<PAGE>
[LOGO]
TO OUR SHAREHOLDERS
Up until April of this year, I never thought I would be involved with a
toy business. Now, not only have I become a significant shareholder in our
company but the Chairman of it's Board. The decision by EDT Toys, LLC to
cancel their proposed investment has created what I've found to be a
wonderful opportunity for all of us as shareholders. Nothing that I have
seen, either in my due diligence or since my investment, has indicated any
reason why we will not be successful in returning Empire to profitability.
The beginning of the second quarter of 1997 was a turbulent time. The
Company was reeling from the shock of the revocation of the EDT Toys, LLC
transaction and continual poor performance. The Company needed new financial
support. Our introduction through HPA Associates, LLC, lead investor of the
$16 million transaction, and the addition of William H. Craig as the
Executive Vice President of Finance, an individual with whom I have had the
pleasure of being associated for many years, helped spearhead our financial
involvement and provided the nucleus for this support.
The Company's $15 million of convertible debt was exchanged for a new
non-voting convertible preferred stock, which does not carry a dividend. We
are working with the Company's lenders to amended our Senior Loan Agreement
to provide for the continuation of its three year $75 million facility, and
we are encouraged by our discussions to date. In all, the Company's balance
sheet went from negative shareholder equity to a positive $28 million today.
I am also pleased that our cash flow for the second quarter was strongly
positive. This positive position was partially provided by over $8 million in
annual expense savings and an excellent control of cash expenditures by our
financial staff. As a result of these measures we trust that the Company will
be cash and operationally profitable for the balance of the year.
As stated in our press releases, HPA, in combination with other
investors, is raising an additional $5 million. Subject to your approval at
the September 25 annual meeting, these funds will be used to purchase
additional Company securities on the same terms as the initial $16 million
investment. The willingness of these investors to increase their investment
demonstrates their belief in the Company, a belief that we hope will soon be
shared by all of you. We ask all of you to vote in favor of this proposal.
We owe a great measure of thanks to our lenders customers, vendors and
employees for their perseverance and friendship throughout these turbulent
times. I hope that the relationship we have forged will now bring a future
harvest of lasting prosperity. I now welcome this challenge and look forward
to our continued success.
Very truly yours,
/s/ Charles S. Holmes
Charles S. Holmes
Chairman of the Board
EMPIRE of Carolina, Inc. 5150 Linton Blvd., Delray Beach, FL 33484
Ph: 561.498.4000 Fx: 561.498.2400
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EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1997 1996 1997 1996
----------- ------------- ----------- ------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
NET SALES $ 27,616 $ 33,422 $ 53,302 $ 55,608
Sales Distribution Settlement 2,400 -- 2,400 --
Capitalized negative variances -- -- -- 1,600
COST OF SALES 22,273 25,907 44,151 43,724
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GROSS PROFIT 7,743 7,515 11,551 13,484
RESERVE REVERSALS -- -- -- (800)
SELLING AND ADMINISTRATIVE EXPENSE 6,732 8,268 13,225 16,366
--------- --------- --------- ---------
OPERATING INCOME/(LOSS) 1,011 (753) (1,674) (2,082)
INTEREST EXPENSE (2,081) (2,299) (4,087) (4,418)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (1,070) (3,052) (5,761) (6,500)
INCOME TAX BENEFIT 309 1,352 1,749 2,644
--------- --------- --------- ---------
NET LOSS $ (761) $ (1,700) $ (4,012) $ (3,856)
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EBITDA $ 3,367 $ 1,551 $ 3,038 $ 2,496
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LOSS PER COMMON SHARE -
Primary and fully diluted $ (0.10) $ (0.32) $ (0.54) $ (0.73)
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Weighted average number of common shares
outstanding - primary and fully diluted 7,439 5,321 7,422 5,261
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</TABLE>
