EMPIRE OF CAROLINA INC, S-3, 1997-12-16

EMPIRE OF CAROLINA INC
S-3, 1997-12-16
GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES)

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<PAGE>
REGISTRATION NO. 333-
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMPIRE OF CAROLINA, INC.

(Exact name of registrant as specified in its charter)

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DELAWARE 3944 13-2999480
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
(561) 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
(561) 498-4000

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:

KENNETH G. KOLMIN
SONNENSCHEIN NATH & ROSENTHAL
8000 SEARS TOWER
CHICAGO, IL 60606
(312) 876-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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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. /X/

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. / /
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CALCULATION OF REGISTRATION FEE

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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.10 par value................... 27,250,000(2)(3) $1.66(1)(4) $45,235,000 $13,345
Series A Preferred Stock, $.01 par value....... 2,100,000 $13.28(4) $27,888,000 $8,227
Common Stock Purchase Warrants................. 10,000,000 $1.375(5) $13,750,000 $4,056
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended. Based
on the average of the high and low prices reported for the Common Stock on
the American Stock Exchange on December 12, 1997.

(2) Includes 16,800,000 shares of common stock issuable upon conversion of
2,100,000 shares of Series A convertible preferred stock, $.01 par value.

(3) Includes: (i) 10,000,000 shares of common stock issuable upon exercise of
10,000,000 warrants issued in connection with the sale of the Series A
Preferred Stock at an exercise price of $1.375 per share and (ii) 200,000
shares of common stock issuable upon exercise of 200,000 warrants issued in
connection with the settlement of fees owed to Gerald Klauer Mattison & Co.
at an exercise price of $1.375 per share.

(4) Estimated soley for the purpose of calculating the registration fee pursuant
to Rule 457(i) under the Securities Act of 1933, as amended. Based on the
number of shares of Common Stock into which a share of Series A Preferred
Stock can be converted multiplied by the Closing Price.

(5) Estimated solely for the registration fee pursuant to Rule 457(g) under the
Securities Act of 1933, as amended. Based on the exercise price of the
Warrants.
------------------------------

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>
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.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1997
PROSPECTUS
COMMON STOCK ($.10 PAR VALUE)
UP TO 27,250,000 SHARES

SERIES A PREFERRED STOCK ($.01 PAR VALUE)
2,100,000 PREFERRED SHARES

COMMON STOCK PURCHASE WARRANTS
UP TO 10,000,000 SHARES
---------------------

This Prospectus relates to:

A. An aggregate of up to 27,250,000 shares (the "Resale Shares") of common
stock, $.10 par value (the "Common Stock"), of Empire of Carolina, Inc., a
Delaware corporation (the "Company"), issued or issuable from time to time
by the Company. The following Resale Shares are being offered for sale from
time to time by the selling shareholders named or to be named in this
Prospectus (the "Selling Securityholders"):

(i) up to 16,800,000 shares (the "Series A Conversion Shares") issuable upon
the conversion or exchange of the Company's outstanding Series A
convertible preferred stock, $.01 par value ("Series A Preferred
Stock");

(ii) up to 10,000,000 shares (the "Warrant Shares") issuable upon the
exercise of warrants issued in connection with the Company's private
placement of the Series A Preferred Stock in June and October of 1997
(the "1997 Warrants");

(iii) up to 200,000 shares (the "GKM Warrant Shares") issuable upon the
exercise of warrants issued in connection with the Company's settlement
of fees owed to Gerard Klauer Mattison & Co., Inc. for services
rendered with respect to certain financings and sales transactions (the
"GKM Warrants"). The 1997 Warrants and the GKM Warrants are sometimes
collectively referred to herein as the "Warrants"; and

(iv) 250,000 outstanding shares of Common Stock (the "Buddy L Shares")
issued in connection with the Company's settlement of certain rights
and obligations owed to Smedley Industries, Inc. Liquidating Trust
related to the Company's purchase of the toy-related Assets of Buddy L
Inc. in 1995; and

B. An aggregate of 2,100,000 of the Company's Series A Preferred Stock; and

C. An aggregate of 10,000,000 of the Company's 1997 Warrants.

If all of the Warrants are exercised, the Company would realize $14,025,000
in proceeds. See "Use of Proceeds." The Company will not receive any
proceeds from any sale of Resale Shares by the Selling Securityholders. The
Company has been advised by the Selling Securityholders that there are no
underwriting arrangements with respect to the sale of Common Stock, that the
Resale Shares may be offered hereby from time to time for the account of
Selling Securityholders in transactions on The American Stock Exchange, in
negotiated transactions or a combination of both at prices related to
prevailing market prices, or at negotiated prices. See "Selling
Securityholders" and "Plan of Distribution." The Company will pay the
expenses in connection with the registration of the Resale Shares, the
Series A Preferred Stock and the 1997 Warrants (collectively, the
"Securities") (other than any underwriting discounts and selling
commissions, and fees and expenses of counsel and other advisors, if any, to
the Selling Securityholders) estimated to be $148,128.

The Common Stock is traded on the American Stock Exchange under the symbol
"EMP." The company has applied for listing of the Series A Preferred Stock
and the 1997 Warrants on the American Stock Exchange under the proposed
symbols of EMPP and EMPW, respectively. On December 12, 1997, the closing
sale price for the Common Stock on the American Stock Exchange was $1.625
per share.

THE SHARES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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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.
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THE DATE OF THIS PROSPECTUS IS DECEMBER 16, 1997
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TABLE OF CONTENTS
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PAGE
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Documents Incorporated by Reference............. 2
The Company..................................... 3
The Offering.................................... 6
Risk Factors.................................... 7
Use of Proceeds................................. 14
Description of Securities....................... 15

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PAGE
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Plan of Distribution............................ 24
Selling Securityholders......................... 27
Legal Matters................................... 45
Experts......................................... 45
Available Information........................... 45
</TABLE>

No dealer, salesman or other person has been authorized to give any
information or to make any representation other than those contained or
incorporated by reference in this Prospectus in connection with the offerings
described herein, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or the Selling
Shareholders. Neither the delivery of this Prospectus nor any offer, sale or
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs or operations of the Company since
the date of this Prospectus, or that the information herein is correct as of any
time subsequent to such date.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents of the Company filed with the Securities and
Exchange Commission (the "Commission") under the Securities Exchange Act of 1934
(the "Exchange Act") are incorporated by reference in this Prospectus:

A. The Company's Annual Report on Form 10-K for the year ended December 31,
1996;

B. The Company's Quarterly Report on Form 10-Q for the quarters ended March
31, June 30, 1997 and September 30, 1997;

C. The Company's Current Reports on Form 8-K filed on April 24, May 5, May
6, May 8, June 30, October 10, 1997 and December 10, 1997; and

D. The Company's Form 14A filed on August 13, 1997.

All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the filing of
a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities then remaining unsold shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of the filing of such reports and documents.

Any statement contained in a document incorporated or deemed to be
incorporated in this Prospectus by reference shall be modified or superseded for
the purpose of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which also is or is
deemed to be incorporated in this Prospectus by reference modifies or replaces
such statement.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, on the
written or oral request of such person, a copy of any and all of the information
that has been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference into the
information that this Prospectus incorporates). Written requests for such copies
should be directed to Secretary, Empire of Carolina, Inc., 5150 Linton
Boulevard, Delray Beach, Florida 33484; telephone (561) 498-4000.

2
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THE COMPANY

Empire of Carolina, Inc. designs, manufactures and markets a broad variety
of toys and plastic decorative holiday products, including Big
Wheel-Registered Trademark- ride-on products, outdoor activities and games such
as Snow Works-TM- winter sleds and Water Works-TM- water slides and pools
(including Crocodile Mile-Registered Trademark- water slides), Buddy
L-Registered Trademark- vehicles, Real Bugs-SM- and Grand
Champions-Registered Trademark- collectible horses and holiday products
featuring plastic decorative holiday display items.

Empire has been a toy manufacturer for approximately 40 years. The Company's
business experienced significant change in 1993 when substantial non-toy
operations were sold. Following the divestitures of non-toy businesses, Empire's
operations were focused on its toy business, including the Big
Wheel-Registered Trademark- non-powered ride-on product line which has been sold
throughout the United States since 1970, and its plastic decorative holiday
products business. Since mid-1994 the Company has undergone a changed control
and management, established a new business strategy, and effected two
acquisitions which added established core toy product lines to the Company's
business.

In the third quarter of 1994, a group of stockholders of the Company, led by
Steven Geller, the current 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. Marchon's core toy products included
Grand Champions-Registered Trademark- collectible horses and Crocodile
Mile-Registered Trademark- water slides. Marchon had substantial experience at
sourcing toy products in the Far East. 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.

In June of 1997, the Company completed a secondary offering of 3,123,908
shares of Common Stock, at a price per share of $12.00. The total proceeds to
the Company were equal to $15,624,000.

In 1997, in response to the Company's serious financial needs, the Company
issued a total of 2,100,000 shares of Series A Preferred Stock and 10,000,000
1997 Warrants. The total gross proceeds from the sale of such securities was $21
million. Concurrently with this offering, the Company's 9% convertible
debentures (which had been convertible into an aggregate of 2,000,000 shares of
Common Shares) were exchanged for newly issued shares of Series C convertible
preferred stock (convertible into 7.5 million shares of Common Stock). In
connection with this private offering, Charles S. Holmes was elected to replace
Steven Geller as Chairman of the Board, and the Series A Preferred Stock
received the right to designate two directors and is entitled to vote on all
matters presented to the stockholder on an as if converted basis. The Series C
has no voting rights.

The Company's net sales were $148.9 million and $153.7 million respectively,
for the years ended December 31, 1996 and 1995. The Company's net sales were
$82.7 million for the nine months ended September 30, 1997. The Company's toy
business net sales were $119.7 million and $121.6 million, respectively, and
contributed 80% and 79%, respectively, of the Company's consolidated net sales,
for the years ended December 31, 1996 and 1995. The Company's toy business net
sales were $17.7 million for the nine months ended September 30, 1997 and
contributed 60% of the Company's consolidated net sales. Net sales of decorative
holiday products were $29.2 million and $32.2 million, respectively, for the
years ended December 31, 1996 and 1995 and contributed approximately 20% of the
Company's consolidated net sales in 1996 and 21% in 1995. Net Sales of
decorative holiday products were $11.7 million and contributed approximately 40%
of the Company's consolidated net sales for the nine months ended September 30,
1997.

RECENT DEVELOPMENTS

3
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private offering, Charles S. Holmes was elected to replace Steven Geller as
Chairman of the Board, and the Series A Preferred Stock received the right to
designate two directors and is entitled to vote on all matters presented to the
stockholder on an as if converted basis.

On June 17, 1997, pursuant to the Securities Purchase Agreement dated as of
May 5, 1997, as amended by Amendment No. 1 to the Securities Purchase Agreement,
dated as of June 5, 1997, among the Company, HPA and EMP, the Company issued to
HPA, EMP and other accredited investors (as defined in Rule 501 under the
Securities Act of 1933, as amended)("Accredited Investors") 1,100,000 shares of
the Company's Series A Preferred Stock, $.01 par value per share, and 5,000,000
warrants to purchase shares of the Company's Common Stock (the "Principal
Investment"). On June 18, 1997, the Company issued to HPA and other Accredited
Investors an additional 500,000 shares of the Series A Preferred Stock and an
additional 2,500,000 warrants (the "Additional Investment", together with the
Principal Investment, the "Initial Investment"). The investors in the Principal
Investment and Additional Investment are collectively referred to herein as the
"Purchasers". The total shares of Series A Preferred Stock issued to Purchasers
in connection with the foregoing was 1,600,000 and the total number of warrants
issued was 7,500,000. $5,000,000 of the Purchase Price was non-cash
consideration represented by the conversion of $5 million of 12% bridge notes
funded by HPA and EMP in May, 1997 in connection with the execution of the
Securities Purchase Agreement.

