-----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, IPKwafqyPz9eqL8d51mMS89Z3u+dZoxT3XFsH693qaPHiuHdQqy00XNOtLB1pR1v bWi57VuScE8OBP50yiDchQ== 0000950168-97-003259.txt : 19971114 0000950168-97-003259.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950168-97-003259 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: SEC FILE NUMBER: 001-07909 FILM NUMBER: 97714452 BUSINESS ADDRESS: STREET 1: 5150 LINTON BLVD STREET 2: 5TH FL CITY: DELRAY BEACH STATE: FL ZIP: 33484 BUSINESS PHONE: 9198234111 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, 1997 ___________________ 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 October 31, 1997 was 7,653,564. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,095 $ 478 Accounts receivable, less allowances and other deductions (1997-$4,097; 1996-$8,777) 25,162 39,678 Inventories, net 21,239 25,115 Income taxes receivable 13,004 Prepaid expenses and other current assets 1,094 2,142 Deferred income taxes 2,183 2,183 --------- --------- Total current assets 53,773 82,600 PROPERTY, PLANT AND EQUIPMENT, NET 18,829 24,845 EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED 13,483 12,867 TRADEMARKS, PATENTS, TRADENAMES AND LICENSES 6,191 6,567 OTHER NONCURRENT ASSETS 516 981 --------- --------- $ 92,792 $ 127,860 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 31,716 $ 58,712 Convertible subordinated debentures 14,139 Accounts payable - trade 10,915 24,783 Other accrued liabilities 15,277 15,464 --------- --------- Total current liabilities 57,908 113,098 --------- --------- LONG-TERM LIABILITIES: Long-term debt 5,255 7,870 Deferred income taxes 2,183 2,183 Other noncurrent liabilities 3,345 2,938 --------- --------- Total long-term liabilities 10,783 12,991 --------- --------- Total liabilities 68,691 126,089 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 4) STOCKHOLDERS' EQUITY: Common stock, $.10 par value, 60,000,000 shares authorized, shares issued and outstanding: 1997 - 7,653,564 and 1996 - 7,403,564 765 740 Preferred stock, $.01 par value, 5,000,000 shares authorized. Issued and outstanding: 1997 - 1,600,000 shares of Series A convertible preferred stock and 1,500 shares of Series C convertible preferred stock 16 Additional paid-in capital 80,097 50,438 Deficit (56,275) (48,860) Stockholder loans (502) (547) --------- --------- Total stockholders' equity 24,101 1,771 --------- --------- $ 92,792 $ 127,860 ========= =========
See notes to consolidated condensed financial statements. EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ----------------------- 1997 1996 1997 1996 ----------- ----------- --------- ----------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NET SALES $ 29,390 $ 50,453 $ 82,692 $ 106,061 SALES DISTRIBUTION SETTLEMENT 2,400 CAPITALIZED NEGATIVE VARIANCES 1,600 COST OF SALES 23,742 41,018 67,893 84,742 NONRECURRING INVENTORY CHARGES 10,325 10,325 --------- --------- --------- --------- GROSS PROFIT 5,648 (890) 17,199 12,594 RESERVE REVERSALS (800) SELLING AND ADMINISTRATIVE EXPENSE 5,885 10,142 19,110 26,508 RESTRUCTURING AND OTHER CHARGES 7,497 7,497 --------- --------- --------- --------- OPERATING INCOME(LOSS) (237) (18,529) (1,911) (20,611) INTEREST EXPENSE (1,417) (2,065) (5,504) (6,483) --------- --------- --------- --------- LOSS BEFORE INCOME TAXES (1,654) (20,594) (7,415) (27,094) INCOME TAX (EXPENSE)BENEFIT (1,749) 7,710 10,354 --------- --------- --------- --------- NET LOSS $ (3,403) $ (12,884) $ (7,415) $ (16,740) ========= ========= ========= ========= LOSS PER COMMON SHARE - Primary and fully diluted $ (0.44) $ (1.82) $ (0.99) $ (2.85) ========= ========= ========= ========= Weighted average number of common shares outstanding - primary and fully diluted 7,654 7,053 7,500 5,859 ========= ========= ========= =========
See notes to consolidated condensed financial statements. EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1997 1996 ----------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,415) $(16,740) Adjustments to reconcile net loss to net cash provided by(used in) operating activities: Depreciation and amortization 7,218 7,009 Other 2,015 12,710 Changes in assets and liabilities 17,487 (22,041) -------- -------- Net cash provided by(used in) operating activities 19,305 (19,062) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (694) (7,213) Proceeds from sale of marketable securities 15 Proceeds from sale of fixed assets 513 90 Other 45 -------- -------- Net cash provided by(used in) investing activities (136) (7,108) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings(repayments) under lines of credit (26,996) 5,798 Proceeds from issuance of long term debt 12,100 Repayments of notes payable (2,615) (11,654) Proceeds from issuance of stock 14,059 17,825 -------- -------- Net cash provided by(used in) financing activities (15,552) 24,069 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,617 (2,101) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 478 2,568 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,095 $ 467 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 3,439 $ 6,324 Income tax refunds 15,784 1,712
