marks, trademarks, trademark
applications, tradestyles and tradenames to continue to conduct its business as
heretofore conducted by it.
(x) Except as disclosed in that certain Phase I Environmental Assessment
dated April 4, 1996 performed by ATEC Associates, Inc. previously delivered to
Collateral Agent:
(i) Borrower has not generated, used, stored, treated,
transported, manufactured, handled, produced or disposed of any
Hazardous Materials, on or off its premises (whether or not owned
by it) in any manner which at any time violates any Environmental
Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of Borrower comply in
all material respects with all Environmental Laws and all
licenses, permits, certificates, approvals and similar
authorizations thereunder;
(ii) there has been no investigation, proceeding, complaint,
order, directive, claim, citation or notice by any governmental
authority or any other Person, nor is any pending or to the best
of Borrower's knowledge threatened, and Borrower shall immediately
notify Agents upon becoming aware of any such investigation,
proceeding, complaint, order, directive, claim, citation or notice
and take prompt and appropriate actions to respond thereto, with
respect to any non-compliance with or violation of the
requirements of any Environmental Law by Borrower or the release,
spill or discharge, threatened or actual, of any Hazardous
Material or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of
any Hazardous Materials or any other environmental, health or
safety matter, which affects Borrower or its business, operations
or assets or any properties at which Borrower has transported,
stored or disposed of any Hazardous Materials;
(iii) Borrower has no material liability (contingent or
otherwise) in connection with a release, spill or discharge,
threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials;
(iv) without limitation the generality of the foregoing,
Borrower shall, following the reasonable determination by
Collateral Agent that there is non-compliance, or any condition
which requires any action by or on behalf of Borrower in order to
avoid any non-compliance, with any Environmental Law, at
Borrower's expenses, cause an independent environmental engineer
reasonably acceptable to Collateral Agent to conduct such tests of
the relevant site as are appropriate and prepare and deliver a
report setting forth the result of such tests, a proposed plan for
remediation and an estimate of the costs thereof; and
(v) Borrower shall continuously operate the groundwater
recovery and treatment system which is currently installed at the
Borrower's facility in Tarboro, North Carolina until the contaminants in
the groundwater at such facility have been remediated to concentrations
which are at or below applicable groundwater quality standards established
by the State of North Carolina and/or any other governmental unit or
agency having jurisdiction over such facility. Borrower shall keep and
maintain in good operating condition and in compliance with all
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<PAGE> 15
applicable Environmental Laws and standards of good commercial
practice such system, and shall cause the groundwater to be sampled on
a periodic basis, but not less frequently than every one-hundred
twenty (120) days, by an independent environmental consulting firm
reasonably acceptable to Agents and the Lenders. The results of such
sampling shall be forwarded to Collateral Agent promptly upon receipt
by Borrower; provided, that after the first anniversary of the date
hereof, such results shall be forwarded to Collateral Agent promptly
following request therefor.
(y) Borrower has paid and discharged, and shall at all times hereafter
promptly pay and discharge all obligations and liabilities arising under the
Employee Retirement Income Security Act of 1974 (as amended, modified or
restated from time to time, "ERISA") of a character which if unpaid or
unperformed might result in the imposition of a lien against any of its
properties or assets and will promptly notify the Collateral Agent of (a) the
occurrence of any reportable event (as defined in ERISA) which might result in
the termination by the Pension Benefit Guaranty Corporation ("PBGC") of any
employee benefit plan ("Plan") covering any officers or employees of Borrower,
any benefits of which are, or are required to be, guaranteed by PBGC, (b)
receipt of any notice from PBGC of its intention to seek termination of any
Plan or appointment of a trustee therefor, and (c) its intention to terminate
or withdraw from any Plan; provided, that Borrower shall not terminate any Plan
or withdraw therefrom if such withdrawal or termination shall result in any
liability to Borrower in excess of $1,000,000.
Borrower represents, warrants and covenants to Agents and Lenders that all
representations and warranties of Borrower contained in this Agreement (whether
appearing in Paragraphs 11 or 12 hereof or elsewhere) shall be true at the time
of Borrower's execution of this Agreement, shall survive the execution,
delivery and acceptance hereof by the parties hereto and the closing of the
transactions described herein or related hereto, shall remain true until the
repayment in full of all of the Liabilities and termination of this Agreement,
and shall be remade by Borrower at the time each Loan is made pursuant to this
Agreement.
12. ADDITIONAL COVENANTS OF BORROWER. Until payment or satisfaction in
full of all Liabilities and termination of this Agreement, unless Borrower
obtains the prior written consent of the Requisite Lenders waiving or modifying
any of Borrower's covenants hereunder in any specific instance, Borrower agrees
as follows:
(a) Borrower shall at all times keep accurate and complete books, records
and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and generally accepted accounting
principles consistently applied, and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on Exhibit B;
(b) Borrower agrees to deliver to Agents and each Lender the following
financial information, all of which shall be prepared in accordance with
generally accepted accounting principles consistently applied: (i) no later
than thirty (30) days after each calendar month, copies of internally prepared
financial statements, including, without limitation, balance sheets and
statements of income, retained earnings and cash flow of Borrower, certified by
the Chief Financial Officer of Borrower; (ii) no later than forty-five (45) days
after the end of each of the first three quarters of Borrower's fiscal year a
balance sheet, operating statement and reconciliation of surplus of Borrower,
which quarterly financial statements may be unaudited but shall be certified by
the Chief Financial Officer of Borrower; (iii) no later than ninety (90) days
after the end of each of Borrower's fiscal years, audited annual financial
statements with an unqualified opinion by independent certified public
accountants selected by Borrower and reasonably satisfactory to Collateral
Agent, which financial statements shall be accompanied by a letter from such
accountants acknowledging that they are aware that a primary intent of Borrower
in obtaining such financial statements is to influence Agents and Lenders and
that Agents and Lenders are relying upon such financial statements in connection
with the exercise of its rights hereunder and copies of any management letters
sent to Borrower by such accountants; (iv) within sixty (60) days after the end
of each of Borrower's fiscal years, projections for the following two (2) fiscal
years of Borrower; and (v) within five (5) days after the filing thereof, copies
of all Securities Exchange Commission filings made by Borrower's Parent;
(c) Borrower shall promptly advise Agents and each Lender in writing of
any material adverse change in the business, assets or condition, financial or
otherwise, of Borrower, the occurrence of any Event of Default hereunder or the
occurrence of any event which, if uncured, will become an Event of Default
hereunder after notice or lapse of time (or both);
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<PAGE> 16
(d) Collateral Agent, or any Persons designated by it, shall have
the right, at any time, to call at Borrower's places of business at any
reasonable times, and, without hindrance or delay, to inspect the
Collateral and to inspect, audit, check and make extracts from Borrower's
books, records, journals, orders, receipts and any correspondence and
other data relating to Borrower's business, the Collateral or any
transactions between the parties hereto, and shall have the right to
make such verification concerning Borrower's business as Collateral Agent
may consider reasonable under the circumstances. Any Lender may, at such
Lender's expense, accompany Collateral Agent in any such inspection.
Borrower shall furnish to Collateral Agent such information relevant to
Agents' or any Lender's rights under this Agreement as Collateral Agent
or any Lender shall at any time and from time to time request. Borrower
authorizes Collateral Agent to discuss the affairs, finances and business
of Borrower with any officers, employees or directors of Borrower or
with any Affiliate or the officers, employees or directors of any
Affiliate, and to discuss the financial condition of Borrower with
Borrower's independent public accountants. Any such discussions shall be
without liability to either Agent, any Lender or to Borrower's
independent public accountants. Borrower shall pay to Collateral Agent
all customary fees and out-of-pocket expenses incurred by Collateral
Agent in the exercise of its rights hereunder, and all of such fees and
expenses shall constitute Loans hereunder, shall be payable on demand
and, until paid, shall bear interest at the highest rate then applicable
to Loans hereunder;
(e) Borrower shall:
(i) keep the Collateral properly housed and insured for the
full insurable value thereof against loss or damage by fire, theft,
explosion, sprinklers, collision (in the case of motor vehicles) and such
other risks as are customarily insured against by Persons engaged in
businesses similar to that of Borrower, with such companies, in such
amounts, with such deductibles and under policies in such form as shall be
satisfactory to Collateral Agent. The insurance companies, policies and
nature and extent of coverage as of the date hereof, in the form
previously delivered to Collateral Agent are satisfactory. Original (or
certified) copies of such policies of insurance have been or shall be
delivered to Collateral Agent within ninety (90) days after the date
hereof, together with evidence of payment of all premiums therefor, and
shall contain an endorsement, in form and substance acceptable to
Collateral Agent, showing loss under such insurance policies payable to
Collateral Agent. Such endorsement, or an independent instrument furnished
to Collateral Agent, shall provide that the insurance company shall give
Collateral Agent at least thirty (30) days written notice before any such
policy of insurance is altered or canceled and that no act, whether
willful or negligent, or default of Borrower or any other Person shall
affect the right of Collateral Agent to recover under such policy of
insurance in case of loss or damage. In addition, Borrower shall cause to
be executed and delivered to Collateral Agent an assignment, for
collateral purposes only, of proceeds of its business interruption
insurance policies. Borrower hereby directs all insurers under all
policies of insurance to pay all proceeds payable thereunder directly to
Collateral Agent, for the benefit of Agents and Lenders; provided, that if
no Event of Default is then in existence, Collateral Agent and Lenders
agree to make such insurance proceeds available to Borrower to repair or
replace the Collateral with respect to which such insurance proceeds were
received, to the extent such proceeds do not exceed $500,000 in the
aggregate during any of Borrower's fiscal years. Borrower irrevocably,
makes, constitutes and appoints Collateral Agent (and all officers,
employees or agents designated by Collateral Agent) as Borrower's true and
lawful attorney (and agent-in-fact) for the purpose of making, settling
and adjusting claims under such policies of insurance, endorsing the name
of Borrower on any check, draft, instrument or other item of payment for
the proceeds of such policies of insurance and making all determinations
and decisions with respect to such policies of insurance, provided, that
if no Event of Default is then in existence, Borrower may make, settle and
adjust claims under such policies of insurance to the extent that the
losses with respect to which such claims are being made do not exceed
$500,000 in the aggregate during any fiscal year of Borrower; and
(ii) maintain, at its expense, such public liability and
third party property damage insurance as is customary for Persons
engaged in businesses similar to that of Borrower with such
companies and in such amounts, with such deductibles and under
policies in such form as shall be satisfactory to Collateral Agent
and original (or certified) copies of such policies have been or
shall be delivered to Collateral Agent within ninety (90) days
after the date hereof, together with evidence of payment of all
premiums therefor; each such policy shall contain an endorsement
showing each Agent and each Lender as additional insured
thereunder and providing that the
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<PAGE> 17
insurance company shall give Collateral Agent at least thirty (30) days
written notice before any such policy shall be altered or canceled. The
insurance companies, policies, and nature and extent of coverage as of the
date hereof, in the form previously delivered to Collateral Agent, are
satisfactory to Collateral Agent.
If Borrower at any time or times hereafter shall fail to obtain or
maintain any of the policies of insurance required above or to pay any premium
relating thereto, then Collateral Agent, without waiving or releasing any
obligation or default by Borrower hereunder, may (but shall be under no
obligation to) obtain and maintain such policies of insurance and pay such
premiums and take such other actions with respect thereto as Collateral Agent
deems advisable. All sums disbursed by Collateral Agent in connection with any
such actions, including, without limitation, court costs, expenses, other
charges relating thereto and reasonable attorneys' fees, shall constitute Loans
hereunder, shall be payable on demand by Borrower to Collateral Agent and,
until paid, shall bear interest at the highest rate then applicable to Loans
hereunder;
(f) Borrower shall not use the Collateral, or any part thereof, in any
unlawful business or for any unlawful purpose or use or maintain any of the
Collateral in any manner that does or could result in material damage to the
environment or a violation of any applicable environmental laws, rules or
regulations; shall keep the Collateral in good condition, repair and order,
ordinary wear and tear, depreciation and obsolescence excepted; shall permit
Collateral Agent and any Lender accompanying Collateral Agent to examine any of
the Collateral at any time and wherever the Collateral may be located; shall not
permit the Collateral, or any part thereof, to be levied upon under execution,
attachment, distraint or other legal process; shall not sell, lease, grant a
security interest in or otherwise dispose of any of the Collateral except as
expressly permitted by this Agreement; shall not settle or adjust any Account
identified by Borrower as an Eligible Account or with respect to which the
Account Debtor is an Affiliate (other than credits and allowances issued in the
ordinary course of Borrower's business) without the consent of Collateral Agent,
which shall not be unreasonably withheld, provided, that following the
occurrence and during the continuation of an Event of Default, Borrower shall
not settle or adjust any Account without the consent of Collateral Agent; and
shall not secrete or abandon any of the Collateral, or remove or permit removal
of any of the Collateral from any of the locations listed on Exhibit B or in any
written notice to Collateral Agent pursuant to Paragraph 11(b) hereof, except
for the removal of Inventory sold in the ordinary course of Borrower's business
as permitted herein and Collateral which has become obsolete or has no
substantial value, so long as the proceeds of any sale or other disposition of
such Collateral are paid to Collateral Agent for application to the Liabilities,
and the proceeds of any such sale or other disposition do not exceed $50,000
with respect to any single item of Collateral or $75,000 in the aggregate during
any fiscal year of Borrower;
(g) all monies and other property obtained by Borrower from either Agent
and/or any Lender pursuant to this Agreement will be used solely for business
purposes of Borrower;
(h) Borrower shall, at the request of Collateral Agent, indicate on its
records concerning the Collateral a notation, in form satisfactory to
Collateral Agent, of the security interest of Collateral Agent hereunder;
(i) Borrower shall file all required tax returns and pay all of its taxes
when due, including, without limitation, taxes imposed by federal, state or
municipal agencies, and shall cause any liens for taxes to be promptly
released; provided, that Borrower shall have the right to contest the payment
of such taxes in good faith by appropriate proceedings so long as (i) the
amount so contested is shown on Borrower's financial statements, (ii) the
contesting of any such payment does not give rise to a lien for taxes, (iii)
Borrower keeps on deposit with Collateral Agent (such deposit to be held
without interest), or a reserve is established against Borrower's availability
to borrow pursuant to Paragraph (1) of Exhibit A, in an amount of money which,
in the sole judgment of Collateral Agent, is sufficient to pay such taxes and
any interest or penalties that may accrue thereon, and (iv) if Borrower fails
to prosecute such contest with reasonable diligence, Collateral Agent may apply
the money so deposited in payment of such taxes. If Borrower fails to pay any
such taxes and in the absence of any such contest by Borrower, Collateral Agent
may (but shall be under no obligation to) advance and pay any sums required to
pay any such taxes and/or to secure the release of any lien therefor, and any
sums so advanced by Collateral Agent shall constitute Loans hereunder, shall be
payable by Borrower to Collateral Agent on demand, and, until paid, shall bear
interest at the highest rate then applicable to Loans hereunder;
(j) Borrower shall not assume, guarantee or endorse, or otherwise become
liable in connection with, the obligations of any Person, except by endorsement
of instruments for deposit or collection or similar transactions in the
ordinary course of business or (i) as co-obligor of the obligations of its
Parent under that
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<PAGE> 18
certain Asset Purchase Agreement dated as of May 19, 1995 by and among
Borrower's Parent, Buddy L Inc. and BLHK and (ii) as guarantor under that
certain Subsidiary Guaranty dated December 22, 1994 of Parent's obligations
under the Debenture Purchase Agreement as described therein;
(k) Borrower shall not without the prior written consent of the Requisite
Lenders, which consent shall not be unreasonably withheld, (i) enter into any
merger or consolidation (ii) sell, lease or otherwise dispose of any of its
assets other than in the ordinary course of business, (iii) purchase all or
substantially all of the assets of any Person or division of such Person, or
(iv) enter into any other transaction outside the ordinary course of Borrower's
business, including, without limitation, any purchase, redemption or retirement
of any shares of any class of its stock or any other equity interest, and any
issuance of any shares of, or warrants or other rights to receive or purchase
any shares of, any class of its stock or any other equity interest;
(l) Except as provided on Schedule 12(l) hereto, Borrower shall not
declare or pay any dividend or other distribution (whether in cash or in kind)
on any class of its stock (if Borrower is a corporation) or on account of any
equity interest in Borrower (if Borrower is a partnership or other type of
entity);
(m) Borrower shall not purchase or otherwise acquire, or contract to
purchase or otherwise acquire, the obligations or stock of any Person, other
than (i) direct obligations of the United States (ii) commercial paper of a
domestic issuer rated at least A-1 by Standard and Poors Corporation or P-1 by
Moody's Investors Service, Inc. and (iii) certificates of deposit with
maturities of one (1) year or less issued by a commercial bank having a
combined capital and surplus of at least $50,000,000;
(n) Borrower shall not amend its organizational documents or change its
fiscal year or enter into a new line of business materially different from
Borrower's current business;
(o) Borrower's Tangible Net Worth shall not, as of the end of each fiscal
quarter of Borrower, be less than the "Minimum Tangible Net Worth"; Minimum
Tangible Net worth being defined for purposes of this subparagraph as (i)
$16,000,000 as of the last day of each fiscal quarter of Borrower from the date
hereof through December 31, 1996, (ii) $17,000,000 as of the last day of each
fiscal quarter of Borrower during Borrower's fiscal year ending December 31,
1997 and (iii) as of the last day of each fiscal quarter of Borrower during
each fiscal year thereafter, the Minimum Tangible Net Worth of the immediately
as of the last day of each fiscal quarter of Borrower during the preceding
fiscal year plus $2,000,000; "Tangible Net Worth" being defined for purposes of
this subparagraph as Borrower's shareholders' equity (including retained
earnings) less the book value of all intangible assets as determined solely by
Collateral Agent on a consistent basis plus the amount of any LIFO reserve plus
the amount of any debt subordinated to Agents and Lenders on the date hereof,
but excluding any contributions to capital or subordinated indebtedness arising
after the date hereof, all as determined under generally accepted accounting
principles applied on a basis consistent with the financial statement most
recently presented to Collateral Agent prior to the date hereof except as set
forth herein;
(p) The ratio during each period of (i) the sum of Borrower's Net Income
before payment or provision of taxes measured by income, plus, without
duplication, Interest Expense, amortization and depreciation expense and other
non-cash items reducing Net Income during such period, to (ii) Interest Expense
during such period, shall not be less than (A) 2.25 to 1.00 for the three (3)
fiscal quarter period ending September 30, 1996, and (B) 2.75 to 1.00 as of the
last day of each fiscal quarter thereafter for the four (4) fiscal quarter
period ending on such date;
(q) Borrower shall reimburse Agents for all costs and expenses, including,
without limitation, legal expenses and reasonable attorneys' fees, incurred by
Agents in connection with (i) documentation and consummation of this transaction
and any other transactions between Borrower and Agents, including, without
limitation, Uniform Commercial Code and other public record searches, lien
filings, Federal Express or similar express or messenger delivery, appraisal
costs, surveys, title insurance and environmental audit or review costs, (ii)
collection, protection or enforcement any rights in or to the Collateral, (iii)
collection of any Liabilities and (iv) administration and enforcement of any of
Agents' or any Lender's rights under this Agreement. Following the occurrence of
an Event of Default, Borrower shall reimburse each Agent and each Lender for all
costs and expenses, including, without limitation, legal expenses and reasonable
attorneys' fees, incurred by such Agent and/or Lender in seeking to collect any
Liabilities owing to such Agent and/or Lender and to enforce any of such Agent's
and/or Lender's rights under this Agreement. Borrower shall also pay all normal
service charges with respect to all accounts maintained by Borrower with
Collateral Agent and any additional services requested by Borrower from
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<PAGE> 19
Collateral Agent. All such costs, expenses and charges shall constitute Loans
hereunder, shall be payable by Borrower to Collateral Agent on demand, and,
until paid, shall bear interest at the highest rate then applicable to Loans
hereunder; and
(r) Borrower shall not purchase or otherwise acquire (including, without
limitation, acquisition by way of capitalized lease), or commit to purchase or
acquire, any fixed asset if, after giving effect to such purchase or other
acquisition, the aggregate cost of all such fixed assets purchased or otherwise
acquired would exceed $7,500,000 during Borrower's fiscal year ending December
31, 1996, $8,500,000 during Borrower's fiscal year ending December 31, 1997 or
$9,500,000 during any fiscal year of Borrower thereafter.
13. DEFAULT. The occurrence of any one or more of the following events
shall constitute an "Event of Default" by Borrower hereunder:
(a) the failure of any Obligor to pay when due or declared due, any of the
Liabilities; provided, that any such failure shall not constitute an Event of
Default hereunder unless such failure is not cured within three (3) calendar
days after its occurrence;
(b) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor
under this Agreement or any of the Other Agreements; provided, that any such
failure shall not constitute an Event of Default hereunder unless such failure
is not cured within fifteen (15) calendar days of the occurrence of such
failure;
(c) the failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor
under any other agreement with any Person if such failure may have a material
adverse effect on such Obligor's business, property, assets, operations or
condition, financial or otherwise;
(d) the making or furnishing by any Obligor to either Agent or any Lender
of any representation, warranty, certificate, schedule, report or other
communication within or in connection with this Agreement or the Other
Agreements or in connection with any other agreement between such Obligor and
such Agent and/or any such Lender, which is untrue or misleading in any
respect;
(e) the loss, theft, damage or destruction of any portion of the
Collateral (whether material or not) adequately covered by insurance (as
determined by Collateral Agent in its discretion) having an aggregate value in
excess of $500,000; the loss, theft, damage or destruction of any material item
or items of Collateral, as determined by the Requisite Lenders in their
reasonable judgment, adequately covered by insurance (as determined by
Collateral Agent in its discretion), whether or not such item or items have an
aggregate value in excess of $500,000; the loss, theft, damage or destruction
of any of the Collateral not adequately covered by insurance (as determined by
Collateral Agent in its discretion), or (except as permitted hereby) the sale,
lease or furnishing under a contract of service of, any of the Collateral;
(f) the creation (whether voluntary or involuntary) of, or any attempt to
create, any lien or other encumbrance upon any of the Collateral, other than the
Permitted Liens, or the making or any attempt to make any levy, seizure or
attachment thereof; provided, that with respect to any involuntarily created
liens which are not Permitted Liens, the creation thereof shall not constitute
an Event of Default hereunder so long as (i) a reserve against Borrower's
availability to borrow under Paragraph (1) of Exhibit A is maintained in an
amount necessary to satisfy such lien if not paid or released, (ii) such lien is
being contested in good faith by Borrower, and (iii) the amount secured by such
lien does not exceed $100,000;
(g) the commencement of any proceedings in bankruptcy by or against any
Obligor or for the liquidation or reorganization of any Obligor, or alleging
that such Obligor is insolvent or unable to pay its debts as they mature, or
for the readjustment or arrangement of any Obligor's debts, whether under the
United States Bankruptcy Code or under any other law, whether state or federal,
now or hereafter existing for the relief of debtors, or the commencement of any
analogous statutory or non-statutory proceedings involving any Obligor;
provided, however, that if such commencement of proceedings against such
Obligor is involuntary, such action shall not constitute an Event of Default
unless such proceedings are not dismissed within thirty (30) days after the
commencement of such proceedings;
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<PAGE> 20
(h) the appointment of a receiver or trustee for any Obligor, for any of
the Collateral or for any substantial part of any Obligor's assets or the
institution of any proceedings for the dissolution, or the full or partial
liquidation, or the merger or consolidation, of any Obligor which is a
corporation, limited liability company or a partnership; provided, however,
that if such appointment or commencement of proceedings against such Obligor is
involuntary, such action shall not constitute an Event of Default unless such
appointment is not revoked or such proceedings are not dismissed within thirty
(30) days after the commencement of such proceedings;
(i) the entry of any judgment or order against any Obligor in an amount
exceeding $10,000 which remains unsatisfied or undischarged and in effect for
thirty (30) days after such entry without a stay of enforcement or execution;
(j) the death of any Obligor who is a natural Person, or of any general
partner of any Obligor which is a partnership, or any member of a limited
liability company or the dissolution of any Obligor which is a partnership,
limited liability company or corporation;
(k) the occurrence of an event of default under, or the revocation or
termination of, any agreement, instrument or document executed and delivered by
any Person to Collateral Agent pursuant to which such Person has guaranteed to
Collateral Agent and Lenders the payment of all or any of the Liabilities or
has granted Collateral Agent a security interest in or lien upon some or all of
such Person's real and/or personal property to secure the payment of all or any
of the Liabilities;
(l) the institution in any court of a criminal proceeding against any
Obligor, or the indictment of any Obligor for any crime; and
(m) the Requisite Lenders shall reasonably feel insecure for any material
reason whatsoever, including, without limitation, fear of removal or waste of
the Collateral, or any part thereof.
14. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence of an Event of Default described in Paragraph
13(g) hereof, all of Borrower's Liabilities shall immediately and automatically
become due and payable, without notice of any kind. Upon the occurrence of any
other Event of Default, all Liabilities may, at the option of the Requisite
Lenders, and without demand, notice or legal process of any kind, be declared,
and immediately shall become, due and payable.
(b) Upon the occurrence of an Event of Default, Collateral Agent may
exercise from time to time any rights and remedies available to it under the
Uniform Commercial Code and any other applicable law in addition to, and not in
lieu of, any rights and remedies expressly granted in this Agreement or in any
of the Other Agreements and all of Collateral Agent's rights and remedies shall
be cumulative and non-exclusive to the extent permitted by law. In particular,
but not by way of limitation of the foregoing, Collateral Agent may, without
notice, demand or legal process of any kind, take possession of any or all of
the Collateral (in addition to Collateral of which it already has possession),
wherever it may be found, and for that purpose may pursue the same wherever it
may be found, and may enter into any of Borrower's premises where any of the
Collateral may be, and search for, take possession of, remove, keep and store
any of the Collateral until the same shall be sold or otherwise disposed of, and
Collateral Agent shall have the right to store the same at any of Borrower's
premises without cost to Agents or Lenders. At Collateral Agent's request,
Borrower shall, at Borrower's expense, assemble the Collateral and make it
available to Collateral Agent at one or more places to be designated by
Collateral Agent and reasonably convenient to Collateral Agent and Borrower.
Borrower recognizes that if Borrower fails to perform, observe or discharge any
of its Liabilities under this Agreement or the Other Agreements, no remedy at
law will provide adequate relief to Agents and Lenders, and agrees that Agents
and Lenders shall be entitled to temporary and permanent injunctive relief in
any such case without the necessity of proving actual damages. Any notification
of intended disposition of any of the Collateral required by law will be deemed
reasonably and properly given if given at least ten (10) calendar days before
such disposition. Any proceeds of any disposition by Collateral Agent of any of
the Collateral may be applied by Collateral Agent to the payment of expenses in
connection with the Collateral, including, without limitation, legal expenses
and reasonable attorneys' fees, and any balance of such proceeds may be applied
by Collateral Agent toward the payment of such of the Liabilities, and in such
order of application, as Collateral Agent may from time to time elect.
15. INDEMNIFICATION. Borrower agrees to defend, protect, indemnify and
hold harmless each Agent, each Lender, each affiliate or subsidiary of each
Agent and each Lender (with counsel satisfactory to such
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<PAGE> 21
Agent or such Lender, as applicable), and each of their respective officers,
directors, employees, attorneys and agents (each an "Indemnified Party") from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature (including, without limitation, the disbursements and the reasonable
fees of counsel for each Indemnified Party in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnified Party
shall be designated a party thereto), which may be imposed on, incurred by, or
asserted against, any Indemnified Party (whether direct, indirect or
consequential and whether based on any federal, state or local laws or
regulations, including, without limitation, securities, environmental and
commercial laws and regulations, under common law or in equity, or based on
contract or otherwise) in any manner relating to or arising out of this
Agreement or any Other Agreement, or any act, event or transaction related or
attendant thereto, the making or issuance and the management of the Loans or any
Letters of Credit or the use or intended use of the proceeds of the Loans or any
Letters of Credit; provided, however, that Borrower shall not have any
obligation hereunder to any Indemnified Party with respect to matters caused by
or resulting from the willful misconduct or gross negligence of such Indemnified
Party. To the extent that the undertaking to indemnify set forth in the
preceding sentence may be unenforceable because it is violative of any law or
public policy, Borrower shall satisfy such undertaking to the maximum extent
permitted by applicable law. Any liability, obligation, loss, damage, penalty,
cost or expense covered by this indemnity shall be paid to each Indemnified
Party on demand, and, failing prompt payment, shall, together with interest
thereon at the highest rate then applicable to Loans hereunder from the date
incurred by each Indemnified Party until paid by Borrower, be added to the
Liabilities of Borrower and be secured by the Collateral. The provisions of
this Paragraph 15 shall survive the satisfaction and payment of the other
Liabilities and the termination of this Agreement.
16. NOTICE. All written notices and other written communications with
respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy (receipt confirmed) or delivered in person, and (i) in the
case of Collateral Agent and LaSalle shall be sent to it at 135 South LaSalle
Street, Chicago, Illinois 60674, Attention: Asset Based Lending Division, (ii)
in the case of any Agent or Lender other than LaSalle, shall be sent to it at
the address identified on the signature page hereto or in the Assignment and
Assumption Agreement with such Lender, and (iii) in the case of Borrower, shall
be sent to it at its principal place of business set forth on the first page of
this Agreement, attention: Marvin Smollar, with a copy to Schwartz & Freeman,
401 North Michigan Avenue, Suite 1900, Chicago, Illinois 60611, attention:
Kenneth Kolmin, or, in any case, such other address of which any party has
notified all other parties hereto in writing.
17. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This
Agreement and the Other Agreements are submitted by Borrower to each Agent and
each Lender for such Agent's and such Lender's acceptance or rejection at such
Agent's principal place of business as an offer by Borrower to borrow monies
from Agents and Lenders now and from time to time hereafter, and shall not be
binding upon Agents and Lenders or become effective until accepted by Agents
and Lenders, in writing, at said place of business. If so accepted by Agents
and Lenders, this Agreement and the Other Agreements shall be deemed to have
been made at said place of business. THIS AGREEMENT AND THE OTHER AGREEMENTS
SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS
AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT AND IN ALL
OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST
RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN
COLLATERAL LOCATED OUTSIDE OF THE STATE OF ILLINOIS, WHICH SHALL BE GOVERNED
AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION IN WHICH SUCH
COLLATERAL IS LOCATED. If any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement.
To induce Agents and Lenders to accept this Agreement, Borrower
irrevocably agrees that, subject to Agents' sole and absolute election, ALL
ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR
RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE
LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS.
BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE
OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE. Borrower hereby
irrevocably appoints and designates Schwartz & Freeman, 401 North Michigan
Avenue, Suite 1900, Chicago, Illinois 60611, Attention: Kenneth Kolmin (or
any other person having and maintaining a place of business in such state whom
Borrower may from time to time hereafter designate upon ten (10) days written
notice to Collateral Agent and who Collateral Agent has agreed in its sole
discretion in writing is satisfactory and who
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<PAGE> 22
has executed an agreement in form and substance satisfactory to Collateral Agent
agreeing to act as such attorney and agent), as Borrower's true and lawful
attorney and duly authorized agent for acceptance of service of legal process.
Borrower agrees that service of such process upon such person shall constitute
personal service of such process upon Borrower. BORROWER HEREBY WAIVES ANY
RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT
AGAINST BORROWER BY COLLATERAL AGENT IN ACCORDANCE WITH THIS PARAGRAPH.
18. CAPITAL ADEQUACY. If after the date hereof, either (i) any change in
or in the interpretation of any law or regulation is introduced, including,
without limitation, with respect to reserve requirements, applicable to either
Agent, any Lender or any other banking or financial institution from whom any
of the Lenders borrow funds or obtain credit (a "Funding Bank"), or (ii) a
Funding Bank or any of the Lenders complies with any future guideline or
request from any central bank or other governmental authority or (iii) a
Funding Bank or any of the Lenders determines that the adoption of any
applicable law, rule or regulation regarding capital adequacy, or any change
therein, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof has or would have the effect described
below, or a Funding Bank or any of the Lenders complies with any request or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, and in the case of
any event set forth in this clause (iii), such adoption, change or compliance
has or would have the direct or indirect effect of reducing the rate of return
on any of the Lenders' capital as a consequence of its obligations hereunder to
a level below that which such Lender could have achieved but for such adoption,
change or compliance (taking into consideration the Funding Bank's or Lenders'
policies with respect to capital adequacy) by an amount deemed by such Lender
to be material, and any of the foregoing events described in clauses (i), (ii)
or (iii) increases the cost to either Agent, the Issuing Bank or any of the
Lenders of (A) funding or maintaining the Loans or (B) issuing, making or
maintaining any Letter of Credit or of purchasing or maintaining any
participation or subparticipation therein, or reduces the amount receivable in
respect thereof by either Agent or any Lender, then Borrower shall upon demand
by Collateral Agent, pay to Collateral Agent, for the account of each
applicable Lender, additional amounts sufficient to indemnify the Lenders
against such increase in cost or reduction in amount receivable. A certificate
as to the amount of such increased cost and setting forth in reasonable detail
the calculation thereof shall be submitted to Borrower by the applicable
Lender, and shall be conclusive absent manifest error. Notwithstanding the
foregoing, in the event that Borrower is required to indemnify any Lender or
Lenders under this Paragraph 18, Borrower may request in writing that
Administrative Agent seek a replacement Lender for any such Lender requesting
indemnification, which replacement Lender would not be subject to the same
increased costs as the Lender seeking indemnification. If Administrative Agent
is unable to find a replacement Lender within sixty (60) days of the request
therefor by Borrower, Borrower may seek a replacement Lender, which replacement
Lender must be acceptable to Agents in their reasonable discretion. Prior to
any such replacement Lender becoming a party hereto, Borrower shall be required
to pay all amounts required under this Paragraph 18.
19. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.
20. POWER OF ATTORNEY. Borrower acknowledges and agrees that its
appointment of Collateral Agent as its attorney and agent-in-fact for the
purposes specified in this Agreement is an appointment coupled with an interest
and shall be irrevocable until all of the Liabilities are satisfied and paid in
full and this Agreement is terminated.
21. WAIVER OF JURY TRIAL; OTHER WAIVERS.
(a) BORROWER, EACH AGENT AND EACH LENDER HEREBY WAIVES ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO
THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL,
ANY ALLEGED TORTIOUS CONDUCT BY BORROWER, AGENT OR ANY LENDER OR WHICH, IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP
BETWEEN BORROWER AND AGENT OR ANY LENDER. IN NO EVENT SHALL EITHER AGENT OR
ANY LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL
DAMAGES.
(b) Borrower hereby waives demand, presentment, protest and notice of
nonpayment, and further waives the benefit of all valuation, appraisal and
exemption laws.
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<PAGE> 23
(c) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND
PRIOR TO THE EXERCISE BY AGENT OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF
BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL.
(d) Agents' and Lenders' failure, at any time or times hereafter, to
require strict performance by Borrower of any provision of this Agreement or
any of the Other Agreements shall not waive, affect or diminish any right of
Agents or Lenders thereafter to demand strict compliance and performance
therewith. Any suspension or waiver by either Agent or Lenders of an Event of
Default under this Agreement or any default under any of the Other Agreements
shall not suspend, waive or affect any other Event of Default under this
Agreement or any other default under any of the Other Agreements, whether the
same is prior or subsequent thereto and whether of the same or of a different
kind or character. No delay on the part of either Agent or Lenders in the
exercise of any right or remedy under this Agreement or any Other Agreement
shall preclude other or further exercise thereof or the exercise of any right
or remedy. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the Other
Agreements and no Event of Default under this Agreement or default under any of
the Other Agreements shall be deemed to have been suspended or waived by either
Agent or Lenders unless such suspension or waiver is in writing, signed by a
duly authorized officer of all Lenders (or such lesser number of Lenders as
required under this Agreement) and directed to Borrower specifying such
suspension or waiver.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the ____ day of May, 1996.
EMPIRE INDUSTRIES, INC. LASALLE NATIONAL BANK, as Collateral Agent and a
Lender
By_________________
Title______________ By________________________
Title_____________________
Maximum Loan Amount: $25,000,000
By___________________
Title________________
BT COMMERCIAL CORPORATION, as Administrative
Agent and a Lender
By____________________
Title_________________
Address: 233 South Wacker Drive
Chicago, Illinois 60606
Attention: Frank Fazio
Maximum Loan Amount: $60,000,000
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<PAGE> 24
EXHIBIT A-SPECIAL PROVISIONS
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity, "BTCC") as a Lender and as
administrative agent ("Administrative Agent") and LASALLE NATIONAL BANK (in its
individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
CREDIT TERMS
(1) LOAN LIMIT: Each Lender, severally and not jointly, agrees to make its
Pro Rata Share of such Loans as Borrower shall request from time to time
from the date hereof, subject to the terms and conditions set forth in
this Agreement, up to the sum of the following sublimits (the "Loan
Limit"):
(a) Up to eighty-five percent (85%) of the face amount (less
maximum discounts, credits and allowances which may be taken by or
granted to Account Debtors in connection therewith) of Borrower's
Eligible Accounts; plus
(b) Up to sixty-five percent (65%) of the lower of the cost or
market value of Borrower's Eligible Inventory consisting solely of
finished goods (other than finished goods which are in transit);
plus
(c) Up to fifty percent (50%) of the lower of the cost or market
value of Borrower's Eligible Inventory consisting solely of finished
goods or finished components of goods which are in transit or Five
Hundred Thousand Dollars ($500,000), whichever is less; plus
(d) Up to fifty percent (50%) of the lower of the cost or market
value of Borrower's Eligible Inventory consisting solely of raw
materials less than one (1) year old; plus
(e) Up to forty percent (40%) of the lower of the cost or market
value of Borrower's Eligible Inventory consisting solely of
work-in-process or Two Million and No/100 Dollars ($2,000,000),
whichever is less; plus
(f) Subject to Paragraph (2) of this Exhibit A, up to fifty
percent (50%) against the face amount of commercial Letters of
Credit issued by Issuing Bank for the
Date: May __, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
<PAGE> 25
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
purpose of purchasing Inventory, provided that such commercial
Letters of Credit are in form and substance satisfactory to
Collateral Agent; plus
(g) Subject to Paragraph (3)(a) hereof, up to Nine Million One
Hundred Thousand and No/100 Dollars ($9,100,000) with respect to
Borrower's Equipment; plus
(h) Subject to Paragraph (3)(b) hereof, up to Three Million and
No/100 Dollars ($3,000,000) with respect to Borrower's real property
located at 501 Daniel Street, Tarboro, North Carolina; minus
(i) Such reserves as Collateral Agent elects, in its reasonable
discretion, to establish from time to time, including, without
limitation, a reserve to pay royalties or other license fees with
respect to patents, trademarks and copyrights licensed by Borrower
in connection with the production or sale of Inventory, in the event
that Collateral Agent becomes aware that such license fees or
royalties are not being paid in a timely fashion or following the
occurrence and during the continuance of an Event of Default;
provided, that the advances at subparagraphs (b), (c), (d), (e) and (f) above
shall in no event exceed the aggregate amount of Twenty-Five Million and No/100
Dollars ($25,000.000); and
further provided, that the aggregate amount of Loans outstanding at any time
shall in no event exceed Eighty-Five Million and No/100 Dollars ($85,000,000)
(the "Loan Limit").
(2) LETTERS OF CREDIT:
(a) Subject to the terms and conditions of this Agreement,
including Exhibit A, and the Other Agreements, during the Original
Term or any Renewal Term, Collateral Agent shall request that
Issuing Bank issue, upon Borrower's request, commercial letters of
credit ("Letters of Credit"), provided that the aggregate undrawn
face amount of all such Letters of Credit shall at no time exceed
Ten Million and No/100 Dollars ($10,000,000). Lenders' contingent
liability under the Letters of Credit shall automatically reduce,
dollar for dollar, the amount which Borrower may borrow based upon
the Loan Limit. Payments made by
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 2 -
<PAGE> 26
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
Agents or Lenders to any Person on account of any Letter of Credit
shall constitute Loans hereunder. At no time shall the aggregate
of direct Loans by Agents and Lenders to Borrower plus the
contingent liability of Lenders under the outstanding Letters of
Credit be in excess of the Loan Limit.
(b) Borrower agrees to pay to the Issuing Bank, on demand by the
Issuing Bank, the Issuing Bank's normal and customary administrative
charges in effect, from time to time, for issuing and administering
any Letters of Credit and if not so paid each Lender shall, without
regard to any other provision of this Agreement or any of the Other
Agreements, any defense that Borrower may have to its obligation to
pay the Issuing Bank in connection with such charges or any defense
any Lender may have in connection with the participation described
in subsection (d) below in connection with any Letter of Credit, pay
the Issuing Bank for such Lender's Pro Rata Share of such charges,
and any payments so made by Lenders to Issuing Bank shall be deemed
to be Loans. Each Lender (other than a Lender that is the Issuing
Bank) acknowledges and agrees that it shall not be entitled to any
of the charges of the Issuing Bank. Borrower further agrees to pay
Collateral Agent, for the benefit of Lenders, a letter of credit fee
equal to two percent (2.00%) per annum on the aggregate undrawn face
amount of all Letters of Credit outstanding, which fee shall be
payable monthly in arrears on the last Business Day of each month.
(c) Borrower agrees to reimburse the Issuing Bank, on demand by
the Issuing Bank, for each payment made by the Issuing Bank under or
pursuant to any Letter of Credit and if not so reimbursed each
Lender shall without regard to any other provision of this Agreement
or any of the Other Agreements, any defense that Borrower may have
to its obligation to reimburse the Issuing Bank in connection with
such payment or any defense any Lender may have in connection with
such payment or any defense any Lender may have in connection with
the participation described in subsection (d) below in connection
with any Letter of Credit, reimburse the Issuing Bank for such
Lender's Pro Rata Share of such payment, and any payments so made by
Lenders to Issuing Bank shall be deemed to be Loans. Collateral
Agent may
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 3 -
<PAGE> 27
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
provide for the payment of any reimbursement obligations and any
interest accrued thereon by advancing the amount thereof to the
Issuing Bank on behalf of Borrower as a Loan.
(d) Immediately upon the issuance of a Letter of Credit in
accordance with this Agreement, each Lender shall be deemed to have
irrevocably and unconditionally purchased and received from the
Issuing Bank, without recourse or warranty, an undivided interest
and participation therein to the extent of such Lender's Pro Rata
Share (including, without limitation, all obligations of Borrower
with respect thereto). Borrower hereby indemnifies each Agent and
each Lender against any and all liability and expense it may incur
in connection with any Letter of Credit and agrees to reimburse each
Agent and each Lender for any payment made by either Agent or any
Lender to the Issuing Bank.
(3) AVAILABILITY REDUCTIONS:
(a) The availability described in Paragraph (1)(g) of this
Exhibit A shall be automatically curtailed by an amount equal to One
Hundred Fifty-One Thousand Six Hundred Sixty-Six and 67/100 Dollars
($151,666.67) per month, commencing on the thirtieth (30th) day
following the date hereof, and continuing on the corresponding day
of each month thereafter, until the earlier to occur of (i) the date
on which said availability shall be reduced in full and (ii) the
date upon which this Agreement terminates pursuant to Paragraph 10
the Agreement.
(b) The availability described in Paragraph (1)(h) of this
Exhibit A shall be automatically curtailed by an amount equal to
Eighty-Three Thousand Three Hundred Thirty-Three and 33/100 Dollars
($83,333.33) per month, commencing on the thirtieth (30th) day
following the date hereof, and continuing on the corresponding day
of each month thereafter until the earliest to occur of (i) the date
on which said availability shall be reduced in full, (ii) the date
on which Borrower refinances the Loans made with respect to the
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 4 -
<PAGE> 28
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
availability described in Paragraph (1)(g) of this Exhibit A, at
which time such availability will be reduced in full, and (iii) the
date upon which this Agreement terminates pursuant to Paragraph 10
of the Agreement.
(c) The availability described in Paragraph (1)(g) shall be
automatically curtailed dollar-for-dollar by the amount of any
proceeds received by Collateral Agent from the sale or other
disposition of any of Borrower's Equipment not replaced pursuant to
Paragraph 6 of the Loan Agreement, such curtailments to be applied
to the curtailments described in Paragraph (3)(a) above in the
inverse order such curtailments are scheduled to occur.
(d) The availability described in Paragraph (1)(h) shall be
automatically curtailed dollar-for-dollar by the amount of any
proceeds received by Collateral Agent from the sale or other
disposition of all or any portion of Borrower's real property other
than the button plant located at 710 Popular Street, Tarboro, North
Carolina, such curtailment to be applied to the curtailments
described in Paragraph (3)(b) above in the inverse order such
curtailments are scheduled to occur.
(e) The availability reductions set forth in Paragraphs (3)(a),
(3)(b), (3)(c) and (3)(d) above shall not reduce the Maximum Loan
Amount of any Lender or reduce the aggregate Loan Limit of
Eighty-Five Million and No/100 Dollars ($85,000,000) set forth in
Paragraph (1) of this Exhibit A.
(4) INTEREST RATE: Subject to the terms and conditions set forth below, the
Loans shall bear interest at the per annum rate of interest set forth in
subsection (a) or (b) below:
(a) One percent (1.00%) plus LaSalle's publicly announced prime
rate (which is not intended to be LaSalle's lowest or most favorable
rate in effect at any time) (the "Prime Rate") in effect from time
to time, payable on the last Business Day of each month in arrears.
Said rate of interest shall increase or decrease by an amount equal
to each increase or decrease in the Prime Rate effective on the
effective date of each such change in the Prime Rate.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 5 -
<PAGE> 29
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(b) The "Applicable Margin" (as defined below), in effect at such
time, in excess of the per annum rate of interest at which U.S.
dollar deposits of an amount comparable to the amount of the Loans
and for a period equal to the relevant Interest Period (as
hereinafter defined) are offered generally to Collateral Agent
(rounded upward if necessary to the nearest 1/16 of 1.00%) in the
London Interbank Eurodollar market at 11:00 a.m. (London time) two
(2) Business Days (as hereinafter defined) prior to the commencement
of each Interest Period ("LIBOR"), such rate to remain fixed for
such Interest Period. "Interest Period" shall mean any continuous
period of thirty (30), sixty (60), ninety (90) or one hundred eighty
(180) days, as selected from time to time by Borrower by irrevocable
notice (in writing, by telex, telegram or cable) given to Collateral
Agent before 12:00 noon, Chicago time, not less than three (3)
Business Days prior to the first day of each respective Interest
Period (any notice received by Collateral Agent after 12:00 noon,
Chicago time, will be deemed on the immediately succeeding Business
Day) commencing on the date hereof; provided, that: (i) each such
period occurring after such initial period shall commence on the day
on which the immediately preceding period expires; (ii) the final
Interest Period shall be such that its expiration occurs on or
before the end of the Original Term or any Renewal Term; and (iii)
if for any reason Borrower shall fail to timely select a period,
then such Loans shall continue as, or revert to, Prime Rate Loans.
"Applicable Margin" shall mean two hundred seventy-five (275) basis
points; provided that the then-effective Applicable Margin shall be
reduced by twenty-five (25) basis points (i) effective five (5)
Business Days after receipt of Borrower's 1996 audited year end
financial statements, in the event such financial statements
evidence net income for Borrower during such fiscal year in excess
of Three Million Five Hundred Sixty-Eight Thousand and No/100
Dollars ($3,568,000) and Tangible Net Worth of Borrower in excess of
Borrower's Tangible Net Worth as shown on its 1995 audited year-end
financial statements, plus One Million Eight Hundred Thousand and
No/100 Dollars ($1,800,000) and (ii) effective five (5) Business
Days after receipt of Borrower's 1997 year-end financial statements,
in the event that such financial statements evidence net income for
Borrower during such fiscal year in excess of Six Million Nine
Hundred Sixty-Eight
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 6 -
<PAGE> 30
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
Thousand and No/100 Dollars ($6,968,000) and Tangible Net Worth in
excess of the sum of (x) the minimum Tangible Net Worth which
Borrower must obtain to achieve a reduction in interest rate as set
forth in (i) above, plus (y) Three Million Five Hundred Thousand
and No/100 Dollars ($3,500,000). Interest on LIBOR Rate Loans
shall be payable on the last day of the applicable Interest Period,
and if the Interest Period is longer than ninety (90) days, at the
end of each ninety (90) day period and the last day of the
applicable Interest Period, and on the date of any payment of
principal with respect to a LIBOR Rate Loan by Borrower. After
Collateral Agent receives a notice from Borrower of the conversion
or continuation of any LIBOR Rate Loan, Collateral Agent shall
provide a copy of such notice to each Lender before 3:00 p.m.,
Chicago time, on the date such notice is deemed given to Collateral
Agent.
(5) OTHER LIBOR PROVISIONS:
(a) Subject to the provisions of this Agreement, Borrower shall
have the option (i) as of any date, to convert all or any part of
the Prime Rate Loans to, or request that new Loans be made as, LIBOR
Rate Loans of various Interest Periods, (ii) as of the last day of
any Interest Period, to continue all or any portion of the relevant
LIBOR Rate Loans as LIBOR Rate Loans; (iii) as of the last day of
any Interest Period, to convert all of any portion of the LIBOR Rate
Loans to Prime Rate Loans; and (iv) at any time, to request new
Loans as Prime Rate Loans; provided, that Loans may not be continued
as or converted to LIBOR Rate Loans, if the continuation or
conversion thereof would violate the provisions of Paragraphs (5)(b)
and (5)(c) of this Exhibit A or if an Event of Default has occurred
and is continuing.
(b) Collateral Agent's determination of LIBOR as provided above
shall be conclusive, absent manifest error. Furthermore, if
Collateral Agent or any Lender determines, in good faith (which
determination shall be conclusive, absent manifest error), prior to
the commencement of any Interest Period that (i) U.S. dollar
deposits of sufficient amount and maturity for funding the Loan
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 7 -
<PAGE> 31
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
are not available to Collateral Agent or any Lender in the London
Interbank Eurodollar market in the ordinary course of business, or
(ii) by reason of circumstances affecting the Loan Interbank
Eurodollar market, adequate and fair means do not exist for
ascertaining the rate of interest to be applicable to the Loans
requested by Borrower to be LIBOR Rate Loans or the Loans bearing
interest at the rates set forth in Paragraph (4)(b) of the Exhibit
A shall not represent the effective pricing to Lenders for U.S.
dollar deposits of a comparable amount for the relevant period
(such as for example, but not limited to, official reserve
requirements required by Regulation D to the extent not given
effect in determining the rate), Collateral Agent shall promptly
notify Borrower (after Collateral Agent is notified by any such
Lender), and (x) all existing LIBOR Rate Loans shall convert to
Prime Rate Loans upon the end of the applicable Interest Period,
and (y) no additional LIBOR Rate Loans shall be made until such
circumstances are cured.
(c) If, after the date hereof, the introduction of, or any change
in any applicable law, treaty, rule, regulation or guideline or in
the interpretation or administration thereof by any governmental
authority or any central bank or other fiscal, monetary or other
authority having jurisdiction over Collateral Agent, any Lender or
their respective lending offices (a "Regulatory Change"), shall, in
the opinion of counsel to Collateral Agent or any Lender, make it
unlawful for Collateral Agent or any Lender to make or maintain
LIBOR Rate Loans, then Collateral Agent shall promptly notify
Borrower and (i) the LIBOR Rate Loans shall immediately convert to
Prime Rate Loans on the last Business Day of the then existing
Interest Period or on such earlier date as required by law and (ii)
no additional LIBOR Rate Loans shall be made until such circumstance
is cured.
(d) If, for any reason, a LIBOR Rate Loan is paid prior to the
last Business Day of any Interest Period or if a LIBOR Rate Loan
does not occur on a date specified by Borrower in its request (other
than as a result of a default by a Lender), Borrower agrees to
indemnify Agents and Lenders against any loss (including
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 8 -
<PAGE> 32
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
any loss on redeployment of the funds repaid), cost or expense
incurred by the Agents and Lenders as a result of such prepayment.
(e) If any Regulatory Change (whether or not having the force of
law) shall (i) impose, modify or deem applicable any assessment,
reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of or loans by, Collateral
Agent or any Lender; (ii) subject Collateral Agent or any Lender or
the LIBOR Rate Loans to any tax, duty, charge, stamp tax or fee or
change the basis of taxation of payments to Collateral Agent or any
Lender of principal or interest due from Borrower to Collateral
Agent and Lenders hereunder (other than a change in the taxation of
the overall net income of Collateral or any Lender); or (iii) impose
on Collateral Agent or any Lender any other condition regarding the
LIBOR Rate Loans or Collateral Agent's or any Lender's funding
thereof, and Collateral Agent or any Lender shall determine (which
determination shall be conclusive, absent any manifest error) that
the result of the foregoing is to increase the cost to Collateral
Agent or such Lender of making or maintaining the LIBOR Rate Loans
or to reduce the amount of principal or interest received by the
Collateral Agent or such Lender hereunder, then Borrower shall pay
to Collateral Agent or such Lender hereunder, then Borrower shall
pay to Collateral Agent and Lenders, on demand, such additional
amount as Collateral Agent and Lenders shall, from time to time,
determine are sufficient to compensate and indemnify Collateral
Agent and Lenders from such increased cost or reduced amount.
Notwithstanding the foregoing, in the event that Borrower is
required to indemnify any Lender from such increased cost or reduced
amount under this Paragraph (5)(e), Borrower may request in writing
that Administrative Agent seek a replacement Lender for any such
Lender requesting indemnification, which replacement Lender would
not be subject to the same increased costs as the Lender seeking
indemnification. If Administrative Agent is unable to find a
replacement Lender within sixty (60) days of the request therefor by
Borrower, Borrower may seek a replacement Lender, which replacement
Lender must be acceptable to Agents in their reasonable discretion.
Prior to
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 9 -
<PAGE> 33
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
any such replacement Lender becoming a party thereto, Borrower
shall be required to pay all amount required under this Paragraph
(5)(e).
(f) Each request for LIBOR Rate Loans shall be in an amount not
less than Two Million Five Hundred Thousand and No/100 Dollars
($2,500,000), and in integral multiples of Five Hundred Thousand and
No/100 Dollars ($500,000) thereafter.
(g) No more than six (6) LIBOR Rate Loans may be outstanding at
any time.
(h) Unless otherwise specified by Borrower, all Loans shall be
Prime Rate Loans.
(i) No LIBOR Rate Loans may be requested or made until the
earlier of (i) ninety (90) days following the date hereof and (ii)
the date on which Administrative Agent completes the initial
syndication of the Loans hereunder to other Lenders.
(6) FEES AND CHARGES:
(a) Unused Line Fee: Borrower shall pay to Collateral Agent, for
the benefit of Lenders, an unused line fee equal to one-half of one
percent (0.50%) per annum, based on a three hundred sixty (360) day
year, of the difference between Eighty-Five Million and No/100
Dollars ($85,000,000) and the average daily loan balance plus the
average daily outstanding face amount of all Letters of Credit.
Such fee shall be fully earned by Lenders and paid to Collateral
Agent monthly in arrears on the last Business Day of each month.
(b) Collateral Monitoring Fee: Borrower shall pay to Collateral
Agent solely for the account of Collateral Agent, an annual
collateral monitoring fee of One Hundred Thousand and No/100 Dollars
($100,000) per year, which fee shall be fully earned and payable on
the date hereof and on each anniversary of the date hereof during
the Original Term or any Renewal Term.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 10 -
<PAGE> 34
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(c) Facility Fee: Borrower shall pay to Collateral Agent, for
the benefit of Lenders a Facility Fee as set forth in that certain
Fee Letter of even date herewith among Borrower Collateral Agent,
LaSalle and BTCC (the "Fee Letter").
(7) SETTLEMENTS, DISTRIBUTIONS AND APPORTIONMENT OF PAYMENTS: On a weekly
basis (or more frequently if requested by Collateral Agent) (a "Settlement
Date"), Collateral Agent shall provide each Lender with a statement of the
outstanding balance of the Liabilities as of the end of the business day
immediately preceding the Settlement Date (the "Pre-Settlement
Determination Date") and the current balance of the Loans funded by each
Lender (whether made directly by such Lender to Borrower or constituting a
settlement by such Lender of a previous Disproportionate Advance made by
Collateral Agent on behalf of such Lender to Borrower). If such statement
discloses that such Lender's current balance of the Loans as of the
Pre-Settlement Determination Date exceeds such Lender's Pro Rata Share of
the Liabilities outstanding as of the Pre-Settlement Determination Date,
then Collateral Agent shall, one (1) business day after the Settlement
Date, transfer, by wire transfer, the net amount due to such Lender in
accordance with such Lender's instructions, and if such statement
discloses that such Lender's current balance of the Loans as of the
Pre-Settlement Determination Date is less than such Lender's Pro Rata
Share of the Liabilities outstanding as of the Pre-Settlement
Determination Date, then such Lender shall, one (1) business day after the
Settlement Date, transfer, by wire transfer the net amount due to
Collateral Agent in accordance with Collateral Agent's instructions. In
addition, payments actually received by Collateral Agent with respect to
the following items shall be distributed by Collateral Agent to Lenders as
follows:
(a) Within three (3) Business Days of receipt thereof by
Collateral Agent, payments to be applied to interest on the Loans
shall be paid to each Lender in proportion to its Pro Rata Share,
subject to any adjustments for any Disproportionate Advances as
provided in Paragraph 2 of the Agreement, so that Collateral Agent
shall receive interest on the Disproportion Advances and
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 11 -
<PAGE> 35
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
each Lender shall only receive interest on the amount of funds
actually advanced by such Lender;
(b) Within three (3) Business Days of receipt thereof by
Collateral Agent, payments to be applied to the prepayment fee as
provided in Paragraph 10 of the Agreement shall be paid to each
Lender in proportion to its Pro Rata Share;
(c) Within three (3) Business Days of receipt thereof by
Collateral Agent, payments to be applied the Letter of Credit fee
set as provided in Paragraph (2)(b) of this Exhibit A shall be paid
to each Lender in proportion to its Pro Rata Share; and
(d) Within three (3) Business Days of receipt thereof by
Collateral Agent, payments to be applied to the Unused Line Fee set
forth on Paragraph (5)(a) of this Exhibit A shall be paid to each
Lender in proportion to its Pro Rata Share;
(e) Within three (3) Business Days of receipt thereof by
Collateral Agent, payments to be applied to the Facilities Fee set
forth in Paragraph (5)(c) of this Exhibit A shall be paid to the
parties, and in the amounts set forth in the Fee Letter.
(8) ADDITIONS AND CHANGES TO COVENANTS
(a) CHECKING ACCOUNT PROVISIONS: Borrower shall maintain its
general checking account with LaSalle. Normal charges shall be
assessed thereon. Although no compensating balance is required,
Borrower must keep monthly balances in order to merit earnings
credits which will cover LaSalle's service charges for demand
deposit account activities.
(9) CONDITIONS TO CLOSING: Agents and Lenders shall be under no obligation
to consummate the transactions contemplated by this Agreement until each
of the conditions listed in this Paragraph (9) has been satisfied.
