-----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, EK5LbtGU63/LHITdXoFwIQALzKcA6CNaijP5MrB7etkl8CdZlLGmi5Aj/JpSHJy2 IzOtICxfnv2y/BSi4gCvdg== 0000950168-99-000980.txt : 19990331 0000950168-99-000980.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950168-99-000980 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 001-07909 FILM NUMBER: 99579053 BUSINESS ADDRESS: STREET 1: 5150 LINTON BLVD STREET 2: 5TH FL CITY: DELRAY BEACH STATE: FL ZIP: 33484 BUSINESS PHONE: 5614984000 MAIL ADDRESS: STREET 1: P O BOX 4000 CITY: TARBORO STATE: NC ZIP: 27886 10-K 1 EMPIRE OF CAROLINA--10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-7909 Empire of Carolina, Inc. (Exact name of registrant as specified in its charter) DELAWARE 13-2999480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5150 LINTON BOULEVARD, DELRAY BEACH, FLORIDA 33484 (Address of principal executive offices) (Zip Code) (561) 498-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: -------------------------------------------------------------------- Name of each exchange Title of each class: on which registered: Common Stock, par value $.10 per share (including the American Stock Exchange associated Preferred Stock Purchase Rights) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None. 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 15, 1999, was $11,184,000 (assuming solely for the purpose of this calculation that all directors and officers of the Registrant are "affiliates"). The number of shares outstanding of the Registrant's Common Stock, par value $.10 per share, as of March 15, 1999, was 16,328,000. Documents Incorporated by Reference: Certain portions of the Registrant's Proxy Statement relating to Registrant's annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS. GENERAL Empire of Carolina, Inc., a Delaware corporation, whose predecessor entity was organized in 1939, and its subsidiaries ("Empire" or the "Company") design, manufacture and market a broad variety of consumer products including toys, plastic decorative holiday products and, since May 1998, golf accessories. The Company's executive offices are located at 5150 Linton Boulevard, Delray Beach, Florida 33484, telephone (561) 498-4000. Empire has been a toy and holiday products manufacturer for approximately 45 years. Its products include Big Wheel(R) ride-ons; Grand Champions(R) collectible horses; Buddy L(R) vehicles; Crocodile Mile(R) water slides; Water Works(TM) pools; Snow Works(TM) winter sleds, toboggans and snow boards; and holiday products featuring plastic decorative holiday display items. Seeking to expand into other consumer product lines, on May 28, 1998, Empire acquired all of the issued and outstanding shares of capital stock of Apple Sports, Inc. and Apple Golf Shoes, Inc., (collectively, the "Apple Companies"), in a non-cash transaction for shares of Company stock. See Note 3 of notes to consolidated financial statements. The Apple Companies have manufactured and distributed Wilson(R) and Wilson Staff(R) golf shoes and other Wilson(R) accessories, including gloves, head covers and practice aids, since 1986. The Company's net sales were $80.5 million, $99.5 million and $148.9 million, respectively, for the years ended December 31, 1998, 1997 and 1996. Net sales in 1998 includes $12.9 million of Apple Companies' sales since their acquisition. In 1998, the operating loss and net loss were $2.9 million and $7.1 million, respectively. In 1997, the operating loss and net loss were $14.2 million and $21.1 million, respectively. In 1996, the Company incurred an operating loss of $47.3 million, which included nonrecurring and special charges of $21.0 million, yielding a net loss of $46.2 million. The Company had positive operating cash flows during 1998 of $7.4 million. Margins have improved from 1997 and manufacturing costs have been reduced, reflecting improved factory operations during 1998, with a higher percentage of on time deliveries and a lower overhead structure. The net loss for 1998 was $7.1 million as compared with a net loss of $21.1 million for 1997. Despite the improvements made during 1998, the Company continues to operate under tight cash constraints. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and notes to consolidated financial statements. INDUSTRY The Company designs, manufactures and markets a broad variety of consumer products including toys, holiday products and golf accessories. THE TOY INDUSTRY According to the Toy Manufacturers of America, Inc. ("TMA"), an industry trade group, total domestic shipments of toys, excluding video games and accessories, were approximately $15.2 billion in 1998, a slight decrease from the prior year. According to the TMA, the United States is the world's largest toy market, followed by Japan and Western Europe. The Company competes with several larger toy companies, such as Mattel, Inc. ("Mattel") and 1 Hasbro, Inc. ("Hasbro"), and many smaller companies in the design and development of new toys, the procurement of licenses, the improvement and expansion of previously introduced products and product lines and the marketing and distribution of toy products. Many factors influence the success of a given toy or product line including product design, play value, pricing, marketing, in-store exposure and product availability. While the success of some toy categories vary, other categories generally perform well from year to year. The perennial best sellers, which form the backbone of the toy business, are referred to as "core" or "staple" toys. Products with relatively short life cycles are referred to as "fad" or "promotional" items. The Company has focused its toy sales on such "core" or "staple" toys as Buddy L(R) vehicles, Grand Champions(R) collectible horses and Big Wheel(R) ride-ons. Along with providing opportunities for fun and learning, toys traditionally mirror scientific progress, changes in social attitudes and topical customs and values from the adult world. Many of the toys which garner the most attention reflect the latest technological advances, incorporate characters made popular in other mediums or are innovative extensions of core products. Toy production is a labor intensive process requiring molding and shaping or cutting and sewing, coloring, painting or detailing, assembling, inspecting, packaging and warehousing. Management believes that the substantial majority of the toys sold in the U.S. are manufactured, either in whole or in part, overseas where labor rates are comparatively low. The largest foreign producer markets are China and, to a lesser extent, other countries in the Far East. Most foreign production is performed by independent contractors which utilize tools, molds and designs provided by U.S. toy companies and which manufacture products under exclusive contracts. While foreign manufacturing operations generally have relatively inexpensive labor costs, such operations require greater lead times than domestic manufacturing and also result in greater shipping costs, particularly for larger toys. The design, production and sale of toy products in the U.S. are subject to various regulations. See "Business -- Regulation." Toy manufacturers sell their products either directly to retailers or to wholesalers who carry the product lines of many manufacturers. There are thousands of retail outlets in the United States which sell toys and games. These outlets include: small, independent toy stores; large toy specialty retailers; general merchandise discount chains; department, drug and variety stores; gift and novelty shops; price clubs and mail order catalogues. Despite the broad number of toy outlets, retail toy sales have become increasingly concentrated through a small number of large chains, such as Toys "R" Us, Inc. ("Toys "R" Us"), Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart Corporation ("Kmart") and Target Stores, Inc., a division of Dayton-Hudson Corp. ("Target"), which generally feature a large selection of toys, and seek to maintain lean inventories to reduce their own inventory risk. This concentration, which was estimated by the TMA to be approximately 50% of retail toy sales in 1997, has tended to favor larger manufacturers which are able to offer these retail chains broader product offerings, higher levels of advertising and marketing support, and consistent product support through electronic data interchange and just-in-time delivery programs. The Company believes that the leading toy retailers desire to have a greater number of toy suppliers which offer a variety of quality, branded product lines and which have the financial strength to support the retailers' product distribution requirements. Licensing is an increasingly important factor in the consumer products. The Company currently offers licensed products across the majority of its product lines. The Company intends to continue to pursue licensing opportunities that fit its business plan. While toys are sold year round, toy industry retail sales are heavily weighted toward the fourth quarter when many toys are purchased as holiday gifts. Each calendar year begins with a major international toy fair held in Hong Kong in the first week in January. This trade show is expanded and repeated in New York in the middle of February. During the January/February period, additional toy fairs are held in London, Paris, Milan, Nuremberg and Valencia. The toy fairs allow manufacturers to display their current lines and begin the process of generating purchase orders for the important holiday season. 2 THE GOLF INDUSTRY According to the National Golf Foundation (NGF), in 1997 there were over 26 million golfers in the United States, with over 16,000 golf courses to choose from. Per NGF statistics, this reflects a 33% increase in golfers and a 20% increase in courses since 1986, with the number of courses growing at a rate of almost 400 per year. It is estimated that golfers spend over $15 billion annually on equipment and playing fees. Of this, it is estimated that $2.8 billion is spent on equipment and accessories other than clubs. After golf balls, the majority of this spending is of the type of golf accessories offered by the Company. PRODUCTS RIDE-ONS The Company's ride-on products include pedal-driven, battery operated and foot-to-floor models. Big Wheel(R), an internationally recognized branded product, is a three-wheeled, pedal-driven ride-on targeted to appeal to children seven and under and has been marketed in the United States since 1970. Introduced new for 1999 is the Snap 'N Stay(TM) model, an easy to assemble Big Wheel(R) which assembles without tools. Big Wheels(R) are manufactured in a variety of sizes and designs. OUTDOOR Crocodile Mile(R) water slides are targeted to the five years old to teen age groups. Water Works(TM) spring and summer products include the Crocodile Mile(R) line of water slides, small plastic wading pools targeted to toddlers through adult groups and plastic sand boxes targeted to children. New to the Water Works(TM) line for 1999 is a group of licensed summer products featuring the Rugrats(TM) characters on sprinklers, pools, floats and inflatables. Snow Works(TM) winter products consist of plastic sleds, toboggans, snowboards and saucers that come in a variety of styles, sizes and colors. While considered toys, they are also distributed in the traditional sporting goods market and are targeted to the toddler to teen age groups. HOLIDAY PRODUCTS This family of highly decorated plastic products comes in a range of colors, styles and sizes for three major holidays: Easter, Halloween and Christmas. These products include Easter baskets and bunnies; Halloween pumpkin baskets, scarecrows and ghosts; and Christmas nativity scenes, Santa Clauses, snowmen and outdoor candles. Certain of these products are illuminated. Light Toppers(R) Halloween and Christmas decorations offer an innovative way to decorate walkways and trees. GIRLS AND BOYS TOYS GIRLS TOYS. Grand Champions(R) The Most Beautiful Horses in the World (TM), is a branded line of collectible