-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WYnA/f6tLQdPb1+fqMxBvkEcYlt07twcqK8YinWwLqii3lgUVSj+gcYaud920e+9 XGtpkyY/ulW6tD5uA+yO2w== 0000950168-98-001939.txt : 19980615 0000950168-98-001939.hdr.sgml : 19980615 ACCESSION NUMBER: 0000950168-98-001939 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980528 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980612 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPIRE OF CAROLINA INC CENTRAL INDEX KEY: 0000312840 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 132999480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-07909 FILM NUMBER: 98647580 BUSINESS ADDRESS: STREET 1: 5150 LINTON BLVD STREET 2: 5TH FL CITY: DELRAY BEACH STATE: FL ZIP: 33484 BUSINESS PHONE: 5614984000 MAIL ADDRESS: STREET 1: P O BOX 4000 CITY: TARBORO STATE: NC ZIP: 27886 8-K 1 EMPIRE OF CAROLINA, INC. 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 May 28, 1998 Date of Report (Date of earliest event reported) Empire of Carolina, Inc. (Exact name of registrant as specified in its charter) Delaware 1-7909 13-2999480 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 5150 Linton Boulevard, 5th Floor, Delray Beach, Florida 33484 (Address of principal executive offices) (Zip Code) (561) 498-4000 (Registrant's telephone number) -1- Item 2. Acquisition or Disposition of Assets. On April 10, 1998, the Company executed a Share Purchase Agreement, whereby the Company agreed to purchase from the Shareholders of Apple Sports, Inc. and Apple Golf Shoes, Inc. (the "Apple Companies") all of their capital stock representing all of the outstanding capital stock of the Apple Companies (the "Acquisition"), in exchange for the issuance of 5 million shares of the Company, reimbursement of certain transfer and other fees of approximately $325,000 and, under certain circumstances, the issuance of additional shares of Common Stock. On May 28, 1998, the Company held its annual meeting and its stockholders voted to approve the Acquisition. Approval of the Acquisition by the stockholders of the Company was 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, where additional shares are to be issued as sole or partial consideration for an acquisition of the stock of another company under certain circumstances. On May 28, 1998, the Company consummated the transactions contemplated by the Share Purchase Agreement. On May 28, 1998, in connection with the consumation of the Acquisition, the Apple Companies' existing $15 million credit facility with Citibank, N.A. was replaced with a $12 million facility from LaSalle National Bank on substantially similar terms. Terms of the Acquisition Under the terms of the Share Purchase Agreement, Empire acquired 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 the 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. -2- On or before August 26, 1998, 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 up to $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 is exercised divided by 500,000. The complete Share Purchase Agreement is attached hereto as Exhibit 2.1. The consideration payable by Empire described above was determined in arms'-length negotiations 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 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. The funds used to pay for the transfer fees and other fees due at closing were paid from the Company's working capital. Dilution of Existing Stockholders The exchange of shares of Common Stock of the Company for shares of the Apple Companies caused 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 -3- 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. Consolidated Business of Apple Sports, Inc. and Apple Golf Shoes, Inc. 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(R) Sporting Goods Inc., 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(R) 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. The Apple Companies source their products both domestically and overseas. The majority of its products are manufactured in the Far East (principally China, Indonesia, Thailand and Taiwan). The Apple Companies sell their 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 the Apple Companies sales personnel in concert with manufacturers' representatives. The Company intends to continue to operate the businesses of the Apple Companies and to use the assets of the Apples Companies in furtherance of such operations. Apple Sports, Inc. Capital Stock Apple Sports, Inc.'s authorized capital stock consists of 200 shares of Common Stock, no par value. Immediately prior to the Acquisition, 100 shares of Common Stock were outstanding. The -4- following shares were acquired from their respective owners of record: 70 shares from Mark Rose Companies Ltd.; 5 shares from E. Joy Rose; 15 shares from Timothy Moran; 5 shares from Robert A. Wertley; and 5 shares from Mark S. Rose. Apple Golf Shoes, Inc. Capital Stock Apple Golf Shoes, Inc.'s authorized capital stock consists of 200 shares of Common Stock, no par value. Immediately prior to the Acquisition, 100 shares of Common Stock were outstanding. The following shares were acquired from their respective owners of