-----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, BNOd4fMhmnlrJbTQWJvLvZEMV2NBiMIfPd6ktT8VWSvqyJlWxPBh/UTaXJ4LRNST tIm8r1QmWMlq5wxkAFx9Fg== 0000950168-96-002200.txt : 19961118 0000950168-96-002200.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950168-96-002200 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07909 FILM NUMBER: 96665962 BUSINESS ADDRESS: STREET 1: 5150 LINTEN BLVD CITY: DEL RAY BEACH STATE: FL ZIP: 33484 BUSINESS PHONE: 4074984000 MAIL ADDRESS: STREET 1: P O BOX 4000 CITY: TARBORO STATE: NC ZIP: 27886 10-Q 1 EMPIRE OF CAROLINA, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File No. 1-7909 EMPIRE OF CAROLINA, INC. (Exact name of Registrant as specified in its charter) Delaware 13-2999480 (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification Number) 5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33484 (Address of principal executive office) (Zip Code) (561) 498-4000 Registrant's telephone number, including area code) ------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ The number of shares outstanding of the issuer's Common Stock, $.10 par value, as of November 14, 1996 was 7,403,564. PART I - FINANCIAL INFORMATION This Form 10-Q 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 contingent liabilities. Statements in this document that are not historical, including those under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Events" and the last paragraph of "--Liquidity and Capital Resources" are forward looking. Such statements are subject to various risks and uncertainties which could cause actual results to vary materially from those stated. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or or projected. Such risks and uncertainties include the Company's ability to manage inventory production and costs, to meet potential increases or decreases in demand, potential adverse customer impact due to delivery delays including effects on existing and future orders, competitive practices in the toy and decorative holiday products industries, changing consumer preferences and risks associated with acceptance of new product introductions, potential increases in raw material prices, potential delays or production problems associated with foreign sourcing of production and the impact of pricing policies including providing discounts and allowances. Certain of these as well as other risks and uncertainties are described in more detail in the Company's Registration Statement on Form S-1 filed under the Securities Act of 1933, Registration No. 333-4440, dated June 25, 1996. Item 1. Financial Statements EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands) - --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, 1996 1995 -------------------- -------------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 467 $ 2,568 Marketable securities 157 189 Accounts receivable, less allowances and other deductions (1996-$5,783; 1995-$4,290) 46,542 48,957 Inventories, net 42,728 30,178 Income tax receivable 6,251 - Prepaid expenses and other current assets 3,641 2,046 Deferred income taxes 5,366 5,596 Total current assets 105,152 89,534 PROPERTY, PLANT AND EQUIPMENT, NET 26,135 23,640 EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED 13,101 15,174 TRADEMARKS, PATENTS, TRADENAMES AND LICENSES 6,687 10,253 OTHER NONCURRENT ASSETS 1,667 1,552 $ 152,742 $ 140,153