horses and accessories which includes realistically sculpted and detailed horses. The Grand Champions(R) line has been offered for eleven years, and has grown through introductions of new breeds, poses, colors, features and packaging. The Feed 'N Nuzzle(TM) collection playsets feature realistic stallions, mares and foals that eat and nuzzle like live horses. Thoroughbred Champions(R) stallion and mare collections and Show Champions(TM) dog assortments were added to the Grand Champions(R) line in 1998. BOYS TOYS. Empire's boys toy lines consist of Buddy L(R) vehicles and preschool products. Buddy L(R) vehicles, which were first made in 1921, include a wide variety of cars, trucks, motorcycles, airplanes and helicopters in multiple sizes, many featuring electronic voice, lights, and sounds. Some models are motorized. New for 1999 are Super Tech Turbo Wheels(TM), a line of realistic licensed vehicles with computerized displays that prompt children to "care" for their vehicles. New for 1998 were YoYo Balls(R) and YoYo Ball(R) Pets, yoyos that always come back to 3 you, the latter being covered with plush animal figures. In the preschool category, the Company recently introduced an assortment of Big Bruiser(R) Adventure Playsets which combine themed vehicles pulling trailers, with drivers and animals. GOLF ACCESSORIES Golf accessories include virtually all golf related items other than clubs, bags and balls. Most of the golf accessories are marketed under the Wilson(R), Wilson Staff(R) or Ultra(R) names. Golf shoes, golf carts and golf umbrellas in many styles are also offered. Soft padded Aviator(TM) travel covers and hard plastic Aviator Plus(TM) wheeled travel covers are available for the golfer on the go. Other accessories include head covers, tees, golf shoe accessories, towels, and practice aids like the EZ-Putt(TM) putting green. CONTRACT MOLDING Contract molding and assembly for original equipment manufacturers ("OEM") is a line of business that the Company began to pursue in 1998 in an effort to utilize a higher percentage of the production capacity of its domestic manufacturing facility (see "Manufacturing"). OEM sales were immaterial in 1998, but formed the foundation for increased OEM revenues in 1999. MARKETING AND SALES The Company's products are sold throughout the world, with the United States representing approximately 93% of 1998 and 1997 sales. The balance is sold primarily in Canada, Western Europe and South America. In the United States, the Company's products are distributed directly to large retailers, including independent toy stores, toy specialty retailers, general merchandise chain stores, department stores, gift and novelty shops and other retail outlets and, to a lesser extent, wholesalers who carry the product lines of many manufacturers. Decorative holiday products are also sold through home improvement and lawn and garden chains. Golf accessories are also sold through sporting good stores, golf courses and pro shops. International sales of the Company's products are made primarily through distributors and, to a lesser extent, through direct sales to retailers. Although the Company sells to over 1,000 accounts, the Company's three largest customers accounted for an aggregate of approximately 52% of its sales in 1998. Percentages of the Company's consolidated sales to customers who accounted for more than 10% during the last three years are as follows: 1998 1997 1996 ------------ ------------ ------------ Wal-Mart 22% 21% 25% Toys "R" Us 17% 26% 19% Target 13% 13% * * less than 10% No other customer accounted for more than 10% of the Company's consolidated sales in those years. The loss of, or deterioration of the Company's relationship with, one or more of the Company's largest customers could have a material adverse effect on the Company's business, financial condition and results of operations. In general, the Company's major toy customers review its product lines and product concepts for the upcoming year at showings beginning in January and February. By the end of June, the Company has historically received orders or order indications for a substantial majority of its full year's toy business. As is customary, these orders generally may be canceled without penalty at any time prior to shipment. Historically, the greatest proportion of shipments of toy products to retailers occurs during the third and fourth quarters of each year. Shipments of golf accessories are generally heaviest in the second quarter and lightest in the fourth quarter of each year. 4 The Company markets its products through an in-house sales force of full-time salaried employees and independent sales organizations that cover most of the United States. Senior sales management supervises an independent sales network, with management controlling the largest accounts as house accounts. The Company maintains sales offices and showrooms in New York City, Long Island, New York and Hong Kong. Historically, the Company's principal mode of advertising has been cooperative advertising and catalogues. The Company selectively uses television advertising, which generally focuses on the promotion of selected products from certain product lines, such as the Sound 'N Action(R) Stallion and Super Crocodile Mile(R) water slides, which reinforce and strengthen sales of product across broad product lines . NEW PRODUCT DEVELOPMENT AND LICENSING Through its product design and development group, the Company regularly refreshes, redesigns and extends existing product lines and develops new product lines. Product design and development are principally conducted by a group of professional designers and engineers employed by the Company. The Company will also enter into licensing agreements to utilize the name, character or product of a licensor as an extension of its core product categories. Management recognizes the importance of licensing and continues to conservatively participate in this marketing strategy. The Company uses third party licenses to permit the Company to manufacture and market items based on names and properties which have developed licenses their own popular identity, often through exposure in various media such as television programs, movies and cartoons. The Company focuses on licensing agreements to extend its core product categories. The Company's current licenses include certain rights to Wilson(R), Harley-Davidson(R), Barbie(TM), Rugrats(TM), Chevrolet(R), Chrysler/Jeep(R) and Ford(R) properties. The Wilson(R) license is significant for the marketing and sale of golf accessories and golf shoes. The Wilson(R) and other related trade names are licensed from the Wilson Sporting Goods Co. and are used on 84% of the golf accessories sold under a long term renewable license, the loss of which would have an adverse impact on the golf accessories business. No other license involved more than 5% of the Company's sales in 1998 and 1997. During the year ended December 31, 1998 the Company spent approximately $1.4 million in connection with the design and development of products, exclusive of royalty payments, as compared to approximately $1.2 million during 1997. The timing and extent of future research and development expenditures will depend to a significant extent upon the availability of capital resources and the Company's business strategy. Recent efforts have focused the product design group on developing items to improve the Company's profit margins and factory utilization. Before tools, dies and molds for new products are produced, the Company generally prepares mock-ups of such products for exhibition to its customers. The decision to include a new product and to build or have built the necessary tools, dies and molds generally requires preliminary acceptance of the new product by major customers. With respect to new product introductions, the Company's strategy is to begin production on a limited basis until a product's initial success has been proven in the marketplace. The production schedule is then modified to meet demand. MANUFACTURING The Company has substantial domestic manufacturing and international sourcing capabilities. Approximately 46% and 64% of the Company's consolidated net sales in 1998 and 1997, respectively, were attributable to products manufactured in the United States. The Company has considerable experience in sourcing products through the Far East, which has enabled the Company to develop extensive contacts and expertise in dealing with foreign sources of production. The Company evaluates a number of factors when determining whether to manufacture domestically or source through the Far East, including the available lead time, shipping and labor costs. 5 DOMESTIC The Company believes that its 1.2 million square foot manufacturing facility in Tarboro, North Carolina is one of the largest plastic manufacturing facilities in the United States, and offers a broad array of manufacturing capabilities, including extrusion, vacuum, blow and injection plastic molding processes, as well as assembly, sealing and warehousing operations. The Company has concentrated production of its domestically manufactured products in the Tarboro facility. The Company bases its production schedules on customer orders, historical trends, the results of market research and current market information. The actual shipments of products ordered and the order cancellation rate are affected by consumer acceptance of product lines, the strengths of competing products, marketing strategies of retailers and overall economic conditions. Unexpected changes in these factors can result in a lack of product availability or excess inventory in a particular product line. Accordingly, the Company closely monitors market activity and adjusts production schedules accordingly. The Company manufactures its products chiefly from plastic resins. The Company purchases certain plastic and non-plastic component parts and accessories from various sources, including several located in Asia. Products are molded, assembled, painted, decorated and packaged at the Company's domestic facility and stored there for shipment. The Company is actively marketing the plant capacity not currently utilized for consumer products to OEM manufacturers for the production of parts or subassemblies. The Company believes that its broad array of plastic molding equipment and assembly capabilities can be efficiently utilized for OEM production, spreading the factory overhead and lowering the cost of the Company's toys and holiday products. FOREIGN The Company sources products from various manufacturers in the Far East, directly or through its facilities in Hong Kong. Approximately 40 manufacturers are utilized for this purpose, with over 85% of this production taking place in China. The Company owns most of the tooling used in manufacturing its toys. Items sourced by the Company in the Far East generally are sold under letters of credit to U.S. and international customers. However, approximately 17% and 28% of the Company's foreign production (based on cost) during the years ended December 31, 1998 and 1997, respectively, was sold in inter-company transactions to Empire in the United States for inclusion in products assembled in the U. S. or for direct sales to U.S. customers. Approximately 54% and 36% of the Company's net sales in the years ended December 31, 1998 and 1997, respectively, were attributable to products manufactured for the Company by unaffiliated parties in the Far East, substantially all of whom are located in the People's Republic of China ("China"). The Company has not entered into long-term contracts with any of these manufacturers. Accordingly, the Company expects to continue to be dependent upon these sources for timely production and quality workmanship. Given the seasonal nature of the Company's business, any delay or quality control problems of such manufacturers, delay in product deliveries, delay in locating or providing new tooling to acceptable substitutes, or delay in increasing the production of alternative