record: 25 shares from Timothy Moran; 5 shares from Robert A. Wertley; 23 1/3 shares from Robert A. Wertley; as Trustee for Mark Rose Irrevocable Trust f/b/o Bridget A. Moran; 23 1/3 from Robert A. Wertley, as Trustee for Mark Rose Irrevocable Trust f/b/o Stacy Dugan; and 23 1/3 shares from Robert A. Wertley, as Trustee for Mark Rose Irrevocable Trust f/b/o Baylee Shea Rose. Interest of Certain Persons in the Acquisition; Certain Affiliated Transactions Timothy Moran, the President and Chief Executive 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 received twenty percent of the Payment Shares. Additionally, Mr. Moran and Mark Rose, formerly 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. In addition, Timothy Moran was elected to Empire's Board of Directors on the May 28, 1998. Item 5. Other Events. On June 1, Empire of Carolina, Inc. issued the press release attached hereto as Exhibit 99, which press release is hereby incorporated by reference herein. Item 7. Financial Statements and Exhibits. Paragraph (a). Below are the financial statements of the Apple Companies required herein. -5- FINANCIAL STATEMENTS OF APPLE SPORTS INC. APPLE SPORTS INC. AND SUBSIDIARIES FINANCIAL STATEMENTS DECEMBER 31, 1996 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
PAGE ----- 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
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 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 ASSETS 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 ==========
See Independent Auditor's Report and Footnotes 2 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDING DECEMBER 31, 1996 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 ==========
See Independent Auditor's Report and Footnotes 3 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDING DECEMBER 31, 1996 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 PROVIDED BY 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) Payment of bank note.......................................................... (1,511,339) ---------- NET CASH USED IN FINANCING ACTIVITIES........................................... (3,275,868) NET DECREASE IN CASH............................................................ (62,513) CASH BEGINNING OF YEAR.......................................................... 104,076 ---------- CASH END OF YEAR................................................................ 41,563 ==========
See Independent Auditor's Report and Footnotes 4 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 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: 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 =========
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 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:
DECEMBER 31, - - -------------------------------------------------------------------------------- 1997............................................................................ $ 343,187 1998............................................................................ 347,923 1999............................................................................ 352,684 2000............................................................................ 357,700 2001............................................................................ 29,843 $ 1,431,337 ============
Rent expense for the year ending December 31, 1996 amounted to $238,938. NOTE 7: INCOME TAXES The components of income tax expense are: 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 =========
NOTE 8: SIGNIFICANT CUSTOMERS--SUPPLIERS a. Customers See Independent Auditor's Report 7 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:
DECEMBER 31, - - -------------------------------------------------------------------------------- 1997............................................................................ $ 700,000 1998............................................................................ 750,000 1999............................................................................ 775,000 2000............................................................................ 800,000 ------------ $ 3,025,000 ============
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 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 APPLE SPORTS INC. AND SUBSIDIARIES FINANCIAL STATEMENTS DECEMBER 31, 1997 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
PAGE ----- 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
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 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 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 ASSETS 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 ==========
The accompanying notes are an integral part of these financial statements 2 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDING DECEMBER 31, 1997 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 ==========
The accompanying notes are an integral part of these financial statements 3 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDING DECEMBER 31, 1997 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 ==========