In connection with the Principal Investment, the Company's 9% convertible
debentures issued to affiliates of Weiss, Peck & Greer in the original principal
amount of $15 million were exchanged by the holders thereof for newly-issued
shares of Series C Preferred Stock of the Company with an aggregate Stated Value
(as defined in the Series C Preferred Stock Certificate of Designation) of $15
million. Such holders also released, among other things, their claims to accrued
and unpaid interest, fees and expenses. Each share of Series C Preferred Stock
is convertible at any time, at the option of the holder thereof, into fully paid
and nonassessable shares of Common Stock at a rate of one share of Common Stock
for each $2.00 of Stated Value of Series C Preferred Stock (subject to
adjustment in certain circumstances). Except as otherwise expressly provided in
the Charter or the By-laws of the Company, the Certificate of Designation
relating to the Series C Preferred Stock, or as may otherwise be required by
law, the Series C Stockholders, by virtue of their ownership thereof, have no
voting rights.

In addition, the successor to the seller under the Company's agreement to
purchase the assets of Buddy L waived or released the claim to certain earn out,
price protection and registration rights in exchange for: (i) $100,000 in cash;
(ii) 250,000 shares of Common Stock of the Company; (iii) a $2.5 million 9% note
from the Company's major subsidiary, and guaranteed by the Company, providing
for $625,000 principal payments on the first four anniversaries of the closing
date of the Preferred Stock Investment (which note includes certain affirmative
and negative covenants which could in certain circumstances permit the
acceleration of payments with respect to such note); and (iv) certain other
benefits, including registration rights.

Also, the bank lenders under the Company's Credit Agreement were to have
agreed to certain amendments to the Credit Agreement as a closing condition.
This condition was waived by HPA. The Company's senior lenders agreed, however,
to extend the May 31, 1997 deadline for receipt of $6 million of additional
equity financing to June 30, 1997, which deadline was satisfied upon the closing
of the Principal Investment.

The Company also adopted the First Amendment to its Stockholder Rights
Agreement in order to facilitate the proposed investment by HPA, EMP and their
respective affiliates. On June 12, 1997, the Company and American Stock Transfer
& Trust Company, a New York corporation, as Rights Agent (the "Rights Agent"),
adopted the Second Amendment (the "Second Amendment") to the Rights Agreement
dated as of September 11, 1996 (the "Rights Agreement") between the Company and
the Rights Agent, as amended by the First Amendment thereto dated as of May 5,
1997. The Second Amendment, among other things, amends the definition of
"Acquiring Person" in Section 1(a) of the Rights Agreement to base the

4
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15% threshold specified therein on the aggregate number of "Fully-Diluted Common
Shares" (as defined in the Second Amendment) of the Company.

In early June 1997, notwithstanding the impending closing of the Initial
Investment, the Company determined that it would, even following such closing,
continue to need significant additional capital in order to fully fund its (i)
marketing programs, (ii) new product development and (iii) certain advantageous
capital improvements, which the Company believed were necessary if it was to
achieve its desired business plan. Accordingly, the Company agreed to an
amendment to the Securities Purchase Agreement pursuant to which, among other
things, the Company agreed to issue and sell to HPA and other private investors
an additional 500,000 shares of Series A Preferred Stock (initially convertible
into 4 million shares of Common Stock) and 500,000 warrants to purchase shares
of Common Stock at an initial exercise price of $1.375 per share, for aggregate
gross consideration of $5,000,000 (the "Further Purchase"). In connection
therewith, to issue to the placement agents and HPA warrants issuable to
purchase an additional 2 million shares of Common Stock at an initial exercise
price of $1.375 per share.

Notwithstanding that the closing price of the Company's Common Stock on the
American Stock Exchange as of June 6, 1997 (the date of the amendment of the
Securities Purchase Agreement) was $2.3275 per share, the price per Unit of the
Further Purchase was identical to the price per Unit paid by the Purchasers in
connection with the Initial Investment.

The Company agreed to make the below market sales as part of the Further
Purchase because of the Company's significant and immediate need for additional
capital, even though this transaction may not have been the least expensive way
for the Company to raise funds. The Company determined that proceeding with HPA
on the terms of the Further Purchase likely would provide an additional $4.6
million of needed capital expeditiously. Given the Company's recent
capital-raising efforts, it determined that any efforts to seek out other
sources of capital would be difficult and the negotiation and consummation of an
alternative transaction likely would be costly both in terms of time and
expenses. Accordingly, it was determined that proceeding with the Further
Purchase on these terms, rather than seeking other sources of capital or
attempting to negotiate more favorable terms, was in the Company's best
interests, as it would be the most effective method of quickly providing the
Company with capital that is necessary for it to pursue its desired business
plan. Closing of the Further Purchase was conditioned upon, among other things,
Stockholder approval of the Further Purchase and certain amendments to the
Company's Certificate of Incorporation (the "Charter").

On September 25, the Company held its annual meeting, and the stockholders
voted to approve: (1) an amendment to the Company's Charter to increase the
number of authorized shares of Common Stock from 30 million to 60 million in
part to assure that the Company has available authorized shares of Common Stock
to issue upon the conversion of preferred stock and the exercise of warrants and
stock options to acquire Common Stock; (2) that James Pinto serve as one of the
two directors to be selected by the Series A Preferred Stockholders; (3) an
amendment to its Charter to provide that its Board of Directors shall be
comprised of a maximum of eight directors, as shall be determined by the Board
of Directors from time to time, and to procure the parties to the Shareholders'
Agreement to amend such agreement to effectuate such changes in the Charter.

On October 10, 1997, the Further Purchase was consummated. The proceeds from
the Further Purchase (which after the deduction of the placement agents'
commission and offering expenses of approximately $350,000 were $4.6 million)
were used for working capital purposes, including the repayment of existing
trade indebtedness and short-term bank debt. The balance, if any, was used for
general corporate purposes.

5
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THE OFFERING

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Common Stock Outstanding as of December 16,
1997(1)................................... 7,834,090 shares

SHARES OFFERED BY SELLING SECURITYHOLDERS:

Common Stock Offered by the Selling
Shareholders(1)........................... 250,000 shares

Common Stock Issued to date upon conversion
of outstanding Series A Preferred Stock,
exercise of 1997 Warrants, or exercise of
GKM Warrants.............................. None.

Common Stock Issuable upon conversion of the
Series A Preferred Stock and to be resold
by the Selling Shareholders(1)............ 16,800,000 shares

Common Stock Issuable upon exercise of 1997
Warrants and to be resold by the Selling
Shareholders(1)........................... 10,000,000 shares

Common Stock Issuable upon exercise of GKM
Warrants and to be resold by the Selling
Shareholders(1)........................... 200,000 shares

OTHER SECURITIES OFFERED BY SELLING SECURITYHOLDERS:

Series A Preferred Stock offered by the
Selling Shareholders...................... 2,100,000 preferred shares

1997 Warrants offered by the Selling
Shareholders.............................. 10,000,000 warrants

OTHER:

Risk Factors................................ The Securities involve a high degree of risk.
Investors should carefully consider the
information set forth under "Risk Factors."

Proceeds to the Company if the Warrants are
exercised in full......................... $14,025,000

Use of Proceeds to the Company.............. To repay existing trade indebtedness, short
term bank debt and for general corporate
purposes. See "Use of Proceeds."

American Stock Exchange Symbol for Common
Stock..................................... EMP

Proposed American Stock Exchange Symbol for
Series A Preferred Stock.................. EMPP

Proposed American Stock Exchange Symbol for
1997 Warrants............................. EMPW
</TABLE>

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(1) See "Selling Securityholders."

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 (561) 498-4000.

6
<PAGE>
RISK FACTORS

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. IN ADDITION,
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT) WHICH
INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY:

FINANCIAL CONDITION; CONTINUING LOSSES. The Company incurred a net loss of
$46.2 million and had negative operating cash flows of $19.6 million during
1996, and a net loss of $7.4 million for the nine months ended September 30,
1997. In addition, the Company's Tarboro, North Carolina facility suffered
significant manufacturing problems in 1996. However, Management believes it has
taken significant corrective actions to improve operations and reduce the
outflow of cash. There can be no assurances that those efforts will be
successful. If the Company's efforts are not largely successful, the Company's
operating cash flows and current lines of credit may be insufficient to fund
continued operations. There can be no assurances that these efforts will be
successful.

As a result of the operating difficulties experienced by the Company, the
report of the Company's independent public accountants, in connection with the
audit of the Company's Consolidated Financial Statements as of December 31,
1996, includes an explanatory paragraph stating that the Company's substantial
1996 net loss and cash flow difficulties raise substantial doubt about the
Company's ability to continue as a going concern. The 1996 Consolidated
Financial Statements have been prepared on a going concern basis which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The 1996 Consolidated Financial Statements do not
include adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities, that might be
necessary should the Company be unable to continue as a going concern. Following
completion of the Company's financing and related transactions in 1997, the
Company's continuation as a going concern is dependent upon its ability to
operate profitably under its restructured organization.

POSSIBLE FUTURE FINANCING NEEDS; USE OF PROCEEDS TO REPAY INDEBTEDNESS. The
Company may require additional capital to finance continued operations after
1997. The Company's continued operations thereafter will depend upon revenues
and operating cash flows, if any, and the availability of additional equity or
debt financing. The Company has no commitments for additional financing and
there can be no assurance that the Company's operations will be profitable, that
the Company will be able to generate levels of revenues and cash flows
sufficient to fund operations, or, if necessary, that the Company will be able
to obtain additional financing on satisfactory terms, if at all. In addition,
the Company may choose to raise additional capital either through debt or equity
financing prior to the date on which capital is required which may have a
dilutive effect.

LEVERAGE/RESTRICTIVE COVENANTS. The Company has significant debt service
obligations. As of September 30, 1997, the Company had outstanding indebtedness
of approximately $37.0 million. The degree to which the Company is leveraged
could have important consequences to the holders of any of the Securities,
including the following: (i) the Company's ability to obtain additional
financing for working capital or other purposes in the future may be limited;
(ii) a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing funds available for operations and capital expenditures; and (iii) the
Company may be more vulnerable to economic downturns or other adverse
developments with respect to its business than certain less leveraged
competitors and, thus, may be limited in its ability to withstand competitive
pressures. In addition, borrowings under the Credit Agreement bear interest at
fluctuating rates. Increases in interest rates on such borrowings would increase
the Company's interest payment obligations and could adversely affect the
amounts that would be available for payment of interest and principal on other
indebtedness of the Company. The Company's ability to make scheduled payments of
the principal of or interest on, or to refinance, its indebtedness will depend
on its future operating performance and cash flow, which are

7
<PAGE>
subject to prevailing economic conditions, prevailing interest rate levels, and
financial, competitive, business and other factors, many of which are beyond its
control.

The Credit Agreement contains numerous financial and operating covenants
including, among others, restrictions on the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments, distributions and investments, and to sell or otherwise dispose of
assets and merge or consolidate with another entity. The Credit Agreement also
requires the Company to meet certain financial ratios and tests. The Company has
entered into an amendment to its Credit Agreement to amend certain financial
covenants and to suspend certain financial covenants in the Credit Agreement
until February 1998 to allow for the good faith negotiation of certain financial
covenant levels. If the Company is unable to reach an agreement with respect to
certain financial covenants by February 15, 1998, the existing covenants will be
reinstated and there can be no assurance that the Company's senior lenders will
not declare an event of default under the Credit Agreement, that the Company
would be able to arrange for any alternative financing, on terms acceptable to
it, or in time to meet the Company's short-term liquidity requirements. If the
Company cannot reach an agreement or arrange for alternative financing in a
timely fashion on terms acceptable to it, the Company may be forced to cease
operations, in which case purchasers of the Securities offered hereby would
likely lose their entire investment. Even if the Company is able to obtain
alternative financing, other indebtedness of the Company that may be incurred in
the future could contain financial or other covenants more restrictive than
those contained in the Credit Agreement.