Whenever a condition contained herein requires delivery of an agreement or
other document to either Agent
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 12 -
<PAGE> 36
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
and/or Lenders, each such agreement or other document shall be in form
and substance satisfactory to Collateral Agent in its sole discretion.
(a) REAL PROPERTY AS COLLATERAL: As additional security for the
payment of all Loans now or in the future made by Lenders to
Borrower and for the payment or other satisfaction of all other
Liabilities, Borrower shall convey, mortgage, assign, transfer and
pledge to Collateral Agent, for the benefit of Agents and Lenders,
that certain real property commonly known as 501 Daniel Street,
Tarboro, North Carolina ("Property") and, if title to said Property
is in a land trust, any beneficial interest relative thereto. In
connection therewith, Borrower shall execute such documentation with
respect to each parcel as Collateral Agent, in its sole discretion,
deems necessary, including, without limitation, a Mortgage and
Security Agreement or similar instrument, Assignment of Leases and
Rents, Tenant Subordination, Tenant and Attornment Agreement and
Collateral Assignment of Beneficial Interest. Borrower shall also
provide Collateral Agent with a copy of all leases, if any, relative
to said Property. Borrower shall furnish Collateral Agent (i) a
current spotted plat of survey of the Property prepared by a North
Carolina Licensed Surveyor and made in accordance with the standards
of practice for land surveying in North Carolina as contained in
Board Rule 1600 of the North Carolina Board of Registration of Land
Surveyors and Engineers and certified to both the Collateral Agent
on behalf of the Lenders and the title insurance company, setting
forth: (a) all easements, rights of way and other encumbrances and
matters of record affecting or appurtenant to the Property; (b) the
established building line(s) and side yard line(s), if any; (c) the
line of the street or streets abutting the Property or any portion
thereof; (d) any and all encroachments (and the extent thereof in
feet and inches) upon the Property or any easement appurtenant
thereto; (e) all improvements on the Property; and (f) the area of
the Property; and (ii) a commitment for an ALTA Mortgagee's Policy
of Title Insurance (the "Title Policy") issued by a title insurance
company acceptable to Collateral Agent and Lenders (the "Title
Company") in such amount and with such exceptions and endorsements
as Collateral Agent
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 13 -
<PAGE> 37
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
deems proper in its sole discretion. Said Title Policy shall
include, without limitation, the following endorsements:
(i) Comprehensive Endorsement;
(ii) Zoning 3.1 (Completed Structure) Endorsement;
(iii) Location Endorsement;
(iv) Last Dollar Endorsement;
(v) Variable Rate Endorsement;
(vi) Future Advance, Revolving Credit Endorsement;
(vii) Doing Business Endorsement;
(viii) Access Endorsement;
(ix) Survey Endorsement;
(x) Usury Endorsement;
(xi) Modified Fraudulent Conveyance Endorsement;
(xii) Contiguity Endorsement; and
(xiii) Tax Parcel Endorsement.
Borrower shall furnish evidence satisfactory to Bank that the Property is
not located in an area designated by the Secretary of Housing and Urban
Development as having special flood hazards, or if it is so located,
furnish satisfactory evidence that flood insurance is in effect.
(b) LANDLORD'S AGREEMENT: Borrower shall cause to be executed
and delivered to Collateral Agent a Landlord's Agreement from each
lessor of property set forth
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 14 -
<PAGE> 38
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
on Exhibit B, which Landlord's Agreements shall include a copy of
the relevant lease.
(c) GUARANTIES: Borrower shall cause to be executed in favor of
Agents and Lenders and delivered to Collateral Agent the Continuing
Unconditional Guaranty of Empire of Carolina, Inc. of any and all
indebtedness of Borrower to Agents and Lenders.
(d) SUBORDINATION AGREEMENTS: Borrower shall cause its
indebtedness to Empire of Carolina, Inc. to be subordinated to the
indebtedness of Borrower to Agents and Lenders on terms acceptable
to Collateral Agent and Lenders in their sole discretion and shall
cause such subordinated debtholder to execute and deliver to
Collateral Agent a Subordination Agreement.
(e) WAREHOUSEMAN'S AGREEMENTS: Agents and Lenders hereby
acknowledge that Eligible Inventory is from time to time stored with
a bailee, warehouseman or similar party at the locations identified
on Exhibit B. Borrower shall cause each such party to execute and
deliver to Collateral Agent a warehouseman's agreement.
(f) FEE LETTER: Borrower shall execute and deliver to Collateral
Agent and Administrative Agent the Fee Letter.
(g) PATENT, TRADEMARK AND LICENSE MORTGAGE: Borrower shall
execute and deliver to Collateral Agent a Patent, Trademark and
License Mortgage.
(h) COPYRIGHT SECURITY AGREEMENT: Borrower shall execute and
deliver to Collateral Agent a Copyright Security Agreement.
(i) STOCK PLEDGE: Borrower shall cause Empire of Carolina, Inc.
to pledge sixty-five percent (65%) of its stock of Marchon Toys Hong
Kong, Ltd. pursuant to documentation acceptable to Collateral Agent
and Lenders.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 15 -
<PAGE> 39
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(j) MERGER: Empire Industries, Inc. and Marchon, Inc. shall have
merged with and into Empire Manufacturing, Inc., with Empire
Manufacturing, Inc. being the surviving entity and Empire
Manufacturing, Inc. shall simultaneously change its name to Empire
Industries, Inc., on terms and conditions and subject to
documentation satisfactory to Agents and Lenders.
(k) OPINIONS OF COUNSEL: Borrower's counsel shall execute and
deliver to Collateral Agent its favorable opinion with respect to
the transactions contemplated hereby.
(l) CONVERSION OF DEBT TO EQUITY: Borrower shall have provided
evidence to Agents and Lenders that all indebtedness of Borrower to
its Parent in excess of $21,095,000 has been reclassified as a
contribution to capital.
(10) AGENT:
(a) APPOINTMENT OF AGENTS:
(i) Each Lender hereby designates LaSalle as
Collateral Agent and BTCC as Administrative Agent to act as
herein specified. Each Lender hereby irrevocably authorizes
Agents to take such action on its behalf under the provisions
of this Agreement and the notes and any other instruments and
agreements referred to herein and to exercise such powers and
to perform such duties hereunder and thereunder as are
specifically delegated to or required of each Agent by the
terms hereof and thereof and such other powers as are
reasonably incidental thereto. Except as otherwise provided
herein, Collateral Agent shall hold all Collateral and all
payments of principal, interest, fees, charges and expenses
received pursuant to this Agreement or any of the Other
Agreements for the benefit of Lenders. Each Agent may perform
any of its duties hereunder by or through its agents or
employees.
(ii) The provisions of this Paragraph (10) are solely
for the benefit of Agents and Lenders, and neither Borrower
nor any other Obligor shall have any
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 16 -
<PAGE> 40
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
rights as a third party beneficiary of any of the provisions
hereof. In performing its functions and duties under this
Agreement, each Agent shall act solely as agent of Lenders
and does not assume and shall not be deemed to have assumed
any obligation toward or relationship of agency or trust with
or for any Obligor.
(b) NATURE OF DUTIES OF AGENTS: Neither Agent shall have duties
or responsibilities except those expressly set forth in this
Agreement. Neither Agent nor any of its respective officers,
directors, employees or agents shall be liable for any action taken
or omitted by it as such hereunder or in connection herewith, unless
caused by its or their gross negligence or willful misconduct. The
duties of each Agent shall be mechanical and administrative in
nature; neither Agent shall have by reason of this Agreement a
fiduciary relationship in respect of any Lender; and nothing in this
Agreement, expressed or implied, is intended to or shall be so
construed as to impose upon either Agent any obligations in respect
of this Agreement except as expressly set forth herein.
(c) LACK OF RELIANCE ON AGENTS:
(i) Independently and without reliance upon either
Agent, each Lender, to the extent it deems appropriate, has
made and shall continue to make (A) its own independent
investigation of the financial or other condition and affairs
of Agents, each Obligor and any other Lender in connection
with the taking or not taking of any action in connection
herewith and (B) its own appraisal of the creditworthiness of
each Agent, each Obligor and any other Lender, and, except as
expressly provided in this Agreement, neither Agent shall have
any duty or responsibility, either initially or on a
continuing basis, to provide any Lender with any credit or
other information with respect thereto, whether coming into
its possession before the making of the Loans or at any time
or times thereafter.
(ii) Neither Agent shall be responsible to any Lender
for any recitals, statements, information, representations or
warranties herein or in any
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 17 -
<PAGE> 41
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
document, certificate or other writing delivered in
connection herewith or for the execution, effectiveness,
genuineness, validity, enforceability, collectibility,
priority or sufficiency of this Agreement or any notes or the
financial or other condition of any Obligor. Neither Agent
shall be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or
conditions of this Agreement or the notes, or the financial
condition of any Obligor, or the existence or possible
existence of any Default or Event of Default, unless
specifically requested to do so in writing by any Lender.
(d) CERTAIN RIGHTS OF AGENTS: Each Agent shall have the right to
request instructions from the Requisite Lenders or all Lenders, as
applicable pursuant to Paragraph (13) of this Exhibit A, by notice
to each Lender. If either Agent shall request instructions from the
Requisite Lenders or all Lenders, as applicable, with respect to any
act or action (including the failure to act) in connection with this
Agreement, such Agent shall be entitled to refrain from such act or
taking such action unless and until such Agent shall have received
instructions from the Requisite Lenders or all Lenders, as
applicable, and such Agent shall not incur liability to any Person
by reason of so refraining. Without limiting the foregoing, no
Lender shall have any right of action whatsoever against either
Agent as a result of such Agent acting or refraining from acting
hereunder in accordance with the instructions of the Requisite
Lenders or all Lenders, as applicable.
(e) RELIANCE BY AGENTS: Each Agent shall be entitled to rely,
and shall be fully protected in relying, upon any note, writing,
resolution, notice, statement, certificate, telex, teletype or
telecopier message, cablegram, radiogram, order or other
documentary, teletransmission or telephone message believed by it to
be genuine and correct and to have been signed, sent or made by the
proper person. Each Agent may consult with legal counsel (including
counsel for Borrower with respect to matters concerning Borrower),
independent public accountants and other experts selected by it and
shall not be liable for any action taken or
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 18 -
<PAGE> 42
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
(f) INDEMNIFICATION OF AGENTS: To the extent an Agent is not
reimbursed and indemnified by Borrower, each Lender will reimburse
and indemnify such Agent, in proportion to its Pro Rata Share, for
and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses (including
counsel fees and disbursements) or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted
against such Agent in performing its duties hereunder, in any way
relating to or arising out of this Agreement; provided, that no
Lender shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from such Agent's gross
negligence or willful misconduct.
(g) AGENTS IN THEIR INDIVIDUAL CAPACITIES: With respect to the
Loans made by it pursuant hereto, each Agent shall have the same
rights and powers hereunder as any other Lender or holder of a note
or participation interest and may exercise the same as though it was
not performing the duties specified herein; and the terms "Lenders,"
"Requisite Lenders" or any similar terms shall, unless the context
clearly otherwise indicates, include each Agent in its individual
capacity. Each Agent may accept deposits from, lend money to,
acquire equity interests in, and generally engage in any kind of
banking, trust, financial advisor or other business with Borrower or
any Affiliate of Borrower as if it were not performing the duties
specified herein, and may accept fees and other consideration from
Borrower for services in connection with this Agreement and
otherwise without having to account for the same to Lenders, to the
extent such activities are not in contravention of the terms of this
Agreement.
(h) HOLDERS OF NOTES: Each Agent may deem and treat the payee of
any promissory note as the owner thereof for all purposes hereof
unless and until a written notice of the assignment or transfer
thereof shall have been filed with Administrative Agent. Any
request, authority or consent of any Person who, at the time of
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 19 -
<PAGE> 43
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
making such request or giving such authority or consent, is the
holder of any promissory note, shall be conclusive and binding on
any subsequent holder, transferee or assignee of such promissory
note or of any promissory note or notes issued in exchange
therefor.
(i) SUCCESSOR AGENT:
(i) Each Agent may, upon five (5) business days'
notice to Lenders and Borrower, resign at any time (effective
upon the appointment of a successor Agent pursuant to the
provisions of this Paragraph (10)(i)) by giving written notice
thereof to the other Agent, Lenders and Borrower. Upon any
such resignation, the Requisite Lenders shall have the right,
upon five (5) days' notice, to appoint a successor Agent. If
no successor Agent shall have been so appointed by the
Requisite Lenders and accepted such appointment, within thirty
(30) days after the retiring Agent's giving of notice of
resignation, then, upon five (5) days' notice, the retiring
Agent may, on behalf of Lenders, appoint a successor Agent,
which shall be a bank or a trust company or other financial
institution which maintains an office in the United States, or
a commercial bank organized under the laws of the United
States of America or of any State thereof, or any Affiliate of
such bank or trust company or other financial institution
which is engaged in the banking business, having a combined
capital and surplus of at least Fifty Million and No/100
Dollars ($50,000,000).
(ii) Upon the acceptance of any appointment as an
Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and
obligations under this Agreement. After any retiring Agent's
resignation hereunder as Agent, the provisions of this
Paragraph (10) shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was an Agent under
this Agreement.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 20 -
<PAGE> 44
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(j) COLLATERAL MATTERS:
(i) Each Lender authorizes and directs Collateral
Agent to enter into the Other Agreements for the benefit of
Lenders. Each Lender hereby agrees that, except as otherwise
set forth herein, any action taken by the Requisite Lenders in
accordance with the provisions of this Agreement or the Other
Agreements, and the exercise by the Requisite Lenders of the
powers set forth herein or therein, together with such other
powers as are reasonably incidental thereto, shall be
authorized and binding upon all Lenders. Collateral Agent is
hereby authorized on behalf of all Lenders, without the
necessity of any notice to or further consent from any Lender
to take any action with respect to any Collateral or Other
Agreements which may be necessary to perfect and maintain
perfected the security interest in and liens upon the
Collateral granted pursuant to the Other Agreements.
(ii) Collateral Agent will not, without the verbal
consent of all Lenders, which consent shall (a) be confirmed
promptly thereafter in writing and (b) not be unreasonably
withheld or delayed, execute any release of Collateral Agent's
security interest in any Collateral except for releases
relating to dispositions of Collateral (x) permitted by this
Agreement and (y) in connection with the repayment in full of
all of the Liabilities by Borrower and the termination of all
obligations of Agents and Lenders under this Agreement and the
Other Agreements; provided, that Collateral Agent shall not be
required to execute any such release on terms which, in
Collateral Agent's opinion, would expose Collateral Agent to
liability or create any obligation or entail any consequence
other than the release of such liens without recourse or
warranty. In the event of any sale or transfer of any of the
Collateral, Collateral Agent shall be authorized to deduct all
of the expenses reasonably incurred by Collateral Agent from
the proceeds of any such sale, transfer or foreclosure.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 21 -
<PAGE> 45
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(iii) Lenders hereby agree that the lien granted to
Collateral Agent in any property sold or disposed of in
accordance with the provisions of Paragraph 6 of the Agreement
shall be automatically released; provided, however that
Collateral Agent's lien shall attach to and continue for the
benefit of Agents and Lenders in the proceeds and products of
such property arising from any such sale or disposition.
(iv) To the extent, pursuant to the provisions of this
Paragraph (10)(j)(iv), Collateral Agent's execution of a
release is required to release its lien upon any sale and
transfer of Collateral which is consented to in writing by the
Requisite Lenders or all Lenders, as applicable, and upon at
least five (5) business days' prior written request by
Borrower, Collateral Agent shall (and is hereby irrevocably
authorized by Lenders to) execute such documents as may be
necessary to evidence the release of the liens granted to
Collateral Agent for the benefit of Lenders herein or pursuant
hereto upon the Collateral that was sold or transferred.
(v) Neither Agent shall have any obligation
whatsoever to Lenders or to any other Person to assure that
the Collateral exists or is owned by Borrower or any other
Obligor or is cared for, protected or insured or that the
liens granted to Collateral Agent herein or pursuant hereto
have been properly or sufficiently or lawfully created,
perfected, protected or enforced or are entitled to any
particular priority, or to exercise or to continue exercising
at all or in any manner or under any duty of care, disclosure
or fidelity any of the rights, authorities and powers granted
or available to Collateral Agent in this Paragraph (10) or in
any of the Other Agreements, it being understood and agreed
that in respect of the Collateral, or any act, omission or
event related thereto, Collateral Agent may act in any manner
it may deem appropriate, in its sole discretion, given
Collateral Agent's own interest in the Collateral as one of
Lenders and that Collateral Agent shall have no duty or
liability whatsoever to Lenders, except for its gross
negligence or willful misconduct.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 22 -
<PAGE> 46
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(k) ACTIONS WITH RESPECT TO DEFAULTS: In addition to Collateral
Agent's right to take actions on its own accord as permitted under
this Agreement, Collateral Agent shall take such action with respect
to an Event of Default as shall be directed by the Requisite Lenders
or all Lenders, as applicable pursuant to Paragraph (13) of this
Exhibit A; provided, that until Collateral Agent shall have received
such directions, Collateral Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with
respect to such Event of Default as it shall deem advisable and in
the best interests of Lenders.
(l) DELIVERY OF INFORMATION: Neither Agent shall be required to
deliver to any Lender originals or copies of any documents,
instruments, notices, communications or other information received
by such Agent from Borrower or any other Obligor, the Requisite
Lenders, any Lender or any other Person under or in connection with
this Agreement or any Other Agreement except (i) as specifically
provided in this Agreement or any Other Agreement and (ii) as
specifically requested from time to time in writing by any Lender
with respect to a specific document, instrument, notice or other
written communication received by and in the possession of
Administrative Agent at the time of receipt of such request and then
only in accordance with such specific request.
(m) DEMAND: Collateral Agent shall make demand for repayment by
Borrower of all Liabilities owing by Borrower hereunder, after the
occurrence of an Event of Default, upon the written request of the
Requisite Lenders. Collateral Agent shall make such demand in such
manner as it deems appropriate, in its sole discretion, to
effectuate the request of the Requisite Lenders. Nothing contained
herein shall limit the discretion of Collateral Agent to take
reserves, to deem certain Accounts and Inventory ineligible, or to
exercise any other discretion granted to Collateral Agent in this
Agreement.
(11) ASSIGNABILITY:
(a) Borrower shall not have the right to assign this Agreement or
any interest therein except with the prior written consent of Agents
and all Lenders.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 23 -
<PAGE> 47
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(b) Any Lender may make, carry or transfer Loans at, to or for
the account of, any of its branch offices or the office of an
Affiliate of such Lender except to the extent such transfer would
result in increased costs to Borrower.
(c) Each Lender may, with the consent of each Agent, which
consent shall not be unreasonably withheld, but without the consent
of any other Lender, assign to one or more banks or other financial
institutions all or a portion of its rights and obligations under
this Agreement; provided, that (i) for each such assignment, the
parties thereto shall execute and deliver to Administrative Agent,
for its acceptance and recording in the Register (as defined below),
an Assignment and Acceptance in the form attached hereto as Exhibit
C, and a processing and recordation fee of Two Thousand Five Hundred
and No/100 Dollars ($2,500) to be paid by the assignee, (ii) no such
assignment shall be for less than Five Million and No/100 Dollars
($5,000,000) and (iii) such assignment will not be made without the
consent of Borrower, which consent will not be unreasonably
withheld, if, but only if, (x) Borrower would be required at the
time of such assignment to pay additional costs and expenses to such
new Lender as a result of additional capital reserve or similar
costs of such new Lender which exceed those of the assigning Lender
at the time of assignment or (y) such new Lender is not a financial
institution listed on Exhibit E hereto. Upon such execution and
delivery of the Assignment and Acceptance to Administrative Agent,
from and after the date specified as the effective date in the
Assignment and Acceptance (the "Acceptance Date"), (x) the assignee
thereunder shall be a party hereto, and, to the extent that rights
and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, such assignee shall have the rights and
obligations of a Lender hereunder and (y) the assignor thereunder
shall, to the extent that rights and obligations hereunder have been
assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights (other than any rights it may have pursuant to
Paragraph 15 of the Agreement which will survive) and be released
from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of
an assigning Lender's rights and obligations under this Agreement,
such Lender shall cease to be a party hereto).
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 24 -
<PAGE> 48
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
(d) By executing and delivering an Assignment and Acceptance, the
assignee thereunder confirms and agrees as follows: (i) other than
as provided in such Assignment and Acceptance, the assigning Lender
makes no representation or warranty and assumes no responsibility
with respect to any statements, warranties or representations made
in or in connection with this Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this
Agreement or any of the Other Agreements, (ii) such assigning Lender
makes no representation or warranty and assumes no responsibility
with respect to the financial condition of Borrower or any other
Obligor or the performance or observance by Borrower or any other
Obligor of its obligations under this Agreement, (iii) such assignee
confirms that it has received a copy of this Agreement, together
with copies of the financial statements referred to in Paragraph
12(b) of the Agreement and such other documents and information as
it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance, (iv) such
assignee will, independently and without reliance upon either Agent,
such assigning Lender or any other Lender and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking
action under this Agreement, (v) such assignee appoints and
authorizes Agents to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to Agents
by the terms hereof, together with such powers as are reasonably
incidental thereto and (vi) such assignee agrees that it will
perform in accordance with their terms all of the obligations which
by the terms of this Agreement are required to be performed by it as
a Lender.
(e) Administrative Agent shall, maintain at its address referred
to in Paragraph 16 of the Agreement a copy of each Assignment and
Acceptance delivered to and accepted by it and a register for the
recordation of the names and addresses of Lenders and the Maximum
Loan Amounts of, and principal amount of the Loans owing to, each
Lender from time to time (the "Register"). The entries in the
Register shall be conclusive and binding for all purposes, absent
manifest error, and Borrower, Agents and Lenders may treat each
Person whose name is
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 25 -
<PAGE> 49
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
recorded in the Register as a Lender hereunder for all purposes of
this Agreement. The Register and copies of each Assignment and
Acceptance shall be available for inspection by Borrower,
Collateral Agent or any Lender at any reasonable time and from time
to time upon reasonable prior notice.
(f) Upon its receipt of an Assignment and Acceptance executed by
an assigning Lender, Administrative Agent shall, if such Assignment
and Acceptance has been completed and is in substantially the form
of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii)
record the information contained therein in the Register, (iii) give
notice thereof to Collateral Agent on the date of receipt and (iv)
give prompt notice thereof to Borrower. Within five (5) Business
Days after its receipt of such notice, Borrower shall execute and
deliver to Administrative Agent in exchange for the surrendered
promissory note or notes, a new promissory note or notes to the
order of the assignee in an amount equal to the maximum amount of
Loans such assignee may at any time make under the terms of this
Agreement and, if the assigning Lender has retained a portion of the
Loans, a new promissory note or notes to the order of the assigning
Lender in an amount equal to the maximum amount of Loans such
assigning Lender may at any time make under the terms of this
Agreement. Such new promissory note or notes shall re-evidence the
indebtedness outstanding under the old promissory note or notes and
shall be in the aggregate principal amount of such surrendered
promissory note or notes, shall be dated of even date herewith and
shall otherwise be in substantially the form of the promissory note
or notes subject to such assignment.
(g) Each Lender may sell participations (without the consent of
either Agent, Borrower or any other Lender) to one or more parties,
in or to all or a portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of its
Maximum Loan Amount or the Loans owing to it); provided, that (i)
such Lender's obligations under this Agreement (including, without
limitation, its Maximum Loan Amount hereunder) shall remain
unchanged, (ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii)
Borrower, Agents, and the other Lenders
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 26 -
<PAGE> 50
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this
Agreement and (iv) such Lender shall not transfer, grant, assign or
sell any participation under which the participant shall have
rights to approve any amendment or waiver of this Agreement except
to the extent such amendment or waiver would (A) extend the final
maturity date or the date for the payment of any installment of
fees or principal or interest of any Loans in which such
participant is participating, (B) reduce the amount of any
installment of principal of the Loans in which such participant is
participating, (C) reduce the interest rate applicable to the Loans
in which such participant is participating, or (D) reduce any fees
payable hereunder.
(h) Each Lender agrees that, without the prior written consent of
Borrower and Agents, it will not make any assignment hereunder in
any manner or under any circumstances that would require
registration or qualification of, or filings in respect of, any Loan
or other Liabilities under the securities laws of the United States
of America or of any jurisdiction.
(i) In connection with the efforts of any Lender to assign its
rights or obligations or to participate interests, such Lender may
disclose any information in its possession regarding Borrower;
provided, that any such prospective assignee executes a
confidentiality Agreement in the form of Exhibit D hereto.
(12) EXCHANGE OF INFORMATION: Borrower hereby agrees that Agents and Lenders
may exchange any information concerning Borrower, including, without
limitation, information relating to the creditworthiness of Borrower in
the possession or control of Agents or Lenders, as the case may be; (i)
with any of their respective affiliates; (ii) to any regulatory authority
having jurisdiction over Agents or Lenders, (iii) to any other person, in
connection with the exercise of Agents' or Lenders' rights hereunder or
under any of the Other Agreements.
(13) AMENDMENTS, ETC.: No amendment or waiver of any provision of this
Agreement or any of the Other Agreements, nor consent to any departure by
any
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 27 -
<PAGE> 51
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE INDUSTRIES, INC. ("Borrower"), BT COMMERCIAL
CORPORATION, (in its individual capacity ("BTCC") and LASALLE NATIONAL BANK (in
its individual capacity, "LaSalle"), as a Lender, and as agent ("Collateral
Agent").
Obligor therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Requisite Lenders, or if Lenders
shall not be parties thereto, by the parties thereto and consented to by
the Requisite Lenders, and each such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for
which given; provided, that no amendment, waiver or consent shall, unless
in writing and signed by all Lenders, do any of the following: (i)
increase the Maximum Loan Amounts of Lenders or subject Lenders to any
additional obligations to extend credit to Borrower, (ii) reduce the
principal of, or interest on, the Loans (other than as expressly permitted
herein) or any fees hereunder, (iii) postpone any date fixed for any
payment in respect of principal of, or interest on, the Loan or any fees
hereunder, (iv) change the Pro Rata Shares of Lenders, or any minimum
requirement necessary for Lenders or the Requisite Lenders to take any
action hereunder, (v) amend or waive this Paragraph (13), or change the
definition of the Requisite Lenders, or (vi) except in connection with the
financing, refinancing, sale or other disposition of any asset of Borrower
permitted under this Agreement, release or subordinate any liens in favor
of Collateral Agent, for the benefit of Agents and Lenders, on any of the
Collateral and provided further, that no amendment, waiver or consent
affecting the rights or duties of either Agent under this Agreement or any
Other Agreement shall in any event be effective, unless in writing and
signed by such Agent in addition to Lenders required hereinabove to take
such action. Notwithstanding any of the foregoing to the contrary, the
consent of Borrower shall not be required for any amendment, modification
or waiver of the provisions of Paragraph (10) of this Exhibit A.
(14) NONLIABILITY OF AGENT AND LENDERS: The relationship between Borrower and
Lenders and Agents shall be solely that of borrower and lender. Neither
Agent nor any Lender shall have any fiduciary responsibilities to
Borrower. Neither Agent nor any Lender undertakes any responsibility to
Borrower to review or inform Borrower of any matter in connection with any
phase of Borrower's business or operations.
Date: May ___, 1996 Borrower: Empire Industries, Inc.
Initialed for Borrower by: _____
Initialed for Collateral Agent by: _____
Initialed for Administrative Agent by: _____
Initialed for LaSalle by: _____
Initialed for BTCC by: _____
- 28 -
<PAGE> 52
EXHIBIT B - BUSINESS AND COLLATERAL LOCATIONS
Attached to and made a part of that certain Loan and Security Agreement of even
date herewith by and among EMPIRE MANUFACTURING CORP. ("Borrower"), BT
COMMERCIAL CORPORATION, as a Lender, LASALLE NATIONAL BANK, as Collateral
Agent, a Lender, and all other Lenders now or hereafter a party to the Loan and
Security Agreement.
A. Borrower's Business Locations (please indicate which location is the
principal place of business and at which locations originals and all
copies of Borrower's books, records and accounts are kept).
1.
2.
3.
B. Other locations of Collateral (including, without limitation, warehouse
locations, processing locations, consignment locations) and all post
office boxes of Borrower. Please indicate the relationship of such
location to Borrower (i.e. public warehouse, processor, etc.).
1.
<PAGE> 53
SECURED PROMISSORY NOTE
Executed as of the ____ day of No. 2
May, 1996 at Chicago, Illinois.
Amount $60,000,000.00
FOR VALUE RECEIVED, the Undersigned (jointly and severally, if more than
one) promises to pay to the order of LaSalle National Bank, as collateral agent
or any successor collateral agent as may arise in accordance with the Loan
Agreement ("COLLATERAL AGENT"), for the benefit of BT Commercial Corporation
("BTCC") at the main office of Collateral Agent, the principal sum of Sixty
Million and No/100 Dollars ($60,000,000.00) or, if less, the aggregate unpaid
principal amount of all advances made by BTCC to the Undersigned (or any one of
them, if more than one) pursuant to and in accordance with Paragraph 2 of the
Loan Agreement (as hereinafter defined). The Undersigned (jointly and
severally, if more than one) further promises to pay interest on the
outstanding principal amount hereof to Collateral Agent, for the benefit of
BTCC, on the dates and at the rates provided in the Loan Agreement from the
date hereof until payment in full hereof.
This Note is referred to in and was delivered pursuant to that certain
Loan and Security Agreement, as it may be amended from time to time, together
with all exhibits thereto, of even date herewith among Collateral Agent,
Administrative Agent, Lenders and the Undersigned (the "LOAN AGREEMENT"). All
terms which are capitalized and used herein (which are not otherwise defined
herein) shall have the meaning ascribed to such term in the Loan Agreement.