NONCASH INVESTING AND FINANCING ACTIVITIES During June 1997, the convertible subordinated debentures and related discount, accrued interest and expenses were converted into 1,500 shares of Series C Preferred Stock, thus increasing preferred stock by $15 and additional paid-in capital by $14,952,584. Also during June 1997, the Company settled its earnout liability with the successor to Buddy L, resulting in an increase in common stock of $25,000, additional paid-in capital of $631,000, goodwill of $1,240,000, and earnout liability of $993,000 and a decrease in other liabilities of $409,000. 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 then existing Series A preferred stock to common stock on a share-for-share basis. See notes to consolidated condensed financial statements. EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited) 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 necessary to present fairly the results for the interim periods presented. The consolidated condensed financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The factors discussed below, as well as the requirement for the Company to raise significant additional funding prior to June 30, 1997, indicated that, if the Company was unable to raise significant additional funding, it may have been unable to continue as a going concern. The independent auditors' report on the December 31, 1996 financial statements stated that "These matters raise substantial doubt about the Company's ability to continue as a going concern . . . . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." The consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities, that might be necessary should the Company be unable to continue as a going concern. Management responded to the circumstances which gave rise to the loss for fiscal 1996 by, among other things, restructuring its operations by consolidating its business units, reducing staffing levels and rationalizing its product lines. In addition, a new plant organization, including a new plant manager was put in place. Although these efforts resulted in reduced cash outflows, the Company, prior to the preferred stock investment described below, had insufficient cash resources to fund its ongoing operations. In addition, these events necessitated the Company's negotiations with certain trade creditors and of certain amendments to its senior loan agreement, which included, among other things, a commitment on the part of the Company to obtain at least $6 million of additional equity financing by May 31, 1997. The Company entered into a definitive Securities Purchase Agreement dated as of May 5, 1997 (as amended, the "Securities Purchase Agreement") with HPA Associates, LLC ("HPA") and EMP Associates LLC ("EMP") providing for the investment by private investors of up to $16 million for newly issued shares of Series A Preferred Stock. In connection with their entry into the Securities Purchase Agreement, HPA and EMP funded a $5 million bridge loan bearing interest at 12% per annum to provide the Company with additional liquidity during the period prior to the closing of the initial investment. The principals of HPA, Charles Holmes and James J. Pinto, have substantial experience with investments in publicly traded companies. Mr. Holmes along with other HPA employees are providing the Company with managerial and operational support to help continue the turnaround of the Company's manufacturing facility in Tarboro, North Carolina. On June 17, 1997, pursuant to the Securities Purchase Agreement, the Company issued to HPA, EMP and other accredited investors, 1,100,000 shares of the Company's Series A Preferred Stock, $.01 par value per share, $10 face value per share (the "Series A Preferred Stock") and 5,000,000 warrants to purchase shares of the Company's common stock, $.10 par value per share. The Series A Preferred Stock bears no dividend, is convertible into common stock at an initial conversion price of $1.25 per share (subject to anti-dilution adjustment in certain circumstances), has the right to designate two members of the Board of Directors and is entitled to vote on all other matters presented to stockholders on an as if converted basis. Each warrant has a six-year term and entitles the holder thereof to purchase one share of common stock at an initial exercise price of $1.375 per share (subject to anti-dilution adjustment in certain circumstances) and is callable by the Company in certain circumstances. On June 18, 1997, the Company issued to HPA and other accredited investors an additional 500,000 shares of the Series A Preferred Stock and an additional 2,500,000 warrants. The gross proceeds from the June 17 and June 18, 1997 transactions $16 million, which included the conversion of the bridge loan. On October 10, 1997, the Company completed the sale of the additional $5 million in securities, by issuing 500,000 shares of Series A Preferred Stock and warrants to purchase shares of the Company's common stock upon the same terms and conditions as the sale of the 1.6 million shares of Series A Preferred