The accompanying notes are an integral part of these financial statements 4 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 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: 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 =========
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 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:
DECEMBER 31, - - ------------------------------------------------------------------------------------ 1998................................................................................ 347,923 1999................................................................................ 352,684 2000................................................................................ 357,700 2001................................................................................ 29,843 ------------ $ 1,088,150 ============
Rent expense for the year ending December 31, 1997 amounted to $241,919. NOTE 7: INCOME TAXES The components of income tax expense are 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 ==========
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 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:
DECEMBER 31, - - ------------------------------------------------------------------------------------ 1998................................................................................ 750,000 1999................................................................................ 775,000 2000................................................................................ 800,000 ------------ $ 2,325,000 ============
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 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 APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET March 31, 1998 (Unaudited) (In thousands except per share) ASSETS Current Assets: Cash and cash equivalents $ 44 Accounts receivable, less allowances ($103) 4,820 Inventories, net 5,062 Prepaid expenses and other current assets 100 Deferred income taxes 340 ---------- Total current assets 10,366 Property, plant and equipment, net 436 Excess cost over fair value of net assets acquired, net 342 Loan receivable - related party 3,124 ---------- $ 14,268 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt $ 3,739 Accounts payable - trade 682 Other accrued liabilities 801 ---------- Total current liabilities 5,222 ---------- Commitments and Contingencies (Note 3) Stockholders' Equity: Common stock, no par value, 200 shares authorized, 100 shares issued and outstanding -- Additional paid-in capital 1,000 Retained earnings 8,046 ---------- Total stockholders' equity 9,046 ---------- $ 14,268 ========== See notes to consolidated condensed financial statements. APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS For the Three Months Ended March 31, 1998 (Unaudited) (In thousands except per share) Net Sales $ 4,909 Cost of Sales 3,460 ------- Gross Profit 1,449 Selling and Administrative Expense 793 ------- Operating Income 656 Interest Expense (82) ------- Earnings Before Income Taxes 574 Income Tax Expense 224 ------- Net Income $ 350 ======= See notes to consolidated condensed financial statements. APPLE SPORTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS Three Months Ended March 31, 1998 (Unaudited) (In thousands) Cash Flows From Operating Activities: Net income $ 350 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 70 Changes in assets and liabilities 773 ------- Net cash provided by operating activities 1,193 ------- Cash Flows From Investing Activities: Capital expenditures (6) ------- Net cash used in investing activities (6) ------- Cash Flows From Financing Activities: Repayments of note payable (515) Increase in related party receivable (647) ------- Net cash used in financing activities (1,162) ------- Net Increase in Cash and Cash Equivalents 25 Cash and Cash Equivalents, Beginning of Period 19 ------- Cash and Cash Equivalents, End of Period $ 44 ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 87 Income taxes, (net of refunds) 68 See notes to consolidated condensed financial statements. APPLE SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Three Months Ended March 31, 1998 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated condensed financial statements included herein have been prepared by the Company, without audit. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the Company's financial statements and the notes thereto included in the Proxy Statement of Empire of Carolina, Inc. In the opinion of management, the information contained in this report reflects all adjustments necessary to present fairly the results for the interim periods presented. 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. Inventory - Inventories are stated at the lower of cost or market, using the first-in first-out method. All inventories at March 31, 1998 are finished goods. Property and equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization - Provision for depreciation and amortization is computed on the straight-line method over the estimated useful lives of the asset, or lease term if shorter. Goodwill - Goodwill, costs in excess of net assets acquired, is being amortized over twenty years. Lease commitments - Rent expense is recognized on a straight-line basis over the term of the lease. Use of Estimates - The preparation of the 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 period. Actual results could differ from those estimates. 