MANAGEMENT OF GROWTH; INTEGRATION OF ACQUISITIONS. 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
has acquired and may acquire in the future. In addition to the acquisitions of
Marchon and substantially all of the toy business assets and the assumption of
certain liabilities of Buddy L in July 1995, the Company may pursue the purchase
of other toy and related businesses as part of its growth strategy. The process
of integrating acquired businesses often involves unforeseen difficulties and
may require a disproportionate amount of the Company's financial and other
resources, including management time. The Company also intends to seek increased
sales in markets outside of the United States as part of its growth strategy.
Considering the Company's acquisitions and divestitures in recent years and its
recent operating difficulties, the Company's historical financial results may
not be indicative of its future performance. There can be no assurance that the
Company will 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 growth, expanding its
facilities and operations or in attracting and retaining qualified personnel.
Any failure to effectively achieve or manage growth, manage its facilities and
operations, or attract and retain qualified personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.

DEPENDENCE ON KEY PERSONNEL. The Company's operations and prospects are
dependent in large part on the performance of its senior management team. 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 the 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 that had been hired by the Company following the change of
control in July 1994 are no longer retained by the Company. To assist the
Company in its ongoing turnaround efforts, the Company anticipates recruiting
additional senior management personnel. There can be no assurance that the
Company will be successful in attracting or retaining such additional management
personnel. 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. Furthermore, as part of the reduction of
costs contemplated by the Securities Purchase Agreement, salaries of some
personnel will be reduced. There can be no assurance

8
<PAGE>
that those persons will remain with the Company and if they should leave, that
the Company will be successful in attracting replacement personnel. The Company
recently replaced its chief financial officer. The success of the Company is
dependent on the ability of the new CFO and other new management personnel to
effectively integrate themselves into the Company's management structures and
manage the Company. There can be no assurances that their efforts or methods
will ultimately be successful or effective.

MANUFACTURING. The Company's 1996 operating results were negatively and
materially impacted by serious difficulties encountered at its Tarboro, North
Carolina plant, which produces substantially all of the Company's domestically
manufactured products. While management has implemented cost-cutting measures
which it believes will significantly lower factory overhead and selling and
administrative expenses, there can be no assurance that such measures will be
successful or that the anticipated savings will be realized. The Company's
business plan generally requires the plant to significantly increase production
during the third and fourth quarters to meet peak seasonal demand, and there can
be no assurance that such positive manufacturing variances will be realized at
increased production levels or otherwise can be sustained in the future or that
the Company will not experience material manufacturing difficulties in the
future. The Company's future business plan contemplates significant additional
cost-cutting measures.

The Company owns only one manufacturing facility, and the Company's revenues
are dependent in substantial part upon the continued operation of such facility.
The operation of a manufacturing plant involves many risks, including power
failures, the breakdown, failure or substandard performance of equipment, the
improper installation or operation of equipment, natural disasters and the
hazards associated with the use of chemicals. While the Company maintains
insurance covering certain of such risks, there can be no assurance that the
occurrence of these or any other operational problems at the Company's facility
would not have a material adverse effect on the Company's business, financial
condition and results of operations.

DEPENDENCE ON MAJOR CUSTOMERS. Like other toy companies, the Company is
dependent upon toy retailers and mass merchandisers to distribute its products.
For the nine months ended September 30, 1997, approximately 60% of the Company's
sales were to 4 customers. The Company does not have long-term contracts with
its customers. The Company's major customers expressed varying degrees of
concern about placing orders with the Company to be fulfilled in the last six
months, because of concerns regarding the Company's financial viability. 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.

CONTINUED RECEIPT OF GOODS AND SERVICES FROM SUPPLIERS. Due to the
Company's negative cash flow, it has not paid many of its suppliers of goods and
services on a timely basis. In many cases, the Company has negotiated payment
terms, in others, suppliers have not extended credit to the Company and, in
others, suppliers have threatened or have brought legal actions against the
Company. No assurance can be given that: suppliers will continue to supply goods
and services to the Company as they have in the past, the Company will be able
to replace any such suppliers, suppliers will grant credit to the Company on
favorable terms (if at all) or that the Company will be able to settle
successfully such legal actions or that suppliers will not be successful in any
legal actions that they have or might institute against the Company.

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,

9
<PAGE>
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. Due to reduced operating cash flow and
losses from operations, the Company has not paid some of its license and royalty
obligations on a timely basis. This may have a negative impact on the Company's
use of licensed intellectual property rights. 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.

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") and Hasbro, Inc. ("Hasbro"), 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. The ability to compete may be adversely
impacted by the Company's lack of operating capital and losses from operations.
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.

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

10
<PAGE>
supplies of popular toys to retailers in a timely fashion, particularly during
the Christmas season, and may consequently lose sales.

FOREIGN SOURCING. Approximately 28% of the Company's net sales in the year
ended December 31, 1996 were attributable to products manufactured for the
Company by unaffiliated parties in the Far East, substantially all of whom are
located in the People's Republic of China ("China"). The Company has not entered
into long-term contracts with any of these manufacturers. Accordingly, the
Company expects to continue to be dependent upon these sources for timely
production and quality workmanship. Given the seasonal nature of the Company's
business, any delay or quality control problems of such manufacturers, delay in
product deliveries, delay in locating or providing new tooling to acceptable
substitutes, or delay in increasing the production of alternative manufacturers
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, foreign operations are subject
to a number of risks, including transportation delays and interruptions,
political and economic disruptions, labor strikes, the imposition of tariffs and
import and export controls, changes in governmental policies, and fluctuations
in currency exchange rates, the occurrence of any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Changes in Chinese labor market conditions in recent years 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. However, there can be no assurance
that such manufacturers will be able to meet the Company's production schedules.

The Company's foreign sourcing and contract manufacturing management office
is located in Hong Kong, until recently a British Crown Colony. Consequently,
the Company may be materially adversely affected by factors affecting Hong
Kong's political situation and its economy or its international political and
economic relations. On July 1, 1997, China assumed sovereignty over Hong Kong.
There can be no assurance that China will continue to grant or renew or
recognize existing licenses, or will continue to abide by the previously
established policies, rules and regulations currently in effect. There can be no
assurance as to the continued stability of political, economic, or commercial
conditions in Hong Kong or that the Company's financial condition and results of
operations will not be materially and adversely affected as a consequence of
these events. In the event of any disruption or other political or economic
change in Hong Kong or China affecting the Company's business, the Company may
be required to seek alternate manufacturing sources. The Company currently does
not have in place plans or arrangements for securing alternate manufacturing
sources in the event that its present relationships with manufacturers prove
impracticable to maintain, and there can be no assurance that there would be
sufficient alternative facilities to meet the increased demand for production
that would likely result from a disruption of manufacturing operations in China.
Furthermore, such a shift to alternate facilities would likely result in
increased manufacturing costs and could subject the Company's products to
increased duties, tariffs or other restrictions.

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
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 and/or increasing prices, there can
be no assurance that the Company would be able to do so or be successful in
doing so in a timely manner.

PRICE PROTECTION; TIMING OF PAYMENTS. Many companies in the toy industry
discount prices of existing products, provide for certain advertising allowances
and credits or give other sales incentives to customers. In addition, many toy
companies lower the prices of their products to provide price adjustments
(referred to as price protection) for retail inventories on hand at the time the
price change occurs. There can be no

11
<PAGE>
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 is made on terms that permit payment more than 90 days
after shipment of merchandise.

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 potential claims relating to such products are difficult to
predict. For the foregoing reasons, there can be no assurance that the Company
will not be subject to material liabilities on account of product liability
claims in the future.

The Company assumes a self-insured retention limit and, to date, the Company
has disposed of substantially all of its product liability claims on this basis.
The Company does maintain insurance on an occurrence basis to provide excess
coverage above the self-insured retention limit for each claim. There can be no
assurance that the limits provided by the excess insurance will be sufficient to
satisfy an adverse judgment in one or more large product liability suits or to
satisfy all claims in the aggregate within a single policy period. Further,
there can be no assurance that an insurer will be solvent at the time of
settlement of an insured claim that exceeds the amount of any state guaranty
fund, or that the Company will be able to obtain excess insurance at acceptable
levels and costs in the future. Successful assertion against the Company of one
or a series of claims that materially exceed the limits of any insurance
coverage could have a material adverse effect on the Company's business,
financial condition or results of operation.

The Company's toys are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act (including the Federal Child
Protection and Toy Safety Act of 1969) and the Flammable Fabrics Act, and the
regulations promulgated thereunder. The Consumer Product Safety Act and the
Federal Hazardous Substances Act enable the CPSC to exclude from the market
consumer products that fail to comply with applicable product safety regulations
or otherwise create a substantial risk of injury and articles that contain
excessive amounts of a banned hazardous substance. The Flammable Fabrics Act
enables the CPSC to regulate and enforce flammability standards for fabrics used
in consumer products. In addition, the Company may be required to give public
notice of any hazardous or defective products and to repair, 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.

The CPSC has recently requested that the Company provide it with information
regarding specified products. The Company does not believe that these products
are defective, or that any repair, replacement or repurchase will be required.
If, however, products contributing materially to the Company's dollar volume of
sales were to require repair, replacement or repurchase, the Company's business,
financial condition and results of operations could be materially adversely
affected.

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.

12
<PAGE>
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.

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 1994, 1995, and 1996, 80%, 75% and 62%,
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 than the rest of the year. 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.

ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE. Although the
Company has applied for listing of the Series A Preferred Stock and the Warrants
on the American Stock Exchange, neither such class of Securities is currently
listed. Accordingly, there can be no assurance as to the liquidity of any
markets that may develop for such Securities, the ability of holders to sell
their Securities, or at what price holders would be able to sell their
Securities. If a trading market does not develop or is not maintained, holders
of the Securities may experience difficulty in reselling the Securities or may
be unable to sell them at all. Prices for the Securities 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 Securities to fluctuate significantly. Securities markets have, on occasion,
experienced extreme price and volume fluctuations which have often been
unrelated to the operating performance of the affected companies. See
"Description of the Securities--Series A Preferred Stock" and "Description of
the Securities--Warrants".

EFFECT OF CERTAIN CHARTER, BY-LAW AND STATUTORY PROVISIONS. Certain
provisions of the Company's 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. 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.

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

13
<PAGE>
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.

SHARES AVAILABLE FOR FUTURE ISSUANCE. As of the date of this Prospectus,
there are 7,834,090 shares of Common Stock outstanding. In addition, a very
substantial number of shares of Common Stock are issuable upon the exercise of
outstanding options or warrants and the conversion of outstanding equity
securities. See "Capitalization." 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, which could, in turn, adversely affect the
market value of the Series A Preferred Stock and the Warrants.

RESTRICTIONS ON THE PAYMENT OF DIVIDENDS. The Series A Preferred Stock is
not entitled to receive any dividends, except when, as and if declared by the
Board of Directors, out of the assets of the Company legally available therefor,
dividends, distributions and offers of subscription, if any, equivalent (both in
amount and kind) to the dividends and distributions paid to the holders of the
number of shares of Common Stock into which the Series A Preferred Stock may be
converted. The Company does not anticipate paying any cash dividends on its
Common Stock or the Series A Preferred Stock 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.

FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. This registration
statement 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 the Company's ability to manage inventory production and
costs, to meet potential increases or decreases in demand, potential adverse
customer impact due to delivery delays including effects on existing and future
orders, competitive practices in the toy and decorative holiday products
industries, changing consumer preferences and risks associated with consumer
acceptance of new product introductions, potential increases in raw material
prices, potential delays or production problems associated with foreign sourcing
of production and the impact of pricing policies including providing discounts
and allowances. Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such forward-looking statements. The Company
undertakes no obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.