See notes to the consolidated condensed financial statements. EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands, Except Share Amounts) - --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, 1996 1995 -------------------- -------------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 55,213 $ 49,206 Accounts payable - trade 28,527 17,516 Accrued liabilities 10,708 15,975 Total current liabilities 94,448 82,697 LONG-TERM LIABILITIES: Long-term debt 8,575 - Convertible subordinated debentures 14,067 13,851 Senior subordinated notes - 7,959 Deferred income taxes 893 2,083 Other noncurrent liabilities 3,161 3,101 Total long-term liabilities 26,696 26,994 Total liabilities 121,144 109,691 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.10 par value, 30,000,000 shares authorized, shares issued and outstanding: 1996 - 7,403,564; 1995 - 5,195,000 740 519 Preferred stock, $.01 par value, 5,000,000 shares authorized. Issued and outstanding: 1995 - 442,264 shares of Series A cumulative convertible preferred stock ($3,206,000 involuntary liquidation preference) - 4 Additional paid-in capital 50,817 33,193 Retained earnings (deficit) (19,399) (2,659) Stockholders' loans (560) (595) Total stockholders' equity 31,598 30,462 $ 152,742 $ 140,153
See notes to the consolidated condensed financial statements. EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (In Thousands, Except Per Share Amounts) - --------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------- ---------------------------------------- 1996 1995 1996 1995 ----------------- ----------------- ----------------- -------------------- NET SALES $ 50,453 $ 53,621 $ 106,061 $ 92,340 COST OF GOODS SOLD 41,018 39,646 83,142 65,522 NONRECURRING INVENTORY CHARGES 10,325 0 10,325 0 GROSS PROFIT (LOSS) (890) 13,975 12,594 26,818 SELLING AND ADMINISTRATIVE EXPENSES 10,142 10,952 25,708 25,368 RESTRUCTURING AND OTHER CHARGES 7,497 1,177 7,497 1,736 OPERATING INCOME (LOSS) (18,529) 1,846 (20,611) (286) OTHER INCOME (EXPENSES): Interest income, dividends and net realized gains 0 34 16 459 Interest expense (2,065) (1,842) (6,499) (3,403) Total other income (expenses) (2,065) (1,808) (6,483) (2,944) INCOME (LOSS) BEFORE INCOME TAXES (20,594) 38 (27,094) (3,230) INCOME TAX EXPENSE (BENEFIT) (7,710) (15) (10,354) (1,015) NET INCOME (LOSS) $ (12,884) $ 53 $ (16,740) $ (2,215) INCOME (LOSS) PER COMMON SHARE $ (1.82) $ 0.01 $ (2.85) $ (0.49) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,053 5,340 5,859 4,507
See notes to the consolidated condensed financial statements. EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) - --------------------------------------------------------------------------------
Nine Months Ended September 30, ------------------------------------------ 1996 1995 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (16,740) $ (2,215) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,009 4,948 Other non-cash adjustments, net 12,710 1,164 Changes in assets and liabilities (22,041) (31,336) Net cash used in operating activities (19,062) (27,439) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7,213) (4,141) Proceeds from sale of marketable securities 15 2,099 Escrow deposits made relating to Buddy L acquisition 0 (15,600) Proceeds from sale of fixed assets 90 525 Net cash used in investing activities (7,108) (17,117) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under lines of credit 5,798 34,470 Proceeds from issuance of long term debt 12,100 7,580 Repayments of notes payable (11,654) (2,925) Net proceeds from issuance of common stock 17,825 1,794 Net proceeds from issuance of preferred stock 0 3,206 Net cash provided by financing activities 24,069 44,125 NET DECREASE IN CASH AND CASH EQUIVALENTS (2,101) (431) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,568 2,738 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 467 $ 2,307 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 6,324 $ 2,445 Income taxes refunded 1,712 276 NONCASH INVESTING AND FINANCING ACTIVITIES During 1996, the Company adjusted its allocation of the purchase price of the assets of Buddy L acquired on July 7, 1995 by increasing assets acquired by $487,000 and decreasing excess cost over fair value of net assets acquired by $487,000. On September 11, 1996, the shareholders approved the conversion of the Series A preferred stock to common stock on a share-for-share basis. See Note 6.