2. NOTE PAYABLE The Company has a 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 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 March 31, 1998, 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. 3. COMMITMENTS AND CONTINGENCIES 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 Company has been approved for a five (5) year extension on the license agreement. Letters of Credit - The Company had outstanding commitments under letters of credit incurred in the normal course of business totaling approximately $1,607,000 at March 31, 1998 compared to $572,000 at December 31, 1997. 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. 4. SUBSEQUENT EVENTS The Company has completed the 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. In April, a definitive share purchase agreement to acquire the stock of Apple Sports, Inc. and its subsidiaries was signed. On May 28, 1998, Empire of Carolina's shareholders approved the acquisition of Apple Sports, Inc. and its subsidiaries. Closing on the acquisition is pending issuance of common stock needed to purchase the assets of Apple Sports, Inc. and its subsidiaries. The Company has acquired a new banking facility with LaSalle National Bank and has paid off the banking facility with Citibank, N.A. FINANCIAL STATEMENTS OF APPLE GOLF SHOES, INC. APPLE GOLF SHOES INC. FINANCIAL STATEMENTS DECEMBER 31, 1996 APPLE GOLF SHOES, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
PAGE ----- 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
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 APPLE GOLF SHOES, INC. BALANCE SHEET AS OF DECEMBER 31, 1996 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 =========
See Independent Auditor's Report and Footnotes 2 APPLE GOLF SHOES, INC. STATEMENT OF INCOME AND DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1996 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) =========
See Independent Auditor's Report and Footnotes 3 APPLE GOLF SHOES, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 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 debt......................................................... 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 USED IN OPERATING ACTIVITIES............................................ (862,555) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds to affiliated company................................................. 862,472 --------- NET CASH PROVIDED BY 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 =========
See Independent Auditor's Report and Footnotes 4 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: Warehouse fixtures................................................ $ 78,120 Shoe Molds........................................................ 42,600 --------- 120,720 Less accumulated depreciation..................................... 44,736 --------- Net book value.................................................... $ 75,984 =========
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 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 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:
DECEMBER 31, - - -------------------------------------------------------------------------------- 1997.......................................................................... $ 200,000 1998.......................................................................... 250,000 1999.......................................................................... 300,000 2000.......................................................................... 400,000 ------------ $ 1,150,000 ============
See Independent Auditor's Report 7 APPLE GOLF SHOES, INC. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
PAGE ----- Independent Auditor's Report............................................................................... 1 Balance Sheet.............................................................................................. 2 Statement of Income and Deficit............................................................................ 3 Statement of Cash Flows.................................................................................... 4 Notes to Financial Statements.............................................................................. 5
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. 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 APPLE GOLF SHOES, INC. BALANCE SHEET AS OF DECEMBER 31, 1997 ASSETS 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 =========
The accompanying notes are an integral part of these financial statements 2 APPLE GOLF SHOES, INC. STATEMENT OF INCOME AND DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1997 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) =========