Stock and warrants completed in June. The Company received gross consideration of $5 million for the sale of these securities, bringing the total investment made through the sale of Series A Preferred Stock and warrants to $21 million. All closing conditions set forth in the Securities Purchase Agreement were met or waived prior to the Principal Investment, including the following: (bullet)The Company's 9% convertible debentures issued to affiliates of Weiss, Peck & Greer in the original principal amount of $15 million were exchanged by the holders thereof for newly-issued Series C Preferred Stock of the Company with an aggregate stated value of $15 million. Such holders also released, among other things, their claims to accrued and unpaid interest, fees and expenses. Each share of Series C Preferred Stock is convertible at any time, at the option of the holder thereof, into fully paid and nonassessable shares of common stock at a rate of one share of common stock for each $2.00 of Stated value of Series C Preferred Stock (subject to adjustment in certain circumstances). Thus, the initially outstanding shares of Series C Preferred Stock are currently convertible into an aggregated of 7.5 million shares of common stock. The Series C Preferred Stock is generally non-voting. (bullet)The successor to the seller under the Company's agreement to purchase the assets of Buddy L waived or released their claim to certain earnout, price protection and registration rights in exchange for: (i) $100,000 in cash; (ii) 250,000 shares of Common Stock of the Company; (iii) a $2.5 million 9% note from the Company's major subsidiary, and guaranteed by the Company, providing for $625,000 principal payments on the first four anniversaries of the June 18th closing date of the initial investment, which note includes certain affirmative and negative covenants which could in certain circumstances permit the acceleration of payments with respect to such note); and (iv) certain other benefits, including registration rights. As a result of the completion of the series of investments, the investors in the Series A Preferred Stock own securities convertible into or exercisable for a substantial majority of the Company's outstanding stock. The Company has adopted an amendment to its Stockholder Rights Agreement in order to facilitate this investment. At October 10, 1997, (upon completion of the additional stock transaction), there were 2,100,000 shares of Series A Preferred Stock, 10,229,900 warrants, of which 10,000,000 relate to the new investment, 1,500 shares of Series C Preferred Stock, 7,653,564 shares of common stock outstanding and options to acquire 1,770,750 shares of common stock. Although management believes the net proceeds from the Preferred Stock Investments (described below) should be sufficient to fund the Company's operations through 1997 based on the Company's 1997 operating plan, the Company may require additional capital to fully finance continued operations after 1997. The Company's continued operations will depend upon revenues and operating cash flows, if any, continued support of the trade and secured senior lenders and the availability of additional equity or debt financing. The Company has no commitments for additional financing and there can be no assurance that the Company's operations will be profitable, that the Company will be able to generate levels of revenues and cash flows sufficient to fund operations, or, if necessary, that the Company will be able to obtain additional financing on satisfactory terms, if at all. In August 1997, the Company's senior lenders amended the terms of its senior loan agreement. The amendment eliminates certain covenants and relaxes others, bringing the Company into compliance with the terms of the loan agreement, as amended. Earnings per share - For the calculation of earnings per share for the three months and nine months ended September 30, 1997 and 1996, all of the various common stock equivalents, convertible securities and contingently issuable shares are excluded from primary and fully diluted earnings per share because they are anti-dilutive. In February 1997, SFAS No. 128, "Earnings Per Share", was issued. This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, Earnings Per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. Earnings per share, as calculated in accordance with the provision of SFAS No. 128, are not materially different from that presented for the quarters ended September 30, 1997 and 1996. 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. INVENTORIES A summary of inventories, by major classification, at September 30, 1997 and December 31, 1996 is as follows (in thousands): September 30, December 31, 1997 1996 ------------ ------------ Raw materials and purchased parts $ 2,721 $ 8,658 Work-in-process 3,880 4,593 Finished goods 14,638 11,864 ============ ============ $ 21,239 $ 25,115 ============ ============ Inventories are net of writedowns for lower of cost or market reserves of $9,780,000 and $10,954,000 at September 30, 1997 and December 31, 1996, respectively. 