THE OUTSTANDING PRINCIPAL BALANCE OF THE UNDERSIGNED'S LIABILITIES TO BTCC
SHALL BE PAYABLE UPON TERMINATION OF THE LOAN AGREEMENT PURSUANT TO PARAGRAPH
10 THEREOF, OR AFTER AN EVENT OF DEFAULT, UPON ACCELERATION OF THE LIABILITIES
PURSUANT TO PARAGRAPH 14 OF THE LOAN AGREEMENT. Prior to such termination or
acceleration, principal hereunder shall be payable pursuant to the terms of the
Loan Agreement.
The Undersigned (and each one of them, if more than one) hereby authorizes
Collateral Agent to charge any account of the Undersigned (and each of them, if
more than one) for all sums due hereunder. If payment hereunder becomes due
and payable on a Saturday, Sunday or legal holiday under the laws of the United
States or the State of Illinois, the due date thereof shall be extended to the
next succeeding business day, and interest shall be payable thereon at the rate
specified during such extension. Credit shall be given for payments made in
the manner and at the times provided in the Loan Agreement. It is the intent
of the parties that the rate of interest and other charges to the Undersigned
under this Note shall be lawful; therefore, if for any reason the interest or
other charges payable hereunder are found by a court of competent jurisdiction,
in a final determination, to exceed the limit which BTCC may lawfully charge
the Undersigned, then the obligation to pay interest or other charges shall
automatically be reduced to such limit and, if any amount in excess of such
limit shall have been paid, then such amount shall be refunded by BTCC to the
Undersigned.
<PAGE> 54
The principal and all accrued interest hereunder may be prepaid by the
Undersigned, in part or in full, at any time; provided, however, that if
Borrower prepays all of the Liabilities prior to the end of the Original Term
or any Renewal Term, the Undersigned shall pay a prepayment fee as provided in
the Loan Agreement.
The Undersigned (and each one of them, if more than one) waives the
benefit of any law that would otherwise restrict or limit Collateral Agent or
BTCC in the exercise of its right, which is hereby acknowledged after the
occurrence and continuation of any Event of Default (as defined in the Loan
Agreement), to set-off against the Liabilities, without notice and at any time
hereafter, any indebtedness matured or unmatured owing from Collateral Agent,
or BTCC to the Undersigned (or any one of them). The Undersigned (and each one
of them, if more than one) waives every defense, counterclaim or setoff which
the Undersigned (or any one of them) may now have or hereafter may have to any
action by Collateral Agent or Lenders in enforcing this Note and/or any of the
other Liabilities, or in enforcing Collateral Agent's rights in the Collateral
and ratifies and confirms whatever Collateral Agent and Lenders may do pursuant
to the terms hereof and of the Loan Agreement and with respect to the
Collateral and agrees that Collateral Agent and Lenders shall not be liable for
any error in judgment or mistakes of fact or law.
The Undersigned, any other party liable with respect to the Liabilities
and any and all endorsers and accommodation parties, and each one of them, if
more than one, waive any and all presentment, demand, notice of dishonor,
protest, and all other notices and demands in connection with the enforcement
of Collateral Agent's and BTCC's rights hereunder.
The loan evidenced hereby has been made and this Note has been delivered
at Chicago, Illinois. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE
INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT,
VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT
LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, and shall be
binding upon the Undersigned (and each one of them, if more than one) and the
Undersigned's heirs, legal representatives, successors and assigns (and each of
them, if more than one). If this Note contains any blanks when executed by the
Undersigned (or any one of them, if more than one), the Collateral Agent is
hereby authorized, without notice to the Undersigned (or any one of them, if
more than one) to complete any such blanks according to the terms upon which
the loan or loans were granted but Collateral Agent shall promptly deliver to
the Undersigned a copy of the Note showing the blanks completed. Wherever
possible, each provision of this Note shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or be invalid under such law, such provision shall be
severable, and be ineffective to the extent of such prohibition or invalidity,
without invalidating the remaining provisions of this Note. If more than one
party shall execute this Note, the term "UNDERSIGNED" as used herein shall mean
all parties signing this Note, and each one of them, and all such parties,
their respective heirs, executors, administrators, successors and assigns,
shall be jointly and severally obligated hereunder.
To induce BTCC to make the loans evidenced by this Note, the Undersigned
(and each one of them, if more than one) (i) irrevocably agrees that, subject
to the Collateral Agent's sole and absolute election, all actions arising
directly or indirectly as a result or in consequence of this Note or any other
agreement with the Collateral Agent, Administrative Agent any Lender, or the
-2-
<PAGE> 55
Collateral, shall be instituted and litigated only in courts having situs in
the City of Chicago, Illinois, (ii) hereby consents to the exclusive
jurisdiction and venue of any State or Federal Court located and having its
situs in said city, and (iii) waives any objection based on forum
non-conveniens. IN ADDITION, THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN
ONE) HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS
DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES, THE COLLATERAL, ANY
ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED, COLLATERAL AGENT, ADMINISTRATIVE
AGENT OR ANY LENDER OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF
OR RELATES TO THE RELATIONSHIP BETWEEN THE UNDERSIGNED AND COLLATERAL AGENT,
ADMINISTRATIVE AGENT OR ANY LENDER, waives personal service of any and all
process, and consents that all such service of process may be made by certified
mail, return receipt requested, directed to the agent designated in and
pursuant to the Loan Agreement; and service so made shall be complete five (5)
days after the same has been deposited in the U.S. mails as aforesaid.
As used herein, all provisions shall include the masculine, feminine,
neuter, singular and plural thereof, wherever the context and facts require
such construction and in particular the word "UNDERSIGNED" shall be so
construed.
IN WITNESS WHEREOF, each of the Undersigned, if more than one, has
executed this Note on the date above set forth.
EMPIRE INDUSTRIES, INC.
By________________________________
Name and Title
Address: 5150 Linton Boulevard
Delray Beach, Florida 33484
FOR AGENT USE ONLY
Officer's Initials: __________
Approval: __________
-3-
<PAGE> 56
SECURED PROMISSORY NOTE
Executed as of the ____ day of No. 1
May, 1996 at Chicago, Illinois.
Amount $25,000,000.00
FOR VALUE RECEIVED, the Undersigned (jointly and severally, if more than
one) promises to pay to the order of LaSalle National Bank, as collateral agent
or any successor collateral agent as may arise in accordance with the Loan
Agreement ("COLLATERAL AGENT"), for the benefit of LaSalle National Bank
("LASALLE") at the main office of Collateral Agent, the principal sum of
Twenty-Five Million and No/100 Dollars ($25,000,000.00) or, if less, the
aggregate unpaid principal amount of all advances made by LaSalle to the
Undersigned (or any one of them, if more than one) pursuant to and in
accordance with Paragraph 2 of the Loan Agreement (as hereinafter defined).
The Undersigned (jointly and severally, if more than one) further promises to
pay interest on the outstanding principal amount hereof to Collateral Agent,
for the benefit of LaSalle, on the dates and at the rates provided in the Loan
Agreement from the date hereof until payment in full hereof.
This Note is referred to in and was delivered pursuant to that certain
Loan and Security Agreement, as it may be amended from time to time, together
with all exhibits thereto, of even date herewith among Collateral Agent,
Administrative Agent, Lenders and the Undersigned (the "LOAN AGREEMENT"). All
terms which are capitalized and used herein (which are not otherwise defined
herein) shall have the meaning ascribed to such term in the Loan Agreement.
THE OUTSTANDING PRINCIPAL BALANCE OF THE UNDERSIGNED'S LIABILITIES TO
LASALLE SHALL BE PAYABLE UPON TERMINATION OF THE LOAN AGREEMENT PURSUANT TO
PARAGRAPH 10 THEREOF, OR AFTER AN EVENT OF DEFAULT, UPON ACCELERATION OF THE
LIABILITIES PURSUANT TO PARAGRAPH 14 OF THE LOAN AGREEMENT. Prior to such
termination or acceleration, principal hereunder shall be payable pursuant to
the terms of the Loan Agreement.
The Undersigned (and each one of them, if more than one) hereby authorizes
Collateral Agent to charge any account of the Undersigned (and each of them, if
more than one) for all sums due hereunder. If payment hereunder becomes due
and payable on a Saturday, Sunday or legal holiday under the laws of the United
States or the State of Illinois, the due date thereof shall be extended to the
next succeeding business day, and interest shall be payable thereon at the rate
specified during such extension. Credit shall be given for payments made in
the manner and at the times provided in the Loan Agreement. It is the intent
of the parties that the rate of interest and other charges to the Undersigned
under this Note shall be lawful; therefore, if for any reason the interest or
other charges payable hereunder are found by a court of competent jurisdiction,
in a final determination, to exceed the limit which LaSalle may lawfully charge
the Undersigned, then the obligation to pay interest or other charges shall
automatically be reduced to such limit and, if any amount in excess of such
limit shall have been paid, then such amount shall be refunded by LaSalle to
the Undersigned.
<PAGE> 57
The principal and all accrued interest hereunder may be prepaid by the
Undersigned, in part or in full, at any time; provided, however, that if
Borrower prepays all of the Liabilities prior to the end of the Original Term
or any Renewal Term, the Undersigned shall pay a prepayment fee as provided in
the Loan Agreement.
The Undersigned (and each one of them, if more than one) waives the
benefit of any law that would otherwise restrict or limit Collateral Agent or
LaSalle in the exercise of its right, which is hereby acknowledged after the
occurrence and continuation of any Event of Default (as defined in the Loan
Agreement), to set-off against the Liabilities, without notice and at any time
hereafter, any indebtedness matured or unmatured owing from Collateral Agent,
or LaSalle to the Undersigned (or any one of them). The Undersigned (and each
one of them, if more than one) waives every defense, counterclaim or setoff
which the Undersigned (or any one of them) may now have or hereafter may have
to any action by Collateral Agent or Lenders in enforcing this Note and/or any
of the other Liabilities, or in enforcing Collateral Agent's rights in the
Collateral and ratifies and confirms whatever Collateral Agent and Lenders may
do pursuant to the terms hereof and of the Loan Agreement and with respect to
the Collateral and agrees that Collateral Agent and Lenders shall not be liable
for any error in judgment or mistakes of fact or law.
The Undersigned, any other party liable with respect to the Liabilities
and any and all endorsers and accommodation parties, and each one of them, if
more than one, waive any and all presentment, demand, notice of dishonor,
protest, and all other notices and demands in connection with the enforcement
of Collateral Agent's and LaSalle's rights hereunder.
The loan evidenced hereby has been made and this Note has been delivered
at Chicago, Illinois. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE
INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT,
VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT
LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, and shall be
binding upon the Undersigned (and each one of them, if more than one) and the
Undersigned's heirs, legal representatives, successors and assigns (and each of
them, if more than one). If this Note contains any blanks when executed by the
Undersigned (or any one of them, if more than one), the Collateral Agent is
hereby authorized, without notice to the Undersigned (or any one of them, if
more than one) to complete any such blanks according to the terms upon which
the loan or loans were granted but Collateral Agent shall promptly deliver to
the Undersigned a copy of the Note showing the blanks completed. Wherever
possible, each provision of this Note shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or be invalid under such law, such provision shall be
severable, and be ineffective to the extent of such prohibition or invalidity,
without invalidating the remaining provisions of this Note. If more than one
party shall execute this Note, the term "UNDERSIGNED" as used herein shall mean
all parties signing this Note, and each one of them, and all such parties,
their respective heirs, executors, administrators, successors and assigns,
shall be jointly and severally obligated hereunder.
To induce LaSalle to make the loans evidenced by this Note, the
Undersigned (and each one of them, if more than one) (i) irrevocably agrees
that, subject to the Collateral Agent's sole and absolute election, all actions
arising directly or indirectly as a result or in consequence of this Note or
any other agreement with the Collateral Agent, Administrative Agent any Lender,
or the
-2-
<PAGE> 58
Collateral, shall be instituted and litigated only in courts having
situs in the City of Chicago, Illinois, (ii) hereby consents to the exclusive
jurisdiction and venue of any State or Federal Court located and having its
situs in said city, and (iii) waives any objection based on forum
non-conveniens. IN ADDITION, THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN
ONE) HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS
DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES, THE COLLATERAL, ANY
ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED, COLLATERAL AGENT, ADMINISTRATIVE
AGENT OR ANY LENDER OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF
OR RELATES TO THE RELATIONSHIP BETWEEN THE UNDERSIGNED AND COLLATERAL AGENT,
ADMINISTRATIVE AGENT OR ANY LENDER, waives personal service of any and all
process, and consents that all such service of process may be made by certified
mail, return receipt requested, directed to the agent designated in and
pursuant to the Loan Agreement; and service so made shall be complete five (5)
days after the same has been deposited in the U.S. mails as aforesaid.
As used herein, all provisions shall include the masculine, feminine,
neuter, singular and plural thereof, wherever the context and facts require
such construction and in particular the word "UNDERSIGNED" shall be so
construed.
IN WITNESS WHEREOF, each of the Undersigned, if more than one, has
executed this Note on the date above set forth.
EMPIRE INDUSTRIES, INC.
By________________________________
Name and Title
Address: 5150 Linton Boulevard
Delray Beach, Florida 33484
FOR AGENT USE ONLY
Officer's Initials: __________
Approval: __________
-3-
<PAGE> 59
SATISFACTION: The indebtedness secured
by this Deed of Trust has been satisfied in full.
By
Name_____________________________
Title______________________________
Date______________________________
Title Insurance issued in connection herewith:
Policy No.__________________________
Company___________________________
NORTH CAROLINA DEED OF
TRUST SECURING FUTURE ADVANCES
COLLATERAL IS OR INCLUDES FIXTURES
(Edgecombe County, North Carolina)
THIS NORTH CAROLINA DEED OF TRUST SECURING FUTURE ADVANCES ("DEED OF
TRUST"), made as of May __, 1996, is made and executed by Empire Industries,
Inc., a North Carolina corporation, having its principal offices at 501 Daniel
Street, Tarboro, North Carolina 27886 ("GRANTOR"), to T. Edmund Rast, having an
office at Moore and Van Allen, PLLC, 100 North Tryon Street, Floor 47,
Charlotte, North Carolina 28202 ("TRUSTEE"), and LaSalle National Bank, a
national banking association ("LASALLE"), having an office at 135 South LaSalle
Street, Chicago, Illinois 60674, as collateral agent ("COLLATERAL AGENT") for
the Lenders (as the term "Lenders" is defined in the Loan Agreement defined
below).
RECITALS
I. Grantor, BT Commercial Corporation ("BTCC"), as a Lender and as
administrative agent ("ADMINISTRATIVE AGENT") for all Lenders, and LaSalle, as
a Lender and as Collateral Agent, are parties to a certain Loan and Security
Agreement of even date herewith (said Loan and Security Agreement, together
with all amendments, supplements, modifications and replacements thereof, being
hereinafter referred to as the "LOAN AGREEMENT"), pursuant to which Collateral
Agent, Administrative Agent and Lenders have agreed to make loans and extend
certain other financial accommodations to Grantor in an aggregate amount not to
exceed $85,000,000 (collectively, the "LOANS").
II. The Loans consist of (i) a revolving loan in a maximum principal
amount of $60,000,000 being made by BTCC, which revolving loan is evidenced by
a certain Secured Promissory Note in the principal amount of $60,000,000
executed by Grantor and made payable to the order of BTCC (said Secured
Promissory Note, together with all amendments,
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supplements, modifications and full or partial replacements thereof, being
hereinafter referred to as the "$60,000,000 REVOLVING NOTE"), and (ii) a
revolving loan in a maximum principal amount of $25,000,000 being made by
LaSalle, which revolving loan is evidenced by a certain Secured Promissory Note
in the principal amount of $25,000,000 executed by Grantor and made payable to
the order of LaSalle (said Secured Promissory Note, together with all
amendments, supplements, modifications and full or partial replacements
thereof, being hereinafter referred to as the "$25,000,000 REVOLVING NOTE").
The $25,000,000 Revolving Note and the $60,000,000 Revolving Note are
hereinafter collectively referred to as the "NOTES." The terms and provisions
of the Notes and the Loan Agreement are hereby incorporated by reference in
this Deed of Trust.
III. The Loans are revolving loans and the aggregate outstanding
principal balances thereof may be increased or decreased from time to time as
more particularly set forth in the Loan Agreement, but in no event shall the
aggregate principal amount of the Loans exceed $85,000,000. The interest rates
chargeable on the Loans shall be as set forth in the Loan Agreement and the
final maturity date of the Loans shall be a date not later than ______________
(subject to renewal as provided in the Loan Agreement).
GRANTING CLAUSES
To secure the payment of (1) the indebtedness evidenced by the Notes and
the payment of all amounts due under and the performance and observance of all
covenants and conditions contained in this Deed of Trust, the Notes, the Loan
Agreement, any and all other mortgages, security agreements, assignments of
leases and rents, guaranties and any other documents and instruments now or
hereafter executed by Grantor or any party related thereto or affiliated
therewith, to evidence, secure or guarantee the payment of all or any portion
of the indebtedness under the Notes and any and all renewals, extensions,
amendments and replacements of this Deed of Trust, the Notes, the Loan
Agreement, and any such other documents and instruments (the Notes, this Deed
of Trust, the Loan Agreement, such other mortgages, security agreements,
assignments of leases and rents, guaranties, reimbursement agreements, and any
other documents and instruments now or hereafter executed and delivered in
connection with the Loans, and any and all amendments, renewals, extensions and
replacements hereof and thereof, being sometimes referred to collectively as
the "LOAN INSTRUMENTS" and individually as a "LOAN INSTRUMENT"), (2) payment of
all sums advanced by Lenders to protect the Mortgaged Property, with interest
at the Default Rate (defined herein), (3) payment of all other sums, with
interest thereon, which may hereafter be loaned to Grantor, or its successors
or assigns, by Lenders, or the successors or assigns of any one of them, when
evidenced by a promissory note or notes reciting that they are secured by this
Deed of Trust, (4) performance of every obligation, covenant and agreement of
Grantor contained in any other agreement now or hereafter executed by Grantor
which recites that the obligations thereunder are secured by this Deed of Trust
(all indebtedness and liabilities secured hereby being hereinafter sometimes
referred to as "BORROWER'S LIABILITIES"), Grantor hereby unequivocally
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grants, bargains, sells, warrants and conveys and does by these presents grant,
bargain, sell and convey unto the Trustee, his heirs, successors and assigns,
with power of sale, for the benefit of Collateral Agent and all Lenders, all of
Grantor's right, title and interest in and to the following described property
subject to the terms and conditions herein:
(A) The land located in Edgecombe County, in the State of North Carolina,
legally described in attached EXHIBIT A ("LAND");
(B) All the buildings, structures, improvements and fixtures of every kind
or nature now or hereafter situated on the Land and all machinery, appliances,
equipment, furniture and all other personal property of every kind or nature
which constitute fixtures with respect to the Land, together with all
extensions, additions, improvements, substitutions and replacements of the
foregoing ("IMPROVEMENTS");
(C) All easements, tenements, rights-of-way, vaults, gores of land,
streets, ways, alleys, passages, sewer rights, water courses, water rights and
powers and appurtenances in any way belonging, relating or appertaining to any
of the Land or Improvements, or which hereafter shall in any way belong, relate
or be appurtenant thereto, whether now owned or hereafter acquired
("APPURTENANCES");
(D) (i) All judgments, insurance proceeds, awards of damages and
settlements which may result from any damage to all or any portion of the Land,
Improvements or Appurtenances or any part thereof or to any rights appurtenant
thereto;
(ii) All compensation, awards, damages, claims, rights of action and
proceeds of or on account of (a) any damage or taking, pursuant to the power of
eminent domain, of the Land, Improvements or Appurtenances or any part thereof,
(b) damage to all or any portion of the Land, Improvements or Appurtenances by
reason of the taking, pursuant to the power of eminent domain, of all or any
portion of the Land, Improvements, Appurtenances or of other property, or (c)
the alteration of the grade of any street or highway on or about the Land,
Improvements, Appurtenances or any part thereof; and, except as otherwise
provided herein, Collateral Agent is hereby authorized to collect and receive
said awards and proceeds and to give proper receipts and acquittances therefor
and, except as otherwise provided herein, to apply the same toward the payment
of the indebtedness and other sums secured hereby; and
(iii) All proceeds, products, replacements, additions, substitutions,
renewals and accessions of and to the Land, Improvements or Appurtenances;
(E) All rents, issues, profits, income and other benefits now or hereafter
arising from or in respect of the Land, Improvements or Appurtenances (the
"RENTS"); it being intended that this Granting Clause shall constitute an
absolute and present assignment of the Rents, subject, however, to the
conditional permission given to Grantor to collect and deposit the Rents as
provided in this Deed of Trust;
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(F) Any and all leases, licenses and other occupancy agreements now or
hereafter affecting the Land, Improvements or Appurtenances, together with all
security therefor and guaranties thereof and all monies payable thereunder, and
all books and records owned by Grantor which contain evidence of payments made
under the leases and all security given therefor (collectively, the "LEASES"),
subject, however, to the conditional permission given in this Deed of Trust to
Grantor to collect and deposit the Rents arising under the Leases as provided
in this Deed of Trust;
(G) Any and all after-acquired right, title or interest of Grantor in and
to any of the property described in the preceding Granting Clauses; and
(H) The proceeds from the sale, transfer, pledge or other disposition of
any or all of the property described in the preceding Granting Clauses;
TO HAVE AND TO HOLD, the Mortgaged Property (defined herein) and all
estate therein, together with all the rights, privileges and appurtenances
thereunder in any way incident, appertaining or belonging, the same unto the
Trustee and his successor or successors forever, and Grantor hereby binds
itself, its successors and assigns, to warrant and forever defend title to the
Mortgaged Property unto the Trustee and his successor or successors, against
every person whomsoever lawfully claiming or to claim the same or any part
thereof to secure the indebtedness herein recited and upon this special trust;
provided, however, that should the indebtedness secured hereby be paid
according to the tenor and effect thereof when the same shall be due and
payable and should Grantor timely and fully discharge its obligations hereunder
and should the obligations of Lenders under the Loan Agreement be terminated,
then the Mortgaged Property shall be reconveyed to Grantor or the title thereto
shall be revested according to the provisions of law.
All of the mortgaged property described in the Granting Clauses, together
with all real and personal, tangible and intangible property pledged in, or to
which a security interest attaches pursuant to, any of the Loan Instruments is
sometimes referred to collectively as the "MORTGAGED PROPERTY." The Leases are
pledged on a parity with the Land and Improvements and not secondarily.
ARTICLE ONE
COVENANTS OF GRANTOR
Grantor warrants, covenants and agrees with Collateral Agent as follows:
1.1 PERFORMANCE UNDER LOAN AGREEMENT, NOTES, DEED OF TRUST AND OTHER LOAN
INSTRUMENTS. Grantor shall perform, observe and comply with or cause to be
performed, observed and complied with in a complete and timely manner all
provisions hereof, of the Loan Agreement and of the Notes, every other Loan
Instrument and every instrument evidencing or securing Borrower's Liabilities.
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1.2 GENERAL COVENANTS AND REPRESENTATIONS. Grantor covenants, represents
and warrants that as of the date hereof and at all times thereafter during the
term
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hereof: (a) Grantor is seized of an indefeasible estate in fee simple in that
portion of the Mortgaged Property which is real property, and has good and
absolute title to it and the balance of the Mortgaged Property free and clear
of all liens, security interests, charges and encumbrances whatsoever except
for the "Permitted Liens" (as defined in the Loan Agreement) and those set
forth on EXHIBIT B attached hereto (the Permitted Liens and such liens,
security interests, charges and encumbrances set forth on EXHIBIT B attached
hereto being collectively hereinafter referred to as the "PERMITTED
ENCUMBRANCES"); (b) Grantor has good right, full power and lawful authority to
mortgage and pledge the Mortgaged Property as provided herein; (c) upon the
occurrence of an Event of Default (hereinafter defined), Collateral Agent may
at all times peaceably and quietly enter upon, hold, occupy and enjoy the
Mortgaged Property in accordance with the terms hereof; and (d) Grantor will
maintain and preserve the lien of this Deed of Trust as a first and paramount
lien on the Mortgaged Property subject only to the Permitted Encumbrances until
Borrower's Liabilities have been paid in full and Lender's obligations under
the Loan Agreement have been paid in full.
1.3 COMPLIANCE WITH LAWS AND OTHER RESTRICTIONS. Grantor covenants and
represents that the Land and the Improvements and the use thereof presently
comply with, and will continue to comply with, all applicable restrictive
covenants, zoning and subdivision ordinances and building codes, licenses,
health and environmental laws and regulations and all other applicable laws,
ordinances, rules and regulations, the failure to comply with which would have
a material adverse effect on Grantor's business, property, assets, operations
or condition, financial or otherwise.
1.4 TAXES AND OTHER CHARGES.
1.4.1 TAXES AND ASSESSMENTS. Grantor shall pay promptly when due all
taxes, assessments, rates, dues, charges, fees, levies, fines, impositions,
liabilities, obligations, liens and encumbrances of every kind and nature
whatsoever now or hereafter imposed, levied or assessed upon or against the
Mortgaged Property or any part thereof, or upon or against this Deed of Trust
or Borrower's Liabilities; provided, however, that Grantor may in good faith
contest the validity, applicability or amount of any asserted tax, assessment
or other charge in accordance with any provisions which may be set forth in the
Loan Agreement regarding the contest of taxes.
1.4.2 TAXES AFFECTING LENDERS' INTEREST. If any state, federal, municipal
or other governmental law, order, rule or regulation, which becomes effective
subsequent to the date hereof, in any manner changes or modifies existing laws
governing the taxation of mortgages or debts secured by mortgages, or the
manner of collecting taxes, so as to impose on Collateral Agent or Lenders a
tax by reason of its ownership of any or all of the Loan Instruments or
measured by the principal amount of Borrower's Liabilities, requires or has the
practical effect of requiring Collateral Agent or Lenders to pay any portion of
the real estate taxes levied in respect of the Mortgaged Property, to pay any
tax levied in whole or in part in substitution for real estate taxes or
otherwise affects materially and adversely the rights of
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Collateral Agent or Lenders in respect of Borrower's Liabilities, this Deed of
Trust or the other Loan Instruments, Borrower's Liabilities and all interest
accrued thereon shall, upon thirty (30) days' notice, become due and payable
forthwith at the option of Collateral Agent, whether or not there shall have
occurred an Event of Default, provided, however, that, if Grantor may, without
violating or causing a violation of such law, order, rule or regulation, pay
such taxes or other sums as are necessary to eliminate such adverse effect upon
the rights of Collateral Agent and/or Lenders, as the case may be, and does pay
such taxes or other sums when due, Collateral Agent shall not declare due
Borrower's Liabilities by reason of the provisions of this Section 1.04.2.
1.5 MECHANIC'S AND OTHER LIENS. Grantor shall not permit or suffer any
mechanic's, laborer's, materialman's, statutory or other lien or encumbrance
(other than any lien for taxes and assessments not yet due) to be created upon
or against the Mortgaged Property; provided, however, that Grantor may in good
faith, by appropriate proceeding, contest the validity, applicability or amount
of any asserted lien in accordance with any provisions which may be set forth
in the Loan Agreement regarding the contest of liens.
1.6 INSURANCE AND CONDEMNATION.
1.6.1 INSURANCE POLICIES. Grantor shall, at its sole expense, obtain for,
deliver to, assign to and maintain for the benefit of Collateral Agent and
Lenders, until Borrower's Liabilities are paid in full, such policies of
insurance as are required by the Loan Agreement.
1.6.2 ADJUSTMENT OF LOSS. Except as otherwise may be provided by the Loan
Agreement, Collateral Agent is hereby authorized and empowered, at its option,
to adjust or compromise any loss under any insurance policies covering the
Mortgaged Property and to collect and receive the proceeds from any such policy
or policies. Grantor hereby irrevocably appoints Collateral Agent as its
attorney-in-fact for the purposes set forth in the preceding sentence.
1.6.3 CONDEMNATION AWARDS. Collateral Agent shall be entitled to all
compensation, awards, damages, claims, rights of action and proceeds of, or on
account of, (i) any damage or taking, pursuant to the power of eminent domain,
of the Mortgaged Property or any part thereof, (ii) damage to the Mortgaged
Property by reason of the taking, pursuant to the power of eminent domain, of
other property, or (iii) the alteration of the grade of any street or highway
on or about the Mortgaged Property. Collateral Agent is hereby authorized, at
its option, to commence, appear in and prosecute in its own or Grantor's name
any action or proceeding relating to any such compensation, awards, damages,
claims, rights of action and proceeds and to settle or compromise any claim in
connection therewith. Grantor hereby irrevocably appoints Collateral Agent as
its attorney-in-fact for the purposes set forth in the preceding sentence.
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1.6.4 REPAIR; PROCEEDS OF CASUALTY INSURANCE AND EMINENT DOMAIN. If all
or any part of the Mortgaged Property shall be damaged or destroyed by
fire or other casualty or shall be damaged or taken through the exercise of the
power of eminent domain or other cause described in Section 1.06.3, Grantor
shall promptly and with all due diligence restore and repair the Mortgaged
Property to the extent that the proceeds, award or other compensation are made
available to Grantor and are sufficient to pay the cost of such restoration or
repair. Except as otherwise may be provided by the Loan Agreement, the entire
amount of such proceeds, award or compensation shall be applied to Borrower's
Liabilities in such order and manner as Collateral Agent may elect.