The accompanying notes are an integral part of these financial statements 3 APPLE GOLF SHOES, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 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 debt......................................................... (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 =========
The accompanying notes are an integral part of these financial statements 4 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:
Warehouse fixtures................................................................ $ 78,120 Shoe Molds........................................................................ 42,600 ---------- 120,720 Less accumulated depreciation..................................................... 74,556 ---------- Net book value.................................................................... $ 46,164 ==========
5 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 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:
DECEMBER 31, - ------------------------------------------------------------------------------------ 1998.............................................................................. $ 250,000 1999.............................................................................. 300,000 2000.............................................................................. 400,000 ---------- $ 950,000 ==========
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 APPLE GOLF SHOES, INC. CONDENSED BALANCE SHEET March 31, 1998 (Unaudited) (In thousands except share amounts) ASSETS Current Assets: Cash $ -- Accounts receivable, less allowances ($44) 879 Inventories, net 1,479 Prepaid expenses and other current assets 25 ----------------- Total current assets 2,383 Property, plant and equipment, net 39 ----------------- $ 2,422 ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 62 Other accrued liabilities 124 ----------------- Total current liabilities 186 ----------------- Long-Term Liabilities: Loans payable, related parties 3,124 ----------------- Total liabilities 3,310 ----------------- Commitments and Contingencies (Note 3) Stockholders' Equity: Common stock, no par value, 200 shares authorized, 100 shares issued and outstanding 2 Additional paid-in capital -- Deficit (890) ------------------ Total stockholders' equity (888) ------------------ $ 2,422 ==================
See notes to condensed financial statements. APPLE GOLF SHOES, INC. CONDENSED STATEMENT OF OPERATIONS Three Months Ended March 31, 1998 (Unaudited) (In thousands except per share) Net Sales $ 1,127 Cost of Sales 765 --------- Gross Profit 362 Selling and Administrative Expense 211 --------- Operating Income 151 Interest expense 59 --------- Earnings Before Income Taxes 92 --------- Net Income $ 92 ========= See notes to condensed financial statements. APPLE GOLF SHOES, INC. CONDENSED STATEMENT OF CASH FLOWS Three Months Ended March 31, 1998 (Unaudited) (In thousands) Cash Flows From Operating Activities: Net income $ 92 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7 Changes in assets and liabilities (746) ----------- Net cash used in operating activities (647) ----------- Cash Flows From Financing Activities: Borrowings under related party loan 647 ----------- Net cash provided by financing activities 647 ----------- Net Change in Cash -- Cash, Beginning of Period -- ---------- Cash, End of Period $ -- ========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest -- See notes to condensed financial statements. APPLE GOLF SHOES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Three Months Ended March 31, 1998 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated condensed financial statements included herein have been prepared by the Company, without audit. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the Company's financial statements and the notes thereto included in the Proxy Statement of Empire of Carolina, Inc. In the opinion of management, the information contained in this report reflects all adjustments necessary to present fairly the results for the interim periods presented. Inventory - Inventories are stated at the lower of cost or market, using the first-in first-out method. All inventories at March 31, 1998 are finished goods. Property and equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization - Provision for depreciation and amortization is computed on the straight-line method over the estimated useful lives of the asset, or lease term if shorter. Operating Leases - 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. Use of Estimates - The preparation of the 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 period. Actual results could differ from those estimates. 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. 2. 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 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 March 31, 1997 was $3,739,000. 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. 3. COMMITMENTS AND CONTINGENCIES 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 Company has been approved for a five (5) year extension on the license agreement. 