3. INCOME TAXES Due to the Company's expectation of a loss for 1997, tax benefits provided at the federal statutory rate during the first six months of 1997, in anticipation of future taxable income, were reversed in the third quarter. 4. COMMITMENTS AND CONTINGENCIES Letters of credit - The Company had outstanding commitments under letters of credit totaling approximately $740,000 at September 30, 1997 compared to $1,532,000 at December 31, 1996. 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. Although there can be no assurance that claims and other contingencies related to the sale will not exceed established reserves, the Company believes that additional exposure related to the indemnification obligations will not be material to the consolidated financial statements. Litigation - Delaney vs. Marchon is a suit claiming infringement of various intellectual property rights which has been filed against Marchon, Inc., a wholly-owned subsidiary of the Company. The Company asserted meritorious defenses and is contesting the plaintiff's claims. During February 1997, Mr. Marvin Smollar, former President, Chief Operating Officer and director of the Company, commenced an action against the Company claiming (a) breach of his employment agreement, (b) breach of a phantom stock plan maintained by Marchon, Inc. prior to its acquisition by the Company and (c) breach of an oral agreement to pay relocation expenses. The complaint seeks unspecified damages in excess of $1 million. During August 1997, 1431 Kingsland Avenue, L.P., a Limited Partnership controlled by Marvin Smollar, the Company's former President and Chief Operating Officer, commenced a lawsuit against the Company alleging breach of a lease for a former Marchon facility located at 1431 Kingsland Avenue, Pagedale, MI. Although the Company believes it has meritorious defenses to the allegations in the complaint, an adverse judgment could have a material adverse effect upon the Company's financial condition. 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. Except as set forth herein, the Company does not believe the outcome of any of its litigation either individually or in the aggregate would have a material adverse effect on the Company's consolidated financial statements. Mr. Smollar was terminated as President and Chief Operating Officer of the Company in January 1997. He is the defendant in a suit filed by the Company in January 1997 which seeks to enforce a certain guarantee by him of debt owed to the Company by 555 Corporate Woods Parkway, Inc. Mr. Smollar has denied the allegations in the Company's complaint. 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. The Company is vigorously contesting these matters. It is the Company's policy to accrue remediation costs when it is possible that such costs will be incurred and when they can be reasonably estimated. As of September 30, 1997, the Company had reserves for environmental liabilities of approximately $320,000, reduced from $500,000 at December 31, 1996 as a result of settlements of certain liabilities during the third quarter of 1997. The amount accrued for environmental liabilities was determined without consideration of possible recoveries from third parties. Estimates of costs for future remediation are necessarily imprecise due to, among other things, 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Sales of many toy products are seasonal in nature. Purchase orders for the Christmas selling season are typically secured in the months of April, May, June, and July so that by the end of July, the Company has historically received orders or order indications for a substantial majority of its full year's toy business. The Company also offers products sold primarily in the spring and summer months including Water Works(R) pools, Crocodile Mile(R) water slides and other items, which are shipped principally in the first and second quarters of the year and counter some of this seasonality. In addition, Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles ship year-round. The Company's production generally is heaviest in the period from June through September. Typically over 60% of toy product revenues are generated in the second half of the year with September and October being the largest shipping months. As a result, a disproportionate amount of receivables are collected and trade credits are negotiated in the first calendar quarter of the following year. Sales of holiday products, which are also seasonal in nature, are heavily concentrated in the Christmas and Halloween shopping seasons. Therefore, substantially all shipments and operating income of the holiday products segment occur in the third and fourth quarters of the year. Sales of Easter products are made in the first quarter. Holiday products can be manufactured throughout the year in anticipation of seasonal demand, because of the more stable nature of the product line, and dependent upon financial resources. Management expects that the Company's quarterly operating results will vary significantly throughout the year. Results of Operations Three and Nine Months Ended September 