USE OF PROCEEDS

If all of the Warrants (with an exercise price of $1.375 per share) are
exercised, the Company will realize proceeds in the amount of $14,025,000. Such
proceeds will be contributed to the working capital of the Company and used for
general corporate purposes. The Company will not receive any proceeds from any
sale of the other Securities by the Selling Securityholders.

14
<PAGE>
CAPITALIZATION

The following table sets forth (i) the pro forma capitalization of the
Company at September 30, 1997 after giving effect to the issuance of 500,000
shares of Series A Preferred Stock, 2,500,000 1997 Warrants and 200,000 GKM
Warrants, and (ii) the capitalization of the Company at September 30, 1997, as
adjusted to reflect the effect of the assumed conversion of all Series A
Preferred Stock into Common Stock, the assumed exercise of all Conversion
Shares, Warrant Shares and GKM Warrant Shares based on the assumptions indicated
in the footnotes to the table below.

<TABLE>
<CAPTION>
ADJUSTS OF SEPTEMBER 30, 1997
ACTUAL ADDL. ------------------------------------
9/30/97 OFFERING PRO FORMA AS ADJUSTED
---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Short-term debt.................................. $ 31,716 $ (4,653) $ 27,063 $ (14,025) $ 13,038
Convertible subordinated debentures............ 0 0 0
Long-term debt:
Senior subordinated notes...................... 0 0 0
Bank facility.................................. 5,255 5,255 5,255
---------- ------------- ----------- ---------- -----------
Total long-term debt......................... 36,971 (4,693) 32,318 (14,025) 18,293

Stockholders' equity:
Common stock, par value $.10 per share;
60,000,000 shares authorized; 7,653,564
issued and outstanding, pro forma and as
adjusted(1).................................. 765 0 765 2,700 3,465
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; 1,600,000 shares
of Series A Preferred Stock authorized, and
1,600,000 shares issued and outstanding, pro
forma and as adjusted........................ 16 5 21 (21) 0
1,500 shares of Series C preferred stock
authorized, and 1,500 shares issued and
outstanding, pro forma and as adjusted....... 0 0 0
Additional paid-in capital..................... 80,897 4,648 84,745 11,346 96,091
Retained earnings (deficit).................... (56,275) (56,275) (56,275)
Stockholders' loans............................ (502) (502) (502)
Total stockholders' equity................... 24,101 4,653 28,754 14,025 42,779
---------- ------------- ----------- ---------- -----------
Total capitalization....................... $ 61,072 $ 0 $ 61,072 $ 0 $ 61,072
---------- ------------- ----------- ---------- -----------
---------- ------------- ----------- ---------- -----------
Proceeds......................................... 4,700
CKM..............................................
Legal fees....................................... 22

4,653
</TABLE>

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

(1) Does not include 195,197 shares of Common Stock issued upon the conversion
of 39.0393 shares of Series C Preferred Stock by WestPool Investment Trust,
PLC on October 10, 1997.

DESCRIPTION OF THE SECURITIES

The authorized capital stock of the Company consists of 60,000,000 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 2,100,000 shares of Preferred Stock as

15
<PAGE>
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 December 12, 1997, there
were 7,834,090 shares of Common Stock outstanding held of record by
approximately 4,105 securityholders.

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 restated certificate of incorporation and by-laws,
in each case as amended to date.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and to not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this Offering will be, when issued and paid
for, fully paid and nonassessable.

PREFERRED STOCK

The Company's Charter provides that the Board of Directors is authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, to issue from time to time up to an aggregate of 5,000,000 shares of
Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying, deferring 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.

THE SERIES A PREFERRED STOCK

The following description of the Series A Preferred 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 the Certificate of Designation
related to the Series A Preferred Stock, in each case as amended to date.

The Board has designated 2,100,000 shares of Preferred Stock as Series A
Preferred Stock, with a stated value per share (the "Stated Value") of $10, in
order to consummate the transactions contemplated by that certain Securities
Purchase Agreement among the Company, HPA Associates, LLC ("HPA") and EMP
Associates, LLC ("EMP") dated May 5, 1997, as amended (the "Securities Purchase
Agreement"). Each share of Series A Preferred Stock shall be convertible at any
time, at the option of the holder thereof, into fully paid and nonassessable
shares of Common Stock at a rate of one share of Common Stock for each $1.25 of
Stated Value of Series A Preferred Stock, subject to adjustment as set forth in
the Certificate of Designation relating to the Series A Preferred Stock (the
"Certificate of Designation"). The conversion ratio of and consideration
received for the Series A Preferred Stock was determined by negotiations between
the proposed securityholders and the Company.

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<PAGE>
In addition to any voting rights provided by law, the holders of Series A
Preferred Stock (the "Series A Holders") shall have the following voting rights:
so long as the Series A Preferred Stock is outstanding, each share of Series A
Preferred Stock shall entitle the holder thereof to vote at all meetings of the
stockholders of the Company on any matter voted on by the holders of Common
Stock (the "Common Holders"), together with the Common Holders and of all other
securities entitled to vote with the Common Stock on such matter (the "Voting
Securities"). With respect to any such vote, from and after the first date on
which shares of the Series A Preferred Stock are issued (the "Issue Date"), each
share of the Series A Preferred Stock shall be entitled to cast a number of
votes equal to the number of shares of Common Stock into which a share of Series
A Preferred Stock may then be converted in accordance with the Certificate of
Designation.

In addition to any class votes required by law, the affirmative vote of the
holders of at least a majority of the outstanding shares of the Series A
Preferred Stock, voting separately as a class, in person or by proxy, at a
special or annual meeting of stockholders called for the purpose, shall be
necessary to (i) authorize, create, increase the authorized or issued number of
shares of, or issue (including on conversion or exchange of any convertible or
exchangeable securities or by reclassification), any shares of any class or
classes or series of the Company's capital stock having rights senior or
superior to (either as to dividends or upon distribution of assets, voluntary or
involuntary liquidation, dissolution or winding up) the Series A Preferred
Stock, or class or series of stock that ranks on a parity with Series A
Preferred Stock, or to increase the number of shares of Series A Preferred Stock
that are authorized for issuance, or (ii) amend, alter or repeal any of the
provisions of the Charter or the Certificate of Designation of the Series A
Preferred Stock in a manner which would materially and adversely affect any
right, preference, privilege or voting power of the Series A Preferred Stock or
the holder thereof (provided, however, that, subject to (i) above, any increase
in the amount of authorized capital stock or the creation and issuance of any
capital stock ranking junior to the Series A Preferred Stock shall not be deemed
materially and adversely to affect such rights, preferences or voting powers).

Notwithstanding anything to the contrary contained in the Charter or
By-laws, the Series A Holders shall have the right, voting separately as a
class, to elect to the Board two directors of the Company and shall have the
right to approve any expansion of the size of the Board beyond five.

No dividends will accrue with respect to the Series A Preferred Stock. The
Series A Holders will be entitled to receive, when, as and if declared by the
Board, out of the assets of the Company legally available therefor, dividends,
distributions and offers of subscription, if any, equivalent (both in amount and
kind) to the dividends and distributions paid to the holders of the number of
shares of Common Stock into which the Series A Preferred Stock may be converted.

Upon any liquidation, dissolution or winding up of the Company, no
distribution shall be made (A) to holders of shares of stock ranking junior to
the Series A Preferred Stock unless, prior thereto, the Series A Holders shall
have received $10 per share, or (B) to the holders of shares of stock ranking on
a parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. The Series A Preferred Stock ranks on a
parity with the Company's Series C Preferred Stock with a Stated Value of no
more than an aggregate of $15 million issued in accordance with the Securities
Purchase Agreement (and senior to the shares of Series B Preferred Stock).

THE 1997 WARRANTS

The following description of the 1997 Warrants does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of the 1997 Warrants.

Each 1997 Warrant entitled the holder thereof (the "Holder") to purchase,
subject to the terms and conditions set forth in the 1997 Warrant, a fully paid
and nonassessable share of Common Stock, at an

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<PAGE>
exercise price of $1.375 per share subject to adjustment as provided in the 1997
Warrant (the "Purchase Price"), at any time or from time to time prior to 5:00
P.M., New York City time, on May 6, 2003 (the "Expiration Date"). The exercise
price of and consideration received for the 1997 Warrants was determined by
negotiations between the proposed securityholders and the Company.

The 1997 Warrants may be exercised, in whole or in part, at any time or from
time to time on or prior to the Expiration Date. As soon as practicable after
surrender of the 1997 Warrants and receipt of payment, the Company shall issue
and deliver to the Holder a certificate or certificates for the number of shares
of Common Stock set forth in the Election to Purchase Shares, in such name or
names as may be designated by such Holder, along with a check for the amount of
cash to be paid in lieu of issuance of fractional shares, if any. The exercise
of a 1997 Warrant shall be deemed to have been effective immediately prior to
the close of business on the Business Day on which the 1997 Warrant is
surrendered to and the Purchase Price is received by the Company as provided in
the 1997 Warrant (the "Exercise Date"), and the Person in whose name any
certificate for shares of Common Stock shall be issuable upon such exercise
shall be deemed to be the record holder of such shares of Common Stock for all
purposes on the Exercise Date.

Notwithstanding the foregoing, at any time after May 5, 2000, the Closing
Price of shares of Common Stock for a period of not less than 30 consecutive
trading days is equal to or greater than the following "Trigger Prices" (subject
to adjustment as set forth in the 1997 Warrant) for any of the following
periods:

<TABLE>
<CAPTION>
PERIOD TRIGGER PRICE
- -------------------------------------------------------------------------------- -------------
<S> <C>
May 7, 2000 to May 6, 2001...................................................... $ 6.25
May 7, 2001 to May 6, 2002...................................................... $ 7.75
May 7, 2002 to February 28, 2003................................................ $ 9.25
</TABLE>

(each such event being referred to herein as the "Triggering Event"), the
Company may elect to cancel all 1997 Warrants that have not been exercised and
that remain outstanding on or prior to the date that is 45 days from the
Triggering Event (the "Final Exercise Date"), without compensation to the
Holders for their loss. To invoke such mandatory exercise mechanism, the Company
shall provide written notice to each Holder of 1997 Warrants, which notice shall
be mailed no later than the 35th day before the Final Exercise Date, by
registered mail, return receipt requested, which notice shall (i) state that a
Triggering Event has occurred and inform the Holders of 1997 Warrants that the
Company has elected to cancel all 1997 Warrants that have not been exercised on
or prior to the Final Exercise Date, (ii) set forth the Purchase Price then in
effect and the number of shares of Common Stock that may be purchased upon
exercise of the 1997 Warrants and (iii) inform the Holders that all 1997
Warrants that have not been exercised in compliance with its terms by the close
of business on the Final Exercise Date shall automatically be canceled in
accordance with the 1997 Warrants and that all rights of the Holders of such
1997 Warrants as Holders will cease with respect to such 1997 Warrants at such
time. No failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity of the proceedings for such mandatory exercise
except as to a Holder (a) to whom notice was not mailed or (b) whose notice was
defective. Effective at 5:00 P.M. (New York City time) on the Final Exercise
Date, all 1997 Warrants then outstanding shall be canceled and the Holders
thereof shall have no further rights thereunder.