4. SUBSEQUENT EVENTS The Company has completed the 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. In April, a definitive share purchase agreement to acquire the stock of Apple Golf Shoes, Inc. was signed. On May 28, 1998, Empire of Carolina's shareholders approved the acquisition of Apple Golf Shoes, Inc. Closing on the acquisition is pending issuance of common stock needed to purchase the assets of Apple Golf Shoes, Inc. The Company has acquired a new banking facility with LaSalle National Bank and has paid off the banking facility with Citibank, N.A. Paragraph (b). 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 Item 2. 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, and the Quarterly Report Form 10-Q for the quarterly period ended March 31, 1998. 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. EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS March 31, 1998 (In thousands except share amounts) Empire of Apple Apple Golf Pro Forma Carolina, Inc. Sports, Inc. Shoes, Inc. Adjustments -------------- ------------ ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 3,487 $ 44 $ - $ - Accounts receivable, less allowances and other deductions 9,647 4,820 879 - Inventories, net 12,522 5,062 1,479 - Prepaid expenses and other current assets 891 100 25 - Deferred income taxes - 340 - (340) (1) ---------- --------- --------- --------- Total current assets 26,547 10,366 2,383 (340) Property, plant and equipment, net 13,288 436 39 (475) (1) Excess cost over fair value of net assets acquired, net 13,281 342 - (1,393) (1) Trademarks, patents, tradenames and licenses, net 5,941 - - - Loan receivable - related party - 3,124 - (3,124) (2) Other noncurrent assets 477 - - - ---------- --------- -------- --------- $ 59,534 $ 14,268 $ 2,422 $ (5,332) ========== ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt $ 16,418 $ 3,739 $ - $ - Accounts payable - trade 10,162 682 62 - Indemification obligations related to sales of subsidiaries 919 - - - Other accrued liabilities 9,606 801 124 325 (1) ----------- -------- -------- --------- Total current liabilities 37,105 5,222 186 325 ----------- -------- -------- --------- Long-Term Liabilities: Long-term debt 8,275 - - - Long-term debt - related party - - 3,124 (3,124)(2) Other noncurrent liabilities 1,676 - - - ----------- -------- ------- ---------- Total long-term liabilities 9,951 - 3,124 (3,124) ----------- -------- ------- ---------- Total liabilities 47,056 5,222 3,310 (2,799) =========== ======== ======= ========== Commitments and Contingencies Stockholders' Equity: Common stock, $.10 par value, 60,000,000 shares authorized, shares issued and outstanding: Historical 785 - 2 498 (1) - 7,849,000; Pro forma 12,849,000 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 - - - Additional paid-in capital 109,282 1,000 - 4,125 (1) Retained earnings(deficit) (97,610) 8,046 (890) (7,156) ----------- -------- ------- ---------- Total stockholders' equity 12,478 9,046 (888) (2,533) ----------- -------- ------- ---------- $ 59,534 $ 14,268 $ 2,422 $ (5,332) =========== ======== ======= =========
Pro Forma ------ ASSETS Current Assets: Cash and cash equivalents $ 3,531 Accounts receivable, less allowances and other deductions 15,346 Inventories, net 19,063 Prepaid expenses and other current assets 1,016 Deferred income taxes -------- Total current assets 38,956 Property, plant and equipment, net 13,288 Excess cost over fair value of net assets acquired, net 12,230 Trademarks, patents, tradenames and licenses, net 5,941 Loan receivable - related party - Other noncurrent assets 477 -------- $ 70,892 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt $ 20,157 Accounts payable - trade 10,906 Indemification obligations related to sales of subsidiaries 919 Other accrued liabilities 10,856 -------- Total current liabilities 42,838 -------- Long-Term Liabilities: Long-term debt 8,275 Long-term debt - related party Other noncurrent liabilities 1,676 -------- Total long-term liabilities 9,951 -------- Total liabilities 52,789 ======== Commitments and Contingencies Stockholders' Equity: Common stock, $.10 par value, 60,000,000 shares authorized, shares issued and outstanding: Historical 1,285 - 7,849,000; Pro forma 12,849,000 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 Additional paid-in capital 114,407 Retained earnings(deficit) (97,610) --------- Total stockholders' equity 18,103 (5) --------- $ 70,892 =========
See notes to proforma financial statements. EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 1998 Empire of Apple Apple Golf Pro Forma Pro Carolina, Inc. Sports, Inc. Shoes, Inc. Adjustments Forma -------------- ------------ ---------- ----------- -------- (In thousands except per share amounts) Net Sales $ 11,896 $ 4,909 $ 1,127 $ - $ 17,932 Cost of Sales (9,391) (3,460) (765) (13,616) --------- -------- -------- --------- -------- Gross Profit 2,505 1,449 362 4,316 Selling and Administrative Expense 4,493 793 211 (68) (3) 5,429 -------- -------- -------- ---------- -------- Operating Income(Loss) (1,988) 656 151 68 (1,113) Other Income(Expense): Interest income, dividends and net realized gains(losses) - - - - - Interest expense (987) (82) (59) - (1,128) --------- -------- -------- --------- ------- Total other income(expense) (987) (82) (59) - (1,128) --------- -------- -------- --------- ------- Loss Before Income Taxes (2,975) 574 92 68 (2,241) Income Tax Expense(Benefit) - 224 - (224) (4) - -------- ------- ------- ---------- -------- Net loss $ (2,975) $ 350 $ 92 $ 292 $ (2,241) ========= ====== ======== ========== ========= Loss Per Common Share - Basic and diluted $ (0.38) $ (0.17) ========= ========= Weighted-average number of common shares outstanding - Basic and diluted 7,849 5,000 (1) 12,849 ========= ========== =========