1.7 COLLATERAL AGENT MAY PAY. Upon Grantor's failure to pay any amount
required to be paid by Grantor under Sections 1.04, 1.05 and 1.06, Collateral
Agent may pay the same. Grantor shall pay to Collateral Agent on demand the
amount so paid by Collateral Agent together with interest at the rate payable
under the Loan Agreement after the occurrence of an "Event of Default" as such
term is defined in the Loan Agreement (the "DEFAULT RATE") and the amount so
paid by Collateral Agent together with interest, shall be added to Borrower's
Liabilities.
1.8 CARE OF THE MORTGAGED PROPERTY. Grantor shall preserve and maintain
the Mortgaged Property in good and first class condition and repair. Grantor
shall not, without the prior written consent of Collateral Agent, permit,
commit or suffer any waste, impairment or deterioration of the Mortgaged
Property or of any part thereof, and will not take any action which will
increase the risk of fire or other hazard to the Mortgaged Property or to any
part thereof. Except as otherwise provided in the Loan Agreement or this Deed
of Trust, no new improvements shall be constructed on the Mortgaged Property
and no part of the Mortgaged Property shall be removed, demolished or altered
in any material manner without the prior written consent of Collateral Agent.
1.9 TRANSFER OR ENCUMBRANCE OF THE MORTGAGED PROPERTY. Except as permitted
by the Loan Agreement, Grantor shall not permit or suffer to occur any sale,
assignment, conveyance, transfer, mortgage, lease (other than leases made in
accordance with the provisions of this Deed of Trust) or encumbrance of, or any
contract for any of the foregoing on an installment basis or otherwise
pertaining to, the Mortgaged Property, any part thereof, any interest therein,
the beneficial interest in Grantor, any interest in the beneficial interest in
Grantor or in any trust holding title to the Mortgaged Property, or any
interest in a corporation, partnership or other entity which owns all or part
of the Mortgaged Property or such beneficial interest, whether by operation of
law or otherwise, without the prior written consent of Collateral Agent having
been obtained.
1.10 FURTHER ASSURANCES. At any time and from time to time, upon
Collateral Agent's request, Grantor shall make, execute and deliver, or cause
to be made, executed and delivered, to Collateral Agent, and where appropriate
shall cause to be recorded, registered or filed, and from time to time
thereafter to be re-recorded, re-registered and refiled at such time and in
such offices and places as shall be deemed desirable by Collateral Agent, any
and all such further mortgages, security agreements, financing statements,
instruments of further assurance, certificates and other documents as
Collateral
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Agent may consider necessary or desirable in order to effectuate or perfect, or
to continue and preserve the obligations under, this Deed of Trust.
1.11 ASSIGNMENT OF RENTS.
(a) The assignment of rents, income and other benefits
contained in Paragraph (E) of the Granting Clauses and the
assignment of leases, licenses and other occupancy agreements
contained in Paragraph (F) of the Granting Clauses shall be fully
operative without any further action on the part of either party,
and, specifically, such rents, income and other benefits shall be
deposited as provided in the Loan Agreement. Grantor shall give
each tenant or other occupant of the Mortgaged Property under any
lease a written direction to deposit rents or other fees in
accordance with the Loan Agreement. Grantor hereby further grants
to Collateral Agent the right effective upon the occurrence of an
Event of Default to do any or all of the following, at Collateral
Agent's option: (i) dispossess by the usual summary proceedings
any tenant defaulting in the payment of rent under any lease, (ii)
lease the Mortgaged Property or any part thereof, (iii) repair,
restore and improve the Mortgaged Property, and (iv) apply the
rents, income and other benefits, after payment of certain
expenses and capital expenditures relating to the Mortgaged
Property, on account of Borrower's Liabilities in such order and
manner as provided for in the Loan Agreement. In the event there
shall occur an Event of Default, such assignment and grant shall
continue in effect until Borrower's Liabilities are satisfied, the
execution of this Deed of Trust constituting and evidencing the
irrevocable consent of Grantor to the entry upon and taking
possession of the Mortgaged Property by Collateral Agent pursuant
to such grant, whether or not foreclosure proceedings have been
instituted. Neither the exercise of any rights under this
paragraph by Collateral Agent nor the application of any such
rents, income or other benefits to payment of Borrower's
Liabilities shall cure or waive any Event of Default or notice
provided for hereunder except to the extent of such application,
or invalidate any act done pursuant hereto or pursuant to any such
notice, but shall be cumulative of all other rights and remedies.
(b) The assignment of rents, income and other benefits from
the Mortgaged Property contained in Paragraph (E) of the Granting
Clauses and the assignment of leases, licenses and other occupancy
agreements contained in Paragraph (F) of the Granting Clauses
shall constitute an absolute and present assignment, subject,
however, to the conditional permission given to Grantor to collect
and deposit the Rents until the occurrence of an Event of Default
at which time such conditional permission shall automatically
terminate; and the existence or exercise of such right of Grantor
shall not operate to subordinate this assignment, in whole or in
part, to any subsequent assignment by Grantor permitted under the
provisions of this Deed of Trust, and any such subsequent
assignment by Grantor shall be subject to the rights of Grantor
and Collateral Agent hereunder.
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(c) Grantor shall act promptly to enforce all available
remedies against any delinquent lessee so as to protect the
interest of the lessor under the Leases and to preserve the value
of the Mortgaged Property.
1.12 AFTER-ACQUIRED PROPERTY. To the extent permitted by, and
subject to, applicable law, the lien of this Deed of Trust shall automatically
attach, without further act, to all property hereafter acquired by Grantor
located in or on, or attached to, or used or intended to be used in connection
with, or with the operation of, the Mortgaged Property or any part thereof.
1.13 LEASES AFFECTING MORTGAGED PROPERTY. Grantor shall comply
with and perform in a complete and timely manner all of its obligations as
landlord under all leases affecting the Mortgaged Property or any part thereof.
The assignment contained in Section (E) of the Granting Clauses shall not be
deemed to impose upon Collateral Agent any of the obligations or duties of the
landlord or Grantor provided in any lease.
1.14 MANAGEMENT OF MORTGAGED PROPERTY. Grantor shall cause the
Mortgaged Property to be managed at all times in accordance with sound
business practice.
1.15 EXECUTION OF LEASES. Except as may be otherwise provided in
the Loan Agreement, Grantor shall not permit any leases to be made of the
Mortgaged Property or existing leases to be modified, terminated, extended or
renewed without the prior written consent of Collateral Agent.
1.16 EXPENSES; INDEMNITY. Without limitation of any obligation of
Grantor set forth in the Loan Agreement, Grantor shall pay when due and
payable, and otherwise on demand made by Collateral Agent, all loan fees,
appraisal fees, recording fees, taxes, brokerage fees and commissions, abstract
fees, title insurance fees, escrow fees, reasonable attorneys' fees, court
costs, documentary and expert evidence, fees of inspecting architects and
engineers, and all other costs and expenses of every character which have been
incurred or which may hereafter be incurred by Collateral Agent in connection
with the Loans, including the preparation, execution, delivery and performance
of this Deed of Trust. If Grantor fails to pay said costs and expenses as
above provided, Collateral Agent may elect, but shall not be obligated, to pay
the costs and expenses described in this Section 1.16, and if Collateral Agent
does so elect, then Grantor will, upon demand by Collateral Agent, reimburse
Collateral Agent for all such expenses which have been or shall be paid or
incurred by it. The amounts paid by Collateral Agent shall bear interest at
the Default Rate and such amounts, together with interest, shall be added to
Borrower's Liabilities, shall be immediately due and payable and shall be
secured by the lien of this Deed of Trust and the other Loan Instruments. In
the event of foreclosure hereof, Collateral Agent shall be entitled to add to
the indebtedness found to be due by the court a reasonable estimate of such
expenses to be incurred after entry of the decree of foreclosure. To the
extent permitted by law, Grantor agrees to hold harmless Trustee, Collateral
Agent and Lenders against and from, and reimburse them for, all claims,
demands, liabilities, losses, damages, judgments, penalties, costs and
expenses, including without limitation reasonable attorneys' fees, which may be
imposed upon, asserted against, or incurred or paid by it by reason of or in
connection with any bodily injury or death or property damage occurring in or
upon or in the vicinity of the
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Mortgaged Property through any cause whatsoever, or asserted against it on
account of any act performed or omitted to be performed hereunder, or on
account of any transaction arising out of or in any way connected with the
Mortgaged Property, this Deed of Trust, the other Loan Instruments, any of the
indebtedness evidenced by the Notes or the Loan Agreement or any of Borrower's
Liabilities, except to the extent that such claims, demands, liabilities,
losses, damages, judgments, penalties, costs or expenses were caused by the
willful misconduct or gross negligence of Collateral Agent or Lenders.
1.17 COLLATERAL AGENT'S PERFORMANCE OF GRANTOR'S OBLIGATIONS. If Grantor
fails to pay any tax, assessment, encumbrance or other imposition, or to
furnish insurance hereunder, or to perform any other covenant, condition or
term in this Deed of Trust, the Notes, the Loan Agreement or any other Loan
Instrument, Collateral Agent may, but shall not be obligated to, pay, obtain or
perform the same. All payments made, whether such payments are regular or
accelerated payments, and costs and expenses incurred or paid by Collateral
Agent in connection therewith shall be due and payable immediately. The
amounts so incurred or paid by Collateral Agent shall bear interest at the
Default Rate and such amounts, together with interest, shall be added to
Borrower's Liabilities and secured by the lien of this Deed of Trust and the
other Loan Instruments.
1.18 PAYMENT OF SUPERIOR LIENS. To the extent that Collateral Agent,
after the date hereof, pays any sum due under any provision of law or
instrument or document creating any lien superior or equal in priority in whole
or in part to the lien of this Deed of Trust, such sum advanced by Collateral
Agent shall be immediately due and payable, with interest at the Default Rate
and shall be deemed to be a part of Borrower's Liabilities, and Collateral
Agent shall have and be entitled to a lien on the premises equal in parity with
that discharged, and Collateral Agent shall be subrogated to and receive and
enjoy all rights and liens possessed, held or enjoyed by, the holder of such
lien, which shall remain in existence and benefit Collateral Agent to secure
the Notes, the Loan Agreement and all obligations and liabilities secured
hereby.
1.19 ENVIRONMENTAL CONDITIONS.
(a) Grantor covenants, warrants and represents that there are
no, nor will there, for so long as any of Borrower's Liabilities
remain outstanding, be, any Hazardous Materials (as hereinafter
defined) generated, released, stored, buried or deposited over,
beneath, in or upon the Mortgaged Property except as such
Hazardous Materials may be required to be used, stored or
transported in connection with the permitted uses of the Mortgaged
Property and then only to the extent permitted by law after
obtaining all necessary permits and licenses therefor. For
purposes of this Deed of Trust, "HAZARDOUS MATERIALS" shall mean
and include any pollutants, flammables, explosives, petroleum
(including crude oil) or any fraction thereof, radioactive
materials, hazardous wastes, toxic substances or related
materials, including, without limitation, any substances defined
as or included in the definition of toxic or hazardous substances,
wastes, or materials under any federal, state or local laws,
ordinances, regulations or guidances which regulate, govern,
prohibit or
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pertain to the generation, manufacture, use, transportation,
disposal, release, storage, treatment of, or response or exposure
to, toxic or hazardous substances, wastes or materials. Such
laws, ordinances and regulations are hereinafter collectively
referred to as the "HAZARDOUS MATERIALS LAWS."
(b) Grantor shall, and Grantor shall cause all employees,
agents, contractors and subcontractors of Grantor and any other
persons from time to time present on or occupying the Mortgaged
Property to, keep and maintain the Mortgaged Property in material
compliance with, and not cause or knowingly permit the Mortgaged
Property to be in material violation of, any applicable Hazardous
Materials Laws. Neither Grantor nor any employees, agents,
contractors or subcontractors of Grantor or any other persons
occupying or present on the Mortgaged Property shall use,
generate, manufacture, store or dispose of on, under or about the
Mortgaged Property or transport to or from the Mortgaged Property
any Hazardous Materials, except as such Hazardous Materials may be
required to be used, stored or transported in connection with the
permitted uses of the Mortgaged Property and then only to the
extent permitted by law after obtaining all necessary permits and
licenses therefor.
(c) Grantor shall immediately advise Collateral Agent in
writing of: (i) any notices received by Grantor (whether such
notices are from the Environmental Protection Agency, or any other
federal, state or local governmental agency or regional office
thereof) of the violation or potential violation occurring on or
about the Mortgaged Property of any applicable Hazardous Materials
Laws; (ii) any and all enforcement, cleanup, removal or other
governmental or regulatory actions instituted, completed or
threatened pursuant to any Hazardous Materials Laws; (iii) all
claims made or threatened by any third party against Grantor or
the Mortgaged Property relating to damage, contribution, cost
recovery compensation, loss or injury resulting from any Hazardous
Materials (the matters set forth in clauses (i), (ii) and (iii)
above are hereinafter referred to as "HAZARDOUS MATERIALS
CLAIMS"); and (iv) Grantor's discovery of any occurrence or
condition on any real property adjoining or in the vicinity of the
Mortgaged Property that could cause the Mortgaged Property or any
part thereof to be subject to any Hazardous Materials Claims.
Collateral Agent shall have the right but not the obligation to
join and participate in, as a party if it so elects, any legal
proceedings or actions initiated in connection with any Hazardous
Materials Claims and Grantor shall pay to Collateral Agent, upon
demand, all reasonable attorneys' and consultants' fees incurred
by Collateral Agent in connection therewith.
(d) Grantor shall be solely responsible for, and shall
indemnify and hold harmless Trustee, Collateral Agent and Lenders,
and the directors, officers, employees, agents, successors and
assigns of each of them, from and against, any loss, damage, cost,
expense or liability directly or indirectly arising out of or
attributable to the use, generation, storage, release, threatened
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release, discharge, disposal or presence (whether prior to or
during the term of the Loans or otherwise and regardless of by
whom caused, whether by Grantor or any predecessor in title or any
owner of land adjacent to the Mortgaged Property or any other
third party, or any employee, agent, contractor or subcontractor
of Grantor or any predecessor in title or any such adjacent land
owner or any third person) of Hazardous Materials on, under or
about the Mortgaged Property; including, without limitation: (i)
claims of third parties (including governmental agencies) for
damages, penalties, losses, costs, fees, expenses, damages,
injunctive or other relief; (ii) response costs, clean-up costs,
costs and expenses of removal and restoration, including
reasonable fees of attorneys and experts, and costs of determining
the existence of Hazardous Materials and reporting same to any
governmental agency; and (iii) any and all expenses or
obligations, including reasonable attorneys' fees, incurred at,
before and after any trial or appeal therefrom whether or not
taxable as costs, including, without limitation, reasonable
attorneys' fees, witness fees, deposition costs, copying and
telephone charges and other expenses. Notwithstanding anything to
the contrary in this Agreement, Grantor shall have no liability
under this subsection (d) for any Hazardous Materials which are
first generated, released, stored, buried, incorporated or
deposited over, beneath, in, on, under, about or from the
Mortgaged Property after the date that Grantor no longer holds
title to the Mortgaged Property as a result of a foreclosure or
deed in lieu of foreclosure; provided that, neither Grantor, nor
any employees, agents, contractors, or subcontractors of Grantor,
nor any persons occupying or present on the Land or the
Improvements during the period of Grantor's ownership, shall have
contributed to the presence of such Hazardous Materials.
(e) Any loss, damage, cost, expense or liability incurred by
Trustee, Collateral Agent or Lenders as a result of a breach or
misrepresentation by Grantor or for which Grantor is responsible
or for which Grantor has indemnified Trustee, Collateral Agent and
Lenders shall be paid to Trustee, Collateral Agent or Lenders, as
the case may be, on demand, and, failing prompt reimbursement,
such amounts shall, together with interest thereon at the Default
Rate from the date incurred until paid by Grantor, be added to
Borrower's Liabilities, be immediately due and payable and be
secured by the lien of this Deed of Trust and the other Loan
Instruments.
(f) So long as any of Borrower's Liabilities remain
outstanding, Collateral Agent may, in its sole discretion, require
Grantor, at its sole cost and expense, from time to time to
perform or cause to be performed, such studies or assessments of
the Mortgaged Property, as Collateral Agent may reasonably deem
necessary or appropriate or desirable, to determine the status of
environmental conditions on and about the Mortgaged Property,
which such studies and assessments shall be for the benefit of,
and be prepared in accordance with the specifications established
by, Collateral Agent.
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(g) Grantor hereby grants to Collateral Agent, its agents,
employees and contractors, access to the Mortgaged Property,
from time to time upon prior written notice, for the purpose of either
(i) taking such action as Collateral Agent shall reasonably determine to
be appropriate to respond to a release, threatened release, or the
presence of Hazardous Materials, or any related condition, on or about
the Mortgaged Property; or (ii) conducting such studies or assessments of
the Mortgaged Property, as Collateral Agent may deem reasonably necessary
or appropriate or desirable.
ARTICLE TWO
DEFAULTS
2.1 EVENT OF DEFAULT. The term "EVENT OF DEFAULT," wherever used in
this Deed of Trust, shall mean any one or more of the following events:
(a) The failure by Grantor (i) to pay or deposit within five
(5) days following the due date thereof any sums to be paid or
deposited by Grantor hereunder or (ii) to keep, perform or observe any
covenant, conditions or agreement contained in Sections 1.04.1, 1.06.1,
1.06.2, 1.09 or 1.19 hereof, or (iii) to keep, perform or observe any
other covenant, condition or agreement on the part of Grantor in this
Deed of Trust for a period of fifteen (15) days or more.
(b) The occurrence of an "Event of Default" under and as
defined in the Loan Agreement.
(c) The occurrence of any event, whether under this Deed of
Trust, the Loan Agreement or any other Loan Instrument, which allows
Collateral Agent to accelerate the maturity of Borrower's Liabilities
or pursuant to which the maturity of Borrower's Liabilities are
accelerated.
(d) The occurrence of any default not cured within the
applicable cure period, if any, under any of the Loan Instruments.
ARTICLE THREE
REMEDIES
3.1 FORECLOSURE AND POWER OF SALE. If an Event of Default shall
have occurred and shall be continuing then the whole of the indebtedness
secured hereby shall, at the option of Collateral Agent, without notice
or demand, become immediately due and payable for all purposes, time
being of the essence of this Deed of Trust; and on application of
Collateral Agent, it shall be lawful for and the duty of Trustee
immediately to enforce the lien of this Deed of Trust either (i) by
instituting an action to foreclose this Deed of Trust pursuant to the
North Carolina General Statutes and other applicable law or (ii) by
selling the Mortgaged Property under the power of sale herein vested in
Trustee in the manner hereinafter provided.
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The Trustee is hereby granted a power of sale, and if Trustee shall sell the
Mortgaged Property under the power of sale herein contained, he shall have all
power and authority to do so and such sale shall be conducted under and in
compliance with Article 2A of Chapter 45 of the General Statutes of North
Carolina, in effect as of the date hereof, subject to the following
provisions:
(a) Such sale shall be conducted pursuant to any subsequently
enacted amendments or revisions of said chapter (or other chapter
governing real estate foreclosure sales under power of sale which
establish obligatory requirements for such sales).
(b) The sale shall be conducted at such place as Trustee
shall designate in the notice of sale.
(c) At any such sale, Trustee may require the successful
bidder to deposit with Trustee cash or certified check in the
amount of ten percent (10%) of its bid, provided notice of such
requirement is contained in any notice or advertisement required
by law. The bid may be rejected if the deposit is not immediately
made. Said deposit shall be refunded in case a resale is ordered
on account of an increased bid. If the purchaser fails to comply
with its bid, the deposit shall be applied toward the expenses of
the sale, and the residue, if any, as a credit to the
indebtedness. In all other cases, the deposit shall be applied
against the purchase price.
(d) In the event that a proceeding under this power of sale
is begun but terminated prior to completion thereof, Grantor shall
pay all expenses of the proceeding, including a reasonable
Trustee's fee.
(e) Trustee may sell the Mortgaged Property at such sale in
whole or in part in Trustee's sole discretion and without regard
to principles of marshalling.
Upon such sale, Trustee shall collect the purchase money and convey
said property to the purchaser. Collateral Agent may bid and purchase at such
sale. It is stipulated and agreed, that if Grantor shall pay the indebtedness
and discharge fully the trust herein declared, then this Deed of Trust shall be
discharged or released of record or the satisfaction thereof otherwise
acknowledged according to the provisions of law. In the event of a sale of the
Mortgaged Property, whether through judicial foreclosure or under the power of
sale granted hereby, the proceeds of such sale shall be applied in such order
and manner as provided in the Loan Agreement. Collateral Agent shall further
have the right to protect and enforce its rights under this Deed of Trust,
either by suit or suits in equity or at law, in any court or courts of
competent jurisdiction, whether for specific performance of any covenant or
agreement contained herein, or in aid of the execution of any powers herein
granted, or for any foreclosure under this Deed of Trust, or for the
enforcement of such other or additional appropriate legal or equitable remedies
as Collateral Agent may deem most effective to protect and enforce such rights.
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3.2 RECEIVER. If an Event of a Default shall have occurred, a
receiver may be appointed by the court, without regard to the solvency or
insolvency of Grantor or the then value of the Mortgaged Property. The
receiver shall have the power to collect any rents and income from the
Mortgaged Property. The receiver shall have the other powers for the
protection, possession, management and operation of the Mortgaged Property
which an absolute owner would have, but the net rents, if any, in the hands of
the receiver shall be applied to the debt hereby secured or to such expenses of
the receivership or foreclosure suit as the court may direct.
3.3 COLLATERAL AGENT IN POSSESSION.
(a) If an Event of Default shall have occurred under this
Deed of Trust, and if the right to foreclose the Deed of Trust has
accrued to Collateral Agent, whether or not the entire debt has
then been accelerated and whether or not foreclosure proceedings
have been commenced, Collateral Agent may, without notice to or
demand upon Grantor, take possession of the Mortgaged Property and
while in possession of the Mortgaged Property, Collateral Agent
shall have the power to pay repair charges, taxes, insurance fees
and all other expenses and add such amounts to the indebtedness
secured hereby.
(b) In the event of a foreclosure, Collateral Agent may
remain in possession of the Mortgaged Property until the
foreclosure sale and thereafter during the entire period of
redemption (if any), if a deficiency exists. Collateral Agent
shall incur no liability for, nor shall Grantor assert any claim
or setoff as a result of, any action taken while Collateral Agent
is in possession of the Mortgaged Property, except only for
Collateral Agent's own willful misconduct. In the event no
foreclosure proceedings are commenced, Collateral Agent may remain
in possession as long as there exists an Event of Default.
3.4 NATURE OF REMEDIES. No delay or omission on the part of
Collateral Agent in the exercise of any remedy for an Event of Default shall
operate as a waiver thereof. The remedies available to Collateral Agent under
this Deed of Trust shall be exercisable in any combination whatsoever and shall
be in addition to, and exercisable in any combination with, any and all
remedies available by operation of law and under any of the Loan Instruments.
3.5 WAIVER OF REDEMPTION. To the extent permitted by law and as an
additional inducement to Lenders to advance funds secured hereby, Grantor
hereby expressly waives and renounces the benefit of (i) all present and future
laws providing for any appraisement before sale of the Mortgaged Property,
commonly known as "appraisement laws," and all present and future laws
extending in any manner the time for enforcement of collection of the
indebtedness secured hereby, commonly known as "stay laws" and "redemption
laws"; (ii) notice of any intent by Lenders to accelerate the maturity of the
indebtedness secured hereby; (iii) notice of the acceleration of the maturity
of the indebtedness secured hereby; and (iv) notice of the commencement by
Collateral Agent or Lenders of an action to foreclose this Deed of Trust.
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3.6 REMEDIES CUMULATIVE. No right, power or remedy conferred upon or
reserved to Collateral Agent by this Deed of Trust or any other Loan Instrument
or any instrument evidencing or securing Grantor's Liabilities is exclusive of
any other right, power or remedy, but each and every such right, power and
remedy shall be cumulative and concurrent and shall be in addition to any other
right, power and remedy given hereunder or under any other Loan Instrument or
any instrument evidencing or securing Grantor's Liabilities, or now or
hereafter existing at law, in equity or by statute.
ARTICLE FOUR
MISCELLANEOUS PROVISIONS
4.1 HEIRS, SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Whenever Grantor
Collateral Agent or Lenders are named or referred to herein, heirs and
successors and assigns of such person or entity shall be included, and all
covenants and agreements contained in this Deed of Trust shall bind the
successors and assigns of Grantor, including any subsequent owner of all or any
part of the Mortgaged Property, and inure to the benefit of the successors and
assigns of Collateral Agent and Lenders. This Section 4.01 shall not be
construed to permit an assignment, transfer, conveyance, encumbrance or other
disposition otherwise prohibited by this Deed of Trust.
4.2 NOTICES. All written notices and other written communications with
respect to this Deed of Trust shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered in person to the following addresses in the
manner provided in the Loan Agreement:
If to Collateral Agent: LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60674
Attention: Asset Based Lending Division
If to Grantor: Empire Industries, Inc.
5150 Linton Boulevard
Delray Beach, Florida 33484
Attention: Marvin Smollar
If to Trustee: T. Edmund Rast
Moore and Van Allen, PLLC
100 North Tryon Street
Floor 47
Charlotte, North Carolina 28202
4.3 HEADINGS. The headings of the articles, sections, paragraphs and
subdivisions of this Deed of Trust are for convenience only, are not to be
considered a part hereof, and shall not limit, expand or otherwise affect any
of the terms hereof.
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4.4 INVALID PROVISIONS. In the event that any of the covenants,
agreements, terms or provisions contained in the Notes, this Deed of Trust, the
Loan Agreement or in any other Loan Instrument shall be invalid, illegal or
unenforceable in any respect, the validity of the remaining covenants,
agreements, terms or provisions contained herein or in the Loan Agreement or in
any other Loan Instrument (or the application of the covenant, agreement, term
held to be invalid, illegal or unenforceable, to persons or circumstances other
than those in respect of which it is invalid, illegal or unenforceable) shall
be in no way affected, prejudiced or disturbed thereby.
4.5 CHANGES. Neither this Deed of Trust nor any term hereof may be
released, changed, waived, discharged or terminated orally, or by any action or
inaction, but only by an instrument in writing signed by the party against
which enforcement of the release, change, waiver, discharge or termination is
sought.
4.6 GOVERNING LAW. This Deed of Trust shall be construed, interpreted,
enforced and governed by and in accordance with the laws of the State of
Illinois; except that the laws of the State of North Carolina shall apply to
all matters affecting or relating to the creation, perfection and priority of
the liens and security interests under this Deed of Trust, to the foreclosure
and other provisions of this Deed of Trust relating to the enforcement of the
rights and remedies of Collateral Agent.
4.7 REQUIRED NOTICES. Grantor shall notify Collateral Agent promptly of
the occurrence of any of the following: (i) receipt of notice from any
governmental authority relating to the violation of any rule, regulation, law
or ordinance, the enforcement of which would materially and adversely affect
the Mortgaged Property; (ii) material default by any tenant in the performance
of its obligations under any Lease of all or any portion of the Mortgaged
Property or receipt of any notice from any such tenant claiming that a default
by landlord in the performance of its obligations under any such Lease has
occurred; or (iii) commencement of any judicial or administrative proceedings
by or against which, in Collateral Agent's judgment, materially and adversely
affects Grantor or the Mortgaged Property.
4.8 FUTURE ADVANCES. This Deed of Trust secures all present and future
loan disbursements made by Lenders to Grantor. The amount of the present
disbursement secured hereby is __________________, and the maximum amount,
including present and future disbursements, which may be secured hereby at any
one time is $85,000,000. Future disbursements are subject to and as provided
in the Loan Agreement, and the time period within which such future
disbursements are to be made is the period between the date hereof and the
fifteenth (15th) anniversary hereof. The lien of this Deed of Trust will
remain in effect until the last dollar of Borrower's Liabilities are paid and
all of Lenders' obligations under the Loan Agreement have been terminated.
4.9 RELEASE. Upon full payment of Borrower's Liabilities and the
termination of all Lenders' obligations under the Loan Agreement or as
otherwise provided in the Loan Agreement, Collateral Agent shall issue to
Grantor an appropriate release deed in recordable form.
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4.10 ATTORNEYS' FEES. Whenever reference is made herein to the payment or
reimbursement of attorneys' fees, such fees shall be deemed to include
reasonable compensation to staff counsel, if any, of Collateral Agent in
addition to the fees of any other attorneys engaged by Collateral Agent.
4.11 COMPLIANCE WITH NORTH CAROLINA FORECLOSURE LAW. In the event that
any provision in this Deed of Trust shall be inconsistent with any provision of
N.C. Gen. Stat. Section 45-21.16 et. seq., as amended from time to time (the
"ACT"), the provisions of the Act shall take precedence over the provisions of
this Deed of Trust, but shall not invalidate or render unenforceable any other
provision of this Deed of Trust that can be construed in a manner consistent
with the Act. If any provision of this Deed of Trust shall grant to Collateral
Agent any rights or remedies upon default of Grantor which are more limited
than the rights that would otherwise be vested in Collateral Agent under the
Act in the absence of said provision, Collateral Agent shall be vested with the
rights granted in the Act to the full extent permitted by law.
4.12 CONFLICTS, INCONSISTENCIES. In the event that any term, provision or
condition contained in this Deed of Trust conflicts or is inconsistent with any
term, provision or condition contained in the Loan Agreement, the Notes or any
other Loan Instrument, as the case may be, the term, provision or condition
contained in the Loan Agreement, the Notes or any other Loan Instrument, as the
case may be, shall govern and control.