If there occurs any capital reorganization or any reclassification of the
Common Stock of the Company, the consolidation or merger of the Company with or
into another Person (as defined in the 1997 Warrant) (other than a merger or
consolidation of the Company in which the Company is the continuing corporation
and which does not result in any reclassification or change of outstanding
shares of its Common Stock) or the sale or conveyance of all or substantially
all of the assets of the Company to another Person, then the Holder will
thereafter be entitled to receive, upon the exercise of a 1997 Warrant in
accordance with the terms thereof, the same kind and amounts of securities
(including shares of stock) or other assets, or both, which were issuable or
distributable to the holders of outstanding Common Stock

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<PAGE>
of the Company upon such reorganization, reclassification, consolidation,
merger, sale or conveyance, in respect of that number of shares of Common Stock
then deliverable upon the exercise of the 1997 Warrant if the 1997 Warrant had
been exercised immediately prior to such reorganization, reclassification,
consolidation, merger, sale or conveyance; and, in any such case, appropriate
adjustments (as determined in good faith by the Board) shall be made to assure
that the provisions hereof (including provisions with respect to changes in, and
other adjustments of, the Purchase Price) shall thereafter be applicable, as
nearly as reasonably may be practicable, in relation to any securities or other
assets thereafter deliverable upon exercise of the 1997 Warrant.

In case the Company shall propose at any time or from time to time (a) to
declare or pay any dividend payable in stock of any class to the Common Holders
or to make any other distribution to the Common Holders (other than a regularly
scheduled cash dividend), (b) to offer to the Common Holders rights or warrants
to subscribe for or to purchase any additional shares of Common Stock or shares
of stock of any class or any other securities, rights or options, (c) to effect
any reclassification of its Common Stock, (d) to effect any consolidation,
merger or sale, transfer or other disposition of all or substantially all of the
property, assets or business of the Company which would, if consummated, adjust
the Purchase Price or the securities issuable upon exercise of the 1997
Warrants, (e) to effect the liquidation, dissolution or winding up of the
Company, or (f) to take any other action that would require a vote of the
Company's stockholders, then, in each such case, the Company shall give to the
Holder a written notice setting forth certain information regarding the proposed
action, which notice shall be so given as promptly as possible but in any event
at least 10 business days prior to the applicable record, determination or
effective date specified in such notice.

The 1997 Warrants do not entitle the Holders thereof to any voting rights or
other rights as a stockholder of the Company. The 1997 Warrants and any term
thereof may be amended, waived, discharged or terminated only by and with the
written consent of the Company and the Holders of 75% of the 1997 Warrants given
in writing upon at least 20 days' notice or at a meeting called for the purpose
in accordance with the By-laws of the Company applicable to meetings of
stockholders.

TERMS OF SERIES B PREFERRED STOCK

The Board of Directors has designated two million shares of Preferred Stock
as Series B Preferred Stock in connection with the adoption of the Stockholder
Rights Agreement described below. Because of the nature of the Series B
Preferred Shares' dividend, liquidation and voting rights, the value of the one
one-hundredth interest in a Series B Preferred Share purchasable upon exercise
of each Right (as defined below) should approximate the value of one Common
Share. Series B Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Series B Preferred Share will be entitled to the greater
of (1) a preferential quarterly dividend payment of $1.00 per share, or (2) an
aggregate dividend of 100 times the dividend declared per Common Share. In the
event of liquidation, the holders of the Series B Preferred Shares will be
entitled to a preferential liquidation payment of $100 per share, plus an amount
equal to 100 times the aggregate amount to be distributed per share of common
stock of 100 times the payment made per Common Share. Each Series B Preferred
Share will have 100 votes, voting together with the Common Shares except as
otherwise required by law. Finally, in the event of any merger, consolidation or
other transaction in which Common Shares are exchanged, each Series B Preferred
Share will be entitled to receive 100 times the amount received per Common
Share. These rights are protected by customary antidilution provisions.

STOCKHOLDER RIGHTS PLAN

The Board of Directors adopted a Stockholder Rights Agreement in September
1996 and declared a dividend of one preferred share purchase right ("Right") on
each outstanding share of the Company's Common Stock payable to stockholders of
record as of the close of business on September 11, 1996 (the "Record Date").
Except as described below, each Right, when exercisable, entitles the holder
thereof to

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<PAGE>
purchase from the Company one one-hundredth of a share of Series B Preferred
Stock of the Company at an exercise price of $40 per one one-hundredth of a
Series B Preferred Share (the "Purchase Price"), subject to adjustment. The
terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and American Stock Transfer & Trust Company, a New York
corporation, as Rights Agent.

Until the earlier to occur of (i) 10 days following a public announcement
that a person or group has become an "Acquiring Person" (as defined below) or
(ii) 10 business days (or such later date as may be determined by action of the
Board of Directors prior to such time as any person or group becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in a person or group (other than certain exempt persons) becoming an Acquiring
Person (the earlier of such dates being called the "Distribution Date"), the
Rights will be evidenced by Common Share certificates.

An "Acquiring Person" is a person or group of affiliated or associated
persons who have acquired beneficial ownership of 15% or more of the
Fully-Diluted outstanding Common Shares (as defined in the Second Amendment),
other than the Company, any subsidiary of the Company, any employee benefit plan
of the Company or its subsidiaries, or WPG Corporate Development Associates IV,
L.P., WPG Corporate Development Associates IV (Overseas) L.P., Glenbrook
Partners, L.P., Westpool Investment Trust plc, Steven E. Geller, and certain
persons affiliated or associated with or related to the foregoing persons
("Exempt Persons"). The Stockholder Rights Agreement, as amended, also provides
that HPA and EMP (collectively with HPA, the "Investors") and their respective
affiliates are "Exempt Persons" from and after the execution of the Securities
Purchase Agreement; provided that (A) if the Investors or their respective
affiliates acquire beneficial ownership of any shares of Common Stock other than
in a transaction with the Company or with the written consent of the Company
from and after the execution of the Securities Purchase Agreement and prior to
the consummation of the investment by the Investors contemplated by the
Securities Purchase Agreement, then the Investors and their affiliates shall not
be deemed to be "Exempt Persons" at any time after such acquisition of
beneficial ownership, or (B) if the investment by the Investors contemplated by
the Securities Purchase Agreement is not consummated, then the Investors and
their respective affiliates shall not be deemed to be "Exempt Persons" at any
time after the Securities Purchase Agreement terminates in accordance with its
terms. Notwithstanding the foregoing, (i) no person shall become an Acquiring
Person as the result of (A) an acquisition of Common Shares by the Company which
increases the proportionate number of shares beneficially owned by such person
and its affiliates and associates to 15% or more of the Common Shares or (B) the
lapse, forfeiture, cancellation, termination or expiration without exercise or
conversion into Common Shares of the Company of any stock option, warrant,
convertible security or other right to acquire Common Shares; PROVIDED, HOWEVER,
that if a person shall become the Beneficial Owner of 15% or more of the
Fully-Diluted Common Shares of the Company by reason of share acquisitions by
the Company or the lapse, forfeiture, cancellation, termination or expiration
without exercise or conversion into Common Shares of any stock option, warrant,
convertible security or other right to acquire Common Shares of the Company and
shall, after such share acquisitions by the Company or such lapse, forfeiture,
cancellation, termination or expiration, (A) acquire, in one or more
transactions, beneficial ownership of an additional number of Common Shares
which exceeds the LESSER of 10,000 Common Shares or 0.25% of the
then-outstanding Common Shares and (B) beneficially owns after such acquisition
15% or more of the Fully-Diluted Common Shares of the Company at such time, then
such person shall be deemed to be an Acquiring Person, and (ii) if the Board of
Directors of the Company determines in good faith that a person who would
otherwise be an Acquiring Person has become such inadvertently, and such person
divests as promptly as practicable a sufficient number of Common Shares so that
such person would no longer be an Acquiring Person, then such person shall not
be deemed to be an Acquiring Person for any purposes of the Rights Agreement.

20
<PAGE>
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Common Shares. Until the Distribution Date (or earlier redemption
or expiration of the Rights), new Common Share certificates issued after the
Record Date will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
will also constitute the transfer of the Rights associated with the Common
Shares represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Shares as of
the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.

The Rights are not exercisable until the Distribution Date. The Rights will
expire on September 11, 2001 (the "Final Expiration Date"), unless the Rights
are earlier redeemed or exchanged by the Company, as described below.

The Purchase Price payable, and the number of Series B Preferred Shares or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series B
Preferred Shares, (ii) upon the grant to holders of the Series B Preferred
Shares of certain rights or warrants to subscribe for or purchase Series B
Preferred Shares at a price, or securities convertible into Series B Preferred
Shares with a conversion price, less than the then-current market price of the
Series B Preferred Shares or (iii) upon the distribution to holders of the
Series B Preferred Shares of evidences of indebtedness, assets or capital stock
(excluding regular periodic cash dividends paid out of earnings or retained
earnings or dividends payable in Series B Preferred Shares) or of subscription
rights or warrants (other than those referred to above). With certain
exceptions, no adjustment in the Purchase Price will be required until
cumulative adjustments require an adjustment of at least 1% in such Purchase
Price. The Company will not be required to issue fractional Common Shares or
Series B Preferred Shares (other than fractions which are integral multiples of
one one-hundredth of a Series B Preferred Share, which may, at the election of
the Company, be evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash may be made based on the market price of the Common Shares or
Series B Preferred Shares on the last trading day prior to the date of exercise.

If any person or group becomes an Acquiring Person, then each holder of a
Right (other than Rights beneficially owned by the Acquiring Person, any
Associate or Affiliate thereof (as such terms are defined in the Rights
Agreement), and certain transferees thereof, which will be void) will have the
right to receive upon exercise of such Right that number of Common Shares (or,
in certain circumstances, cash, property or other securities of the Company)
having a market value of two times the exercise price of the Right.

If at any time after the time that any person or group becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power is sold,
proper provision will be made so that each holder of a Right (other than Rights
beneficially owned by the Acquiring Person, any Associate or Affiliate thereof,
and certain transferees thereof, which will be void) will thereafter have the
right to receive, upon the exercise thereof at the then-current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right.

At any time after the time that any person or group becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights beneficially owned by such person or
group, any Associate or Affiliate thereof, and certain transferees thereof,
which will be void), in whole or in part, at an exchange ratio of one Common
Share or one one-hundredth of a Series B Preferred Share (or of a share of a
class or series of the Company's preferred stock having equivalent rights,
preferences and privileges) per Right (subject to adjustment).

21
<PAGE>
At any time prior to the time that any person becomes an Acquiring Person,
the Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right, subject to adjustment (the "Redemption
Price"), which may (at the option of the Company) be paid in cash, Common Shares
or other consideration deemed appropriate by the Board of Directors. The
redemption of the Rights may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish; provided, however, that no redemption will be permitted or required
after the time that any person becomes an Acquiring Person. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of the Rights will be to receive the Redemption
Price.

The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person becomes an Acquiring Person no such amendment may
make the Rights redeemable if the Rights are not then redeemable in accordance
with the terms of the Rights Agreement or may adversely affect the interests of
the holders of the Rights.

Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors.

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.

As permitted by the 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 ar 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.

22
<PAGE>
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, the Series A
Preferred Stock and the 1997 Warrants is American Stock Transfer & Trust
Company, New York, New York.

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<PAGE>
PLAN OF DISTRIBUTION

SALE BY THE SELLING SHAREHOLDERS--COMMON STOCK. The Company issued the
250,000 Common Shares to Smedley Industries, Inc. Liquidating Trust on June 17,
1997. The Company will receive no proceeds from the resale of the Common Stock.

SALE BY THE SELLING SHAREHOLDERS--SERIES A PREFERRED STOCK AND SERIES A
CONVERSION SHARES. Pursuant to the terms of the Initial Investment, Additional
Investment and Further Purchase, the Company will issue the Conversion Shares
upon the conversion from time to time of the 2,100,000 shares of Series A
Preferred Stock presently outstanding by the holders thereof pursuant to the
terms of the Series A Preferred Stock for no additional consideration. The
Company will receive no proceeds from the resale of the Series A Preferred Stock
or the Series A Conversion Shares.