See notes to proforma financial statements. EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 1997 Empire of Apple Apple Golf Pro Forma Pro Carolina, Inc. Sports, Inc. Shoes, Inc. Adjustments Forma -------------- ------------ ------------ ------------ ------ (In thousands except per share amounts) Net Sales $ 99,516 $ 21,828 $ 2,209 $ - $ 123,553 Sales Distribution Settlement 2,400 2,400 Cost of Sales (87,524) (13,723) (1,380) - (102,627) -------- -------- -------- -------- --------- Gross Profit 14,392 8,105 829 23,326 Selling and Administrative Expense 24,863 5,059 832 (354) (3) 30,400 Restructuring and Other Charges 3,739 - - - 3,739 -------- -------- ------- --------- -------- Operating Income(Loss) (14,210) 3,046 (3) 354 (10,813) Other Income(Expense): Interest income, dividends and net realized gains(losses) 102 504 - - 606 Interest expense (7,022) (375) (239) - (7,636) -------- --------- --------- --------- -------- Total other income(expense) (6,920) 129 (239) - (7,030) -------- --------- --------- --------- -------- Loss Before Income Taxes (21,130) 3,175 (242) 354 (17,843) Income Tax Expense(Benefit) - 1,235 1 (1,236) (4) - ------- -------- --------- --------- -------- Net Loss (21,130) 1,940 (243) 1,590 (17,843) Accretion of noncash preferred stock dividend (24,645) - - - (24,645) ---------- -------- -------- ---------- --------- Net loss applicable to common stock $ (45,775) $ 1,940 $ (243) $ 1,590 $ (42,488) ========== ======== ======== ========== ========= Loss Per Common Share - Basic and diluted $ (6.04) $ (3.38) ========= ========= Weighted-average number of common shares outstanding - Basic and diluted 7,583 5,000 (1) 12,583 ====== ========= =========
See notes to proforma financial statements. EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES Notes to Unaudited Pro Forma Consolidated Statements of Operations and Balance Sheets As Of and For the Three Months Ended March 31, 1998 and For the Year Ended December 31, 1997. 1. Adjustment includes allocation of the purchase price. 5,000,000 shares of Empire's common stock will be issued (closing price of $1.125 on May 28, 1998) and closing costs are estimated at $325,000. The pro forma adjustments do not reflect the issuance of 1,153,846 shares of Empire common stock as additional consideration in the event that during the Adjustment Period (defined below) the closing daily market price of the Company's common stock shall not be at a price of $2.00 per share or higher for each of 45 consecutive stock trading days. The Adjustment Period is the period of time commencing on the first trading date after the date on which the registration statement of the 5,000,000 shares is declared effective and the shares 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. 2. Reflects elimination of receivable and payable between Apple Sports, Inc. and Apple Golf Shoes, Inc. 3. Reflects amortization of negative goodwill over twenty years and reversal of depreciation and goodwill previously recorded by Apple Sports, Inc. 4. Reflects the income tax benefit from the utilization of tax operating loss of Empire. 5. Book value per common share (assuming the conversion of preferred stock) is $.39 and $.49 on a historical and a pro forma basis, respectively. Paragraph (c) Exhibit Number Description - -------- -------------- 2.1 Share Purchase Agreement (1) 23.1 Letter issued by Steven J. Zaffos, dated June 12, 1998. 99 Press Release, dated June 1, 1998. - --------------- (1) Previously filed as Exhibit B to the Company's Proxy Statement filed on April 28, 1998 and incorporated by reference herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. EMPIRE OF CAROLINA, INC. By /s/ Lawrence Geller -------------------- Name: Lawrence Geller Title: Vice President and General Counsel Date: June 12, 1998 -7- EXHIBIT INDEX Exhibit Number Description ------- ----------- 2.1 Share Purchase Agreement(1) 23.1 Letter issued by Steven J. Zaffos, dated June 12, 1998. 