4.13 LIMITATION OF INTEREST. Should a court of competent jurisdiction
determine that the laws of any state other than the laws of the State of
Illinois apply to the interest rate or rates charged upon the indebtedness
secured hereby, the enforcement of this Deed of Trust is subject to the express
condition that at no time shall Grantor be obligated or required to pay
interest hereunder at a rate which could subject Collateral Agent to either
civil or criminal liability as a result of being in excess of the maximum
interest rate which Grantor is at any time required or obligated by the terms
of this Deed of Trust or any of the other Loan Instruments to pay interest
hereunder or thereunder at a rate in excess of such maximum rate, the rate of
interest chargeable shall be deemed to be immediately reduced to such maximum
rate, and all prior payments in excess of such maximum rate shall be applied
and shall be deemed to have been payments in reduction of the principal balance
hereof.
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IN WITNESS WHEREOF, Grantor has caused this instrument to be executed by
its duly authorized officers as of the day and year first above written.
EMPIRE INDUSTRIES, INC.,
ATTEST: a North Carolina corporation
By _____________________ By _______________________
Its (Assistant) Secretary Its (Vice) President
[AFFIX CORPORATE SEAL]
THIS INSTRUMENT PREPARED BY,
AND AFTER RECORDING RETURN TO:
Carole K. Towne, Esq.
Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
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ACKNOWLEDGMENT
North Carolina
Edgecombe County
This ____ day of May, 1996, personally came before me,
________________________, Notary Public for said County and State, Marvin
Smollar, who, being by me duly sworn, says that he is the ____________
President of Empire Industries, Inc., a North Carolina corporation, and that
the seal affixed to the foregoing instrument in writing is the corporate seal
of said company, and that said writing was signed and sealed by him on behalf
of said corporation by its authority duly given, and the said Marvin Smollar
acknowledged the said writing to be the act and deed of said corporation.
Witness my hand and official seal, this the ___ day of May, 1996.
[Official Seal] ____________________________
Notary Public
My Commission Expires: ______________________, 19__.
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EXHIBIT A
LEGAL DESCRIPTION
<PAGE> 81
EXHIBIT B
PERMITTED ENCUMBRANCES
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SUBORDINATION AGREEMENT
WHEREAS, Empire Industries, Inc. ("Borrower"), is indebted to the
Undersigned, as evidenced by a Subordinated Promissory Note in the principal
amount of $21,095,000 dated May __, 1996 (the "Junior Debt Instruments"), and
will or may from time to time hereafter be otherwise indebted to the
Undersigned in various sums:
WHEREAS, the Undersigned is desirous of having LaSalle National Bank, as a
Lender (in its individual capacity as a Lender, "LaSalle") and as collateral
agent ("Collateral Agent") for itself, BT Commercial Corporation ("BTCC") and
the other lenders who are or may become party to the Loan Agreement (as
hereinafter defined) (collectively, the Lenders"), BTCC, as a Lender and as
administrative agent ("Administrative Agent") for the Lenders and any other
Lenders, extend and/or continue the extension of credit to Borrower from time
to time as Collateral Agent in its sole discretion may determine, and Lenders
have refused to consider the extension and/or continued extension of such
credit until the "Junior Debt" (as defined below) is subordinated to the
"Senior Debt" (as defined below) in the manner hereinafter set forth; and
WHEREAS, the extension and/or continued extension of credit, as aforesaid,
by Lenders is necessary or desirable to the conduct and operation of the
business of Borrower, and will inure to the financial benefit of the
Undersigned.
NOW, THEREFORE, in consideration of the extension and/or continued
extension of credit by Lenders to Borrower, as Collateral Agent may, in its
sole discretion, determine, and for other good and valuable consideration to
the Undersigned, the receipt and sufficiency of which is hereby acknowledged,
the Undersigned hereby:
(A) subordinates the indebtedness evidenced by the Junior
Debt Instruments, as well as any and all other indebtedness now or
at any time or times hereafter owing by Borrower, or any successor
or assign of Borrower, including without limitation, a receiver,
trustee or debtor-in-possession (the term "Borrower" as used
hereinafter shall include any such successor or assign) to the
Undersigned, whether such indebtedness is absolute or contingent,
direct or indirect and howsoever evidenced, including without
limitation all interest thereon, (collectively, the "Junior Debt")
to any and all indebtedness now or at any time or times hereafter
owing by Borrower to Collateral Agent, Administrative Agent or any
Lender (whether absolute or contingent, direct or indirect and
howsoever evidenced, including without limitation all interest
thereon) and all other demands, claims, liabilities or causes of
action for which Borrower may now or at any time or times
hereafter in any way be liable to Collateral Agent, Administrative
Agent or any Lender, whether under any agreement, instrument or
document executed and delivered or made by Borrower to Collateral
Agent, Administrative Agent or any Lender or otherwise, including
without limitation, that certain Loan and Security
<PAGE> 83
Agreement of even date herewith among Collateral Agent,
Administrative Agent, Lenders and Borrower ("Loan Agreement")
(collectively, the "Senior Debt"), except for the Permitted
Payments (as defined in Rider A attached hereto);
(B) agrees not to ask for or receive from Borrower or any
other person or entity any security for the Junior Debt not
specifically granted by the Junior Debt Instruments; agrees to
subordinate all security interests, liens, encumbrances and
claims, whether now existing or hereafter arising, which in any
way secure the payment of the Junior Debt (the "Undersigned's
Collateral") to all security interests, liens, encumbrances and
claims, whether now existing or hereafter arising, which in any
way secure the payment of the Senior Debt (the "Collateral Agent's
Collateral"); agrees that it will not take any action to enforce
any of its liens on the Undersigned's Collateral; and agrees that
it shall have no right to possession of any assets included in the
Undersigned's Collateral or the Collateral Agent's Collateral,
whether by judicial action or otherwise, unless and until
Collateral Agent has, in writing, notified the Undersigned that
all the Senior Debt has been paid in full and all obligations
arising in connection therewith have been discharged;
(C) agrees to instruct Borrower not to pay, and agrees not to
accept payment of, or assert, demand, sue for or seek to enforce
against Borrower or any other person or entity, by setoff or
otherwise, all or any portion of the Junior Debt, unless and until
Collateral Agent has, in writing, notified the Undersigned that
the Senior Debt has been paid in full and all obligations arising
in connection therewith have been discharged;
(D) subrogates Collateral Agent, for the benefit of itself
and Lenders, to the Junior Debt and the Undersigned's Collateral;
irrevocably authorizes Collateral Agent (i) to collect, receive,
enforce and accept any and all sums or distributions of any kind
that may become due, payable or distributable on or in respect of
the Junior Debt or the Undersigned's Collateral, whether paid
directly by Borrower or paid or distributed in any liquidation,
bankruptcy, arrangement, receivership, assignment, reorganization
or dissolution proceedings or otherwise, and (ii) in Collateral
Agent's sole discretion, to make and present claims therefor in,
and take such other actions as Collateral Agent deems necessary or
advisable in connection with, any such proceedings, either in
Collateral Agent's name or in the name of the Undersigned; and
agrees that upon the written request of Collateral Agent, it will
promptly assign, endorse and deliver to and deposit with
Collateral Agent all agreements, instruments and documents
evidencing the Junior Debt, including without limitation the
Junior Debt Instruments; unless and until Collateral Agent has, in
writing, notified the Undersigned that all the Senior
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Debt has been paid in full and all obligations arising in
connection therewith have been discharged;
(E) agrees to receive and hold in trust for and promptly turn
over to Collateral Agent, in the form received (except for the
endorsement or assignment by the Undersigned where necessary), any
sums at an time paid to, or received by, the Undersigned in
violation of the terms of this Agreement and to reimburse
Collateral Agent for all costs, including reasonable attorney's
fees, incurred by Collateral Agent in the course of collecting
said sums should the Undersigned fail to voluntarily turn the same
over to Collateral Agent as herein required. If the Undersigned
fails to endorse or assign to Collateral Agent any items of
payment received by the Undersigned on account of the Junior Debt,
the Undersigned hereby irrevocably makes, constitutes and appoints
Collateral Agent (and all persons designated by Collateral Agent
for that purpose) as the Undersigned's true and lawful attorney
and agent-in-fact, to make such endorsement or assignment in the
Undersigned's name, unless and until Collateral Agent has, in
writing, notified the Undersigned that all the Senior Debt has
been paid in full and all obligations arising in connection
therewith have been discharged; and
(F) agrees that it shall not modify or amend any agreement,
instrument or document evidencing or securing the Junior Debt,
including without limitation the Junior Debt Instruments, without
the prior written consent of Collateral Agent, unless and until
Collateral Agent has, in writing, notified the Undersigned that
all the Senior Debt has been paid in full and all obligations
arising in connection therewith have been discharged.
The Undersigned represents and warrants to Collateral Agent and Lenders
that the Undersigned has not assigned or otherwise transferred the Junior Debt
or the Undersigned's Collateral, or any interest therein to any person or
entity, that the Undersigned will make no such assignment or other transfer
thereof, and that all agreements, instruments and documents evidencing the
Junior Debt and the Undersigned's Collateral will be endorsed with proper
notice of this Agreement. The Undersigned will promptly deliver to Collateral
Agent a certified copy of the Junior Debt Instruments, as well as certified
copies of all other agreements, instruments and documents hereafter evidencing
any Junior Debt, in each case showing such endorsement. The Undersigned
represents and warrants to Collateral Agent and Lenders that the outstanding
amount of Junior Debt evidenced by the Junior Debt Instruments as of the date
of this Agreement is $21,095,000.
The Undersigned expressly waives all notice of the acceptance by
Collateral Agent or any Lender of the subordination and other provisions of
this Agreement and all notices not specifically required pursuant to the terms
of this Agreement, and the Undersigned expressly waives reliance by Collateral
Agent or any Lender upon the subordination and other provisions of this
Agreement as herein provided. The Undersigned consents and agrees that all
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Senior Debt shall be deemed to have been made, incurred and/or continued at the
request of the Undersigned and in reliance upon this Agreement. The
Undersigned agrees that neither Collateral Agent nor any Lender has made any
warranties or representations with respect to the due execution, legality,
validity, completeness or enforceability of the documents, instruments and
agreements evidencing the Senior Debt, that Collateral Agent shall be entitled
to manage and supervise its financial arrangements with Borrower in accordance
with its usual practices, without impairing or affecting this Agreement, and
that neither Collateral Agent nor any Lender shall have any liability to the
Undersigned, and the Undersigned hereby waives any claim which it may now or
hereafter have against Collateral Agent or any Lender arising out of (i) any
and all actions which Collateral Agent takes or omits to take (including
without limitation actions with respect to the creation, perfection or
continuation of liens or security interests in any existing or future
Collateral Agent's Collateral, actions with respect to the occurrence of an
event of default under any documents, instruments or agreements evidencing the
Senior Debt, actions with respect to the foreclosure upon, sale, release, or
depreciation of, or failure to realize upon, any of Collateral Agent's
Collateral and actions with respect to the collection of any claim for all or
any part of the Senior Debt from any account debtor, guarantor or other person
or entity) with respect to the documents, instruments and agreements evidencing
the Senior Debt or to the collection of the Senior Debt or the valuation, use,
protection or release of Collateral Agent's Collateral (ii) Collateral Agent's
election in any proceeding instituted under Chapter 11 of Title 11 of United
States Code (11 U.S.C. Section 101 et. seq.) (the "Bankruptcy Code"), of the
application of Section 1111(b) (2) of the Bankruptcy Code, and/or (iii) any
borrowing or grant of a security interest under Section 364 of the Bankruptcy
Code by Borrower, as debtor in possession. Without limiting the generality of
the foregoing, the Undersigned waives the right to assert the doctrine of
marshalling with respect to any of the Collateral Agent's Collateral, and
consents and agrees that Collateral Agent may proceed against any or all of the
Collateral Agent's Collateral in such order as Collateral Agent shall determine
in its sole discretion.
The Undersigned agrees that Collateral Agent, Administrative Agent and
Lenders, at any time and from time to time hereafter, may enter into such
agreements with Borrower as they may deem proper extending the time of payment
of or renewing or otherwise altering the terms of all or any of the Senior Debt
or affecting any of Collateral Agent's Collateral, and may sell or surrender or
otherwise deal with any of Collateral Agent's Collateral, and may release any
balance of funds of Borrower with Collateral Agent or any Lender, without
notice to the Undersigned and without in any way impairing or affecting this
Agreement.
This Agreement shall be irrevocable and shall constitute a continuing
agreement of subordination and shall be binding on the Undersigned and its
heirs, personal representatives, successors and assigns, and shall inure to the
benefit of Collateral Agent and Lenders, their successors and assigns until
Collateral Agent has, in writing, notified the Undersigned that all of the
Senior Debt has been paid in full and all obligations arising in connection
therewith have been discharged. Collateral Agent and Lenders may continue,
without notice to the Undersigned, to lend monies, extend credit and make other
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<PAGE> 86
accommodations to or for the account of Borrower on the faith hereof. The
Undersigned hereby agrees that all payments received by Collateral Agent or any
Lender may be applied, reversed, and reapplied, in whole or in part, to any of
the Senior Debt, without impairing or affecting this Agreement.
The Undersigned hereby assumes responsibility for keeping itself informed
of the financial condition of Borrower, any and all endorsers and any and all
guarantors of the Senior Debt and the Junior Debt and of all other
circumstances bearing upon the risk of nonpayment of the Senior Debt and the
Junior Debt that diligent inquiry would reveal, and the Undersigned hereby
agrees that neither Collateral Agent nor any Lender shall have any duty to
advise the Undersigned of information known to Collateral Agent or such Lender
regarding such condition or any such circumstances or to undertake any
investigation not a part of its regular business routine. If Collateral Agent
or any Lender, in its sole discretion, undertakes, at any time or from time to
time, to provide any information of the type described herein to the
Undersigned, neither Collateral Agent nor such Lender shall be under any
obligation to subsequently update any such information or to provide any such
information to the Undersigned on any subsequent occasion.
No Waiver shall deemed to be made by Collateral Agent of any of its rights
hereunder unless the same shall be in writing signed on behalf of Collateral
Agent and each such waiver, if any, shall be a waiver only with respect to the
specific matter or matters to which the waiver relates and shall in no way
impair the rights of Collateral Agent or Lenders or the obligations of the
Undersigned to Collateral Agent or Lenders in any other respect at any other
time.
THIS AGREEMENT SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF
THE STATE OF ILLINOIS.
To induce Collateral Agent to accept this Agreement, for the benefit of
itself and Lenders, the Undersigned irrevocably agrees that, subject to
Collateral Agent's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN
ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT
SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF
ILLINOIS. THE UNDERSIGNED HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF
ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE. The
Undersigned hereby irrevocably appoints and designates Schwartz & Freeman,
whose address is 401 North Michigan Avenue, Suite 1900, Chicago, Illinois
60611, Attention: Kenneth G. Kolmin, (or any other person having and
maintaining a place of business in such state whom the Undersigned may from
time to time hereafter designate upon ten (10) days written notice to
Collateral Agent and who Collateral Agent has agreed in its sole discretion in
writing is satisfactory and who has executed an agreement in form and substance
satisfactory to Collateral Agent agreeing to act as such attorney and agent),
as the Undersigned's true and lawful attorney and duly authorized agent for
acceptance of service of legal process. The Undersigned agrees that service of
such
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<PAGE> 87
process upon such person shall constitute personal service of such process upon
the Undersigned. THE UNDERSIGNED HEREBY WAIVES ANY RIGHT IT MAY HAVE TO
TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST THE UNDERSIGNED
BY COLLATERAL AGENT OR LENDERS IN ACCORDANCE WITH THIS PARAGRAPH.
THE UNDERSIGNED HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT.
Attached to this Agreement is Rider A - Special Provisions, which Rider is
by this reference incorporated into and made a part of this Agreement.
IN WITNESS WHEREOF this Agreement has been executed as of this ____ day of
May, 1996.
EMPIRE OF CAROLINA, INC.
By____________________________
Title_______________________
Address:
5150 Linton Boulevard
Delray Beach, Florida 33484
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<PAGE> 88
BORROWER'S CONSENT
Borrower hereby consents to the foregoing Agreement (and the terms
thereof) and agrees to abide thereby and to keep, oversee and perform the
several matters and things therein intended to be kept, observed and performed
by it, and specifically agrees not to make any payments contrary to the terms
of said Agreement.
A breach of any of the terms and conditions of this consent shall
constitute an "Event of Default" under the Loan and Security Agreement dated
May __, 1996 among Borrower, Collateral Agent, Administrative Agent and
Lenders.
BORROWER:
EMPIRE INDUSTRIES, INC.
By_________________________________
Title____________________________
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<PAGE> 89
ACKNOWLEDGMENT OF SIGNATURES
STATE OF )
) SS
COUNTY OF )
I, __________________________, a Notary Public in and for state and county
aforesaid, DO HEREBY CERTIFY THAT before me this day personally appeared
______________________________, known to me to be the same person whose name is
subscribed to the foregoing Agreement, and acknowledged to me that _he executed
and delivered the foregoing Agreement as _______ free and voluntary act, for
the uses set forth therein.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this
______ day of May, 1996.
________________________________________
Notary Public
My Commission Expires:
________________________________________
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<PAGE> 90
ACKNOWLEDGMENT OF SIGNATURES
STATE OF )
) SS
COUNTY OF )
I, __________________________, a Notary Public in and for state and county
aforesaid, DO HEREBY CERTIFY THAT before me this day personally appeared
______________________________, known to me to be the same person whose name is
subscribed to the foregoing consent, and acknowledged to me that _he executed
and delivered the foregoing consent as _______ free and voluntary act, for the
uses set forth therein.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal this
______ day of May, 1996.
________________________________________
Notary Public
My Commission Expires:
________________________________________
9
<PAGE> 91
RIDER A - SPECIAL PROVISIONS
This Rider A - Special Provisions is attached to and made a part of that
certain Subordination Agreement (the "Agreement") of even date herewith
executed by Empire of Carolina, Inc. (the "Undersigned") and consented to by
Empire Industries, Inc. ("Borrower").
1. Permitted Payments. Notwithstanding anything contained in the
Agreement to the contrary, provided no Event of Default (as defined in that
certain Loan and Security Agreement dated of even date herewith among
Collateral Agent, Administrative Agent, Lenders and Borrower) exists at the
time of, or would be created by, the making of any such payment, Borrower shall
be permitted to make and the Undersigned shall be permitted to receive (i)
payments of principal with respect to indebtedness for borrowed money owing by
Borrower to the Undersigned, other than indebtedness evidenced by the Junior
Debt Instruments, to the extent that Collateral Agent has, at the request of
Borrower, instituted a reserve in the amount of said indebtedness against
Borrower's availability to request loans under the Loan Agreement commencing on
the date Borrower receives the proceeds of such borrowed money from the
undersigned, said reserve to be established by Collateral Agent upon request by
Borrower and reduced in amount by any repayments of principal actually made by
Borrower and permitted hereunder, and (ii) payment of the management fees
described on Schedule 11(l) of the Loan Agreement
Payments permitted by this Rider A and made at the times specified herein
are hereinafter referred to as "Permitted Payments." The Undersigned
acknowledges and agrees that no other payments to the Undersigned, including,
without limitation, any other payments, whether constituting prepayments or
otherwise, of the Junior Debt Instruments, shall be Permitted Payments.
EMPIRE OF CAROLINA, INC.
By_______________________________
Title____________________________
Accepted and Agreed to this
____ day of May, 1996.
LASALLE NATIONAL BANK,
as Collateral Agent
By____________________________
Title_________________________
<PAGE> 92
EXHIBIT C
ASSIGNMENT AND ACCEPTANCE
This Assignment and Acceptance (the "Assignment and Acceptance") is
executed as of _____________, 199__ between
_________________________________________ ("Assignor") and
_________________________________ ("Assignee").
W I T N E S S E T H
WHEREAS, Assignor is party to a Loan and Security Agreement dated as of
May ___, 1996 (the "Loan Agreement") among Empire Industries, Inc., LaSalle
National Bank, for itself and as collateral agent ("Collateral Agent") for all
"Lenders" (as defined in the Loan Agreement), BT Commercial Corporation, for
itself and as administrative agent ("Administrative Agent") for all Lenders and
all such Lenders;
WHEREAS, Assignor has agreed to assign a portion of its loans and other
financial accommodations to Borrower pursuant to the Loan Agreement to
Assignee;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
1. Defined Terms
Capitalized terms not otherwise defined herein shall have the meanings
ascribed to such terms in the Loan Agreement.
2. Assignment and Assumption
Assignor hereby assigns to Assignee, without recourse, representation or
warranty (other than as expressly provided herein), and Assignee hereby
assumes, all of Assignor's right, title and interest arising under the Loan
Agreement and the Other Agreements with respect to a portion of the outstanding
Loans to Borrower equal to Assignee's Pro Rata Share (as set forth under
Assignee's signature hereto) of the outstanding Loans to Borrower; provided,
that Assignee's obligations to Assignor, Borrower, Collateral Agent,
Administrative Agent and any Lender are strictly limited to those obligations
under the Loan Agreement unless otherwise explicitly provided for herein. Upon
the Assignment Effective Date (as defined below), Assignee's Maximum Loan
Amount shall be as set forth below Assignee's signature hereto. After giving
effect to the assignment hereunder, Assignor's remaining Pro Rata Share and
Maximum Loan Amounts shall be as set forth below Assignor's signature hereto.
3. Payments on Assignment Effective Date
In consideration of the assignment by Assignor to Assignee pursuant to
this Assignment and Acceptance, Assignee agrees to pay to Assignor on or prior
to the Assignment Effective Date an amount specified by Assignor in writing on
or prior to the Assignment
<PAGE> 93
Effective Date which represents Assignee's Pro Rata Share of the Loans to
Borrower and outstanding on the Assignment Effective Date.
4. Effectiveness
This Assignment and Acceptance shall become effective upon the full
execution and delivery of this Assignment and Acceptance (the "Assignment
Effective Date").
5. Representations and Warranties
(a) Each of Assignor and Assignee represents and warrants to the other
party as follows:
(1) it has full power and authority, and has taken all action
necessary, to execute and deliver this Assignment and Acceptance
and to fulfill its obligations under, and to consummate the
transactions contemplated by, this Assignment and Acceptance;
(2) the making and performance by it of this Assignment and
Acceptance and all documents required to be executed and delivered
by it hereunder do not and will not violate any law or regulation
of the jurisdiction of its incorporation or any other law or
regulation applicable to it;
(3) this Assignment and Acceptance has been duly executed and
delivered by it and constitutes its legal, valid and binding
obligation, enforceable in accordance with its terms, except as
limited by applicable bankruptcy, reorganization, insolvency or
similar laws affecting the enforcement of creditors' rights
generally and by general equity principles; and
(4) all approvals, authorizations, or other actions by, or
filing with, any governmental authority necessary for the validity
or enforceability of its obligations under this Assignment and
Acceptance have been obtained.
(b) Assignor represents and warrants to Assignee that Assignee's
Pro Rata Share of the Loan Limit and the outstanding Loans being
assigned hereunder are not subject to any liens or security interests created
by or known to Assignor.
6. Miscellaneous
(a) Assignor shall not be responsible to Assignee for the execution (by
any party other than Assignor), effectiveness, genuineness, validity,
enforceability, collectibility or sufficiency of the Loan Agreement, the Loan
Agreement, the Other Agreements or any of the agreements, documents or
instruments executed and/or delivered in connection therewith (collectively,
the "Loan Documents") or for any representations, warranties, recitals or
statements made therein or in any written or oral statement or in any financial
or other statements, instruments, reports, certificates or any other documents
made or furnished or made available by Assignor to Assignee or by or on behalf
of the Borrower or any other person obligated under the Loan Documents
(collectively, the "Credit Parties") to Assignor
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<PAGE> 94
or Assignee in connection with the Loan Documents and the transactions
contemplated thereby. Except as otherwise set forth in the Loan Agreement,
Assignor shall not be required to ascertain or inquire as to the performance or
observance of any of the terms, conditions, provisions, covenants or
agreements contained in any of the Loan Documents or as to the use of the
proceeds of the Loans or as to the existence or possible existence of any
default (matured or unmatured) under the Loan Documents.
(b) Assignee represents and warrants that it has made its own independent
investigation of the financial condition and affairs of the Credit Parties in
connection with the making of the Loans and the assignment by Assignor to
Assignee hereunder and has made and shall continue to make its own appraisal of
the creditworthiness of the Credit Parties. Assignor shall have no duty or
responsibility (except as expressly provided in the Loan Agreement) either
initially or on a continuing basis to make any such investigation or any such
appraisal on behalf of Assignee or to provide Assignee with any credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter and shall further have
no responsibility with respect to the accuracy of, or the completeness of, any
information provided to Assignee, whether by Assignor or by or on behalf of any
Credit Party.
(c) Assignee (x) agrees that it will perform all of the obligations which
by the terms of the Loan Agreement are required to be performed by it as a
Lender and (y) represents that it is either (i) a corporation organized under
the laws of the United States or a state thereof or (ii) entitled to complete
exemption from United States withholding tax imposed on or with respect to any
payments to be made to it pursuant to the Loan Agreement.
(d) ANY DISPUTE BETWEEN ASSIGNOR AND ASSIGNEE ARISING OUT OF, CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE AND WHETHER ARISING IN CONTRACT,
TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL
LAWS AND NOT THE CONFLICTS OF LAW PROVISIONS OF THE STATE OF ILLINOIS.
(e) No term or provision of this Assignment and Acceptance may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the parties to this Assignment and Acceptance.
(f) This Assignment and Acceptance may be executed in one or more
counterparts, each of which shall be an original but all of which, taken
together, shall constitute one and the same instrument.
(g) All payments hereunder or in connection herewith shall be made in
Dollars and in immediately available funds, payable to the account of Assignor
at its office as designated in the Loan Agreement.
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<PAGE> 95
(h) This Assignment and Acceptance shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
Neither of the parties hereto may assign or transfer any of its rights or
obligations under this Assignment and Acceptance without the prior consent of
the other party. The preceding sentence shall not limit the right of Assignee
to assign all or part of its Pro Rata Share of the Loan Limit and any
outstanding Loans assigned under this Assignment and Acceptance in the manner
contemplated by the Loan Agreement.
(i) All representations and warranties made herein and indemnities
provided for herein shall survive the consummation of the transactions
contemplated hereby.
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<PAGE> 96
IN WITNESS WHEREOF, the parties hereto have executed this Assignment and
Acceptance as the date first above written.
(ASSIGNOR)
By ______________________________________
Title ___________________________________
Pro Rata Share: _________%
Maximum Loan Amount: $________
(ASSIGNEE)
By _____________________________________
Its ____________________________________
Pro Rata Share: _________%
Maximum Loan Amount: $________
Acknowledged and Agreed to this ____ day of
__________, 199__.
BT COMMERCIAL CORPORATION, as
Administrative Agent
By ____________________________________
Its ___________________________________
LASALLE NATIONAL BANK, as
Collateral Agent
By ____________________________________
Its ___________________________________
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<PAGE> 97
CONTINUING UNCONDITIONAL GUARANTY
WHEREAS, Empire Industries, Inc. ("Borrower") has entered into Loan and
Security Agreement dated of even date herewith, (the "Loan Agreement") with
LaSalle, as collateral agent ("Collateral Agent") for LaSalle, BT Commercial
Corporation (in its individual capacity, "BTCC") and any other lender now or
hereafter party to the Loan Agreement (collectively, "Lenders") and BTCC as
administrative agent ("Administrative Agent") for the Lenders, pursuant to
which Collateral Agent, Administrative Agent and Lenders have agreed to make
loans and advances to or extend other financial accommodations to Borrower from
time to time;
WHEREAS, the undersigned is desirous of having Collateral Agent,
Administrative Agent and Lenders extend credit to Borrower and Collateral
Agent, Administrative Agent and Lenders have required that Guarantor (as
hereinafter defined) execute and deliver this Guaranty to Collateral Agent as a
condition to the extension and continuation of credit by Collateral Agent,
Administrative Agent and Lenders; and
WHEREAS, the extension of credit, as aforesaid, by Collateral Agent,
Administrative Agent and Lenders is necessary and desirable to the conduct and
operation of the business of Borrower and will inure to the personal and
financial benefit of Guarantor;
NOW, THEREFORE, for value received and in consideration of any loan,
advance, or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or granted to Borrower by Collateral Agent,
Administrative Agent and/or any Lender (including, without limitation, the
Loans as defined in, and made or to be made by Collateral Agent, Administrative
Agent and/or Lenders to Borrower pursuant to the Loan Agreement), the
undersigned, and each of them, if there be more than one, (collectively, the
"Guarantor") unconditionally guaranties (i) the full and prompt payment when
due, whether at maturity or earlier, by reason of acceleration or otherwise,
and at all times thereafter, of all of the indebtedness, liabilities and
obligations of every kind and nature of Borrower to Collateral Agent,
Administrative Agent and/or Lenders or any parent, affiliate or subsidiary of
Collateral Agent, Administrative Agent and/or Lenders (the terms "Collateral
Agent", "Administrative Agent" and "Lenders" as used hereafter shall include
such parents, affiliates and subsidiaries), howsoever created, arising or
evidenced, whether direct or indirect, absolute or contingent, joint or
several, now or hereafter existing, or due or to become due, and howsoever
owned, held or acquired by Collateral Agent, Administrative Agent and/or
Lenders, whether through discount, overdraft, purchase, direct loan or as
collateral or otherwise, including without limitation all obligations and
liabilities of Borrower to Collateral Agent, Administrative Agent and/or
Lenders under the Loan Agreement and (ii) the prompt, full and faithful
discharge by Borrower of each and every term, condition, agreement,
representation and warranty now or hereafter made by Borrower to Collateral
Agent, Administrative Agent and Lenders (all such indebtedness, liabilities and
obligations being hereinafter referred to as the "Borrower's Liabilities").
