<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Preliminary Copies
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EMPIRE OF CAROLINA, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / $125 per Exchange Act Rules 0-11(c)(i)(ii), 14a-6(i)(1), 14a-6(i)(2)
or item 22(a)(2) of Schedule 14A.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
6,153,846
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (Set forth the amount on which the
filing fee is calculated and state how it was determined): The filing
fee of $1,478.00 represents 1/50 of 1% of the sum of (a) $7,138,461,
which amount is the value of the securities to be issued by the
registrant as consideration in the transaction (as calculated by
multiplying the average of the high and low prices of the registrant's
common stock on April 15, 1998 by the number of shares to be issued --
$1.16 x 6,153,846 = $7,138,461) and (b) $250,000, the fee paid in
connection with the transfer of certain licenses.
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$7,388,461.36
-----------------------------------------------------------------------
(5) Total fee paid:
$1,478.00
-----------------------------------------------------------------------
/ / Fee previously paid with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
EMPIRE OF CAROLINA, INC.
5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 20, 1998
---------------------
To the Stockholders of
EMPIRE OF CAROLINA, INC.:
You are cordially invited to attend the Annual Meeting of the Stockholders
(the "Annual Meeting") of Empire of Carolina, Inc. (together with its
subsidiaries, the "Company"), which will be held at Chase Conference Center, 270
Park Avenue, 11th Floor, Room A, New York, New York on May 20, 1998, at 10:30
a.m., local time, for:
(1) The holders of Series A Preferred Stock (the "Series A Holders") to
elect two members to the Board of Directors and the Series A Holders and
the holders of Common Stock (the "Common Holders", and collectively with
the Series A Holders, the "Voting Holders"), voting together, to elect
four members to the Board, all such persons being elected to hold office
for a one-year term and until their respective successors are duly
elected and qualified.
(2) The Voting Holders to consider and act upon a proposal to approve the
adoption of the 1998 Stock Option Plan pursuant to which an aggregate of
2,000,000 shares of Common Stock will be available for grant.
(3) The Voting Holders to consider and act upon a proposal to issue
5,000,000 shares of the Company's Common Stock, subject to increase under
certain circumstances by up to 1,153,864 shares, pursuant to the terms of
that certain Share Purchase Agreement, dated as of April 10, 1998 between
the Company and the Shareholders of Apple Sports, Inc. and Apple Golf
Shoes, Inc. (together the "Apple Companies") pursuant to which the
Company will acquire all of the outstanding capital stock of the Apple
Companies in consideration for such issuance of Common Stock and grant a
right to the existing shareholders of the Apple Companies to require the
Company, under certain circumstances, to repurchase up to an aggregate of
500,000 of the shares of Common Stock so issued, as further described
herein under "Proposal 3".
(4) The Voting Holders to ratify the appointment of Deloitte & Touche LLP as
the Company's independent auditors for the fiscal year ending December
31, 1998.
(5) The Voting Holders to transact such other business as may properly come
before the Annual Meeting or any adjournments thereof.
Only holders of record of Common Stock and Series A Preferred Stock at the
close of business on April 15, 1998, will be entitled to notice of, and to vote
at, the Annual Meeting or any adjournments or postponements thereof. A list of
stockholders entitled to vote at the Annual Meeting will be open to examination
by any stockholder, for any purpose germane to the meeting, at the offices of
Sonnenschein Nath & Rosenthal, 1221 Avenue of the Americas, 24th Floor, New
York, New York 10020 during ordinary business hours for ten days prior to the
Annual Meeting. Such list shall also be available during the Annual Meeting. A
copy of the Annual Report of the Company for the fiscal year ended December 31,
1997 is enclosed herewith.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR
NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY CARDS AND RETURN IT WITHOUT DELAY IN THE ENCLOSED
POSTAGE PREPAID ENVELOPE. YOUR PROXY WILL NOT BE USED IF YOU ARE PRESENT AND
PREFER TO VOTE IN PERSON OR IF YOU REVOKE THE PROXY.
By order of the Board of Directors,
- --------------------------------------------------------------------------------
Lawrence Geller, SECRETARY
April 29, 1998
Delray Beach, Florida
<PAGE>
EMPIRE OF CAROLINA, INC.
5150 LINTON BOULEVARD
DELRAY BEACH, FLORIDA 33484
------------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF STOCKHOLDERS
MAY 20, 1998
------------------------
SOLICITATION AND REVOCATION OF PROXIES
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board") of Empire of Carolina, Inc., a
Delaware corporation (the "Company" or "Empire"), for use at the Annual Meeting
of Stockholders of the Company and for any adjournments or postponements thereof
(the "Annual Meeting"), to be held at Chase Conference Center, 270 Park Avenue,
11th Floor, Room A, New York, New York on May 20, 1998, at 10:30 a.m., local
time, for the purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders. A proxy (the "Proxy") for the Annual Meeting is enclosed, by means
of which you may indicate your votes as to the proposals described in this Proxy
Statement as to which your Proxy is being solicited. This Proxy Statement and
the accompanying Notice of Annual Meeting of Stockholders, the applicable Proxy,
and the Annual Report to Stockholders for the fiscal year ended December 31,
1997 are first being mailed to stockholders on or about April 29, 1998.
Proxies are being solicited hereby from the holders (the "Series A Holders")
of the Company's Series A Preferred Stock, par value $.01 per share ("Series A
Preferred Stock"), as to Proposal 1 with respect to the election of two of the
six director nominees. Proxies are being solicited hereby from the holders (the
"Common Holders") of the Company's Common Stock, par value $.01 per share
("Common Stock") and the Series A Holders (collectively with the Common Holders,
the "Voting Holders"), with respect to the election of four of the nominees for
the Board pursuant to Proposal 1. Proxies are being solicited hereby from the
Voting Holders with respect to Proposals 2 through 4.
Because of these circumstances, separate forms of proxy are applicable to
the Series A Holders and the Common Holders. To the extent that any Voting
Holder owns both Series A Preferred Stock and Common Stock, such stockholder
will receive two separate proxy cards, and must complete and return BOTH of such
proxies in order to ensure that the voting power represented by both the Series
A Preferred Stock and Common Stock held by such person are voted by proxies.
IN THE ABSENCE OF CONTRARY INSTRUCTIONS, SHARES REPRESENTED BY ANY PROXY
WILL BE VOTED FOR THE ELECTION OF THE APPLICABLE NOMINEES LISTED IN PROPOSAL 1
AND FOR ALL OF THE OTHER PROPOSALS AS TO WHICH SUCH PROXY APPLIES. All Proxies
which are properly completed, signed and returned to the Company prior to the
Annual Meeting, and which have not been revoked, will be voted in accordance
with the stockholder's instructions contained in such Proxy. A stockholder may
revoke his Proxy at any time before it is exercised by filing with the Secretary
of the Company at its executive offices in Delray Beach, Florida, either a
written notice of revocation or a duly executed Proxy bearing a later date, or
by appearing in person at the Annual Meeting and expressing a desire to vote his
or her shares in person.
The entire cost of preparing, assembling, printing and mailing this Proxy
Statement, the enclosed Proxy and other materials, and the cost of soliciting
Proxies with respect to the Annual Meeting, will be borne by the Company. The
Company will request banks and brokers to solicit their customers who
beneficially own shares listed of record in names of nominees, and will
reimburse those banks and brokers for the reasonable out-of-pocket expenses of
such solicitations. The original solicitation of Proxies by mail
<PAGE>
may be supplemented by telephone, facsimile, telegram and personal contacts by
officers and other regular employees of the Company, but no additional
compensation will be paid to such individuals. The Company has retained, at its
expense, Shareholder Communications Corporation ("SCC"), a proxy solicitation
firm, to assist with proxy soliciting activities to obtain stockholder approval
of the proposals set forth in this proxy statement. Stockholders' votes may be
taken by telephone by a representative of SCC, subject to procedures designed to
authenticate stockholders' identities and confirm voting instructions. SCC will
receive a fee of $7,500 for its services plus reasonable expenses actually
incurred, not to exceed $5,000.
VOTING RIGHTS AND VOTING SECURITIES OUTSTANDING
The Company has fixed April 15, 1998 as the record date (the "Record Date")
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting or any adjournments or postponements thereof. As of the Record
Date, the Company had outstanding 7,848,761 shares of Common Stock and 2,100,000
shares of Series A Preferred Stock, the only outstanding voting securities of
the Company. In addition, as of the Record Date, the Company had outstanding
1460.9607 shares of its Series C Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock") which is non-voting except as expressly provided by
law or the Company's Certificate of Designation for the Series C Preferred
Stock.
With respect to the election of two of the directors pursuant to Proposal 1
for which the holders of Series A Preferred Stock vote separately, each holder
of Series A Preferred Stock is entitled to one vote for each share held. With
respect to such proposal, holders of 50% of the outstanding shares of Series A
Preferred Stock shall constitute a quorum. With respect to all other matters,
each Series A Holder is entitled to eight votes for each share of Series A
Preferred Stock held, each Common Holder is entitled to one vote for each share
of Common Stock held. In the event a quorum is not present at the Annual
Meeting, it is expected such meeting will be adjourned or postponed to solicit
additional proxies. The persons named as proxies by a stockholder may propose
and vote for one or more adjournments or postponements of the Annual Meeting,
including without limitation, to permit further solicitation of proxies in favor
of any proposal; provided, however, that no proxy that is voted against any of
Proposals 2, 3 or 4 will be voted in favor of any such adjournment or
postponement.
With respect to the election of four directors pursuant to Proposal 1, and
with respect to Proposals 2, 3 and 4, holders of shares of Series A Preferred
Stock and Common Stock representing a majority of the votes represented by all
outstanding shares of Series A Preferred Stock and Common Stock shall constitute
a quorum. With respect to Proposals 2, 3 and 4, the affirmative vote by holders
of Series A Preferred Stock and Common Stock representing a majority of the
voting power of all shares of Series A Preferred Stock and Common Stock present,
in person or by proxy, and entitled to vote at the Annual Meeting is required
for approval of the proposal. With respect to Proposal 1, the holders of Common
Stock and Series A Preferred Stock do not have cumulative voting rights, which
means (a) the directors to be elected by the Series A Holders voting alone will
be elected by the vote of the holders of a plurality of the shares of Series A
Preferred present, in person or by proxy, and entitled to vote at the Annual
Meeting and (b) the other directors to be elected will be elected by the vote of
the Series A Holders and Common Holders representing a plurality of the voting
power of all shares of Series A Preferred Stock and Common Stock held by holders
present in person or by proxy and entitled to vote at the Annual Meeting.
Abstentions and broker non-votes are counted for the purposes of determining
the presence or absence of a quorum for the transaction of business. Abstentions
and broker non-votes will have no effect upon the outcome of Proposal 1. As to
Proposals 2, 3 and 4, abstentions have the effect of votes against the Proposals
and broker non-votes will have no effect upon the outcome of the Proposals.
A list of stockholders entitled to vote at the Annual Meeting will be open
to examination by any stockholder, for any purpose germane to the meeting, at
the offices of Sonnenschein Nath & Rosenthal,
2
<PAGE>
1221 Avenue of the America, 24th Floor, New York, New York 10020, during
ordinary business hours for ten days prior to the Annual Meeting. Such list also
shall be available at the Annual Meeting.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Record Date, 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 Series C
Preferred Stock by (i) each person known by the Company to be the owner of more
than 5% of the outstanding Common Stock, (ii) each Director and nominee for
election as a director, (iii) each executive officer named in the Summary
Compensation Table, (iv) Timothy Moran, who became President and Chief Operating
Officer of the Company effective February, 1998 and who is President, Chief
Operating Officer and a significant stockholder of the Apple Companies (see
Proposal 3) and (v) all current directors and executive officers as a group:
<TABLE>
<CAPTION>
SERIES A SERIES C
NAME AND ADDRESS COMMON STOCK PREFERRED PREFERRED FULLY DILUTED
OF BENEFICIAL OWNER(1) OWNERSHIP(2) STOCK(3) STOCK(4) OWNERSHIP(5)
- ---------------------------------------------------------------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
William H. Craig(6)............................................. 35,000 0 0 *
*
Jeffrey L. Currier.............................................. 0 0 0 0
John J. Doran(7)................................................ 90,000 10,000 0 *
1.13% *
Steven E. Geller(8)............................................. 1,184,167 0 0 2.69%
14.62%
Charles S. Holmes(9)............................................ 3,843,752 135,000 0 8.75%
32.87% 6.43%
Timothy Moran(10)............................................... 533,333 50,000 0 1.21%
6.36% 2.38%
James J. Pinto(11).............................................. 3,451,752 110,000 0 7.85%
30.50% 5.24%
J. Artie Rogers(12)............................................. 20,000 0 0 *
*
Frederick W. Rosenbauer, Jr..................................... 0 0 0 0
Lenore H. Schupak(13)........................................... 214,167 22,500 0 *
2.66% 1.07%
Marvin Smollar.................................................. 0 0 0 0
All Current Directors and Executive Officers As
A Group (10 persons) (6)(7)(8)(9)(10)(11)(12)(13)(14)........... 9,472,171 327,500 0 21.56%
57.43% 15.60%
OTHER 5% STOCKHOLDERS
WPG Corporate Development Associates IV, L.P.(15)............... 6,707,474 0 1,174 15.26%
One New York Plaza 48.61% 80.36%
New York, New York 10004
J. Richard Messina(16).......................................... 3,379,742 250,000 0 7.69%
745 Fifth Avenue 30.10% 11.90%
New York, New York 10151
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SERIES A SERIES C
NAME AND ADDRESS COMMON STOCK PREFERRED PREFERRED FULLY DILUTED
OF BENEFICIAL OWNER(1) OWNERSHIP(2) STOCK(3) STOCK(4) OWNERSHIP(5)
- ---------------------------------------------------------------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
EMP Associates LLC(17).......................................... 3,266,988 250,000 0 7.43%
745 Fifth Avenue 29.39% 11.90%
New York, New York 10151
WPG Corporate Development Associates IV (Overseas), Ltd.(18).... 1,557,556 0 277 3.54%
One New York Plaza 16.87% 18.96%
New York, New York 10004
Topolobompo 13 Investment Co., Ltd.............................. 818,583 0 0 1.86%
CIDB Building, P.O. Box 208 10.43%
Avarua, Rarotonga, Cook Islands
Halco Industries, Inc.(19)...................................... 734,039 0 0 1.67%
441 South Federal Highway 9.35%
Deerfield Beach, FL 33441
Smedley Industries, Inc. Liquidating Trust...................... 666,467 0 0 1.52%
152 West 57th Street, Suite 4500 8.49%
New York, New York 10019
TelCom Partners L.P.(20)........................................ 562,500 62,500 0 1.28%
235 Sunrise Avenue 6.69% 2.98%
Palm Beach, Florida 33480
Mark S. Rose(21)................................................ 475,000 50,000 0 1.08%
72 Clare Rose Blvd 5.75% 2.38%
Patchocue, NY 11772
Freeburn Ventures Ltd(22)....................................... 450,000 50,000 0 1.02%
30195 Chagrin Blvd 5.42% 2.38%
Pepper Pike, OH 44124
William Forman(23).............................................. 450,000 50,000 0 1.02%
c/o North Atlantic Instruments 5.42% 2.38%
170 Wilbur Place
Bohemia, NY 11716
Dimensional Fund Advisors, Inc.(24)............................. 417,100 0 0 *
1299 Ocean Avenue, 11th Floor 5.31%
Santa Monica, CA 90401
</TABLE>
- ------------------------
* Less than 1%.
(1) Unless otherwise indicated, the business address of the persons and
entities named in the above table is care of Empire of Carolina, Inc., 5150
Linton Boulevard, Delray Beach, Florida 33484. Unless otherwise indicated,
each person has sole investment and voting power with respect to the shares
listed in the table, subject to community property laws, where applicable.
(2) For purposes of this column, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire within 60 days. For purposes of computing the
percentage of outstanding shares of Common Stock held by each person or
group of persons, any security which such person or group of persons has
the right to acquire within 60 days is deemed to be outstanding for the
purpose of computing the percentage ownership for such person or persons,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
4
<PAGE>
(3) Percentages are based solely upon the number of shares of Series A
Preferred Stock held as of the Record Date. As of the Record Date 2,100,000
shares of Series A Preferred Stock were outstanding. Each share of Series A
Preferred Stock has a stated value of $10 (the "Stated Value"). Each share
of Series A Preferred Stock is convertible at any time at the option of the
holder into Common Stock at a rate of one share of Common Stock for each
$1.25 of Stated Value of Series A Preferred Stock. Each share of Series A
Preferred Stock votes on all matters to be voted on by the Common Holders
on an as if converted basis.
(4) There are a total of 1,500 shares of Series C Preferred Stock authorized,
and, as of the Record Date, 1460.9607 of such shares were outstanding.
Holdings of Series C Preferred Stock have been rounded to the nearest whole
number in the chart. Each share of Series C Preferred Stock has a Stated
Value per share of $10,000 and is convertible at any time, at the option of
the holder thereof, into one share of Common Stock for every $2.00 of
Stated Value of Series C Preferred Stock. Except as otherwise expressly
provided by law or the Company's Certificate of Designation of the Series C
Preferred Stock or Bylaws, the Series C Preferred Stock is non-voting.
(5) On a fully diluted basis, as of April 15, 1998, a total of 43,940,876
shares of Common Stock would be outstanding. This amount is composed of (i)
the 7,848,761 shares of Common Stock outstanding on the Record Date, (ii)
the 16,800,000 shares of Common Stock issuable upon conversion of the
2,100,000 shares of Series A Preferred Stock outstanding on the Record
Date, (iii) the 10,200,000 shares of Common Stock issuable upon the
exercise of warrants issued in connection with the sale and issuance of the
Series A Preferred Stock, (iv) the 7,304,803 shares of Common Stock
issuable upon conversion of the 1460.9607 shares of Series C Preferred
Stock outstanding on the Record Date, (v) the 1,782,312 shares of Common
Stock issuable upon the exercise of options issued pursuant to the
Company's Amended and Restated 1994 Stock Option Plan (the "1994 Option
Plan") and outstanding on the Record Date (whether or not exercisable
within 60 days of the Record Date) and (vi) the 5,000 shares of Common
Stock issuable upon the exercise of options issued pursuant to the
Company's Non-Employee Stock Option Plan (the "Director Plan") and
outstanding as of the Record Date. The calculation does not include shares
(a) eligible for issuance but not subject to outstanding awards pursuant to
the 1994 Option Plan and the Director Plan or (b) eligible for issuance but
not actually issued pursuant to the Company's 1996 Employee Stock Purchase
Plan. The percentage represents the percentage of such total represented by
the shares of Common Stock owned by each such person as reflected in the
column of this table headed "Common Stock Ownership."
(6) Includes shares of Common Stock which Mr. Craig has the right to acquire
within sixty days pursuant to options granted under the 1994 Stock Option
Plan. Does not include 140,000 shares of Common Stock subject to options
issued to Mr. Craig pursuant to the 1994 Stock Option Plan which are not
exercisable within sixty days.
(7) Includes (a) 10,000 shares of Series A Preferred Stock which are
convertible into 80,000 shares of Common Stock and (b) 10,000 shares of
Common Stock issuable upon the exercise of warrants at an exercise price of
$1.375 per share. Mr. Doran became a director of the Company on November
13, 1997.
(8) Includes 734,039 shares of Common Stock with respect to which Steven Geller
holds voting power pursuant to the Halco Voting Agreement. Includes 250,000
shares of Common Stock which Steven Geller has a right to acquire within 60
days of the Record Date pursuant to options granted under the 1994 Option
Plan. Does not include 250,000 shares of Common Stock subject to options
granted to Mr. Geller pursuant to the 1994 Option Plan which are not
exercisable within 60 days of the Record Date. Mr. Geller directly owns
200,128 shares of Common Stock.
(9) Includes (a) 135,000 shares of Series A Preferred Stock which are
convertible into 1,080,000 shares of Common Stock and (b) 2,763,752 shares
of Common Stock issuable upon the exercise of warrants by Mr. Holmes at an
exercise price of $1.375 per share.
5
<PAGE>
(10) Includes (a) 50,000 shares of Series A Preferred Stock which Mr. Moran has
the right to convert into 400,000 shares of Common Stock, (b) 50,000
shares of Common Stock issuable upon the exercise of warrants at an
exercise price of $1.375 per share, and (c) options to purchase 83,333
shares pursuant to the 1994 Option Plan which are exercisable within 60
days of the Record Date. Mr. Moran is the President and Chief Operating
Officer of the Company and is the President of Apple Sports, Inc.
(11) Includes the securities held by Mr. Pinto, individually, and those held by
TelCom Partners, L.P., of which Mr. Pinto is the sole general partner (see
footnote 19 to this table), Churchill L.P. and Churchill Inc. (as
Churchill L.P.'s sole general partner (jointly, "Churchill"). Mr. Pinto
has the right to acquire 276,000 shares, TelCom has the right to acquire
500,000 shares and Churchill has the right to acquire 104,000 shares of
Common Stock at any time upon conversion of all or any portion of the
34,500, 62,500 and 13,000 shares of Series A Preferred Stock held
respectively by them. In addition, Mr. Pinto, TelCom and Churchill have
the respective rights, as owners of warrants, to acquire all or any
portion of 2,613,252, 62,500 and 13,000 shares of Common Stock at a price
of $1.375 per share at any time. Because of his ownership of and position
with respect to Churchill Inc., Mr. Pinto may be deemed to share
beneficial ownership of the Series A Preferred Stock and the Warrants held
by Churchill L.P. Accordingly, Mr. James Pinto has sole voting and/or
dispositive power over the equivalent of 3,451,752 shares of Common Stock
and shared voting and/or dispositive power over the equivalent of 117,000
shares of Common Stock, TelCom has sole voting and/or dispositive power
over the equivalent of 562,500 shares of Common Stock and Churchill L.P.
and Churchill Inc. each has sole voting and/or dispositive power over the
equivalent of 117,000 shares of Common Stock. With respect to Series A
Preferred Stock, Mr. James Pinto has sole and/or shared voting and
dispositive power over 110,000 shares (including TelCom's and Churchill
L.P's shares), TelCom has voting and dispositive power over 62,500 shares,
and Churchill L.P. and Churchill Inc. each has voting and dispositive
power over 13,000 shares. Mr. James Pinto has shared power with Mr. John
Pinto to vote and dispose of the Series A Preferred Stock and Warrants
held by Churchill L.P., acting through Churchill Inc., as general partner.
(12) Includes shares of Common Stock which Mr. Rogers has the right to acquire
within sixty days pursuant to options granted under the 1994 Option Plan.
Does not include 20,000 shares of Common Stock subject to options issued
to Mr. Rogers pursuant to the 1994 Option Plan which are not exercisable
within 60 days of the Record Date.
(13) Includes (a) 10,000 shares of Common Stock, (b) 22,500 shares of Series A
Preferred Stock which are convertible into 180,000 shares of Common Stock,
(c) 22,500 shares of Common Stock issuable upon the exercise of warrants
at an exercise price of $1.375 per share and (d) 1,667 shares of Common
Stock which Ms. Schupak has the right to acquire within sixty days
pursuant to options granted under the 1996 Non-Employee Directors Option
Plan. Does not include 3,333 shares subject to options issued to Ms.
Schupak which are not exercisable within sixty days. Ms. Schupak became a
director of the Company in May, 1997.
(14) Also includes options to purchase 100,000 shares issued to an executive
officer not named in this table pursuant to the 1994 Option Plan which are
exercisable within 60 days of the Record Date. Excludes 100,000 shares of
Common Stock subject to options issued to an executive officer not named
in this table pursuant to the 1994 Option Plan which are not so
exercisable.
(15) Voting and dispositive powers are exercised through its sole general
partner, WPG Private Equity Partners, L.P. Voting and dispositive powers
of WPG Private Equity Partners, L.P., which does not directly own any
shares of Common Stock, are exercised through its managing general
partner, Wesley W. Lang, Jr. Includes (a) 717,095 shares of Common Stock
which WPG Corporate Development Associates IV, L.P. holds directly, (b)
1,148.4396 shares of Series C Preferred Stock which are currently
convertible into 5,742,198 shares of Common Stock; (c) 39,648 shares of
Common Stock owned in the aggregate by certain affiliates of WPG, (d)
25.5924 shares of Series C Preferred Stock owned in the aggregate by such
affiliates of WPG which are convertible into 127,962 shares of Common
Stock, and (e) warrants held by WPG Corporate Development Associates IV,
L.P. to
6
<PAGE>
purchase an additional 80,571 shares of Common Stock at an exercise price
of $7.50 per share which were received as consideration for agreeing to
provide certain managerial services to the Company for the period ending
December 31, 1995.
(16) Mr. Messina is the sole member of EMP Management LLC, and accordingly has
the power to direct the voting and disposition of the securities held by
EMP Associates LLC (see footnote 20 to this table). In addition, Mr.
Messina is the sole shareholder, director and executive officer of
Pellinore Securities Corp. which owns warrants to purchase 112,754 shares
of Common Stock at an exercise price of $1.375 per share. Mr. Messina does
not directly own any shares of Common Stock.
(17) Represents (a) 250,000 shares of Series A Preferred Stock which are
convertible into 2,000,000 shares of Common Stock and (b) 1,266,988 shares
of Common Stock issuable upon the exercise of warrants at an exercise
price of $1.375 per share. EMP Management LLC is the managing member of
EMP Associates LLC and has the power to direct the voting and disposition
of all such securities.
(18) Voting and dispositive powers may be deemed to be shared with its two
general partners, WPG Private Equity Partners (Overseas), L.P. and WPG CDA
IV (Overseas), Ltd. Wesley W. Lang, Jr. serves as managing general partner
of WPG Private Equity Partners (Overseas), L.P. and as a director of WPG
CDA IV (Overseas), Ltd. Includes 277 shares of Series C Preferred Stock
which are currently convertible into 1,384,643 shares of Common Stock. WPG
Corporate Development Associates IV (Overseas), Ltd. currently holds
172,913 shares of Common Stock directly.
(19) All of these shares are directly owned by Halco Industries, Inc.
("Halco"). Voting power with respect to these shares is held by Steven
Geller pursuant to the Halco Voting Agreement. Maurice A. Halperin is the
indirect owner of the shares owned by Halco and shares investment power
with respect to the shares of Common Stock owned by Halco. Maurice A.
Halperin does not directly own any shares of Common Stock. Barry S.
Halperin, as the owner of substantially all of the shares of common stock
of Halco, is the indirect owner of the shares of Common Stock owned by
Halco and shares investment power with respect to the shares of Common
Stock owned by Halco. Barry S. Halperin does not directly own any shares
of Common Stock.
(20) Represents (a) 62,500 shares of Series A Preferred Stock which TelCom has
the right to convert into 500,000 shares of Common Stock and (b) 62,500
shares of Common Stock issuable upon the exercise of warrants at an
exercise price of $1.375 per share. (See Footnote 10 to this table.)
(21) Represents (a) 50,000 shares of Series A Preferred Stock which are
convertible into 400,000 shares of Common Stock and (b) 50,000 shares of
Common Stock issuable upon the exercise of warrants at an exercise price
of $1.375 per share. Mr. Rose directly owns 25,000 shares of Common Stock.
Mr. Rose is a majority stockholder of the Apple Companies. See "Proposal
3;" and "Certain Relationships and Transactions"
(22) Represents (a) 50,000 shares of Series A Preferred Stock which Freeburn
has the right to convert into 400,000 shares of Common Stock and (b)
50,000 shares of Common Stock issuable upon the exercise of Warrants at an
exercise price of $1.375 per share.
(23) Represents (a) 50,000 shares of Series A Preferred Stock which Mr. Forman
has the right to convert into 400,000 shares of Common Stock and (b)
50,000 shares of Common Stock issuable upon the exercise of warrants at an
exercise price of $1.375 per share.
(24) Dimensional Fund Advisors, Inc. ("Dimensional") disclaims beneficial
ownership of all such shares. Dimensional, a registered investment
advisor, is deemed to have beneficial ownership of 417,100 shares of
Common Stock as of December 31, 1997, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in a series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and the DFA Participating
Group Trust, investment vehicles for qualified employee benefit plans, for
all of which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional has sole voting power over 282,250 shares and sole dispositive
power over 417,100 shares.
7
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The Board has nominated Charles S. Holmes, Steven E. Geller, Frederick W.
Rosenbauer, John J. Doran, Lenore H. Schupak and James J. Pinto for election as
directors at the Annual Meeting to hold office for a one-year term and until
their successors are duly elected and qualified. Each of the nominees currently
serves as a Director.
Pursuant to the Certificate of Designation filed by the Company with respect
to the Series A Preferred Stock, two board members are to be elected by the
holders of Series A Preferred Stock, voting alone (the "Preferred Directors"),
with the remaining directors ("Other Directors") to be elected by the holders of
Common Stock and Series A Preferred Stock voting together as a class. The
nominees for directors are as follows:
<TABLE>
<CAPTION>
PREFERRED DIRECTOR
NOMINEES OTHER DIRECTOR NOMINEES
- -------------------------- --------------------------------
<S> <C> <C>
Charles S. Holmes Steven E. Geller
James J. Pinto Frederick W. Rosenbauer, Jr.
John J. Doran
Lenore H. Schupak
</TABLE>
Proxies will be solicited from the Common Holders with respect to the
election of Messrs. Geller, Rosenbauer and Doran and Ms. Schupak. Proxies will
be solicited from the Series A Holders with respect to all six nominees.
The voting persons named in the enclosed Proxy intend to nominate and vote
in favor of the election of each of the persons named below unless authorization
is withheld. If any of the nominees becomes unavailable for election, votes will
be cast for the election of such other person or persons as the proxy holders,
in their judgment, may designate. Management has no reason to believe that any
of the nominees will not be a candidate or will be unable to serve.
Set forth below is certain information as of the Record Date concerning each
nominee, including his or her age, present principal occupation and business
experience during the past five years and the period he or she has served as a
director.
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
- ------------------------------ --- -----------------------
<S> <C> <C>
Charles S. Holmes............. 53 May, 1997
Steven E. Geller.............. 57 September, 1994
Frederick W. Rosenbauer, 63 February, 1998
Jr. ........................
John J. Doran................. 48 November, 1997
James J. Pinto................ 48 September, 1997
Lenore H. Schupak............. 44 May, 1997
</TABLE>
CHARLES S. HOLMES has served as a director of the Company since May, 1997
and as Chairman of the Board since June, 1997. Since 1991, Mr. Holmes has served
as principal and is the sole stockholder of Asset Management Associates of New
York, Inc. ("Asset Management"), a New York-based firm specializing in
acquisitions of manufacturing businesses. Mr. Holmes founded and was a partner
in Asset Management Associates, a predecessor partnership of Asset Management,
from 1978 to 1991. Mr. Holmes also is a principal stockholder and serves on the
Board of Directors of NAI Technologies, Inc., a company whose common stock is
traded on the Nasdaq Stock Market. Mr. Holmes has been a principal of HPA
Associates L.L.C. ("HPA") since October, 1996. See "Certain Relationships and
Transactions."
8
<PAGE>
STEVEN E. GELLER has 35 years' experience in the toy industry. Mr. Geller
has served as Chief Executive Officer of the Company since September, 1994, and
as Chairman of the Board and Chief Executive Officer of Empire Industries, Inc.
("EII"), the principal operating subsidiary of the Company, since July 1994.
From September, 1994 to June, 1997, Mr. Geller served as Chairman of the Board
of the Company. Prior to joining the Company, Mr. Geller served as President of
Arco Toys, Inc., a wholly owned subsidiary of Mattel from December, 1986 through
December, 1991 and as a consultant for Mattel from January 1991 through December
1993. From January, 1994 to July, 1994, Mr. Geller was self-employed, engaged in
structuring, negotiating and financing the acquisition of the Company. See
"Certain Relationships and Transactions."
FREDERICK W. ROSENBAUER, JR. has served as a director of the Company since
February, 1998. Since 1988, Mr. Rosenbauer has been employed by the United
States Trust Company of New York, as Vice President in the private banking
division. Since 1970, Mr. Rosenbauer has worked in the banking industry with
three different institutions.
JOHN J. DORAN. has served as a director of the Company since November, 1997.
He is President of Citizens Medical Corporation, a pharmacy benefit management
company. Mr. Doran is a director of Sandwich Cooperative Bank and Wedgestone
Financial.
LENORE H. SCHUPAK has served as a director of the Company since May, 1997.
Since 1990, Ms. Schupak has been President and principal owner of LHS
Environmental Management Inc., a New Jersey based company which provides
environmental management consulting services in North America and Europe. From
1979 to 1989, she was an executive with American Standard, Inc., most recently
serving as Corporate Director, Environmental Technology. Prior to that time, Ms.
Schupak was employed from 1977 to 1979 as an environmental engineer for General
Motors Corporation and from 1974 to 1977 as a development engineer for Carrier
Corp. See "Certain Relationships and Transactions."
JAMES J. PINTO has served as a director of the Company since September,
1997. Since 1990, Mr. Pinto has been the President of the Private Finance Group,
Corp., a merchant banking company, and has been a principal of HPA since
October, 1996. Mr. Pinto is a director of the following publicly traded
companies: Anderson Group, Inc. (an electronics manufacturer); Biscayne
Holdings, Inc. (an apparel manufacturer); and National Capital Management Corp.
(a specialty finance company). See "Certain Relationships and Transactions."
BOARD OF DIRECTORS
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board has established three committees: an Executive Committee, a
Compensation Committee and an Audit Committee. Each such committee has two or
more members, who serve at the pleasure of the Board.
The Board met 18 times and acted by written consent 4 times during 1997. The
Compensation Committee met 5 times, the Audit Committee did not meet and the
Executive Committee met 3 times during 1997. Although the Audit Committee did
not meet in 1997, it has met once since the last Annual Meeting of Stockholders.
All incumbent members of the Board attended at least 75% of the meetings of the
Board and each of the committees on which he or she served during the period in
which he or she was a director in 1997.
The Executive Committee is authorized to exercise all of the authority of
the Board that may be delegated to a committee of the Board under Delaware law,
(which excludes the authority to authorize dividends and other distributions, to
fill vacancies on the Board or its committees, to amend, adopt or repeal
certificate of incorporation or by-law provisions, to approve mergers or matters
requiring stockholder approval, or (except within certain prescribed limits) to
authorize or approve the issuance or reacquisition of shares and related
matters.) At the beginning of 1997 the Executive Committee consisted
9
<PAGE>
of Mr. Geller, and two former directors, Eugene Matalene and Steven Hutchinson.
Mr. Matalene resigned solely from the Executive Committee on January 20, 1997.
On May 13, 1997, the Executive Committee was reconstituted to consist of Messrs.
Geller and Holmes. Mr. Pinto was appointed to the Executive Committee on March
15, 1998. Currently, Messrs. Holmes, Geller and Pinto serve on the Executive
Committee.
The Compensation Committee is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Company's
equity benefit plans. In January, 1997 the Compensation Committee consisted of
Messrs. Hutchinson and Matalene. On May 13, 1997, the Compensation Committee was
reconstituted to consist of Mr. Hutchinson and Ms. Schupak. Upon Mr.
Hutchinson's resignation from the Board on November 12, 1997, he was replaced by
Mr. Doran on the Compensation Committee. Since March 15, 1998 Mr. Pinto and Ms.
Schupak have served on the Compensation Committee.
The Audit Committee is responsible for reviewing the Company's financial
statements, audit reports, internal financial controls and the services
performed by the Company's independent public accountants, and for making
recommendations with respect to those matters to the Board. In January, 1997 the
Audit Committee consisted of Mr. Matalene and another former director, Peter
Pfister. On May 13, 1997 the Committee was reconstituted to consist of Mr.
Matalene and Ms. Schupak. Mr. Matalene resigned from the Board on October 21,
1997 and was not immediately replaced on the Audit Committee. On November 13,
1997 Mr. Doran was appointed to the Committee. Since March 15, 1998, Messrs.
Doran, Rosenbauer and Pinto have served on the Audit Committee.
DIRECTORS' COMPENSATION
Prior to November 13, 1997, the Company agreed to pay each director who is
not an employee of the Company (each a "Non-Employee Director") a retainer of
$4,000 per quarter for serving on the Board. In addition, each Non-Employee
Director received up to 5,000 options to purchase Common Stock of the Company at
the first Annual Meeting of Shareholders after their election, and 2,500 options
each year thereafter pursuant to the Non-Employee Director Stock Option Plan.
On November 13, 1997 the Board approved a resolution that, effective as of
May 13, 1997, directors' annual fees shall be $15,000 per year, plus $2,500 for
each meeting of the Board or a committee attended in person. Mr. Pinto waived
all fees for 1997.
On February 19, 1998, the Board resolved that, effective March 15, 1998,
each Non-Employee Director shall receive $15,000 per year and $2,500 for each
Board meeting attended and $2,500 per year for each committee on which he or she
serves in addition to the option grants described above. All directors are
reimbursed for out-of-pocket expenses incurred in connection with attendance at
meetings of the Board or its committees. Charles S. Holmes does not receive any
directors' fees, however, he does receive $10,000 per month for serving as
Chairman of the Board of Directors. Mr. Holmes received $65,000 for such
services in 1997.
Directors who are officers or employees of the Company are not paid for
their service on the Board or its committees.
The Board of Directors recommends that the holders of Series A Preferred
Stock vote FOR the approval of the Preferred Director Nominees.
The Board of Directors recommends that the Voting Holders vote FOR the
approval of the other Director Nominees.
10
<PAGE>
PROPOSAL 2
APPROVAL OF THE 1998 STOCK OPTION PLAN
The Board of Directors of the Company has adopted the 1998 Stock Option Plan
(the "Stock Option Plan") effective April 15, 1998, subject to the approval of
stockholders. As of the date of this Proxy Statement, no grants have been made
pursuant to the Stock Option Plan, and it is not contemplated that any grants
will be made until after the Annual Meeting.
REASON FOR SEEKING STOCKHOLDER APPROVAL
Approval of the Stock Option Plan is necessary to permit income recognized
in connection with grants of options under the Plan to qualify as "performance
based" compensation for purposes of Section 162(m) of the Internal Revenue Code
(the "Code"). Under Section 162(m), the Company cannot claim a federal corporate
tax income deduction on compensation paid to its chief executive officer or any
of its four other most-highly compensated executive officers in excess of
$1,000,000 in any year, unless the compensation qualifies as
stockholder-approved "performance based" compensation.
SUMMARY OF THE PLAN
The principal terms and provisions of the Stock Option Plan are summarized
below. As a summary, the description below is not a complete description of all
of the terms of the Stock Option Plan. A copy of the Stock Option Plan is
attached hereto as Exhibit A and is hereby incorporated, in its entirety, by
reference thereto.