manufacturers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, foreign operations are subject to a number of risks, including transportation delays and interruptions, political and economic disruptions, labor strikes, the imposition of tariffs and import and export controls, changes in governmental policies, and fluctuations in currency exchange rates, the occurrence of any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Many countries in the Asia Pacific region have recently experienced severe currency devaluations, credit shortages, high interest rates and other economic difficulties. Changes in Chinese labor market conditions in recent years have made it more difficult for Hong Kong based manufacturers, and in particular consumer products manufacturers, to obtain the work force necessary to meet aggressive seasonal production schedules. The 6 Company is working with its manufacturers to ensure timely delivery of the Company's product. However, there can be no assurance that such manufacturers will be able to meet the Company's production schedules. The Company's foreign sourcing and contract manufacturing management office is located in Hong Kong, until recently a British Crown Colony. On July 1, 1997, China assumed sovereignty over Hong Kong. Consequently, the Company may be materially adversely affected by factors affecting Hong Kong's political situation and its economy or its international political and economic relations. There can be no assurance that China will continue to grant or renew or recognize existing licenses, or will continue to abide by the previously established policies, rules and regulations currently in effect. There can be no assurance as to the continued stability of political, economic, or commercial conditions in Hong Kong or that the Company's financial condition and results of operations will not be materially and adversely affected as a consequence of these events. In the event of any disruption or other political or economic change in Hong Kong or China affecting the Company's business, the Company may be required to seek alternate manufacturing sources. The Company currently does not have in place plans or arrangements for securing alternate manufacturing sources in the event that its present relationships with manufacturers prove impracticable to maintain, and there can be no assurance that there would be sufficient alternative facilities to meet the increased demand for production that would likely result from a disruption of manufacturing operations in China. Furthermore, such a shift to alternate facilities would likely result in increased manufacturing costs and could subject the Company's products to increased duties, tariffs or other restrictions. China currently enjoys "most favored nation" ("MFN") status under United States tariff laws, which provides the most favorable category of United States import duties. There has been, and continues to be, opposition to the extension of MFN status for China. The loss of MFN status for China would result in a substantial increase in the import duty of consumer products (which vary depending on product category, and currently include duties of up to 70% for non-MFN countries) manufactured in China which would result in increased costs for the Company. Although the Company would attempt to mitigate this increased cost by shifting its production to other countries and/or increasing prices, there can be no assurance that the Company would be able to do so or be successful in doing so in a timely manner. The inability to obtain its products from foreign manufacturers because of trade restrictions, economic conditions in the Far East, work stoppages or otherwise, or a material rise in tariffs, could have a material adverse effect upon the Company's business, financial condition and results of operations. RAW MATERIALS The basic raw materials used by the Company are petrochemical resin derivatives such as high density polyethylene and high impact polystyrene. Petrochemical plastic resin derivatives are the single largest raw material component in cost of goods sold. Costs of petrochemical derivatives are affected by demand and supply as well as the value of the United States dollar in relation to foreign currencies, and have been subject to volatility in recent years. There can be no assurance as to the timing or extent to which the Company will be able to pass on any raw material price increases to its customers. Due to the time lag between the purchase of raw materials and the sale of finished goods, results of operations may be only partially affected in the period in which such prices change. The Company does not enter into any hedging or similar transactions with respect to its raw materials. In 1998, the Company obtained approximately 84% of its petrochemical derivatives from one major domestic chemical company (77% from three suppliers in 1997) and the balance from several other sources. The Company has entered into a contract which sets forth pricing for 1999. The Company believes that an adequate supply of petrochemical derivatives is available from existing and alternate suppliers. There can be no assurance, however, that there will not be disruptions in the availability of such supply. The other materials necessary to the various aspects of the Company's business are generally available in the marketplace from numerous suppliers. 7 COMPETITION The toy industry is highly competitive, with competition based primarily on product design, promotion, price, quality and play value. In recent years, the toy industry has experienced rapid consolidation driven, in part, by the ability of manufacturers to offer a range of products across a broader variety of categories. The Company competes with several larger toy companies, such as Mattel and Hasbro and many smaller companies in the design and development of new toys, the procurement of licenses, the improvement and expansion of previously introduced products and product lines and the marketing and distribution of its products. The introduction of new products and product lines by the Company makes its operations susceptible to the risks associated with new products, such as production, distribution and quality control problems and the need to gain customer acceptance. The sale of holiday products is also competitive. The primary competitive factors in the sale of holiday products are price, design and product quality. The decorative holiday products industry is generally highly fragmented with no dominant market leader. However, the Company believes that it has a leading market position in several of the product categories in which it participates. The sale of golf accessories and shoes is also very competitive. The primary competitors to Empire's golf shoe business are Dexter, Etonic, Foot Joy and Nike. Competition in the golf accessories business comes from a variety of manufacturers including Gold Eagle, Dennco and Ajay Sports, which manufactures Spaulding(R) licensed products. REGULATION The Company's toys are subject to the provisions of the Consumer Product Safety Act, the Federal Hazardous Substances Act (including the Federal Child Protection and Toy Safety Act of 1969) and the Flammable Fabrics Act, and the regulations promulgated thereunder. The Consumer Product Safety Act and the Federal Hazardous Substances Act enable the Consumer Product Safety Commission ("CPSC") to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, and articles that contain excessive amounts of a banned hazardous substance. The Flammable Fabrics Act enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. The Company may be required to give public notice of any hazardous or defective products and to repair, replace or repurchase any such products previously sold. The Company is also required to report to the CPSC any information which reasonably supports the conclusion that any of its products may be defective or entail a substantial risk of injury to the public. In addition, the Company is subject to various state, local and foreign laws designed to protect children from hazardous or potentially hazardous products. If any of the Company's products materially contributing to its dollar volume of sales were found to be hazardous to the public health and safety or to contain a defect which created a risk of injury to the public, the cost to repair, replace or repurchase such products could have a material adverse effect on the Company's business, financial condition and results of operations. The CPSC has requested that the Company provide it with information regarding specified products. The Company does not believe that these products are defective, or that any repair, replacement or repurchase will be required. If, however, products contributing materially to the Company's dollar volume of sales were to require repair, replacement or repurchase, the Company's business, financial condition and results of operations could be materially adversely affected. The Company maintains a quality control program to comply with the various federal, state, local and international product safety requirements, as well as to maintain appropriate quality and reliability standards of its products. The Company uses paint and other raw materials classified as hazardous substances and generates waste in the manufacture of its products. The Company is subject to federal and state regulations in the emission, storage and disposal of such materials. 8 TRADEMARKS AND PATENTS The Company believes that selective use of patent, copyright and trademark protection is significant in protecting the Company's rights in its products and establishing product recognition. The Company has approximately 100 registered trademarks in the U.S., including Big Wheel(R), Crocodile Mile(R), Grand Champions(R), and Buddy L(R), and owns approximately 30 U.S. patents, including several relating to features of its Crocodile Mile(R) water slides. Other U.S. trademark and patent applications are pending. The Company has also sought and obtained trademark protection with respect to certain of its product lines in selected countries outside of the United States in which such products are sold. EMPLOYEES At March 15, 1999, the Company had approximately 375 employees in the United States, approximately 90 of whom were salaried, and approximately 25 employees in Hong Kong and China. If required by the Company's future operations, the Company believes it could supplement its work force through the recall of hourly production employees and the hiring of temporary employees. No employees are covered by a collective bargaining agreement. FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE This Annual Report contains various forward-looking statements and information, including under the captions "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," that are based on management's beliefs as well as assumptions made by and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources and management's plans and objectives. When used in this document, the words "expect," "anticipate," "estimate," "believe," and similar expressions are intended to identify forward-looking statements. 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 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, golf and decorative holiday products industries, changing consumer preferences and risks associated with consumer 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, reliance on key customers, the seasonality of the Company's business, the ability of the Company to meet existing financial obligations in the event of adverse industry or other developments, and the Company's ability to obtain additional capital to fund future commitments and operations. Certain of these as well as other risks and uncertainties are described in more detail in the Company's Registration Statement on Form S-3 filed under the Securities Act of 1933, Registration No. 333-57963. The Company undertakes no obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 9 ITEM 2. PROPERTIES.