Guarantor further agrees to pay all costs and expenses, including, without
limitation, all court costs and reasonable attorneys' and paralegals' fees paid
or incurred by
<PAGE> 98
Collateral Agent, Administrative Agent and Lenders in endeavoring to collect
all or any part of Borrower's Liabilities from, or in prosecuting any action
against, Guarantor or any other guarantor of all or any part of Borrower's
Liabilities. All amounts payable by Guarantor under this Guaranty shall be
payable upon demand by Collateral Agent.
Notwithstanding any provision of this Guaranty to the contrary, it is
intended that this Guaranty, and any liens and security interests granted by
Guarantor to secure this Guaranty, not constitute a "Fraudulent Conveyance" (as
defined below). Consequently, Guarantor agrees that if the Guaranty, or any
liens or security interests securing this Guaranty, would, but for the
application of this sentence, constitute a Fraudulent Conveyance, this Guaranty
and each such lien and security interest shall be valid and enforceable only to
the maximum extent that would not cause this Guaranty or such lien or security
interest to constitute a Fraudulent Conveyance, and this Guaranty shall
automatically be deemed to have been amended accordingly at all relevant times.
For purposes hereof, "Fraudulent Conveyance" means a fraudulent conveyance
under Section 548 of the "Bankruptcy Code" (as hereinafter defined) or a
fraudulent conveyance or fraudulent transfer under the provisions of any
applicable fraudulent conveyance or fraudulent transfer law or similar law of
any state, nation or other governmental unit, as in effect from time to time.
Guarantor hereby agrees that, except as hereinafter provided, its
obligations under this Guaranty shall be unconditional, irrespective of (i) the
validity or enforceability of Borrower's Liabilities or any part thereof, or of
any promissory note or other document evidencing all or any part of Borrower's
Liabilities, (ii) the absence of any attempt to collect Borrower's Liabilities
from Borrower or any other guarantor or other action to enforce the same, (iii)
the waiver or consent by Collateral Agent, the Requisite Lenders and/or Lenders
with respect to any provision of any instrument evidencing Borrower's
Liabilities, or any part thereof, or any other agreement heretofore, now or
hereafter executed by Borrower and delivered to Collateral Agent and/or
Lenders, (iv) failure by Collateral Agent or any Lender to take any steps to
perfect and maintain its security interest in, or to preserve its rights to,
any security or collateral for Borrower's Liabilities, (v) the institution of
any proceeding under Chapter 11 of Title 11 of the United States Code (11
U.S.C. Section 101 et seq.), as amended (the "Bankruptcy Code"), or any similar
proceeding, by or against Borrower, or Collateral Agent's election in any such
proceeding of the application of Section 1111(b)(2) of the Bankruptcy Code,
(vi) any borrowing or grant of a security interest by Borrower as
debtor-in-possession, under Section 364 of the Bankruptcy Code, (vii) the
disallowance, under Section 502 of the Bankruptcy Code, of all or any portion
of Collateral Agent's, Administrative Agent's and/or any Lender's claim(s) for
repayment of Borrower's Liabilities, or (viii) any other circumstance which
might otherwise constitute a legal or equitable discharge or defense of a
guarantor.
Guarantor hereby waives diligence, presentment, demand of payment, filing
of claims with a court in the event of receivership or bankruptcy of Borrower,
protest or notice with respect to Borrower's Liabilities and all demands
whatsoever, and covenants that this Guaranty will not be discharged, except by
complete performance of the obligations and liabilities contained herein. Upon
any default by Borrower as provided in any instrument or
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<PAGE> 99
document evidencing all or any part of Borrower's Liabilities, including
without limitation the Loan Agreement, Collateral Agent may, at its sole
election, proceed directly and at once, without notice, against Guarantor to
collect and recover the full amount or any portion of Borrower's Liabilities,
without first proceeding against Borrower, or any other person, firm, or
corporation, or against any security or collateral for Borrower's Liabilities.
Collateral Agent and Lenders are hereby authorized, without notice or
demand and without affecting the liability of Guarantor hereunder, to at any
time and from time to time (i) renew, extend, accelerate or otherwise change
the time for payment of, or other terms relating to, Borrower's Liabilities or
otherwise modify, amend or change the terms of any promissory note or other
agreement, document or instrument now or hereafter executed by Borrower and
delivered to Collateral Agent and/or Lenders; (ii) accept partial payments on
Borrower's Liabilities; (iii) take and hold security or collateral for the
payment of Borrower's Liabilities guaranteed hereby, or for the payment of this
Guaranty, or for the payment of any other guaranties of Borrower's Liabilities
or other liabilities of Borrower, and exchange, enforce, waive and release any
such security or collateral; (iv) apply such security or collateral and direct
the order or manner of sale thereof as Collateral Agent in its sole discretion
it may determine; and (v) settle, release, compromise, collect or otherwise
liquidate Borrower's Liabilities and any security or collateral therefor in any
manner, without affecting or impairing the obligations of Guarantor hereunder.
Collateral Agent shall have the exclusive right to determine the time and
manner of application of any payments or credits, whether received from
Borrower or any other source, and such determination shall be binding on
Guarantor. All such payments and credits may be applied, reversed and
reapplied, in whole or in part, to any of Borrower's Liabilities as Collateral
Agent shall determine in its sole discretion without affecting the validity or
enforceability of this Guaranty.
Guarantor hereby assumes responsibility for keeping itself informed of the
financial condition of Borrower, and any and all endorsers and/or other
guarantors of any instrument or document evidencing all or any part of
Borrower's Liabilities and of all other circumstances bearing upon the risk of
nonpayment of Borrower's Liabilities or any part thereof that diligent inquiry
would reveal and Guarantor hereby agrees that none of Collateral Agent,
Administrative Agent or any Lender shall have any duty to advise Guarantor of
information known to Collateral Agent, Administrative Agent or such Lender
regarding such condition or any such circumstances or to undertake any
investigation not a part of its regular business routine. If Collateral Agent,
Administrative Agent or any Lender, in its sole discretion, undertakes at any
time or from time to time to provide any such information to any Guarantor,
none of Collateral Agent, Administrative Agent or such Lender shall be under
any obligation to update any such information or to provide any such
information to Guarantor on any subsequent occasion.
Guarantor consents and agrees that Collateral Agent shall be under no
obligation to marshall any assets in favor of Guarantor or against or in
payment of any or all of Borrower's Liabilities. Guarantor further agrees that,
to the extent that Borrower makes a payment or payments to Collateral Agent or
any Lender, or Collateral Agent or any Lender receives any
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<PAGE> 100
proceeds of collateral, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to Borrower, its estate, trustee, receiver or any
other party, including, without limitation, Guarantor, under any bankruptcy
law, state or federal law, common law or equitable theory, then to the extent
of such payment or repayment, Borrower's Liabilities or the part thereof which
has been paid, reduced or satisfied by such amount, and Guarantor's obligations
hereunder with respect to such portion of Borrower's Liabilities, shall be
reinstated and continued in full force and effect as of the date such initial
payment, reduction or satisfaction occurred.
Guarantor agrees that any and all claims of Guarantor against Borrower,
any endorser or any other guarantor of all or any part of Borrower's
Liabilities, or against any of Borrower's properties, whether arising by reason
of any payment by Guarantor to Collateral Agent or any Lender pursuant to the
provisions hereof, or otherwise, shall be subordinate and subject in right of
payment to the prior payment, in full, of all of Borrower's Liabilities.
Collateral Agent, Administrative Agent and Lenders may, without notice to
anyone, sell or assign Borrower's Liabilities or any part thereof, or grant
participations therein, and in any such event each and every immediate or
remote assignee or holder of, or participant in, all or any of Borrower's
Liabilities shall have the right to enforce this Guaranty, by suit or otherwise
for the benefit of such assignee, holder, or participant, as fully as if herein
by name specifically given such right, but Collateral Agent and Lenders shall
have an unimpaired right, prior and superior to that of any such assignee,
holder or participant, to enforce this Guaranty for the benefit of Collateral
Agent or such Lender, as to any part of Borrower's Liabilities retained by
Collateral Agent or such Lender.
This Guaranty shall be binding upon Guarantor and upon the successors
(including without limitation, any receiver, trustee or debtor in possession of
or for Guarantor) of Guarantor and shall inure to the benefit of Collateral
Agent and Lenders and their respective successors and assigns. If there is
more than one signatory hereto, all references to Guarantor herein shall
include each and every Guarantor and each and every obligation of Guarantor
hereunder shall be the joint and several obligation of each Guarantor. Each
Guarantor that is a corporation or a partnership hereby represents and warrants
that it has all necessary corporate or partnership authority, as the case may
be, to execute and deliver this Guaranty and to perform its obligations
hereunder.
This Guaranty shall continue in full force and effect, and Collateral
Agent and Lenders shall be entitled to make loans and advances and extend
financial accommodations to Borrower on the faith hereof until such time as
Collateral Agent has, in writing, notified Guarantor that all of Borrower's
Liabilities have been paid in full and discharged and the Loan Agreement has
been terminated or until Collateral Agent has actually received written notice
from any Guarantor of the discontinuance of this Guaranty as to that Guarantor,
or written notice of the death, incompetency or dissolution of any Guarantor.
In case of any discontinuance by, or death, incompetency or dissolution of, any
Guarantor (collectively, a
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<PAGE> 101
"Termination Event"), this Guaranty and the obligations of such Guarantor and
his or its heirs, legal representatives, successors or assigns, as the case may
be, shall remain in full force and effect with respect to all of Borrower's
Liabilities incurred prior to the receipt by Collateral Agent of written notice
of the Terminating Event. The occurrence of a Terminating Event with respect
to one Guarantor shall not affect or impair the obligations of any other
Guarantor hereunder.
Wherever possible each provision of this Guaranty shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
THIS GUARANTY SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE
STATE OF ILLINOIS.
Guarantor irrevocably agrees that, subject to Collateral Agent's sole and
absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT,
ARISING OUT OF OR FROM OR RELATED TO THIS GUARANTY SHALL BE LITIGATED IN COURTS
HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. GUARANTOR HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS
LOCATED WITHIN SAID CITY AND STATE. Guarantor hereby irrevocably appoints and
designates the Secretary of State of Illinois, whose address is Springfield,
Illinois (or any other person having and maintaining a place of business in
such state whom Guarantor may from time to time hereafter designate upon ten
(10) days written notice to Collateral Agent and who Collateral Agent has
agreed in its sole discretion in writing is satisfactory and who has executed
an agreement in form and substance satisfactory to Collateral Agent agreeing to
act as such attorney and agent), as Guarantor's true and lawful attorney and
duly authorized agent for acceptance of service of legal process. Guarantor
agrees that service of such process upon such person shall constitute personal
service of such process upon Guarantor. GUARANTOR HEREBY WAIVES ANY RIGHT IT
MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST
GUARANTOR BY COLLATERAL AGENT IN ACCORDANCE WITH THIS PARAGRAPH.
GUARANTOR HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS GUARANTY.
If there is attached to this Guaranty a Rider A - Special Provisions, such
Rider is by this reference incorporated into and made a part of this Guaranty.
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IN WITNESS WHEREOF, this Guaranty has been duly executed by the
undersigned as of this ____ day of May, 1996.
EMPIRE OF CAROLINA, INC.
By________________________________
Its_______________________________
Address:
5150 Linton Boulevard
Delray Beach, Florida 33484
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<PAGE> 103
RIDER A - SPECIAL PROVISIONS
This Rider A - Special Provisions is attached to and made a part of that
certain Continuing Unconditional Guaranty (the "Guaranty") of even date
herewith executed by Empire of Carolina, Inc. ("Guarantor") in favor of
Collateral Agent, for the benefit of Collateral Agent and Lenders.
1. No payment made by or for the account of Guarantor including, without
limitation, (i) a payment made by Guarantor in respect of Borrower's
Liabilities or (ii) a payment made by any other person under any other
guaranty, shall entitle the Guarantor by subrogation or otherwise, to any
payment from Borrower or from or out of any property of Borrower and Guarantor
shall not exercise any right or remedy against Borrower or any property of
Borrower by reason of any performance by Guarantor under the Guaranty.
EMPIRE OF CAROLINA, INC.
By________________________________
Its_______________________________
Address:
5150 Linton Boulevard
Delray Beach, Florida 33484
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<PAGE> 104
PATENT, TRADEMARK AND LICENSE MORTGAGE
THIS PATENT, TRADEMARK AND LICENSE MORTGAGE (the "Mortgage") made as of
this ____ day of May, 1996, by Empire Industries, Inc., a North Carolina
corporation having an address at 501 Daniel Street, Tarboro, North Carolina
27886-4000 ("Mortgagor"), in favor of LaSalle National Bank ("LaSalle"), with
an office at 135 South LaSalle Street, Chicago, Illinois 60674, as collateral
agent for the lenders ("Lenders") who are now or hereafter parties to the Loan
Agreement ("Mortgagee"):
W I T N E S S E T H
WHEREAS, Mortgagor, Mortgagee, Lenders and BT Commercial Corporation as
administrative agent ("Administrative Agent") are parties to a certain Loan and
Security Agreement (the "Loan Agreement") and other related loan documents of
even date herewith (collectively, with the Loan Agreement, the "Loan
Documents"), which Loan Documents provide (i) for Mortgagee, Lenders and
Administrative Agent to, from time to time, extend credit to or for the account
of Mortgagor and (ii) for the grant by Mortgagor to Mortgagee of a security
interest in certain of Mortgagor's assets, including, without limitation, its
patents, patent applications, trademarks, trademark applications, tradenames,
service marks, service mark applications, goodwill and licenses;
NOW, THEREFORE, in consideration of the premises set forth herein and for
other good and valuable consideration, the receipt, sufficiency and adequacy of
which are hereby acknowledged, Mortgagor agrees as follows:
1. Capitalized Terms. All terms capitalized but not otherwise defined
herein shall have the same meanings herein as in the Loan Documents.
2. Mortgage of Patents, Trademarks and Licenses. To secure the complete
and timely satisfaction of all of Mortgagor's "Liabilities" (as defined in the
Loan Agreement), Mortgagor hereby grants, mortgages, pledges, and creates a
security interest in, as and by way of a first mortgage and security interest
having priority over all other security interests, to Mortgagee with power of
sale, to the extent permitted by law or by the specific license agreements,
upon exercise by Mortgagee of its rights as a secured party following the
occurrence of an "Event of Default" (as defined in the Loan Agreement) all of
Mortgagor's right, title and interest in and to all of its now existing and
hereafter created or acquired:
(i) patents and patent applications, including, without
limitation, the inventions and improvements described and claimed
therein, and those patents listed on Exhibit A attached hereto and
hereby made a part hereof, and (a) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part
thereof, (b) all income, damages and payments now and hereafter
due or payable under or with respect thereto, including, without
limitation, damages and payments for past or future infringements
thereof, (c)
<PAGE> 105
the right to sue for past, present and future infringements
thereof, and (d) all rights corresponding thereto throughout the
world (all of the foregoing patents and applications, together
with the items described in clauses (a)-(d) of this subsection
2(i), are sometimes hereinafter referred to individually as a
"Patent" and, collectively, as the "Patents");
(ii) trademarks, trademark registrations, trademark
applications, tradenames and tradestyles, service marks, service
mark registrations and service mark applications, including,
without limitation, the trademarks, tradenames, service marks and
applications and registrations thereof listed on Exhibit B
attached hereto and hereby made a part hereof, and (a) renewals or
extensions thereof, (b) all income, damages and payments now and
hereafter due or payable with respect thereto, including, without
limitation, damages and payments for past or future infringements
thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto
throughout the world (all of the foregoing trademarks, tradenames
and tradestyles, service marks and applications and registrations
thereof, together with the items described in clauses (a)-(d) of
this subsection 2(ii), are sometimes hereinafter referred
individually as a "Trademark", and, collectively, as the
"Trademarks");
(iii) all license agreements with respect to any of the
Patents or the Trademarks or any other patent, trademark, service
mark or any application or registration thereof or any other
tradename or tradestyle between Mortgagor and any other party,
whether Mortgagor is a licensor or licensee under any such license
agreement, to the extent such licenses can be pledged or assigned
by Mortgagor without the consent of the Licensor, which consent
has not been obtained, including, without limitation, the licenses
listed on Exhibit C attached hereto and hereby made a part hereof
(all of the foregoing license agreements and Mortgagor's rights
thereunder are referred to collectively as the "Licenses"); and
(iv) the goodwill of Mortgagor's business connected with and
symbolized by the Trademarks.
3. Warranties and Representations. Mortgagor warrants and represents to
Mortgagee that, except as set forth on Exhibit D attached hereto:
(i) The Patents, Trademarks and Licenses have not been
adjudged invalid or unenforceable and have not been canceled, in
whole or in part and are presently subsisting;
(ii) Each of the Patents, Trademarks and Licenses is valid
and enforceable;
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<PAGE> 106
(iii) Mortgagor is the sole and exclusive owner of the entire
and unencumbered right, title and interest in and to each of the
Patents, Trademarks and Licenses, free and clear of any liens,
charges and encumbrances, including without limitation licenses,
shop rights and covenants by Mortgagor not to sue third persons;
(iv) Mortgagor has adopted, used and is currently using all
of the Trademarks;
(v) Mortgagor has no notice of any suits or actions commenced
or threatened with reference to the Patents, Trademarks or
Licenses; and
(vi) Mortgagor has the right to execute and deliver this
Mortgage and perform its terms and has entered into or will enter
into written agreements with each of its present and future
employees, agents and consultants which will enable it to comply
with the covenants contained herein.
4. Restrictions on Future Agreements. Mortgagor agrees that until
Mortgagor's Liabilities shall have been satisfied in full and the Loan
Documents shall have been terminated, Mortgagor shall not sell or assign its
interest in, or grant any license under, the Patents, Trademarks or Licenses,
or enter into any other agreement with respect to the Patents, Trademarks or
Licenses which is inconsistent with Mortgagor's obligations under this
Mortgage, without the prior written consent of Mortgagee, which consent shall
not be unreasonably withheld, and Mortgagor further agrees that it shall not
take any action, or permit any action to be taken by others subject to its
control, including licensees, or fail to take any action (solely with respect
to the Patents and the Tradenames), which would affect the validity or
enforcement of the rights transferred to Mortgagee under this Mortgage.
Notwithstanding the foregoing, Mortgagor will not be required to obtain the
consent of Mortgagee in connection with the settlement of any Trademark
oppositions or potential Trademark oppositions wherein in order to settle same
Mortgagor grants a non-exclusive royalty free license in connection with such
Trademark.
5. New Patents, Trademarks, and Licenses. Mortgagor represents and
warrants that, to the best of Mortgagor's knowledge, the Patents, Trademarks
and Licenses listed on Exhibits A, B and C, respectively, constitute all of the
Patents, registered or applications for Trademarks, and Licenses now owned by
Mortgagor. If, before Mortgagor's Liabilities shall have been satisfied in
full or before the Loan Documents have been terminated, Mortgagor shall (i)
become aware of any existing Patents, Trademarks or Licenses of which Mortgagor
has not previously informed Mortgagee, (ii) obtain rights to any new patentable
inventions, Patents, Trademarks or Licenses necessary to any material portion
of the ongoing business of Mortgagor, or (iii) become entitled to the benefit
of any Patents, Trademarks, or Licenses or any improvement on any Patent, the
provisions of this Mortgage above shall automatically apply thereto and
Mortgagor shall give to Mortgagee prompt written notice thereof. Mortgagor
hereby authorizes Mortgagee to modify this
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<PAGE> 107
Mortgage by amending Exhibits A, B and C, as applicable, to include any such
Patents, Trademarks and Licenses.
6. Royalties; Terms. The term of the mortgages granted herein shall
extend until the earlier of (i) the expiration of each of the respective
Patents, Trademarks and Licenses assigned hereunder, and (ii) Mortgagor's
Liabilities have been paid in full and the Loan Documents have been terminated.
Upon the occurrence of an Event of Default, Mortgagor agrees that the use by
Mortgagee of all Patents, Trademarks and Licenses shall be worldwide and
without any liability for royalties or other related charges from Mortgagee to
the Mortgagor.
7. Exercise of Rights. From and after the date Mortgagee commences
exercising its rights as a secured party following the occurrence of an Event
of Default, Mortgagor's right to retain the Patents, Trademarks and Licenses
shall terminate forthwith, and Mortgagee shall have, in addition to all other
rights and remedies given it by this Mortgage, those allowed by law and the
rights and remedies of a secured party under the Uniform Commercial Code as
enacted in any of the jurisdictions in which the Patents, Trademarks or
Licenses may be located.
8. Mortgagee's Right to Inspect. Mortgagee shall have the right, at any
time and from time to time during normal business hours and prior to payment in
full of Mortgagor's Liabilities and termination of the Loan Documents, to
inspect Mortgagor's premises and to examine Mortgagor's books, records and
operations.
9. Release of Mortgage. This Mortgage is made for collateral purposes
only. Upon payment in full of Mortgagor's Liabilities and termination of the
Loan Documents, Mortgagee shall execute and deliver to Mortgagor all releases,
assignments and other instruments, and shall take such other actions, as may be
necessary or proper to release Mortgagee's security interest in the Patents,
Trademarks, and Licenses, subject to any disposition thereof which may have
been made by Mortgagee pursuant hereto or pursuant to the Loan Documents.
10. Expenses. All expenses incurred in connection with the performance of
any of the agreements set forth herein shall be borne by Mortgagor. All fees,
costs and expenses, of whatever kind or nature, including reasonable attorneys'
and paralegals' fees and legal expenses, incurred by Mortgagee in connection
with the filing or recording of any documents (including all taxes in
connection therewith) in public offices, the payment or discharge of any taxes,
counsel fees, maintenance fees, encumbrances or otherwise in protecting,
maintaining or preserving the Patents, Trademarks and Licenses, or in
defending or prosecuting any actions or proceedings arising out of or related
to the Patents, Trademarks and Licenses, shall be borne by and paid by
Mortgagor on demand by Mortgagee and until so paid shall be added to the
principal amount of Mortgagor's Liabilities and shall bear interest at the rate
for "Prime Rate Loans" (as defined in the Loan Agreement).
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<PAGE> 108
11. Duties of Mortgagor. To the extent commercially reasonable, Mortgagor
shall have the duty (i) to prosecute diligently any patent, trademark or
service mark applications pending as of the date hereof or thereafter until
Mortgagor's Liabilities shall have been paid in full, (ii) to make application
on unpatented but patentable inventions and on trademarks and service marks, as
appropriate, and to the extent commercially reasonable, (iii) to preserve and
maintain all rights in the Patents, Trademarks and Licenses, and (iv) to ensure
that the Patents, Trademarks and Licenses are and remain enforceable. Any
expenses incurred in connection with Mortgagor's obligations under this Section
11 shall be borne by Mortgagor. Mortgagor shall not abandon any right to file
a patent, trademark or service mark application, or abandon any pending patent
application, or any other Patent, Trademark or License without the consent of
Mortgagee, which consent shall not be unreasonably withheld. Notwithstanding
the foregoing, and prior to the occurrence of an Event of Default, Mortgagor
has no obligation to:
(i) begin or recommence use of any Trademarks not currently
in use;
(ii) maintain Trademarks for products, services or product
lines which are discontinued in the ordinary course of business;
and
(iii) maintain any trademark application, or registration
which is not in use or patent rights which are obsolete; and
Mortgagee's prior consent is not required to abandon any
application or registration for a Trademark which is not in use.
12. Mortgagee's Right to Sue. After the occurrence of an Event of
Default, Mortgagee shall have the right, but shall in no way be obligated, to
bring suit in its own name to enforce the Patents, Trademarks and Licenses,
and, if Mortgagee shall commence any such suit, Mortgagor shall, at the request
of Mortgagee, do any and all lawful acts and execute any and all proper
documents required by Mortgagee in aid of such enforcement and Mortgagor shall
promptly, upon demand, reimburse and indemnify Mortgagee for all reasonable
costs and expenses incurred by Mortgagee in the exercise of its rights under
this Section 12.
13. Waivers. No course of dealing between Mortgagor and Mortgagee, nor
any failure to exercise, nor any delay in exercising, on the part of Mortgagee,
any right, power or privilege hereunder or under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
14. Severability. The provisions of this Mortgage are severable, and if
any clause or provision shall be held invalid and unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction, and shall
not in any manner affect such clause
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<PAGE> 109
or provision in any other jurisdiction, or any other clause or provision of
this Mortgage in any jurisdiction.
15. Modification. This Mortgage cannot be altered, amended or modified in
any way, except as specifically provided in Section 5 hereof or by a writing
signed by the parties hereto.
16. Cumulative Remedies; Power of Attorney; Effect on Financing Agreement.
All of Mortgagee's rights and remedies with respect to the Patents, Trademarks
and Licenses, whether established hereby or by the Loan Documents, or by any
other agreements or by law shall be cumulative and may be exercised singularly
or concurrently. Upon the occurrence of an Event of Default, Mortgagor hereby
authorizes Mortgagee to make, constitute and appoint any officer or agent of
Mortgagee as Mortgagee may select, in its sole discretion, as Mortgagor's true
and lawful attorney-in-fact, with power to (i) endorse Mortgagor's name on all
applications, documents, papers and instruments necessary or desirable for
Mortgagee in the use of the Patents, Trademarks and Licenses, or (ii) take any
other actions with respect to the Patents, Trademarks and Licenses as Mortgagee
deems to be in the best interest of Mortgagee, or (iii) grant or issue any
exclusive or non-exclusive license under the Patents, Trademarks or Licenses to
anyone, or (iv) assign, pledge, convey or otherwise transfer title in or
dispose of the Patents, Trademarks or Licenses to anyone. Mortgagee hereby
ratifies all that such attorney shall lawfully do or cause to be done by virtue
hereof. This power of attorney, being coupled with an interest, shall be
irrevocable until Mortgagor's Liabilities shall have been paid in full and the
Loan Agreement, including any amendments thereto, has been terminated.
Mortgagor acknowledges and agrees that this Mortgage is not intended to limit
or restrict in any way the rights and remedies of Mortgagee under the Loan
Documents but rather is intended to facilitate the exercise of such rights and
remedies. Mortgagee shall have, in addition to all other rights and remedies
given it by the terms of this Mortgage and the Loan Documents, all rights and
remedies allowed by law and the rights and remedies of a secured party under
the Uniform Commercial Code as enacted in any jurisdiction in which the
Patents, Trademarks or Licenses may be located.
17. Binding Effect; Benefits. This Mortgage shall be binding upon the
Mortgagor and its respective successors and assigns, and shall inure to the
benefit of Mortgagee, its successors, nominees and assigns.
18. Governing Law. This Mortgage shall be governed by and construed in
accordance with the internal laws of the State of Illinois.
19. Headings. Paragraph headings used herein are for convenience only and
shall not modify the provisions which they precede.
20. Further Assurances. Mortgagor agrees to execute and deliver such
further agreements, instruments and documents, and to perform such further
acts, as
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<PAGE> 110
Mortgagee shall reasonably request from time to time in order to carry out the
purpose of this Mortgage and agreements set forth herein.
21. Survival of Representations. All representations and warranties of
Mortgagor contained in this Mortgage shall survive the execution and delivery
of this Mortgage and shall be remade on the date of each borrowing under the
Loan Documents.
IN WITNESS WHEREOF, Mortgagor has duly executed this Mortgage in favor of
Mortgagee as of the date first written above.
ATTEST: EMPIRE INDUSTRIES, INC.
_________________________________
By ______________________________ By _____________________________
Its _____________________________ Its ____________________________
Agreed and Accepted this ____ day of May, 1996
LASALLE NATIONAL BANK, as Collateral Agent
By _______________________________
Its ______________________________
THIS INSTRUMENT PREPARED BY AND
AFTER FILING RETURN TO:
Kristine M. Schuler, Esq.
GOLDBERG, KOHN, BELL, BLACK,
ROSENBLOOM & MORITZ, LTD.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
(312) 201-4000
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<PAGE> 111
ACKNOWLEDGMENT
STATE OF _____________)
) SS
COUNTY OF ____________)
The foregoing Patent, Trademark and License Mortgage was executed and
acknowledged before me this ____ day of May, 1996, by
______________________________ and ______________________________, personally
known to me to be the ____________________ and ____________________,
respectively, of Empire Industries, Inc., a North Carolina corporation, on
behalf of such corporation.
GIVEN under my hand and notarial seal this ______ day of May, 1996.
________________________________
Notary Public
My Commission Expires
________________________________
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<PAGE> 112
ACKNOWLEDGMENT
STATE OF ________________ )
) SS
COUNTY OF ______________ )
I, ____________________________, a Notary Public in and for and residing
in said County and State, DO HEREBY CERTIFY THAT ______________________, the
______________________ of LaSalle National Bank, personally known to me to be
the same person whose name is subscribed to the foregoing instrument, appeared
before me this day in person and acknowledged that he signed and delivered said
instrument as his own free and voluntary act and as the free and voluntary act
of said bank for the uses and purposes therein set forth.