30, 1997 Compared to Three and Nine Months Ended September 30, 1996 Net Sales and Net Loss. Net sales for the three and nine months ended September 30, 1997 decreased by $21.1 million, or 41.7%, to $29.3 million and decreased by $23.4 million, or 22%, to $82.7 million compared to the three and nine months ended September 30, 1996, respectively. The net loss for the three months ended September 30, 1997 was $3.4 million compared to $12.8 million for the three months ended September 30, 1996 and was $7.4 million compared to $20.6 million for the nine month periods ended September 30, 1997 and 1996, respectively. During the three and nine months ended September 30, 1996, the Company recognized nonrecurring inventory charges and restructuring and other charges totaling $17.3 million. During the nine months ended September 30, 1997, the Company recognized a $2.4 million gain from the settlement and termination of an international sales distribution agreement. The following table shows the Company's net sales and operating loss from continuing operations (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ----------------------------- 1997 1996 1997 1996 ------------- -------------- ------------- ------------- Net Sales: Toys $ 17,705 $ 33,999 $ 69,049 $ 84,905 Holiday Products 11,685 16,454 13,643 21,156 ------------- -------------- ------------- ------------- Total Net Sales $ 29,390 $ 50,453 $ 82,692 $ 106,061 ============= ============== ============= ============= Operating Income(Loss): Toys $ (1,198) $ (2,238) $ (2,906) (4,231) Holiday Products 961 1,031 995 942 Nonrecurring inventory charges 0 (9,825) 0 (9,825) Restructuring and other charges 0 (7,497) 0 (7,497) ------------- -------------- ------------- ------------- Total Operating Income(Loss) $ (237) $ (18,529) $ (1,911) $ (20,611) ============= ============== ============= =============
The decrease in toy sales for the three and nine months ended September 30, 1997 primarily reflects decreases in sales of Power DriversTM, Buddy L(R) vehicles and Big Wheelies(TM) when compared to the three and nine months ended September 30, 1996, partially offset by sales of new products such as Real Bugs(TM) and Record `N Play(TM) toys. The decrease in net sales compared to 1996 was also partially due to the termination of an international sales distribution agreement. The reduction in sales during the three months ended September 30, 1997 compared to the like period of 1996 is largely a result of customers' concerns about the continued viability of the Company during the period from October 1996 through May 1997, when orders are traditionally booked for shipments during the third and fourth quarters of 1997. Decreases in sales in the Halloween product category during the three months ended September 30, 1997 reflected most of the change in holiday product sales when compared to the similar period of 1996, and, when coupled with the decrease in sales in the Easter product category, reflected most of the change in holiday product sales for the nine months ended September 30, 1997 when compared to the like period of the prior year. Gross Profit Margins. Gross profit margins improved during the three and nine months ended September 30, 1997 as compared to the three and nine months ended September 30, 1996 due to nonrecurring inventory charges recorded in the third quarter of 1996. Selling and Administrative ("S&A"). S&A expenses were lower for the three and nine months ended September 30, 1997 as compared to the three and nine months ended September 30, 1996, primarily as a result of cost cutting measures begun in the last quarter of 1996, partially offset by higher advertising expenditures during the first nine months of 1997 ($2,241,000 increase). Cost cutting measures include the reduction of strategic business units, which are accountable for the sales and marketing of specific product categories ($1,212,000 decrease for the first nine months of 1997 compared to the first nine months of 1996), reductions in new product development costs ($1,134,000 decrease), reductions in selling, customer service and distribution expenses ($3,865,000 decrease) and the restructuring and other charges recorded in the third quarter of 1996 ($7,497,000). S&A expenses for the nine months ended September 30, 1996 reflected the reversal of approximately $600,000 of certain indemnification reserves due to the expiration of certain time limitations and the reversal of $200,000 of environmental reserves. S&A expenses were approximately 23.1% of sales for the nine months ended September 30, 1997 as compared to 25% of sales for the nine months ended September 30, 1996, excluding the impact of the reversal of the reserves and the restructuring and other charges. Interest Expense. Interest expense was $1.4 million and $5.5 million for the three and nine months ended September 30, 1997 as compared to $2.1 million and $6.5 million for the three and nine months ended September 30, 1996, reflecting the benefit of new equity investments in 1997 versus borrowing under the senior loan agreement, and the conversion of certain debt to