LOCATION GENERAL CHARACTER AND USE OF PROPERTY OWNED: (1) SQUARE FEET USE --------------------- -------------- --------------------------------- Tarboro, NC 1,200,000 factory, warehouse and office space Tarboro, NC 24,000 warehouse space LEASED: Ronkonkoma, NY 60,000 warehouse, office and showroom space New York, NY 29,000 showroom space (2) Delray Beach, Fl 16,000 office space Hong Kong 2,600 showroom Hong Kong 1,200 showroom Hong Kong 1,358 warehouse space
- ------------ (1) The real property owned by the Company is subject to liens in favor of its senior lenders. (2) Approximately 22,000 square feet of the location is sub-leased. Management believes that the Company's office space in Delray Beach and Hong Kong is larger than necessary and is seeking alternatives. Otherwise, in the opinion of management, the Company's various properties used in operations are generally in good condition and adequate for its business. ITEM 3. LEGAL PROCEEDINGS. INTELLECTUAL PROPERTY LITIGATION. George Delaney and Rehkemper I.D., Inc. v. Marchon, Inc. ("Marchon", an acquired company), is an action pending in the Circuit Court of Cook County, Illinois, which was commenced on December 3, 1990, arising from a business arrangement between the plaintiffs and Marchon, alleging an interest in one of Marchon's products. On November 22, 1991, the trial court judge issued an opinion and dismissed plaintiff's complaint with prejudice. Plaintiffs appealed and, on September 23, 1993, the Appellate Court reversed the dismissal and remanded the case for further proceedings. The plaintiffs have filed an amended complaint against the Company and a trial is scheduled for August 1999. Although the Company is vigorously contesting the matters set forth in the complaint, it is unable at this time to determine the extent of its financial exposure. ENVIRONMENTAL MATTERS. The Company may be subject to potential environmental claims by the EPA and state environmental regulatory authorities. Neither the EPA nor any state environmental regulatory authorities have initiated or threatened litigation regarding any of these sites to date. 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, 1998, the Company had reserves for environmental liabilities of approximately $98,000. Estimates of costs of 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 business, financial position and results of operations, 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 clean-up for its current remediation sites will not, in the aggregate, have a material adverse impact on its consolidated financial statements. PRODUCT LIABILITY MATTERS. Due to the nature of its business, the Company at any particular time is a defendant in a number of product liability lawsuits involving personal injury allegedly related to the Company's products. Many 10 of these claims allege damages for injuries suffered from the use of the Company's products. Typical product liability claims might include allegations of failure to warn, design defects or defects in the manufacturing process. While the Company maintains product liability insurance, no assurance can be given that such insurance will cover all such product liability claims, that an insurer will seek to deny or limit coverage or that an insurer will be solvent at the time of any covered loss. Further, there can be no assurance that the Company will be able to obtain insurance coverage at acceptable levels, costs and coverages in the future. Successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could have a material adverse effect on the Company's business, financial condition and results of operations. It is also likely that, due to deductible and self-retention levels under the Company's insurance policies, the assertion in any given year of a large number of claims against the Company could have a similar effect on the Company. TAX MATTERS. On November 13, 1996, the Internal Revenue Service ("IRS") issued the Company a notice of an asserted income tax deficiency in the amount of $1.3 million. The alleged deficiency related to the taxable year ended December 31, 1993 and involved the disallowance of deductions for officers' compensation, country club dues and a state intangible tax paid by Empire on behalf of two former officers. The Company filed a petition in the U. S. Tax Court on February 7, 1997 asking for a redetermination of the asserted deficiency. On January 26, 1998, the Company and the IRS filed with the Tax Court a Stipulation of Settled Issues, reducing the proposed deficiency to $4,307. ROUTINE MATTERS. The Company is also involved from time to time in routine litigation incidental to its business. Although no assurance can be given as to the outcome or expense associated with any of these routine proceedings, the Company believes that none of such proceedings, either individually or in the aggregate, will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS Information concerning the executive officers of the Company, their ages, position and business experience during the last five years is set forth below:
Name Age Positions(s) ---- --- ------------ Charles S. Holmes............. 54 Chairman of the Board Timothy Moran................. 35 President and Chief Executive Officer William H. Craig.............. 43 Executive Vice President - Finance and Chief Financial Officer J. Artie Rogers............... 39 Senior Vice President- Finance and Assistant Secretary Lawrence A.Geller............. 35 Vice President, General Counsel and Secretary
CHARLES S. HOLMES has served as a director of the Company since May 1997 and as Chairman of the Board of Directors since June 1997. Since 1991, Mr. Holmes has served as principal and is the sole stockholder of Asset Management Associates of New York, Inc., a New York-based firm specializing in acquisitions of manufacturing businesses. Mr. Holmes is an officer of HPA Associates, LLC. TIMOTHY MORAN has served as President and Chief Executive Officer and as Director since May 1998. He was President and Chief Operating Officer from February 1998 to May 1998. Since February 1993, Mr. Moran was President of Apple Sports, Inc. and Apple Golf Shoes, Inc. 11 WILLIAM H. CRAIG has served as Executive Vice President - Finance and Chief Financial Officer since May 1997. Prior to joining the Company, Mr. Craig was President of Wm. Craig & Co., a financial services firm specializing in workouts and turnarounds with middle market companies. Formation of his own firm was preceded by nearly five years with GE Capital, lending and investing in industrial companies, with a particular emphasis in the plastics industry, including various cross-selling and co-investing activities with GE Plastics. Before GE Capital, Mr. Craig was with a merchant bank in Texas, providing expansion and acquisition capital on a mezzanine or equity basis in middle market companies, with particular emphasis on manufacturing, plastics, and consumer products. Mr. Craig's early career was as a consultant with the predecessor of Deloitte & Touche LLP, as well as GMAC. J. ARTIE ROGERS has 13 years experience in the toy industry. Mr. Rogers has served as Senior Vice President-Finance of the Company since December 1994. From 1987 to December 1994, Mr. Rogers served as Vice President - Finance of the Company. From 1987 to December 1995, Mr. Rogers served as Secretary of the Company, and has served as Assistant Secretary since December 1995. Mr. Rogers is a certified public accountant, and prior to joining the Company in 1986, he worked for Deloitte Haskins & Sells, predecessor to the Company's current independent public accountants. LAWRENCE A. GELLER has served as Vice President - General Counsel since January 1997 and as Secretary of the Company since December 1995. Mr. Geller joined the Company in April 1995 as corporate counsel. Prior to joining the Company, Mr. Geller was engaged in the practice of law with an emphasis on litigation as a partner with the firm of Imhoff & Geller in Norwalk, Connecticut from 1993 to 1995. During 1991 and 1992, Mr. Geller was an associate with the law offices of John W. Imhoff, Jr. and from 1989 to 1991 he was an associate with the law offices of Francis J. Discala. Mr. Geller is the son of Steven Geller, a former Director of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. COMMON STOCK - The common stock of the Company, par value $.10 per share ("Common Stock"), is listed on the American Stock Exchange under the symbol EMP. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices for the Common Stock on the American Stock Exchange.
1998 1997 ------------------------- ------------------------- QUARTER HIGH LOW HIGH LOW ------------ ------ ----- ------ --- 1st $2.25 $1.31 $4.56 $ 2.88 2nd 1.63 .88 5.00 .63 3rd 1.19 .63 3.00 1.75 4th .69 .44 2.50 1.38
In connection with the acquisition of the Apple Companies, the Company issued as consideration an aggregate of 5,000,000 shares of the Company's common stock. In the event that during the year following July 10, 1998, the closing daily market price of the Company's common stock trading on any nationally recognized stock exchange shall not be at a price of $2.00 per share or higher for each of 45 consecutive stock trading days, then Empire shall be obligated to pay additional consideration in the amount of 1,153,846 shares of Empire Common Stock, thereby bringing the number of shares of Empire common stock paid for the Acquisition to an aggregate of 6,153,846. As of March 15, 1999, the number of holders of record of Common Stock was approximately 4,900. SERIES A PREFERRED STOCK AND WARRANTS - The Series A preferred stock, $.01 par value per share, and warrants to purchase shares of the Company's common stock are listed on the American Stock Exchange under the symbols EMP.PRA and EMP.WS. Each warrant has a six-year term and entitles the holder thereof to purchase one share of common stock at an exercise price of $1.375 per share. 12 SERIES C PREFERRED STOCK - In June 1997, the Company's 9% convertible debentures in the original principal amount of $15 million were exchanged by the holders thereof for newly-issued shares of Series C preferred stock of the Company with an aggregate Stated Value (as defined in the Series C preferred stock Certificate of Designation) of $15 million. 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 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). DIVIDENDS - The Company has not paid any cash dividends since 1990 and does not anticipate paying cash dividends in the foreseeable future. The Company's current policy is to retain earnings to provide funds for the operation and expansion of its business and for the repayment of indebtedness. Any determination in the future to pay dividends will depend upon the Company's financial condition, capital requirements, results of operations and other factors deemed relevant by the Company's Board of Directors, including any contractual or statutory restrictions on the Company's ability to pay dividends. The Company's bank facility does not restrict the payment of dividends by the Company; however, that agreement limits the dividends which Empire Industries, Inc. ("EII"), the Company's principal operating subsidiary, 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). Such restrictions could limit the funds available for the payment of dividends by the Company. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data have been derived from the consolidated financial statements of the Company for the fiscal years 1998, 1997, 1996, 1995, and 1994. The selected financial data should be read in conjunction with the audited consolidated financial statements and notes thereto and with "Management's Discussion and analysis of Financial Condition and Results of Operations" included elsewhere herein. All amounts in the tables and notes below are in thousands, except per share data.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1998(1) 1997 1996 1995 (2) 1994(3) -------- -------- ----- -------- --------- STATEMENT OF OPERATIONS DATA: Net Sales ............................................ $ 80,497 $ 99,516 $ 148,908 $ 153,744 $ 57,964 Sales distribution settlement ........................ -- 2,400 -- -- -- Cost of Sales ........................................ 62,120 87,524 133,464 111,905 40,557 Nonrecurring inventory charge ........................ -- -- 12,185 -- -- Gross Profit ......................................... 18,377 14,392 3,259 41,839 17,407 Selling and administrative expenses .................. 21,297 24,863 41,751 36,183 16,442 Restructuring and other charges ...................... -- 3,739 8,800 7,550 -- Operating income (loss) .............................. (2,920) (14,210) (47,292) (1,894) 965 Interest expense ..................................... 4,088 7,022 11,236 5,996 1,407 Other income (loss) .................................. (66) 102 (5) 514 1,839 Net income (loss) before income taxes ................ (7,074) (21,130) (58,533) (7,376) 1,397 Income tax expense (benefit) ......................... -- -- (12,332) (2,875) 808 Net income (loss) .................................... (7,074) (21,130) (46,201) (4,501) 589 Accretion of noncash preferred stock dividend ........ -- (24,645) -- -- -- Net income (loss) applicable to common stock ..... $ (7,074) $ (45,775) $ (46,201) $ (4,501) $ 589 Weighted- average common shares outstanding -- basic and diluted .............................. 12,068 7,583 6,248 4,681 12,159 Income (loss) per common share -- basic and diluted .............................. $ (.59) $ (6.04) $ (7.39) $ (.96) $ .05 BALANCE SHEET DATA (AT PERIOD END): Working Capital ...................................... $ (6,350) $ (10,608) $ (30,498) $ 6,837 $ 8,915 Total assets ......................................... 57,646 63,576 127,860 140,153 67,956 Total debt ........................................... 23,997 23,413 80,721 71,106 22,249 Stockholders' equity ................................. 15,757 15,453 1,771 30,462 20,577