PURPOSE. The Company believes that the Stock Option Plan provides key
incentives for the Company to attract new employees, retain existing employees
and stimulate employees towards furthering the interests of both the Company and
shareholders alike. Specifically, the Company believes adoption of the Stock
Option Plan is beneficial because there are only 217,688 shares of stock
available for award under the 1994 Option Plan.
TYPES OF AWARDS. The Plan permits the granting of stock options, including
incentive stock options ("ISOs") and options other than ISOs ("non-qualified
options") to employees.
NUMBER OF SHARES. Subject to adjustment as described below, the number of
shares of Common Stock available under the Stock Option Plan is 2,000,000. The
number of shares for which options may be granted in any calendar year to any
employee may not exceed 500,000.
ELIGIBILITY. All employees of the Company and its subsidiaries
(approximately 500 persons) are eligible to be participants.
ADMINISTRATION. The Plan shall be administered by the Board, or a committee
appointed by the Board (the "Committee"). The Committee has the authority to
select employees to whom options are granted, to determine the types of options
and the number of shares covered and to set the terms, conditions and provisions
of such options. The Committee shall be authorized to interpret the Stock Option
Plan, to establish, amend, and rescind any rules and regulations relating to the
Stock Option Plan, to determine and amend the terms of option agreements entered
into with employees, and to make all other determinations which may be necessary
or advisable for the administration of the Stock Option Plan.
POWER TO AMEND PLAN. The Board may amend or terminate the Plan at any time
without the approval of the stockholders of the Company, except (i) as such
stockholder approval may be required by stock exchange listing requirements, and
(ii) that no amendment shall be made without stockholder approval which shall
increase the total number of shares available for issuance pursuant to the Stock
Option Plan.
STOCK OPTIONS. The exercise price per share of Common Stock purchasable
under any stock option will be determined by the Committee, but cannot in any
event be less than 100% of the fair market value of the Common Stock on the date
the option is granted. For reference, the closing sale price reported for the
11
<PAGE>
Common Stock on the American Stock Exchange on April 15, 1998 was $1.25 per
share. The Committee shall determine the term of each stock option (subject to a
maximum of 10 years), and the time or times when it may be exercised. The grant
and the terms of ISOs shall be restricted to the extent required for
qualification as ISOs by the Code. Options may be exercised by payment of the
exercise price in (i) cash or (ii) pursuant to a "cashless exercise" through a
broker-dealer under an arrangement approved by the Company.
ADJUSTMENTS. In the event of any change affecting the shares of Common
Stock by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, or other corporate change, the Committee shall make
such substitution or adjustment in the aggregate number or class of shares which
may be distributed under the Plan, and in the number, class and option price of
shares subject to the outstanding awards granted under the Stock Option Plan as
it deems to be appropriate in order to maintain the purpose of the original
grant.
CHANGE OF CONTROL. The Committee may provide in connection with an option
grant or subsequent thereto special terms and conditions for the option which
apply in the event of a change of control (as defined by the Committee). This
provides the Committee broad discretion in responding to proxy contests, tender
offers, or other proposals (whether negotiated or hostile) regarding corporate
control or a sale of the Company (or a significant portion thereof) and provides
additional benefits to grantees in the event of the occurrence of any such
matter.
OTHER. The Stock Option Plan will terminate when there are no longer any
shares available thereunder. Awards may not be transferred other than by will or
intestate succession unless otherwise permitted by the Committee.
TAX ASPECTS OF THE STOCK OPTION PLAN
The following are the federal tax consequences generally arising under
present law with respect to options granted under the Stock Option Plan. The
grant of an option will create no tax consequences for a grantee or the Company.
The grantee will have no taxable income upon exercising an ISO (except that the
alternative minimum tax may apply), and the Company will receive no deduction
when an ISO is exercised. Upon exercising a non-qualified option, the optionee
must recognize ordinary income equal to the difference between the exercise
price and the fair market value of the stock on the date of the exercise; the
Company will be entitled to a deduction for the same amount, subject to the
possible applicability of the $1,000,000 compensation deductibility limit of
Section 162(m) of the Code. The treatment of a disposition of shares acquired
through the exercise of an option depends on how long the shares have been held
and on whether such shares were acquired by exercising an ISO or by exercising a
non-qualified option. Generally, there will be no tax consequence to the Company
in connection with a disposition of shares acquired by exercise of an option
except that the Company may be entitled to a deduction in the case of a
disposition of shares acquired by exercise of an ISO before the applicable ISO
holding periods have been satisfied.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE VOTING HOLDERS VOTE FOR THE
APPROVAL OF THE 1998 STOCK OPTION PLAN.
PROPOSAL 3
APPROVAL OF ACQUISITION
GENERAL
On April 10, 1998, the Company executed a definitive Share Purchase
Agreement (the "Share Purchase Agreement") with the shareholders of Apple
Sports, Inc. and the shareholders of Apple Golf Shoes, Inc. (collectively, the
"Apple Company Shareholders" and with respect to the companies, the "Apple
Companies") whereby the Company agreed to purchase from the Apple Company
Shareholders all of their capital stock representing all of the outstanding
capital stock of the Apple Companies (the
12
<PAGE>
"Acquisition"). If the Acquisition is consummated in accordance with the terms
of the Share Purchase Agreement described herein, the Company will issue to the
Apple Company Shareholders 5,000,000 shares of Common Stock (with an obligation
to issue up to an additional of 1,153,864 shares upon certain specified
circumstances), assume liability of which Management believes may be
approximately $5.3 million reimburse certain transfer and other fees of
approximately $325,000 and, under certain circumstances, issue an additional
1,153,864 shares of Common Stock.
Approval of the Acquisition by the stockholders of the Company is not
required by the General Corporation Law of the State of Delaware or by the
Company's Certificate of Incorporation or By-Laws, as amended. However, the
rules of the American Stock Exchange, Inc. (the "AMEX"), on which the Company's
Common Stock is listed for trading, require stockholder approval, as a
prerequisite to approval of applications to list additional shares to be issued
as sole or partial consideration for an acquisition of the stock of another
company in the following circumstances: (a) where the present or potential
issuance of common stock, or securities convertible into common stock, could
result in an increase in outstanding common shares of 20% or more; and (b) if
any individual director, officer or substantial shareholder of the listed
company has a 5% or greater interest (or such persons collectively have a 10% or
greater interest), directly or indirectly, in the company or assets to be
acquired or in the consideration to be paid in the transaction and the present
or potential issuance of common stock, or securities convertible into common
stock, could result in an increase in outstanding common shares of 5% or more.
Upon the issuance of the 5,000,000 shares of the Company's Common Stock as
consideration. Apple Company Shareholders will hold approximately 39% of the
outstanding shares of Common Stock. If the Company is required to issue the
additional 1,153,864 shares of Common Stock it would result in the Apple Company
Shareholders holding approximately 44% of the Company's outstanding shares (and
approximately 11% and 14% respectively on a fully diluted basis, assuming the
exercise of issued and outstanding options, the exercise of outstanding warrants
and the conversion of issued and outstanding preferred stock). In addition, Mr.
Moran the President and Chief Operating Officer of Empire, who is also the
President and Chief Operating Officer of the Apple Companies and a significant
shareholder of the Apple Companies, will receive at least one million shares of
the Company's Common Stock pursuant to the Acquisition.
FORWARD-LOOKING INFORMATION
This Proposal 3 contains certain forward-looking statements (within the
meaning of the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. When used in this Proposal 3, the words
"believe" and "intend" and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. A
number of important factors could cause the Company's and the Apple Companies'
actual results, performance or achievements for fiscal 1998 and beyond to differ
materially from those expressed in such forward-looking statements. These
factors include, without limitation, failure to achieve anticipated synergies,
charges and costs related to acquisitions, attraction and retention of key
personnel, general economic and business conditions and enhanced competition and
new competitors.
BACKGROUND OF THE ACQUISITION
In May, 1997, Timothy Moran, the President and Chief Operating Officer of
the Apple Companies was introduced to the Board of Directors of Empire ("Board")
and was recommended to the Board as a candidate to become President and Chief
Operating Officer of Empire. After discussion the Board determined to offer Mr.
Moran the position upon the completion of the sale of the Apple Companies to a
an unaffiliated third party. On May 13, 1997, the Board of Directors approved
the appointment of Mr. Moran as a consultant to Empire. Pursuant to the Board's
resolution, Mr. Moran was to become President and Chief Operating Officer of
Empire after the sale of the Apple Companies.
In the ensuing period, the Board determined that the acquisition of the
Apple Companies could partially offset the cyclical nature of the toy business
and expand the customer base, and proposed that Empire acquire the Apple
Companies. The parties negotiated the terms of the purchase through January,
13
<PAGE>
1998, and on February 11, 1998, Empire and the stockholders of the Apple
Companies signed a letter of intent proposing that Empire purchase the Apple
Companies upon the terms and conditions set forth therein. The purchase was made
contingent upon approval of Empire's Board of Directors and stockholders.
On February 19, 1998, Empire's Board of Directors ratified the signing of
the letter of intent, and authorized the officers of Empire to conduct a due
diligence investigation of the Apple Companies and to prepare and enter into a
definitive purchase agreement. Due diligence was conducted through April, 1998,
and the officers executed a definitive Share Purchase Agreement on April 10,
1998. On February 19, 1998, Mr. Moran became President and Chief Operating
Officer of Empire.
TERMS OF THE ACQUISITION
The description in this Proxy Statement of the terms and conditions of the
Acquisition and the Share Purchase Agreement are qualified in their entirety by
reference to the copy of the Share Purchase Agreement attached hereto as Exhibit
B, and hereby incorporated by reference thereto. Stockholders are encouraged to
read the Share Purchase Agreement in its entirety.
Under the terms of the Share Purchase Agreement, Empire will acquire all of
the issued and outstanding shares of capital stock of each of the Apple
Companies, for consideration equal to an aggregate of 5,000,000 shares of the
Company's Common Stock (the "Initial Payment Shares"), subject to increase as
described below. In the event that during the Adjustment Period (defined below)
the closing daily market price of the Company's Common Stock trading on the AMEX
or on any nationally recognized stock exchange (including The Nasdaq Stock
Market or the New York Stock Exchange) (an "Exchange") shall not be at a price
of $2.00 per share or higher for each of 45 consecutive stock trading days, then
Empire shall be obligated to pay additional consideration in the amount of
1,153,846 shares of Empire Common Stock (the "Additional Payment Shares"; and
together with the Initial Payment Shares, the "Payment Shares"), thereby
bringing the number of shares of Empire Common Stock paid for the Acquisition to
an aggregate of 6,153,846. For reference, the closing price per share of the
Common Stock on the AMEX on April 15, 1998 was $1.25 per share.
Within 90 days from the date of the issuance of any Payment Shares, Empire
shall cause to be filed and use its best efforts to have declared effective, a
registration statement (the "Registration Statement") under the Securities Act
of 1933, as amended, for an offering to be made on a delayed or continuous basis
permitting sales of the Payment Shares in dealer transactions or in any other
transfer for consideration not involving an underwritten public offering, and
Empire shall pay all expenses of registration in connection with the
Registration Statement.
The Adjustment Period is the period of time commencing on the first trading
date after the date on which the Registration Statement is declared effective by
the Securities and Exchange Commission and the Payment Shares in question are
deemed fully transferable on an Exchange (the "Effective Date") and ending on
the first calendar anniversary of the Effective Date; provided, however, that if
the Effective Date shall not have occurred within 90 days of the closing date of
the Acquisition (the "Closing Date"), the Adjustment Period shall mean a period
of 365 days commencing on the 91st day after the Closing Date.
If the Effective Date shall not have occurred on or prior to 90 days after
the Closing Date, the Apple Company Shareholders shall have the right (the "Put
Right") to require Empire to repurchase up to an aggregate of 500,000 of the
Payment Shares at a price of $2.00 per share for a total of $1,000,000. Any
exercise of the Put Right will reduce the number of Additional Payment Shares
issuable as consideration in the Acquisition by the percentage determined by
multiplying (x) 100 by (y) the quotient of the number of Payment Shares as to
which the Put Right are exercised divided by 500,000.
The consideration payable by Empire described above was determined in
arms'-length negotiation by the Board of Directors of Empire and the Apple
Company Shareholders. In determining the consideration, the Board of Directors
and Apple Company Shareholders considered, among other factors, the Apple
14
<PAGE>
Companies' history of growth and profitability, the growth potential of the golf
industry and the prospects of Empire and the Apple Companies on a combined
basis.
It is contemplated that the Closing will occur as soon as practicable after
the Annual Meeting, and upon satisfaction or waiver of all of the other
conditions set forth in the Share Purchase Agreement. The Closing is presently
anticipated to occur on May 28, 1998.
REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
In the Share Purchase Agreement, the Company and the Apple Company
Shareholders make certain representations and warranties to one another with
respect to certain customary matters, such as their respective organization,
their respective authority to enter into the Share Purchase Agreement and the
enforceability of the Share Purchase Agreement. In addition, the Apple Company
Shareholders make certain representation and warranties to the Company with
respect to, among other things, (i) the capitalization of the Apple Companies,
(ii) the Apple Companies' audited consolidated financial statements for the year
ended December 31, 1996 and the unaudited financial statements of the Apple
Companies for the year ended December 31, 1997, (iii) the absence of certain
changes in the business as of certain dates, (iv) product and warranty
liability, (v) environmental conditions with respect to the Apple Companies
properties and (vi) trademarks and other intellectual property rights. The
representation and warranty of the Apple Companies with respect to their
consolidated financial statements states that such financial statements fairly
present the financial condition, results of operations, and cash flows of the
Apple Companies as at the dates and for the periods indicated, in each case in
accordance with generally accepted accounting principles consistently applied.
Empire makes similar representation and warranties regarding its financial
statements. Most of these representations and warranties survive the Closing for
a period of 18 months. The Apple Company Shareholders agree to indemnify the
Company for any losses incurred relative to the breach of such stockholders
representations, warranties, covenants and agreements pursuant to the Agreement
(except certain tax liabilities). However, no claim may be submitted until the
aggregate amount to be paid on account of all such claims exceeds $50,000. The
maximum aggregate liability of the Apple Company Shareholders is $750,000 in the
absence of fraud.
CONDITIONS OF THE SHARE PURCHASE AGREEMENT
Conditions to the Closing include, but are not limited to, the following:
1. PERFORMANCE OF OBLIGATIONS. Each of Empire and the Apple Company
Shareholders shall have performed in all material respects their obligations
under the Share Purchase Agreement required to be performed by them on or prior
to the Closing Date.
2. STOCKHOLDER APPROVAL. The Share Purchase Agreement and the transactions
contemplated thereby shall have been approved and adopted by the requisite vote
of the holders of the outstanding shares of Empire capital stock. If the
stockholders of Empire fail to approve the Acquisition, the Acquisition will not
be consummated.
3. WILSON LICENSES. The existing licenses from Wilson Sporting Goods Co.
held by the Apple Companies shall have been extended and shall not terminate as
a result of the Acquisition.
4. REPLACEMENT OF LONG-TERM DEBT. Empire shall have obtained a new credit
facility replacing the existing obligations of the Apple Companies for borrowed
money in the approximate amount of $4.3 million so that the individual
guarantors of such borrowed money shall be fully released from liability and all
liens created to secure such borrowed money that affect the Apple Company
Shareholders shall be fully released.
5. INDEMNITY BOND. The Apple Company Shareholders shall have obtained a
non-cancelable bond indemnifying Empire for the full amount of damages claimed
under a certain lawsuit filed against Dorson Sports, Inc. (a wholly owned
subsidiary of Apple Sports) by Cigna Property and Casualty Insurance.
15
<PAGE>
TERMINATION OF THE MERGER AGREEMENT
The Share Purchase Agreement may be terminated prior to the Closing upon the
occurrence of certain events, including, but not limited to, the following:
1. By mutual consent of Empire and the Apple Company Shareholders.
2. By Empire or the Apple Company Shareholders if the Acquisition shall not
have been consummated as a result of the conditions precedent to their
respective obligations under the Share Purchase Agreement not having been
satisfied in all material respects through no fault of the terminating party on
or prior to May 31, 1998.
DILUTION OF EXISTING STOCKHOLDERS
The exchange of shares of Common Stock of the Company for shares of the
Apple Companies will cause substantial dilution to the voting power and
interests of current Empire stockholders. The issuance of the Payment Shares
pursuant to the Share Purchase Agreement may also adversely affect the market
price of the Company's securities. Based on the 7,848,761 shares of Empire
Common Stock outstanding as of April 15, 1998, the issuance of the Initial
Payment Shares and the Additional Payment Shares will equal approximately 39%
and 44% of the Common Stock outstanding respectively and approximately 11% and
14% respectively, on a fully diluted basis, assuming the exercise of issued and
outstanding options, the exercise of outstanding warrants and the conversion of
issued and outstanding preferred stock.
UNCERTAINTIES IN FUTURE CONSOLIDATED RESULTS
The Company and the Apple Companies each are enterprises with operations in
different markets. There can be no assurance that future consolidated results
will improve as a result of the Acquisition, or as to the timing or extent to
which cost savings and efficiencies anticipated by the Company will be achieved.
EMPIRE'S REASONS FOR THE ACQUISITION AND BOARD OF DIRECTOR'S RECOMMENDATION
The Board of Directors of Empire believes that the Acquisition is fair and
in the best financial interests of its stockholders because for the reasons
discussed below it will permit the stockholders to participate in a diversified
and more competitive Company. The Board recommends that Empire's stockholders
vote in favor of the proposal to issue the Payment Shares as consideration for
the acquisition of the Apple Companies (the "Issuance").
Through meetings and discussions with the stockholders of the Apple
Companies and their representatives, discussions with Empire's legal counsel and
auditors, and frequent consultations with the executive officers of Empire, the
Board considered the terms and structure of the deal and the legal, financial
and other ramifications of the proposed acquisition.
In reaching its decision to approve the Acquisition and to recommend the
issuance of the Payment Shares pursuant thereto to Empire's stockholders, the
Board considered a number of factors, including, without limitation, the
following:
1. The Apple Companies' history of growth and profitability;
2. The growth potential of the golf industry;
3. The potential offset to the toy industry cycles;
4. The financial condition of Empire;
5. The product synergies; and
6. The results of operations, financial condition, competitive positions
and prospects of Empire and the Apple Companies, both on an historical and
prospective basis.
The Board concluded, in light of these factors, that the acquisition is fair
to and in the best interests of Empire and its stockholders and approved the
Acquisition on February 19, 1998. The foregoing discussion
16
<PAGE>
of the information and factors considered by the Board of Directors in
determining that the Acquisition is fair and in the best interests of the
stockholders is not intended to be exhaustive, but is believed to include the
material factors considered by the Board of Directors in connection with its
evaluation of the Acquisition. THE BOARD OF DIRECTORS OF EMPIRE RECOMMENDS THAT
THE STOCKHOLDERS OF EMPIRE APPROVE THE ISSUANCE.
CONSOLIDATED BUSINESS OF APPLE SPORTS, INC. AND APPLE GOLF SHOES, INC.
Apple Sports, Inc. and Apple Golf Shoes, Inc. (together the "Apple
Companies") are privately held golf products companies engaged in the
development, marketing and sale of golf footware and golf related accessories.
Apple Sports, Inc. and Apple Golf Shoes, Inc. are the exclusive United
States licensees of golf accessory products and golf shoes for Wilson Sporting
Goods, one of the most recognized names in golf. The Apple Companies' broad
range of golf products include shoes, pull carts, gloves, head covers, spikes,
tees, umbrellas and many other accessory items. The Apple Companies also sell
golf accessories under the Dorson brand, which has been a recognized name in
golf accessories since the 1940s.
Apple Golf Shoes, Inc. offers a variety of golf related footware for men and
women. Its primary competitors are major footware manufacturing companies,
including Dexter, Etonic, Foot Joy and Nike. Apple Sports, Inc.'s competes with
other golf accessory companies, including Gold Eagle, Dennco, and Ajay Sports,
which sells products under license from Spalding.
Apple sources its products both domestically and overseas. The majority of
its products are manufactured in the Far East (principally China, Indonesia,
Thailand and Taiwan). Apple sells its products in the United States (90%) and
internationally. Customers include sporting goods chains (40%), mass
merchandisers (40%), pro shops and other golf product retailers (20%). The pro
shop accounts are managed by commissioned manufacturers' representatives,
whereas mass merchandisers and sporting goods chains are managed by Apple
Sports' sales personnel in concert with manufacturers' representatives.
The Apple Companies' principal executive office is located in a 65,000
square-foot facility in Ronkonkoma, New York. Apple has approximately 31
employees. Apple's principal executive office address is 1 Roebling Court,
Ronkonkoma, NY 11779. Their phone number is 516-585-5400.
DESCRIPTION OF APPLE SPORTS, INC. CAPITAL STOCK
Apple Sports' authorized capital stock consists of 200 shares of Common
Stock, no par value. As of the date of this Proxy Statement, 100 shares of
Common Stock were outstanding, owned of record as follows: 70 shares by Mark
Rose Companies Ltd.; 5 shares by E. Joy Rose; 15 shares by Timothy Moran; 5
shares by Robert A. Wertley; and 5 shares by Mark S. Rose. Apple Sports' Common
Stock is not listed or traded on any stock market.
DESCRIPTION OF APPLE GOLF SHOES, INC. CAPITAL STOCK
Apple Golf Shoes' authorized capital stock consists of 200 shares of Common
Stock, no par value. As of the date of this Proxy Statement, 100 shares of
Common Stock were outstanding, owned of record as follows: 25 shares by Timothy
Moran; 5 shares by Robert A. Wertley; 23 1/3 shares by Robert A. Wertley, as
Trustee for Mark Rose Irrevocable Trust f/b/o Bridget A. Moran; 23 1/3 shares by
Robert A. Wertley, as Trustee for Mark Rose Irrevocable Trust f/b/o Stacy Dugan;
and 23 1/3 shares by Robert A. Wertley, as Trustee for Mark Rose Irrevocable
Trust f/b/o Baylee Shea Rose. Apple Golf Shoes' Common Stock is not listed or
traded on any stock market.
DIVIDENDS IN ARREARS OR DEFAULT WITH RESPECT TO SECURITIES
Neither the Company nor the Apple Companies has any dividends in arrears or
has defaulted in the payment of principal or interest in respect of any of their
respective securities.
17
<PAGE>
INTEREST OF CERTAIN PERSONS IN THE ACQUISITION; CERTAIN AFFILIATED TRANSACTIONS
Timothy Moran, the President and Chief Operating Officer of Empire, is also
the President, Chief Operating Officer and a significant stockholder of the
Apple Companies. In connection with the Acquisition, Mr. Moran will receive
twenty percent of the Payment Shares, equal to at least one million shares.
Accordingly, the stockholders should consider Mr. Moran's interest in the
Acquisition in connection with their recommendation of the Acquisition.
Additionally, Mr. Moran and Mark Rose, the majority stockholder of the Apple
Companies, each owns 50,000 shares of Empire Series A Preferred Stock and holds
warrants to acquire 50,000 shares of Common Stock. There are no past, present or
proposed material contracts, agreements, arrangements, understandings,
negotiations or transactions between Empire and the Apple Companies during the
periods for which financial statements are presented or incorporated by
reference.
GOVERNMENTAL AND REGULATORY APPROVALS
Neither Empire nor the Apple Company Shareholders are aware of any material
governmental or regulatory approvals required for the consummation of the
Acquisition, other than compliance with federal and applicable state securities
and corporate laws.
ACCOUNTING TREATMENT
The Acquisition is intended to be accounted for as a purchase for accounting
and financial reporting purposes.
FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
The Acquisition of the shares of the Apple Companies is intended to be
treated as non-taxable by the Company. The Company does not believe that there
will be federal income tax consequences to the Company or the Apple Company
Shareholders as a result of the transaction.
MARKET PRICES
Empire's Common Stock, par value $.10 per share, is listed and principally
traded on the American Stock Exchange under the symbol "EMP." The following
table sets forth the range of high and low sales prices on the AMEX for the
specified time periods:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
QTR HIGH LOW HIGH LOW
- -------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1st......................................... $ 4.56 $ 2.88 $ 12.25 $ 6.88
2nd......................................... 5.00 .63 15.00 11.88
3rd......................................... 3.00 1.75 12.13 3.56
4th......................................... 2.50 1.38 6.81 3.75
</TABLE>
The high and low price of the Company's Common Stock on the AMEX on February
11, 1998, the date preceding public announcement of the Letter of Intent
regarding the Acquisition, was $1.625.
The high and low prices of the Company's Common Stock on the AMEX on April
13, 1998, the date preceding public announcement of the signing of the
definitive Share Purchase Agreement with the Apple Companies were $1.1375 and
$1.125, respectively.
As of April 15, 1998, there were 7,848,761 shares of Common Stock
outstanding held of record by approximately 5,061 securityholders.
18
<PAGE>
DESCRIPTION OF COMPANY CAPITAL STOCK
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 or 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 Series A
Preferred Stock, and all of such shares of Series A Preferred Stock are
outstanding as of the date of this Proxy Statement. The Board has also
designated 1,500 shares of Preferred Stock as Series C Preferred Stock, of which
1460.9607 shares are outstanding as of the date of this Proxy Statement. In
addition, the Board has designated 2,000,000 shares of Preferred Stock as Series
B Preferred Stock, in connection with the Company's Rights Agreement with
American Stock Transfer and Trust Company, as Rights Agent, of which no shares
are outstanding.
COMMON STOCK
As of April 15, 1998 there were 7,848,761 shares of Common Stock issued and
outstanding. In connection with the Acquisition, the Company may issue up to
between 5,000,000 and 6,153,846 additional shares. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. 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
the Acquisition will be, when issued and paid for, fully paid and nonassessable.
DIVIDENDS
The Company has not paid any cash dividends since 1990 and does not
anticipate paying cash dividends in the foreseeable future. The Company's
current policy is to retain earnings to provide funds for the operation and
expansion of its business and for the repayment of indebtedness. Any
determination in the future to pay dividends will depend upon the Company's
financial condition, capital requirements, results of operations and other
factors deemed relevant by the Company's Board of Directors, including any
contractual or statutory restrictions on the Company's ability to pay dividends.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE VOTING HOLDERS VOTE FOR THE APPROVAL
OF THE ISSUANCE OF SHARES OF THE COMPANY'S COMMON STOCK AS CONSIDERATION IN THE
ACQUISITION PURSUANT TO THE TERMS OF THE SHARE PURCHASE AGREEMENT.
19
<PAGE>
APPLE SPORTS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands)
The following selected consolidated financial data for the years ended
December 31, 1995, 1996 and 1997 and as of December 31, 1995, 1996 and 1997 are
derived from the Financial Statements of Apple Sports, Inc. which have been
audited by Steven J. Zaffos, independent certified public accountant. The
following selected consolidated financial data for the years ended December 31,
1993 and 1994 and as of December 31, 1993 and 1994 are derived from the
Financial Statements of Apple Sports, Inc., which have been audited by Rose and
Haar, independent certified public accountants. The Selected Consolidated
Financial Data should be read in conjunction with the Financial Statements of
Apple Sports, Inc. and notes thereto included as Exhibit C to this Proxy
Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $ 17,922,297 $ 18,680,725 $ 19,693,614 $ 17,046,789 $ 21,827,644
Cost of sales........................ 13,573,274 12,268,527 12,349,641 10,875,343 13,722,670
------------- ------------- ------------- ------------- -------------
Gross margin......................... 4,349,023 6,412,198 7,343,973 6,171,446 8,104,974
------------- ------------- ------------- ------------- -------------
Selling expenses..................... 1,653,992 2,197,078 2,585,086 2,414,570 2,812,398
Administrative expenses.............. 1,052,138 1,444,856 2,239,873 1,706,147 2,247,056
Interest expenses.................... 341,539 431,065 627,504 501,935 375,018
------------- ------------- ------------- ------------- -------------
Total expenses....................... 3,047,599 4,072,999 5,452,463 4,622,652 5,434,472
Operating income..................... 1,301,424 2,339,199 1,891,510 1,548,794 2,670,502
Other income......................... 0 0 0 728,913 504,514
------------- ------------- ------------- ------------- -------------
Income before income taxes........... 1,301,424 2,339,199 1,891,510 2,278,707 3,175,016
Provision for income taxes........... 492,097 1,109,319 616,325 854,114 1,234,985
------------- ------------- ------------- ------------- -------------
Net income........................... $ 809,327 $ 1,229,880 $ 1,275,185 $ 1,424,593 $ 1,940,031
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................. $ 161,328 $ 67,267 $ 104,076 $ 41,563 $ 18,888
Accounts receivable, less
allowances.......................... 1,598,245 2,402,923 3,488,675 3,604,685 5,698,074
Inventory............................ 3,822,406 4,155,102 4,883,855 3,410,596 4,273,071
Other current assets................. 143,185 130,593 335,542 378,462 452,611
Property and equipment, net.......... 486,304 976,871 1,117,829 785,826 489,687
Other assets......................... 518,153 1,831,456 2,506,013 3,326,941 2,829,096
Total assets......................... 6,729,621 9,564,212 12,435,990 11,548,073 13,761,427
Current liabilities.................. 914,461 903,431 1,115,981 666,594 5,064,576
Other liabilities.................... 2,988,000 4,603,741 5,987,784 4,124,661 0
Total liabilities.................... 3,902,461 5,507,172 7,103,765 4,791,255 5,064,576
TOTAL SHAREHOLDERS' EQUITY........... 2,827,160 4,057,040 5,332,225 6,756,818 8,696,851
</TABLE>
20
<PAGE>
APPLE GOLF SHOES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands)
The following selected consolidated financial data for the years ended
December 31, 1995, 1996 and 1997 and as of December 31, 1995, 1996 and 1997 are
derived from the Financial Statements of Apple Golf Shoes, Inc. which have been
audited by Steven J. Zaffos, independent certified public accountant. The
Selected Consolidated Financial Data should be read in conjunction with the
Financial Statements of Apple Golf Shoes, Inc. and notes thereto included as
Exhibit D in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................................... $ 1,093,067 $ 2,739,015 $ 2,208,676
Cost of sales........................................................... 711,199 1,865,830 1,380,131
------------ ------------ ------------
Gross margin............................................................ 381,868 873,185 828,545
------------ ------------ ------------
Selling expenses........................................................ 256,620 690,889 404,552
Administrative expenses................................................. 151,444 499,220 427,358
Interest expenses....................................................... 142,483 258,683 239,320
------------ ------------ ------------
Total expenses.......................................................... 550,547 1,448,792 1,071,230
Operating income (loss)................................................. (168,679) (575,607) (242,685)
Other income............................................................ 0 0 0
------------ ------------ ------------
Income (loss) before income taxes....................................... (168,679) (575,607) (242,685)
Provision for income taxes.............................................. 325 325 325
------------ ------------ ------------
Net income (loss)....................................................... $ (169,004) $ (575,932) $ (243,010)
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................... $ 159 $ 76 $ 0
Accounts receivable, less allowances.................................... 239,396 706,213 238,958
Inventory............................................................... 1,529,402 1,594,454 1,259,129
Other current assets.................................................... 263,047 36,158 26,124
Property and equipment, net............................................. 105,808 75,984 46,164
Other assets............................................................ 0 0 0
Total assets............................................................ 2,137,812 2,412,885 1,570,375
Current liabilities..................................................... 228,679 217,212 74,013
Other liabilities....................................................... 2,070,948 2,933,420 2,477,119
Total liabilities....................................................... 2,299,627 3,150,632 2,551,132
TOTAL STOCKHOLDERS' EQUITY.............................................. (161,815) (737,747) (980,757)
</TABLE>
21
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND
BALANCE SHEETS
The following unaudited pro forma consolidated statements of operations give
effect to the events as described in this Proposal 3. The unaudited pro forma
consolidated statements of operations are based on the estimates and assumptions
set forth herein and in the notes to such statements. This pro forma information
has been prepared utilizing the historical consolidated financial statements of
Apple Sports, Inc. and Apple Golf Shoes, Inc. This information should be read in
conjunction with Empire's historical financial statements and schedules filed
with the SEC on the Annual Report on Form 10-K for the year ended December 31,
1997. The pro forma financial data is provided for comparative purposes only and
does not purport to be indicative of the results which actually would have been
obtained if the events had been effected on the date indicated or of those
results which may be obtained in the future.
The pro forma adjustments are described in the accompanying Notes to the
Unaudited Pro Forma Consolidated Statements of Operations and Balance Sheets.
The unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1997 assume that the events occurred as of January 1, 1997.
PURCHASE PRICE ALLOCATION
An estimate of the purchase price allocation to individual assets and
liabilities has been made on the basis of currently available information.
However, adjustments to these allocations could occur during the allocation
period which could alter the ultimate determination of fair value.
For purposes of pro forma presentation, trademark license rights are being
amortized over three years.
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
(In thousands except share amounts)
<TABLE>
<CAPTION>
EMPIRE OF APPLE
CAROLINA, SPORTS, APPLE GOLF PRO FORMA PRO
INC. INC. SHOES, INC. ADJUSTMENTS FORMA
------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 3,483 $ 19 $ -- $ -- $ 3,502
Accounts receivable, less allowances and other
deductions................................... 14,052 5,698 239 -- 19,989
Inventories, net............................... 9,933 4,273 1,259 -- 15,465
-- -- -- -- --
Prepaid expenses and other current assets...... 1,980 113 26 -- 2,119
Deferred income taxes.......................... -- 340 -- -- 340
------------- ----------- ----------- ----------- ---------
Total current assets........................... 29,448 10,443 1,524 -- 41,415
PROPERTY, PLANT AND EQUIPMENT, NET............... 14,135 490 46 -- 14,671
EXCESS COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, NET................................... 13,491 352 -- (352)(1) 13,491
TRADEMARKS, PATENTS, TRADENAMES AND LICENSES,
NET............................................. 6,066 -- -- 1,088(1) 7,154
LOAN RECEIVABLE--RELATED PARTY................... -- 2,477 -- (2,477)(2) --
OTHER NONCURRENT ASSETS.......................... 436 -- -- -- 436
------------- ----------- ----------- ----------- ---------
$ 63,576 $ 13,762 $ 1,570 $ (1,741) $ 77,167
------------- ----------- ----------- ----------- ---------
------------- ----------- ----------- ----------- ---------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EMPIRE OF APPLE
CAROLINA, SPORTS, APPLE GOLF PRO FORMA PRO
INC. INC. SHOES, INC. ADJUSTMENTS FORMA
------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt......................................... $ 16,988 $ 4,254 -- -- $ 21,242
Accounts payable--trade........................ 12,317 320 -- -- 12,637
Indemnification obligations related to sales of
subsidiaries................................. 919 -- -- -- 919
Other accrued liabilities...................... 9,832 491 74 325(1) 10,722
------------- ----------- ----------- ----------- ---------
Total current liabilities.................... 40,056 5,065 74 325 45,520
------------- ----------- ----------- ----------- ---------
LONG-TERM LIABILITIES:
Long-term debt................................. 6,425 -- -- -- 6,425
Long-term debt--related party.................. -- -- 2,477 (2,477)(2) --
Deferred income taxes.......................... -- -- -- -- --
Other noncurrent liabilities................... 1,642 -- -- -- 1,642
------------- ----------- ----------- ----------- ---------
Total long-term liabilities.................. 8,067 -- 2,477 (2,477) 8,332
------------- ----------- ----------- ----------- ---------
Total liabilities............................ 48,123 5,065 2,551 (2,152) 53,587
------------- ----------- ----------- ----------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER EQUITY:
Common stock, $.10 par value, 60,000,000 shares
authorized, shares issued and outstanding:
7,849,000 785 -- 2 500(1) 1,287
Preferred stock, $.01 par value, 5,000,000
shares authorized. Issued and outstanding:
2,100,000 shares of Series A convertible
preferred stock and 1,461 shares of Series C
convertible preferred stock.................. 21 -- -- -- 21
Additional paid-in-capital..................... 109,282 1,000 -- 6,625(1) 116,907
Retained earnings (deficit).................... (94,635) 7,697 (983) (6,714) (94,635)
------------- ----------- ----------- ----------- ---------
Total stockholders' equity................... 15,453 8,697 (981) 411 23,580
------------- ----------- ----------- ----------- ---------
$ 63,576 $ 13,762 $ 1,570 $ (1,741) $ 77,167
------------- ----------- ----------- ----------- ---------
------------- ----------- ----------- ----------- ---------
</TABLE>
23
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(In thousands except per share amounts)
<TABLE>
<CAPTION>
EMPIRE OF APPLE
CAROLINA, SPORTS, APPLE GOLF PRO FORMA PRO
INC. INC. SHOES, INC. ADJUSTMENTS FORMA
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $ 99,516 $ 21,828 $ 2,290 $ -- $ 123,553
SALES DISTRIBUTION SETTLEMENT................. 2,400 -- -- -- 2,400
COST OF SALES................................. (87,724) (13,723) (1,380) -- (102,827)
------------- ----------- ----------- ----------- -----------
GROSS PROFIT.................................. 14,192 8,105 829 -- 23,126
SELLING AND ADMINISTRATIVE EXPENSE............ 24,863 5,059 832 363(3) 31,117
RESTRUCTURING AND OTHER CHARGES............... 3,539 -- -- -- 3,539
------------- ----------- ----------- ----------- -----------
OPERATING INCOME(LOSS)........................ (14,210) 3,046 (3) (363) (11,530)
Other Income (Expense):
Interest income, dividends and net realized
gains (losses)............................ 102 504 -- -- 606
Interest expense............................ (7,072) (375) (239) -- (7,030)
------------- ----------- ----------- ----------- -----------
Total other income (expense).................. (6,920) 129 (239) -- (7,030)
------------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES...................... (21,130) 3,175 (242) (363) (18,560)
INCOME TAX EXPENSE (BENEFIT).................. -- 1,235 1 (1,236)(4) --
------------- ----------- ----------- ----------- -----------
NET LOSS...................................... (21,130) 1,940 (243) 873 (18,560)
ACCRETION OF NONCASH PREFERRED STOCK
DIVIDEND..................................... (24,645) -- -- -- (24,645)
------------- ----------- ----------- ----------- -----------
Net Loss applicable to common stock........... $ (45,775) $ 1,940 $ (243) $ 873 $ (43,205)
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
LOSS PER COMMON SHARE --
Basic and diluted........................... $ (6.04) -- -- -- $ (1.48)
------------- -----------
------------- -----------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING --............................... 12,583
-----------
-----------
Basic and diluted........................... 7,583 5,000(1)
------------- -----------
------------- -----------
</TABLE>
24
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE
SHEETS
1. Adjustment includes allocation of the purchase price. 5,000,000 shares of
Empire's common stock will be issued (closing price of $1.625 on March 27,
1998) and closing costs are estimated at $325,000.