See notes to consolidated condensed financial statements. EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 - -------------------------------------------------------------------------------- 1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES The consolidated condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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 financial statements and the notes thereto included in the Company's latest annual report, as amended, on Form 10-K/A. In the opinion of management, the information contained in this report reflects all adjustments, consisting only of normal recurring adjustments, except for the adjustments described in Notes 2 and 3, necessary to present fairly the results for the interim periods presented. Earnings(loss) per share - For the calculation of earnings (loss) per share for the three and nine months ended September 30, 1996 and 1995, all outstanding stock options and warrants and convertible debentures are excluded from primary and fully-diluted earnings per share since they are anti-dilutive. Accounting for Stock-Based Compensation - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which was effective for the Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosure of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share for the year ending December 31, 1996. 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. 2. NONRECURRING INVENTORY CHARGES By the end of the third quarter of 1996, the Company substantially completed the transfer of production of products, acquired as part of the Buddy L acquisition, from Buddy L's facilities in Gloversville, NY to the Company's facility in Tarboro, NC. During the third quarter, the Company was attempting to rapidly ramp up production of existing product to meet peak seasonal demand. Difficulties in the third quarter associated with integrating the manufacture of Buddy L products, including the inflow of transferred product and machines, led to product damage, loss of production efficiency and missed shipping deadlines. This situation was exacerbated by the loss of the Plant Manager due to a critical illness, delays in the installation and start up of both transferred and new machinery, and by two hurricanes. As a result of these circumstances, the Company, during the third quarter, experienced an increase in scrap and damages in addition to disruptions in its operations. In addition, during the third quarter, the Company determined that a substantial amount of the work in process and purchased parts inventory obtained as part of the Buddy L acquisition was no longer useable. Also, the Company decided to outsource certain production to meet customer demand, resulting in increased costs. While the Company will not be able to make a final determination of these costs until year-end, the Company has made a provision of $10.3 million as an estimate of the effect. 3. RESTRUCTURING AND OTHER CHARGES In response to the reduction in operating margins experienced during the third quarter of 1996, the Company has restructured its operations and reduced cost by eliminating administrative and manufacturing jobs and curtailing non-essential spending. The Company has also provided additional amounts related to the shut down of its Gloversville, NY facility and made a provision for estimated customer charge backs resulting from the circumstances described in Note 2. A $3.5 million charge has been recorded to reflect the one time costs related to these matters. In addition, during the third quarter, the Company made a determination that certain toys previously marketed under the Empire, Marchon or Buddy L names should be dropped from the product line, resulting in a $500,000 reserve included in the nonrecurring inventory charge. A review of the carrying value of long-lived and intangible assets related to the discontinued products has been made in accordance with the rules set forth in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Four million dollars has been provided to write off the patents, trademarks and trade names associated with discontinued products as well as the estimated goodwill attributed to them. For the three and nine months ended September 30, 1995, the Company recorded $1,177,000 and $1,736,000 of charges also related to establishment of corporate headquarters in Delray Beach, Florida and the relocation of equipment from the Buddy L New York facility to Tarboro, NC. 4. INVENTORIES, NET September 30, December 31, 1996 1995 (unaudited) Finished goods $18,030 $14,418 Raw Materials 19,639 13,591 Work-in-process 5,559 2,169 $43,228 $30,178 5. NOTES PAYABLE AND LONG-TERM DEBT During May 1996, Empire Industries, Inc. ("EII") a wholly-owned subsidiary of the Company, entered into a secured bank facility which provides up to $85,000,000 in financing. The financing is for a three-year term. Of the $85,000,000, $12,100,000 is in the form of a three-year term loan which requires monthly payments of $235,000. The balance of the availability under the loan agreement is based on EII's domestic accounts receivable and inventory balances, as defined, less outstanding commitments under letters of credit ($1,221,000 at September 30, 1996). The loan is collateralized by substantially all of the domestic assets of EII, including all machinery, equipment, real property, accounts receivable, inventories, and intangibles, with an aggregate book value of approximately $133 million at September 30, 1996. This facility replaces two domestic facilities of $25,000,000 each. The loan agreement requires the Company to maintain specified financial ratios. The Company's banks have waived compliance with these financial ratios as of September 30, 1996. The Company and its banks are near agreement on the terms of an amendment to its agreement, which may require additional debt or equity financing, but no assurance can be given that the amendment will be finalized. On July 5, 1996 the Company exercised its option to redeem all $7,580,000 senior subordinated notes at 110% of the original principal amount and thereby retired the related 758,000 warrants to purchase common stock. In connection with the redemption, $323,000 of unamortized loan fees were written off in the third quarter of 1996. 