13 (1) The results of operations for 1998 include the results of operations of the Apple Companies since their acquisition on May 28, 1998. See Note 3 of notes to consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) The results of operations for 1995 include the results of operations of Buddy L since its acquisition on July 7, 1995. (3) The results of operations for 1994 included the results of operations of Marchon since its acquisition on October 13, 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the Company's consolidated results of operations and consolidated financial position should be read in conjunction with the Selected Consolidated Financial Data and the Company's consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report. GENERAL The Company designs, manufactures and markets a broad variety of consumer products including toys, plastic decorative holiday products, and golf shoes and accessories. The Company has been involved in the toy and holiday products industries for approximately 45 years., Since mid-1994, the Company has undergone changes in management and effected three significant acquisitions which added core toy product lines and golf shoes and accessories to the Company. Toy lines include ride-ons, outdoor activities and holiday products which are primarily manufactured domestically, and girls and boys toys, which are sourced through Empire's Hong Kong office. Golf shoes and accessories which are primarily sold under license from Wilson(R) include golf carts, umbrellas, shoes and shoe accessories, travel covers, tees, head covers, gloves, towels and practice aids. In October 1994, the Company acquired Marchon, Inc. ("Marchon"), a toy designer, marketer and manufacturer. Marchon's core toy products included Grand Champions(R) collectible horses and Crocodile Mile(R) water slides. Marchon had substantial experience at sourcing toy products in the Far East. In July 1995, the Company acquired substantially all of the toy product lines of Buddy L Inc. and its Hong Kong subsidiary (collectively, "Buddy L"), one of the oldest toy brands in the United States. Buddy L's core toy products included plastic toy cars, trucks and other vehicles bearing the Buddy L(R) name. In May 1998, the Company acquired the Apple Companies, manufacturers and distributors of Wilson(R) and Wilson Staff(R) golf shoes and other golf accessories. The Company's 1996 operating results were negatively impacted by serious difficulties encountered at its Tarboro, NC plant. Increased seasonal demand in the face of transfers of production from former Buddy L facilities; delays in the startup of new or transferred production equipment; increased cost of outsourced production; difficulties created by the influx of Buddy L product and the training of new employees all led to the loss of production efficiency, product damage, and missed shipping deadlines which contributed to the Company's 1996 nonrecurring charges and net loss. Since 1997, management has focused on putting the Tarboro facility on a sound manufacturing base in order to regain the confidence of Empire's customers and reduce losses on domestic product. A new plant organization, including a new plant manager, has implemented cost cutting and control measures which have significantly reduced factory operating costs from prior year levels. In May 1998, the Company acquired the Apple Companies, manufacturers and distributors of Wilson(R) and Wilson Staff(R) golf shoes and other Wilson(R) golf accessories since 1986. During 1998 the Company began to pursue contract molding for original equipment manufacturers, which is anticipated to expand in 1999. 14 During 1999, the Company will continue to rationalize its business, which includes focusing on the elimination of products or accounts that are not profitable. In addition, the Company is actively developing new products for 1999, as well as seeking to better utilize plant capacity by securing molding contracts from OEM manufacturers. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 The 1998 amounts in the ensuing discussions include the results of operations of the Apple Companies for the period May 28, 1998 (date of acquisition) to December 31, 1998. NET SALES AND NET LOSS. The net loss for the year ended December 31, 1998 declined dramatically to $7.1 million from a net loss of $21.1 million for the year ended December 31, 1997, in spite of lower 1998 sales levels. The current year loss reflects improvements in gross margin, lower interest expense and lower selling and administrative expense. The net loss for 1997 includes a $4.5 million loss related to the (i) impairment of long-lived assets associated with discontinued product lines of $3.5 million and (ii) a $1.0 million loss on the sale of the steel walled pool business. Net sales for the year ended December 31, 1998 decreased by $19.0 million or 19.1%, to $80.5 million from $99.5 million for the year ended December 31, 1997. Decreases in sales resulted in part from a focus on more profitable lines and products, reduced sales to a significant customer, and reduced sales of toy products nationally. Sales of marginally profitable lines including the steel-walled pool product line and products closed out in 1997 or discontinued thereafter, decreased from 1997 levels by approximately $9.3 million. Decreased sales of Real Bugs(TM) ($5.2 million), decreased sales of seasonal product ($6.5 million) and the overall decrease in sales to a significant customer ($8.1 million) adversely impacted the current year in comparison to the prior year. Offsetting the declines were sales of the newly reintroduced YoYo Balls(R) of approximately $4.5 million and net sales of the Apple Companies of $12.9 million. During 1997 the Company received a $2.4 million settlement upon termination of an international sales distribution agreement. GROSS PROFIT MARGINS. Gross profit margins, excluding the 1997 sales distribution settlement, were 22.8% for the year ended December 31, 1998 as compared to 14.8% for the year ended December 31, 1997. The improvement in gross margins is attributable to lower costs of domestic operations, improved margins on domestic items, the inclusion of Apple operations since their acquisition in May 1998, and the reduction in 1998 sales of marginally profitable or discontinued product lines. SELLING AND ADMINISTRATIVE ("S&A"). Selling and administrative expenses were reduced during the year ended December 31, 1998 as compared to the previous year primarily due to the decreases in advertising, sales commissions and royalties ($2.8 million), commensurate with the reduction in sales, and elimination of consulting fees which had been $.4 million during 1997; offset by $.4 million increases in other S&A expenses resulting from the inclusion of the golf accessories business. Due to the decrease in sales, however, total selling and administrative expenses were 26.4% of sales for 1998 as compared to 24.9% in the prior year. INTEREST EXPENSE Interest expense was $4.1 million for the year ended December 31, 1998 as compared to $7.0 million for the year ended December 31, 1997. Interest expense was lower in 1998 due to the conversion of debt to equity in the second quarter of 1997 and the use of proceeds from the 1997 sales of Series A convertible preferred stock to reduce debt, which, along with contracted operations reduced loan balances throughout 1998. INCOME TAXES. For 1998 and 1997, the Company did not recognize any tax benefits related to the loss. 15 YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 NET SALES AND NET LOSS. Net sales for the year ended December 31, 1997 decreased to $99.5 million from $148.9 million for the year ended December 31, 1996. The net loss for the year ended December 31, 1997 was $21.1 million as compared to a net loss of $46.2 million for the year ended December 31, 1996. The net loss for 1997 includes a $4.5 million loss related to the (i) impairment of long-lived assets associated with discontinued product lines of $3.5 million and (ii) a $1.0 million loss on the sale of the steel-walled pool business. The net loss for the year ended December 31, 1996 included a decrease in profit margins resulting from difficulties encountered in the integration of Buddy L; $12.2 million of nonrecurring inventory charges; $8.8 million of restructuring and other charges; a $5.2 million increase in interest expense; and higher than normal reserves established for inventory obsolescence and other items. Net sales for 1997 decreased by approximately $49.4 million from 1996, primarily due to lack of customer confidence in Empire's ability to fulfill orders because of production and delivery problems during 1996, as well as the Company's financial situation in the early part of the year. Customers dramatically reduced the number of items taken as well as quantities ordered per item. As a result, the sales for the domestically produced products declined dramatically. During 1997, the Company decided to eliminate the production of battery operated vehicles due to profitability issues. Battery operated vehicles sales declined by $16 million during 1997. In addition, 1997 sales of Big Wheelie(R) products decreased by $4.9 million. The Company's sales in the holiday products category dropped almost $12.5 million during 1997. Stiff competition and lack of customer confidence in Empire's ability to fulfill orders based on the poor performance in 1996 are considered the main reasons for this decrease. The consistency of sales in the girls and boys toys category, which are mostly manufactured in the Far East, showed the relative strength of the Grand Champions(R) and Buddy L(R) vehicle lines, supported by the Real Bugs(TM) and Record 'N Play(TM) toys introduced during 1997. During 1997 the Company received a $2.4 million settlement upon termination of an international sales distribution agreement. GROSS PROFIT MARGINS. Gross profit margins, excluding the 1997 sales distribution settlement and the 1996 nonrecurring charges, were slightly higher for the year ended December 31, 1997 as compared to the year ended December 31, 1996. The increase was primarily due to production improvements at the Company's Tarboro, North Carolina manufacturing facility and the increased percentage of sales of higher margin products manufactured overseas. The effect of these improvements were adversely impacted by the lower than planned sales volume. SELLING AND ADMINISTRATIVE ("S&A"). Selling and administrative expenses were reduced significantly during the year ended December 31, 1997 as compared to the previous year primarily due to the decreases in the following: executive, marketing and administrative staff (approximately $4.8 million); the outsourcing of warehouse management and shipping functions ($3.7 million); and new product development and customer support ($3.4 million). Total selling and administrative expenses were 25.0% of sales for 1997 as compared to 28.0% in 1996. INTEREST EXPENSE Interest expense was $7.0 million for the year ended December 31, 1997 as compared to $11.2 million for the year ended December 31, 1996. Interest expense was lower due to the infusion of cash into the Company in June and October 1997 from the preferred stock investments, the conversion of the 9% senior subordinated debentures to equity and lower loan balances due to lower accounts receivable and inventory levels. Interest expense during 1996 was increased by the write off of $2.0 million in deferred financing charges resulting from amending the Company's lending facilities in December 1996. 