2. Reflects elimination of receivable and payable between Apple Sports, Inc.
and Apple Golf Shoes, Inc.
3. Reflects amortization of trademark license fee over three years.
4. Reflects the income tax benefit from the utilization of operating losses.
5. Book value per common share is $.48 and is $.64 on a pro forma basis.
25
<PAGE>
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board has appointed Deloitte & Touche LLP, certified public accountants,
to continue as the Company's independent auditors and to audit the books of
account and other records of the Company for the fiscal year ending December 31,
1998.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting to respond to appropriate questions from stockholders and to make
a statement if they desire to do so.
The affirmative vote of Voting Holders possessing a majority of the voting
power represented by the shares of Series A Preferred Stock and Common Stock
which actually are voted hereon is required to ratify the appointment of
Deloitte & Touche LLP as the Company's independent auditors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE VOTING HOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
INDEPENDENT AUDITORS.
26
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table (the "Compensation Table")
summarizes compensation information with respect to the Chief Executive Officer
of the Company and each of the Company's most highly compensated executive
officers who earned on an annualized basis more than $100,000 for services
rendered during the year ended December 31, 1997 (collectively, the "Named
Executive Officers"). The Compensation Table does not include information with
respect to the current President and Chief Operating Officer of the Company as
Mr. Moran was not employed by the Company during fiscal year 1997. See "Proposal
3--Approval of Acquisition--Interests of Certain Persons in the Acquisition" and
"--Certain Affiliated Transactions," and "Certain Relationships and
Transactions."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------------
-------------------------------------- SECURITIES ALL OTHER
NAME AND SALARY BONUS OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION(S) FISCAL YEAR ($) ($) COMPENSATION OPTIONS # $ (1)
- --------------------------------------- ----------- ----------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Geller....................... 1997 287,615(2) -- 17,745(3) 500,000(4) 182,000
(Chief Executive Officer and 1996 325,000 -- -- 250,000(5) --
Former Chairman of the Board) 1995 324,519 -- 83,028(6) 200,000(5) 508,075
William H. Craig....................... 1997 75,288 -- 3,850(8) 175,000(4) 15,106
(Executive Vice-President, 1996 -- -- -- -- --
Chief Financial Officer(7) 1995 -- -- -- -- --
J. Artie Rogers........................ 1997 131,589 -- -- 40,000(4) --
(Senior Vice President--Finance 1996 132,000 -- -- 5,000(5) --
and Assistant Secretary and 1995 132,211 15,000 -- -- --
Former Vice President--Finance and
Secretary)
Jeffrey L. Currier..................... 1997 145,444 -- 4,010(8) -- 40,298
(Former Chief Financial 1996 83,192 -- -- 30,000(4) 12,831
Officer) (9) 1995 -- -- -- -- --
Marvin Smollar......................... 1997 25,054 -- -- -- --
(Former President and Chief 1996 325,000 -- -- -- --
Operating Officer) (10) 1995 318,750 -- -- 200,000(4) 290,338(11)
</TABLE>
- --------------------------
(1) Relocation expenses including a gross-up for individual income taxes.
(2) Mr. Geller agreed to defer a total of $100,000 of his salary (with $37,385
apportioned to the 1997 fiscal year) with the receipt of such salary being
conditioned upon the Company achieving certain financial milestones. As the
Company failed to achieve these milestones, Mr. Geller did not receive the
$37,385 that had been deferred in 1997.
(3) Represents $7,800 for automobile expenses and $9,945 for club dues.
(4) Options granted pursuant to the 1994 Option Plan.
(5) Options cancelled in connection with the grant of a replacement option.
(6) Includes $70,000 paid to Mr. Geller in lieu of reimbursement of expenses
incurred for the benefit of the Company and allowances of $13,028 for
automobile expenses and club dues.
(7) Mr. William Craig became the Company's Executive Vice President and Chief
Financial Officer on May 13, 1997.
(8) Represents automobile expenses.
(9) Mr. Currier resigned as Chief Financial Officer on May 9, 1997. On May 14,
1997, Mr. Currier entered into a General Release and Settlement Agreement
whereby the Company agreed to pay severance pay (at his current rate of
pay), his car allowance and COBRA premiums for health insurance through
August 9, 1997.
27
<PAGE>
The Company and Mr. Currier entered into a mutual release whereby Mr.
Currier agreed to release the Company from all claims arising out of his
employment with the Company or separation from that employment and the
Company agreed to release Mr. Currier from any claims arising from or
relating to his July, 1996 employment agreement.
(10) Mr. Smollar ceased operating as President and Chief Operating Officer
effective in January, 1997. Mr. Smollar resigned as a director in April,
1997. See section titled "Employment Contracts and Termination of
Employment Arrangements" below.
(11) Includes $287,908 for relocating expenses grossed up for individual income
taxes and $2,430 of life insurance premiums. Excludes $122,265 paid to Mr.
Smollar in 1995 which he earned at Marchon, Inc. prior to its acquisition
by the Company on October 13, 1994, which amount was paid by the Company
in 1995.
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
SHARES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM ($)(2)
OPTIONS EMPLOYEES BASE PRICE(1) EXPIRATION ----------------------
NAME GRANTED IN 1997(%) ($/SHARE) DATE 5% 10%
- ------------------------------------ ----------- ------------- ------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Steven Geller....................... 500,000(3) 23.5 $ 2.000 05/13/2007 $ 527,088 $ 1,431,633
William H. Craig.................... 105,000(4) 8.2 2.000 05/13/2002 $ 41,267 $ 107,069
70,000(5) 2.375 07/15/2002 $ 46,200 $ 45,129
J. Artie Rogers..................... 40,000(6) 1.9 2.000 05/13/2002 $ 15,721 $ 40,787
Jeffrey L. Currier.................. 0 0 N/A N/A N/A N/A
Marvin Smollar...................... 0 0 N/A N/A N/A N/A
</TABLE>
- --------------------------
(1) The closing price of the Common Stock on the American Stock Exchange on the
date of grant for (3), (4), (5) was $1.875 per share and $2.375 for grant
(6).
(2) The amounts shown as potential realizable values are based on assumed
annualized rates of appreciation in the price of the Common Stock of five
percent and ten percent over the term of the options, as set forth in the
rules of the Securities and Exchange Commission. Actual gains, if any, on
stock option exercises are dependent upon the future performance of the
Common Stock. There can be no assurance that the potential realizable values
reflected in this table will be achieved.
(3) Granted pursuant to the 1994 Stock Option Plan on 05/13/97. Option vests in
four equal installments on 8/13/97, 5/13/98, 5/13/99 and 5/13/00.
(4) Granted pursuant to the 1994 Stock Option Plan on 05/13/97. Option vests in
three equal installments on 5/13/98, 5/13/99 and 5/13/00.
(5) Granted pursuant to the 1994 Stock Option Plan on 07/15/97. Option vests in
three ratable installments on 7/15/98, 7/15/99 and 7/15/00.
(6) Granted pursuant to the 1994 Stock Option Plan on 05/13/97. Option vests in
four equal installments on 8/13/97, 5/13/98, 5/13/99 and 5/13/00.
28
<PAGE>
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers that were outstanding at
December 31, 1997 (see "10-year Option Repricings"):
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS OPTIONS(2)
UPON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven Geller..................... -- -- 125,000 375,000 -- --
William H. Craig.................. -- -- 0 175,000 -- --
J. Artie Rogers................... -- -- 10,000 30,000 -- --
Jeffrey L. Currier................ -- -- -- -- -- --
Marvin Smollar.................... -- -- -- -- -- --
</TABLE>
- --------------------------
(1) Does not include warrants to acquire shares of Common Stock. See "Certain
Relationships and Transactions."
(2) Based on the $1.375 per share closing price of the Company's Common Stock on
the American Stock Exchange on December 31, 1997.
The following table sets forth certain information with respect to the
repricing of stock options granted to each of the Named Executive Officers.
Except as reflected in the following table, the Company has not in the prior 10
fiscal years repriced any previously granted options.
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK AT EXERCISE PRICE REMAINING AT
OPTIONS TIME OF AT TIME OF NEW DATE OF
NAME DATE REPRICED REPRICING REPRICING EXERCISE PRICE REPRICING
- -------------------------------- --------- ----------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Steven Geller................... 5/13/97 500,000 $ 1.875 (1) $ 2.00 (1)
William H. Craig................ N/A N/A N/A N/A N/A N/A
J. Artie Rogers................. 5/13/97 35,000 $ 1.875 $ 5.875 $ 2.00 3 1/2 years
5,000 $ 1.875 $ 4.94 $ 2.00 4 1/2 years
Jeffrey L. Currier.............. N/A N/A N/A N/A N/A N/A
Marvin Smollar.................. N/A N/A N/A N/A N/A N/A
</TABLE>
- --------------------------
(1) In connection with this repricing, Mr. Geller agreed to the cancellation of
options to purchase 950,000 shares of Common Stock under certain conditions.
See "Board Compensation Committee Report on Executive
Compensation--Compensation to the Chief Executive Officer." These options
were for the following number of shares at the following exercise prices and
had the following expiration dates:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF OPTIONS PRICE EXPIRATION DATE
- ------------------ ------------- ---------------
<S> <C> <C>
439,624 $ 6.50 7/15/04
60,376 $ 6.625 7/15/04
200,000 $ 6.750 12/13/00
250,000 $ 4.50 12/13/06
</TABLE>
Each of the repriced options granted to Mr. Geller expires on May 13, 2007.
The repriced options vest in four equal installments on August 13, 1997, and May
13 of each year 1998, 1999 and 2000.
29
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
On July 15, 1994, Steven Geller entered into an employment agreement
pursuant to which he became Chairman and Chief Executive Officer of EII, the
Company's principal subsidiary. Subsequently, the obligations of EII under such
agreement were assigned to the Company, and Mr. Geller became Chairman of the
Board and Chief Executive Officer of the Company. The agreement provides for a
base salary of $300,000 per annum, which was increased by the Compensation
Committee to $325,000 per annum effective January 1, 1995. The initial term of
the agreement expires on July 15, 1998, provided that such term is automatically
extended for successive one-year periods on July 15 of each year (the "Extension
Date") commencing July 15, 1996, unless either the Company or Mr. Geller gives
60 days' prior written notice to the other party that it or he elects not to
extend the term of the agreement. Mr. Geller's employment agreement includes
non-competition and confidentiality provisions and a change of control provision
which provides that if for any reason Mr. Geller opposes a change of control (as
defined in the agreement) which occurs while Mr. Geller is employed by the
Company, Mr. Geller may within six months of such change in control elect to
terminate his employment by giving the Company 30 days' prior written notice. In
the event that Mr. Geller elects to terminate his employment in such
circumstances, he is entitled to receive a lump sum severance payment equal to
(i) 290% of his then-current compensation (determined in accordance with the
agreement) if the majority of the Board opposed the change of control or (ii)
250% of his then-current compensation if the majority of the Board approved the
change of control, subject in either case to certain tax limitations. During
1997 and in connection with the repricing of options discussed under the heading
"10-Year Option Repricings", Mr. Geller agreed to defer $100,000 of his salary
with the receipt of such deferred salary being conditioned upon the Company
achieving certain financial milestones in fiscal 1997. As the Company failed to
achieve these milestones, Mr. Geller did not receive the salary that had been
deferred in 1997.
Marvin Smollar, a former director of the Company, was the defendant in a
suit filed by the Company in January, 1997 which sought to enforce a certain
guarantee by Mr. Smollar of debt owed to the Company by 555 Corporate Woods
Parkway, Inc. Mr. Smollar denied the allegations in the Company's complaint. On
February 24, 1997, Mr. Smollar commenced an action in the Circuit Court of Palm
Beach County, Florida captioned Marvin Smollar v. Empire of Carolina, Inc.
claiming (a) breach of his employment agreement, (b) breach of a Marchon phantom
stock plan agreement and (c) breach of an oral agreement to pay relocation
expenses, and seeking injunctive relief enjoining the Executive Committee of the
Board of Directors from taking certain actions. Mr. Smollar's claims arose in
part from his termination as President and Chief Operating Officer of the
Company in January, 1997. The complaint sought unspecified damages in excess of
$1 million in respect of his employment agreement. During January, 1998, the
Company and Mr. Smollar entered into a settlement agreement resolving each of
these claims in addition to a claim that had been brought by 1431 Kingsland
Avenue, L.P., alleging that the Company had breached a lease at 1431 Kingsland
Avenue in Pagedale, Missouri. Pursuant to this settlement agreement, the Company
was relieved of its obligations under such lease and the Company agreed to pay
$10,000, and under certain circumstances $15,000, per month beginning in
January, 1998 until $780,000 has been paid. Only a portion of this financial
payment is attributable to settling any employment related claims by Mr.
Smollar.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Pursuant to Section 16 of the Exchange Act, the Company's directors and
executive officers and beneficial owners of more than 10% of the Common Stock
are required to file certain reports, within specified time periods, indicating
their holdings of and transactions in the Common Stock. Based solely on a review
of such reports provided to the Company and written representations from such
persons regarding the necessity to file such reports, the Company has determined
that: (i) with respect to persons required to file a form in 1997, Ms. Schupak
failed to timely file two Form 4s and one Form 5; Mr. S. Geller failed to timely
file one Form 5; Mr. Rogers failed to timely file one Form 5; Mr. Craig failed
to timely file one Form 5 and Mr. L. Geller failed to timely file one Form 5
and, (ii) with respect to persons required to file a form in 1998, Mr. Moran
failed to timely file one Form 3 and Mr. Rosenbauer failed to
30
<PAGE>
timely file one Form 3. Each of these persons intends to file his or her Forms
as soon as practicable. Based solely on a review of such reports provided to the
Company, the Company has determined that: WPG Corporate Development Associates
IV, L.P. and WPG Corporate Development Associates IV (Overseas), Ltd. each
failed to file a Form 4; J. Richard Messina and EMP Associates LLC each failed
to file a Form 3 and Topolobompo 13 Investment Co., Ltd has failed to file a
required form.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company has a Compensation Committee consisting of two directors. The
Board has delegated matters relating to compensation, including the grant of
options under the 1994 Option Plan, to the Compensation Committee. This report
describes the Company's compensation policies, the application of those policies
to the Company's executive officers, and the basis for the Chief Executive
Officer's compensation for 1997.
GENERAL COMPENSATION POLICIES
The policy and objectives of the Company with respect to executive
compensation are to improve stockholder value by enhancing corporate performance
through attracting and retaining highly qualified key executive personnel. The
philosophy of the Compensation Committee is to base executive compensation on
short-and long-term performance criteria, thereby providing the motivation and
incentive for outstanding performance by executive officers. The Company's
executive compensation program is designed to:
- Create an inducement and motivation for executive officers to facilitate
and sustain Company growth and market share and to find attractive
acquisition prospects complementary to the Company's business.
- Align the financial interests of the executive officers with those of the
Company's stockholders.
- Reward above-average performances which will result in increased returns
to stockholders.
- Induce corporate loyalty in both the short and long term.
The Company's executive compensation program has three major components:
base salaries, bonuses, and long-term incentives.
BASE SALARIES
In determining an executive officer's salary, the Compensation Committee or
the Chairman and the Chief Executive Officer, as the case may be, generally
review such officer's knowledge, abilities, experience, responsibilities and
anticipated workload for the year, and his or her commitment and contribution to
the Company's development and financial performance. Salaries are intended to
maintain the Company's competitiveness with similar companies in the marketplace
in attracting and retaining qualified executives. In those cases where an
executive has entered into an employment agreement, the base salary is
determined by that agreement, which is often the result of negotiation between
the executive and the Company. The base salary of Mr. Steven Geller, the Chief
Executive Officer, is set by his employment agreement, which was entered into in
1994.
BONUS PROGRAM
The Company's bonus program for its executive officers is designed to
motivate these individuals to achieve annual corporate goals, reward individual
effort and further assist the Company in attracting and retaining highly
qualified executives. In setting bonuses, the Compensation Committee or the
Chairman and the Chief Executive Officer, as the case may be, consider specific
goals and performance criteria that are selected to enhance the profitability of
the Company, the prospects of the Company and the financial condition of the
Company. In addition, the Company attempts to recognize exceptional
contributions to the Company made by individual executives during the year.
31
<PAGE>
LONG-TERM INCENTIVES
The Company has established the 1994 Option Plan and on April 15, 1998, the
Board approved the 1998 Stock Option Plan, which is subject to stockholder
approval. (See Proposal 2.) Pursuant to both plans stock options are awarded by
the Compensation Committee periodically to key employees, including executive
officers and are designed to encourage employees to acquire an equity interest
in the Company and thereby align their long-term financial interests with those
of the shareholders.
OPTION REPRICINGS
Pursuant to the 1994 Option Plan, the Compensation Committee had granted
stock options to numerous executives and employees at exercise prices ranging
from $4.50 to $9.25 per share. After the decline in the market price of the
Company's Common Stock, the Compensation Committee considered whether or not, in
conjunction with the other forms of compensation, the outstanding stock options
were sufficient to motivate and retain highly qualified personnel.
The Compensation Committee concluded that the outstanding options were
insufficient to retain key employees and, therefore, the Compensation Committee
determined that stockholder value would be enhanced by granting new options to
certain employees in consideration of their agreement to the cancellation of
outstanding options. Accordingly, on May 13, 1997, the Compensation Committee
approved a resolution canceling substantially all of the options outstanding
under the 1994 Option Plan and replacing them with options with an exercise
price of $2.00 per share (a reduction of $2.50 to $6.25 per share in the
exercise price of the cancelled options).
COMPENSATION TO THE CHIEF EXECUTIVE OFFICER
Mr. Steven Geller, the Chief Executive Officer, has an existing employment
agreement providing for a base salary of $325,000. During 1997 and in connection
with the repricing of options discussed above, Mr. Geller agreed to defer
$100,000 of his salary with the receipt of such deferred salary being
conditioned upon the Company achieving certain financial milestones in fiscal
1997. As the Company failed to achieve these milestones, Mr. Geller did not
receive the salary that had been deferred. The Compensation Committee believes
that Mr. Geller's compensation is principally through his equity interest in the
Company and not through his salary. For that reason, and in reviewing the
Company's financial performance in 1997, the Compensation Committee determined
that a cash bonus for the Chief Executive Officer was not appropriate.
In connection with the repricing of options discussed above, Mr. Geller
agreed to (i) defer $100,000 of his salary as conditioned above, (ii) cancel all
950,000 options which had previously been granted to him pursuant to the Option
Plan (250,000 of which had an exercise price of $4.50 per share and were granted
in 1997; 439,624 of which had an exercise price of $6.50 per share; 60,376 of
which had an exercise price of $6.625 per share; and 200,000 of which had an
exercise price of $6.75 per share) and (iii) accept 500,000 options with an
exercise price of $2.00 per share. Pursuant to the terms of the 1994 Option
Plan, options to purchase no more than 500,000 shares may be granted to any
individual employee in any year. As a condition to the reduction in the number
of shares subject to options granted to Mr. Geller, the Compensation Committee
agreed to consider, and ultimately approved, the grant of an equal number of
options to certain employees and executive officers of the Company who are
related to Mr. Geller.
Members of the Compensation Committee
John J. Doran
Lenore H. Schupak
32
<PAGE>
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the cumulative total returns
(assuming dividend reinvestment) of the Company's Common Stock, the Media
General Toys and Games Industry Group Index as a representative industry index
and the American Stock Exchange Market Index ("Amex Index") as the required
board equity market index. The Media General Toys and Games Industry Group Index
is comprised of 37 toy and game companies.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EMPIRE OF MG TOYS & GAMES
<S> <C> <C> <C>
Year Ended December 31, Carolina, Inc. Industry Group Index AMEX Index
1992 $100.00 $100.00 $100.00
1993 101.96 110.86 118.81
1994 103.92 85.23 104.95
1995 109.92 94.96 135.28
1996 66.67 117.16 142.74
1997 21.57 146.99 171.76
</TABLE>
33
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In connection with the Series A Preferred Stock transactions described under
"the Company," the following members of the Company's Board of Directors had
investments either directly or indirectly in the Company at December 31, 1997:
<TABLE>
<CAPTION>
SHARES OF
SERIES A WARRANTS TO
PREFERRED ACQUIRE
STOCK COMMON STOCK
-------------- --------------
<S> <C> <C>
Charles S. Holmes................................................. 125,000 2,753,752
James J. Pinto.................................................... 100,000 2,678,752
Lenore H. Schupak................................................. 22,500 22,500
John Doran........................................................ 10,000 10,000
</TABLE>
In connection with the proposed acquisition of the Apple Companies, each of
Timothy Moran, the Company's President and Chief Operating Officer, who is also
the president and a significant shareholder of the Apple Companies, and Mark
Rose, the majority shareholder of the Apple Companies, participated in the
Series A Preferred Stock transactions, each acquiring 50,000 shares of Series A
Preferred Stock and warrants to acquire 50,000 shares of Common Stock.
During 1995, in connection with the Company's acquisition of Buddy L,
affiliates of Weiss, Peck & Greer, L.L.C. (collectively referred to as "WPG"),
an investment firm, purchased 247,392 shares of common stock at $7.25 per share
and 442,264 of Series A Preferred Stock at $7.25 per share for an aggregate
purchase price of $5,000,006. On September 11, 1996, upon the approval by the
stockholders of the Company, the outstanding shares of Series A Preferred Stock
were converted into Common Stock on a share for share basis. The conversion
resulted in the issuance of 442,264 shares of Common Stock to WPG. At December
31, 1997 and 1996, WPG was the holder of 721,595 shares of Common Stock. Two
principals of WPG were members of the Company's Board of Directors from 1994
through November, 1997.
WPG, on behalf of investment funds for which they are managers, was the
holder of approximately $14,900,000 of the Company's 9% five-year, subordinated
convertible debentures. Concurrent with the closing of this debenture financing
in December, 1994, WPG was issued warrants to purchase 100,000 shares of common
stock at the exercise price of $7.50 per share. In June, 1997, these debentures
were exchanged for 1,490 newly-issued Series C Preferred Stock of the Company.
WPG 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.
Messrs. Holmes and Pinto, each a director of the Company, are principals of
HPA Associates, L.L.C. ("HPA"), which (i) is a party to the Securities Purchase
Agreement dated as of May 5, 1997 among the Company, HPA and EMP Associates,
LLC, as amended, and (ii) made a $5,000,000 bridge note in May, 1997 which was
repaid from the proceeds of the preferred stock investment in June 1997.
Steven Geller, Chief Executive Officer of the Company, has the right to vote
734,039 shares of Common Stock of the Company owned by a former control group of
the Company. Geller's right to vote such shares terminates upon the former
control group's disposal thereof. Geller has certain rights of first refusal
relative to the former control group's disposal of their remaining shares.
Geller has a rolling three year employment agreement with the Company.
At December 31, 1996, the Company had an unsecured receivable from the owner
of its facility in Vernon Hills, Illinois of $538,000 respectively, related to
costs incurred during its construction which receivable was guaranteed by Marvin
Smollar, a former Company director and former President and Chief
34
<PAGE>
Operating Officer. This receivable bore interest at an annual rate of 7.5% and
was due on December 31, 1998. Subsequent to December 31, 1994, the operations of
Marchon were moved to the Company's facilities in Tarboro, North Carolina.
Marchon terminated the lease on the Illinois facility effective June, 1995. In
connection with the Marchon acquisition, the Company assumed a lease related to
Marchon's Pagedale, Missouri facility from an entity of which Mr. Smollar is a
principal. The lease provided for a monthly rental of $15,000 through December
15, 1995 and $20,000 thereafter. The lease per its terms, expired during 2013.
This facility had not been occupied by the Company since Marchon moved
operations to the main Tarboro plant in the first quarter of 1995. The
settlement agreement between the Company and Mr. Smollar during January, 1998,
inter alia, released Mr. Smollar from his guarantee of the receivable due from
the owner of the facility in Vernon Hills, Illinois and terminated the Company's
lease at the facility in Pagedale, Missouri.
Rona Geller, the wife of Steven Geller and the mother of Lawrence Geller, is
the Company's travel agent. Although she is paid commissions, which may exceed
$60,000 per year, in connection with such services, such commissions are paid by
the airline, hotel and other travel service companies with which she contracts,
and not by the Company.
The Company's policy is that all transactions between the Company and its
executive officers, directors and principal stockholders occurring outside the
ordinary course of the Company's business be on terms no less favorable than
could be obtained from unaffiliated third parties or are subject to the approval
of the Company's disinterested directors.
EXECUTIVE OFFICERS
Information concerning the current executive officers of the Company, their
ages, position and business experience during the last five years is set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
Charles S. Holmes............. 53 Chairman of the Board
Steven E. Geller.............. 57 Chief Executive Officer; Director
Timothy Moran................. 34 President and Chief Operating Officer
William H. Craig.............. 41 Executive Vice President and Chief Financial
Officer
J. Artie Rogers............... 37 Senior Vice President--Finance and Assistant
Secretary
Lawrence A. Geller............ 34 Vice President, General Counsel and Secretary
</TABLE>
For information concerning the business experience of Charles S. Holmes and
Steven E. Geller, see "Proposal 1".
TIMOTHY MORAN has served as President and Chief Operating Officer of the
Company since February, 1998. He has been President and Chief Operating Officer
of Apple Sports, Inc. and Apple Golf, since February 1993. Apple Sports, Inc.,
is a manufacturer and distributor of licensed golf products under the Wilson
Sporting Goods name.
WILLIAM H. CRAIG has served as Executive Vice President and Chief Financial
Officer since May, 1997. From November, 1994 to May, 1997, Mr. Craig was
President of Wm. Craig & Co., a financial services firm specializing in workouts
and turnarounds with middle market companies. Formation of his own firm was
preceded by nearly five years with GE Capital, lending and investing in
industrial companies, with a particular emphasis in the plastics industry,
including various cross-selling and co-investing activities with GE Plastics.
Mr. Craig's early career was as a consultant with the predecessor of Deloitte &
Touche LLP.
J. ARTIE ROGERS has 12 years experience in the toy industry. Mr. Rogers has
served as Senior Vice President--Finance of the Company since December, 1994.
From 1987 to December, 1994, Mr. Rogers
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served as Vice President--Finance of the Company. From 1987 to December, 1995,
Mr. Rogers served as Secretary of the Company, and has served as Assistant
Secretary since December, 1995. Prior to joining the Company in 1986, Mr. Rogers
worked for Deloitte Haskins & Sells, predecessor to the Company's current
independent public accountants, for six years.
LAWRENCE A. GELLER has served as Vice President and General Counsel since
January, 1997 and as Secretary of the Company since December, 1995. Mr. Geller
joined the Company in April, 1995 as corporate counsel. Prior to joining the
Company, Mr. Geller was engaged in the practice of law as a partner with the
firm of Imhoff & Geller in Norwalk, Connecticut from 1993 to 1995. Mr. Geller is
the son of Steven Geller, the Chief Executive Officer and former Chairman of the
Company.
STOCKHOLDER PROPOSALS
No person who intends to present a proposal for action at a forthcoming
stockholders' meeting of the Company may seek to have the proposal included in
the proxy statement or form of proxy for such meeting unless that person (a) is
a record beneficial owner of at least 1% or $1,000 in market value of shares of
Common Stock, has held such shares for at least one year at the time the
proposal is submitted, and such person shall continue to own such shares through
the date on which the meeting is held, (b) provides the Company in writing with
his name, address, the number of shares held by him and the dates upon which he
acquired such shares with documentary support for a claim of beneficial
ownership, (c) notifies the Company of his intention to appear personally at the
meeting or by a qualified representative under Delaware law to present his
proposal for action, and (d) submits his proposal timely. A proposal to be
included in the proxy statement or proxy for the Company's next annual meeting
of stockholders will be submitted timely only if the proposal has been received
at the Company's principal executive office in Delray Beach, Florida no later
than December 31, 1998. If the date of such meeting is changed by more than 30
calendar days from the date of the Annual Meeting, or if the proposal is to be
presented at any meeting other than the next annual meeting of stockholders, the
proposal must be received at the Company's principal executive office at a
reasonable time before the solicitation of proxies for such meeting is made.
If the foregoing requirements are satisfied, a person may submit only one
proposal of not more than 500 words with a supporting statement if the latter is
requested by the proponent for inclusion in the proxy materials, and under
certain circumstances enumerated in the Securities and Exchange Commission's
rules relating to the solicitation of proxies, the Company may be entitled to
omit the proposal and any statement in support thereof from its proxy statement
and form of proxy.
OTHER INFORMATION
The Board of Directors does not know of any other matters that may be
brought before the Annual Meeting. In the event that any other matter shall come
before the Annual Meeting, the persons named in the enclosed Proxy will have
discretionary authority to vote all Proxies not marked to the contrary with
respect to such matter in their discretion.
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OTHER INFORMATION
The Board of Directors does not know of any other matters that may be
brought before the Annual Meeting. In the event that any other matter shall come
before the Annual Meeting, the persons named in the enclosed Proxy will have
discretionary authority to vote all Proxies not marked to the contrary with
respect to such matter in their discretion.
DOCUMENTS INCORPORATED BY REFERENCE
This Proxy Statement incorporates by reference documents and information
delivered herewith in the Company's Annual Report to Stockholders. Each of the
following items is hereby incorporated by reference herein, in its entirety:
<TABLE>
<S> <C>
(i) Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the
"1997 10-K");
(ii) Report of Independent Auditor filed as part of the Company's 1997 10-K;
(iii) Current Reports on Form 8-K, filed on February 24, March 30, and March 31, 1998;
(iv) Item 1 of Part I ("Business") of the 1997 10-K;
(v) Item 6 of Part I ("Selected financial Data") of the 1997 10-K;
(vi) Item 7 of Part I ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") of the 1997 10-K. This section sets forth, INTER
ALIA, the information required by Item 305 of S-K with respect to quantitative
and qualitative disclosures about market risk;
(vii) Item 5 of Part II ("Market for Registrant's Common Equity and Related
Stockholder Matters") of the 1997 10-K;
(viii) Item 8 of Part II ("Supplementary Financial Data") filed as part of the 1997
10-K;
(ix) Consolidated balance sheets as of December 31, 1996 and 1997 filed as part of
the 1997 10-K;
(x) Consolidated statements of operations for the years ended December 31, 1995,
1996 and 1997 filed as part of the 1997 10-K;
(xi) Consolidated statements of stockholders' equity for the years ended December 31,
1995, 1996 and 1997 filed as part of the 1997 10-K;
(xii) Consolidated statements of cash flows for the years ended December 31, 1995,
1996 and 1997 filed as part of the 1997 10-K; and
(xiii) Notes to consolidated financial statements filed as part of the 1997 10-K.
</TABLE>
By Order Of The Board Of Directors,
- --------------------------------------------------------------------------------
Lawrence Geller
SECRETARY
Delray Beach, Florida
April 29, 1998
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EXHIBIT A
EMPIRE OF CAROLINA, INC.
1998 STOCK OPTION PLAN
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Article 1. Establishment, Effective Date, Objectives, and Duration........................................ 1
Article 2. Definitions.................................................................................... 1
Article 3. Administration................................................................................. 3
Article 4. Shares Subject to the Plan and Maximum Awards.................................................. 4
Article 5. Eligibility and General Conditions of Options.................................................. 5
Article 6. Stock Options.................................................................................. 5
Article 7. Rights of Employees............................................................................ 7
Article 8. Change in Control.............................................................................. 7
Article 9. Amendment, Modification, and Termination....................................................... 7
Article 10. Withholding.................................................................................... 8
Article 11. Successors..................................................................................... 8
Article 12. Additional Provisions.......................................................................... 8
</TABLE>
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EMPIRE OF CAROLINA, INC.
1998 STOCK OPTION PLAN
ARTICLE 1. ESTABLISHMENT, EFFECTIVE DATE, OBJECTIVES, AND DURATION
1.1 ESTABLISHMENT OF PLAN. Empire of Carolina, Inc., a Delaware
corporation (the "Company"), hereby establishes the Empire of Carolina, Inc.
1998 Stock Option Plan (the "Plan"), as set forth herein, effective April 15,
1998 (the "Effective Date"). The Plan has been adopted by the Board of Directors
of the Company on April 15, 1998 and is subject to stockholder approval.
1.2 OBJECTIVES OF THE PLAN. The purposes of the Plan are to encourage
employees of the Company and its Subsidiaries to acquire a proprietary and
vested interest in the growth and performance of the Company, to generate an
increased incentive to contribute to the Company's future success and
prosperity, thus enhancing the value of the Company for the benefit of
shareholders, and to enhance the ability of the Company and its Subsidiaries to
attract and retain individuals of exceptional talent upon whom, in large
measure, the sustained progress, growth and profitability of the Company
depends.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date
subject to stockholder approval and shall remain in effect, subject to the right
of the Board to amend or terminate the Plan at any time pursuant to Article 9
hereof, until all Shares subject to it shall have been acquired according to the
Plan's provisions. However, in no event may an Incentive Stock Option be granted
after 10 years from the date the Plan was adopted by the Board.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below:
2.1 "ARTICLE" means an Article of the Plan.
2.2 "BOARD" means the Board of Directors of the Company.
2.3 "CAUSE" means, unless otherwise defined in any Employment Agreement
or Option Agreement, any one or more of the following:
(A) a Grantee's commission of a crime which, in the judgment of the
Committee, is likely to result in injury to the Company or a Subsidiary;
(B) the material violation by the Grantee of written policies of the
Company or a Subsidiary;
(C) the habitual neglect by the Grantee in the performance of his or
her duties to the Company or a Subsidiary;
(D) action or inaction by the Grantee in connection with his or her
duties to the Company or a Subsidiary resulting, in the judgment of the
Committee, in a material injury to the Company or a Subsidiary;
(E) the rendering of services by the Grantee for any organization or
engaging directly or indirectly in any business which is or becomes
competitive with the Company or a Subsidiary or which organization or
business, or the rendering of services to such organization or business,
is or becomes otherwise prejudicial to or in conflict with the interests
of the Company or a Subsidiary;
(F) any attempt by the Grantee directly or indirectly to induce any
employee of the Company or a Subsidiary to be employed or perform
services elsewhere or any attempt directly or indirectly to solicit
(other than for the account of the Company or a Subsidiary) the trade or
business of any current or prospective customer, supplier, or partner of
the Company or a Subsidiary; or
(G) any other conduct or act determined by the Committee to be
injurious, detrimental, or prejudicial to any interest of the Company or
a Subsidiary.
<PAGE>
2.4 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time, and regulations and rulings thereunder. References to a
particular section of the Code include references to successor provisions.
2.5 "COMMITTEE" has the meaning set forth in Article 3.
2.6 "COMMON STOCK" means the common stock, $.10 par value, of the
Company.
2.7 "COMPANY" means Empire of Carolina, Inc.
2.8 "DISABILITY" means, unless otherwise defined in an Employment
Agreement or Option Agreement, for purposes of the exercise of an Incentive
Stock Option after Termination of Employment, a disability within the
meaning of Section 22(e)(3) of the Code, and for all other purposes, a
mental or physical condition which, in the judgment of the Committee,
renders a Grantee unable to perform any of the principal job
responsibilities which such Grantee held or the tasks to which such Grantee
was assigned at the time the disability was incurred, and which condition is
expected to be permanent or for an indefinite duration exceeding two years.
2.9 "DISQUALIFYING DISPOSITION"--see Section 6.4.
2.10 "EFFECTIVE DATE"--see Section 1.1.
2.11 "ELIGIBLE PERSON" means any employee (including any officer) of
the Company or any Subsidiary.
2.12 "EMPLOYMENT AGREEMENT" means, with respect to any Grantee, any
employment agreement by and between the Company or Subsidiary and such
Grantee.
2.13 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time. References to a particular section of the
Exchange Act include references to successor provisions.
2.14 "FAIR MARKET VALUE" means, with respect to Shares, as of any date,
(i) the closing price on the date of determination on the American Stock
Exchange (or, if no sale of Shares was reported for such date, on the next
preceding date on which a sale of Shares was reported), (ii) if the Shares
are not listed on the American Stock Exchange, the closing price on the date
of determination on such other national exchange on which the Shares are
principally traded or as reported by the National Market System, or similar
organization (or, if no sale of Shares was reported for such date, on the
next preceding date on which a sale of Shares was reported), or if no such
quotations are available, the average of the high bid and low asked
quotations in the over-the-counter market as reported by the National
Quotation Bureau Incorporated or similar organizations; or (iii) in the
event that there shall be no public market for the Shares, the fair market
value of the Shares as determined (which determination shall be conclusive)
in good faith by the Committee, based upon the value of the Company as a
going concern, as if such Shares were publicly owned stock, but without any
discount with respect to minority ownership.
2.15 "GRANT DATE"--see Section 5.2.
2.16 "GRANTEE" means an individual who has been granted an Option.
2.17 "INCENTIVE STOCK OPTION" means an Option granted under Article 6
of the Plan that is intended to meet the requirements of Section 422 of the
Code or any successor provisions thereto.
2.18 "INCLUDING" OR "INCLUDES" means "including, without limitation,"
or "includes, without limitation", respectively.
2.19 "OPTION" means an option granted under Article 6 of the Plan.
2.20 "OPTION AGREEMENT" means the written agreement by which an Option
shall be evidenced.
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2.21 "OPTION PRICE" means the price at which a Share may be purchased
by a Grantee pursuant to an Option.
2.22 "OPTION TERM" means the period beginning on the Grant Date of an
Option and ending on the expiration date of such Option, as specified in the
Option Agreement for such Option and as may, in the discretion of the
Committee and consistent with the provisions of the Plan, be extended from
time to time prior to or after the expiration date of such Option then in
effect.
2.23 "PERFORMANCE-BASED EXCEPTION" means the performance-based
exception from the tax deductibility limitations of Code Section 162(m).
2.24 "PERMITTED TRANSFEREE" means a person who is Grantee's spouse,
lineal ancestor, lineal descendant, a spouse of such ancestor or descendant,
a trust primarily for the benefit of Grantee or one or more of such persons,
or a partnership all the partners of which are Grantee or one or more of
such persons.
2.25 "PLAN" means the Empire of Carolina, Inc. 1998 Stock Option Plan,
as set forth herein and as amended from time to time.
2.26 "REQUIRED WITHHOLDING"--see Article 10.
2.27 "RULE 16B-3" means Rule 16b-3 promulgated by the SEC under the
Exchange Act, as amended from time to time, together with any successor
rule, as in effect from time to time.
2.28 "RETIREMENT" means by any Grantee, a Termination of Employment by
the Grantee on or after attaining age 65.
2.29 "SEC" means the United States Securities and Exchange Commission,
or any successor thereto.
2.30 "SECTION" means, unless the context otherwise requires, a Section
of the Plan.
2.31 "SHARE" means a share of Common Stock.