GIVEN under my hand and notarial seal this ____ day of May, 1996
________________________________
Notary Public
My Commission Expires:
________________________________
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<PAGE> 113
EXHIBIT A
Patents
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<PAGE> 114
EXHIBIT B
Trademarks
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<PAGE> 115
EXHIBIT C
Licenses
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<PAGE> 116
ASSIGNMENT OF PLEDGED STOCK AND RIGHTS AND REMEDIES
UNDER STOCK PLEDGE AND CREDIT AGREEMENT
This Assignment ("Assignment") is made this ____ day of May, 1996, by
Empire of Carolina, Inc., a Delaware corporation ("Empire") and its
subsidiaries, including but not limited to, Empire Industries, Inc., a North
Carolina corporation ("Industries") (Empire, together with its subsidiaries,
including Industries, ("Assignor")), in favor of LaSalle National Bank, as
Collateral Agent ("Collateral Agent") for the lenders ("Lenders") who are or
may upon time to time become parties to that certain Loan and Security
Agreement among Collateral Agent, BT Commercial Corporation, as Administrative
Agent ("Administrative Agent") for Lenders and Lenders.
W I T N E S S E T H :
WHEREAS, Assignor agreed to extend a revolving line of credit (the "Line
of Credit") to Centrex International, a sole proprietorship ("Centrex") to
enable Centrex to purchase up to $2,000,000 of pool products and accessories
manufactured and/or to be manufactured by Assignor;
WHEREAS, in consideration of Assignor's agreement to extend the Line of
Credit, Centrex agreed to pledge to Assignor a security interest in all
existing and certain after-acquired shares of certificated securities owned by
Assignor in ACM Government Opportunity Fund, Inc. ("Pledged Stock") up to an
aggregate value of One Million and No/100 ($1,000,000.00) Dollars computed as
of August 1, 1995 pursuant to a Stock Pledge and Credit Agreement dated as of
August 31, 1995 among Paul Sirianni, Centrex and Assignor ("Pledge Agreement");
WHEREAS, Industries and Collateral Agent, Administrative Agent and Lenders
have entered into that certain Loan and Security Agreement of even date
herewith (the "Loan Agreement"), pursuant to which Industries has granted
Collateral Agent, for its benefit and the benefit of Lenders, a security
interest in substantially all of Industries' assets;
WHEREAS, Lenders have required, as a condition to making loans to
Industries pursuant to the Loan Agreement, that Assignor assign to Collateral
Agent, for its benefit and the benefit of Lenders, as additional security for
the repayment of the "Liabilities" (as defined in the Loan Agreement),
Assignor's security interest in the Pledged Stock and all of Assignor's rights
and remedies under the Pledge Agreement;
NOW, THEREFORE, in consideration of the premises set forth herein and for
other good and valuable consideration, receipt of which is hereby acknowledged,
Assignor hereby agrees as follows:
1. Assignor hereby assigns and transfers to Collateral Agent, for its
benefit and the benefit of Lenders, a security interest in, as additional
security for the
<PAGE> 117
repayment in full of the Liabilities, Assignor's security interest in the
Pledged Stock and all of Assignor's rights and remedies under the Pledge
Agreement.
2. Contemporaneously herewith, Assignor is delivering to Assignee the
certificates representing the Pledged Stock, together with duly executed
undated instruments of transfer or assignment in blank for the purpose of
perfecting Assignee's security interest therein. Assignee agrees to hold the
Pledged Stock, as Collateral Agent, for its benefit and the benefit of Lenders
and also as bailee for Assignor pursuant to Article 8-313 of the Uniform
Commercial Code of the State of North Carolina. Except for the safe custody of
the Pledged Stock in its possession, Collateral Agent shall have no duty with
respect to the Pledged Stock. Collateral Agent shall be deemed to have
exercised reasonable care in the custody and preservation of the Pledged Stock
if the Pledged Stock is accorded treatment that is substantially equivalent to
that which Collateral Agent accords its own property. Such certificates shall
be returned to Assignor upon payment in full by Centrex of the Line of Credit
and termination of all obligations of Centrex under the Credit Agreement (as
defined in the Pledge Agreement) and the Pledge Agreement.
3. Assignor hereby irrevocably authorizes and empowers Collateral Agent or
its agent, in Collateral Agent's sole discretion, at any time after the
occurrence of an "Event of Default" (as defined in the Loan Agreement) to (a)
either directly or on behalf of Assignor, assert any and all claims and demands
and enforce any and all rights and remedies that Assignor may have (including,
without limitation, any and all rights of set-off) from time to time against
Centrex, with respect to the Pledged Stock or the Pledge Agreement or any
document or instrument executed in connection therewith and (b) receive and
collect any and all proceeds or amounts due to Assignor under the Pledge
Agreement (whether as proceeds of the Pledged Stock or otherwise) and apply all
such amounts on account of the Liabilities in such manner as Collateral Agent
shall elect. Assignor hereby irrevocably makes, constitutes and appoints
Collateral Agent (and all officers, employees or agents designated by
Collateral Agent) as Assignor's true and lawful attorney (and agent-in-fact)
for the purpose of enabling Collateral Agent or its agent to assert any and all
such claims and demands or enforce any and all such rights and remedies and
collect such proceeds, awards and amounts and to apply such monies to the
Liabilities in such manner as Collateral Agent shall elect.
4. Assignor hereby agrees and acknowledges that Collateral Agent shall not
be deemed to have assumed any of the obligations or liabilities of Assignor
under the Pledge Agreement by reason of execution and delivery of this
Assignment or otherwise, Assignor further agrees to indemnify, protect, defend
and hold Collateral Agent harmless from and with respect to any claims or
demands by Centrex hereunder or thereunder.
5. Assignor hereby agrees that if Assignor shall receive any monies with
respect to the Pledged Stock or the Pledge Agreement, whether or not by reason
of any assertion by Assignor or Collateral Agent of any of Assignor's rights
and remedies under the Pledge Agreement, said monies shall be received in trust
by Assignor for Collateral Agent,
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<PAGE> 118
for its benefit and the benefit of Lenders, and immediately turned over to
Collateral Agent by Assignor for application to the Liabilities in such manner
as Collateral Agent shall elect.
6. THIS ASSIGNMENT SHALL BE CONSTRUED ACCORDING TO THE INTERNAL LAWS (AS
OPPOSED TO CONFLICTS OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS.
IN WITNESS WHEREOF, this Assignment has been executed and delivered as of
the day and year first written above.
EMPIRE OF CAROLINA, INC., a
Delaware corporation
By_________________________________
Its_______________________________
EMPIRE INDUSTRIES, INC., a
North Carolina corporation
By_________________________________
Its_______________________________
Agreed and Accepted this ______
day of May, 1996.
LASALLE NATIONAL BANK, as Collateral
Agent
By_________________________________
Its_______________________________
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<PAGE> 119
EXHIBIT E
LIST OF APPROVED ASSIGNEES
1. Sanwa Business Credit, Inc.
2. Bank of New York Commercial Corp.
3. BOT Financial Corporation
4. Heller Financial, Inc./Heller Business Credit
5. Nationsbank Business Credit, Inc./NationsBank
6. GE Capital Corporation
7. The CIT Group
8. Transamerica Business Credit
9. First Source Financial
10. Bank of America
11. FINOVA Capital Corporation
12. Gibraltor
13. The First National Bank of Chicago/NBD Bank
14. American National Bank and Trust Company of Chicago
15. Congress Financial Corporation
In addition to the foregoing, any affiliates of such financial
institutions and any successor of such financial institutions by merger,
acquisition or otherwise.
<PAGE> 120
EXHIBIT D
CONFIDENTIALITY AGREEMENT
WHEREAS, reference is made to that certain Loan and Security Agreement
(the "Loan Agreement") dated as of May __, 1996 among Empire Industries, Inc.
("Borrower"), LaSalle National Bank, for itself ("LaSalle") and as collateral
agent for all "Lenders" under and as defined in the Loan Agreement ("Collateral
Agent"), BT Commercial Corporation, for itself ("BTCC") and as administrative
agent for all Lenders ("Administrative Agent"), and all other Lenders now or
hereafter a party to the Loan Agreement;
WHEREAS, ________________ ("XXX"), a Lender under the Loan Agreement, is
interested in assigning or participating all or a portion of its loans to
Borrower to ________________ ("YYY"), and YYY is interested in becoming an
assignee or participant;
WHEREAS, pursuant to the terms of the Loan Agreement, prior to providing
any confidential information to a potential assignee or participant, such party
must execute a confidentiality agreement in the form hereof.
NOW, THEREFORE, for this and other good and valuable consideration XXX and
YYY agree as follows:
YYY hereby agrees to keep any non-public information delivered or made
available to YYY or any authorized representative of YYY regarding Borrower or
its affiliates confidential from any person other than persons employed or
retained by YYY or who are or are expected to become engaged in evaluating,
approving, administering or otherwise involved in the assignment of or purchase
of a participation in the loans and other financial accommodations to Borrower
under the Loan Agreement (which persons shall also be bound by this provision);
provided, however, that nothing herein shall prevent YYY or any such party from
disclosing such information as required or requested by any governmental agency
or representative thereof or pursuant to legal process, or to any future
assignee or participant of YYY, so long as such future assignee or participant
executes a confidentiality agreement in substantially the form hereof. In
addition, nothing herein shall prevent YYY from discussing such information
with, or disclosing such information to, any other Lender, Collateral Agent or
Administrative Agent.
<PAGE> 121
IN WITNESS WHEREOF, the parties hereto have executed this Confidentiality
Agreement this ____ day of ____________, 199__.
XXX
By_________________________
Its________________________
YYY
By_________________________
Its________________________
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<PAGE> 122
COPYRIGHT SECURITY AGREEMENT
THIS COPYRIGHT SECURITY AGREEMENT ("Security Agreement") is made as of the
_____ day of May, 1996, by Empire Industries, Inc., a North Carolina
corporation having an address at Post Office Box 4000, 501 Daniel Street,
Tarboro, North Carolina 27886-4000 ("Borrower"), in favor of LaSalle National
Bank, a national banking association having an office at 135 South LaSalle
Street, Chicago, Illinois 60674, as Collateral Agent ("Collateral Agent") for
the lenders ("Lenders") who are or may from time to time become parties to the
Loan Agreement (as hereinafter defined):
W I T N E S S E T H:
WHEREAS, Collateral Agent, BT Commercial Corp., as Administrative Agent
(Administrative Agent") for the Lenders and Lenders are parties to a certain
Loan and Security Agreement of even date herewith (the "Loan Agreement"), which
Loan Agreement provides (i) for Lenders, from time to time, to extend credit to
or for the account of Borrower and (ii) for the grant by Borrower to Collateral
Agent, for its benefit and the benefit of Lenders, of a security interest in
certain of Borrower's assets, including, without limitation, its copyrights,
copyright applications and interests under copyright license agreements; and
WHEREAS, it is a condition precedent to the extension of credit by
Collateral Agent and Lenders under the Loan Agreement that Borrower grant the
security interest and make the copyright assignment contemplated by this
Security Agreement;
NOW, THEREFORE, in consideration of the premises and in order to induce
Lenders to make Loans under the Loan Agreement, Borrower hereby agrees as
follows:
1. Capitalized Terms. All terms capitalized but not otherwise defined
herein shall have the meanings ascribed to such terms in the Loan Agreement.
2. Grant of Security Interest. To secure the timely and complete payment,
observance and performance of all of the Liabilities, Borrower hereby grants,
bargains, mortgages, pledges, creates a security interest in, as and by way of
a first mortgage and security interest having priority over all other security
interests, to Collateral Agent, for its benefit and the benefit of Lenders, and
its successors, transferees and assigns, with power of sale as hereinafter
provided, to the extent not prohibited by law, all of Borrower's right, title
and interest in and to all of its now owned or existing or hereafter acquired
or arising:
United States and foreign copyrights, copyright applications,
including, without limitation, copyrights applications for which
registrations have been issued or applied for in the United States
Copyright Office, and interests under copyright license agreements (both
as licensee and licensor), including, without limitation, the work fixed
in a tangible medium described therein, the copyrights and applications
listed on Exhibit A attached hereto and made a part hereof, and the
interests under
<PAGE> 123
copyright license agreements listed on Exhibit B attached hereto and made
a part hereof; and (a) all reissues, divisions, continuations, renewals,
extensions and continuations-in-part thereof, (b) all income, royalties,
damages and payments now or hereafter due and/or payable under or with
respect thereto, including, without limitation, payments under all
licenses entered into in connection therewith and damages and payments
for past or future infringements thereof, (c) the right to sue for past,
present and future infringements thereof and (d) all rights corresponding
thereto throughout the world (all of the foregoing copyrights,
applications and interests under copyright license agreements, together
with the items described in clauses (a) through (d) of this Paragraph 2,
are sometimes hereinafter referred to individually as a "Copyright" and,
collectively, as the "Copyrights").
3. Restrictions on Future Agreements. Borrower agrees that until all
Liabilities shall have been satisfied in full and the Loan Agreement shall have
been terminated, Borrower shall not, without Collateral Agent's prior written
consent (which consent shall not be unreasonably withheld), abandon any
Copyright or enter into any agreement, including, without limitation, any
license agreement, which is inconsistent with Borrower's obligations under this
Security Agreement. Borrower further agrees that it will not take any action,
or permit any action to be taken by others subject to its control, including
licensees, or fail to take any action, which would affect the validity or
enforcement of the rights transferred to Collateral Agent under this Security
Agreement, and any such agreement or action which may take place so affecting
such validity or enforcement shall be null and void and of no effect
whatsoever.
4. New Copyrights. Borrower represents and warrants that the Copyrights
listed on Exhibit A and the Copyrights listed on Exhibit B constitute all of
the Copyrights now owned by or licensed to or by Borrower for which
registrations have been issued or applied for in the United States Copyright
Office. If, before the Liabilities have been satisfied in full and the Loan
Agreement has been terminated, Borrower shall (i) become aware of any existing
Copyright of which Borrower has not previously informed Collateral Agent, (ii)
obtain rights to any new copyrightable works, or (iii) become entitled to the
benefit of any Copyright (including, without limitation, any reissue, division,
continuation, renewal, extension, or continuation-in-part of any Copyright),
which benefit is not in existence on the date hereof, then the provisions of
this Security Agreement, including, without limitation, Paragraph 2 above,
shall automatically apply thereto and Borrower shall give to Collateral Agent
prompt written notice thereof. Borrower hereby authorizes Collateral Agent to
modify this Security Agreement by amending Exhibit A and Exhibit B, as
applicable, to include any such Copyrights.
5. Representations and Warranties. Borrower hereby represents, warrants,
covenants and agrees that:
(a) It is and will continue to be the sole and exclusive owner of
all right, title and interest in the Copyrights so long as the Copyrights
shall
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<PAGE> 124
continue in force, free and clear of any and all liens, claims and
encumbrances, except for security interests granted to Collateral Agent,
for its benefit and the benefit of Lenders.
(b) Each of the Copyrights is valid, enforceable and presently
subsisting.
(c) It has the full right and power to grant the security interests
in the Copyrights made hereby and perform its obligations hereunder.
(d) It has made no previous assignment, transfer or agreements in
conflict herewith or constituting a present or future assignment, or
transfer of, or encumbrance on, any of the Copyrights except for license
agreements to use such Copyrights granted to licensees described on
Exhibit B hereto.
(e) There is no financing statement or other document or instrument
now signed by Borrower or on file in any public office covering any part
of the Copyrights, except those showing Collateral Agent as secured
party, and so long as any Liabilities remain outstanding under the Loan
Agreement or the Loan Agreement has not been terminated, Borrower will
neither execute nor permit to be filed in any public office any such
financing statement or other document or instrument, except financing
statements on file or to be filed in favor of Collateral Agent.
(f) It will neither sell, assign its interest in, nor grant any
license under, any of the Copyrights, without the prior written consent
of Collateral Agent which consent will not be unreasonably withheld.
(g) To the best knowledge of Borrower no infringement or
unauthorized use is presently being made of any of the Copyrights which
would materially adversely affect the fair market value of the Copyrights
or the benefits to Collateral Agent of this Security Agreement,
including, without limitation, the priority or perfection of the security
interest granted herein or the remedies of Collateral Agent hereunder.
(h) All information furnished to Collateral Agent or any Lender
concerning the Copyrights and proceeds thereof, for the purpose of
obtaining credit or an extension of credit from Collateral Agent and
Lenders, is, or will be at the time the same is furnished, accurate and
correct in all material respects.
6. Royalties; Terms. Borrower hereby agrees that any use by
Collateral Agent of any rights granted hereunder with respect to the Copyrights
shall be worldwide and without any liability for royalties or other related
charges from Collateral Agent to Borrower or any other Person. The term of the
assignments and security interests granted herein shall
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<PAGE> 125
extend until the earlier of (i) the expiration or termination of each of the
Copyrights assigned hereunder or (ii) the payment in full of all Liabilities
and the termination of the Loan Agreement.
7. Release of Security Interest. This Security Agreement is made for
collateral purposes only. Upon payment in full of all Liabilities and
termination of the Loan Agreement, Collateral Agent shall, at Borrower's sole
cost and expense, execute and deliver to Borrower all termination statements,
assignments and other instruments as may be necessary or proper to re-vest in
Borrower full title to the Copyrights granted hereby, subject to any
disposition thereof which may have been made by Collateral Agent pursuant to
the Loan Agreement, this Security Agreement or applicable law.
8. Duties of Borrower. Borrower shall have the duty (i) to file and
prosecute diligently any copyright application that is part of the Copyrights
pending as of the date hereof or thereafter until all Liabilities shall have
been paid in full and the Loan Agreement shall have been terminated, (ii) to
make application on uncopyrighted but copyrightable works, as appropriate, and
to the extent commercially reasonable, (iii) to preserve and maintain all
rights in the Copyrights to the extent commercially reasonable, (iv) to ensure
that the Copyrights are and remain enforceable to the extent commercially
reasonable and (v) to provide Collateral Agent on an annual basis with a list
of all copyright applications filed or made pursuant to this Paragraph 8. Any
expenses incurred in connection with this Paragraph 8 shall be borne by
Borrower. Borrower shall neither abandon any right to file a copyright
application nor abandon any pending copyright application, or any Copyrights,
without the consent of Collateral Agent which consent will not be unreasonably
withheld. If Borrower fails to comply with any of the foregoing duties,
Collateral Agent may perform said duties in Borrower's name, to the extent
permitted by law, at Borrower's expense, and Borrower hereby agrees to
reimburse Collateral Agent in full for all expenses incurred in connection with
Collateral Agent's performance of such duties, including reasonable attorneys'
fees and expenses so incurred by Collateral Agent. Notwithstanding the
foregoing, and prior to the occurrence of an Event of Default, Borrower has no
obligation to: (i) begin or recommence use of any Copyrights not currently in
use; (ii) maintain Copyrights for products, services or product lines which are
discontinued in the ordinary course of business and (iii) maintain any
Copyright application or registration which is not in use or which is obsolete,
and Collateral Agent's prior consent is not required to abandon any Copyright
application or Copyright for a Copyright which is not in use.
9. Expenses. All expenses incurred in connection with the performance of
any of the agreements set forth herein shall be borne by Borrower. All fees,
costs and expenses, of whatever kind or nature, including reasonable attorneys'
and paralegals' fees and legal expenses, incurred by Collateral Agent or any
Lender in connection with the filing or recording of any documents (including
all taxes in connection therewith) in public offices, the payment or discharge
of any taxes, counsel fees, maintenance fees, encumbrances or otherwise in
protecting, defending, maintaining or preserving the Copyrights, or in
defending or prosecuting any actions or proceedings arising out of or related
to the
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<PAGE> 126
Copyrights, shall be borne by and paid by Borrower on demand by Collateral
Agent and until so paid shall be added to the principal amount of Borrower's
Liabilities and shall bear interest at the rate for Loans.
10. Right to Sue. After the occurrence of an Event of Default, Collateral
Agent shall have the right, but shall in no way be obligated, to bring suit in
its own name to enforce the Copyrights, and any licenses thereunder, and, if
Collateral Agent shall commence any such suit, Borrower shall, at the request
of Collateral Agent, do any and all lawful acts and execute any and all proper
documents required by Collateral Agent or such other party in aid of such
enforcement, and Borrower shall promptly, upon demand, reimburse and indemnify
Collateral Agent or such other party for all costs and expenses incurred by
Collateral Agent or such other party in the exercise of its or their rights
under this Paragraph 10.
11. Waivers. Neither any course of dealing between Borrower and
Collateral Agent and/or any Lender, nor any failure to exercise, nor any delay
in exercising, on the part of Collateral Agent or any Lender, any right, power
or privilege hereunder or under the Loan Agreement shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
12. Severability. The provisions of this Security Agreement are
severable, and if any clause or provision shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof,
in such jurisdiction, and shall not in any manner affect such clause or
provision in any other jurisdiction, or any other clause or provision of this
Security Agreement in any jurisdiction.
13. Modification. This Security Agreement cannot be altered, amended or
modified in any way, except as specifically provided in Paragraph 4 hereof or
by a writing signed by the parties hereto.
14. Cumulative Remedies; Power of Attorney; Effect on Loan Agreement. All
of the rights and remedies of Collateral Agent with respect to the Copyrights,
whether established hereby, by the Loan Agreement, by any other agreements or
by law, shall be cumulative and may be exercised singularly or concurrently.
Borrower hereby authorizes Collateral Agent, at any time after an Event of
Default, to make, constitute and appoint any officer or agent of Collateral
Agent as Collateral Agent may select, in its sole discretion, as Borrower's
true and lawful attorney-in-fact, with power to (i) endorse Borrower's name on
all applications, documents, papers and instruments necessary or desirable for
Collateral Agent in the use of the Copyrights, (ii) grant or issue any
exclusive or non-exclusive license under the Copyrights to any Person, (iii)
assign, pledge, convey or otherwise transfer title in or dispose of the
Copyrights to any Person free and clear of any encumbrance upon title thereof
created after the date of this Security Agreement, and (iv) take any other
actions with respect
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<PAGE> 127
to the Copyrights as Collateral Agent deems to be in its best interests.
Borrower hereby ratifies all that such attorney-in-fact shall lawfully do or
cause to be done by virtue hereof. This power of attorney, being coupled with
an interest, shall be irrevocable until all Liabilities shall have been paid in
full and the Loan Agreement shall have been terminated. Borrower acknowledges
and agrees that this Security Agreement is not intended to limit or restrict in
any way the rights and remedies of Collateral Agent, Administrative Agent,
Lenders or their successors, transferees and assigns under the Loan Agreement
but rather is intended to facilitate the exercise of such rights and remedies.
Collateral Agent, Administrative Agent, Lenders and such other parties shall
have, in addition to all other rights and remedies given it or them by the
terms of this Security Agreement, all rights and remedies allowed by law and
the rights and remedies of a secured party under the Uniform Commercial Code as
enacted in any jurisdiction in which the Copyrights may be located. Recourse
to security will not be required at any time.
15. Care of Copyrights. Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of the Copyrights if it takes
such action for that purpose as Borrower shall request in writing, but failure
of Collateral Agent to comply with any such request shall not of itself be
deemed a failure to exercise reasonable care, and no failure of Collateral
Agent to preserve or protect any rights with respect to the Copyrights against
prior parties, or to do any act with respect to preservation of the Copyrights
not so requested by Borrower shall be deemed a failure to exercise reasonable
care in the custody or preservation of the Copyrights.
16. Certain Rights Regarding Copyrights and Liabilities. Collateral Agent
may from time to time, whether before or after any of the Liabilities shall
become due and payable, without notice to Borrower, take all or any of the
following actions: (a) at any time and from time to time after the occurrence
of an Event of Default, transfer all or any part of the Copyrights into the
name of Collateral Agent or its nominee, with or without disclosing that such
Copyrights are subject to the lien and security interest hereunder, (b) after
the occurrence of an Event of Default, notify the parties obligated on any of
the Copyrights to make payment to Collateral Agent of any amounts due or to
become due with respect thereto, (c) at any time and from time to time after
the occurrence of an Event of Default, enforce collection of any of the
Copyrights by suit or otherwise, and surrender, release or exchange all or any
part thereof, or compromise or extend or renew for any period (whether or not
longer than the original period) any obligations of any nature of any party
with respect thereto and (d) after the occurrence of an Event of Default, take
control of any proceeds of the Copyrights.
17. Binding Effect; Benefits. This Security Agreement shall be binding
upon Borrower and its respective successors and assigns, and shall inure to the
benefit of Collateral Agent, Lenders and their respective successors,
transferees and assigns.
18. Governing Law. This Security Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois, except to the
extent that the
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<PAGE> 128
validity or perfection of the security interest hereunder, or remedies
hereunder, in respect of any of the Copyrights, are governed by the laws of a
jurisdiction other than the State of Illinois. Unless otherwise defined herein
or in the Loan Agreement, terms used in Article 9 of the Uniform Commercial
Code as enacted in the State of Illinois are used herein as therein defined.
19. Notice. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon either of the parties by the other, or whenever either
of the parties desires to give or serve upon the other any communication with
respect to this Security Agreement, each such notice, demand, request, consent,
approval, declaration or other communication shall be in writing and shall be
delivered in the manner provided in the Loan Agreement.
20. Consent to Jurisdiction. TO INDUCE COLLATERAL AGENT TO ACCEPT THIS
AGREEMENT, BORROWER, IRREVOCABLY AGREES THAT, SUBJECT TO COLLATERAL AGENT'S
SOLE AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR
RESPECT, ARISING OUT OF, FROM, OR RELATED TO THIS AGREEMENT, THE LOAN
AGREEMENT, ANY RELATED LOAN DOCUMENTS OR AGREEMENTS OR THE COPYRIGHTS SHALL BE
LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS.
BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR
FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS BE MADE IN ACCORDANCE WITH THE LOAN AGREEMENT.
21. WAIVER OF JURY TRIAL. BORROWER, COLLATERAL AGENT AND EACH LENDER EACH
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY RIGHTS UNDER THIS AGREEMENT.
22. Further Assurances. Borrower agrees to execute and deliver such
further agreements, instruments and documents, and to perform such further
acts, as Collateral Agent shall reasonably request from time to time in order
to carry out the purpose of this Security Agreement and agreements set forth
herein.
23. Survival of Representations. All representations and warranties of
Borrower contained in this Security Agreement shall survive the execution and
delivery of this Security Agreement and shall be remade on the date of each
borrowing under the Loan Agreement.
24. Headings. Paragraph headings used herein are for convenience only and
shall not modify the provisions which they precede.
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<PAGE> 129
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Security Agreement as of the date first above written.
EMPIRE INDUSTRIES, INC..
By
---------------------
Title
------------------
Agreed to and Accepted this
____ day of May, 1996.
LASALLE NATIONAL BANK,
as Collateral Agent
By
-------------------------
Title
----------------------
-8-
<PAGE> 130
STATE OF __)
)SS.
COUNTY OF__)
The foregoing Collateral Copyright Security Agreement was executed and
acknowledged before me this _____ day of May, 1996, by _______________________
personally known to be to be the __________________ of Empire Industries, Inc.,
a North Carolina corporation, on behalf of such corporation.
(SEAL) -------------------------------------------
Notary Public
My Commission Expires:
-------------------------------------------
THIS INSTRUMENT PREPARED BY
AND AFTER RECORDING RETURN TO:
Kristine Schuler, Esq.
GOLDBERG, KOHN, BELL, BLACK,
ROSENBLOOM & MORITZ, LTD.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
(312) 201-4000
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<PAGE> 131
ACKNOWLEDGMENT
STATE OF __)
)SS.
COUNTY OF__)
I, ________________________, a Notary Public in and for and residing in
said County and State, DO HEREBY CERTIFY THAT ____________________, the
___________________ of LaSalle National Bank, as Collateral Agent, personally
known to me to be the same person whose name is subscribed to the foregoing
instrument, appeared before me this day in person and acknowledged that he
signed and delivered said instrument as his own free and voluntary act and as
the free and voluntary act of said corporation for the uses and purposes
therein set forth.
GIVEN under my hand and notarial seal this ____ day of May, 1996.
_______________________________________
Notary Public
My Commission Expires:
_______________________________________
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<PAGE> 132
EXHIBIT A
TO
COLLATERAL COPYRIGHT SECURITY AGREEMENT
DATED AS OF MAY __, 1996
COPYRIGHTS AND APPLICATIONS
TITLE OF DATE OF REGISTRATION
FILE NO. WORK REGISTRATION NO.
<PAGE> 133
EXHIBIT B
TO
COLLATERAL COPYRIGHT SECURITY AGREEMENT
COPYRIGHT LICENSE AGREEMENT
Description of License Licensee under Licenser
Name/Address Agreement Agreement under Agreement
<PAGE> 1
EXHIBIT 21
EMPIRE OF CAROLINA, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY OR VOTING SECURITIES
STATE OF OWNED BY THE
NAME OF SUBSIDIARY INCORPORATION COMPANY
- ------------------------------------------------------------ -------------- -----------------
<S> <C> <C>
Empire Industries, Inc.(1)(2)............................... North Carolina 100%
Marchon Toys, Ltd.(2)....................................... Hong Kong 99.9%
CLR Corporation............................................. Delaware 75%
Carnichi Limited............................................ Hong Kong 100%
</TABLE>
- ------------------------------
(1) The name of this corporation was changed from Carolina Enterprises, Inc. to
Empire Industries, Inc. as of February 7, 1995. Empire Industries, Inc.
does business under the names "Empire of Carolina," "Empire Manufacturing,"
"Marchon" and "Caldwell Button Company."
(2) Effective May 1996, Empire Manufacturing, Inc. and Marchon, Inc.,
wholly-owned subsidiaries of Empire of Carolina, Inc., were merged into
Empire Industries, Inc., and Marchon, Inc.'s subsidiary, Marchon Toys,
Ltd., was dividended up to Empire of Carolina, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-4440 of Empire of Carolina, Inc. of our reports dated December 22, 1995 and
March 29, 1996 (April 8, 1996 as to Note 17), appearing in the Prospectus, which
is part of this Registration Statement, and of our report dated March 29, 1996
(April 8, 1996 as to Note 17) relating to the financial statement schedule
appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
June 14, 1996