16 INCOME TAXES. For 1997, the Company did not recognize any tax benefits related to the loss. For 1996, income tax benefits of $12.3 million were recognized as a result of the ability of the Company to carry net operating losses back to prior years. SEASONALITY OF SALES Sales of many products are seasonal in nature. Purchase orders for toys are typically secured in the months of April, May and June so that by the end of June, the Company has historically received orders or order indications for a substantial majority of its full year's toy business. Products sold primarily in the spring and summer months include golf shoes and accessories, Water Works(TM) 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 the seasonality associated with the Company's toy products. In addition, certain toys such as Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles ship year-round. Sales of holiday products are heavily concentrated in the Christmas and Halloween shopping seasons with substantially all shipments occurring the third and fourth quarters of the year. 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 of the seasonality, a disproportionate amount of receivables are collected and trade credits are negotiated in the first calendar quarter of the following year. The Company expects that its quarterly operating results will vary significantly throughout the year. LIQUIDITY AND CAPITAL RESOURCES The Company has experienced operating difficulties during the past several years and sales have declined over this period. The net loss for 1998 was $7.1 million compared with a net loss of $21.1 million for 1997 and a net loss of $46.2 million for 1996. Improvements since 1996 when the Company expanded to absorb two acquisitions include exiting unprofitable product lines, downsizing of operations through the elimination of underutilized assets and excess overhead, streamlining of manufacturing operations and attaining a higher percentage of on time deliveries. Despite the improvements made during 1998 and 1997, the Company continues to operate under tight cash constraints. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The factors discussed above, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, and ultimately to attain profitable operations. The Company had positive operating cash flows during 1998 of $7.4 million, which primarily resulted from converting accounts receivable and inventory into cash. Pursuant to the eighth amendment to the Company's secured bank facility, which amendment was effective March 9, 1999, the Company, through its domestic operating subsidiaries, has a series of cross-guaranteed secured bank lines which currently aggregate up to $50 million ($40 million for Empire Industries and $10 million for the Apple Companies) available for financing. As part of the Empire Industries facility, there is a three-year term loan of $6.8 million which requires monthly principal payments of $133,000. Also, up to $9 million of Empire Industries' availability is not tied by formula to the underlying assets and requires monthly repayment of $1.5 million commencing September 30, 1999 through February 29, 2000. The balance of the availability of borrowings 17 for each subsidiary under the facilities is based on all domestic accounts receivable and inventory balances as defined, less outstanding commitments under letters of credit. A substantial portion of the Company's shipments in the United States are sold with seasonal dating terms. Payments on sales of the Company's spring product lines produced domestically are generally due June 10th and payments on sales of its fall product lines are generally due December 10th. Goods sourced in the Far East are sold either under bank letters of credit with most payments received within 30 days of shipment or shipped to the U. S. and sold with domestic credit terms. A substantial portion of the Company's shipments of holiday products are made on terms that permit payment more than 90 days after shipment of merchandise. Such shipments are generally made after June and require payment by December 10 of the year in which shipment is made. 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. Empire Hong Kong, a subsidiary of the Company located in Hong Kong, meets its working capital needs through a bank credit facility which is due on demand. Empire Hong Kong can borrow up to approximately $714,000 at interest rates ranging up to 1.5% over the bank's best lending rates. The availability of borrowings is primarily based on Empire Hong Kong accounts receivable and inventory balances, as defined. All of Empire Hong Kong assets are collateralized under the loan agreements. During 1998, the Company purchased the Apple Companies, in exchange for the issuance of 5 million shares of the Company's common stock, reimbursement of certain transfer and other fees of approximately $325,000 and, under certain circumstances, the issuance of up to an additional 1,153,846 shares of the Company's common stock. Capital expenditures, principally for the purchase of tooling for new products and equipment, were $1.2 million for the year ended December 31, 1998 as compared to $924,000 for the year ended December 31, 1997. The Company is subject to various actions and proceedings, including those relating to intellectual property matters, environmental matters and product liability matters. See "Legal Proceedings" and Note 11 of notes to consolidated financial statements. YEAR 2000 READINESS The inability of computers, software and other equipment to recognize and properly process data fields containing a two digit year is commonly referred to as the Year 2000 Readiness Issue. As in the case with most companies using computers, the Company is in the process of addressing the Year 2000 Readiness Issue. During the second quarter of 1998, the Company assigned a manager to the Year 2000 project and engaged consultants to help evaluate the overall business requirements of its systems. The Company anticipates achieving Year 2000 readiness for its information technology systems in addition to meeting other customer requirements through the implementation of new software as a result of this evaluation. The Company has selected software which has been installed and is expecting full implementation by the end of the second quarter of 1999. Also, during the second quarter of 1998, the Company began evaluating the Year 2000 readiness of its non-information technology systems. The Company believes that the majority of these systems will not be affected by the Year 2000 issue, and is evaluating options to address any non-information technology systems that will be so effected. The Company expects to have fully addressed any issues for these systems by September 30, 1999. The Company has identified third-party vendors which could materially impact the business if they were unable to provide goods and services, and is in the process of obtaining representations regarding their Year 2000 readiness. 18 The Company estimates the total cost for the new management information software, hardware and peripherals will be approximately $250,000. During 1998, the Company has spent an additional $40,000 for consulting fees relating to the evaluation of the business requirements of its management information system and its Year 2000 readiness. Because of the nature of its business and seasonality, the Company feels its exposure to Year 2000 problems could be contained to specific areas. The Company believes that the most reasonably likely worst case scenario regarding the Year 2000 issue would be that the new software is not installed in time or that it has functionality issues. However, in the event that the new management software is not fully functional or if certain non-information technology systems have not been updated by the end of 1999, the Company would handle any such scenarios by using manual overrides, outsourcing services, or relying upon its current PC based software. IMPACT OF INFLATION The primary raw materials used in the manufacture of the Company's domestic toys and holiday products are petrochemical derivatives, principally polyethylene. Polyethylene prices remained relatively stable during 1998 and 1997. During 1996 prices rose by approximately 35%. Due to the time lag between the purchase of raw materials and the sale of finished goods, results of operations may be only partially affected in the period in which such prices change. BACKLOG The Company had open orders of $5.3 million and $6.6 million as of December 31, 1998 and December 31, 1997, respectively. End of year order positions do not yet include orders for fall product lines. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company is exposed to certain market risks which arise from transactions entered into in the normal course of business. The Company's primary exposures are changes in interest rates with respect to its debt and foreign currency exchange fluctuations. The Company finances its working-capital needs primarily through a variable rate loan facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources." The company's results may be adversely or positively affected by fluctuations in interest rates. The Company sources products from various manufacturers in the Far East. The purchases are generally made in Hong Kong dollars while goods are sold in U.S. dollars. Due to the small levels of inventory, and the historical consistency of the Hong Kong dollar/U.S dollar exchange rates, the Company does not believe that any adverse or positive affect would be significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data to be provided pursuant to this Item 8 are included under Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required by this item, insofar as it relates to directors, will be contained under the captions "Election of Directors" in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of 19 Stockholders, and is hereby incorporated by reference thereto. The information relating to executive officers of the Company is contained in Part I, Item 4 of this report. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, under the caption "Executive Compensation," and is hereby incorporated by reference thereto. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, under the caption "Security Ownership of Certain Beneficial Owners and Management," and is hereby incorporated by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, under the caption "Certain Relationships and Related Transactions," and is hereby incorporated by reference thereto. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as a part of this Report. (1) Financial Statements: Report of Independent Auditors........................................................ F-1 Consolidated balance sheets as of December 31, 1998 and 1997.......................... F-2 Consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996......................................................................... F-3 Consolidated statements of stockholders' equity for the years ended December 31, 1998, 1997 and 1996................................................................... F-4 Consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996.............................................................................. F-5 Notes to consolidated financial statements............................................ F-7 Supplementary Financial Data.......................................................... F-23 (2) Financial Statement Schedules: Report of Independent Auditors........................................................ S-1 Schedule I -- Condensed Financial Information of Registrant........................... S-2
The financial statement schedule should be read in conjunction with the consolidated financial statements. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits filed as part of this Report:
EXHIBIT NO. DESCRIPTION 2.1 Stock Purchase Agreement dated July 29, 1988, by and among Clabir, Clabir Corporation (California), HMW Industries, Inc. and Olin Corporation.(1) 20 EXHIBIT NO. DESCRIPTION 2.2 Agreement and Plan of Merger, dated as of November 14, 1989, between AmBrit, Inc. ("AmBrit") and Empire of Carolina, Inc. (the "Company"), including amendment thereto, dated as of December 4, 1989.(2) 2.3 Agreement and Plan of Merger, dated as of November 14, 1989, by and among the Company, Clabir Corporation ("Clabir") and CLR Corporation, including amendment thereto, dated as of December 4, 1989.(2) 2.4 Sale and Purchase Agreement between the Company and Cargill, Incorporated, dated September 30, 1992.(3) 2.5 Purchase Agreement among Conopco, Inc., the Company, The Isaly Klondike Company, Inc., The Isaly Company, Popsicle Industries, Ltd., Ice Cream Novelties, Inc. and Smith & O'Flaherty Limited, dated as of January 27, 1993.(4) 2.6 Agreement and Plan of Reorganization, dated October 13, 1994, by and among the Company, Marchon, Inc. ("Marchon") and the stockholders of Marchon.(5) 2.7 Agreement dated August 31, 1995, among the Company, CLR Corporation, Clabir Corporation, Olin Corporation and General Defense Corporation.(7) 3.1 Restated Certificate of Incorporation of the Company.(6) 3.2 First Amendment to Restated Certificate of Incorporation of the Company.(8) 3.3 Amended and Restated By-Laws of the Company.(9) 3.4 Certificate of Designation of the Series B Junior Participating Preferred Stock.(10) 3.5 Certificate of Designation Relating to Series A Preferred Stock.(11) 3.6 Certificate of Designation Relating to Series C Preferred Stock.(11) 4.1 Form of specimen certificate representing the Company's Common Stock.(12) 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.(6) 4.3 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.(10) 4.4 Warrant Agreement dated as of June 17, 1997 between the Company and the holders from time to time of the warrants.(11) 4.5 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.(11) 4.6 Promissory Note from the Company to Smedley Industries, Inc. Liquidating Trust in the amount of $2,500,000.(11) 4.7 First Amendment dated as of May 5, 1997 to Rights Agreement of September 11, 1996, between Empire of Carolina, Inc. and American Stock Transfer and Trust Company as Rights Agent.(13) 9.1 Voting Agreement, dated September 30, 1994, by and between Halco Industries, Inc. ("Halco") and Steve Geller.(5) 10.1 Amended and Restated 1994 Stock Option Plan of the Company.(9) 10.2 Empire of Carolina, Inc. 1996 Outside Directors Stock Option Plan.(14) 10.3 Empire of Carolina, Inc. 1996 Employee Stock Purchase Plan.(14) 10.4 Employment Agreement, dated July 15, 1994, by and among the Company, Empire Industries, Inc. ("EII") and Steven Geller.(15) 10.5 Employment Agreement, dated July 15, 1994, by and among the Company, EII and Neil Saul.(15) 21 EXHIBIT NO. DESCRIPTION 10.6 Settlement and Termination Agreement with Neil Saul.(7) 10.7 Stock Purchase Agreement, dated July 15, 1994, among Steven Geller, Maurice A. Halperin, individually and as custodian for the benefit of Lauren Halperin and Heather Halperin, Carol A. Minkin, individually and as custodian for the benefit of Joshua Minkin and Rebecca Minkin, and Halco (the Halperins and Minkins, collectively, the "Halperin Group").(5) 10.8 Redemption Agreement, dated September 30, 1994, by and between the Company and the Halperin Group.(5) 10.9 Omnibus Agreement, dated September 30, 1994, by and among the Halperin Group, Steven Geller, the Company and EII.(5) 10.10 Stockholders' Agreement, dated October 13, 1994, by and among Steven Geller, Marvin Smollar and Neil Saul.(5) 10.11 Investor's Rights Agreement, dated October 13, 1994, by and among the Company, Marvin Smollar, Kar Ye Yeung, Tyler Bulkley and Harvey Katz.(5) 10.12 Stockholders' Agreement dated October 13, 1994, among Steven Geller, Marvin Smollar and Neil Saul.(5) 10.13 Debenture Purchase Agreement, dated as of December 2, 1994, among the Company, WPG Corporate Development Associates IV (Overseas), Ltd., Westpool Investment Trust PLC, Glenbrook Partners, L.P., Eugene Matalene, Jr., Richard Hockman, Weiss, Peck & Greer, as Trustee under Nora E. Kerppola IRA, Peter B. Pfister and Weiss, Peck & Greer, as Trustee under Craig S. Whiting IRA and WPG Corporate Development Associates IV, L.P. (all of such parties, other than the Company, collectively, the "WPG Group").(16) 10.14 Registration Rights Agreement, dated as of December 22, 1994, by and between the Company, and the WPG Group.(16) 10.15 Shareholders' Agreement, dated December 22, 1994, by and among the WPG Group, Steven Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(16) 10.16 Stock Purchase Agreement, dated as of December 22, 1994, between WPG Corporate Development Associates IV (Overseas), Ltd. and Steven Geller.(16) 10.17 Assignment and Assumption Agreement dated as of June 21, 1995 between the Company and EAC.(6) 10.18 Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(6) 10.19 Lease dated July 7, 1995 between Buddy L Inc. Debtor-in-Possession ("Buddy L") and Empire Acquisition Corp., Inc. ("EAC").(6) 10.20 Form of Subscription Agreement executed in connection with subscription of Common Stock and Preferred Stock by WPG Corporate Development Associates IV (Overseas), L.P., Westpool Investment Trust PLC, Glenbrook Partners, L.P., and WPG Corporate Development Associates IV, L.P.(6) 10.21 Shareholders' Agreement ("Shareholders' Agreement") dated December 22, 1994 among WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee under Craig S. Whiting IRA, Peter Pfister, Weiss, Peck & Greer, as Trustee under Nora E. Kerppola IRA Westpool Investment Trust, PLC, Glenbrook Partners, L.P., Steve Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(17) 10.22 Amendment No. 2 to Shareholders' Agreement dated as of June 29, 1995 among WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd., as the exempt transferee of WPG Corporate Development Associates IV (Overseas), Ltd., certain persons identified on Schedule I of Amendment No. 2 to the Shareholders' Agreement, Geller, Saul and the Trust as the permitted transferee of Champ Enterprises Limited Partnership.(6) 22 EXHIBIT NO. DESCRIPTION 10.23 Registration Rights Agreement ("Registration Rights Agreement") dated as of December 22, 1994 by and among Empire of Carolina, Inc., WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd., Weiss Peck & Greer, as Trustee under Craig Whiting IRA, Peter B. Pfister, Weiss, Peck & Greer, as Trustee under Nora Kerppola IRA, Westpool Investment Trust PLC and Glenbrook Partners, L.P.(17) 10.24 Amendment No. 1 to Registration Rights Agreement.(6) 10.25 Loan and Security Agreement dated May 29, 1996 among LaSalle National Bank ("LaSalle"), BT Commercial Corporation ("BTCC") and EII, with exhibits and security instruments.(18) 10.26 First Amendment to Amended and Restated Loan and Security Agreement among LaSalle, BTCC, Congress Financial Corporation (Central) ("Congress") and EII, with exhibits.(19) 10.27 Consent and Second Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, the CIT Group/Credit Finance, Inc. ("CIT"), Finova Capital Corporation ("Finova") and EII.(20) 10.28 Third Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, CIT, Finova and EII.(21) 10.29 Securities Purchase Agreement dated as of May 5, 1997 among the Company, HPA Associates, LLC and EMP Associates, LLC.(22) 10.30 Amendment No. 1 dated as of June 5, 1997 to Securities Purchase Agreement dated as of May 5, 1997 among the Company, HPA Associates, LLC and EMP Associates, LLC.(11) 10.31 Buddy L Settlement Agreement, dated as of June 17, 1997 between the Company and Smedley Industries Inc. Liquidating Trusts ("SLM").(11) 10.32 Letter of the Company to Pellinore Securities Corp., Axiom Capital Management, Inc. and Commonwealth Associates, Inc. regarding the registration rights provisions affecting the Series A Preferred Stock.(11) 10.33 Buddy L Registration Rights Agreement dated as of June 17, 1997 between the Company and SLM.(11) 10.34 WPG Registration Rights Agreement dated as of June 17, 1997 among the Company and WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd., Weiss, Peck & Greer, as trustee under Craig Whiting IRA, Peter B. Pfister, Weiss, Peck & Greer as Trustee under Nora Kerppola IRA, Westpool Investment Trust, PLC, Eugene M. Matalene, Jr., Richard Hochman, and Glenbrook Partners, L.P. (collectively the "WPG Affiliated Entities").(11) 10.35 WPG Release Agreement dated as of June 17, 1997 between the Company and the WPG Affiliated Entities.(11) 10.36 Fourth Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, CIT, Finova and EII.(23) 10.37 Fifth Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, CIT, Finova and EII.(24) 10.38 Sixth Amendment to Loan and Security Agreement among LaSalle, Congress, CIT, Finova and EII.(25) 10.39 First Amendment dated January 22, 1998 to the Warrant Agreement dated June 17, 1997 between Empire of Carolina, Inc. and the holders from time to time of the Warrants.(23) 10.40 Share Purchase Agreement by and between the Shareholders of Apple Sports, Inc. and the Shareholders of Apple Golf Shoes, Inc. as Sellers and Empire of Carolina, Inc. as Purchaser, dated April 10, 1997. (26) 10.41 Empire of Carolina, Inc. 1998 Stock Option Plan. (26) 23 EXHIBIT NO. DESCRIPTION 10.42 Loan and Security Agreement dated May 27, 1998 among LaSalle National Bank and Apple Sports, Inc.(27) 10.43 Loan and Security Agreement dated May 27, 1998 among LaSalle National Bank and Apple Golf Shoes, Inc.(27) 10.44 Loan and Security Agreement dated May 27, 1998 among LaSalle National bank and Dorson Sports, Inc.(27) 10.45 Seventh Amendment to Loan and Security Agreement dated November 11, 1998.(28) 10.46 Eighth Amendment to Loan and Security Agreement (the "Agreement" with LaSalle National Bank, Finova Capital Corporation and Congress Financial Corporation (Central).(29) 10.47 Amended, Restated and Consolidated Loan and Security Agreement by and between LaSalle National Bank, Finova Capital Corporation and Congress Financial Corporation (Central) as Lenders and Apple Sports, Inc., Apple Golf Shoes, Inc., and Dorson Sports, Inc., as Borrowers.(29) 21 Subsidiaries of the Company.(27) 27 Financial Data Schedule.
(1) Previously filed as an exhibit to Clabir's Current Report on Form 8-K, dated December 23, 1988 (File No.1-7769) and incorporated by reference. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-4 (File No. 33-32186, dated November 17, 1989 and incorporated by reference. (3) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated October 6, 1992 and incorporated by reference. (4) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated February 1, 1993 and incorporated by reference. (5) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated September 30, 1994 and incorporated by reference. (6) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated July 21, 1995 and incorporated by reference. (7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996 and incorporated by reference. (9) 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. (10) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated September 12, 1996 and incorporated by reference. (11) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated June 17, 1997 and incorporated by reference. 24 (12) 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. (13) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated May 8, 1997 and incorporated by reference. (14) Previously filed as an appendix to the Company's definitive Proxy Statement filed with the Commission on August 27, 1996 and incorporated by reference. (15) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated by reference. (16) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by the WPG Group, dated December 23, 1994 and incorporated by reference. (17) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by WPG Corporate Development Associates IV., L.P., WPG Private Equity Partners, L. P., WPG Corporate Development Associates IV (Overseas), L.P., WPG Private Equity Partners (Overseas), L.P., Steven Hutchinson, Wesley Lang, Peter Pfister, Craig Whiting, Nora Kerppola, Glenbrook Partners, L.P., Prim Ventures, Inc., Westpool Investment Trust PLC and Weiss, Peck & Greer with the Securities and Exchange Commission on December 23, 1994, and incorporated by reference. (18) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 for (Reg. No.333-4440) declared effective by the Commission on June 25, 1996 and incorporated by reference. (19) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated December 11, 1996 and incorporated by reference. (20) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated February 5, 1997 and incorporated by reference. (21) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated May 1, 1997 and incorporated by reference. (22) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated by reference. (23) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated March 30, 1998 and incorporated by reference. (24) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated August 25, 1997 and incorporated by reference. (25) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated March 31, 1998 and incorporated by reference. (26) Previously filed as an exhibit to the Company's Proxy Statement pursuant to Section 14(A) of the Securities Exchange Act of 1934 as filed with the Securities and Exchange Commission on April 28, 1998 and incorporated by reference. 25 (27) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated by reference. (28) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated by reference. (29) Previously filed as an exhibit to the Company's Current Report on Form 8-K dated March 9, 1999 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 (c) The exhibits to this Form 10-K appear following the Company's Consolidated Financial Statements and Schedules included in this Form 10-K. (d) The Financial Statements and Schedules to this Form 10-K begin on page F-1 of this Form 10-K. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Empire of Carolina, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMPIRE OF CAROLINA, INC. Date: March 25, 1999 By: /s/ Charles S. Holmes -------------- --------------------- Chairman of the Board Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Empire of Carolina, Inc., in the capacities and on the dates indicated.