2.32 "SUBSIDIARY" means, for purposes of grants of Incentive Stock
Options, a corporation as defined in Section 424(f) of the Code (with the
Company being treated as the employer corporation for purposes of this
definition) and, for all other purposes, a United States or foreign
corporation with respect to which the Company owns, directly or indirectly,
50% or more of the then-outstanding common stock.
2.33 "TERMINATION OF EMPLOYMENT" occurs on the first day on which an
individual is for any reason no longer providing services to the Company or
any Subsidiary in the capacity of an employee, or with respect to an
individual who is an employee of a Subsidiary, the first day on which the
Company no longer owns, directly or indirectly, voting securities possessing
at least 50% of the combined voting power of the then-outstanding securities
entitled to vote generally in the election of directors of such Subsidiary.
ARTICLE 3. ADMINISTRATION
3.1 COMMITTEE. Subject to Article 9, and to Section 3.2, the Plan shall be
administered by the Board, or a committee appointed by the Board to administer
the Plan. Any references herein to "Committee" are references to the Board, or a
committee established by the Board, as applicable. To the extent the Board
considers it desirable to comply with or qualify under Rule 16b-3 or meet the
Performance-Based Exception, the Committee shall consist of two or more
directors of the Company, all of whom qualify as "outside directors" as defined
for purposes of the regulations under Code Section 162(m) and "non-employee
directors" within the meaning of Rule 16b-3.
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<PAGE>
3.2 POWERS OF COMMITTEE. Subject to the express provisions of the Plan,
the Committee has full and final authority and sole discretion as follows:
(i) to determine when, to whom and in what types and amounts Options
should be granted and the terms and conditions applicable to each Option;
(ii) to construe and interpret the Plan and to make all determinations
necessary or advisable for the administration of the Plan;
(iii) to make, amend, and rescind rules relating to the Plan, including
rules with respect to the exercisability and nonforfeitability of Options
upon the Termination of Employment of a Grantee;
(iv) to determine the terms and conditions of all Option Agreements
(which need not be identical) and, with the consent of the Grantee, to amend
any such Option Agreement; PROVIDED that the consent of the Grantee shall
not be required for any amendment which (A) does not adversely affect the
rights of the Grantee, or (B) is necessary or advisable (as determined by
the Committee) to carry out the purpose of the Option as a result of any new
or change in existing applicable law;
(v) to cancel, with the consent of the Grantee, outstanding Options and
to grant new Options in substitution therefor;
(vi) to accelerate the exercisability of, and to accelerate or waive any
or all of the terms and conditions applicable to, any Option or any group of
Options for any reason and at any time, including in connection with a
Termination of Employment (other than for Cause);
(vii) subject to Sections 1.3 and 5.3, to extend the time during which
any Option or group of Options may be exercised;
(viii) to make such adjustments or modifications to Options to Grantees
working outside the United States as are advisable to fulfill the purposes
of the Plan;
(ix) to impose such additional terms and conditions upon the grant,
exercise or retention of Options as the Committee may, before or
concurrently with the grant thereof, deem appropriate, including limiting
the percentage of Options which may from time to time be exercised by a
Grantee; and
(x) to take any other action with respect to any matters relating to the
Plan for which it is responsible.
The determination of the Committee on all matters relating to the Plan or
any Option Agreement shall be final, conclusive and binding on all persons. No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Option.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as
provided in Section 4.2, the number of Shares hereby reserved for issuance under
the Plan shall be 2,000,000. If any Shares subject to an Option granted
hereunder are forfeited or such Option otherwise terminates without the issuance
of such Shares, the Shares subject to such Option to the extent of any such
forfeiture or termination shall again be available for grant under the Plan. The
Committee shall from time to time determine the appropriate methodology for
calculating the number of shares issued pursuant to the Plan. Shares issued
pursuant to the Plan may be treasury shares or newly-issued Shares. The maximum
aggregate number of Shares subject to Options that may be granted in any one
calendar year to any one Grantee shall be 500,000.
4.2 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger,
reorganization, consolidation, recapitalization, stock dividend, stock split,
spin-off or other change in corporate structure affecting the
4
<PAGE>
Shares, such adjustment shall be made in the aggregate number and class of
Shares which may be delivered under the Plan, and in the number, class and
option price of Shares subject to outstanding Options granted under the Plan, as
may be determined to be appropriate by the Committee, in its sole discretion,
provided that the number of Shares subject to any Option shall always be a whole
number. The grant of Options pursuant to the Plan shall not affect in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to merge or
to consolidated or to dissolve, liquidate, or sell or transfer all or any part
of its business or assets.
ARTICLE 5. ELIGIBILITY AND GENERAL CONDITIONS OF OPTIONS
5.1 ELIGIBILITY. The Committee may in its discretion grant Options to any
Eligible Person, whether or not he or she has previously received an Option.
5.2 GRANT DATE. The Grant Date of an Option shall be the date on which the
Committee grants the Option or such later date as specified in advance by the
Committee.
5.3 MAXIMUM TERM. Any provision of the Plan to the contrary
notwithstanding, the Option Term or other period during which an Option may be
outstanding shall under no circumstances extend more than 10 years after the
Grant Date, and shall be subject to earlier termination as herein provided.
5.4 OPTION AGREEMENT. To the extent not set forth in the Plan, the terms
and conditions of each Option (which need not be the same for each grant or for
each Grantee) shall be set forth in an Option Agreement.
5.5 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise or vesting of an
Option as it may deem advisable, including restrictions under applicable federal
securities laws.
5.6 NONTRANSFERABILITY OF OPTIONS. Each Option granted hereunder shall not
be assignable or transferable other than by will or the laws of descent and
distribution provided, however, that a Grantee may in any manner specified by
the Committee, (i) designate in writing a beneficiary who is a Permitted
Transferee to exercise his Option after the Grantee's death, and (ii) transfer
an Option to a Permitted Transferee if and to the extent permitted by the
Committee.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to any Eligible Person in such number, and upon such
terms, and at any time and from time to time as shall be determined by the
Committee.
6.2 OPTION AGREEMENT. Each Option grant shall be evidenced by an Option
Agreement that shall specify the Option Price, the Option Term, the number of
shares to which the Option pertains, the time or times at which such Option
shall be exercisable and such other provisions as the Committee shall determine.
6.3 OPTION PRICE. The Option Price of an Option under this Plan shall be
determined in the sole discretion of the Committee, but shall be at least equal
to 100% of the Fair Market Value of a Share on the Grant Date.
6.4 GRANT OF INCENTIVE STOCK OPTIONS. At the time of the grant of any
Option, the Committee may in its discretion designate that such Option shall be
made subject to additional restrictions to permit it to qualify as an "incentive
stock option" under the requirements of Section 422 of the Code. Any Option
designated as an Incentive Stock Option:
(i) shall, if granted to a 10% Owner, have an Option Price not less than
110% of the Fair Market Value of a Share on its Grant Date;
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(ii) shall be for a period of not more than 10 years (five years in the
case of an Incentive Stock Option granted to a 10% Owner) from its Grant
Date, and shall be subject to earlier termination as provided herein or in
the applicable Option Agreement;
(iii) shall not have an aggregate Fair Market Value (as of the Grant Date
of each Incentive Stock Option) of the Shares with respect to which
Incentive Stock Options (whether granted under the Plan or any other stock
option plan of the Grantee's employer or any parent or Subsidiary thereof
("Other Plans")) are exercisable for the first time by such Grantee during
any calendar year, determined in accordance with the provisions of Section
422 of the Code, which exceeds $100,000 (the "$100,000 Limit");
(iv) shall, if the aggregate Fair Market Value of the Shares (determined
on the Grant Date) with respect to the portion of such grant which is
exercisable for the first time during any calendar year ("Current Grant")
and all Incentive Stock Options previously granted under the Plan and any
Other Plans which are exercisable for the first time during a calendar year
("Prior Grants") would exceed the $100,000 Limit, be exercisable as follows:
(A) the portion of the Current Grant which would, when added to any
Prior Grants, be exercisable with respect to Shares which would have an
aggregate Fair Market Value (determined as of the respective Grant Date
for such options) in excess of the $100,000 Limit shall, notwithstanding
the terms of the Current Grant, be exercisable for the first time by the
Grantee in the first subsequent calendar year or years in which it could
be exercisable for the first time by the Grantee when added to all Prior
Grants without exceeding the $100,000 Limit; and
(B) if, viewed as of the date of the Current Grant, any portion of a
Current Grant could not be exercised under the preceding provisions of
this Section during any calendar year commencing with the calendar year
in which it is first exercisable through and including the last calendar
year in which it may by its terms be exercised, such portion of the
Current Grant shall not be an Incentive Stock Option, but shall be
exercisable as a separate option at such date or dates as are provided in
the Current Grant;
(v) shall be granted within 10 years from the earlier of the date the
Plan is adopted or the date the Plan is approved by the stockholders of the
Company;
(vi) shall require the Grantee to notify the Committee of any
disposition of any Shares issued pursuant to the exercise of the Incentive
Stock Option under the circumstances described in Section 421(b) of the Code
(relating to certain disqualifying dispositions) (any such circumstance, a
"Disqualifying Disposition"), within 10 days of such Disqualifying
Disposition; and
(vii) shall by its terms not be assignable or transferable other than by
will or the laws of descent and distribution and may be exercised, during
the Grantee's lifetime, only by the Grantee; PROVIDED, HOWEVER, that the
Grantee may, to the extent provided in the Plan in any manner specified by
the Committee, designate in writing a beneficiary to exercise his or her
Incentive Stock Option after the Grantee's death.
Notwithstanding the foregoing, the Committee may, without the consent of the
Grantee, at any time before the exercise of an option (whether or not an
Incentive Stock Option), take any action necessary to prevent such option from
being treated as an Incentive Stock Option.
6.5 EXERCISABILITY. Options shall be exercisable at such time or times as
determined by the Committee. In the event that any Grantee shall have a
Termination of Employment for any reason which in the opinion of the Committee
shall constitute Cause, any Option still held by such person at such time shall
automatically terminate. The decision of the Committee as to what shall
constitute Cause shall be final and binding upon all concerned. Except as
otherwise provided in an Option Agreement, an Option may be exercised only if
the Grantee has been an employee of the Company or of any Subsidiary at all
times
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during the period beginning with the Grant Date and ending ninety (90) days
before the date of such exercise; provided, however, that in the case of a
Grantee who has a Termination of Employment due to Retirement, Death or
Disability (as determined by the Committee), the ninety (90) days shall be
extended to one (1) year. Except as otherwise permitted by the Committee, only
those Options exercisable at the date the Grantee's employment is terminated may
be exercised during the period following such termination, whether such
termination is by Retirement or otherwise.
6.6 PAYMENT. Options granted under this Article 6 shall be exercised by
the delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the option is to be exercised,
accompanied by full payment for the Shares made by any one or more of the
following means subject to the approval of the Committee:
(A) cash, personal check or wire transfer; or
(B) subject to applicable law, pursuant to procedures previously
approved by the Company, through the sale of the Shares acquired on exercise
of the Option through a broker-dealer to whom the Grantee has submitted an
irrevocable notice of exercise and irrevocable instructions to deliver
promptly to the Company the amount of sale or loan proceeds sufficient to
pay for such Shares, together with, if requested by the Company, the amount
of federal, state, local or foreign withholding taxes payable by Grantee by
reason of such exercise.
ARTICLE 7. RIGHTS OF EMPLOYEES
7.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or a Subsidiary to terminate any Grantee's
employment at any time, nor confer upon any Grantee the right to continue in the
employ of the Company or Subsidiary.
7.2 PARTICIPATION. No employee shall have the right to be selected to
receive an Option under this Plan, or, having been so selected, to be selected
to receive a future Option.
ARTICLE 8. CHANGE IN CONTROL
8.1 TREATMENT OF OUTSTANDING OPTIONS. The Committee may provide in an
Option Agreement for different terms and conditions to apply prior to and after
a Change in Control of the Company or a Subsidiary.
8.2 OCCURRENCE OF CHANGE OF CONTROL. The Committee may set rules for
determining when a Change of Control of the Company or a Subsidiary has
occurred.
ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION
9.1 AMENDMENT, MODIFICATION, AND TERMINATION. Subject to the terms of the
Plan, the Board may at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part without the approval of the Company's
stockholders, except to the extent that such stockholder approval may be
required under the listing requirements of any securities exchange or national
market system on which are listed the Company's equity securities or pursuant to
any other regulatory or legal requirement; provided that shareholder approval is
required to increase the number of Shares available under the Plan (except as
provided in Section 4.2).
9.2 OPTIONS PREVIOUSLY GRANTED. Notwithstanding any other provision of the
Plan to the contrary, no termination, amendment, or modification of the Plan
shall adversely affect in any material way any Option previously granted under
the Plan, without the written consent of the Grantee of such Option.
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ARTICLE 10. WITHHOLDING
10.1 MANDATORY TAX WITHHOLDING.
(a) Whenever under the Plan, Shares are to be delivered upon exercise of an
Option, the Company shall be entitled to require (i) that the Grantee remit an
amount in cash, sufficient to satisfy all federal, state, and local tax
withholding requirements related thereto ("Required Withholding"), (ii) the
withholding of such Required Withholding from compensation otherwise due to the
Grantee or (iii) any combination of the foregoing.
(b) Any Grantee who makes a Disqualifying Disposition or an election under
Section 83(b) of the Code shall remit to the Company an amount sufficient to
satisfy all resulting Required Withholding; PROVIDED that, in lieu of or in
addition to the foregoing, the Company shall have the right to withhold such
Required Withholding from compensation otherwise due to the Grantee.
10.2 ELECTIVE SHARE WITHHOLDING.
a. If permitted by the Committee in an Option Agreement and subject to the
following subsection, a Grantee may elect the withholding ("Share Withholding")
by the Company of a portion of the Shares otherwise deliverable to such Grantee
upon the exercise of an Option (a "Taxable Event") having a Fair Market Value
equal to (i) the minimum amount necessary to satisfy Required Withholding
liability attributable to the Taxable Event; or (ii) a greater amount, not to
exceed the estimated total amount of such Grantee's tax liability with respect
to the Taxable Event.
b. Each Share Withholding election shall be subject to the following
conditions:
(1) the Grantee's election must be made before the date (the "Tax Date")
on which the amount of tax to be withheld is determined; and
(2) the Grantee's election shall be irrevocable.
10.3 NOTIFICATION UNDER CODE SECTION 83(B). If the Grantee, in connection
with the exercise of any Option, makes the election permitted under Section
83(b) of the Code to include in such Grantee's gross income in the year of
transfer the amounts specified in Section 83(b) of the Code, then such Grantee
shall notify the Company of such election within 10 days of filing the notice of
the election with the Internal Revenue Service, in addition to any filing and
notification required pursuant to regulations issued under Section 83(b) of the
Code. The Committee may, in connection with the grant of an Option or at any
time thereafter, prohibit a Grantee from making the election described above.
ARTICLE 11. SUCCESSORS
All obligations of the Company under the Plan with respect to Options
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise of all or substantially all of the business
and/or assets of the Company.
ARTICLE 12. ADDITIONAL PROVISIONS
12.1 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
12.2 SEVERABILITY. If any part of the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any Section or part
of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.
8
<PAGE>
12.3 REQUIREMENTS OF LAW. The granting of Options and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required. Notwithstanding any provision of the
Plan or any Option, Grantees shall not be entitled to exercise, or receive
benefits under, any Option, and the Company shall not be obligated to deliver
any Shares or deliver benefits to a Grantee, if such exercise or delivery would
constitute a violation by the Grantee or the Company of any applicable law or
regulation.
12.4 SECURITIES LAW COMPLIANCE. (a) If the Committee deems it necessary
to comply with any applicable securities law, or the requirements of any stock
exchange upon which Shares may be listed, the Committee may impose any
restriction on Shares acquired pursuant to Options under the Plan as it may deem
advisable. All certificates for Shares delivered under the Plan pursuant to any
Option or the exercise thereof shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the SEC, any stock exchange upon which
Shares are then listed, any applicable securities law, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. If so requested by the Company, the Grantee
shall make a written representation to the Company that he or she will not sell
or offer to sell any Shares unless a registration statement shall be in effect
with respect to such Shares under the Securities Act of 1993, as amended, and
any applicable state securities law or unless he or she shall have furnished to
the Company, in form and substance satisfactory to the Company, that such
registration is not required.
(b) If the Committee determines that the exercise of, or delivery of Shares
pursuant to, any Option would violate any applicable provision of securities
laws or the listing requirements of any national securities exchange or national
market system on which are listed any of the Company's equity securities, then
the Committee may postpone any such exercise or delivery, as applicable, but the
Company shall use all reasonable efforts to cause such exercise or delivery to
comply with all such provisions at the earliest practicable date.
12.5 NO RIGHTS AS A STOCKHOLDER. A Grantee shall not have any rights as a
stockholder of the Company with respect to the Shares which may be deliverable
upon exercise of such Option until such shares have been delivered to him or
her.
12.6 NATURE OF PAYMENTS. Options shall be special incentive payments to
the Grantee and shall not be taken into account in computing the amount of
salary or compensation of the Grantee for purposes of determining any pension,
retirement, death or other benefit under (a) any pension, retirement, profit-
sharing, bonus, insurance or other employee benefit plan of the Company or any
Subsidiary or (b) any agreement between (i) the Company or any Subsidiary and
(ii) the Grantee, except as such plan or agreement shall otherwise expressly
provide.
12.7 GOVERNING LAW. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Delaware,
other than its laws respecting choice of law.
9
<PAGE>
EXHIBIT B
SHARE PURCHASE AGREEMENT
BY AND BETWEEN
THE SHAREHOLDERS OF APPLE SPORTS, INC.
AND
THE SHAREHOLDERS OF APPLE GOLF SHOES, INC.,
AS SELLERS
AND
EMPIRE OF CAROLINA, INC.,
AS PURCHASER
---------------------
APRIL 10, 1998
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
I. SALE AND PURCHASE OF SHARES AND ASSETS............................................................. 1
1.1 Sale and Purchase....................................................................... 1
1.2 Excluded Assets......................................................................... 1
1.3 Certain Assets of the Sports Entities................................................... 1
1.4 Disclaimer.............................................................................. 2
1.5 Percentage Interest..................................................................... 2
II. PURCHASE PRICE; MANNER OF PAYMENT.................................................................. 2
2.1 Purchase Price.......................................................................... 2
2.2 Capital Stock Changes................................................................... 3
2.3 Payment of Purchase Price............................................................... 3
2.4 Registration Rights..................................................................... 3
2.5 Put Rights.............................................................................. 3
III. REPRESENTATIONS AND WARRANTIES OF SELLERS.......................................................... 4
3.1 Sellers' Representation................................................................. 4
(a) Organization and Good Standing of the Sports Entities........................ 4
(b) Organization and Good Standing of Golf....................................... 4
(c) Ownership and Title to the Shares............................................ 4
(d) Capitalization of Other Sports Entities...................................... 5
(e) No Options, Etc.............................................................. 5
(f) Stock Transfer Records....................................................... 5
(g) Authority and Effect......................................................... 5
(h) Violations; Consents......................................................... 5
(i) No Conflicts or Violations........................................ 5
(ii) Consents and Approvals............................................ 6
(i) Financial Statements......................................................... 6
(1) Financial Statements for Period Ended December 31, 1996........... 6
(2) Interim Financial Statements...................................... 6
(3) Absence of Undisclosed Liabilities................................ 6
(A) No Liabilities......................................... 6
(B) No Knowledge........................................... 6
(j) No Changes................................................................... 7
(1) No Material Adverse Change........................................ 7
(2) No Material Damage, Etc........................................... 7
(3) No New Material Liabilities....................................... 7
(4) No Material Change in Business Relationship....................... 7
(5) Assets Not Pledged................................................ 7
(6) No Material Assets Sold........................................... 7
(7) Compliance and Performance........................................ 7
(8) Increase in Compensation, Etc..................................... 7
(9) No Capital Changes or Dividends................................... 7
(10) No Other Corporate Action......................................... 8
(11) Certain Transactions.............................................. 8
(k) The Business................................................................. 8
(l) Product Liability; Warranty Liability........................................ 8
(1) No Claims, Etc.................................................... 8
(2) Reserves.......................................................... 8
(m) Places of Business........................................................... 8
(1) Facilities........................................................ 8
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(2) Leases............................................................ 8
(3) Condition......................................................... 9
(4) Condemnation...................................................... 9
(n) Permits, Etc................................................................. 9
(o) Zoning Laws, Etc............................................................. 9
(p) Environmental................................................................ 9
(1) Hazardous Substances.............................................. 9
(2) Underground Tanks................................................. 9
(3) Compliance........................................................ 9
(4) Material Violations, Etc.......................................... 10
(q) OSHA......................................................................... 10
(r) Title to Assets; No Liens.................................................... 10
(s) Accounts Receivable.......................................................... 10
(t) Inventory.................................................................... 11
(u) Bank Accounts, Guarantees and Powers......................................... 11
(v) Agreements and Commitments................................................... 11
(w) Intellectual Property........................................................ 11
(1) Trademarks, Etc................................................... 11
(2) No Claims, Etc.................................................... 11
(x) Customers.................................................................... 12
(y) Employment Practices......................................................... 12
(1) No Employees...................................................... 12
(2) No Union, Etc..................................................... 12
(3) Employment Law Violations......................................... 12
(4) No Employment Contracts, Etc...................................... 12
(5) Sick Pay, Etc..................................................... 12
(6) No Investigations or Suspension................................... 12
(z) Employee Benefit Plans....................................................... 13
(1) Plans Maintained by the Sports Entities and Golf.................. 13
(2) Plan.............................................................. 13
(3) Other............................................................. 13
(aa) Litigation................................................................... 14
(bb) Tax Matters.................................................................. 14
(1) All Returns Filed................................................. 14
(2) All Taxes Paid.................................................... 14
(3) Tax Audits, Etc................................................... 14
(4) Foreign Person, Etc............................................... 15
(5) Parachute Payments................................................ 15
(6) Withholding....................................................... 15
(7) Asset Attributes.................................................. 15
(cc) Insurance.................................................................... 15
(dd) Brokers...................................................................... 15
(ee) Corporate Action and Records................................................. 15
(ff) Disclosures.................................................................. 16
(gg) Knowledge.................................................................... 16
IV. REPRESENTATIONS AND WARRANTIES OF PURCHASER........................................................ 16
4.1 Purchaser's Representations............................................................. 16
(a) Organization, Standing and Qualification..................................... 16
(b) Corporate Authority.......................................................... 16
(c) Validity of Empire Common Stock.............................................. 16
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(d) Violations; Consent.......................................................... 16
(1) No Conflicts Or Violations........................................ 17
(2) Consents and Approvals............................................ 17
(3) Investment Intent................................................. 17
(4) Broker............................................................ 17
(e) Financial Statements......................................................... 17
(1) Financial Statements for Period Ended December 31, 1996........... 17
(2) Interim Financial Statements...................................... 17
(3) Absence of Undisclosed Liabilities................................ 18
(A) No Liabilities......................................... 18
(B) No Knowledge........................................... 18
V. COVENANTS OF THE PARTIES........................................................................... 18
5.1 Pre-Closing Covenants of Sellers........................................................ 18
(a) Conduct of Business Prior to Closing......................................... 18
(1) Business Only in Ordinary Course.................................. 18
(2) Maintain Assets................................................... 18
(3) No Sale, Etc...................................................... 18
(4) Preserve Business................................................. 18
(5) Perform Under All Agreements, Etc................................. 18
(6) Capital Structure and Dividends................................... 19
(7) Transfer of the Shares............................................ 19
(8) Information and Access............................................ 19
(9) Notify Purchaser of Material Changes.............................. 19
(10) (a) Announcements.......................................... 19
(b) Tax Matters............................................ 19
(c) Compliance with Conditions............................. 20
5.2 Pre-Closing Covenants of Purchaser...................................................... 20
(a) No Public Announcement....................................................... 20
(b) Wilson License............................................................... 20
(c) Other........................................................................ 20
5.3 Post-Closing Covenants of Sellers....................................................... 20
(a) Restrictive Agreement........................................................ 20
(b) Permits, Licenses............................................................ 20
(c) Cooperation.................................................................. 20
5.4 Post-Closing Covenants of Purchaser..................................................... 20
(a) Continuation of Employment................................................... 20
(b) Transfer Taxes............................................................... 20
(c) Cooperation.................................................................. 20
5.5 Joint Covenants of the Parties.......................................................... 20
(a) Announcements................................................................ 20
(b) Tax Assistance............................................................... 21
(c) Access to Records............................................................ 21
VI. CLOSING: CLOSING REQUIREMENTS...................................................................... 21
6.1 Closing................................................................................. 21
6.2 Closing Obligations of Sellers.......................................................... 21
(a) Share Certificates........................................................... 21
(b) Certificate.................................................................. 21
(c) Restrictive Agreements of Sellers............................................ 22
(d) Legal Opinion................................................................ 22
(e) Good Standing Certificate.................................................... 22
</TABLE>
iii
<PAGE>
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
(f) Consents..................................................................... 22
(g) Supplemental Schedules....................................................... 22
(h) Wilson License............................................................... 22
(i) Leases....................................................................... 22
(j) Resignations................................................................. 22
(k) Termination of Stockholders Agreements, Options, Etc......................... 22
(l) Certificate of Incorporation and By-Laws..................................... 22
(m) Pay-Off Letter............................................................... 22
(n) Indemnity Bond............................................................... 22
6.3 Closing Obligations of Purchaser........................................................ 22
(a) Certificate.................................................................. 22
(b) Payment of The Purchase Price................................................ 23
(c) Special Reimbursement........................................................ 23
(d) New Credit Facility.......................................................... 23
(e) Legal Opinion................................................................ 23
(f) Resolutions.................................................................. 23
(g) Good Standing Certificate.................................................... 23
VII. CONDITIONS FOR CLOSING............................................................................. 23
7.1 Conditions Precedent to Obligations of Sellers.......................................... 23
(a) Representations and Warranties True at Closing Date.......................... 23
(b) Replacement of Long-Term Debt................................................ 23
(c) Closing Requirements......................................................... 23
7.2 Conditions Precedent to Obligations of Purchaser........................................ 23
(a) Representations and Warranties True at Closing Date.......................... 23
(b) No Material Adverse Change................................................... 24
(c) Wilson License............................................................... 24
(d) Leases....................................................................... 24
(e) Indemnity Bond............................................................... 24
(f) No Litigation, Etc........................................................... 24
(g) Approvals.................................................................... 24
(h) Compliance with Covenants.................................................... 24
(i) Supplemental Schedules....................................................... 24
(j) Closing Requirements......................................................... 24
7.3 Closing Deemed Waiver................................................................... 24
VIII. FURTHER ASSURANCES................................................................................. 24
8.1 Further Assurances...................................................................... 24
IX. TERMINATION........................................................................................ 25
9.1 Termination of Agreement................................................................ 25
(a) Mutual Consent............................................................... 25
(b) Breach....................................................................... 25
(c) Failure of Respective Conditions............................................. 25
9.2 Liability on Termination................................................................ 25
X. SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................................................... 25
10.1 Representations and Warranties.......................................................... 25
(a) Non-Survival of Certain Matters.............................................. 25
(b) Certain Other Matters........................................................ 25
(c) Post-Closing Covenants....................................................... 25
(d) Tax Matters.................................................................. 25
XI. INDEMNIFICATION.................................................................................... 26
</TABLE>
iv
<PAGE>
<TABLE>
<C> <S> <C> <C> <C> <C> <C>
11.1 Basis for Indemnification By Sellers.................................................... 26
11.2 Limitations on Obligation to Indemnify.................................................. 26
(a) Satisfaction of Third-Party Claim............................................ 26
(b) 1997 Sports Entities' Income Tax Liabilities................................. 26
(c) Minimum Claim Amount......................................................... 26
(d) Maximum Amount of Aggregate Liability........................................ 26
(e) Other Limitations............................................................ 27
11.3 Claims Procedure........................................................................ 27
(a) Assertion of Claims.......................................................... 27
(b) Third-Party Claims Other Than Tax............................................ 27
(c) Claims Involving Taxes....................................................... 28
11.5 Indemnification Payment................................................................. 28
(a) To Purchaser................................................................. 28
(b) Failure to Timely Pay Indemnification........................................ 28
XII. REGISTRATION RIGHTS................................................................................ 28
12.1 Shelf Registration...................................................................... 28
12.2 Piggyback Registration.................................................................. 29
12.3 Termination of Registration Rights; Provision of Rule 144 Information................... 30
12.4 Registration Procedures................................................................. 30
12.5 Registration Expenses................................................................... 32
12.6 Indemnification; Contribution........................................................... 32
(a) Indemnification by the Purchaser............................................. 32
(b) Indemnification by Sellers................................................... 33
(c) Conduct of Indemnification Proceedings....................................... 33
(d) Contribution................................................................. 34
XIII. MISCELLANEOUS...................................................................................... 34
13.1 Successors and Assigns.................................................................. 34
13.2 No Third Party Beneficiaries............................................................ 35
13.3 Expenses................................................................................ 35
13.4 Notices................................................................................. 35
13.5 Governing Law; Venue.................................................................... 36
13.6 Counterparts............................................................................ 36
13.7 Headings................................................................................ 36
13.8 Exhibits................................................................................ 36
13.9 Entire Agreement........................................................................ 36
13.10 Severability............................................................................ 36
13.11 Confidentiality......................................................................... 36
13.12 Amendments.............................................................................. 36
</TABLE>
v
<PAGE>
AGREEMENT (this "Agreement") made and entered into this 10th day of April,
1998, by and between MARK ROSE COMPANIES LTD., a New York corporation ("LTD"),
MARK S. ROSE ("MR"), TIMOTHY MORAN ("TM"), E. JOY ROSE ("EJR"), ROBERT A.
WERTLEY ("RW"), ROBERT A. WERTLEY, as Trustee for Mark Rose Irrevocable Trust
f/b/o Bridget A. Moran ("Trust A"), ROBERT A. WERTLEY, as Trustee for Mark Rose
Irrevocable Trust f/b/o Stacy Dugan ("Trust B") and ROBERT A. WERTLEY, as
Trustee for Mark Rose Irrevocable Trust f/b/o Baylee Shea Rose ("Trust C"),
hereinafter sometimes collectively referred to as "Seller" or "Sellers", and
EMPIRE OF CAROLINA, INC., a Delaware corporation, hereinafter referred to as
Purchaser.
W I T N E S S E T H:
WHEREAS, LTD, MR, TM, EJR and RW (collectively the "Sports Shareholders")
own, in the aggregate all of the issued and outstanding shares of capital stock
(the "Sports Shares") of Apple Sports, Inc., a New York corporation ("Sports");
and
WHEREAS, TM, RW, Trust A, Trust B, and Trust C (collectively, the "Golf
Shareholders" and together with the Sports Shareholders, the "Seller" or
"Sellers") own, in the aggregate, all of the issued and outstanding shares of
capital stock (the "Golf Shares" and together with the Sports Shares, the
"Shares") of Apple Golf Shoes, Inc., a New York Corporation ("Golf"); and
WHEREAS, Sports is the sole shareholder of Dorson Sports, Inc. ("Dorson")
and Dorson is the sole shareholder of Kingsley Golf Co., Inc. ("Kingsley") and
Lee Richards, Inc. ("Lee Richards") (Dorson, Kingsley and Lee Richards are
collectively referred to as the "Subsidiaries" and Sports and the Subsidiaries
are collectively and taken as a whole referred to as the "Sports Entities", and
each as a "Sports Entity", unless otherwise specifically identified); and
WHEREAS, Sellers and Purchaser wish to enter into this Agreement for
purposes of setting forth the terms and conditions of the agreements between
them pursuant to which the Sports Shareholders would sell and Purchaser would
acquire the Sports Shares and the Golf Shareholders would sell and Purchaser
would acquire the Golf Shares, in exchange for voting common stock, par value
$.10 per share, of the Purchaser ("Empire Common Stock") as hereinafter
provided.
NOW, THEREFORE, the parties hereto, each in consideration of the payments
and the representations, warranties, covenants and agreements of the other
provided for or contained herein, do hereby agree as follows:
I.
SALE AND PURCHASE OF SHARES AND ASSETS
1.1 SALE AND PURCHASE. Subject to the terms and conditions of this
Agreement, at the Closing provided for in Section 6.1 (the "Closing"): (i) the
Sports Shareholders agree to sell, transfer, convey, assign and deliver all of
their right, title and interest in and to the Sports Shares to Purchaser, and
(ii) the Golf Shareholders agree to sell, transfer, convey, assign and deliver
all of their right, title and interest in and to the Golf Shares to Purchaser,
and Purchaser agrees to purchase the Sports Shares and the Golf Shares in a
single transaction upon the payment of the Purchase Price specified in Article
II below and the performance of the other obligations of Purchaser hereunder.
1.2 EXCLUDED ASSETS. Notwithstanding any other provision hereof, there
shall be excluded from the sale to Purchaser herein contemplated, all furniture,
memorabilia and equipment that are located in TM's office and which are the sole
and exclusive property of TM as described in SCHEDULE 1.2 of the Seller
Memorandum (as defined in Section 3.1 hereof) (the "Excluded Assets").
1.3 CERTAIN ASSETS OF THE SPORTS ENTITIES. It is further acknowledged and
agreed that the Sports Entities intend to convey the following assets of the
Sports Entities prior to the Closing, and, accordingly, such assets shall not be
deemed assets of the Sports Entities, and, therefore, ownership of such assets
shall not vest in Purchaser (either directly or indirectly by means of
Purchaser's purchase of the Shares) at
<PAGE>
Closing: (a) a 1995 Mercedes-Benz automobile (model S420); (b) 1953 Rolls-Royce
limousine; and (c) a 1994 Cadillac SDS.
1.4 DISCLAIMER. Except as otherwise expressly set forth in this Agreement,
Seller makes no representation or warranty as to the nature or condition of the
assets reflected on the books of either Sports or Golf, and any representations
or warranties implied by law are hereby expressly disclaimed, including without
limitation, any warranty of merchantability or fitness.
1.5 PERCENTAGE INTEREST. Based on the agreed allocation of the Purchase
Price between Golf and Sports set forth in Section 2.3 hereof, and the
respective ownership of each of the Sellers in each thereof, the term
"Applicable Percentage" shall as to each of the individual Sellers be as
follows:
<TABLE>
<C> <S> <C> <C>
(i) LTD -- 35%
(ii) MR -- 2.5%
(iii) TM -- 20%
(iv) ETR -- 2.5%
(v) RW -- 5%
(vi) Trust A -- 11 2/3%
(vii) Trust B -- 11 2/3%
(viii) Trust C -- 11 2/3%
-------
100%
</TABLE>
II.
PURCHASE PRICE; MANNER OF PAYMENT
2.1 PURCHASE PRICE. The purchase price for the Shares (the "Purchase
Price") shall be paid by the Purchaser at Closing by its issuance and delivery
to Sellers of certificates evidencing an aggregate of 5,000,000 shares (the
"Initial Payment Shares") of Common Stock (par value $.10 per share) of
Purchaser ("Empire Common Stock"); provided, however, that if subsequent to the
Closing and during the Adjustment Period (hereinafter defined), the closing
daily market price of Empire Common Stock trading on the Exchange (as such term
is defined in Section 12.4(i) of this Agreement), as reported in the New York
City edition of the Wall Street Journal shall not be at a price of $2 per share
or higher for each of forty-five consecutive stock trading days on such Exchange
(the "Market Level Requirement"), then, in such event, Sellers shall have the
absolute and unconditional right to receive and Purchaser shall deliver to
Sellers, on a date that is not later than the Adjustment Date (hereinafter
defined), an additional 1,153,846 newly issued, fully paid and non-assessable
shares (the "Additional Payment Shares") of Empire Common Stock, thereby
bringing to 6,153,846 the number of shares of Empire Common Stock that will be
paid in the event the Market Level Requirement is not satisfied. The Initial
Payment Shares and the Additional Payment Shares, if any, that are required to
be delivered hereunder are hereinafter sometimes collectively referred to as the
"Payment Shares". As used herein: (i) the term "Adjustment Period" shall mean
the period of time commencing on the Effective Date and ending on the first
calendar anniversary of the Effective Date; provided that if the Effective Date
shall not have occurred within ninety (90) days of the Closing Date, the
Adjustment Period shall mean a period of three hundred sixty-five (365) days
commencing on the ninety-first (91st) day after the Closing Date (hereinafter
defined); (ii) the term "Adjustment Date" shall mean the date that is the later
of: (a) fifteen (15) business days after the date on which it can be ascertained
that the Market Level Requirement can not be satisfied and (b) three hundred
sixty-five (365) days after the date on which the Adjustment Period shall have
commenced; and (iii) the term "Effective Date" shall mean the first trading date
after which the registration statement referred to in Subsection (a) of Section
12.1 of this Agreement above is declared effective by the Securities and
Exchange Commission and the Payment Shares in question shall be deemed fully
transferrable on an Exchange.
2
<PAGE>
2.2 CAPITAL STOCK CHANGES. If, prior to the time for issuance of any
Payment Shares pursuant to Section 2.1 above, Empire Common Stock shall be
recapitalized or reclassified or the Purchaser shall effect any stock dividend,
stock split or reverse stock split of Empire Common Stock or the Purchaser shall
merge, consolidate, reorganize, or enter into another business combination with
any other corporation or shall sell or exchange all or substantially all of its
assets, then the Initial Payment Shares and the Additional Payment Shares, as
the case may be, shall be appropriately and equitably adjusted and shall be
deemed to refer to the kind and amount of shares of stock and other securities
and property which the holders of such shares would have been entitled to
receive had such stock been issued and outstanding as of the record date for
determining stockholders entitled to participate in such corporate event. The
foregoing provisions shall apply to successive mergers, consolidations,
reorganizations and combinations.
2.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be allocated 50%
to the exchange of the Golf Shares and 50% to the exchange of the Sports Shares
and shall be paid by Purchaser as follows:
(a) At the Closing, the Initial Payment Shares, registered in the names
of the individuals or entities constituting Sellers and in amounts
proportional to their respective Applicable Percentages set forth in Section
1.5 hereof, as the case may be, shall be delivered to the Sellers entitled
thereto.
(b) If the Market Level Requirement shall not have been satisfied, on or
prior to the Adjustment Date, Purchaser shall deliver the Additional Payment
Shares registered in the names of the Sports Shareholders and Golf
Shareholders, as the case may be, in accordance with their respective
Applicable Percentages.
2.4 REGISTRATION RIGHTS. The Sellers and Payment Shares to be issued
hereunder shall be entitled to the Registration Rights and other benefits of
Article XII hereof.