99 Press Release, dated June 1, 1998. - -------- (1) Previously filed as Exhibit B to the Company's Proxy Statement filed on April 28, 1998 and incorporated by reference herein. -8- EX-23 2 EXHIBIT 23.1 Exhibit 23.1 INDEPENDENT AUDITOR'S CONSENT STEVEN J. ZAFFOS CERTIFIED PUBLIC ACCOUNTANT 5 EVON DRIVE SYOSSET, NEW YORK 11791-6311 - ------------------------------- TELEPHONE (516) 364-4028 ================================================================================ June 12, 1998 Mr. Timothy Moran Apple Sports, Inc. and Subsidiaries Apple Golf Shoes, Inc. Via Fax Tim, This is to inform you that as of June 12, 1998, I have completed the necessary procedures as described in AU Sections 711 and 560.12 of the AICPA Professional Standards Guide concerning the audited financial statements of Apple Sports Inc. and Subsidiaries and Apple Golf Shoes Inc. for the year ending December 31, 1997. I have concluded that there are no events that have occurred subsequent to the date of my Independent Auditor's Report that have a material effect on the audited financial statements in order to keep them from being misleading. I agree to the inclusion in the Current Report Form 8-K, and incorporation by reference in Form S-3 Registration Statement of Empire of Carolina, Inc., of my report, dated March 3, 1998, on my audit of the financial statements of Apple Sports, Inc. and Subsidiaries for the year ending December 31, 1997, and my report, dated March 12, 1997, on my audit of the financial statements of Apple Sports, Inc. and Subsidiaries for the year ending December 31, 1996. I also agree to the inclusion in the Current Report Form 8-K, and incorporation by reference in Form S-3 Registration Statement of Empire of Carolina, Inc., of my report, dated March 3, 1998, on my audit of the financial statements of Apple Golf Shoes, Inc. for the year ending December 31, 1997, and my report, dated March 12, 1997, on my audit of the financial statements of Apple Golf Shoes, Inc. for the year ending December 31, 1996. Respectfully submitted, /s/ Steven J Zaffos ------------------- Steven J Zaffos Certified Public Accountant -9- EX-99 3 EXHIBIT 99 Exhibit 99 FOR IMMEDIATE RELEASE EMPIRE OF CAROLINA ANNOUNCES CLOSING OF APPLE ACQUISITION, APPROVAL OF SHAREHOLDER PROPOSALS Delray Beach, FL, June 1, 1998 - Empire of Carolina (AMEX:EMP) announced today that it has completed the acquisition of Apple Sports, Inc., and Apple Golf Shoes, Inc., and that the Company's shareholders approved each of the proposals presented at its annual meeting. The Company also reported that Steve Geller, Chief Executive Officer of Empire since 1994, announced his resignation during the shareholders' meeting and that the Board had unanimously appointed Timothy Moran as President and Chief Executive Officer. Mr. Moran had been the President and Chief Operating Officer of Empire and the President to Apple Sports, Inc. and Apple Golf Shoes, Inc. In his new position, Mr. Moran will be responsible for the day to day management and operation of Empire's golf, toy and holiday product business. Steve Geller will continue to serve as director of the Company. In addition to approving the issuance of stock needed to complete the Apple acquisition, the shareholders elected Charles S. Holmes, John J. Doran, Steven E. Geller, James J. Pinto, Frederick W. Rosenbauer, Jr., and Lenore H. Schupak to serve additional terms as directors. In addition, the Board of Directors elected Timothy Moran to serve as a seventh member of the Board. Charles Holmes, Chairman, commented, "we are pleased that our shareholders voted to approve the Apple acquisition and that we have completed the transaction. The addition of Apple's line of Wilson(TM) licensed golf shoes and accessory products is expected to boost our cash flow, operating margins and earnings per share. It also enhances our distribution of products and allows us to cross sell various domestic products." Empire of Carolina, Inc., designs, develops, manufacturers and markets a broad range of basic plastic children's toys and golf products. The Company's full line of toys includes the Big Wheel(TM) line of ride-on toys. Grand Champions(TM) collectible horses, and Buddy L(TM) cars and trucks. Its Holiday Products Division produces and markets decorative seasonal items including Christmas, Halloween and Easter illuminated products. Its golf line includes Wilson(TM) golf shoes and accessories. This press release contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management's plans and objectives. Such statements are subject to various risks and uncertainties which would cause actual results to vary materially from those stated. Should one or more of these risks or uncertainties -10- materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. Such risks and uncertainties include the Company's ability to integrate the Apple operations with its own, its ability to achieve the anticipated synergies of the Apple acquisitions, the Company's ability to manage inventory, production and costs, to meet potential increases or decreases in demand, potential adverse customer impact due to delivery delays including effects on existing and future orders, competitive practices in the toy, golf and decorative holiday products industries, changing consumer preferences and risk associated with consumer acceptance of new product introductions, potential increases in raw materials prices, potential delays or production problems associated with foreign sourcing of production and the impact of pricing policies including providing discounts and allowances. Certain of these as well as other risks and uncertainties are the Securities Act of 1933, Registration No. 333-4440. The Company undertakes no obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. CONTACT: William Craig (561)498-4000, or bcraig@empiretoys.com Attachment cc: American Stock Exchange -11- -----END PRIVACY-ENHANCED MESSAGE-----