SALE BY THE SELLING SHAREHOLDERS--1997 WARRANTS AND 1997 WARRANT
SHARES. Pursuant to the terms of the Initial Investment, Additional Investment
and Further Purchase, the Company will issue Warrant Shares from time to time
upon the exercise of the 1997 Warrants by the holders thereof at an exercise
price of $1.375 per share. Certain triggering prices may result in the mandatory
exercise/cancellation of the 1997 Warrants. Any warrants of the 1997 Warrants
not exercised before 5:00 PM on May 6, 2003 automatically will expire. The
Company will receive from such holders the exercise price of the 1997 Warrants
upon such exercise. The Company will not receive any of the proceeds from
resales of the 1997 Warrants or the 1997 Warrant Shares. The Series A Preferred
Stock and the 1997 Warrants were issued by the Company in private placements in
June and October, 1997.

SALE BY THE SELLING SHAREHOLDERS--AND GKM WARRANT SHARES. The Company will
issue GKM Warrant Shares from time to time upon the exercise of the GKM Warrants
by the holders thereof at an exercise price of $1.375 per share. Certain
triggering prices may result in the mandatory exercise/cancellation of the GKM
Warrants. Any warrants of the GKM Warrants not exercised before 5:00 PM on May
6, 2003 automatically will expire. The Company will receive from such holders
the exercise price of the GKM Warrant Shares upon such exercise. The Company
will not receive any of the proceeds from resales of the GKM Warrant Shares. The
GKM Warrants were issued by the Company in a settlement of fees owed by the
Company for services rendered.

The Selling Securityholders may sell all or a portion of the Securities
offered hereby in accordance with the procedures set forth in this Prospectus
from time to time while the Registration Statement of which this Prospectus is a
party remains effective. The Company has been advised by the Selling
Securityholders that the Securities may be sold on terms to be determined at the
times of such sales through customary brokerage channels, negotiated
transactions or a combination of these methods, at fixed prices that may be
changed, at market prices then prevailing or at negotiated prices then
obtainable. There is no assurance that the Selling Securityholders will sell any
or all of the Securities offered pursuant to this Prospectus. Each of the
Selling Securityholders reserves the right to accept and, together with its
agents from time to time, to reject in whole or in part any proposed purchase of
the Securities to be made directly or through agents. The Company will receive
no portion of the proceeds from the sale of Securities offered hereby. The
aggregate proceeds to the Selling Securityholders from the sale of the
Securities offered by the Selling Securityholders hereby will be the purchase
price of such Securities less any discounts or commissions.

The Selling Securityholders, acting as principals for their own account, may
sell Securities from time to time directly to purchasers or through agents,
dealers or underwriters to be designated by the Selling Securityholders from
time to time who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Securityholders and the purchasers
of the Securities for whom they may act as agent. The Selling Securityholders
and any agents, broker-dealers or underwriters that participate with the Selling
Securityholders in the distribution of the Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, in which event any
discounts, commissions or

24
<PAGE>
concessions received by such broker-dealers, agents or underwriters and any
profit on the resale of the Securities purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act.

A Selling Securityholder may elect to engage a broker or dealer to effect
sales of the Securities in one or more of the following transactions: (a) block
trades in which the broker or dealer so engaged will attempt to sell the
Securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus, and (c) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers and dealers engaged
by a Selling Securityholder may arrange for other brokers or dealers to
participate. Broker-dealers may agree with the Selling Securityholders to sell a
specified number of such Securities at a stipulated price and, to the extent
required, to fulfill the broker-dealer commitment to such Selling
Securityholder. Broker-dealers who acquire Securities as principal may
thereafter resell such Securities from time to time in transactions (which may
involve crosses and block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Securities commissions as described above.

Selling Securityholders may also offer the Securities covered by this
Prospectus under other registration statements or pursuant to exemptions from
the registration requirements of the Securities Act, including sales which meet
the requirements of Rule 144 under the Securities Act. Selling Securityholders
should seek advice from their own counsel with respect to the legal requirements
for such sales.

To comply with the securities laws of certain states if required, the
Company shall use its best efforts to register or qualify the [Securities] under
such other securities or "blue sky" laws of such jurisdictions as any Selling
Securityholder reasonably requests in writing and to do any or all other acts
and things that may be reasonably necessary or advisable to register or qualify
for sale in such jurisdictions the [Securities] owned by such Selling
Securityholder; PROVIDED, HOWEVER, that the Company shall not be required to (i)
qualify generally to do business in any jurisdiction where it is not then so
qualified, (ii) subject itself to taxation in any such jurisdiction, (iii)
consent to general service of process in any such jurisdiction or (iv) provide
any undertaking required by such other securities or "blue sky" laws or make any
change in its charter or by-laws that the Board of Directors of the Company
determines in good faith to be contrary to the best interest of the Company and
its stockholders.

Each of the Selling Securityholders has certain registration rights with
respect to the Securities owned by such Selling Securityholder. The Company has
filed the Registration Statement of which this Prospectus is a part pursuant to
such registration rights.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Securities may not simultaneously engage in
market making activities with respect to the Common Stock for a period of one
business day prior to the commencement of such distribution. In addition and
without limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M. These provisions may
limit the timing of purchases and sales of the Securities by the Selling
Securityholders.

A supplement to this Prospectus will be filed, if required, pursuant to Rule
424 under the Securities Act disclosing (a) the name of the participating
broker-dealer(s); (b) the number of Shares involved; (c) the price at which such
Shares were sold; (d) the commissions paid or discounts or concessions allowed
to such broker-dealer(s), where applicable; and (e) other facts material to the
transaction, including the name and other information regarding the Selling
Shareholders.

25
<PAGE>
The Company will maintain the effectiveness of the Registration Statement so
long as any 1997 Warrants remain outstanding and shall then terminate the
effectiveness (except in the case of shares of Common Stock that are acquired
upon the exercise of 1997 Warrants by an HPA Person ("HPA Party Common Stock")),
PROVIDED THAT (i) the Company shall be entitled to remove from registration
herein 1997 Warrants held by any person or any entity (other than HPA, Charles
S. Holmes or James J. Pinto, or any direct or indirect transferee of Warrants
from any of them in transactions not involving a public offering (an "HPA
Person") who are affiliates of the Company) who have acquired such 1997 Warrants
for consideration pursuant to a transaction covered by the registration provided
herein and (ii) at any time after two years after the date of the issuance of
the 1997 Warrants, so long as the 1997 Warrants are freely tradable under Rule
144 in the hands of any person or entity who is not an affiliate of the Company,
(A) the Company shall be entitled to remove 1997 Warrants held by non-affiliates
from registration herein, and (B) if no HPA Person remains an affiliate of the
Company, or no HPA Person who is an affiliate of the Company owns more than 1%
of the then outstanding 1997 Warrants, registration of the 1997 Warrants herein
shall no longer be required. Registration may terminate with respect to HPA
Party Common Stock when, and to the extent that, no HPA Person who remains an
affiliate of the Company owns more than 1% of the then outstanding shares of
Common Stock, or as agreed by the Company and the Selling Securityholders.

The Company will maintain the effectiveness of the Registration Statement so
long as any shares of Series A Preferred Stock and the Conversion Shares remain
outstanding and shall then terminate (except in the case of shares of Common
Stock into which Shares of Series A Preferred Stock may be converted pursuant to
the Certificate of Designation for the Company's Series A Preferred Stock ("HPA
Party Shares")), PROVIDED THAT (i) the Company shall be entitled to remove from
registration herein Preferred Shares held by any person or entity (other than
HPA Persons who are affiliates of the Company) who have acquired such Shares of
Series A Preferred Stock or Conversion Shares for consideration pursuant to a
transaction covered by the registration provided by herein, and (ii) at any time
after two years after the date of the issuance of the Shares of Series A
Preferred Stock, so long as the Shares of Series A Preferred Stock are freely
tradable under Rule 144 in the hands of a person or entity who is not an
affiliate of the Company, (A) the Company shall be entitled to remove such
Securities held by non-affiliates from registration herein, and (B) if no HPA
Person remains an affiliate of the Company, or no HPA Person who is an affiliate
of the Company owns more than 1% of the then outstanding Shares of Series A
Preferred Stock or Common Shares, registration of the Shares of Series A
Preferred Stock or Conversion Shares (as applicable) shall no longer be
required. Registration may terminate herein with respect to HPA Party Shares
when, and to the extent that, no HPA Person who remains an affiliate of the
Company owns more than 1% of the then outstanding Shares of Series A Preferred
Stock or Conversion Shares.

26
<PAGE>
SELLING SECURITYHOLDERS

The following table sets forth certain information concerning those persons
known to the Company, based on information known to the Company, contained in
statements filed with the Securities and Exchange Commission pursuant to Section
13(d) or 13(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and/or obtained from such persons, with respect to the beneficial
ownership (as such term is defined in Rule 13d-3 under the Exchange Act) of
Common Stock, Series A Preferred Stock, and Warrants by each Selling
Securityholder:

SELLING SECURITYHOLDERS

<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
EMP ASSOCIATES, LLC
Common Stock................................................ 3,266,988 3,266,988
Series A Preferred Stock.................................... 250,000 250,000
Warrants.................................................... 1,266,988 1,266,988

AQUAE SULIS INVESTMENT FUND LIMITED
Common Stock................................................ 135,000 135,000
Series A Preferred Stock.................................... 15,000 15,000
Warrants.................................................... 15,000 15,000

ATLANTIC & OVERSEAS HOLDINGS LTD
Common Stock................................................ 225,000 225,000
Series A Preferred Stock.................................... 25,000 25,000
Warrants.................................................... 25,000 25,000

CONTRARY FUND-PARKER QUILLEN/PRES
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

MELANIE R. DACUS
Common Stock................................................ 85,500 85,500
Series A Preferred Stock.................................... 9,500 9,500
Warrants.................................................... 9,500 9,500

LOUIS DE RICCO
Common Stock................................................ 31,500 31,500
Series A Preferred Stock.................................... 3,500 3,500
Warrants.................................................... 3,500 3,500

THE HUMAYAN WAHEED MD PC PENSION
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

LITTLE WING LP
Common Stock................................................ 250,000 250,000
Series A Preferred Stock.................................... 30,000 30,000
Warrants.................................................... 10,000 10,000
</TABLE>

27
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
MEDUSA CAPITAL S.A.
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

CHARLES S. MEYER
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

GREGORY J. OSBORNE
Common Stock................................................ 40,250 40,250
Series A Preferred Stock.................................... 4,500 4,500
Warrants.................................................... 4,500 4,500

SWISS BANK CORPORATION
Common Stock................................................ 270,000 270,000
Series A Preferred Stock.................................... 30,000 30,000
Warrants.................................................... 30,000 30,000

SWISS BANK CORPORATION
Common Stock................................................ 67,500 67,500
Series A Preferred Stock.................................... 7,500 7,500
Warrants.................................................... 7,500 7,500

SWISS BANK CORPORATION
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

SWISS BANK CORPORATION
Common Stock................................................ 170,000 170,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

SWISS BANK CORPORATION
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

TRADEWINDS FUND LTD
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

KENNETH ALLEN
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000
</TABLE>

28
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
NICKY BORCEA, IRA ROLLOVER
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

TAI-SAN CHENG
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

FONTAINE R. AND FRANK A. CHRISTENSEN
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

KEVIN FLANDERS(1)
Common Stock................................................ 27,100 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

LUKE SCANLON
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

ANTHONY CIRILLO
Common Stock................................................ 112,500 112,500
Series A Preferred Stock.................................... 12,500 12,500
Warrants.................................................... 12,000 12,500

JOHN ILLIBASSI FAMILY TRUST
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

JASTMAR ASSOCIATES
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

KENNETH R. KAFESAK
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

GARY F. LEXA
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

M. PERRY GRANT
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000
</TABLE>

29
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
WAYNE AND CAROLYN MCLAUGHLIN
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