2.5 PUT RIGHTS. In addition to and not in limitation of other remedies
available to Sellers in such circumstances, if for any reason whatsoever the
Effective Date shall not have occurred on or prior to ninety (90) days after the
Closing Date, Sellers shall have the following right (hereinafter sometimes
referred to as the "Put") to require Purchaser to repurchase up to 500,000 of
the Payment Shares in the aggregate at a net price of $2.00 per share. The Put
may be irrevocably exercised by any Seller by its delivery to Purchaser of a
written notice of exercise setting forth the number of Payment Shares that it
desires to Put to Purchaser (the "Exercise Notice"), which may be delivered at
any time during the period (the "Exercise Period") commencing on the
ninety-first (91st) day after the Closing Date and ending on the earlier of (a)
the Effective Date and (b) the calendar anniversary of the commencement of the
Exercise Period. Upon delivery of such Exercise Notice, the closing on the Put
(the "Put Closing") shall take place on a date (the "Put Closing Date") which
shall be thirty (30) days after the date of receipt by Purchaser of the Exercise
Notice. The Put Closing shall be held at the office of Seller's Counsel referred
to in Section 6.1 or at such other place mutually agreeable to the exercising
Seller(s) and Purchaser. At the Put Closing, (i) each exercising Seller shall
deliver to Purchaser the Payment Shares that are being Put (with all necessary
stock powers being duly completed) and the Purchaser shall deliver to such
exercising Seller a certified or official bank check in the aggregate amount of
$2.00 times the number of Payment Shares being Put by such exercising Seller,
and, (ii) if necessary, the Purchaser shall return to such exercising Seller a
new share certificate representing the remaining shares of Empire Common Stock
remaining after exercise of the Put. In the event that more than 500,000 Payment
Shares in the aggregate, shall be Put to Purchaser by Sellers, the number of
Payment Shares for each exercising Seller which may be Put hereunder shall be
equal to a fraction, the numerator of which is the number of Payment Shares
originally delivered to each exercising Seller respectively, and the denominator
of which is the aggregate number of Payment Shares delivered to all of the
exercising Sellers.
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<PAGE>
III.
REPRESENTATIONS AND WARRANTIES OF SELLERS
3.1 SELLERS' REPRESENTATION. Sellers hereby jointly and severally, make
the following representations and warranties to Purchaser, each and all of which
are true and correct as of the date hereof (except where another date is
specified), except as set forth in the schedules (the "Schedules") to the
memorandum to Purchaser (the "Seller Memorandum") regarding specific
representations and warranties delivered concurrently herewith, in the
Supplemental Schedules delivered between the date hereof and the Closing
pursuant to the provisions of Section 5.1(a)(9) or as the same may be modified
and supplemented to the extent specifically disclosed in any document,
instrument, letter or other writing provided to Purchaser by Sellers or Sellers'
representatives during Purchaser's due diligence investigation or as set forth
in any document, instrument, letter or other writing set forth on SCHEDULE III
to the Seller Memorandum (in each case, a "Disclosure Item"), and Sellers
jointly and severally acknowledge that, subject to the provisions of Section
5.1(a)(9) hereof, Purchaser is relying on such representations and warranties in
connection with the transactions contemplated by this Agreement:
(a) ORGANIZATION AND GOOD STANDING OF THE SPORTS ENTITIES. Each of the
Sports Entities is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of New York and each has all
necessary corporate powers to own, lease and operate its assets and
properties and to carry on the business now being conducted by it. None of
the Sports Entities is qualified or registered to do business as a foreign
corporation in any state or jurisdiction. Sports is the owner of all of the
issued and outstanding shares of capital stock of Dorson, and Dorson is the
owner of all of the issued and outstanding shares of capital stock of each
of Kingsley and Lee Richards. Except for the ownership of Dorson by Sports,
and the ownership of Kingsley and Lee Richards by Dorson, none of the Sports
Entities owns, directly or indirectly, any interest in any corporation,
association, joint venture, partnership or other business organization, firm
or enterprise of any character whatsoever whether domestic or foreign.
(b) ORGANIZATION AND GOOD STANDING OF GOLF. Golf is a corporation duly
incorporated, validly existing and in good standing under the laws of the
State of New York and has all necessary corporate powers to own, lease and
operate its assets and properties and to carry on the business now being
conducted by it. Golf is not qualified or registered to do business as a
foreign corporation in any other jurisdiction. Golf does not own, directly
or indirectly, any interest in any corporation, association, joint venture,
partnership or other business organization, firm or enterprise of any
character whatsoever, whether domestic or foreign.
(c) OWNERSHIP AND TITLE TO THE SHARES. The Sports Shareholders and the
Golf Shareholders, as the case may be, severally own, or at the Closing will
own, all of the Shares, which are owned by them individually, in the numbers
set forth opposite their respective names on SCHEDULE 3.1(C) to the Seller
Memorandum. Each Golf Shareholder and Sports Shareholder, respectively,
represents and warrants for himself, herself or itself that he, she or it
has, or will at Closing have, good and marketable title to the number of
Shares owned by him, her or it, free and clear of any and all liens,
pledges, security interests, mortgages, exceptions, reservations, charges,
claims, judgments, liabilities, rights of third parties and other
encumbrances and obligations of every kind and nature whatsoever, whether
arising by agreement, operation of law or otherwise, except for any of the
foregoing which are created pursuant to the provisions of the Bank Debt
(hereinafter referred to), all of which Shares have been validly issued and
are fully paid and nonassessable (subject to the provisions of the
applicable laws of the State of New York; provided, however, that none of
the circumstances that would result in assessment under applicable laws of
the State of New York are, or at Closing will be, present).
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(d) CAPITALIZATION OF OTHER SPORTS ENTITIES. The authorized capital
stock of the other Sports Entities is as follows:
<TABLE>
<CAPTION>
Dorson -- 200 shares of Common Stock (no par value)
<S> <C> <C>
Kingsley -- 200 shares of Common Stock (no par value)
Lee Richards -- 200 shares of Common Stock (par value $0 per value)
</TABLE>
No Sports Entity is authorized to issue shares of capital stock of any
other class. There presently are issued and outstanding 100 shares of
Dorson Common Stock, 100 shares of Kingsley Common Stock, and 100 shares
of Lee Richards Common Stock, all of which have been validly issued and
are fully paid and nonassessable (subject to the provisions of the
applicable laws of the State of New York). The Dorson shares are 100%
owned by Sports and the Kingsley and Lee Richards shares are 100% owned
by Dorson.
(e) NO OPTIONS, ETC. There are no outstanding subscription rights,
options, stock rights, warrants, convertible securities or other agreements
or commitments obligating Golf or any Sports Entity to issue or to transfer
from treasury, or entitling any person to purchase, any additional shares of
common stock or other securities of Golf or any Sports Entity.
(f) STOCK TRANSFER RECORDS. The stock transfer records of each of Golf
and the Sports Entities accurately and completely show and disclose all
issuances, transfers, repurchases, redemptions, cancellations and other
transactions involving shares of capital stock of each of Golf and the
Sports Entities, as the case may be. As of the date hereof, the Sports
Shareholders are shown on the stock transfer records of Sports as the owners
of record, in the aggregate, of the Sports Shares and the Golf Shareholders
are shown on the stock transfer records of Golf, as the owners of record, in
the aggregate, of the Golf Shares, Sports is shown on the stock transfer
records of Dorson as the owner of record of all of the issued and
outstanding shares of Dorson and Dorson is shown on the respective stock
transfer records of Kingsley and Lee Richards as the owner of record of all
of the issued and outstanding shares of Kingsley and Lee Richards,
respectively.
(g) AUTHORITY AND EFFECT. Each of Sellers has the full power, legal
right and authority to enter into this Agreement and any other agreements or
instruments required to be entered into by Sellers under the terms hereof
and the Sellers collectively have the right to consummate the transactions
contemplated hereby and thereby. Upon execution and delivery of this
Agreement and of the other agreements or instruments required of Sellers
hereunder, each will constitute the legal, valid and binding obligation of
each of Sellers enforceable against each of them in accordance with their
respective terms, except as each of Sellers' obligations hereunder and
thereunder may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights and judicial
discretion with respect to equitable principles and remedies in general.
(h) VIOLATIONS; CONSENTS. Neither the execution and delivery of this
Agreement or of any other agreements or instruments required of any and all
of Sellers by the terms hereof, nor the performance of or compliance by any
and all of Sellers with any of the respective terms and provisions of this
Agreement or of such other agreements or instruments:
(i) NO CONFLICTS OR VIOLATIONS. (a) Subject to the provisions of
Subsection (h)(ii) of this Section 3.1, violates, or will violate (with
or without notice or lapse of time, or both), any statute, regulation,
rule, judgment, order, decree, stipulation, injunction, charge, or other
restriction of any government, governmental agency or court to which any
of Sellers, Golf or any of the Sports Entities is subject or any
provision of the Certificate of Incorporation, By-Laws and/or any other
organizational documents or governing instruments of Golf or any of the
Sports Entities, or (b) except as described in Schedule 3.1(h)(i) of the
Seller Memorandum, conflicts with, or will conflict with or will result
in the breach of, constitute a default under (with or without notice or
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lapse of time, or both), result in the acceleration of, create in any
party the right to accelerate, terminate, modify or cancel, or require
any notice under the terms, conditions or provisions of any permit,
license, accreditation, approval or authorization held by any of Sellers,
Golf or any of the Sports Entities or of any mortgage, bond, debenture,
note, indenture, loan or credit agreement, security agreement, contract,
lease, sublease, instrument or any other agreement or restriction to
which any of Sellers, Golf or the Sports Entities is a party or is
obligated or bound; or
(ii) CONSENTS AND APPROVALS. Except as described in Schedule
3.1(h)(ii) to the Seller Memorandum, requires the consent or approval of,
any notice to, any filings by any of Sellers, Golf or the Sports Entities
or any authorization for any of Sellers, Golf or the Sports Entities from
any person, government, governmental agency, bureau, commission or board.
(i) FINANCIAL STATEMENTS.
(1) FINANCIAL STATEMENTS FOR PERIOD ENDED DECEMBER 31, 1996. Except
as otherwise disclosed in the Seller Memorandum or any other Schedule or
Supplemental Schedule delivered in connection herewith, the audited
financial statements of (i) Golf and (ii) the Sports Entities (on a
consolidated basis) consisting of balance sheets as of December 31, 1996
and income statements for the period then ended (the "Seller Annual
Financial Statements"), copies of which have heretofore been delivered to
Purchaser, have been prepared in accordance with GAAP applied on a basis
consistent with past practices, are true and correct and present fairly
the financial position of Golf and the Sports Entities, as the case may
be, as of the relevant date or dates and the results of their respective
operations for the period or periods then ended; and
(2) INTERIM FINANCIAL STATEMENTS. Except as otherwise disclosed in
the Seller Memorandum or any other Schedule or Supplemental Schedule
delivered in connection herewith, the unaudited financial statements of
Golf and the Sports Entities for the year ended December 31, 1997,
consisting of balance sheets as of the relevant date and income
statements for the period then ended ("Seller Unaudited Financial
Statements"), copies of which have heretofore been delivered to
Purchaser, have been prepared in accordance with GAAP applied on a basis
consistent with past practices, are true and correct and, subject to
audit and year end adjustments, present fairly the respective financial
positions of Golf and the Sports Entities, as the case may be, as of the
date thereof and the results of their respective operations for the
interim period then ended.
(3) ABSENCE OF UNDISCLOSED LIABILITIES. Except as otherwise
disclosed in the Seller Memorandum or any other Schedule or Supplemental
Schedule delivered in connection herewith, including, without limitation,
Schedule 3.1(i)(3) to the Seller Memorandum, or noted, reflected or
reserved against in the Seller Annual Financial Statements or in the
Seller Unaudited Financial Statements (including the notes thereto):
(A) NO LIABILITIES. None of Golf or the Sports Entities has any
liabilities or obligations other than Inter-Company Indebtedness
which are material, either singly or in the aggregate, whether
secured or unsecured, accrued, absolute, contingent or otherwise, and
whether due, about to become due or due at some future date, relating
to their respective assets and/or business; and
(B) NO KNOWLEDGE. Except as referred to in this Agreement or
otherwise disclosed to Purchaser in any Disclosure Item, Sellers know
of no basis for assertion against Golf or any of the Sports Entities
of any claim or liability relating to their respective assets and/or
business, and are not aware of any occurrence or fact that has or
might reasonably be expected to materially and adversely affect the
respective businesses of Sports Entities or Golf.
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<PAGE>
(j) NO CHANGES. Except as disclosed in Schedule 3.1(j) to the Seller
Memorandum, with respect to all of the following in this section 3.1(j)
except sections 3.1(j)(4), (7), (8) and (11) (as to which four sections the
reference date shall be December 31, 1996, the ending date of the Seller
Annual Financial Statements) since December 31, 1997, the ending date of the
Seller Unaudited Financial Statements:
(1) NO MATERIAL ADVERSE CHANGE. There has not been any material
adverse change in or to the assets, the financial condition, operations
of the business or prospects of any of Golf or the Sports Entities;
(2) NO MATERIAL DAMAGE, ETC. There has not been any material
damage, destruction or loss to any of the assets of Golf or the Sports
Entities, whether or not covered by insurance, which has materially and
adversely affected or impaired, or which would reasonably be foreseen to
materially and adversely affect or impair, the value or usefulness of any
of such assets or the ability of Purchaser to conduct the business of
Golf and the Sports Entities as heretofore conducted by Golf or the
Sports Entities;
(3) NO NEW MATERIAL LIABILITIES. Neither Golf nor any of the Sports
Entities has incurred any material liabilities or obligations (whether
absolute, contingent or otherwise) relating to its business or assets,
whether singly or in the aggregate, other than liabilities incurred in
the ordinary course of business which are in amounts that are reasonably
consistent with prior periods and practices;
(4) NO MATERIAL CHANGE IN BUSINESS RELATIONSHIP. There has not been
any termination or cancellation of, or material modification or change
in, and none of Sellers, Golf or the Sports Entities has received or has
any knowledge of any proposed or prospective cancellation of, or material
modification or change in, any (a) business relationship with any
customer or customers of the Sports Entities or Golf that is or are
material to the business or financial condition of the Sports Entities or
Golf, either singly or in the aggregate, or (b) other material business
agreement or arrangement involving or related to which any of the Sports
Entities or Golf is a party;
(5) ASSETS NOT PLEDGED. Except pursuant to the Bank Debt, none of
the assets of the Sports Entities or Golf has been pledged or subjected
to any lien, security interest, mortgage, pledge, claim, charge or other
encumbrance;
(6) NO MATERIAL ASSETS SOLD. None of the material assets or
interests involved in or necessary to the conduct of the business of the
Sports Entities or Golf has been sold or otherwise disposed of, other
than the sale of inventory in the ordinary course of business ,and no
rights of substantial value of any of the Sports Entities or Golf to the
extent related to their respective businesses have been waived;
(7) COMPLIANCE AND PERFORMANCE. Each of Golf and the Sports
Entities has performed or complied in all material respects with all
material agreements, obligations and covenants required to be performed
or complied with by it in connection with its assets and business and has
not defaulted on any of its obligations thereunder;
(8) INCREASE IN COMPENSATION, ETC. No increases in the rates of
compensation of employees of any of the Sports Entities or Golf have been
granted other than those which are consistent with past compensation
practices, no new employee benefit plans or programs have been granted
other than those which are consistent with past compensation practices,
no new employee benefit plans or programs have been adopted or increases
made in the benefits provided by existing employee benefit plans and no
new employees have been hired by any of the Sports Entities or Golf at
annual compensation levels in excess of $50,000;
(9) NO CAPITAL CHANGES OR DIVIDENDS. Except as permitted hereunder,
neither Golf nor any of the Sports Entities has made any distributions
with respect to its shares or any changes in
7
<PAGE>
its capital or financial structure, including without limitation by: (a)
declaring or paying any dividends, or making any other distributions of
cash or property, to its shareholders, (b) redeeming or agreeing to
redeem any of its shares; or (c) issuing or agreeing to issue any
additional shares of capital stock of any class;
(10) NO OTHER CORPORATE ACTION. No action by the shareholders or
directors of Golf or any of the Sport Entities has been taken at any
meeting or by written consent other than in the ordinary course of
business or as may be required to authorize and/or consummate the
transactions contemplated by or described in this Agreement; and
(11) CERTAIN TRANSACTIONS. None of Golf or the Sports Entities has
entered into any transaction or transactions with any affiliate or
affiliates, or into any other transaction or transactions relating to its
business or assets, except as is consistent with their prior practice as
heretofore disclosed to Purchaser.
(k) THE BUSINESS. Golf and the Sports Entities are engaged in the
business of sourcing, assembling and distributing golf accessory products,
including, without limitation, pull carts gloves, head covers, spikes, tees,
umbrellas and other accessory items, and golf shoes and in certain other
related business (collectively, the "Business"). Customers of the Business
are located in the United States and U.S. Military Installations worldwide,
Europe, the Middle East and North Africa, and include sporting goods chains,
mass merchandisers, pro shops and other golf product retailers.
(l) PRODUCT LIABILITY; WARRANTY LIABILITY.
(1) NO CLAIMS, ETC. All claims, actions, suits, inquiries,
proceedings or investigations by or before any court or governmental or
other regulatory or administrative agency or commission pending or, to
the knowledge of Sellers, threatened against or involving the Sports
Entities or Golf relating to any product alleged to have been
manufactured or sold by the Sports Entities or Golf and alleged to have
been defective or improperly designed or manufactured are listed in
Schedule 3.1(l) to the Seller Memorandum (all claims, actions, suits,
inquiries, proceedings or investigations to such effect are hereinafter
referred to as "Claims"). There are no existing Claims, except and to the
extent identified in Schedule 3.1(1) to the Seller Memorandum which, if
adversely decided, would reasonably be foreseen to have, either
individually or in the aggregate, a material adverse effect upon the
properties, assets, financial condition, results of operation or business
prospects of the Sports Entities or Golf, singly or in the aggregate; and
(2) RESERVES. There are no reserves for product warranty
liabilities reflected on the Seller Annual Financial Statements or to the
Seller Unaudited Financial Statements, and no such reserves are required
by GAAP to be reflected on such financial statements.
(m) PLACES OF BUSINESS.
(1) FACILITIES. The Sports Entities and Golf conduct their
respective businesses at the facilities described in Schedule 3.1(m) to
the Seller Memorandum (the "Places of Business") and none of the Sports
Entities or Golf maintain any other office or other business facility;
(2) LEASES. Schedule 3.1(m) to the Seller Memorandum describes each
of the leases for the Places of Business that are currently in effect
(the "Leases"). Each of such Leases is in full force and effect and each
of the Sports Entities is in compliance in all material respects with all
terms and conditions of all such Leases and has paid or provided for all
amounts required to be paid or provided for by it under or pursuant to
the terms of the Leases. There are no restrictions or limitations in any
of said Leases which affect or impair, or which would reasonably be
foreseen to affect or impair, the use of the premises covered thereby in
the conduct and operation of their respective businesses, as heretofore
conducted at such premises, on and after the Closing Date. The Leases
prohibit the assignment thereof or the subletting of all or a portion of
the premises
8
<PAGE>
covered thereby without the consent of the landlord, which under the
terms of the Leases is not to be unreasonably withheld. Golf is not a
party to any Lease;
(3) CONDITION. To the knowledge of Sellers, all buildings,
improvements and appurtenances on the Places of Business, including the
roofs on the buildings, are in serviceable condition and not in need of
any material repairs or replacement which are the obligation of any
Sports Entity under the Leases; and
(4) CONDEMNATION. There are no condemnation proceedings pending or
to the knowledge of Sellers, threatened with respect to all or any
portion of any of the Places of Business.
(n) PERMITS, ETC. Each of Golf and the Sports Entities has all
material business licenses, permits and authorizations required in
connection with the ownership of its assets and the conduct of its business
as heretofore conducted. None of such licenses, permits or authorizations
has lapsed or been revoked or terminated, and the business of each of Golf
and the Sports Entities have at all times been operated and conducted in
accordance with and consistent with all material terms and conditions
thereof.
(o) ZONING LAWS, ETC. Except as described in Schedule 3.1(o) to the
Seller Memorandum, none of Sellers, Golf or the Sports Entities is in
possession of, and during the past five (5) years has not received, any
notice of actual or possible violation of any zoning, land use, building
code, fire code, noise emissions and other applicable laws, ordinances,
regulations and codes, including with respect to all storage tanks, signs
and parking areas on said premises, with respect to the Places of Business
and the conduct of the business of the Sports Entities and/or Golf thereat,
and none of Sellers, Golf or the Sports Entities has any knowledge of any
such violations or reason to believe that the Places of Business are not, or
may not be, in full compliance with all such laws, ordinances, regulations
and codes.
(p) ENVIRONMENTAL.
(1) HAZARDOUS SUBSTANCES. The Sellers have no actual knowledge that
Golf or the Sports Entities, or any predecessor in interest, has at any
time, used, stored, treated, generated, manufactured, transported,
disposed of or deposited any petroleum or fractions thereof or any
hazardous or toxic substances (collectively, "Hazardous Substances"), as
defined in any federal, state or local law, regulation or ordinance
concerned with environmental protection (collectively, "Environmental
Laws"), on the Places of Business or on any other property owned or used
by Golf or the Sports Entities other than in accordance in all material
respects with Environmental Laws and permits obtained in accordance with
Environmental Laws. There has been no material spill, discharge, leak,
emission, escape, dumping or release (collectively, "Releases" and
individually, "Release") by the Sports Entities or Golf (or to the best
knowledge of Sellers and the Sports Entities, by any other person) of any
Hazardous Substances on or at the Places of Business or during the
conduct of the business of any of Golf or the Sports Entities in
violation of any law or regulation which regulates such Release;
(2) UNDERGROUND TANKS. Insofar as Sellers are aware, there are no
underground storage tanks as defined in 42 U.S.C. 6991 located on the
Places of Business;
(3) COMPLIANCE. Insofar as Sellers are aware, each of Golf and the
Sports Entities, in connection with the conduct of their respective
business and the Places of Business, is in compliance in all material
respects with all Environmental Laws, has obtained and is in compliance
in all material respects with all permits required by Environmental Laws
and has filed all reports and other documents required by Environmental
Laws, and each of Golf's and Sports' operations are in compliance in all
material respects with and meet all standards established for the
discharge of pollutants under all Environmental Laws; and
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<PAGE>
(4) MATERIAL VIOLATIONS, ETC. Except as described in Schedule
3.1(p) to the Seller Memorandum, none of Sellers, Golf or the Sports
Entities has within the last three (3) years: (a) received any notice of
violation or apparent violation of any Environmental Laws from any
governmental agency and none of Sellers is aware of any circumstances
which would reasonably be foreseen to give rise to any such violations or
charges of violations relative to the operations of the business of
either Golf or the Sports Entities and/or the Places of Business; (b)
received notice of any threatened suit or intent to sue pursuant to any
citizen suit provision of any Environmental Laws; (c) received any
administrative order from any federal, state or local administrative
agency concerned with environmental protection indicating or asserting,
or any communication or informal contact from or with any such agency
suggesting, indicating or asserting, that the Places of Business or the
operations of the business of Golf and/or any Sports Entity might not be
in compliance with all applicable requirements or that certain changes
might be necessary in order to be, or continue to be, in compliance with
such requirements; or (d) received notice from any government agency or
any person of any potential liability under any Environmental Laws or any
request for information regarding the Property as a disposal site.
(q) OSHA. There are not now pending, and during the past five (5)
years have not been, any Occupational Safety & Health Act ("OSHA")
inspections, complaints and/or citations relative to the Places of Business
or the operations of the business of Golf and/or any Sports Entity conducted
thereat or therefrom. To the best knowledge of Sellers and the Sports
Entities, no material modifications or changes in or to the Places of
Business and/or any of the machinery and equipment used therein or in
connection therewith, are necessary for the continued operation of the
Places of Business in accordance with all presently applicable OSHA
requirements.
(r) TITLE TO ASSETS; NO LIENS. Except as set forth in the Schedule
3.1(r) to the Seller Memoran-
dum, each of the Sports Entities and Golf has good and marketable title to,
and is in possession of or has control over, all of the tangible assets that
are owned by it and used in its business, free and clear of all liens and
encumbrances other than the lien imposed as the security for the Bank Debt.
Except as indicated in Schedule 3.1(r) to the Seller Memorandum:
(1) None of the material assets of Golf or any Sports Entity is
held under any lease or conditional sales contract; and
(2) All of the tangible assets (other than the Inventory) of each
of Golf and the Sports Entities, including the Purchased Assets,
which are necessary for the continued conduct of the respective
business of Golf and the Sports Entities as now being conducted are
in good repair and operating condition and there are no defects or
other conditions with respect to any such assets which would
necessitate repairs (other than routine repairs), reconditioning or
replacement thereof.
(s) ACCOUNTS RECEIVABLE. All of the accounts receivable of each of the
Sports Entities and Golf, other than inter-company indebtedness in the
approximate amount of $3.5 Million (the "Inter-Company Indebtedness") arose
out of BONA FIDE, arms-length transactions for the sale of goods or the
performance of services and are at the balances shown on the respective
accounting records of the Sports Entities and Golf, were and are legally
collectible in the ordinary course of business of the Sports Entities and
Golf in amounts equal to those at which such account receivables were or are
reflected on the respective accounting records of the Sports Entities and
Golf, net of provisions for bad debts reflected on such accounting records
in accordance with past practice. Except as disclosed in Schedule 3.1(s) to
the Seller Memorandum, there are no allowances with respect to any accounts
receivable, for promotions, co-op advertising or returns or any other type
of allowances. Upon the replacement by Purchaser of the Bank Debt as set
forth in Subsection 7.1(b), each of Sports and Golf will have good and
marketable title to all of its respective accounts receivable, free and
clear of all liens and encumbrances.
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(t) INVENTORY. The inventory of each of Golf and the Sports Entities,
including all raw materials, work-in-process and finished goods (the
"Inventory"), reflected in the Seller Unaudited Financial Statements, and
the Inventory acquired since the date thereof, net, in each case, of
provisions for shrinkage and obsolescence, if any, reflected on the Seller
Unaudited Financial Statements and the respective books and records of Golf
and the Sports Entities. Such Inventory substantially consists of items of a
quantity and quality which are usable and saleable in the ordinary course of
the respective business of Golf and the Sports Entities consistent with past
practices. None of the Inventory is consigned to any third party.
(u) BANK ACCOUNTS, GUARANTEES AND POWERS. Schedule 3.1(u) to the
Seller Memorandum sets forth: (a) a list of all accounts, borrowing
resolutions and deposit boxes maintained by each of Golf and the Sports
Entities at any bank or other financial institution and the names of the
persons authorized to effect transactions in such accounts and pursuant to
such resolutions and with access to such boxes; (b) all agreements or
commitments of each of Golf and the Sports Entities guaranteeing the payment
of money or the performance of other contracts by Golf or any Sports Entity,
or by any third persons; and (c) the names of all persons, firms,
associations, corporations or business organizations holding general or
special powers of attorney from either Golf or any Sports Entity, together
with a summary of the terms thereof.
(v) AGREEMENTS AND COMMITMENTS. Schedule 3.1(v) to the Seller
Memorandum contains a list of all of the material agreements or other
commitments of Golf and the Sports Entities. Subject to any required
consents, each of the Sports Entities and Golf have performed and is in
compliance with all material terms and conditions of each of such agreements
required to be performed by or complied with by it. There is no actual or to
the best knowledge of Sellers, intended, proposed or threatened termination
or cancellation of, or any material modification or change in, or any
material breach of or noncompliance with, any of the terms of any of such
agreements or commitments. The transactions contemplated by this Agreement,
when consummated, will not violate or result in a default under the terms
and conditions of any of such agreements or commitments or give rise to any
right of termination on the part of any party thereto to terminate such
agreement or commitment or to materially modify any of the terms and
provisions thereof or require a waiver except as set forth in Schedule
3.1(h)(ii) of the Seller Memorandum, or the consent of any third party
thereto.
(w) INTELLECTUAL PROPERTY.
(1) TRADEMARKS, ETC. All trademarks (whether registered or
unregistered), trademark applications, trade names, service marks, logos,
copyrights and copyright applications, and all renewals or continuances
thereof and all other intellectual property rights, owned and used by
Golf and/or any Sports Entity, or owned by third parties and used by Golf
and/or any Sports Entity pursuant to licensing or other arrangements in
connection with their respective businesses (collectively the
"Intellectual Property Rights") are listed or described in Schedule
3.1(w) to the Seller Memorandum. Schedule 3.1(w) to the Seller Memorandum
indicates the Intellectual Property Rights which have been duly
registered in, filed with or issued by the governmental agencies or
offices indicated; and
(2) NO CLAIMS, ETC. There is (a) to the best knowledge of Sellers
and the Sports Entities, no person having or claiming to have a protected
interest in any of the Intellectual Property Rights as used by Sellers,
Golf or any of the Sports Entities (exclusive of rights to the marks
"Apple" and "Golf"); (b) no proceeding in any court, administrative
agency or other forum which has been instituted or to the best knowledge
of Sellers, threatened, challenging in any way the exclusive right, title
or interest of any Sports Entity or Golf in and to any of the
Intellectual Property Rights or claiming that the use thereof by any
Sports Entity or Golf constitutes unfair competition or an infringement
or other unlawful act; or (c) to the best knowledge of Sellers and
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the Sports Entities, no adversely held right that infringes upon, or is
itself infringed upon by, the exercise or use of any of the Intellectual
Property Rights by any Sports Entity or Golf.
(x) CUSTOMERS. Schedule 3.1(x) to the Seller Memorandum contains a
true and correct list of the top 10 customers of each of the Sports Entities
and Golf. To the extent indicated on the list, the Sports Entities or Golf
have entered into a written agreement or work order with each of such
customers. Each agreement with a customer, whether written or oral, is in
full force and effect and is enforceable against that customer in accordance
with its terms. Each of Golf and the Sports Entities has performed and is in
compliance in all material respects with all terms and conditions required
to be performed or complied with by it under all written and oral agreements
with its customers. None of Sellers nor any Sports Entity has any knowledge
of any actual, proposed or threatened termination or cancellation of, or any
material modification or change in, any such agreement or in the business
relationships of any of the Sports Entities or Golf with any customer,
whether or not under written contract, that is or are material to the
business of the Sports Entities or Golf, singly or in the aggregate.
(y) EMPLOYMENT PRACTICES.
(1) NO EMPLOYEES. Golf has no employees.
(2) NO UNION, ETC. None of the employees of any of the Sports
Entities is covered by or subject to any collective bargaining agreement,
union contract, labor agreement or conciliation agreement. There have
been no attempts to organize any of the employees of the Sports Entities
or any representation elections with respect to such employees within the
five (5) year period preceding the date hereof, and during such period
there have been no strikes, work stoppages, lock-outs, arbitrations, or
other significant labor disputes or disagreements involving the employees
of the Sports Entities;
(3) EMPLOYMENT LAW VIOLATIONS. Except as described in Schedule
3.1(y) to the Seller Memorandum, there are not now pending or to the best
knowledge of Sellers, threatened, any, and during the five (5) year
period preceding the date hereof, there have been no, charges or
complaints or grievances alleging any unfair labor practices or
violations in connection with the employees of any Sports Entity or the
operations of the business of the Sports Entities under federal, state,
local or other civil rights laws, laws or regulations concerning
discrimination in employment based upon race, sex, age, religion or
national origin or any similar federal, state, or local labor and
employment laws, ordinances, rules and regulations. The employment
practices of each of the Sports Entities have been and are now in
compliance in all material respects with all such laws, ordinances, rules
and regulations;
(4) NO EMPLOYMENT CONTRACTS, ETC. Except as set forth in Schedule
3.1(y), none of the employees of any Sports Entity is covered by a
written employment or similar agreement specifying his compensation or
other terms of employment or providing for any severance payments in the
event of his termination of employment;
(5) SICK PAY, ETC. Except as reflected in the Seller Annual
Financial Statements and/or the Seller Unaudited Financial Statements,
none of the Sports Entities has any accrued liability (or liability that
is properly accruable under GAAP) for sick pay, vacation pay, severance
pay or similar benefits relative to its respective employees; and
(6) NO INVESTIGATIONS OR SUSPENSION. Except as set forth in
Schedule 3.1(y) to the Seller Memorandum, to the best knowledge of
Sellers, none of the employees of the Sports Entities is now, or during
the past five (5) years has been, under or subject to any investigation,
suspension, debarment or disqualification by any government agency which
has, might or will adversely affect the Sports Entities.
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(z) EMPLOYEE BENEFIT PLANS.
(1) PLANS MAINTAINED BY THE SPORTS ENTITIES AND GOLF. Schedule
3.1(z) to the Seller Memorandum describes all employment, consulting,
bonus, commission, incentive, compensation, pension, profit-sharing or
other retirement, deferred compensation, employee stock purchase,
termination or severance allowance, insurance (including, without
limitation, life, disability, medical and hospitalization insurance) and
other fringe or employee benefit agreements and plans that are provided,
maintained, administered or contributed to for the benefit of the
employees of the Sports Entities and Golf. Sellers have delivered or has
caused to be delivered to Purchaser current, accurate and complete copies
of all such plans (including all amendments to such plans);
(2) PLAN. The Apple Dorson 401-K & Profit Sharing Plan (the "Plan")
was duly adopted and is maintained by Sports for the benefit of its
employees, is qualified in all respects under the Internal Revenue Code
(the "Code") and all applicable government regulations and has at all
times since adoption been operated in accordance with the provisions
thereof. Sports has made all contributions to the Plan required to be
made by it as of the Closing Date or has accrued the liability for all
such contributions. All required reports and returns required to be filed
with respect to the Plan have been duly filed; and
(3) OTHER. With respect to each plan now maintained by any Sports
Entity or Golf within the scope of subsection 3.1(z)(1) (including the
plan which is the subject of the Subsection 3.1(z)(2), or any such plan
previously maintained by any Sports Entity or Golf with respect to their
respective employees to the extent applicable:
(i) There are no actions, suits or claims (other than routine
claims for benefits in the ordinary course) pending or threatened,
and none of Sellers nor Sports have any knowledge of any facts which
would give rise to any such actions, suits or claims;
(ii) Neither Golf nor any of the Sports Entities have, with
respect to any plan, engaged in any "prohibited transaction", as such
term is defined in Section 4975 of the Code or ERISA Section 406,
which would subject Golf or any Sports Entity (or Purchaser) to any
taxes, penalties or other liabilities resulting from prohibited
transactions under Section 4975 of the Code or under ERISA Sections
409 or 502(i);
(iii) No event has occurred and no condition exists that would
subject Golf or any Sports Entity (or Purchaser) to any tax under
Sections 4971, 4972, 4977 or 4979 of the Code or to a fine under
ERISA Section 502(c);
(iv) All premiums due relative to all insurance plans and
programs maintained for the benefit of the employees of the Sports
Entities and Golf have been timely paid or, if not yet due, the
liability for such premiums has been accrued;
(v) There is no event or condition existing which is a
"reportable event" within the meaning of ERISA Section 4043 with
respect to which the 30-day notice requirement therein has not been
waived; and
(vi) With respect to each plan which is an "employee welfare
benefit plan" (within the meaning of ERISA Section 3(1)):
(A) each such plan which is intended to meet the requirements
for tax-favored treatment under Subchapter B of Chapter 1 of the
Code meets such requirements;
(B) there is no "disqualified benefit" (as such term is
defined in Section 4976(b) of the Code) which would subject Golf
or any Sports Entity (or Purchaser) to a tax under Code Section
4976(a);
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(C) each such plan which is a group health plan complies, and
in each and every case has complied, with the applicable
requirements of Section 4980B of the Code and the applicable
provisions of the Social Security Act; and
(D) each such plan (including any such plan covering former
employees of any Sports Entity or Golf, may be amended or freely
terminated by such Sports Entity or Golf on or at any time after
the Closing Date;
(vii) None of the Sports Entities nor Golf has incurred liability
to the Pension Benefit Guarantee Corporation ("PBGC") as a result of
the voluntary or involuntary termination of any retirement plan
subject to Title I of ERISA; there is currently no active filing by
any Sports Entity or Golf with PBGC (and no proceeding has been
commenced by PBGC) to terminate any retirement plan subject to Title
IV or ERISA, funded in whole or in part by any Sports Entity or Golf;
None of the Sports Entities nor Golf has made any complete or partial
withdrawal from a multi-employer plan, as that term is defined in
Section 3(27) of ERISA, resulting in "withdrawal liability" as such
term is defined in Section 4201 of ERISA; and
(viii) Each of the Sports Entities and Golf has complied in all
respects, and is now in compliance, with all applicable requirements
with respect to the availability of health care continuation coverage
under the Consolidated Omnibus Budget Reconciliation Act of 1985.
(aa) LITIGATION. Except as disclosed in Schedule 3.1(aa) to the Seller
Memorandum, there are not now pending, and during the preceding three (3)
years have not been, any suits, actions, arbitrations or other legal,
administrative or other proceedings which are now pending or, to Sellers'
knowledge, now threatened against or affecting the respective business or
operations of Golf or the Sports Entities, under which an adverse
determination, either individually or collectively, would materially and
adversely affect the business or operations of Golf or the Sports Entities,
as the case may be, and none of Sellers nor the Sports Entities is in
possession of any facts which would reasonably be foreseen to indicate any
basis for any of the foregoing. Neither Golf nor any Sports Entity is in
default with respect to any order, writ or injunction or decree of any
federal, state, local or foreign court, agency or instrumentality relating
to its respective assets, business or operations.
(bb) TAX MATTERS.
(1) ALL RETURNS FILED. Except as disclosed in Schedule 3.1(bb) to
the Seller Memorandum, all federal, state, local and foreign income,
franchise, sales, use, excise, real and personal property, employment
(including FICA and other payroll) and other tax returns, reports and
declarations of every kind and nature (collectively, "Returns") required
to be filed by or on behalf of Golf and the Sports Entities, on or before
the date hereof have been filed and such Returns are complete and
accurate and disclose all taxes (and other charges) required to be paid
for the periods covered thereby. No extension of time in which to file
any such Returns is currently in effect, and there are no outstanding
agreements or waivers extending the statutory period of limitation
applicable to such Returns;
(2) ALL TAXES PAID. Except as disclosed in Schedule 3.1(bb) to the
Seller Memorandum, all taxes (and other charges) shown on such Returns or
otherwise required to be paid, and any deficiency assessments, penalties
and interest have been paid, and there is no current liability for any
taxes (or other charges) due in connection with such Returns or
otherwise. There are no tax liens on any of the assets of Golf or any
Sports Entity and to the best knowledge of Sellers, no basis exists for
the imposition of any such liens;
(3) TAX AUDITS, ETC. Except as set forth in Schedule 3.1(bb) to the
Seller Memorandum, none of the Returns have been audited by the Internal
Revenue Service ("IRS") or other pertinent tax authorities. No issues
have been raised (or are currently pending) by the IRS or any
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other taxing authority in connection with any of the Returns which, if
decided adversely, could reasonably be expected to have a material
adverse effect on Golf or any Sports Entity, nor are there any such
issues which have not been so raised but if so raised by the IRS or any
other taxing authority in connection with any of the Returns, could
reasonably be expected to have such a material adverse effect on Golf or
any Sports Entity;
(4) FOREIGN PERSON, ETC. None of Sellers are a "foreign person" as
defined in Section 1445(f)(3) of the Code. None of Sellers have a
permanent establishment in any foreign country, as defined in the
applicable tax treaty, if any, between the United States and such foreign
country. Purchaser is not required to withhold tax on the purchase of the
Purchased Assets and/or the Shares by reason of Section 1445 of the Code.