equity. Income Taxes. Due to the Company's expectation of a loss for 1997, tax benefits provided at the federal statutory rate during the first six months of 1997, in anticipation of future taxable income, were reversed in the third quarter. Liquidity And Capital Resources The consolidated condensed financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The factors discussed above, as well as the requirement for the Company to raise significant additional funding prior to June 30, 1997, indicate that, if the Company was unable to raise significant additional funding, it may have been unable to continue as a going concern. The independent auditors' report on the December 31, 1996 financial statements stated that "These matters raise substantial doubt about the Company's ability to continue as a going concern . . . . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." The consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities, that might be necessary should the Company be unable to continue as a going concern. Management responded to the circumstances which gave rise to the loss for fiscal 1996 by, among other things, restructuring its operations by consolidating its business units, reducing staffing levels and rationalizing its product lines. In addition, a new plant organization, including a new plant manager was put in place. Although these efforts resulted in reduced cash outflows, the Company, prior to the preferred stock transaction described below, had insufficient cash resources to fund its ongoing operations. In addition, these events necessitated the Company's negotiations with certain trade creditors and of certain amendments to its senior loan agreement, which included, among other things, a commitment on the part of the Company to obtain at least $6 million of additional equity financing by May 31, 1997. The Company retained investment bankers to assist the Company in identifying and evaluating various alternatives, including the sale of certain product lines or fixed assets, and the potential recapitalization of the Company. The Board of Directors, after presentations by the Company's legal and financial advisors and consideration of the Company's liquidity and operational requirements, concluded that it was in the best interests of the Company to pursue financing pursuant to a proposal made by HPA Associates, LLC ("HPA") and EMP Associates LLC ("EMP"), described under "Summary of Business Operations and Significant Accounting Policies" of notes to consolidated condensed financial statements. The Company intends to use substantially all of the $18,840,000 net proceeds (the last $4,700,000 of which was received on October 10, 1997) of the $21 million preferred stock investment for working capital purposes, including the repayment of existing trade indebtedness and short-term bank debt. In August 1997, the Company's senior lenders amended the terms of its senior loan agreement. The amendment eliminates certain covenants and relaxes others, bringing the Company into compliance with the terms of the loan agreement, as amended. Although management believes the net proceeds from the Preferred Stock Investments should be sufficient to fund the Company's operations through 1997 based on the Company's 1997 operating plan, the Company may require additional capital to fully finance continued operations after 1997. The Company's continued operations will depend upon revenues and operating cash flows, if any, continued support of the trade and secured senior lenders and the availability of additional equity or debt financing. The Company has no commitments for additional financing and there can be no assurance that the Company's operations will be profitable, that the Company will be able to generate levels of revenues and cash flows sufficient to fund operations, or, if necessary, that the Company will be able to obtain additional financing on satisfactory terms, if at all. 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. The Company's inventories, accounts receivable, accounts payable, notes payable and current portion of long-term debt vary significantly by quarter due to the seasonal nature of the Company's business. During the first quarter of 1997, the Company received its 1996 federal income tax refund of $15.6 million which was applied to general working capital needs. Capital expenditures, principally for the purchase of tooling for new products and equipment, were $694,000 for the nine months ended September 30, 1997 compared to $7,213,000 for the nine months ended September 30, 1996. The Company's capital forecast for 1997 provides for expenditures of approximately $1.5 million to acquire new equipment and tooling. The Company is subject to various actions and proceedings, including those relating to intellectual property matters, environmental matters and product liability matters. See notes to consolidated condensed financial statements. Backlog The Company had open orders for toys of $6.7 million and $22.1 million as of September 30, 1997 and September 30, 1996, respectively. Open orders at September 30, 1997 mainly