6. STOCKHOLDERS' EQUITY On June 25, 1996, the Company sold 1,400,000 shares of its common stock in public offering which resulted in net proceeds to the Company of approximately $17,825,000 (including proceeds to the Company upon the exercise by certain selling stockholders of stock options and warrants to acquire 356,100 shares of common stock). The proceeds from the offering were used to reduce the outstanding balance under EII's revolving line of credit and to redeem the senior subordinated notes. See Note 5. On September 11, 1996, upon the approval by the stockholders of the Company at its 1996 annual meeting, the outstanding shares of Series A Preferred Stock converted into Common Stock on a share-for-share basis. The conversion resulted in the issuance of 442,264 shares of Common Stock to the holders of Series A Preferred Stock. As of September 30, 1996 there are no Series A preferred shares outstanding. At September 30, 1996, there were 7,403,564 shares of common stock outstanding. The effect of the conversion on earnings (loss) per share is antidilutive. On September 12, 1996, the Company adopted a stockholder rights agreement and declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of Empire of Carolina, Inc. common stock. Each Right will entitle stockholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $40.00. The Rights will be exercisable only if a person or group (other than certain exempt persons) acquires 15% or more of Empire of Carolina, Inc.'s common stock or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the common stock. 7. COMMITMENTS AND CONTINGENCIES Letters of credit - The Company had outstanding commitments under letters of credit totaling $1,221,000 at September 30, 1996 compared to $1,246,000 at December 31, 1995. Leases - During the second quarter ending June 30, 1996, the Company entered into a 10-year operating lease for new molding machines having monthly lease payments of $25,000. Indemnifications - In connection with the sale of the assets used in the businesses of its wholly-owned subsidiaries, Isaly Klondike Company and Popsicle Industries Ltd. to Thomas J. Lipton Company and its affiliates in 1993, the Company agreed to certain indemnification obligations. The Company has established reserves for all claims known to it and for other contingencies in connection with the sale. During the quarter ended March 31, 1996, the Company reduced the reserves by $600,000 due to the expiration of certain time limitations. Although there can be no assurance that claims and other contingencies related to the sale will not exceed established reserves, the Company believes that any additional exposure related to the indemnification obligations will not be material to the Company's consolidated financial statements. During 1995, the Company and majority-owned subsidiary, CLR Corporation ("CLR"), were released from substantially all indemnification obligations including certain tax matters arising from the December 23, 1988 sale of General Defense Corporation to Olin Corporation by CLR's predecessor, Clabir Corporation. In exchange for the release, the Company paid $475,000 and extended the expiration date of the options granted to Olin Corporation from September 30, 1996 to September 30, 1997. The options were exercised on June 25, 1996. The Company believes future obligations, if any, related to the indemnification will not have a material adverse effect on its consolidated financial statements. Litigation - There are two suits claiming infringement of various intellectual property rights which have been filed against Marchon, Inc., a wholly-owned subsidiary of the Company. These claims are in various stages of litigation. The Company believes that it has meritorious defenses to the open claims and has provided reserves for its estimated costs to settle these matters. The Company does not believe that any additional amounts required to ultimately resolve these matters will have a material adverse effect on the Company's consolidated financial statements. The Company's operating subsidiaries and its former operating subsidiaries are subject to various types of consumer claims for personal injury from their products. The Company's subsidiaries maintain product liability insurance. Various product liability claims, each of which management believes is adequately covered by insurance and/or reserves, are currently pending. The Company does not believe the outcome of any of this litigation either individually or in the aggregate would have a material adverse effect on the Company's consolidated financial statements. Contingencies - The Company has been identified as a potentially responsible party, along with numerous other parties, at