None of Sellers have nor any of the Sports Entities has participated in
any international boycott within the meaning of Section 999 of the Code;
(5) PARACHUTE PAYMENTS. None of the Sports Entities nor Golf has
made, is obligated to make, or will, as a result of any event connected
with the purchase of the Purchased Assets, the Shares or any other
transaction contemplated herein, make or become obligated to make any
"excess parachute payment" as defined in Section 280G of the Code; and
(6) WITHHOLDING. Each of the Sports Entities has withheld from its
respective employees and others (and timely remitted to the appropriate
taxing authorities) proper and accurate amounts for all periods in
compliance with all tax withholding provisions of applicable federal,
state, foreign, local and other laws (including, without limitation,
income, withholding, social security, employment and other payroll
taxes); and
(7) ASSET ATTRIBUTES. None of the assets of any of the Sports
Entities or Golf (a) is tax-exempt property within the meaning of Section
168(h) of the Code, (b) directly or indirectly secures any debt, the
interest on which is tax exempt under Section 103(a) of the Code, or (c)
is required to be treated as property owned by another under Section
168(f) of the Code. None of the Sports Entities nor Golf has agreed to
make, or is required to make any adjustment asserted by the IRS under
Section 481(a) of the Code. None of the Sports Entities nor Golf is a
party to or bound by any tax indemnity, tax sharing or tax allocation
agreement.
(cc) INSURANCE. Schedule 3.1(cc) to the Seller Memorandum contains a
true and correct list of all policies of insurance issued to and now
maintained by Golf and/or the Sports Entities, setting forth the types and
amounts of coverage (including the relevant policy periods, premiums,
deductible or retention provisions and limitations thereon) for each such
policy. Each such policy of insurance is in full force and effect, and all
premiums due prior to the date hereof with respect to such policies have
been paid. All such insurance is in amounts and against such risks as are
usual and customary and adequate to protect the respective business and
assets of Golf and the Sports Entities, as the case may be. Copies of all
such insurance policies described in Schedule 3.1(cc) to the Seller
Memorandum have been provided to Purchaser. No claims have been made under
policies of insurance carried by Golf or the Sports Entities relative to
errors and omissions, products liability, property, casualty, fire or theft
within the past 3 years.
(dd) BROKERS. No broker or finder is involved in this transaction for
or on behalf of Sellers.
(ee) CORPORATE ACTION AND RECORDS. Sellers have heretofore delivered
to Purchaser true and complete copies of the articles of incorporation and
bylaws of Golf and the Sports Entities and of the minute books and stock
records of Golf and the Sports Entities. Such minute books and stock records
correctly reflect all material corporate actions taken at all meetings of,
or by written consents of, directors of the Sports Entities (including
committees thereof) and shareholders.
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(ff) DISCLOSURES. Neither this Agreement, including the Exhibits, the
Schedules and the Supplemental Schedules hereto, nor any written agreements,
statements, financial statements, documents, certificates or other documents
delivered by Sellers hereunder, when taken together in their entirety,
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make the statements
contained herein or therein (as the case may be), in light of the
circumstances under which made, not misleading.
(gg) KNOWLEDGE. For purposes of this Article 3, "knowledge",
"awareness", "best knowledge" and words or phrases of similar import shall
mean the knowledge of Sellers and the knowledge of Mr. Tom Wenzler after due
inquiry; provided, however, that in the case of Mr. Wenzler, such knowledge
shall be limited to that set forth in a certificate with respect thereto to
be delivered to Sellers and Purchaser on or prior to the Closing Date.
IV.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
4.1 PURCHASER'S REPRESENTATIONS. Purchaser makes the following
representations and warranties to Sellers, each and all of which are true and
correct as of the date hereof, except as set forth in the Schedules to the
Memorandum to Sellers (the "Purchaser Memorandum") regarding specific
representations and warranties delivered concurrently herewith, and acknowledges
that Sellers are relying on such representations and warranties in connection
with the transactions contemplated by this Agreement:
(a) ORGANIZATION, STANDING AND QUALIFICATION. Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and is duly qualified to do business in all
other states or jurisdictions where failure so to qualify would materially
and adversely affect its assets, properties or business.
(b) CORPORATE AUTHORITY. All corporate actions by Purchaser required
to authorize and approve the entering into and the execution, delivery and
performance of this Agreement, and the purchase of the Shares and other
transactions contemplated herein, have been, or will, at the time of Closing
have been, duly taken. Purchaser has (or, with respect to stockholder
approval, at Closing, will have) full power, authority, and legal right to
enter into this Agreement and any other agreements required to be entered
into by it under the terms hereof and to consummate the transactions and
perform its obligations contemplated hereby and thereby. Upon execution and
delivery of this Agreement, and of any other agreements required of
Purchaser (or, with respect to approval by the stockholders of Purchaser, at
the time of Closing), each will constitute the legal, valid and binding
obligation of Purchaser, enforceable against Purchaser in accordance with
their respective terms except as Purchaser's obligations hereunder and
thereunder may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights, and judicial
discretion with respect to equitable principles and remedies in general.
(c) VALIDITY OF EMPIRE COMMON STOCK. The authorized capital stock of
Purchaser consists of 60,000,000 shares of common stock, par value $.10 per
share (the "Empire Common Stock"), and 5,000,000 shares of Preferred Stock
$.10 par value per share ("Empire Preferred Stock"). Approximately 7,650,000
shares of the Empire Common Stock are outstanding. Each of the outstanding
shares of Empire Common Stock is duly authorized, validly issued, fully paid
and non-assessable. Each of the shares of Empire Common Stock delivered to
Sellers as the Initial Payment Shares and, if required pursuant to the
provisions of Section 2.1 hereof, each of the Additional Payment Shares,
when issued pursuant to the terms of this Agreement, will be legally
authorized, validly issued, fully paid and non-assessable.
(d) VIOLATIONS; CONSENT. Neither the execution and delivery of this
Agreement or of any other agreements or instruments required of Purchaser by
the terms hereof, nor the performance of or
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compliance by Purchaser with any of the respective terms and provisions of
this Agreement or of such other agreements or instruments:
(1) NO CONFLICTS OR VIOLATIONS. (a) Violates any statute,
regulation, rule, judgment, order, decree, stipulation, injunction,
charge, or other restriction of any government, governmental agency or
court to which Purchaser is subject, or any provision of the Certificate
of Incorporation, By-Laws, and/or any other organizational documents or
governing instruments of Purchaser, or (b) conflicts with or will
conflict with or will result in the breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice under the
terms, conditions or provisions of any permit, license, accreditation,
approval or authorization held by Purchaser or any mortgage, bond,
debenture, note, indenture, loan or credit agreement, security agreement,
contract, lease, sublease, instrument or any other agreement or
restriction to which Purchaser is a party or by which it is obligated or
bound; or
(2) CONSENTS AND APPROVALS. Except as set forth in Schedule
4.1(d)(2) to the Purchase Memorandum, requires the consent or approval
of, any notice to, any filings by Purchaser, or any authorization for
Purchaser from any person, government, governmental agency, bureau,
commission or board.
(3) INVESTMENT INTENT. Purchaser is an "Accredited Investor" within
the meaning of Regulation (D) (17 C.F.R. Section230.501) of the rules and
regulations under the Securities Act of 1933 as amended (the "Act").
Purchaser further understands that the Shares have not been, and are not
proposed to be registered under the Act or any state securities laws, and
are being offered and sold in reliance upon federal and state exceptions
for transactions not involving a public offering. Purchaser represents
that it has been afforded an opportunity to and has asked questions,
received answers to its satisfaction and otherwise conducted its due
diligence review relative to this transaction; provided, Sellers
expressly acknowledge that such due diligence review in no way affects
Sellers' representations and warranties except as expressly set forth in
Article XI hereof. Purchaser represents that it is acquiring the Shares
for investment purposes and not with a view to the distribution thereof
in contravention of applicable law and/or government regulation.
(4) BROKER. Purchaser has not dealt with any broker or finder in
connection with the transactions contemplated by this Agreement.
(e) FINANCIAL STATEMENTS.
(1) FINANCIAL STATEMENTS FOR PERIOD ENDED DECEMBER 31, 1996. The
audited financial statements of the Purchaser and its subsidiaries (on a
consolidated basis) consisting of balance sheets as of December 31, 1996
and income statements for the twelve (12) month period then ending and
the notes thereto (the "Purchaser Annual Financial Statements"), copies
of which have heretofore been delivered to Sellers, have been prepared in
accordance with GAAP applied on a basis consistent with past practices,
are true and correct and present fairly the financial position of
Purchaser and its consolidated subsidiaries, as of the relevant date or
dates and the results of their respective operations for the period or
periods then ended; and
(2) INTERIM FINANCIAL STATEMENTS. The interim financial statements
of the Purchaser and its consolidated subsidiaries for the nine-month
period ended September 30, 1997, consisting of balance sheets as of the
relevant date and income statements for the period then ended and the
relevant notes thereto ("Purchaser Interim Financial Statements"), copies
of which have heretofore been delivered to Sellers, have been prepared in
accordance with GAAP applied on a basis consistent with past practices,
are true and correct and, subject to audit and year end adjustments, will
present fairly the respective financial positions of Purchaser an its
consolidated subsidiaries,
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as of the date thereof and the results of their respective operations for
the interim period then ended.
(3) ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in
Schedule 4.1(e) to the Purchaser Memorandum, or noted, reflected or
reserved against in the Purchaser Annual Financial Statements or in the
Purchaser Interim Financial Statements (including the notes thereto):
(A) NO LIABILITIES. Purchaser has no obligations or liabilities
which are material, either singly or in the aggregate, whether
secured or unsecured, accrued, absolute, contingent or otherwise, and
whether due, about to become due or due at some future date, relating
to the assets and/or business of Purchaser; and
(B) NO KNOWLEDGE. Purchaser knows of no basis for the assertion
against Purchaser of any claim or liability relating to its assets
and/or business, and is not aware of any occurrence of fact that has
or might be reasonably expected to materially and adversely affect
the business or operations of Purchaser.
V.
COVENANTS OF THE PARTIES
In addition to their other covenants and agreements herein, Purchaser and
Sellers hereby covenant and agree with each other as follows:
5.1 PRE-CLOSING COVENANTS OF SELLERS. Except as otherwise expressly
provided for in this Agreement, between the date hereof and the Closing Date (or
until such other date as may be expressly stated in a particular covenant),
Sellers shall:
(a) CONDUCT OF BUSINESS PRIOR TO CLOSING. Sellers shall cause Golf and
the Sports Entities to:
(1) BUSINESS ONLY IN ORDINARY COURSE. Conduct and carry on their
respective businesses only in the ordinary course, without any material
changes and in the same general manner as heretofore conducted;
(2) MAINTAIN ASSETS. Maintain and keep their respective assets in
good repair, working order and condition as at present, normal wear and
tear excepted, and maintain insurance coverage on such assets in at least
such amounts and of such types as are being maintained on the date
hereof;
(3) NO SALE, ETC. Not sell or otherwise transfer or dispose of any
or all of their assets, interests and/or business to any third-party
except for sales of Inventory in the ordinary course of business and
transfer of the automobiles described in Section 1.3, and not grant any
new mortgage, pledge or security interests in, or subject to any new
security interests, lien or other encumbrance, any of their respective
assets or acquire any other person or all or substantially all of the
assets thereof, or enter into any agreement to do so;
(4) PRESERVE BUSINESS. Use reasonable efforts to preserve intact
the assets and business of Golf and Sports, including by timely
assembling and shipping products ordered by customers;
(5) PERFORM UNDER ALL AGREEMENTS, ETC. Timely perform and comply in
all material respects with all, and not default on any, of their
respective obligations and covenants under all material agreements and
commitments, subject to any and all defenses and other rights of Golf and
the Sports Entities under such agreements and commitments;
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(6) CAPITAL STRUCTURE AND DIVIDENDS.
(A) Not make any changes in the capital or financial structure of
Golf or any Sports Entity, including, without limitation, issuing or
agreeing to issue any additional shares of capital stock of any
class, redeeming or agreeing to redeem any shares of capital stock,
granting an option to purchase, or agreeing to sell, any presently
issued and outstanding shares (or any new shares or issued shares
which have been repurchased or redeemed but not yet cancelled); or
(B) Declare or pay any dividends on or in respect of the Shares.
(7) TRANSFER OF THE SHARES. Not make or enter into any agreement to
make, either for or without consideration, any sale or other transfer of
any of the Shares and further agree not to grant any options or other
rights with respect to the Shares to any third-party, other than
transfers of Shares between Sellers or to the spouse or any ancestor or
descendent of any of Sellers or of his/her spouse, or any trust or
custodianship created for the benefit of such spouse, ancestor or
descendent of any of Sellers or of his/her spouse, ancestor or
descendent; provided, however, that the party transferring his, hers or
its Shares pursuant to this Subsection shall cause the ultimate
transferee to execute this Agreement and to sell his, her or its Shares
to Purchaser in accordance with the terms of this Agreement;
(8) INFORMATION AND ACCESS. Upon reasonable notice by Purchaser and
at reasonable times, cause Golf and the Sports Entities to afford
Purchaser and its employees, accountants, legal counsel and other
representatives or agents, full access to all of the books, records and
files relating to the business, assets, tax and financial affairs of Golf
and the Sports Entities for purposes of enabling Purchaser and its
authorized representatives to conduct or to complete such a review
thereof as Purchaser shall deem necessary or desirable;
(9) NOTIFY PURCHASER OF MATERIAL CHANGES. Give prompt written
notice to Purchaser of any event, condition or fact of which they became
aware which: (a) could reasonably be foreseen to, or does materially
affect the business or assets of Golf and/or the Sports Entities, or (b)
impairs or could reasonably be foreseen to impair Sellers' ability to
perform this Agreement, or (c) is required to make the Schedules hereto
complete and accurate (any such notification under this Section 5.1(a)(9)
being referred to as a "Supplemental Schedule"). The Schedules shall be
deemed to be modified and supplemented by and to include all matters
disclosed in any Supplemental Schedule to the extent of such disclosure;
provided, however, that if any matter disclosed in any Supplemental
Schedule constitutes a material change from the representations and
warranties of Sellers set forth in Article III hereof (as modified by the
Schedules thereto and in accordance with the first paragraph of Article
III hereof), Purchaser may, as its sole remedy (to the extent of such
disclosure) elect not to proceed with the Closing;
(10) (a) ANNOUNCEMENTS. Except with the prior written consent of
Purchaser, not make, and shall cause Golf and the Sports Entities not to
make, any public announcement or disclosure of the execution of this
Agreement or relative to the transactions contemplated hereby unless
required by applicable law;
(b) TAX MATTERS. Sellers shall cause the Sports Entities to prepare
and file any and all Returns due between January 1, 1998 and the Closing
Date by the applicable due dates thereof (including any extensions of
such dates; provided, however, that Sellers shall inform the Purchaser in
writing if any Return will not be filed by the applicable due date but is
proposed to be filed during the period of extension of such due date) in
a manner consistent with prior years, including (a) utilization of all
available net operating loss carryforwards, tax credits and tax credit
carryforwards, and (b) the reporting of all items of income and deduction
(including amortization and depreciation) in a manner consistent with
prior practice, and to pay or accrue for the
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payment of all taxes due and payable pursuant to such Returns provided,
however, that Seller shall not be responsible for the payment of, and
shall not be liable for any taxes, interest and/or penalties due (or
claimed to be due) which arise out of any tax audit disclosed on Schedule
3.1(bb) to Seller Memorandum (a "Disclosed Audit"); and
(c) COMPLIANCE WITH CONDITIONS. Undertake in good faith to perform
all other obligations and conditions required to be performed by Sellers
under this Agreement prior to the Closing Date.
5.2 PRE-CLOSING COVENANTS OF PURCHASER. Between the date hereof and the
Closing Date, Purchaser shall:
(a) NO PUBLIC ANNOUNCEMENT. Not make any public announcement of the
transactions contemplated by this Agreement except with the Sellers' prior
consent unless required by applicable law;
(b) WILSON LICENSE. Purchaser shall cooperate in connection with the
negotiation and execution of the new Wilson Sporting Goods ("Wilson")
licenses described in Section 7.2(c) and shall execute and deliver all
documents reasonably required by Wilson in connection therewith; and
(c) OTHER. Undertake in good faith to satisfy its obligations to
Sellers under this Agreement, including the performance of all other
obligations and conditions required to be performed by Purchaser under this
Agreement, prior to the Closing Date.
5.3 POST-CLOSING COVENANTS OF SELLERS. Sellers covenant and agree with
Purchaser to:
(a) RESTRICTIVE AGREEMENT. At the Closing, each of Sellers (except TM)
shall execute and deliver to Purchaser the Restrictive Agreement in the form
attached hereto as Exhibit A (the "Restrictive Agreement"). The Restrictive
Agreement, and all of the terms and provisions thereof, are incorporated
herein by reference and made a part of this Agreement;
(b) PERMITS, LICENSES. Assist Purchaser, at Purchaser's expense, in
transferring and/or obtaining such permits, licenses, approvals and
authorizations as are necessary to conduct the business of Golf and the
Sports Entities; and
(c) COOPERATION. Cooperate with Purchaser at Purchaser's expense
(except as and to the extent such cooperation is required with respect to
matters which were the express obligations of Sellers under this Agreement)
after the Closing as reasonably necessary to give effect to the provisions
of this Agreement.
5.4 POST-CLOSING COVENANTS OF PURCHASER. Purchaser covenants and agrees
with Sellers to:
(a) CONTINUATION OF EMPLOYMENT. Purchaser shall continue employment
immediately after the Closing of the employees of Golf and Sport. Nothing
contained herein shall alter the "at will" relationship between the
employees of Sports and Sports or prevent Sports and/or Purchaser from
terminating such employees after the Closing for any reason;
(b) TRANSFER TAXES. Timely pay or otherwise discharge all sales and/or
transfer taxes arising at or in connection with the sale of the Purchased
Assets hereunder; and
(c) COOPERATION. Cooperate with Sellers after the Closing as
reasonably necessary to give effect to the provisions of this Agreement.
5.5 JOINT CONVENANTS OF THE PARTIES. The parties covenant and agree with
each other as follows:
(a) ANNOUNCEMENTS. At the request of the other party, each of the
parties agrees to join with the other in one or more public announcements
and/or notices to customers or other third parties concerning the
transactions covered by this Agreement. Each of the parties agrees that it
will not
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make any public or other announcement concerning the transactions
contemplated by this Agreement without the prior consent (which consent
shall not be unreasonably withheld) of an authorized representative of the
other party unless such announcement is required under applicable law;
(b) TAX ASSISTANCE. Each of the parties shall provide to the other,
after the Closing, such assistance as it may reasonably request in
connection with the preparation of any return, any audit or other
examination by any taxing authority, including any Disclosed Audit, or any
judicial or administrative proceedings relating to the liability of either
Golf or any Sports Entity. Such assistance shall include making itself
available on a mutually convenient basis to provide additional information
or explanation of material provided hereunder and shall include providing
copies of any relevant returns and supporting work papers and schedules.
Each of the parties shall retain for the full period of any applicable
statute of limitations, and provide the other party with copies of, any
records or information in its possession which may be relevant to such
preparation, audit, examination, proceedings or determination relative to
each of Golf and the Sports Entities; and
(c) ACCESS TO RECORDS. Each of the parties agrees to give reasonable
access to the books and records relating to the business and the assets of
Golf or the Sports Entities for periods prior to the Closing Date during
normal business hours, to the other party, its auditors and its agents for
the purposes of (i) the preparation of its financial statements, (ii) any
governmental agency review, (iii) monitoring the collection of accounts
receivable of Golf or the Sports Entities existing as of the Closing, and
(iv) any other legitimate business purpose. Prior to destroying any of said
books and records, a party shall give notice thereof to the other party and
allow the other party to take copies of the same.
VI.
CLOSING: CLOSING REQUIREMENTS
6.1 CLOSING. The Closing (the "Closing") shall take place on or prior to
April 30, 1998 or such later date that is mutually agreeable to the parties as
of when all of the conditions precedent set forth in Article VII shall have been
satisfied or waived (the Closing Date"), provided that time is of the essence
that the Closing occur on or prior to May 28, 1998. Unless otherwise agreed to
by the Sellers and Purchasers, the Closing shall be conducted at the law offices
of Messrs. Lane & Mittendorf LLP ("Sellers' Counsel"), 320 Park Avenue, New
York, New York, at a time to be agreed.
6.2 CLOSING OBLIGATIONS OF SELLERS. At the Closing, Sellers shall execute
and deliver, or cause to be executed and delivered, to Purchaser, the following
documents and instruments, in form and substance reasonably satisfactory to
Purchaser and legal counsel to Purchaser, against delivery by Purchaser of the
items specified in Section 6.3:
(a) SHARE CERTIFICATES. Certificates evidencing the Shares, registered
in the name of Sellers, in form ready for transfer and duly endorsed by each
of Sellers in blank for transfer or accompanied by a stock power or powers
duly executed by each of Sellers together with such other documents and
instruments as may be reasonably required in order to fully vest in and
secure to Purchaser all right, title and interest in and to the Shares, free
and clear of all liens and encumbrances;
(b) CERTIFICATE. A Certificate of Sellers certifying that the
representations and warranties given by Sellers pursuant to this Agreement
are true and correct as of the Closing Date except as set forth in the
Schedules to this Agreement or Supplemental Schedules delivered at Closing,
and that Sellers are not in default of their obligations under this
Agreement;
(c) RESTRICTIVE AGREEMENTS OF SELLERS. The Restrictive Agreements with
Sellers (other than TM) in the form attached as Exhibit A pursuant to which
Sellers (other than TM) agree not to compete with the Business for the
periods set forth therein;
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(d) LEGAL OPINION. The opinion of legal counsel to Sellers
substantially in the form attached as Exhibit B;
(e) GOOD STANDING CERTIFICATE. Certificates of governmental
authorities confirming the good standing of each of Golf and each Sports
Entity in its state of incorporation;
(f) CONSENTS. Assuming the satisfaction of the condition set forth in
Subsection 7.2(h), the written consent(s) of any third party or of any
bureau, commission, board or regulatory agency required by the terms of this
Agreement;
(g) SUPPLEMENTAL SCHEDULES. Any Supplemental Schedules disclosing
changes from the Schedules;
(h) WILSON LICENSE. Assuming the satisfaction by Purchaser of its
obligations pursuant to Subsection 5.2(b), evidence that the existing
licenses from Wilson to Golf and Sports have been extended and that the
Wilson licenses will not be terminated as a result of the sale of the Shares
as herein contemplated;
(i) LEASES. The lease is dated April 10, 1998, for the sports
facilities located at 1-99 Roebling Ct, Ronkonkomo, A/K/A 1 Roebling Court,
Ronkonkomo, NY between Sports and Vets Park Associates (the "Facility
Lease"), a copy of which has been delivered to Purchaser;
(j) RESIGNATIONS. To the extent requested by Purchaser, and subject to
the provisions of Section 5.4(a) hereof, the resignations of the directors
and officers of each of Golf and the Sports Entities;
(k) TERMINATION OF STOCKHOLDERS AGREEMENTS, OPTIONS, ETC. Copies of
executed written documents or instruments relative to (a) termination of the
Stock Purchase Agreement dated October 11, 1997 between Mark Rose and Robert
Wertley, and (b) exercise or termination of all outstanding options under
Tim Moran's Employment Agreement dated July 1, 1992;
(l) CERTIFICATE OF INCORPORATION AND BY-LAWS. The certificate of
incorporation of each of Golf and the Sports Entities certified as of a date
within sixty (60) days prior to the Closing Date by the Secretary of State
of New York, and by-laws of each of Golf and the Sports Entities certified
by the respective secretary of each of Golf and Sports Entity;
(m) PAY-OFF LETTER. If requested by Purchaser, pay-off letter with
respect to all indebtedness for borrowed money owed by Sports, Golf and
Dorson to Citibank NA; and
(n) INDEMNITY BOND. Assuming satisfaction of the condition set forth
in Subsection 7.1(b), a noncancellable bond indemnifying Purchaser for the
full amount of damages claimed under that certain litigation known as CIGNA
PROPERTY AND CASUALTY INSURANCE V. DORSON SPORTS, INC., et al., as more
fully described on Schedule 3.29 the Seller Memorandum (the "Cigna
Litigation"), and related expenses (including attorneys' fees) in form and
substance reasonably satisfactory to Purchaser.
6.3 CLOSING OBLIGATIONS OF PURCHASER. At the Closing, Purchaser shall
execute and deliver to Sellers, or cause to be executed and delivered, the
following payments, documents and instruments, in form and substance reasonably
satisfactory to legal counsel for Seller, against delivery by Sellers of the
items specified in Section 6.2;
(a) CERTIFICATE. A certificate of Purchaser certifying that the
representations and warranties given by Purchaser pursuant to this Agreement
are true and correct as of the Closing Date, that all conditions
contemplated hereby have been fulfilled (other than conditions which are not
otherwise obligations of Purchaser under this Agreement) and that all
covenants to be performed on or before the Closing Date by Purchaser have
been so performed;
(b) PAYMENT OF THE PURCHASE PRICE. Delivery of the Initial Payment
Shares as set forth in Section 2.1 hereof;
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(c) SPECIAL REIMBURSEMENT. In addition to and not in limitation of its
obligations under Section 13.3 hereof, Purchaser shall deliver to Sellers at
the Closing, a bank check in the amount of up to $250,000 (the "Wilson Fee")
drawn to the order of Sellers in reimbursement of the fee, if any, paid by
Sellers in connection with the transfer and extension of the licenses from
Wilson; provided however, that the Wilson Fee shall be paid by Purchaser
only to the extent that an analogous payment was made to Wilson by Sellers;
(d) NEW CREDIT FACILITY. Evidence of Purchaser's compliance with the
provisions of Section 7.1(b) hereof;
(e) LEGAL OPINION. Sellers shall have received the legal opinion of
counsel to Purchaser substantially in the form of Exhibit C;
(f) RESOLUTIONS. Resolutions of Purchaser's Board of Directors,
certified by the Secretary or an Assistant Secretary thereof, authorizing
Purchaser to enter into this Agreement and to consummate the transactions
contemplated hereby; and
(g) GOOD STANDING CERTIFICATE. The certificate of incorporation of the
Purchaser certified as of a date within sixty (60) days prior to the Closing
Date by the Secretary of State of Delaware and the by-laws of Purchaser
certified by its corporate secretary; and a certificate of the Secretary of
State of the State of Delaware confirming the good standing of Purchaser in
the State of Delaware.
VII.
CONDITIONS FOR CLOSING
7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS. The obligations of
Sellers to close are subject to the satisfaction, at or prior to Closing, of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING DATE. Purchaser's
representations and warranties made in this Agreement shall be true and
correct in all material respects as of the Closing Date;
(b) REPLACEMENT OF LONG-TERM DEBT. Purchaser shall have in place, at
its cost and expense, a new credit facility replacing the existing
obligations of Golf and Sports for borrowed money in the approximate amount
of $4,300,000 ("Bank Debt") so that LTD., Golf and all individual guarantors
of such Bank Debt shall be fully released from liability and any and all
liens created to secure such Bank Debt that affects Sellers or any
shareholders of Sellers or their respective assets shall be fully released,
including without limitation, the return of any collateral therefor to the
owners thereof; and
(c) CLOSING REQUIREMENTS. Purchaser shall have delivered or caused to
be delivered, at the Closing, those items required of it pursuant to Section
6.3 and satisfied the other obligations required of it hereunder.
7.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. Purchaser's
obligation to close is subject to the satisfaction, at or prior to the Closing,
of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING DATE. The
representations and warranties of Sellers made in this Agreement shall be
true and correct in all material respects as of the Closing Date except as
set forth in the Schedules to this Agreement or the Supplemental Schedules
delivered at or prior to the Closing;
(b) NO MATERIAL ADVERSE CHANGE. There shall not have been any material
adverse change in the condition of the assets and/or business of Golf or the
Sports Entities from the date of the execution hereof;
(c) WILSON LICENSE.
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(1) The currently existing licenses from Wilson to Golf and Sports
shall each have been amended to reflect the terms set forth on Schedule
7.2(c) to the Seller Memorandum; and
(2) Wilson shall have agreed not to terminate the licenses with Golf
and Sports as a result of the change of control of Golf and Sports as a
result of the transactions contemplated hereunder;
(d) LEASES. The Facility Lease shall be in full force and effect;
(e) INDEMNITY BOND. Sellers shall have obtained a noncancellable bond
indemnifying Purchaser for the full amount of damages claimed under the
Cigna Litigation and related expenses (including attorneys' fees) in form
and substance reasonably satisfactory to Purchaser;
(f) NO LITIGATION, ETC. No litigation, proceeding, investigation or
inquiry shall be pending, or to the best of Sellers' knowledge, threatened,
nor shall Purchaser or Sellers be in receipt of any notice or claim, to
enjoin or prevent the consummation of the transactions contemplated by this
Agreement;
(g) APPROVALS. Any required approvals or consents of any third-party
and/or any government bureau, commission, board or regulatory agency shall
have been obtained;
(h) COMPLIANCE WITH COVENANTS. Sellers shall have complied in all
material respects with all of their preclosing covenants hereunder;
(i) SUPPLEMENTAL SCHEDULES. The Supplemental Schedules to be delivered
by Sellers at the Closing shall not disclose any additional material
exceptions to the representations and warranties of Sellers herein which
Purchaser deems unacceptable in its sole discretion;
(j) CLOSING REQUIREMENTS. Sellers shall have executed and delivered,
or cause to be delivered, at the Closing, those items required of them
pursuant to Section 6.2 and satisfied all of their other Closing obligations
hereunder;
(k) To the extent required by their respective terms, all contracts and
commitments set forth in Schedule 3.1(v) to the Seller Memorandum shall have
been properly assigned and transferred to the Purchaser; and
(l) Purchaser shall have obtained approval of its stockholders to
consummate the transactions contemplated by this Agreement.
7.3 CLOSING DEEMED WAIVER. Upon the Closing, each of Purchaser and Sellers
shall be deemed to have waived any condition precedent to their respective
obligations to close the transactions herein contemplated which has not then
been satisfied.
VIII.
FURTHER ASSURANCES
8.1 FURTHER ASSURANCES. Each of the parties agrees to execute and deliver
to the other, from time to time after the Closing, upon the request of the other
party, all such further instruments of conveyance, sale, assignment or transfer,
and such further assurances as may be reasonably necessary to consummate the
transactions contemplated hereunder; provided that any out of-pocket cost of the
providing party in connection with providing such further assurances shall be
paid by the requesting party.
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IX.
TERMINATION
9.1 TERMINATION OF AGREEMENT. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to Closing, as follows:
(a) MUTUAL CONSENT. By mutual consent of all of the parties hereto;
(b) BREACH. By Purchaser or by Sellers by reason of the breach by the
other in any material respect of any of its or their representations,
warranties, covenants or agreements contained in this Agreement; and
(c) FAILURE OF RESPECTIVE CONDITIONS. By Purchaser or by Sellers if
the Closing shall not have been consummated as a result of the conditions
precedent to their respective obligations contained in Sections 7.1 or 7.2
hereof not having been satisfied in all material respects through no fault
of the terminating party on or prior to May 31, 1998.
9.2 LIABILITY ON TERMINATION. If this Agreement is terminated pursuant to
this Section IX and the transactions contemplated hereby are not consummated,
this Agreement shall be void and of no further force and effect, except that in
the event of a breach of this Agreement, each non-breaching party shall have all
rights and remedies available at law or in equity against any of the parties in
breach of this Agreement.
X.
SURVIVAL OF REPRESENTATIONS
AND WARRANTIES
10.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
(as modified by the exceptions thereto set forth in each Schedule and
Supplemental Schedule applicable to such representation and warranty and as
further modified in accordance with the first paragraph of Article III hereof)
given by Sellers and by Purchaser in this Agreement shall survive the Closing
for a period of eighteen (18) months thereafter and no claims for
indemnification may be asserted by Purchaser after the expiration of such
eighteen month period, except:
(a) NON-SURVIVAL OF CERTAIN MATTERS. All representations, warranties,
covenants and agreements of Sellers relating to Accounts Receivable set
forth in Section 3.1(s), and to Inventory set forth in Section 3.1(t), shall
not survive the Closing;
(b) CERTAIN OTHER MATTERS. All representations, warranties, covenants
and agreements of Sellers relating to Sellers' authority, title to the
Purchased Assets or the Shares, or for fraud shall survive the Closing
indefinitely;
(c) POST-CLOSING COVENANTS. The post-closing covenants of Sellers and
Purchaser shall survive for the time period set forth therein, and if no
time period is stated, shall survive the Closing indefinitely; and
(d) TAX MATTERS. All representations, warranties, covenants and
agreements of Sellers relating to tax matters for or relating to any full or
partial taxable year of Golf or the Sports Entities shall survive until a
date thirty (30) days after expiration of the applicable period of
limitations (including any extensions) under any applicable statute or
regulations for such full or partial year, or if any return of Golf or the
Sports Entities for any such year is under examination as of that date
and/or any deficiency in taxes (and/or any penalties or interest) has been
assessed or proposed until a date thirty (30) days after a final
determination (including all appeals) of the liability of Golf or the Sports
Entities for any deficiency in taxes, interest and/or penalties.
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XI.
INDEMNIFICATION
11.1 BASIS FOR INDEMNIFICATION BY SELLERS. Subject to the provisions of,
and the limitations set forth in, this Article XI, Sellers jointly and severally
agree to indemnify Purchaser against any damages, losses, liabilities, costs or
expenses (including, without limitation, costs and expenses of litigation,
experts fees, costs of compliance, fines or penalties, remediation and response
costs, and reasonable attorneys' fees) incurred by Purchaser relative to any
breach by Sellers of any of their representations, warranties, covenants and
agreements contained in this Agreement, or in any other agreement or instrument
executed and delivered by it pursuant to the terms hereof, or any
misrepresentation in or omission from any other document or instrument given to
Purchaser by Sellers pursuant to this Agreement.
11.2 LIMITATIONS ON OBLIGATION TO INDEMNIFY.
(a) SATISFACTION OF THIRD-PARTY CLAIM. No party hereto shall have any
right of action against or claim to indemnification from any other party by
reason of the incorrectness of any representations and warranties of, or the
breach of any covenant or agreements by, such other party to the extent it
involves a claim by a third party and the other party to this Agreement is
obligated to and does in fact satisfy any resulting liability to the
relevant third party;
(b) 1997 SPORTS ENTITIES' INCOME TAX LIABILITIES. Notwithstanding any
provision herein to the contrary, Purchaser shall not be entitled to
indemnification hereunder for the payment of any additional income tax
liabilities (including interest and penalties) which may hereafter be
assessed or asserted against any of Golf or the Sports Entities for any
period subsequent to December 31, 1997 or arising in connection with any
Disclosed Audit. All income tax liabilities (including interest and
penalties), of Golf or the Sports Entities for periods ending December 31,
1997 and earlier shall be the responsibility and obligation of Sellers, and
Purchaser shall be entitled to indemnification therefor in accordance with
the provisions of this Article XI; provided, however, that all income tax
liabilities arising in connection with any Disclosed Audit shall be the
responsibility of Purchaser and accordingly, Purchaser shall not be entitled
to indemnification therefor;
(c) MINIMUM CLAIM AMOUNT. Purchaser shall not be entitled to payment
of indemnification hereunder until the amount actually payable with respect
to asserted claims exceeds Fifty Thousand Dollars ($50,000) (the "Minimum
Claim Amount"), and such indemnification shall be further subject to the
limitations set forth in Subsections (d) and (e) of this Section 11.2. Once
the Minimum Claim amount has been achieved, Purchaser shall be entitled to
indemnification for all amounts actually payable with respect to asserted
claims, and not just for amounts in excess of the Minimum Claim Amount;
(d) MAXIMUM AMOUNT OF AGGREGATE LIABILITY. Purchaser shall not be
entitled to indemnification hereunder in excess of Seven Hundred Fifty
Thousand and 00/100 ($750,000.00) (the "Maximum Claim Amount"), which amount
shall be the aggregate maximum amount that may be recoverable for successful
indemnification claims by Purchaser against all of the Sellers; provided,
that the limitation provided for in this Subsection 11.2(d) shall not apply
to claims of Purchaser for: (i) indemnification from all of the entities
constituting Seller for title to the Shares and Purchased Assets; (ii)
income tax liabilities of Golf, or of the Sports Entities to which Purchaser
is entitled to indemnity pursuant to Subsection 11.2(b); and (iii) any
liability for fraud, in all of which cases, Purchaser shall be entitled to
indemnification from all of the entities constituting Seller up to the
Maximum Amount specified in Subsection 11.2(e)(5) in the aggregate for all
such claims;
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(e) OTHER LIMITATIONS.
(1) Purchaser agrees to exercise all commercially reasonable efforts
to mitigate its damages and the amount of resulting indemnification
claims hereunder, including the submission of claims under insurance
policies then in effect, where commercially reasonable, provided that (i)
Sellers shall be liable for any deductibles or co-payments and (ii) such
submission would not result in an increase in premiums for Purchaser's
insurance;
(2) Purchaser agrees that indemnification pursuant to this Article XI
shall be Purchaser's sole and exclusive remedy for any claim by Purchaser
against Sellers alleging any breach by Sellers of their obligations,
representations, warranties and/or agreements set forth in, or
contemplated by, this Agreement or any document or instrument delivered
pursuant to this Agreement;
(3) Purchaser agrees that Sellers' indemnification obligations
pursuant to this Article XI shall be reduced to the extent Purchaser is
entitled to and actually receives indemnity for any loss or damage
suffered by it arising out of the breach or claim under the terms of any
insurance
policy then in force (provided, however, that nothing in this subsection
is intended to reduce the Maximum Claim Amount or the Maximum Amount);
(4) Each such claim for indemnification shall be a several claim
against each person or entity constituting the Sellers in the amount of
its respective Applicable Percentage of such claim; and
(5) Anything to the contrary herein notwithstanding, for claims of
the type specifically referred to in clauses (i) (ii) or (iii) of Section
11.2(c) hereof, the aggregate liability of Seller for indemnity
obligations shall be limited to the aggregate amount of $10,000,000 (the
"Maximum Amount"), of which each person or entity constituting a Seller
shall have an individual limit in the amount of its Applicable Percentage
of the Maximum Amount.