reflected orders for boys and girls toys and ride-ons. Open orders at September 30, 1996 included approximately $7 million of orders for battery powered ride-ons which were de-emphasized for 1997. The Company believes that because order patterns in the retail industry vary from time to time, open orders on any date in a given year are not a meaningful indication of the future sales. The Company had open orders of $3.2 million and $8 million as of September 30, 1997 and 1996, respectively, for holiday products. The decrease in orders at September 30, 1997 reflects increased competition in the Company's Christmas products category. PART II - OTHER INFORMATION Item 1. Legal Proceedings Collection matters - Due to the cash flow constraints experienced during the latter part of 1996 and the early part of 1997, several actions have been brought against the Company seeking payment of past due accounts. In each instance, the Company has either structured a payment plan with the plaintiff or denied the allegations in the complaint. The Company believes that none of these actions, either individually or in the aggregate, will have a material adverse effect on the financial condition of the Company. On July 18, 1997, the Company filed a complaint against Amloid Corporation, Come Play Products Company and certain individuals. The complaint claimed that Amloid's "Super Trike" product infringed upon the Company's Big Wheel(R) line of products, and sought injunctive and other relief. This action was settled during the third quarter of 1997 and the terms of the settlement will not have a material impact on the Company's consolidated financial statements. On August 1, 1997, the Company filed a complaint against MAC Plastics, Inc., Grand Venture, Ltd., and certain individuals. The complaint claims that the defendants copied certain of the Company's manufacturing processes and seeks injunctive and other relief. The Company has recorded an agreement in principle to settle this action and does not believe that the settlement will have a material effect on the Company's consolidated financial statements. During August 1997, 1431 Kingsland Avenue, L.P., a Limited Partnership controlled by the Company's former President and Chief Operating Officer, commenced a lawsuit against the Company alleging breach of a lease for a former Marchon facility located at 1431 Kingsland Avenue, Pagedale, MI. Although the Company believes it has meritorious defenses to the allegations in the complaint, an adverse judgment could have a material adverse effect upon the Company's financial condition. Item 2. Changes in Securities Item 5 ("Other Events") of the Company's Report on Form 8-K filed June 30, 1997 is incorporated herein by reference. On October 10, 1997, the Company completed the sale of $5 million in securities. The Company issued 500,000 shares of Series A Preferred Stock and warrants to purchase shares of the Company's common stock upon the same terms and conditions as the sale of the 1.6 million shares of Series A Preferred Stock and warrants completed in June pursuant to the Securities Purchase Agreement dated as of May 5, 1997. The Company received gross consideration of $5 million for the sale of these securities, bringing the total investment made through the sale of Series A Preferred Stock and warrants to $21 million. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on September 25, 1997. The following matters were voted upon at the meeting: Approval by holders of Series A Preferred Stock ("Series A Holders") of a proposal to expand the number of directors actually constituting the Company's Board of Directors (the "Board") from five to six. For 1,090,500 Against 22,500 Abstain 0 Approval by Series A Holders to elect two members (Charles Homes and James J. Pinto) to the Board of Directors and the Series A Holders and the holders of Common Stock (the "Common Holders", and collectively with the Series A Holders, the "Voting Holders"), voting together, to elect four members to the Board, all such persons being elected to hold office for a one-year term and until their respective successors are duly elected and qualified. For Withheld Authority Charles Holmes 1,103,000 10,000 James J. Pinto 1,103,000 10,000 Steven E. Geller 13,547,368 1,244,109 Steven N. Hutchinson 13,542,655 1,248,822 Eugene M. Matalene, Jr. 13,543,396 1,248,081 Lenore H. Schupak 13,545,396 1,246,237 The remaining proposals were voted upon by all voting holders. Approval of a proposal to sell 500,000 shares of Series A Preferred Stock and 500,000 warrants to acquire Common Stock, including the issuance of 2,000,000 additional warrants to acquire Common Stock in order to facilitate the sale of such securities. For 7,312,632 Against 5,110,685 Abstain 48,307 Approval of a proposal to amend the Company's Restated Certificate of Incorporation (the "Certificate") to increase the number of authorized shares of Common Stock from 30 million to 60 million shares. For 16,524,302 Against 1,294,849 Abstain 676,220 Approval of a proposal to amend the Certificate to provide that its Board shall be comprised of a maximum