various U. S. Environmental Protection Agency ("EPA") designated superfund sites. It is the Company's policy to accrue remediation costs when it is probable that such costs will be incurred and when they can be reasonably estimated. As of December 31, 1995 and September 30, 1996, the Company had reserves for environmental liabilities of $600,000 and $400,000 respectively. Estimates of costs for future remediation are necessarily imprecise due, among other things, to the allocation of costs among potentially responsible parties. Although it is possible that additional environmental liability related to these matters could result in amounts that could be material to the Company's consolidated financial statements, a reasonably possible range of such amounts cannot presently be estimated. Based upon the facts presently known, the large number of other potentially responsible parties and potential defenses that exist, the Company believes that its share of the costs of cleanup for its current remediation sites will not, in the aggregate, have a material adverse impact on its consolidated financial statements. 8. SUBSEQUENT EVENTS Subsequent to September 30, 1996, the Company entered into a new ten year lease for office space, with lease payments of $26,000 a month. Rents commence on issuance of a certificate of occupancy which is expected in January 1997. On October 31, 1996, the Company signed an agreement to sell its Caldwell Button Co. division for approximately $800,000 in cash plus a $150,000 promissory note. Sales of the Caldwell Button Co. division represented approximately 1% of the Company's consolidated net sales for the nine months ended September 30, 1996. The sale is expected to close by December 31, 1996. The estimated $200,000 loss on the sale of this division is included in the third quarter 1996 restructuring charge. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sales of the Company's products are seasonal in nature. Generally, the Company's largest sales occur in the third and fourth quarters of the year when it ships its toys for the Christmas shopping season and holiday products for the Christmas and Halloween shopping seasons. The Company's production generally is heaviest in the period from July through October. Management expects that the Company's quarterly operating results will vary significantly throughout the year. RECENT EVENTS By the end of the third quarter of 1996, the Company substantially completed the transfer of production of products, acquired as part of the Buddy L acquisition, from Buddy L's facilities in Gloversville, NY to the Company's facility in Tarboro, NC. During the third quarter, the Company was attempting to rapidly ramp up production of existing product to meet peak seasonal demand. Difficulties in the third quarter associated with integrating the manufacture of Buddy L products, including the inflow of transferred product and machines, led to product damage, loss of production efficiency and missed shipping deadlines. This situation was exacerbated by the loss of the Plant Manager due to a critical illness, delays in the installation and start up of both transferred and new machinery, and by two hurricanes. As a result of these circumstances, the Company, during the third quarter, experienced an increase in scrap and damages in addition to disruptions in its operations. In addition, during the third quarter the Company determined that a substantial amount of the work in process and purchased parts inventory obtained as part of the Buddy L acquisition was no longer useable. Also, the Company decided to outsource certain production to meet customer demand, resulting in increased costs. While the Company will not be able to make a final determination of these costs until year-end, the Company has made a provision of $10.3 million as an estimate of the effect. In response to the reduction in operating margins experienced during the third quarter of 1996, the Company has restructured its operations and reduced cost by eliminating administrative and manufacturing jobs and curtailing non-essential spending. The Company has also provided additional amounts related to the shut down of its Gloversville, NY facility and made a provision for estimated customer charge backs resulting from the circumstances described in the above paragraph. A $3.5 million charge has been recorded to reflect the one time costs related to these matters. In addition, during the third quarter, the Company made a determination that certain toys previously marketed under the Empire, Marchon or Buddy L names should be dropped from the product line, resulting in a $500,000 reserve included in the nonrecurring inventory charge. A review of the carrying value of long-lived and intangible assets related to the discontinued products has been made in accordance with the rules set forth in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Four million dollars has been provided to write off the patents, trademarks and trade names associated with discontinued products as well as the estimated goodwill attributed to them. For the three and nine months ended September 30, 1995, the Company recorded $1,177,000 and $1,736,000 of charges also related to establishment of corporate headquarters in Delray Beach, Florida and the relocation of equipment from the Buddy L New York facility to Tarboro, NC. On September 25, 1996, the Company announced that it has signed an agreement with Tyco Toys, Inc. ("Tyco") for the distribution