11.3 CLAIMS PROCEDURE.
(a) ASSERTION OF CLAIMS. In the event Purchaser believes it is
entitled to indemnification from any Seller under this Agreement, Purchaser
shall so notify Sellers in writing, as soon as reasonably practicable after
securing actual knowledge of the facts on which the claim is based, setting
forth the basis for the claim. Purchaser shall become entitled to
indemnification with respect to its claim:
(1) In the event there is mutual agreement between the parties
concerning the claim in accordance with such agreement; and
(2) In all other cases, based on a final, nonappealable judgment of a
court of competent jurisdiction or a ffinal and binding arbitration
award;
(b) THIRD-PARTY CLAIMS OTHER THAN TAX. In the event a third-party
asserts a claim which results, or may result, in a claim by Purchaser for
indemnification from Sellers (other than a claim relating to taxes for which
Purchaser is entitled to indemnification pursuant to Subsection 11.3(c)),
Purchaser ("Claimant") shall inform each of the Sellers ("Indemnitor") as
soon as reasonably practicable. In the event of any claim by a third party,
the Indemnitor may, in its discretion, defend any such claim or timely
direct that the Claimant do so. If the Indemnitor defends such claim it
shall have full authority to defend and settle the claim provided that the
Indemnitor shall have obtained the consent of the Claimant hereto to such
settlement (which consent shall not be unreasonably withheld). If the
Claimant is directed to assume the defense of the claim, the Claimant,
subject to the provisions of this Article XI, shall have full authority to
defend and settle the claim provided that the Claimant shall have obtained
the consent of the Indemnitor to such settlement (which consent shall not
reasonably be withheld). Any defense by Sellers of a claim by Purchaser
shall be conducted in a manner which does not unreasonably interfere with or
adversely impact the business, operations, relationships or
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assets of Purchaser. Each party agrees to cooperate with the other in any
defense or settlement of any such claim (including where appropriate giving
a power of attorney to the other party) and to give the other party full
access to all information relevant to such defense; and
(c) CLAIMS INVOLVING TAXES. In the event any tax liabilities are
assessed or asserted against Purchaser for which Purchaser is entitled to
indemnification, Sellers shall defend Purchaser against any such assessment
or assertion and if, notwithstanding such defense, Purchaser is deemed or
treated as liable for any such liabilities, Purchaser shall, subject to the
provisions of Subsections (a), (b), (c) and (d) of Section 11.2, be
indemnified by Sellers in accordance with Subsection 11.3(a) and the other
applicable provisions of this Article XI.
11.5 INDEMNIFICATION PAYMENT.
(a) TO PURCHASER. If any indemnification becomes due to Purchaser
hereunder, such indemnification shall be paid by the Sellers, each in
proportion to its Applicable Percentage, to Purchaser up to the applicable
limitations therefor (including, without limitation, the provisions of
Section 11.2 hereof), within ten (10) days after Purchaser becomes entitled
to indemnification by certified check, bank draft or wire transfer to an
account designated by Purchaser; and
(b) FAILURE TO TIMELY PAY INDEMNIFICATION. In the event any of the
persons or entities constituting Sellers fail to make an indemnification
payment within the period just described, Purchaser shall be entitled to
interest from such defaulting Seller at a rate equal to two percent (2%) in
excess of the prime rate reported in the Wall Street Journal at the time the
payment is required to be made for the period between the date on which the
indemnification payment was required to be made and the date it is actually
made.
XII.
REGISTRATION RIGHTS
12.1 SHELF REGISTRATION.
(a) Within 90 days from the date of issuance of any Payment Shares
hereunder, Purchaser shall cause to be filed a registration statement (a "Shelf
Registration") on Form S-3 or any other appropriate form under the Securities
Act of 1933, as amended (the "Securities Act") for an offering to be made on a
delayed or continuous basis pursuant to Rule 415 thereunder or any similar rule
that may be adopted by the Securities and Exchange Commission (the "Commission")
and permitting (i) sales of each of such Payment Shares in dealer transactions
or in any other transfer for consideration not involving an underwritten public
offering (and shall register or qualify such Payment Shares to be sold in such
offering under such other securities or "blue sky" laws, if any, as would be
required pursuant to Section 12.4 hereof). Prior to the filing of the Shelf
Registration or any supplement or amendment thereto, Purchaser shall furnish
copies of the Shelf Registration or such amendment to one counsel designated by
Sellers, and Purchaser will not file the Shelf Registration or such amendment
without the prior consent of such counsel, which consent shall not be
unreasonably withheld. Counsel for the Sellers referred to in the immediately
preceding sentence shall have 3 business days after delivery of the Shelf
Registration or amendment in which to comment on such registration statement to
Purchaser, after which period of time consent to the filing shall be deemed to
have been given. Purchaser shall, if necessary, supplement or make amendments to
the Shelf Registration, if required by the registration form used by Purchasers
for the Shelf Registration or by the instruments applicable to such registration
form or by the Securities Act or the rules or regulations thereunder or as may
reasonably be requested by Sellers. The Purchaser shall pay all Registration
Expenses incurred in connection with the Shelf Registration; and
(b) The requirement of the Purchaser to file the Shelf Registration shall be
subject to the following limitation: if counsel to Purchaser determines that any
registration of Payment Shares should not be made or continued because it would
violate any statute, law, rule or regulation applicable to Purchaser or the
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Payment Shares (a "Violation"), the Purchaser may postpone filing such Shelf
Registration until such Violation no longer exists, and, in case the Shelf
Registration has been filed, if the Violation has not resulted from actions
taken by the Purchaser, the Purchaser may cause such Shelf Registration to be
withdrawn and its effectiveness terminated or may postpone amending or
supplementing such Shelf Registration; and the Purchaser shall give written
notice of its determination to postpone or withdraw the Shelf Registration and
of the fact that the Violation for such postponement or withdrawal no longer
exists, in each case, promptly after the occurrence thereof. Each Seller agrees
that, upon notice from the Purchaser that Purchaser has determined to withdraw
the Shelf Registration pursuant to this subsection (b), such Seller will
discontinue its disposition of Payment Shares pursuant to such Shelf
Registration and, if so directed by Purchaser, will deliver to the Purchaser (at
the Purchaser's expense) all copies, other than permanent file copies, then in
such Seller's possession, of the prospectus covering such Payment Shares that
was in effect at the time of receipt of such notice. If the Purchaser shall give
any notice of withdrawal or postponement of the Shelf Registration, the
Purchaser shall, at such time as the Violation that caused such withdrawal or
postponement no longer exists, use its best efforts to effect the registration
under the Securities Act of the Payment Shares.
12.2 PIGGYBACK REGISTRATION. In addition to, and not in limitation of, the
rights conferred pursuant to subdivision (a) above, the following provisions
apply at any time prior to the date upon which the right of Piggyback
Registration is no longer held by HPA Associates, LLC, Charles S. Holmes or
James J. Pinto, or any direct or indirect transferees of Payment Shares from
them in a transaction not involving a public offering (such parties being
referred to as "HPA Parties" and such Payment Shares as "HPA Party Shares"), so
long as Payment Shares are held by any Seller who is an affiliate of Purchaser
for purposes of Rule 144 (as defined below). Whenever Purchaser proposes to file
a registration statement under the Securities Act with respect to an
underwritten public offering of Preferred Shares or Common Shares by the
Purchaser for its own account or for the account of an other holder of Preferred
Shares or Common Shares or any other security convertible into Common Shares,
the Company shall give at least 30 days' written notice before the anticipated
filing date (the "Offering Notice") of such proposed filing to each Seller
holding Payment Shares. Such Offering Notice shall offer all such Sellers who
are affiliates of the opportunity to register such number of Payment Shares as
each such Seller may request in writing, which request for registration (each, a
"Piggyback Registration", with the rights to registration thereof being referred
to as "Piggyback Rights") must be received by Purchaser within 15 days after the
Offering Notice is given. The Purchaser shall use all reasonable efforts to
cause the managing underwriter or underwriters of a proposed underwritten
offering to permit the Sellers of the Payment Shares requested to be included in
the registration for such offering to include such Payment Shares in such
offering on the same terms and conditions as the securities of the Company
included therein. Notwithstanding the foregoing, if the managing underwriter or
underwriters of a proposed underwritten offering advise the Purchaser in writing
that in its or their opinion the number of Payment Shares proposed to be sold in
such offering exceeds the number of Payment Shares that can be sold in such
offing without adversely affecting the market for the Purchaser securities or
the price that may be obtained in such offering, the Purchaser shall include in
such registration the number of Payment Shares in the opinion of such managing
underwriter or underwriters can be sold without adversely affecting the market
for the Preferred Shares or the Common Shares or the price to be received in
such offering. In such event, the number of Payment Shares, if any, to be
offered for the accounts of Sellers shall be reduced PRO RATA on the basis of
the relative number of any Payment Shares requested by each such Seller to be
included in such registration to the extent necessary to reduce the total number
of Payment Shares to be included in such offering to the number recommended by
such managing underwriter or underwriters, PROVIDED that if any other Person has
rights to a Piggyback Registration with respect to the same underwritten public
offering, the rights of the Sellers to sell their securities together with such
other Persons holding Piggyback Rights shall be cut back proportionably (in
relation to the number of shares the each Person so participating in the
Piggyback Registration has requested to be included (using Converted Common
Share equivalents in a case in which a cutback is required of a Piggyback
Registration of Preferred Shares) compared to the number of all shares with
respect to which
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inclusion has been properly requested), except to the extent that the instrument
governing such other Piggyback Rights specifically provides that the rights held
by such other Person either take precedence over or shall be subordinated to the
Piggyback Rights held by the Sellers hereunder, it being understood that the
rights of holders of Series A, B and C Preferred Stock of the Purchaser take
precedence as to cutbacks over the rights of Sellers hereunder. Purchaser shall
pay all Registration Expenses incurred in connection with any Piggyback
Registration.
12.3 TERMINATION OF REGISTRATION RIGHTS; PROVISION OF RULE 144
INFORMATION. As used in this section, "affiliate" has the meaning given to it
in Rule 144 under the Securities Act ("Rule 144"). The registration rights
provided hereunder shall continue so long as any Payment Shares remain
outstanding and shall then terminate, PROVIDED that (i) the Purchaser shall be
entitled to remove from the registration under subsection 12.1 Payment Shares
held by persons who have acquired such Payment Shares for consideration pursuant
to a transaction covered by the registration provided by Subsection 12.1, and
(ii) at any time after two years after the date of the issuance of the Payment
Shares, so long as the Payment Shares are freely tradable under Rule 144 in the
hands of persons who are not affiliates of Purchaser.
For a period of at least two years, and continuing while any Seller remains
an affiliate of the Company and continues to hold Payment Shares, the Purchaser
shall be required (i) to file such reports under the Securities Exchange Act of
1934, as amended, or otherwise make publicly available such information, as may
be required by section (c) of Rule 144 in order for sales to be permitted under
the provisions of Rule 144 and (ii) to provide confirmation of such filing or
availability upon request to any Seller who seeks to rely upon Rule 144 (other
than section (k) thereof) in the sale of Payment Shares.
12.4 REGISTRATION PROCEDURES. Whenever Payment Shares are to be registered
pursuant hereto, the Purchaser shall use its best efforts to effect the
registration of Payment Shares in accordance with the intended method of
disposition thereof as expeditiously as practicable and, in connection with any
such request, the Purchaser shall as expeditiously as possible:
(a) furnish to each seller of Payment Shares such number of copies of
the registration statement, each amendment and supplement thereto (in each
case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as each seller may reasonably request in order to facilitate
the disposition of the Payment Shares owned by such seller;
(b) if required, use best efforts to register or qualify such Payment
Shares under such other securities or "blue sky" laws of such jurisdictions
as any seller reasonably requests in writing and to do any and all other
acts and things that may be reasonably necessary or advisable to register or
qualify for sale in such jurisdictions the Payment Shares owned by such
seller; PROVIDED, HOWEVER, that the Purchaser 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 Purchaser determines in good faith to be contrary to the best interest
of the Purchaser and its stockholders;
(c) use best efforts to cause the Payment Shares covered by such
registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Purchaser to enable the seller or sellers
thereof to consummate the disposition of such Payment Shares;
(d) Notify each seller at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the
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circumstances under which they were made, not misleading, and prepare and
file with the Commission a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Payment Shares, such
prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, PROVIDED, in the case of a Piggyback
Registration, that prior to the filing of such supplement or amendment, the
Purchaser shall furnish copies thereof to the Sellers whose Payment Shares
are included in such registration, any underwriters and counsel for such
Sellers, and will not file such supplement or amendment without the prior
consent of such counsel, which consent shall not be unreasonably withheld;
(e) enter into customary agreements including an underwriting agreement
in customary form if the offering is an underwritten offering) and take such
other actions as are reasonably requested in order to expedite or facilitate
the disposition of such Payment Shares;
(f) make available for inspection by any seller of Payment Shares and
any attorney, accountant or other agent retained by any such seller
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Purchaser (collectively, the
"Records") as are reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Purchaser's officers, directors,
employees and agents to supply all information reasonably requested by any
such Inspector in connection with such registration statement. Records that
the Purchaser determines, in good faith, to be confidential and that it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless the release of such Records is ordered pursuant to a
subpoena or other order from the court or governmental agency of competent
jurisdiction or required (in the written opinion of counsel to such Seller,
which counsel shall be reasonably acceptable to the Purchaser) pursuant to
applicable state or federal law. Each seller of Payment Shares shall be
required to agree, however, that it will, upon learning that disclosure of
such Records are sought by a court or governmental agency, give notice to
the Purchaser and allow the Purchaser, at the Purchaser's expense, to
undertake appropriate action to prevent disclosure of the Records deemed
confidential;
(g) if such sale is pursuant to an underwritten offering, use reasonable
efforts to obtain a "cold comfort" letter and updates thereof from the
Purchaser's independent public accountants in customary form and covering
such matters of the type customarily covered by "cold comfort" letters as
the managing underwriter or underwriters reasonably request;
(h) Otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make generally available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act;
(i) The Purchaser shall use its best efforts to maintain the listing of
the Empire Common Stock on the American Stock Exchange, Inc. ("AMEX") or on
any other nationally recognized stock exchange (including the Nasdaq Stock
Market or the New York Stock Exchange) (an "Exchange"), and the Purchaser
shall cause all Payment Shares to be listed on the applicable Exchange as
promptly as is feasible;
(j) The Purchaser may require each seller or prospective seller of
Payment Shares as to which any registration is being effected to furnish to
the Purchaser such information regarding the distribution of such securities
and other matters as may be required to be included in the registration
statement; and
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(k) Upon receipt of any notice from the Purchaser of the happenings of
any event of the kind described in Subsection 12.4(d), each holder of
Payment Shares shall forthwith discontinue disposition of Payment Shares
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Subsection 12.4(d) and, if so directed by the
Purchaser, such holder shall deliver to the Purchaser (at the Purchaser's
expense) all copies, other than permanent file copies then in holder's
possession, of the prospectus covering such Payment Shares current at the
time of the receipt of such notice. If the Purchaser gives any such notice,
the Purchaser shall extend the period during which such registration
statement shall be maintained effective pursuant to this Agreement by the
number of days during the period from and including the date of the giving
of such notice pursuant to Subsection 12.4(d) to and including the date when
each seller of Payment Shares covered by such registration statement shall
have received the copies of the supplemented or amended prospectus
contemplated in Subsection 12.4(d). Notwithstanding anything to the contrary
set forth above in this paragraph, the Purchaser may not require the holders
of Payment Shares to discontinue disposition of Payment Shares for purposes
of effecting a public offering of any securities of the Purchaser by any of
its securityholders (other than an offering made pursuant to a registration
on Form S-8). Notwithstanding the foregoing , if the Purchaser furnishes to
the Sellers a certificate signed by the Chief Financial Officer of the
Purchaser stating that (i) in the good faith judgment of the Board of
Directors of the Purchaser it would be significantly disadvantageous to the
Purchaser and its stockholders for any such Shelf Registration to be amended
or supplemented and (ii) the need for such an amendment or supplement is not
caused by a proposed secondary public offering of securities of the
Purchaser by any of its securityholders (other than an offering made
pursuant to a registration on Form S-8), the Purchaser may defer such
amending or supplementing of such Shelf Registration for not more than 45
days and in such event the Sellers shall be required to discontinue
disposition of any Payment Shares covered by such Shelf Registration during
such period. Notwithstanding the foregoing, in connection with any amendment
or supplement required to reflect a public offering of securities by the
Purchaser, the Purchaser shall file such amendment or supplement to the
holders of Payment Shares promptly following such filing.
12.5 REGISTRATION EXPENSES. The Purchaser shall pay the following expenses
incident to its performance of or compliance with the provisions of Article XII,
and no others ("Registration Expenses"), regardless of whether such registration
becomes effective including: (a) all Commission, Exchange or market and National
Association of Securities Dealers, Inc., registration and filing fees, (b) all
fees and expenses incurred in complying with securities or "blue sky" laws
(including reasonable fees and disbursements of counsel in connection with "blue
sky" qualifications of the Payment Shares), (c) all printing, messenger and
delivery expenses, (d) all fees and disbursements of the Purchaser's independent
public accountants and counsel, (e) all fees and expenses of any special experts
retained by the Purchaser in connection with any Piggyback Registration pursuant
to the terms of this Agreement, and (f) the fees and disbursements of one
counsel retained collectively by the Sellers for a registration; PROVIDED,
HOWEVER, that the Purchaser shall not pay the costs and expenses of any counsel,
accountants or other representatives retained by the Sellers, individually or in
the aggregate.
12.6 INDEMNIFICATION; CONTRIBUTION.
(a) INDEMNIFICATION BY THE PURCHASER. The Purchaser shall indemnify,
to the fullest extent permitted by law, each Seller, its officers, directors
and agents and each person, if any, who controls such Seller (within the
meaning of the Securities Act), against any and all losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of a
prospectus, in light of the circumstances under which they were made) not
misleading, except insofar as the same are caused by or contained in any
information with respect to such Seller furnished in writing to the
Purchaser by such Seller expressly for use therein or by such Seller's
failure to deliver a copy of the prospectus or
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any supplements thereto after the Purchaser has furnished such Seller with a
sufficient number of copies of the same or by the delivery of prospectuses
by such Seller after the Purchaser notified such Seller in writing to
discontinue delivery of prospectuses. The Purchaser also shall indemnify any
underwriters of the Payment Shares, their officers and directors and each
person who controls such underwriters (within the meaning of the Securities
Act) to the same extent as provided above with respect to the
indemnification of the Sellers);
(b) INDEMNIFICATION BY SELLERS. In connection with any registration
statement in which a Seller is participating, each such Seller shall furnish
to the Purchaser in writing such information and affidavits with respect to
such Seller as the Purchaser reasonably requests for use in connection with
any such registration statement or prospectus and agrees, subject to the
limitation set forth in Subsection 11.2(d) and (e) hereof, to indemnify,
severally and not jointly, to the fullest extent permitted by law, the
Purchaser, its officers, directors and agents and each Person, if any, who
controls the Purchaser (within the meaning of the Securities Act) against
any and all losses, claims, damages, liabilities and expenses resulting from
any untrue or alleged untrue statement of a material fact or any omission or
alleged omission of a material fact required to be stated in any
registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or necessary to make the statements
therein (in the case of a prospectus, in light of the circumstances under
which they were made) not misleading, to the extent, but only to the extent,
that such untrue or alleged untrue statement or omission is contained in or
improperly omitted from, as the case may be, any information or affidavit
with respect to such Seller so furnished in writing by such Seller. Each
Seller also shall indemnify any underwriters (within the meaning of the
Securities Act) to the same extent as provided above with respect to the
indemnification of the Purchaser;
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any party that proposes to
assert the right to be indemnified pursuant to the provisions of this
Article XII shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against
an indemnifying party or parties hereunder, notify each such indemnifying
party of the commencement of such action, enclosing a copy of all papers
served; provided, however, that the omission so to notify such indemnifying
party will not relieve it from any liability that it may have to any
indemnified party under the foregoing provisions unless, and only to the
extent that, such omission results in the forfeiture of substantive rights
or defenses by the indemnifying party. If any such action is brought against
any indemnified party and its notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and,
to the extent that it elects by delivering written notice to the indemnified
party promptly after receiving notice of the commencement of the action from
the indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified part of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except of the
reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense. If the indemnifying party assumes the
defense, the indemnifying party shall have the right to settle such action
without the consent of the indemnified party; PROVIDED, HOWEVER, that the
indemnifying party shall be required to obtain such consent (which consent
shall not be unreasonably withheld) if the settlement includes any admission
of wrongdoing on the part of the indemnified party or any decree or
restriction on the indemnified party or its officers or directors; PROVIDED,
FURTHER, that no indemnifying party, in the defense of any such action,
shall, except with the consent of the indemnified party (which consent shall
not be unreasonably withheld), consent to entry of any judgement or enter
into any settlement that does not include as an unconditional term thereof
the giving by the claimant of plaintiff to such indemnified party of a
release from all liability with respect to such action against the
indemnified party. The indemnified party will have the right to employ its
own counsel in any such action, but the fees, expenses and other charges of
such counsel will be at the expense of such indemnified party unless (a) the
employment of
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counsel by the indemnified party has been authorized in writing by the
indemnifying party, (b) the indemnified party has reasonably concluded
(based on advice of counsel) that there may be legal defenses available to
it or other indemnified parties that are different form or in addition to
those available to the indemnified party, (c) a conflict or potential
conflict exists (based on advise of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such
action on behalf of the indemnified party), or (d) the indemnifying party
has not in fact employed counsel to assume the defense of such action within
a reasonable time after receiving notice of the commencement of the action,
in each of which cases the reasonable fees, disbursements and other charges
of counsel will be at the expense of the indemnifying party or parties. It
is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees, disbursements and other
charges of more than one separate firm admitted to practice in such
jurisdiction at any one time from such indemnified party or parties unless
(x) the employment of more than one counsel has been authorized in writing
by the indemnifying party or parties, (y) an indemnified party has
reasonably concluded (based on advice of counsel) that there may be legal
defenses available to it that are different from or in addition to those
available to the other indemnified parties, or (z) a conflict or potential
conflict exists (based on advice of counsel to an indemnified party) between
such indemnified party and the other indemnified parties, in each of which
cases the indemnifying part shall be obligated to pay the reasonable fees
and expenses of such additional counsel or counsels. An indemnifying party
shall not be liable for any settlement of any action or claim effected
without its written consent (which consent shall not be unreasonably
withheld); and
(d) CONTRIBUTION. If the indemnification provided for in this Article
XII from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then the indemnifying party, to the extent such
indemnification is unavailable, in lieu of indemnifying such indemnified
party, shall, subject to the limitations set forth in Subsection 11.2(e)(5)
hereof, contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the
indemnifying party and indemnified parties in connection with the actions
that resulted in such losses, claims, damages, liabilities or expenses. The
relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact, has been made
by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Subsection (c) hereof, any legal or
other fees or expenses reasonably incurred by such party in connection with
any investigation or proceeding.
If indemnification is available hereunder, the indemnifying parties shall
indemnify each indemnified party to the full extent provided in Subsections
(a) and (b) hereof without regard to the relative fault of said indemnifying
parties or indemnified party.
XIII.
MISCELLANEOUS
13.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors and assigns, except that neither party may assign any of its rights
or obligations hereunder except with the prior written consent of the other
party hereto.
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13.2 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended
to confer upon any person other than the parties hereto and their successors and
permitted assigns, any rights or remedies under or by reason of this Agreement.
13.3 EXPENSES. In addition to any of its other reimbursement obligations
hereunder, including, without limitation, Purchaser's obligation to pay all
Registration Expenses, Purchaser agrees to make payment of and be responsible
for all of its and Sellers' costs and expenses (including all legal, accounting,
investment banking and other costs) with respect to the transaction contemplated
by this agreement; provided that Purchaser's responsibility for the payment of
professional fees owing by Sellers shall be limited to $75,000 and which shall
be paid by Purchaser to Sellers at Closing, if the Closing shall occur. No
out-of-pocket expenses incurred by the Sellers in connection with the
consummation of the transaction shall be charged against or paid by Golf and the
Sports Entities, as the case may be; however, each of Golf and the Sports
Entities, as the case may be, shall bear its own expenses in connection with the
transaction (including, without limitation, payment of any fees to Wilson in
connection with the transactions contemplated by this Agreement).
13.4 NOTICES. Notices hereunder shall be effective and deemed given when
deposited in the U.S. mails, postage prepaid, registered or certified mail with
return receipt requested, or by air courier, and addressed, in the case of
Purchaser, to:
Empire of Carolina, Inc.
5150 Linton Boulevard
Delray Beach, FL 33484
Attention: Lawrence Geller, Esq.
Telecopier No.: (561) 498-0722
with a copy to:
Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, P.A.
777 South Flagler Drive
Suite 10--East Tower
West Palm Beach, FL 33401
Attention: Morris Brown, Esq.
Telecopier No.: (561) 655-6222
and in the case of Sellers to:
Apple Golf Shoes, Inc.
c/o Clare Rose Inc.
72 Clare Rose Boulevard
Patchogue, NY 11772
Attention: Robert A. Wertley
Telecopier No.: (516) 475-1837
with a copy to:
Lane & Mittendorf LLP
320 Park Avenue
New York, NY 10022
Attention: Harvey Feldschreiber, Esq.
Telecopier No.: (212) 421-2996
Any party may change the address to which such notices are to be addressed by
giving the other party notice in the manner herein set forth.
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13.5 GOVERNING LAW; VENUE. The validity, interpretation and performance of
this Agreement shall be determined in accordance with the laws of the State of
New York (without regard to its conflicts or choices of law principles)
applicable to contracts made and to be performed within said State. Each party
hereto irrevocably submits to the jurisdiction of any New York State or federal
court sitting in New York County, New York in any action or proceeding arising
out of or relating to this Agreement and agrees that all claims in respect of
such action or proceeding may be heard or determined in such courts to the
extent permitted by applicable law. Each party irrevocably waives to the fullest
extent it may effectively do so, the defense of any inconvenient forum to the
maintenance of such action or proceeding.
13.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
13.7 HEADINGS. The headings, subheadings and captions in this Agreement
and in any exhibit hereto are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
13.8 EXHIBITS. The exhibits annexed hereto and the other documents,
Schedules and Supplemental Schedules to be delivered pursuant hereto are
expressly made a part of this Agreement as if set forth in full herein.
13.9 ENTIRE AGREEMENT. This Agreement, including the Schedules, the
Supplemental Schedules and Exhibits hereto, and all other documents and
instruments to be delivered hereunder contains the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
negotiations, prior discussions, agreements, arrangements and understandings,
written or oral, relating to the subject matter hereof.
13.10 SEVERABILITY. If any court of competent jurisdiction should declare
any provision of this Agreement invalid or unenforceable for any reason, then
the parties hereto agree that the court shall have the express authority to
reform such provision and the invalidity or unenforceability of such provision
shall not affect any other provision hereof or this Agreement as a whole.
13.11 CONFIDENTIALITY. Except as required by law or as the parties hereto
may otherwise agree, all financial statements and disclosures of confidential
information provided to Purchaser or discovered in connection with the due
diligence review shall remain strictly confidential and shall not be disclosed
to any third party until such time as the Closing hereunder shall have occurred
and if for any reason whatsoever the Closing hereunder shall not occur such
confidential materials shall be promptly returned to Sellers, and Sellers shall
not thereafter make any use of such confidential information until such time as
such confidential information shall become otherwise publicly available. For
purposes of this Agreement, "confidential information" shall not include (a)
information which at the time of disclosure is public knowledge through no fault
or action by Purchaser, (b) information resulting from research and development
independent of any disclosure (other than research regarding the business or
financial condition of Sellers conducted by Purchaser in connection with the
transaction contemplated by this Agreement), or (c) information received from
third parties and which to Purchaser's knowledge was not obtained by such third
parties, directly or indirectly, from Sellers without authorization. The
provisions of this Section 13.11 shall survive the Closing indefinitely.
13.12 AMENDMENTS. This Agreement may not be amended except by written
instrument duly executed by or on behalf of each of the parties hereto.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly
executed and delivered as of the day and year first above written.
EMPIRE OF CAROLINA, INC.
By: /s/ WILLIAM H. CRAIG
--------------------------------------
William H. Craig, CHIEF FINANCIAL
OFFICER
SELLERS:
MARK ROSE COMPANIES, LTD.
By: /s/ ROBERT A. WERTLEY
--------------------------------------
Robert A. Wertley, SECRETARY
/s/ E. JOY ROSE
--------------------------------------
E. Joy Rose
/s/ ROBERT A. WERTLEY
--------------------------------------
Robert A. Wertley
MARK ROSE IRREVOCABLE TRUST
FOR THE BENEFIT OF BRIDGET ROSE MORAN
By: /s/ ROBERT WERTLEY
--------------------------------------
Robert Wertley, TRUSTEE
MARK ROSE IRREVOCABLE TRUST
FOR THE BENEFIT OF STACY ROSE DUGAN
By: /s/ ROBERT WERTLEY
--------------------------------------
Robert Wertley, TRUSTEE
MARK ROSE IRREVOCABLE TRUST
FOR THE BENEFIT OF BAYLEE SHEA ROSE
By: /s/ ROBERT WERTLEY
--------------------------------------
Robert Wertley, TRUSTEE
MARK S. ROSE
By: /s/ WILLIAM R. GARBARINO
--------------------------------------
William R. Garbarino, AS ATTORNEY IN
FACT
37
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit A -- Restrictive Agreement
<S> <C> <C>
Exhibit B -- Sellers' Legal Opinion
Exhibit C -- Purchaser's Legal Opinion
</TABLE>
<PAGE>
EXHIBIT C
FINANCIAL STATEMENTS OF
APPLE SPORTS INC.
<PAGE>
APPLE SPORTS INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report............................................................................... 1
Consolidated Balance Sheet................................................................................. 2
Consolidated Statement of Income and Retained Earnings..................................................... 3
Consolidated Statement of Cash Flows....................................................................... 4
Notes to Consolidated Financial Statements................................................................. 5
</TABLE>
<PAGE>
STEVEN J. ZAFFOS
CERTIFIED PUBLIC ACCOUNTANT
5 EVON DRIVE
SYOSSET, NEW YORK 11791-6311
- ----------------------------
TELEPHONE (516) 364-4028
Board of Directors and Shareholders
Apple Sports, Inc. and Subsidiaries
1 Roebling Court
Ronkonkoma, NY 11779
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying consolidated balance sheets of Apple Sports,
Inc. and Subsidiaries (a subsidiary of Mark Rose Companies, Ltd.) as of December
31, 1996, and the related consolidated statements of income and retained
earnings, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these consolidated financial statements based on my
audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. I believe that my audit provides
a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Apple
Sports, Inc. and Subsidiaries at December 31, 1996, and the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
My audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules of
consolidated cost of sales, selling expenses and administrative expenses are
presented for purposes of additional analysis and are not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in my opinion, are fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
March 12, 1997
/s/ STEVEN J. ZAFFOS
- ----------------------------
Steven J. Zaffos
1
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash......................................................................... $ 41,563
Accounts Receivable, less allowances ($74,387)................................. 3,604,685
Inventory.................................................................... 3,410,596
Deferred income tax benefit.................................................. 227,979
Prepaid expenses............................................................. 145,675
Prepaid income taxes......................................................... 4,808
----------
TOTAL CURRENT ASSETS........................................................... 7,435,306
----------
PROPERTY AND EQUIPMENT, NET.................................................... 785,826
----------
OTHER ASSETS
Loans receivable--affiliated company......................................... 2,933,420
Goodwill, less amortization ($478,878)....................................... 393,521
----------
TOTAL OTHER ASSETS............................................................. 3,326,941
TOTAL ASSETS................................................................... 11,548,073
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $ 141,742
Accrued expenses............................................................. 433,704
Taxes payable, other than income............................................. 2,774
Income taxes payable......................................................... 88,374
----------
TOTAL CURRENT LIABILITIES...................................................... 666,594
----------
OTHER LIABILITIES
Note payable bank............................................................ 4,124,661
----------
TOTAL OTHER LIABILITIES........................................................ 4,124,661
----------
TOTAL LIABILITIES.............................................................. 4,791,255
----------
SHAREHOLDERS' EQUITY
Common stock, no par, 200 shares authorized, 100 shares issued and
outstanding................................................................ 100
Additional paid in capital................................................... 1,000,000
Retained earnings............................................................ 5,756,718
----------
TOTAL SHAREHOLDERS' EQUITY..................................................... 6,756,818
----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY....................................... 11,548,073
----------
----------
</TABLE>
See Independent Auditor's Report and Footnotes
2
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDING DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES...................................................................... $17,046,789
COST OF SALES.................................................................. 10,875,343
----------
GROSS MARGIN................................................................... 6,171,446
----------
EXPENSES
Selling...................................................................... 2,414,570
Administrative............................................................... 1,706,147
Interest..................................................................... 501,935
----------
TOTAL EXPENSES................................................................. 4,622,652
----------
OPERATING INCOME............................................................... 1,548,794
OTHER INCOME................................................................... 729,913
----------
INCOME BEFORE INCOME TAXES..................................................... 2,278,707
PROVISION FOR INCOME TAXES..................................................... 854,114
----------
NET INCOME..................................................................... 1,424,593
RETAINED EARNINGS
BEGINNING OF YEAR............................................................ 4,332,125
----------
END OF YEAR.................................................................. 5,756,718
----------
----------
</TABLE>
See Independent Auditor's Report and Footnotes
3
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDING DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $1,424,593
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING
ACTIVITIES:
Depreciation and amortization................................................. 390,714
(Recovery) Provision for bad debt............................................. (56,511)
Increase in income tax benefit................................................ (117,282)
CHANGE IN ASSETS AND LIABILITIES:
Increase in accounts receivable............................................... (59,499)
Decrease in inventory......................................................... 1,473,259
Decrease in prepaid income taxes.............................................. 5,958
Decrease in prepaid expenses.................................................. 68,404
Increase in accounts payable.................................................. 90,622
Decrease in accrued expenses.................................................. (73,848)
Increase in taxes payable, other than income.................................. 2,679
Increase income taxes payable................................................. 81,432
----------
TOTAL ADJUSTMENTS............................................................... 1,805,928
----------
NET CASH USED IN OPERATING ACTIVITIES........................................... 3,230,521
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property and equipment................................ (17,166)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans receivable, affiliated company.......................................... (862,472)
Payments to related parties................................................... (902,057)
Proceeds from bank note....................................................... (1,511,339)
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... (3,275,868)
NET DECREASE IN CASH............................................................ (62,513)
CASH BEGINNING OF YEAR.......................................................... 104,076
----------
CASH END OF YEAR................................................................ 41,563
----------
----------
</TABLE>
See Independent Auditor's Report and Footnotes
4
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Apple Sports, Inc. (the "Company") is in the business of distributing
sporting goods, primarily golf accessories. The Company has a license agreement
for the marketing of Wilson Sporting Goods Co. golf accessories, which expires
on December 31, 2000.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation
The consolidated statements include the accounts of the Company and its
wholly owned subsidiaries, Dorson Sports, Inc., Kingsley Golf Co. Inc., and Lee
Richards, Inc. All material intercompany accounts and transactions have been
eliminated.
b. Inventory
Inventories are stated at the lower of cost or market, using the first-in
first-out method.
c. Property and equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. (See Note 4, below.)
d. Depreciation and amortization
Provision for depreciation and amortization is computed on the straight-line
method over the estimated useful lives of the assets, or lease term if shorter.
e. Goodwill
Goodwill, costs in excess of net assets acquired, is being amortized over
twenty years.
f. Lease commitments
Rent expense is recognized on a straight-line basis over the term of the
lease.
NOTE 2: PREPAID INCOME TAXES
Prepaid income taxes of $4,808 represents an overpayment of current income
taxes, which is being applied to the subsequent year.
NOTE 3: DEFERRED INCOME TAX BENEFIT
The amount for deferred income tax asset of $339,821 is a result of
temporary differences reported differently for financial reporting and tax
purposes relating to inventory capitalization, allowance for uncollectible
accounts, depreciation methods, and lease commitments.
See Independent Auditor's Report
5
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<S> <C>
Furniture and equipment......................................... $ 577,773
Transportation equipment........................................ 204,623
Leasehold improvements.......................................... 827,129
---------
Total........................................................... 1,609,525
Less accumulated depreciation................................... 823,699
---------
Net book value.................................................. 785,826
---------
---------
</TABLE>
NOTE 5: NOTE PAYABLE, BANK
Revolving credit agreement
On November 20, 1995, the Company revised its revolving credit agreement
with Citibank, N.A., which commits it to lend up to $15 Million. The terms of
the credit agreement provide that interest on borrowings be the lender's base
rate. Under the credit agreement, the Company is currently required to pay fees
of 1/4 of 1% per annum on the average daily unused portion of the lending
commitment.
All borrowings under the credit agreement are due no later than 364 days
from the effective date of the revised agreement. There is an option to extend
the agreement for four (4) successive one-year periods. The intent of all
parties is to extend the agreement for all periods accordingly.
The credit agreement requires the Company to maintain stated minimum net
worth, net profit and current ratio levels. In addition, the credit agreement
forbids the declaration or payment of any cash dividends without the written
consent of the bank. At December 31, 1996, the Company was not in compliance
with all the covenants under the credit agreement. The Company was in default of
the covenant requiring a stated minimum net earnings. The lending institution
has issued as waiver with regard to this loan covenant default. There are no
compensating balance requirements under the credit agreement.
The revolving credit agreement is collateralized by the assets of the
Company and guaranteed by its shareholders and officers. Apple Golf Shoes, Inc.,
an affiliated company, is a party to and guarantor of the credit agreement. (See
Note 6).
NOTE 6: RELATED PARTY TRANSACTIONS
a. Loans receivable, affiliated company
The Company has made certain advances to an affiliated company, Apple Golf
Shoes, Inc. These advances are the primary source of the affiliated company's
financing. The affiliated company is a party to and a guarantor of the revolving
credit agreement referred to in Note 5. The advances bear interest at the rate
charged by the lending institution.