of eight directors, as shall be determined by the Board from time to time. For 14,525,045 Against 1,118,679 Abstain 761,249 Approval of a proposal to amend the Certificate by deleting in its entirety Article ELEVENTH, which included certain super-majority Board of Directors approval requirements but which are no longer applicable. For 10,479,215 Against 1,237,974 Abstain 791,784 Ratification of Deloitte & Touche LLP as the Company's independent certified public accountants to audit the books of account of the company for the year ending December 31, 1997. For 13,516,863 Against 1,178,465 Abstain 96,149 Item 5. Other Information Item 5 ("Other Events") of the Company's Report on Form 8-K filed October 10, 1997 (relating to the Fifth Amendment to its senior loan agreement) is incorporated herein by reference. In October 1997, the Company received the resignation of Eugene Matalene, a Director of the Company. Such registration was not due to any disagreement with the Company on any matters relating to the Company's operations, policies or practices. The Company and its Board of Directors is currently seeking a replacement for Mr. Matalene, to act as an independent Board member. 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 First Amendment to Restated Certificate of Incorporation of the Company.(2) 3.3 Amended and Restated By-Laws of the Company.(3) 3.4 Certificate of Designation of the Series B Junior Participating Preferred Stock(4) 3.5 Certificate of Designation relating to Series A Preferred Stock.(5) 3.6 Certificate of Designation relating to Series C Preferred Stock.(5) 4.1 Form of specimen certificate representing the Company's Common Stock.(6) 4.2 Excerpts from the Company's amended By-Laws and the Company's Restated 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.(7) 4.4 Form of Warrant Certificate of purchase common stock of the Company, issued December 22, 1994.(8) 4.5 Rights Agreement, dated as of September 11, 1996, between Empire of Carolina, Inc. and American Stock Transfer & Trust Company as Rights Agent, which includes (i) as Exhibit A thereto the form of Certificate of Designation of the Series B Junior Participating Preferred Stock, (ii) as Exhibit B thereto the form of Right certificate (separate certificates for the Rights will not be issued until after the Distribution Date) and (iii) as Exhibit C thereto the Summary of Stockholder Rights Agreement.(4) 4.6 First Amendment as of May 5, 1997, to Rights Agreement dated as of September 11, 1996, between Empire of Carolina, Inc. and American Stock Transfer & Trust Company as Rights Agent. (9) 4.7 Warrant Amendment dated May 6, 1997 to Warrant Certificate issued May 6, 1997 among Company, HPA Associates, LLC and EMP Associates LLC. (5) 4.8 Warrant Agreement dated as of June 17, 1997 between the Company and the holders from time to time of the warrants. (5) 4.9 Second Amendment dated as of June 12, 1997, to Rights Agreement, dated as of September 11, 1996, between Empire of Carolina, Inc. and American Stock Transfer & Trust Company as Rights Agent. (5) 4.10 Promissory Note from the Company to Smedley Industries, Inc. Liquidating Trust in the amount of $2,500,000.(5) 10.47 Fifth Amendment to Loan and Security Agreement dated August 25, 1997 among Empire Industries, Inc., LaSalle National Bank and lenders named therein. (10) 27 Financial Data Schedule - ----------- 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 the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. 3 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 and incorporated by reference. 4 Previously filed as an exhibit to the Company's Current Report on Form 8-K for September 12, 1996 and incorporated by reference. 5 Previously filed as an exhibit to the Company's Current Report on Form 8-K filed June 30, 1997 and incorporated by reference. 6 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. 7 Previously fled as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference. 8 Previously filed as an exhibit to the Company' s Current Report on Form 8-K for December 22, 1994 and incorporated by reference. 9 Previously filed as an exhibit to the Company's Current Report on Form 8-K filed May 8, 1997 and incorporated by reference. 10 Previously filed as an exhibit to the Company's Current Report on Form 8-K filed October 10, 1997 and incorporated by reference. (b) The following reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this report: None Subsequent to September 30, 1997, the following report on Form 8-K was filed by the Company: Form 8-K filed October 10, 1997 (relating to the Fifth Amendment to its senior loan agreement.) 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/ William H. Craig ____________________ William H. Craig Chief Financial Officer Dated: November 10, 1997 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-31-1997 JAN-01-1997 SEP-30-1997 4,095 0 25,162 4,097 21,239 53,773 56,485 37,656 92,792 57,908 0 0 16 765 23,320 92,792 82,692 85,092 67,893 67,893 19,110 480 2,012 (7,415) 0 (7,415) 0 0 0 (7,415) (0.99) (0.99)
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