of the Company's toys internationally other than in Canada. Tyco will offer several of the Company's most popular product lines, all of which will be sourced through the Company's Hong Kong operations. RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 The results of operations for the three and nine months ended September 30, 1996 reflects the impact of the Buddy L acquisition (which acquisition occurred on July 7, 1995). See the Company's 1995 Annual Report, as amended, on Form 10-K/A for further information regarding this acquisition. Net sales increased $13,721,000 for the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1995 due to the acquisition of the Buddy L (R) lines of product in July 1995, sales of new products, and an increase in sales of certain of the Company's historical toy product lines. However, sales for the third quarter of 1996 were adversely affected by production and shipment delays experienced at the Company's Tarboro facility. As a result, net sales decreased $3,168,000 for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995. The operating loss increased to $18,529,000 and $20,611,000 for the three and nine months ended September 30, 1996 as compared to an operating income of $1,846,000 and an operating loss of $286,000 for the three and nine months ended September 30, 1995. The increase in the operating losses is primarily due to the inventory charge of $9,825,000 and restructuring and other charges of $7,497,000 during the third quarter of 1996 and lower gross profit margins resulting from the cost of outsourcing of certain components to independent contractors and unfavorable production cost variances. The following table shows sales and operating income by the Company's product segments (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, Net Sales: 1996 1995 1996 1995 ---- ---- ---- ---- Toys $ 33,999 $ 36,499 $ 84,905 $ 72,185 Holiday Products 16,454 17,122 21,156 20,155 --------- --------- --------- -------- Net Sales $ 50,453 $ 53,621 $ 106,061 $ 92,340 --------- --------- --------- -------- Operating Income (loss): Toys $ (2,238) $ 783 $ (4,231) $ (521) Holiday Products 1,031 2,240 942 1,971 Nonrecurring inventory charge (9,825) (9,825) Restructuring and other charges (7,497) (1,177) (7,497) (1,736) --------- Operating Income (Loss) $ (18,529) $ 1,846 $ (20,611) $ (286) =========
Toy sales decreased $2,500,000 for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995. The decrease in sales for the quarter was due to production and shipment delays experienced during the third quarter at the Company's Tarboro facility. Toy sales for the nine months ended September 30, 1996 increased $12,720,000 as compared to the nine months ended September 30, 1995 due to sales from acquired Buddy L(R) toy lines, increased sales of new products such as Big WheelieTM and Fantasy Fillies(R), and increased sales of Crocodile Mile(R) water slides and Grand Champions Horses(R). These increases were partially offset by the virtual elimination of Power RangerTM sales and lower road racing sales which combined sales were approximately $8,067,000 and $24,014,000 for the three and nine months ended September 30, 1995. The Company's sales of holiday products decreased $668,000 for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995 due to decreased sales in the Christmas product category resulting from production and shipping delays during the third quarter. For the nine months ended September 30, 1996, sales of holiday products increased $1,001,000 as compared to the nine months ended September 30, 1995 due to increased sales in the Easter and Halloween categories. Gross profits were lower for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995, due to unfavorable production variances, and a reduction in Power RangerTM sales, which products sold at high gross margins. Production costs have been adversely affected by the integration of domestic manufacturing at the Company's Tarboro, North Carolina manufacturing facility and due to the delay in the installation and start up of equipment, the loss of the Plant Manager due to a critical illness, and delays due to hurricanes Bertha and Fran. Also, the Company decided to outsource certain production to meet customer demand, resulting in increased costs. The impact of the reduction in the Power Ranger TM sales on operating income for the three and nine months ended September 30, 1996 was partially offset by the corresponding decrease in royalties on the sales of Power RangerTM products. Selling and administrative expenses were lower for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995 primarily due to lower royalty expenses and $850,000 of income from the settlement of an insurance claim. Included in selling and administrative expenses for the three months ended September 30, 1996 are duplicate facilities costs of approximately $95,000 for the continuing integration of Buddy L, and the incremental cost of approximately $232,000 for staffing of four strategic business units ("SBUs"), which were established in 1996 to improve control over marketing and sales of the Company's products. SBU's are accountable for the sales and marketing for specific product categories: ride-ons, outdoor activities and games, girls and boys toys and holiday products. Despite the lower royalty expense, Selling and administrative expenses were slightly higher for the nine months ended September 30, 1996, as compared to the nine months ended September 30, 1995 primarily