See Independent Auditor's Report
6
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6: RELATED PARTY TRANSACTIONS (CONTINUED)
The affiliated company has paid a management fee equal to 10.5% of its
sales. The fee for year ending December 31, 1996, amounted to $285,241. The
affiliated company also paid interest on the outstanding balance of these
advances equal to the lender's base rate. The amount of interest income received
by the Company for the year ending December 31, 1996, amounted to $258,683.
b. Operating leases
The Company leases its office and warehouse facilities located in
Ronkonkoma, New York from a related party, pursuant to an operating lease
expiring on January 31, 2001. The Company is responsible for real estate taxes
and other operating expenses.
Operating lease expenses are allocated to an affiliated company based upon
estimated square footage used to warehouse inventory and maintain office
facilities.
The minimum future rental payments under the operating lease are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 343,187
1998............................................................................ 347,923
1999............................................................................ 352,684
2000............................................................................ 357,700
2001............................................................................ 29,843
$ 1,431,337
------------
------------
</TABLE>
Rent expense for the year ending December 31, 1996 amounted to $238,938.
NOTE 7: INCOME TAXES
The components of income tax expense are:
<TABLE>
<S> <C>
Currently payable
Federal....................................................... $ 808,325
State......................................................... 145,113
---------
953,438
Deferred income taxes benefit
Federal....................................................... (71,723)
State......................................................... (27,601)
---------
(99,324)
Total provision for income taxes.................................. $ 854,114
---------
---------
</TABLE>
NOTE 8: SIGNIFICANT CUSTOMERS--SUPPLIERS
a. Customers
See Independent Auditor's Report
7
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8: SIGNIFICANT CUSTOMERS--SUPPLIERS (CONTINUED)
The Company sells a substantial amount of goods to major national retailers
and chains. These amounts represent 72.16% of total revenues. As of December 31,
1996, 73.63% of trade accounts receivable are from these customers.
b. Suppliers
The company purchases a substantial amount of goods from major foreign
suppliers. These amounts represent 75.77% of total purchases.
NOTE 9: ROYALTY AGREEMENT
Pursuant to the Company's Trademark License Agreement with Wilson Sporting
Goods Co., it is obligated to pay a stated percentage of royalties of certain
net sales against minimum guarantees. The amount of royalties paid in 1997
amounted to $892,998.
The minimum future royalty payments under the current licensing agreement
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 700,000
1998............................................................................ 750,000
1999............................................................................ 775,000
2000............................................................................ 800,000
------------
$ 3,025,000
------------
------------
</TABLE>
NOTE 10: COMMITMENTS AND CONTINGENT LIABILITIES
a. Employment contract
The Company has entered into an employment contract with its president,
which provides for a minimum annual salary of $70,000, adjusted for cost of
living changes and incentives based upon the Company's attainment of specified
levels of pretax earnings.
b. Contingent liabilities
The Company has a contingent liability of $1,396,440 as of December 31, 1996
for commercial letters of credit incurred in the normal course of business.
NOTE 11: EMPLOYEE SAVINGS AND RETIREMENT PLAN
a. 401(k) cash or deferred arrangement
The Company adopted a 401(k) savings and retirement plan in January 1995.
The plan covers all employees who are 18 years of age or older and who have been
employed for one year. The Company's retirement and savings plan contribution is
a 25% matching contribution for all eligible employees. Company matching
contributions for the year amounted to $12,162.
See Independent Auditor's Report
8
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 11: EMPLOYEE SAVINGS AND RETIREMENT PLAN (CONTINUED)
b. Profit sharing plan
On January 1, 1995, the Company set up a non-contributory profit sharing
plan for the benefit of all eligible employees. The contribution, if made, will
be allocated to all eligible employees in the ratio of each employee's earnings
to the total earnings of all participants. In 1997, there were no contributions
made to this plan.
See Independent Auditor's Report
9
<PAGE>
APPLE SPORTS INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report............................................................................... 1
Consolidated Balance Sheet................................................................................. 2
Consolidated Statement of Income and Retained Earnings..................................................... 3
Consolidated Statement of Cash Flows....................................................................... 4
Notes to Consolidated Financial Statements................................................................. 5
</TABLE>
<PAGE>
[letterhead]
Board of Directors and Shareholders
Apple Sports, Inc. and Subsidiaries
1 Roebling Court
Ronkonkoma, NY 11779
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying consolidated balance sheets of Apple Sports,
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income and retained earnings, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
consolidated financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. I believe that my audit provides
a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Apple
Sports, Inc. and Subsidiaries at December 31, 1997, and the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
My audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules of
consolidated cost of sales, selling expenses and administrative expenses are
presented for purposes of additional analysis and are not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in my opinion, are fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
March 3, 1998
/s/ STEVEN J. ZAFFOS
- ----------------------------
Steven J. Zaffos
1
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash......................................................................... $ 18,888
Accounts Receivable, less allowances ($100,883).............................. 5,698,074
Inventory.................................................................... 4,273,071
Deferred income tax benefit.................................................. 339,821
Prepaid expenses............................................................. 87,137
Related party receivable..................................................... 10,312
Prepaid income taxes......................................................... 15,341
----------
TOTAL CURRENT ASSETS........................................................... 10,442,644
----------
----------
PROPERTY AND EQUIPMENT, NET.................................................... 489,687
----------
OTHER ASSETS
Loans receivable-affiliated company.......................................... 2,477,119
Goodwill, less amortization ($478,878)....................................... 351,977
----------
TOTAL OTHER ASSETS............................................................. 2,829,096
----------
TOTAL ASSETS................................................................... 13,761,427
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $ 319,569
Accrued expenses............................................................. 452,416
Note payable bank............................................................ 4,254,246
Taxes payable, other than income............................................. 331
Income taxes payable......................................................... 38,014
----------
TOTAL CURRENT LIABILITIES...................................................... 5,064,576
----------
SHAREHOLDERS' EQUITY
Common stock, no par, 200 shares authorized, 100 shares issued and
outstanding................................................................ 100
Additional paid in capital................................................... 1,000,000
Retained earnings............................................................ 7,696,751
----------
TOTAL SHAREHOLDERS' EQUITY..................................................... 8,696,851
----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY....................................... 13,761,427
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND
RETAINED EARNINGS
FOR THE YEAR ENDING DECEMBER 31,1997
<TABLE>
<S> <C>
NET SALES...................................................................... $21,827,644
COST OF SALES.................................................................. 13,722,670
----------
GROSS MARGIN................................................................... 8,104,974
EXPENSES
Selling...................................................................... 2,812,398
Administrative............................................................... 2,247,056
Interest..................................................................... 375,018
----------
TOTAL EXPENSES................................................................. 5,434,472
----------
OPERATING INCOME............................................................... 2,670,502
OTHER INCOME................................................................... 504,514
----------
INCOME BEFORE INCOME TAXES..................................................... 3,175,016
PROVISION FOR INCOME TAXES..................................................... 1,234,985
----------
NET INCOME..................................................................... 1,940,031
RETAINED EARNINGS
BEGINNING OF YEAR............................................................ 5,756,720
----------
END OF YEAR.................................................................. 7,696,751
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
CASH FLOWS
FOR THE YEAR ENDING DECEMBER 31,1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $1,940,031
----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING
ACTIVITIES:
Depreciation and amortization................................................. 368,457
Provision for bad debt........................................................ 26,496
Increase in income tax benefit................................................ (111,842)
CHANGE IN ASSETS AND LIABILITIES:
Increase in accounts receivable............................................... (2,119,885)
Increase in inventory......................................................... (862,475)
Increase in prepaid income taxes.............................................. (10,533)
Decrease in prepaid expenses.................................................. 58,538
Increase in accounts payable.................................................. 177,827
Increase in accrued expenses.................................................. 18,712
Decrease in taxes payable, other than income.................................. (2,443)
Decrease income taxes payable................................................. (50,360)
----------
TOTAL ADJUSTMENTS............................................................... (2,507,508)
----------
NET CASH USED IN OPERATING ACTIVITIES........................................... (567,477)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property and equipment................................ (30,772)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans receivable, affiliated company.......................................... 456,301
Payments to related parties................................................... (10,312)
Proceeds from bank note....................................................... 129,585
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 575,574
----------
NET DECREASE IN CASH............................................................ (22,675)
CASH BEGINNING OF YEAR.......................................................... 41,563
----------
CASH END OF YEAR................................................................ 18,888
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997.
Apple Sports, Inc. (the "Company") is in the business of distributing
sporting goods, primarily golf accessories. The Company has a license agreement
for the marketing of Wilson Sporting Goods Co. golf accessories, which expires
on December 31, 2000.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation
The consolidated statements include the accounts of the Company and its
wholly owned subsidiaries, Dorson Sports, Inc., Kingsley Golf Co. Inc., and Lee
Richards, Inc. All material intercompany accounts and transactions have been
eliminated.
b. Inventory
Inventories are stated at the lower of cost or market, using the first-in
first-out method.
c. Property and equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. (See Note 4, below.)
d. Depreciation and amortization
Provision for depreciation and amortization is computed on the straight-line
method over the estimated useful lives of the assets, or lease term if shorter.
e. Goodwill
Goodwill, costs in excess of net assets acquired, is being amortized over
twenty years.
f. Lease commitments
Rent expense is recognized on a straight-line basis over the term of the
lease.
g. Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2: PREPAID INCOME TAXES
Prepaid income taxes of $15,341 represents an overpayment of current income
taxes, which is being applied to the subsequent year.
NOTE 3: DEFERRED INCOME TAX BENEFIT
The amount for deferred income tax asset of $339,821 is a result of
temporary differences reported differently for financial reporting and tax
purposes relating to inventory capitalization, allowance for uncollectible
accounts, depreciation methods, and lease commitments.
5
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<S> <C>
Furniture and equipment......................................... $ 582,296
Transportation equipment........................................ 204,057
Leasehold improvements.......................................... 827,129
---------
Total........................................................... 1,613,482
Less accumulated depreciation................................... 1,123,795
---------
Net book value.................................................. 489,687
---------
---------
</TABLE>
NOTE 5: NOTE PAYABLE, BANK
REVOLVING CREDIT AGREEMENT
On November 20, 1995, the Company revised its revolving credit agreement
with Citibank, N.A., which commits it to lend up to $15 Million. The terms of
the credit agreement provide that interest on borrowings be the lender's base
rate. Under the credit agreement, the Company is currently required to pay fees
of 1/4 of 1% per annum on the average daily unused portion of the lending
commitment.
All borrowings under the credit agreement are due no later than 364 days
from the effective date of the revised agreement. There is an option to extend
the agreement for four (4) successive one-year periods. The intent of management
is to renew the agreement for an additional period in the event that the merger
arrangement, as discussed in Note 12 below, is not consummated.
The credit agreement requires the Company to maintain stated minimum net
worth, net profit and current ratio levels. In addition, the credit agreement
forbids the declaration or payment of any cash dividends without the written
consent of the bank. At December 31, 1997, the Company was in compliance with
all the covenants under the credit agreement. There are no compensating balance
requirements under the credit agreement.
The revolving credit agreement is collateralized by the assets of the
Company and guaranteed by its shareholders and officers. Apple Golf Shoes, Inc.,
an affiliated company, is a party to and guarantor of the credit agreement. (See
Note 6).
NOTE 6: RELATED PARTY TRANSACTIONS
a. Loans receivable, affiliated company
The Company has made certain advances to an affiliated company, Apple Golf
Shoes, Inc. These advances are the primary source of the affiliated company's
financing. The affiliated company is a party to and a guarantor of the revolving
credit agreement referred to in Note 5. The advances bear interest at the rate
charged by the lending institution.
The affiliated company has paid a management fee equal to 10.5% of its
sales. The fee for year ending December 31, 1997, amounted to $232,308. The
affiliated company also paid interest on the outstanding balance of these
advances equal to the lender's base rate. The amount of interest income received
by the Company for the year ending December 31, 1997, amounted to $239,320.
6
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997.
NOTE 6: RELATED PARTY TRANSACTIONS (CONTINUED)
b. Operating leases
The Company leases its office and warehouse facilities located in
Ronkonkoma, New York from a related party, pursuant to an operating lease
expiring on January 31, 2001. The Company is responsible for real estate taxes
and other operating expenses.
Operating lease expenses are allocated to an affiliated company based upon
estimated square footage used to warehouse inventory and maintain office
facilities.
The minimum future rental payments under the operating lease are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------------
<S> <C>
1998................................................................................ 347,923
1999................................................................................ 352,684
2000................................................................................ 357,700
2001................................................................................ 29,843
------------
$ 1,088,150
------------
------------
</TABLE>
Rent expense for the year ending December 31, 1997 amounted to $241,919.
NOTE 7: INCOME TAXES
The components of income tax expense are
<TABLE>
<S> <C>
Currently payable
Federal....................................................... $1,133,204
State......................................................... 211,004
---------
1,344,209
Deferred income taxes benefit
Federal....................................................... (96,589)
State......................................................... (12,635)
---------
(109,224)
---------
Total provision for income taxes................................ $1,234,985
---------
---------
</TABLE>
NOTE 8: SIGNIFICANT CUSTOMERS--SUPPLIERS
a. Customers
The Company sells a substantial amount of goods to major national retailers
and chains. These amounts represent 77.10% of total revenues. As of December 31,
1997, 81.39% of trade accounts receivable are from these customers.
b. Suppliers
The company purchases a substantial amount of goods from major foreign
suppliers. These amounts represent 78.41% of total purchases.
7
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997.
NOTE 9: ROYALTY AGREEMENT
Pursuant to the Company's Trademark License Agreement with Wilson Sporting
Goods Co., it is obligated to pay a stated percentage of royalties of certain
net sales against minimum guarantees. The amount of royalties paid in 1997
amounted to $1,131,730.
The minimum future royalty payments under the current licensing agreement
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------------
<S> <C>
1998................................................................................ 750,000
1999................................................................................ 775,000
2000................................................................................ 800,000
------------
$ 2,325,000
------------
------------
</TABLE>
NOTE 10: COMMITMENTS AND CONTINGENT LIABILITIES
a. Employment contract
The Company has entered into an employment contract with its president,
which provides for a minimum annual salary of $70,000, adjusted for cost of
living changes and incentives based upon the Company's attainment of specified
levels of pretax earnings.
b. Contingent liabilities
The Company has a contingent liability of $571,645 as of December 31, 1997
for commercial letters of credit incurred in the normal course of business.
c. Litigation
The Company is a defendant in legal proceedings that arose from a claim for
damages for losses suffered in a fire at the Company's place of business. The
ultimate disposition is not presently determinable. Management does not expect
the outcome to have an adverse effect on the Company's financial position. The
potential loss for an unfavorable result in this matter would be $1,565,704.
NOTE 11: EMPLOYEE SAVINGS AND RETIREMENT PLAN
a. 401(k) cash or deferred arrangement
The Company adopted a 401(k) savings and retirement plan in January 1995.
The plan covers all employees who are 18 years of age or older and who have been
employed for one year. The Company's retirement and savings plan contribution is
a 25% matching contribution for all eligible employees. Company matching
contributions for the year amounted to $13,344.
b. Profit sharing plan
On January 1, 1995, the Company set up a non-contributory profit sharing
plan for the benefit of all eligible employees. The contribution, if made, will
be allocated to all eligible employees in the ratio of each employee's earnings
to the total earnings of all participants. In 1997, there were no contributions
made to this plan.
8
<PAGE>
APPLE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997.
NOTE 12: SUBSEQUENT EVENTS
The Company is currently negotiating a merger arrangement with a
manufacturer of children's toys. Under a letter of intent, Empire of Carolina,
Inc. will acquire 100% of the Company's stock.
9
<PAGE>
EXHIBIT D
FINANCIAL STATEMENTS OF
APPLE GOLF SHOES, INC.
<PAGE>
APPLE GOLF SHOES INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
APPLE GOLF SHOES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report............................................................................... 1
Balance Sheet.............................................................................................. 2
Statement of Income and Deficit............................................................................ 3
Statement of Cash Flows.................................................................................... 4
Notes to Consolidated Financial Statements................................................................. 5
</TABLE>
<PAGE>
STEVEN J. ZAFFOS
CERTIFIED PUBLIC ACCOUNTANT
5 EVON DRIVE
SYOSSET, NEW YORK 11791-6311
- -------------------------------
TELEPHONE (516) 364-4028
Board of Directors and Shareholders
Apple Golf Shoes, Inc.
1 Roebling Court
Ronkonkoma, NY 11779
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheet of Apple Golf Shoes, Inc. (an
S Corporation) as of December 31, 1996, and the related statements of income and
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apple Golf Shoes, Inc. at
December 31, 1996, and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
My audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules of cost of sales, selling
expenses and administrative expenses are presented for purposes of additional
analysis and are not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in my opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
March 12, 1997
/s/ STEVEN J. ZAFFOS
- ----------------------------
Steven J. Zaffos
1
<PAGE>
APPLE GOLF SHOES, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash.......................................................................... $ 76
Accounts Receivable, less allowances ($40,000)................................ 706,213
Inventory..................................................................... 1,594,454
Other current assets.......................................................... 36,158
---------
TOTAL CURRENT ASSETS............................................................ 2,336,901
PROPERTY AND EQUIPMENT, NET..................................................... 75,984
---------
TOTAL ASSETS.................................................................... 2,412,885
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................. 176,362
Accrued expenses.............................................................. 11,137
Accrued royalties............................................................. 29,388
Income taxes payable.......................................................... 325
---------
TOTAL CURRENT LIABILITIES....................................................... 217,212
---------
OTHER LIABILITIES
Loans payable, related parties................................................ 2,933,420
---------
TOTAL OTHER LIABILITIES......................................................... 2,933,420
---------
TOTAL LIABILITIES............................................................... 3,150,632
---------
SHAREHOLDERS' EQUITY
Common stock, no par, 200 shares authorized, 100 shares issued and
outstanding................................................................. 2,000
Retained earnings (deficit)................................................... (739,747)
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............................................ (737,747)
---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........................................ 2,412,885
---------
---------
</TABLE>
See Independent Auditor's Report and Footnotes
2
<PAGE>
APPLE GOLF SHOES, INC.
STATEMENT OF INCOME AND DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES....................................................................... $2,739,015
COST OF SALES................................................................... 1,865,830
---------
GROSS MARGIN.................................................................... 873,185
---------
EXPENSES
Selling....................................................................... 690,889
Administrative................................................................ 499,220
Interest...................................................................... 258,683
---------
TOTAL EXPENSES.................................................................. 1,448,792
---------
LOSS BEFORE INCOME TAXES........................................................ (375,607)
PROVISION FOR INCOME TAXES...................................................... 325
---------
NET LOSS........................................................................ (575,932)
RETAINED EARNINGS (DEFICIT)
BEGINNING OF YEAR............................................................. (163,815)
---------
END OF YEAR................................................................... (739,747)
---------
---------
</TABLE>
See Independent Auditor's Report and Footnotes
3
<PAGE>
APPLE GOLF SHOES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)..................................................................... $(575,932)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
FROM OPERATING ACTIVITIES:
Depreciation and amortization.................................................. 29,824
Provision for bad deb.......................................................... 35,974
CHANGE IN ASSETS AND LIABILITIES:
Increase in accounts receivable................................................ (502,791)
Increase in inventory.......................................................... (65,052)
Decrease in other assets....................................................... 226,889
Increase in accounts payable................................................... 47,295)
Increase in accrued expenses................................................... 1,807
Decrease in accrued royalties.................................................. (60,569)
---------
TOTAL ADJUSTMENTS................................................................ (286,623)
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ (862,555)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds to affiliated company................................................. 862,472
---------
NET CASH USED IN FINANCING ACTIVITIES............................................ 862,472
---------
NET (DECREASE) INCREASE IN CASH.................................................. (83)
CASH BEGINNING OF YEAR........................................................... 159
---------
CASH END OF YEAR................................................................. 76
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................................. $ 258,683
---------
---------
Income taxes paid.............................................................. $ 325
---------
---------
</TABLE>
See Independent Auditor's Report and Footnotes
4
<PAGE>
APPLE GOLF SHOES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Apple Golf Shoes, Inc. ("the Company") is in the business of distributing
golf shoes under a license agreement with Wilson Sporting Goods Co., which
expires on December 31, 2000.
NOTE 1: FINANCIAL ARRANGEMENTS
The Company's primary source of financing is from affiliated companies,
Apple Sports, Inc. and Dorson Sports, Inc. At the present time, these affiliated
companies intend to continue required financing.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Inventory
Inventories are stated at the lower of cost or market, using the first-in
first-out method.
b. Property and equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. (See Note 3, below.)
c. Depreciation and amortization
Provision for depreciation and amortization is computed on the straight line
method over the estimated useful lives of the assets.
d. Operating lease
Operating lease expenses are allocated on a straight-line basis, from
affiliated companies, over the term of the lease. This allocation is based upon
estimated square footage. (See Note 4(c)).
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<S> <C>
Warehouse fixtures................................................ $ 78,120
Shoe Molds........................................................ 42,600
---------
120,720
Less accumulated depreciation..................................... 44,736
---------
Net book value.................................................... $ 75,984
---------
---------
</TABLE>
NOTE 4: RELATED PARTY TRANSACTIONS
a. Loans payable
The Company has received certain advances from the affiliated companies.
These advances are the primary source of the Company's financing. These advances
bear interest at the rate charged by the lending institution.
See Independent Auditor's Report
5
<PAGE>
APPLE GOLF SHOES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4: RELATED PARTY TRANSACTIONS (CONTINUED)
The Company is a party to and a guarantor of a revolving credit agreement
that the affiliated companies have with Citibank, N.A. The agreement commits
Citibank, N.A. to lend up to $15 million to the affiliated companies. The
outstanding balance on December 31, 1996 was $4,124,661. The terms of the credit
agreement provide that interest on borrowings be at the lender's base rate. The
affiliated companies are required to pay fees amounting to 1/4 of 1% per annum
on the average daily unused portion of the lending commitment.
b. Management fees
Management fees are paid to affiliated companies in order to cover overhead
expenses. Fees are charged at a rate of 10.5% of the Company's gross sales.
Management fee for 1996 amounted to $285,241.
c. Operating lease expense
Operating lease expenses are allocated from affiliated companies based upon
estimated square footage used to warehouse inventory and maintain office
facilities. Rent expense, as allocated, for the year ending December 31, 1996
amounted to $132,764.
NOTE 5: INCOME TAXES
The Company has elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code. Under these provisions, the Company does not pay
federal corporate income tax on its taxable income. The Company has made a
similar election for New York State Franchise Tax purposes. Under New York State
provisions, the Company is subject to certain minimum and alternate franchise
taxes. Under both federal and state provisions, the stockholders are liable for
their share of income taxes based upon the Company's taxable income.
NOTE 6: SIGNIFICANT CUSTOMERS--SUPPLIERS
(a) Customers
The Company sells a substantial amount of goods to major national retailers
and chains. These amounts represent 46.47% of total revenues. As of December 31,
1996, 40.25% of trade accounts receivable are from these customers.
(b) Suppliers
The company purchases ninety-nine (99%) percent of goods from one major
foreign supplier.
NOTE 7: ROYALTY AGREEMENT
Pursuant to the Company's Trademark License Agreement with Wilson Sporting
Goods Inc., it is obligated to pay a stated percentage of royalties of certain
net sales against minimum guarantees. The amount of royalties paid in 1996
amounted to $175,000.
See Independent Auditor's Report
6
<PAGE>
APPLE GOLF SHOES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 7: ROYALTY AGREEMENT (CONTINUED)
The minimum future royalty payments under the licensing agreement are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 200,000
1998.......................................................................... 250,000
1999.......................................................................... 300,000
2000.......................................................................... 400,000
------------
$ 1,150,000
------------
------------
</TABLE>
See Independent Auditor's Report
7
<PAGE>
APPLE GOLF SHOES INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
APPLE GOLF SHOES, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report............................................................................... 1
Balance Sheet.............................................................................................. 2
Statement of Income and Deficit............................................................................ 3
Statement of Cash Flows.................................................................................... 4
Notes to Financial Statements.............................................................................. 5
</TABLE>
<PAGE>
[letterhead]
Board of Directors and Shareholders
Apple Golf Shoes, Inc.
1 Roebling Court
Ronkonkoma, NY 11779
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheet of Apple Golf Shoes, Inc. as
of December 31, 1997, and the related statements of income and deficit, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apple Golf Shoes, Inc. at
December 31, 1997, and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
My audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules of cost of sales, selling
expenses and administrative expenses are presented for purposes of additional
analysis and are not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in my opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
March 3, 1998
/s/ STEVEN J. ZAFFOS
- ----------------------------
Steven J. Zaffos
1
<PAGE>
APPLE GOLF SHOES, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash.......................................................................... $ 0
Accounts Receivable, less allowances ($40,000)................................ 238,958
Inventory..................................................................... 1,259,129
Other current assets.......................................................... 26,124
---------
TOTAL CURRENT ASSETS............................................................ 1,524,211
PROPERTY AND EQUIPMENT, NET..................................................... 46,164
---------
TOTAL ASSETS.................................................................... 1,570,375
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses.............................................................. 23,692
Accrued royalties............................................................. 49,996
Income taxes payable.......................................................... 325
---------
TOTAL CURRENT LIABILITIES....................................................... 74,013
OTHER LIABILITIES
Loans payable, related parties................................................ 2,477,119
---------
TOTAL OTHER LIABILITIES......................................................... 2,477,119
---------
TOTAL LIABILITIES............................................................... 2,551,132
---------
SHAREHOLDERS' EQUITY
Common stock, no par, 200 shares authorized, 100 shares issued and
outstanding................................................................. 2,000
Retained earnings (deficit)................................................... (982,757)
---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............................................ (980,757)
---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........................................ 1,570,375
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
APPLE GOLF SHOES, INC.
STATEMENT OF INCOME AND DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
NET SALES....................................................................... $2,208,676
COST OF SALES................................................................... 1,380,131
---------
GROSS MARGIN.................................................................... 828,545
EXPENSES
Selling....................................................................... 404,552
Administrative................................................................ 427,358
Interest...................................................................... 239,320
---------
TOTAL EXPENSES.................................................................. 1,071,230
---------
LOSS BEFORE INCOME TAXES........................................................ (242,685)
PROVISION FOR INCOME TAXES...................................................... 325
---------
NET LOSS........................................................................ (243,010)
---------
RETAINED EARNINGS (DEFICIT)
BEGINNING OF YEAR............................................................. (739,747)
---------
END OF YEAR................................................................... (982,757)
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
APPLE GOLF SHOES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 ,1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)..................................................................... $(243,010)
---------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING
ACTIVITIES:
Depreciation and amortization.................................................. 29,820
Provision for bad deb.......................................................... (6,030)
CHANGE IN ASSETS AND LIABILITIES:
Decrease in accounts receivable................................................ 473,285
Decrease in inventory.......................................................... 335,325
Decrease in other assets....................................................... 10,034
Decrease in accounts payable................................................... (176,362)
Increase in accrued expenses................................................... 12,555
Increase in accrued royalties.................................................. 20,608
---------
TOTAL ADJUSTMENTS................................................................ 699,235
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 456,225
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to affiliated company................................................. (456,301)
---------
NET CASH USED IN FINANCING ACTIVITIES............................................ (456,301)
---------
NET (DECREASE) INCREASE IN CASH.................................................. (76)
---------
CASH BEGINNING OF YEAR......................................................... 76
CASH END OF YEAR............................................................... 0
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................................. $ 239,320
---------
---------
Income taxes paid.............................................................. $ 325
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
APPLE GOLF SHOES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Apple Golf Shoes, Inc. ("the Company") is in the business of distributing
golf shoes under a license agreement with Wilson Sporting Goods Co., which
expires on December 31, 2000.
NOTE 1: FINANCIAL ARRANGEMENTS
The Company's primary source of financing is from affiliated companies,
Apple Sports, Inc. and Dorson Sports, Inc. At the present time, these affiliated
companies intend to continue required financing.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Inventory
Inventories are stated at the lower of cost or market, using the first-in
first-out method.
b. Property and equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. (See Note 3, below.)
c. Depreciation and amortization
Provision for depreciation and amortization is computed on the straight line
method over the estimated useful lives of the assets.
d. Operating lease
Operating lease expenses are allocated on a straight-line basis, from
affiliated companies, over the term of the lease. This allocation is based upon
estimated square footage. (See Note 4(c)).
e. Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Warehouse fixtures................................................................ $ 78,120
Shoe Molds........................................................................ 42,600
----------
120,720
Less accumulated depreciation..................................................... 74,556
----------
Net book value.................................................................... $ 46,164
----------
----------
</TABLE>
5
<PAGE>
APPLE GOLF SHOES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 4: RELATED PARTY TRANSACTIONS
a. Loans payable
The Company has received certain advances from the affiliated companies.
These advances are the primary source of the Company's financing. These advances
bear interest at the rate charged by the lending institution.
The Company is a party to and a guarantor of a revolving credit agreement
that the affiliated companies have with Citibank, N.A. The agreement commits
Citibank, N.A. to lend up to $15 million to the affiliated companies. The
outstanding balance on December 31, 1997 was $4,254,246. The terms of the credit
agreement provide that interest on borrowings be at the lender's base rate. The
affiliated companies are required to pay fees amounting to 1/4 of 1% per annum
on the average daily unused portion of the lending commitment.
b. Management fees
Management fees are paid to affiliated companies in order to cover overhead
expenses. Fees are charged at a rate of 10.5% of the Company's gross sales.
Management fee for 1997 amounted to $223,308.
c. Operating lease expense
Operating lease expenses are allocated from affiliated companies based upon
estimated square footage used to warehouse inventory and maintain office
facilities. Rent expense, as allocated, for the year ending December 31, 1997,
amounted to $134,421.
NOTE 5: INCOME TAXES
The Company has elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code. Under these provisions, the Company does not pay
federal corporate income tax on its taxable income. The Company has made a
similar election for New York State Franchise Tax purposes. Under New York State
provisions, the Company is subject to certain minimum and alternate franchise
taxes. Under both federal and state provisions, the stockholders are liable for
their share of income taxes based upon the Company's taxable income.
NOTE 6: SIGNIFICANT CUSTOMERS--SUPPLIERS
(a) Customers
The Company sells a substantial amount of goods to major national retailers
and chains. These amounts represent 50.33% of total revenues. As of December 31,
1997, 30.86% of trade accounts receivable are from these customers.
(b) Suppliers
The company purchases ninety-nine (99%) percent of goods from one major
foreign supplier.
NOTE 7: ROYALTY AGREEMENT
Pursuant to the Company's Trademark License Agreement with Wilson Sporting
Goods Inc., it is obligated to pay a stated percentage of royalties of certain
net sales against minimum guarantees. The amount of royalties paid in 1997
amounted to $200,000.
6
<PAGE>
APPLE GOLF SHOES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7: ROYALTY AGREEMENT (CONTINUED)
The minimum future royalty payments under the licensing agreement are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 250,000
1999.............................................................................. 300,000
2000.............................................................................. 400,000
----------
$ 950,000
----------
----------
</TABLE>
NOTE 8: SUBSEQUENT EVENTS
The Company is currently negotiating a merger arrangement with a
manufacturer of children's toys. Under a letter of intent, Empire of Carolina,
Inc. will acquire 100% of the Company's stock.
7
<PAGE>
PROXY
EMPIRE OF CAROLINA, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
EMPIRE OF CAROLINA, INC.
FROM THE HOLDERS OF SERIES A PREFERRED STOCK
The undersigned, a holder of Series A Preferred Stock of Empire of Carolina,
Inc., a Delaware corporation (the "Company"), hereby appoints CHARLES S. HOLMES,
STEVEN E. GELLER, and each of them, the proxies of the undersigned, each with
full power of substitution, to attend, represent and vote for the undersigned,
all of the shares of the Company's Common Stock which the undersigned would be
entitled to vote, at the Annual Meeting of Stockholders of the Company to be
held on May 20, 1998 and any adjournments or postponements thereof, as follows:
The undersigned hereby revokes any other proxy to vote the shares of Series
A Preferred Stock owned by the undersigned at such Annual Meeting, and hereby
ratifies and confirms all that said attorneys and proxies, and each of them, may
lawfully do by virtue hereof. With respect to matters not known at the time of
the solicitations hereof, said proxies are authorized to vote in accordance with
their best judgment.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS ON THE OTHER SIDE HEREOF, IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" THE ELECTION OF THE SIX DIRECTORS NAMED, "FOR" THE ADOPTION OF
EACH OF THE OTHER PROPOSALS AND AS SAID PROXIES SHALL DEEM ADVISABLE ON SUCH
OTHER BUSINESS AS MAY COME BEFORE THE MEETING AND ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF.
(PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.)
SEE REVERSE SIDE
<PAGE>
1. ELECTION OF DIRECTORS, as provided in Proposal 1 of the Company's Proxy
Statement
<TABLE>
<S> <C> <C> <C>
FOR ALL NOMINEES WITHHOLD AUTHORITY NOMINEES: John J. Doran, Steven E. Geller,
LISTED AT RIGHT / / TO VOTE FOR ALL NOMINEES Frederick W. Rosenbauer, Jr.
LISTED AT RIGHT / / Lenore H. Schupak, Charles S. Holmes,
James J. Pinto
<CAPTION>
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
-----------------------------------------------------
<CAPTION>
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE(S) NAME BELOW:)
</TABLE>
2. The proposal to approve the adoption of the 1998 Stock Option Plan pursuant
to which an aggregate of 2,000,000 shares of Common Stock will be available
for grant.
/ / FOR / / AGAINST / / ABSTAIN
3. The proposal to issue 5,000,000 shares of the Company's Common Stock, subject
to increase under certain circumstances by up to 1,153,864 shares, pursuant
to the terms of the Share Purchase Agreement, pursuant to which the Company
will acquire all of the outstanding capital stock of the Apple Companies in
consideration for such issuance of Common Stock and grant a right to the
existing shareholders of the Apple Companies to require Empire, under certain
circumstances, to repurchase up to an aggregate of 500,000 of the shares of
Common Stock so issued, as described in Proposal 3 in the Company's Proxy
Statement.
/ / FOR / / AGAINST / / ABSTAIN
4. The ratification of the appointment of Deloitte & Touche LLP as the Company's
auditors for the fiscal year ending December 31, 1998 as described in
Proposal 4 in the Company's Proxy Statement.
/ / FOR / / AGAINST / / ABSTAIN
5. Upon such other matters as may properly come before the meeting or any
adjournments or postponements thereof.
/ / FOR / / AGAINST / / ABSTAIN
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF A COPY OF THE NOTICE OF ANNUAL MEETING,
THE ACCOMPANYING PROXY STATEMENT RELATING TO THE ANNUAL MEETING AND THE ANNUAL
REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997.
Dated _______________________________, 1998
___________________________________________
Signature of Shareholder
NOTE: The signature(s) hereon should
correspond exactly with the name(s) of the
Stockholder(s) appearing on the Stock
Certificate representing the shares of Common
Stock owned by the undersigned. If stock is
jointly held, all joint owners should sign.
When signing as attorney, executor,
administrator, trustee, or guardian, please
give full title as such. If signer is a
corporation, please sign the full corporate
name, and give title of signing office.
<PAGE>
PROXY
EMPIRE OF CAROLINA, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
EMPIRE OF CAROLINA, INC.
FROM THE HOLDERS OF COMMON STOCK
The undersigned, a holder of Common Stock of Empire of Carolina, Inc., a
Delaware corporation (the "Company"), hereby appoints CHARLES S. HOLMES, STEVEN
E. GELLER, and each of them, the proxies of the undersigned, each with full
power of substitution, to attend, represent and vote for the undersigned, all of
the shares of the Company's Common Stock which the undersigned would be entitled
to vote, at the Annual Meeting of Stockholders of the Company to be held on May
20, 1998 and any adjournments or postponements thereof, as follows:
The undersigned hereby revokes any other proxy to vote the shares of Common
Stock owned by the undersigned at such Annual Meeting, and hereby ratifies and
confirms all that said attorneys and proxies, and each of them, may lawfully do
by virtue hereof. With respect to matters not known at the time of the
solicitations hereof, said proxies are authorized to vote in accordance with
their best judgment.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS ON THE OTHER SIDE HEREOF, IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" THE ELECTION OF THE FOUR DIRECTORS NAMED, "FOR" THE ADOPTION OF
EACH OF THE OTHER PROPOSALS AND AS SAID PROXIES SHALL DEEM ADVISABLE ON SUCH
OTHER BUSINESS AS MAY COME BEFORE THE MEETING AND ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF.
(PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.)
SEE REVERSE SIDE
<PAGE>
1. ELECTION OF DIRECTORS, as provided in Proposal 1 of the Company's Proxy
Statement
<TABLE>
<S> <C> <C> <C>
FOR ALL NOMINEES WITHHOLD AUTHORITY NOMINEES: John J. Doran, Steven E. Geller,
LISTED AT RIGHT / / TO VOTE FOR ALL NOMINEES Frederick W. Rosenbauer, Jr.
LISTED AT RIGHT / / Lenore H. Schupak
<CAPTION>
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
-----------------------------------------------------
<CAPTION>
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE(S) NAME BELOW:)
</TABLE>
2. The proposal to approve the adoption of the 1998 Stock Option Plan pursuant
to which an aggregate of 2,000,000 shares of Common Stock will be available
for grant.
/ / FOR / / AGAINST / / ABSTAIN
3. The proposal to issue 5,000,000 shares of the Company's Common Stock, subject
to increase under certain circumstances by up to 1,153,864 shares, pursuant
to the terms of the Share Purchase Agreement, pursuant to which the Company
will acquire all of the outstanding capital stock of the Apple Companies in
consideration for such issuance of Common Stock and grant a right to the
existing shareholders of the Apple Companies to require Empire, under certain
circumstances, to repurchase up to an aggregate of 500,000 of the shares of
Common Stock so issued, as described in Proposal 3 in the Company's Proxy
Statement.
/ / FOR / / AGAINST / / ABSTAIN
4. The ratification of the appointment of Deloitte & Touche LLP as the Company's
auditors for the fiscal year ending December 31, 1998 as described in
Proposal 4 in the Company's Proxy Statement.
/ / FOR / / AGAINST / / ABSTAIN
5. Upon such other matters as may properly come before the meeting or any
adjournments or postponements thereof.
/ / FOR / / AGAINST / / ABSTAIN
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF A COPY OF THE NOTICE OF ANNUAL MEETING,
THE ACCOMPANYING PROXY STATEMENT RELATING TO THE ANNUAL MEETING AND THE ANNUAL
REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997.
Dated _______________________________, 1998
___________________________________________
Signature of Shareholder
NOTE: The signature(s) hereon should
correspond exactly with the name(s) of the
Stockholder(s) appearing on the Stock
Certificate representing the shares of Common
Stock owned by the undersigned. If stock is
jointly held, all joint owners should sign.
When signing as attorney, executor,
administrator, trustee, or guardian, please
give full title as such. If signer is a
corporation, please sign the full corporate
name, and give title of signing office.