JOHN C. AND KATHY E. MCNAY
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

JOHN P. O'SHEA
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

GEORGE MORDIGLIA IRA R/O DECD.
Common Stock................................................ 135,000 135,000
Series A Preferred Stock.................................... 15,000 15,000
Warrants.................................................... 15,000 15,000

RHL ASSOCIATES, L.P.
Common Stock................................................ 135,000 135,000
Series A Preferred Stock.................................... 15,000 15,000
Warrants.................................................... 15,000 15,000

JAY T. ROBLING
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

LANCE C. SENNING
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

MICHAEL SPADARO
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

ARTHUR STEINBERG, IRA ROLLOVER
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

LESLIE C. TAYLOR TRUST AGREEMENT
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

LLOYD W. AND MARY J. TAYLOR
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000
</TABLE>

30
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
HARVEY K. YEE
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

TIMOTHY MORAN(2)
Common Stock................................................ 450,000 450,000
Series A Preferred Stock.................................... 50,000 50,000
Warrants.................................................... 50,000 50,000

MARK S. ROSE(3)
Common Stock................................................ 475,000 450,000
Series A Preferred Stock.................................... 50,000 50,000
Warrants.................................................... 50,000 50,000

FREEBURN VENTURES LTD
Common Stock................................................ 450,000 450,000
Series A Preferred Stock.................................... 50,000 50,000
Warrants.................................................... 50,000 50,000

WILLIAM FORMAN
Common Stock................................................ 450,000 450,000
Series A Preferred Stock.................................... 50,000 50,000
Warrants.................................................... 50,000 50,000

RICHARD L. AND EILEEN A. BAZELON
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

RICHARD G. DAVID
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

RONALD A. AND BARBARA KOPLOW
Common Stock................................................ 49,500 49,500
Series A Preferred Stock.................................... 5,500 5,500
Warrants.................................................... 5,500 5,500

VENOGOPAL K. MENON
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

JULIO NOVOGRODZKI
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

LEONARD M. SCHILLER
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000
</TABLE>

31
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
SUZANNE SCHILLER
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

SCHNEIDER FUEL & OIL, INC. PENSION PLAN
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

EDWARD T. SCHNEIDER
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

TOWN & COUNTRY OIL CORP PENSION PLAN & TRUST
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

THEODORE STERN SEP IRA ("TS SEP IRA")
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

THEODORE AND ELIZABETH S. STERN(4)
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

ANDREW A. STERN & JOANNE M. GOLD
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

JO-BAR ENTERPRISES, L.L.C.
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

JOYCE N. WESTMORELAND
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

KENNETH R. FALCHUK
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

ZACHARY GOMES
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000
</TABLE>

32
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
DANIEL R. LEE
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

PATRICK H. MILLER JR.
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

PATRICK H. MILLER, JR. & LEE MILLER
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

ALEXANDER B. MILLER
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

RONALD MILLER
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

ALBERT J. MILLER & HELEN K. MILLER FAMILY TRUST
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

STEPHEN V. AND PATRICIA MILLEA
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

FREDERICK J. OSWALD
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

J.F. SHEA CO., INC. AS NOMINEE 1997-25
Common Stock................................................ 1,800,000 1,800,000
Series A Preferred Stock.................................... 200,000 200,000
Warrants.................................................... 200,000 200,000

J. MICHAEL WOLFE
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

PRO SERIES RACING, INC.
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000
</TABLE>

33
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
BILL AND PAMELA T. HICKEY
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

AEGIS PENSION PLAN
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

JAMES R. AND LISA BAUGH
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

W. SAM CHANDOHA(5)
Common Stock................................................ 100,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

JOHN J. DORAN(6)
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

HARVEY AND FRANCES FELDSCHREIBER
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

DR. PHILLIP T. GEORGE
Common Stock................................................ 112,500 112,500
Series A Preferred Stock.................................... 12,500 12,500
Warrants.................................................... 12,500 12,500

PHILLIP T. GEORGE
Common Stock................................................ 112,500 112,500
Series A Preferred Stock.................................... 12,500 12,500
Warrants.................................................... 12,500 12,500

PHILLIP D. GUNN & CO., INC.
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

J. PETER & CAREN W. KLINE(7)
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

JAMES H. LYNCH, JR.
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000
</TABLE>

34
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
SANFORD AND MYRA KIRSCHENBAUM(8)
Common Stock................................................ 135,000 135,000
Series A Preferred Stock.................................... 16,000 16,000
Warrants.................................................... 16,000 16,000

SANFORD KIRSCHENBAUM & CO. CPA, PA
Common Stock................................................ 18,00 18,000
Series A Preferred Stock.................................... 2,000 2,000
Warrants.................................................... 2,000 2,000

MKS' OMO CONTRACTING INC.
Common Stock................................................ 18,500 18,000
Series A Preferred Stock.................................... 2,000 2,000
Warrants.................................................... 2,000 2,000

LENORE H. SCHUPAK(9)
Common Stock................................................ 202,500 192,500
Series A Preferred Stock.................................... 22,500 22,500
Warrants.................................................... 22,500 22,500

SINTRA FUND, LTD.(10)
Common Stock................................................ 250,000 225,000
Series A Preferred Stock.................................... 25,000 25,000
Warrants.................................................... 25,000 25,000

SJG MANAGEMENT, INC.
Common Stock................................................ 112,500 112,500
Series A Preferred Stock.................................... 12,500 12,500
Warrants.................................................... 12,500 12,500

YAIR TALMI
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

PAUL AND BERNADETTE TORRE(11) C/O SHAREHOLDER COMMUNICATIONS
Common Stock................................................ 48,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

WORLDWIDE FABRICS, L.P.
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

DONNA DE VARONA(12)
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

FAISAL FINANCE (SWITZERLAND) S.A.
Common Stock................................................ 270,000 270,000
Series A Preferred Stock.................................... 30,000 30,000
Warrants.................................................... 30,000 30,000
</TABLE>

35
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
WILLIAM JOE AND ANN STREET JACKSON
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

WILLIAM JOE & ANN STREET JACKSON
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

KEVIN L. JACKSON
Common Stock................................................ 11,250 11,250
Series A Preferred Stock.................................... 1,250 1,250
Warrants.................................................... 1,250 1,250

JOHN SHAW
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

JOSHUA AND RANDI GOTTLIEB
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

DAVID H. ZISES
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

WILFRED AND MARGARET HUSE
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

CHARLES S. HOLMES(13)
Common Stock................................................ 3,753,752 3,703,752
Series A Preferred Stock.................................... 125,000 125,000
Warrants.................................................... 2,703,752 2,703,752

JAMES J. PINTO(14)
Common Stock................................................ 3,478,252 3,478,252
Series A Preferred Stock.................................... 24,500 24,500
Warrants.................................................... 2,603,252 2,603,252

CHURCHILL ASS. L.P.
Common Stock................................................ 117,000 117,000
Series A Preferred Stock.................................... 13,000 13,000
Warrants.................................................... 13,000 13,000

TELCOM PARTNERS, L.P.
Common Stock................................................ 562,500 562,500
Series A Preferred Stock.................................... 62,500 62,500
Warrants.................................................... 62,500 62,500
</TABLE>

36
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
BERNARD KIRSNER TRUST
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

BRUCE CORBIN
Common Stock................................................ 10,000 10,000
Series A Preferred Stock.................................... 1,000 1,000
Warrants.................................................... 1,000 1,000

DR. RICHARD CORBIN
Common Stock................................................ 13,500 13,500
Series A Preferred Stock.................................... 1,500 1,500
Warrants.................................................... 1,500 1,500

CHARLES E. BRADLEY
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

CHARLES LEITHAUSER
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

CLAUDIA ROUHANA
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

WILLIAM J. ROUHANA, JR.
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

DAVID MORLEY
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

DAVID S. LAWI
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

PAUL W. PERKINS
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

DR. PAUL D. GOLDENHEIM
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500
</TABLE>

37
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
ESTELLE K. MEISLICH
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

GARO A. PARTOYAN
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

GERALD B. JONES
Common Stock................................................ 90,000 90,000
Series A Preferred Stock.................................... 10,000 10,000
Warrants.................................................... 10,000 10,000

H. EUGENE GRAVES
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

HARE & CO. AS CUSTODIAN FOR ROYAL BANK OF CANADA
Common Stock................................................ 360,000 360,000
Series A Preferred Stock.................................... 40,000 40,000
Warrants.................................................... 40,000 40,000

HARVEY & DOROTHY CAMPBELL
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

J. DAVID SHAPIRO
Common Stock................................................ 9,000 9,000
Series A Preferred Stock.................................... 1,000 1,000
Warrants.................................................... 1,000 1,000

JONATHAN COHEN & NANCY SHAPIRO
Common Stock................................................ 9,000 9,000
Series A Preferred Stock.................................... 1,000 1,000
Warrants.................................................... 1,000 1,000

J.A. CARDWELL
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

J.A. CARDWELL, JR.
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

JOHN PICCOLO
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000
</TABLE>

38
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
JOHN T. AND JOANNE M. STANNER
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

NEAL HOLTVOGT
Common Stock................................................ 18,000 18,000
Series A Preferred Stock.................................... 2,000 2,000
Warrants.................................................... 2,000 2,000

RICHARD & LYNNE MARIE PALMER
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

ROBERT A. SIMMS
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000

WALTER INGSTRUP
Common Stock................................................ 11,250 11,250
Series A Preferred Stock.................................... 1,250 1,250
Warrants.................................................... 1,250 1,250

WILLIAM H. LENNON
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

WILLIAM & BARBARA SCHOEN
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

ANDRE W. ISELI
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

CONZETT EUROPA--INVEST
Common Stock................................................ 450,000 450,000
Series A Preferred Stock.................................... 50,000 50,000
Warrants.................................................... 50,000 50,000

CSP TRUST
Common Stock................................................ 112,500 112,500
Series A Preferred Stock.................................... 12,500 12,500
Warrants.................................................... 12,500 12,500

FIDUCIE DESJARDINS A/C 744766-7-59
Common Stock................................................ 180,000 180,000
Series A Preferred Stock.................................... 20,000 20,000
Warrants.................................................... 20,000 20,000
</TABLE>

39
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
FIDUCIE DESJARDINS A/C 900595-0-59
Common Stock................................................ 45,000 45,000
Series A Preferred Stock.................................... 5,000 5,000
Warrants.................................................... 5,000 5,000

GEORGE L. SMITH
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

GOLDSTEIN FAMILY LOVING TRUST
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

HOWARD BERNSTEIN
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

STEPHEN T. SKOLY, JR.
Common Stock................................................ 22,500 22,500
Series A Preferred Stock.................................... 2,500 2,500
Warrants.................................................... 2,500 2,500

THOMAS E. MCLAIN PC EMPLOYEE RETIREMENT TRUST(15)
Common Stock................................................ 67,250 67,250
Series A Preferred Stock.................................... 7,500 7,500
Warrants.................................................... 7,500 7,500

WALTER F. TOOMBS
Common Stock................................................ 49,500 49,500
Series A Preferred Stock.................................... 5,500 5,500
Warrants.................................................... 5,500 5,500

FERDINAND F. ANDERSON, JR.
Common Stock................................................ 11,250 11,250
Series A Preferred Stock.................................... 1,250 1,250
Warrants.................................................... 1,250 1,250

COMMONWEALTH ASSOCIATES, INC.
Common Stock................................................ 9,100 9,100
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 9,100 9,100

MICHAEL S. FALK
Common Stock................................................ 759,100 759,100
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 759,100 759,100

KEITH ROSENBLOOM
Common Stock................................................ 87,973 87,973
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 87,973 87,973
</TABLE>

40
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
ED DOWNE
Common Stock................................................ 50,000 50,000
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 50,000 50,000