due to duplicate facilities costs of approximately $781,000, and the incremental cost of approximately $1,108,000 for staffing of the SBU's. Selling and administrative expenses for the nine months ended September 30, 1996 reflect the reversal of approximately $600,000 of indemnification reserves due to the expiration of time limitations, the reversal of $200,000 of environmental reserves, a $796,000 gain relating to a favorable settlement of disputed 1995 royalty expenses, and $850,000 of income from the settlement of an insurance claim. Excluding the impact of the reversal of the indemnification reserves, the gain on settlement of royalties, and the income from settlement of an insurance claim, selling and administrative expenses were approximately 27% of sales for the nine months ended September 30, 1996 as compared to 28% of sales for the nine months ended September 30, 1995. On July 5, 1996 the Company exercised its option to redeem all $7,580,000 senior subordinated notes at 110% of the original principal amount and thereby retired the related 758,000 warrants to purchase common stock. In the connection with the redemption, $323,000 of unamortized loan fees were written off and are included in selling and administrative expenses. Operating income for both the toy and holiday products segments of the Company have been negatively affected by shipping and production delays as well as higher production costs. Interest expense was $2,065,000 and $6,499,000 for the three and nine months ended September 30, 1996 as compared to $1,842,000 and $3,403,000 for the three and nine months ended September 30, 1995. Interest expense was higher due to the issuance of $7.6 million of senior subordinated notes during the third quarter of 1995 to finance the Buddy L acquisition, increased working capital needs and increased capital expenditures. The tax benefit for the three and nine months ended September 30, 1996 and 1995 approximates the federal, state and foreign statutory rates, net of certain nondeductible expenses, primarily amortization of goodwill. The effective tax rate for the three and nine months ended September 30, 1996 is higher than the expected statutory rates due to taxable income in Hong Kong which is taxed at a lower rate. LIQUIDITY AND CAPITAL RESOURCES Due to the seasonality of its revenues, the Company's working capital requirements fluctuate significantly during the year. The Company's seasonal financing requirements are highest during the fourth quarter and lowest during the first quarter. Working capital at September 30, 1996 was $10,704,000 as compared to $6,837,000 at December 31, 1995. The increase in working capital is primarily due to the receipt of the proceeds from the stock offering and the term loan. During May 1996, Empire Industries, Inc. ("EII") a wholly-owned subsidiary of the Company, entered into a secured bank facility which provides up to $85,000,000 in financing. The financing is for a three-year term. Of the $85,000,000, $12,100,000 is in the form of a three-year term loan which requires monthly payments of $235,000. The balance of the availability under the loan agreement is based on EII's domestic accounts receivable and inventory balances, as defined, less outstanding commitments under letters of credit ($1,221,000 at September 30, 1996). The loan is collateralized by substantially all of the domestic assets of EII, including all machinery, equipment, real property, accounts receivable, inventories, and intangibles, with an aggregate book value of approximately $133 million at September 30, 1996. This facility replaces two domestic facilities of $25,000,000 each. The loan agreement required the Company to maintain specified financial ratios. However, the lenders have waived compliance with these financial ratios pending finalization of an amendment to the loan agreement. Although agreement has been reached on the terms of the amendment, no assurance can be given that the amendment will be finalized. Marchon Toys Ltd., the Company's Hong Kong based subsidiary ("Marchon"), meets its working capital needs through two local bank credit facilities which are due on demand. Marchon can borrow up to approximately $2,500,000 at interest rates ranging from 0.5% to 1.75% over the banks' prime rate. The availability of borrowings is primarily based on Marchon's accounts receivable and inventory balances. All of Marchon's assets are collateralized under the loan agreements. On June 28, 1996 the Company sold 1,400,000 shares of its common stock in a public offering which resulted in net proceeds to the Company of approximately $17,825,000 (including proceeds to the Company upon the exercise by certain selling stockholders of stock options and warrants to acquire 356,100 shares of common stock). The proceeds from the offering were used to reduce the outstanding balance under EII's revolving line of credit (and to redeem the senior subordinated notes described in the following paragraph.). On July 5, 1996 the Company exercised its option to redeem all $7,580,000 senior subordinated notes at 110% of the original principal amount and thereby retired the related 758,000 warrants to purchase common stock. The Company's inventory and accounts payable balances were higher at September 30, 1996 as compared to December 31, 1995, due to the seasonal nature of the Company's business. The proceeds from the June 1996 stock offering and proceeds from the new term loan facility were used to reduce the balance outstanding