ERIC RAND
Common Stock................................................ 48,571 48,571
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 48,571 48,571

ROBERT O'SULLIVAN
Common Stock................................................ 43,986 43,986
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 43,986 43,986

CORNELIA ELDRIDGE
Common Stock................................................ 30,000 30,000
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 30,000 30,000

ROBERT BEURET
Common Stock................................................ 26,857 26,857
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 26,857 26,857

VINCENT LABARBARA
Common Stock................................................ 20,250 20,250
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 20,250 20,250

STEPHEN LABARBARA
Common Stock................................................ 6,661 6,661
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 6,661 6,661

BASIL ASOUITTO
Common Stock................................................ 14,286 14,286
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 14,286 14,286

JOSEPH P. WYNNE
Common Stock................................................ 14,286 14,286
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 14,286 14,286

MICHAEL R. LYALL(16)
Common Stock................................................ 14,286 14,286
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 14,286 14,286

JAMES WALKER
Common Stock................................................ 9,500 9,500
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 9,500 9,500
</TABLE>

41
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
MICHAEL VOLPE
Common Stock................................................ 6,661 6,661
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 6,661 6,661

ANTHONY GIARDINA
Common Stock................................................ 5,357 5,357
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 5,357 5,357

DAVID STEIN
Common Stock................................................ 3,750 3,750
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 3,750 3,750

RONALD MOSCHETTA
Common Stock................................................ 3,571 3,571
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 3,571 3,571

ERIC RUBENSTEIN
Common Stock................................................ 3,571 3,571
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 3,571 3,571

TRAVIS BROCK
Common Stock................................................ 3,500 3,500
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 3,500 3,500

ROBERT NASS
Common Stock................................................ 1,786 1,786
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,786 1,786

MARK DANIELI
Common Stock................................................ 1,786 1,786
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,786 1,786

CRAIG LEPPLA
Common Stock................................................ 1,786 1,786
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,786 1,786

RICHARD GALTERIO
Common Stock................................................ 1,500 1,500
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,500 1,500

MARIO MARSILLO, JR.
Common Stock................................................ 1,500 1,500
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,500 1,500
</TABLE>

42
<PAGE>
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED SECURITIES TO BE
SELLING SECURITYHOLDER PRIOR TO THE OFFERING* SOLD**
- -------------------------------------------------------------- -------------------------- ---------------------
<S> <C> <C>
DAVID WYNN
Common Stock................................................ 1,500 1,500
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,500 1,500

MICHAEL SCALFANI
Common Stock................................................ 1,500 1,500
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 1,500 1,500

PELLINORE SECURITIES CORP.
Common Stock................................................ 112,754 112,754
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 112,754 112,754

AXIOM CAPITAL MANAGEMENT, INC.
Common Stock................................................ 112,754 112,754
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 112,754 112,754

SMEDLEY LIQUIDATING TRUST, INC.(17)
Common Stock................................................ 250,000 250,000
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 0 0

GERARD KLAVER MATTISON & CO. ("GKM")(18)
Common Stock................................................ 200,000 200,000
Series A Preferred Stock.................................... 0 0
Warrants.................................................... 0 0
</TABLE>

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

* For Common Stock, includes (a) all shares of Common Stock outstanding owned
by the applicable person, (b) all shares of common stock acquirable upon
conversion or exercise of Warrants and Series A Preferred Stock owned by
the applicable person and (c) any shares of Common Stock otherwise acquired
by the applicable person at any time from January 1 until March 1, 1997.
For Series A Preferred Stock, includes the number of shares of Series A
Preferred Stock outstanding. For Warrants, equals the number of shares of
Common Stock, acquirable upon the exercise of the Warrants.

** Except as otherwise indicated, all selling securityholders will hold less
than one percent (1%) of the securities after the Offering.

(1) Assuming none of the shares is sold, Kevin Flanders will beneficially own
4,600 shares of common stock after the Offering.

(2) Timothy Moran also owns 250,000 options to purchase common stock at $2.00
per share that are exercisable as follows: 83,000 options are exercisable
on 05/13/98, 83,000 options are exercisable on 05/13/99 and are not
otherwise sold (will continue to be owned by him following completion of
the Offering). Mr. Moran is a consultant to the Company.

(3) Assuming the shares are not sold, Mark S. Rose will beneficially own 25,000
shares of common stock after the Offering.

(4) Mr. Stern is also the beneficial owner of the shares and warrants to be
offered by TS SEP IRA.

(5) Shareholder Communication Corporation, a company of which W. Sam Chandoha
is a principal, acted as a proxy solicitor and received a fee of $7,500,
plus reimbursement of reasonable and actual

43
<PAGE>
expenses up to $5,000. Assuming the shares are not sold, W. Sam Chandoha
will beneficially own 10,000 shares of common stock after the Offering.

(6) John Doran became a director on November 13, 1997.

(7) Caren Kline's sister is married to James J. Pinto, who is a director of the
Company.

(8) Sanford Kirschenbaum is also the beneficial owner of the shares and
warrants owned by Sanford Kirschenbaum & Co. CPA, PA and MKS' OMO
Contracting Inc. ("MKS"), corporations in which he is a principal. MKS will
beneficially own 500 shares of common stock after the Offering.

(9) Lenore H. Schupak will still beneficially own 10,000 shares of common stock
after the Offering. She also owns 5,000 options not exercisable until the
following vesting schedule (one-third (1/3) on September 25, 1998;
two-thirds (2/3) on September 25, 1999; and three-thirds (3/3) on September
25, 2000). Lenore Schupak has also been a director from May, 1997 to the
present.

(10) Sintra Fund will still beneficially own 25,000 shares of Common Stock
after the Offering.

(11) Paul and Bernadette Torre will still beneficially own 3,000 shares of
common stock after the Offering.

(12) Donna De Varona's brother-in-law is James Pinto, who is a director of the
Company.

(13) This figure includes 50,000 shares of common stock owned by Mr. Holmes'
daughter, which are not issued in this Offering. Mr. Holmes is the
Chairman of the Board of Directors of the corporation, as well as a
partner in HPA Associates.

(14) James J. Pinto is a director of the corporation and is a partner with
Charles Holmes in HPA. Moreover, Mr. Pinto is also the beneficial owner of
Telcom Partners L.P. and Churchill Associates, L.P., of which he is the
General Partner for both entities.

(15) Celeste Pinto McKain, a Trustee of the Retirement Trust, is the sister of
James Pinto, who is a director of the Company.

(16) Michael R. Lyall is the Managing Director of Commonwealth Associates. See
"Recent Developments".

(17) See "Recent Developments" for discussion of transaction in which these
shares were acquired.

(18) These shares are subject to warrants held by GKM which were issued as
compensation to GKM for the performance of brokerage and related services
in connection with the financing transactions described in "Recent
Developments".

44
<PAGE>
LEGAL MATTERS

The validity of the Common Stock, Series A Preferred Stock and Warrants
offered hereby will be passed upon for the Company by Sonnenschein Nath &
Rosenthal, Chicago, Illinois.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1996, and for the year then ended have been incorporated herein by reference and
in the Registration Statement in reliance upon the report of Deloitte & Touche
LLP, independent certified public accountants, incorporated by reference herein
and in the Registration Statement upon the authority of said firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "Commission") on Form S-3 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.

45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. 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............... $ 25,628
---------
American Stock Exchange Listing Fee............................... $ 37,500
Accounting Fees and Expenses...................................... $ *
Printing and Engraving Expenses................................... $ 15,000
Legal Fees and Expenses........................................... $ 70,000
Blue Sky Fees and Expenses........................................ $ *
Miscellaneous..................................................... $ *
---------
Total......................................................... $ 148,128
---------
---------
</TABLE>

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

* To be completed by amendment.

The foregoing items, except for the Securities and Exchange Commission and
NASD fees, are estimated. All expenses will be borne by the Company.

ITEM 15. 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)
actually 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,

II-1
<PAGE>
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 duty as a 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.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company(1)
3.2 First Amendment to Restated Certificate of Incorporation of the Company(2)
4.1 Form of Warrant Certificate to purchase common stock of the company,
issued May 6, 1997(3)
4.2 Amendment to the Warrant Agreement dated as of May 6, 1997 by and among
the Company, HPA Associates, LLC and EMP Associates LLC.
4.3 Securities Purchase Agreement dated as of May 5, 1997 among the company,
HPA Associates, LLC and EMP Associates LLC(4)
4.4 Amendment No. 1 dated as of June 5, 1997 to Securities Purchase Agreement
dated as of May 5, 1997 among the Company, HPA Associates, LLC and EMP
Associates LLC(5)
4.5 Certificate of Designation relating to Series A Preferred Stock(6)
5.1 Opinion re legality(7)
23.1 Independent Auditor's Consent(8)
24.1 Power of attorney(9)
</TABLE>

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

(1) Previously filed as an exhibit to the Company's Current report on Form 10-Q
dated as of September 30, 1997, and incorporated herein by reference.

(2) Previously filed as an exhibit to the Company's Current report on Form 10-Q
dated as of September 30, 1997, and incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's Current Report 8-K dated as
of August 25, 1997, and incorporated herein by reference.

(4) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated August 25, 1997, and incorporated herein by reference.

(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated August 25, 1997, and incorporated herein by reference.

(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated August 25, 1997, and incorporated herein by reference.

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<PAGE>
(7) To be filed by amendment at a later date.

(8) To be filed by amendment at a later date.

(9) See "Power of Attorney and Signatures," p. II-5.

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes:

1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof), which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;

PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the Registration Statement.

2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement 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.

(c) The undersigned Registrant hereby undertakes (1) to use its best efforts
to distribute prior to the opening of bids, to prospective bidders,
underwriters, and dealers, a reasonable number of copies of a prospectus which
at that time meets the requirements of Section 10(a) of the Act, and relating to
the securities offered at competitive bidding, as contained in the Registration
Statement, together with any supplements thereto, and (2) to file an amendment
to the Registration Statement reflecting the results of bidding, the terms of
the reoffering and related matters to the extent required by the applicable
form, not later than the first use, authorized by the issuer after the opening
of bids, of a prospectus relating to the securities offered at competitive
bidding, unless no further public offering of such securities by the issuer and
no reoffering of such securities by the purchasers is proposed to be made.

(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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

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<PAGE>
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.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be filed on its behalf by the
undersigned, thereunto duly authorized in Delray Beach, Florida on December 16,
1997.

<TABLE>
<S> <C> <C>
EMPIRE OF CAROLINA, INC.

By: /s/ STEVEN GELLER
------------------------------------------
Steven Geller,
CHIEF EXECUTIVE OFFICER
</TABLE>

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Empire of Carolina, Inc.,
hereby severally constitute and appoint Charles S. Holmes, Steven Geller and
Lawrence Geller, and each of them singly, our true and lawful attorneys, with
full power to them and each of them singly, to sign for us in our names in the
capacities indicated below, all pre-effective and post-effective amendments to
this Registration Statement, including any filings pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, and generally to do all things in our
names and on our behalf in such capacities to enable Empire of Carolina, Inc. to
comply with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ CHARLES S. HOLMES
- ------------------------------ December 16, 1997
Charles S. Holmes Chairman of the Board of
Directors

/s/ STEVEN GELLER
- ------------------------------ December 16, 1997
Steven Geller Chief Executive Officer
(Principal Executive
Officer), Director

/s/ JAMES PINTO
- ------------------------------ December 16, 1997
James Pinto Director

/s/ WILLIAM CRAIG
- ------------------------------ December 16, 1997
William Craig Executive Vice
President--Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>

II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ LENORE SCHUPAK
- ------------------------------ December 16, 1997
Lenore Schupak Director

/s/ JOHN DORAN
- ------------------------------ December 16, 1997
John Doran Director
</TABLE>

II-6