under EII's revolving line of credit. Capital expenditures, principally for the purchase of tooling for new products and equipment, were $7,213,000 for the nine months ended September 30, 1996 as compared to $4,141,000 for the nine months ended September 30, 1995. During the second quarter of 1996, the Company entered into a 10-year operating lease for new molding machines having monthly lease payments of $25,000. Subsequent to September 30, 1996 the Company entered into a 10-year operating lease for office space having monthly lease payments of $26,000. The Company is subject to various actions and proceedings, including those relating to intellectual property matters and product liability matters. See Note 7 to Consolidated Condensed Financial Statements. The Company believes that cash generated from operations and amounts that would be available under its proposed credit facility amendment will be adequate to finance its operations for the next twelve months although no assurance can be given that any such amendment will be finalized. The Company is considering additional equity or debt financing. Although the Company believes that it has the ability to raise additional equity or debt financing, no assurance can be given that any such effort would be successful. PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During May 1996, Empire Industries, Inc., ("EII"), a wholly-owned subsidiary and principal operating subsidiary of the Company, entered into a new secured bank facility which provides up to $85,000,000 in financing. This bank facility does not restrict the payment of dividends by the Company; however, the agreement limits the dividends which EII may pay to the Company. Under the bank facility, EII may not pay dividends to the Company in excess of the lesser of $3.6 million or 30% of EII's cumulative net income (except for certain items specifically permitted for purposes other than the payment of dividends by the Company, such as the payment of taxes). The Company does not currently pay dividends and has no plans to start paying dividends in the near future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on September 11, 1996. The following matters were voted upon at the meeting: Election of directors to serve until the 1997 Annual Meeting of Stockholders: For Withheld Authority Steven E. Geller 4,051,403 34,702 Marvin Smollar 4,051,403 34,702 Steven N. Hutchinson 4,051,391 34,714 Peter B. Pfister 4,051,393 34,712 Leonard E. Greenberg 4,051,393 34,712 Eugene M. Matalene, Jr. 4,051,393 34,712 Proposal that an affirmative vote of more than two-thirds of the Directors then in office is needed to take certain specified corporation action. Yes 3,895,784 No 165,880 Abstain 4,441 Approval of a proposal to convert the Series A Preferred Stock into Common Stock Yes 4,039,199 No 20,257 Abstain 6,649 Approval of a proposal to adopt the Outside Directors Stock Option Plan Yes 3,957,269 No 101,036 Abstain 27,800 Approval of a proposal to adopt the 1996 Employee Stock Purchase Plan Yes 3,981,811 No 78,668 Abstain 5,626 Ratification of Deloitte & Touche LLP as the Company's independent certified public accountants to audit the accounts of the Company for the year ending December 31, 1996. Yes 4,057,341 No 4,460 Abstain 4,304 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Index and Exhibits
Exhibit No. Description 3.1 Restated Certificate of Incorporation of the Company. (1) 3.2 Amended and Restated By-Laws of the Company. (2) 3.3 Certificate of Designation, Preference and Rights of the Company filed September 30, 1995. (1) 3.4 Shareholders' Rights Plan adopted September 12, 1996. (6) 4.1 Form of specimen certificate representing the Company's common Stock.(3) 4.2 Excerpts from the Company's amended By-Laws and the Company's amended Certificate of Incorporation relating to rights of holders of the Company's Common Stock. (1) 4.3 Form of 9% Convertible Debentures, issued December 22, 1994. (4) 4.4 Form of Warrant Certificate of purchase common stock of the Company, issued December 22, 1994. (5) 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed.
- ------------------------------ 1 Previously filed as an exhibit to the Company's Current Report on Form 8-K dated July 21, 1995, and incorporated by reference. 2 Previously filed as an exhibit to Amendment No. 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 3 Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by reference. 4 Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference. 5 Previously filed as an exhibit to the Company's Current Report on Form 8-K for December 22, 1994 and incorporated by reference. 6 Previously filed as an exhibit to the Company's Current Report on Form 8-K for September 12, 1996 and incorporated by reference. (b) The Company filed on August 7, 1996, September 10, 1996 and September 12, 1996 Current Reports on Form 8-K. SIGNATURE 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 thereunto duly authorized. EMPIRE OF CAROLINA, INC. By: /s/ Jeffrey L. Currier Jeffrey L. Currier Executive Vice President - Finance, Chief Financial Officer Dated: November 14, 1996 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AND THE UNAUDITED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 467 157 46,542 5,783 42,728 105,152 57,134 30,999 152,742 94,448 0 740 0 0 30,858 152,742 106,061 106,061 83,142 93,467 33,205 542 6,499 (27,094) 10,354 (16,740) 0 0 0 (16,740) (2.85) (2.85)
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