Signature Title Date - ---------- ----- ---- /s/ Timothy Moran President, Chief Executive March 25, 1999 - ------------------------------- Officer and Director Timothy Moran /s/ William H. Craig Executive Vice President-Finance - ------------------------------- and Chief Financial Officer March 25, 1999 William H. Craig /s/ John J. Doran Director March 25, 1999 - ------------------------------- John J. Doran /s/ James J. Pinto Director March 25, 1999 - ------------------------------- James J. Pinto /s/ Frederick W. Rosenbauer, Jr. Director March 25, 1999 - -------------------------------- Frederick W. Rosenbauer, Jr. /s/ Lenore Schupak Director March 25, 1999 - --------------------------------- Lenore Schupak.
27 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF EMPIRE OF CAROLINA, INC. We have audited the accompanying consolidated balance sheets of Empire of Carolina, Inc. and its subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Empire of Carolina, Inc. and its subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations and current cash constraints raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 11 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in 1996. DELOITTE & TOUCHE LLP Raleigh, North Carolina March 25, 1999 F-1 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (In thousands except share amounts)
1998 1997 -------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,295 $ 3,483 Accounts receivable, less allowances and other deductions (1998-$5,083; 1997-$5,487) 11,462 14,052 Inventories, net 10,876 9,933 Prepaid expenses and other current assets 817 1,980 --------- --------- Total current assets 27,450 29,448 PROPERTY, PLANT AND EQUIPMENT, NET 11,571 14,135 EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET 12,670 13,491 TRADEMARKS, PATENTS, TRADENAMES AND LICENSES, NET 5,565 6,066 OTHER NONCURRENT ASSETS 390 436 --------- --------- $ 57,646 $ 63,576 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 17,547 $ 16,988 Accounts payable - trade 7,718 12,317 Other accrued liabilities 8,535 10,751 --------- --------- Total current liabilities 33,800 40,056 --------- --------- LONG-TERM LIABILITIES: Long-term debt 6,450 6,425 Other noncurrent liabilities 1,639 1,642 --------- --------- Total long-term liabilities 8,089 8,067 --------- --------- Total liabilities 41,889 48,123 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 10) STOCKHOLDERS' EQUITY: Common stock, $.10 par value, 60,000,000 shares authorized. Shares issued and outstanding: 1998 - 16,117,000 and 1997 - 7,849,000 1,612 785 Preferred stock, $.01 par value, 5,000,000 shares authorized Shares issued and outstanding: Series A convertible preferred stock: 1998 - 1,751,000 and 1997 - 2,100,000; Series C convertible preferred stock: 1998 - 1,451 and 1997 - 1,461 18 21 Additional paid-in capital 115,813 109,282 Deficit (101,686) (94,635) --------- --------- Total stockholders' equity 15,757 15,453 --------- --------- $ 57,646 $ 63,576 ========= =========
See notes to consolidated financial statements. F-2 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NET SALES $ 80,497 $ 99,516 $148,908 SALES DISTRIBUTION SETTLEMENT -- 2,400 -- COST OF SALES (62,120) (87,524) (133,464) NONRECURRING INVENTORY CHARGES -- -- (12,185) -------- --------- ---------- GROSS PROFIT 18,377 14,392 3,259 SELLING AND ADMINISTRATIVE EXPENSE 21,297 24,863 41,751 RESTRUCTURING AND OTHER CHARGES -- 3,739 8,800 -------- --------- ---------- OPERATING LOSS (2,920) (14,210) (47,292) OTHER INCOME(EXPENSE): Interest income, dividends and net realized gains(losses) (66) 102 (5) Interest expense (4,088) (7,022) (11,236) -------- --------- ---------- Total other income(expense) (4,154) (6,920) (11,241) -------- --------- ---------- LOSS BEFORE INCOME TAXES (7,074) (21,130) (58,533) INCOME TAX BENEFIT -- -- (12,332) -------- --------- ---------- NET LOSS (7,074) (21,130) (46,201) ACCRETION OF NONCASH PREFERRED STOCK DIVIDEND -- (24,645) -- -------- --------- ---------- NET LOSS APPLICABLE TO COMMON STOCK $ (7,074) $ (45,775) $ (46,201) ========== =========== ========== LOSS PER COMMON SHARE - Basic and diluted $ (0.59) $ (6.04) $ (7.39) ========= ========= ======== WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic and diluted 12,068 7,583 6,248 ======== ======== ========
See notes to consolidated financial statements. F-3 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
Convertible Additional Retained Stock- Common Stock Preferred Stock Paid-In Earnings holder Shares Amount Shares Amount Capital (Deficit) Loans Total ------ ------ ------ ------ ---------- --------- ------ ------- BALANCE, JANUARY 1, 1996 5,195 $ 519 442 $ 4 $ 33,193 $ (2,659) $ (595) $30,462 Net loss -- -- -- -- -- (46,201) -- (46,201) Exercise of stock options and warrants 367 37 -- -- 2,940 -- -- 2,977 Issuance of common stock in public offering 1,400 140 -- -- 14,345 -- -- 14,485 Conversion of preferred stock 442 44 (442) (4) (40) -- -- -- Collections on stockholder loans -- -- -- -- -- -- 48 48 ------ ------- ----- ------- -------- --------- ------- ------- BALANCE, DECEMBER 31, 1996 7,404 740 -- -- 50,438 (48,860) (547) 1,771 Net loss -- -- -- -- -- (21,130) -- (21,130) Issuance of common stock 250 25 -- -- 631 -- -- 656 Issuance of Series A preferred stock -- -- 2,100 21 18,691 -- -- 18,712 Issuance of Series C preferred stock on conversion of subordinated debt -- -- 2 -- 14,897 -- -- 14,897 Conversion of Series A preferred stock 195 20 -- -- (20) -- -- -- Settlement of stockholder loans -- -- -- -- -- -- 547 547 "Intrinsic" preferred stock dividend -- -- -- -- 24,645 (24,645) -- -- ------ ------- ----- ------- -------- --------- ------- ------- BALANCE, DECEMBER 31, 1997 7,849 785 2,102 21 109,282 (94,635) -- 15,453 Net loss -- -- -- -- -- (7,074) -- (7,074) Issuance of common stock 424 43 -- -- 135 -- -- 178 Issuance of common stock in Apple acquisition 5,000 500 -- -- 6,670 -- -- 7,170 Conversion of Series A preferred stock 2,789 279 (349) (3) (276) -- -- -- Conversion of Series C preferred stock 50 5 -- -- (5) -- -- -- Conversion of warrants 5 -- -- -- 7 -- -- 7 Contribution of debt to equity -- -- -- -- -- 23 -- 23 ------ ------- ----- ------- -------- --------- ------- ------- BALANCE, DECEMBER 31, 1998 16,117 $1,612 1,753 $ 18 $115,813 $(101,686) $ -- $15,757 ========= ====== ======= ======== ======== ========= ======= =======
See notes to consolidated financial statements. F-4 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,074) $(21,130) $(46,201) Adjustments to reconcile net loss to net cash provided by(used in) operating activities: Depreciation and amortization 4,402 8,053 9,674 Changes in allowances for losses on accounts receivable (404) (3,290) 4,487 Changes in allowances for losses on inventories (4,250) (3,904) 7,813 Changes in allowance for deferred income taxes -- -- 9,272 Net losses on sales of securities and property and equipment 540 3,650 86 Writedown of assets -- -- 5,275 Changes in assets and liabilities, net of acquisitions and dispositions of businesses: Accounts receivable 11,094 28,916 4,947 Inventories 10,555 19,886 (2,750) Prepaid expenses and other current assets 1,298 162 (96) Other noncurrent assets 42 (925) 571 Accounts payable - trade (4,949) (12,522) 7,267 Other accrued liabilities (3,248) (5,796) 514 Current and deferred income taxes -- 15,526 (20,338) Other noncurrent liabilities (628) 1,235 (163) -------- -------- -------- Net cash provided by(used in) operating activities 7,378 29,861 (19,642) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,211) (924) (8,296) Acquisition of Apple Companies 848 -- -- Proceeds from sale of securities and property and equipment 72 505 85 Other -- 520 155 -------- -------- -------- Net cash provided by(used in) investing activities (291) 101 (8,056) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings(repayments) under lines of credit (6,846) (42,349) 9,514 Proceeds from issuance of common stock -- -- 14,485 Proceeds from stock options and warrants exercised 7 -- 2,977 Net proceeds from(expenses of) issuance of preferred stock (86) 18,712 -- Repayments of notes payable and long-term debt 650 (3,320) (12,193) Proceeds from issuance of long-term debt -- -- 12,100 Financing costs -- -- (1,275) -------- -------- -------- Net cash provided by(used in) financing activities (6,275) (26,957) 25,608 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 812 3,005 (2,090) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,483 478 2,568 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,295 $ 3,483 $ 478 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 3,140 $ 4,486 $ 7,806 Income taxes, (net of refunds) 264 (15,785) (1,697)
See notes to consolidated financial statements F-5 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED YEARS ENDED DECEMBER 1, 1998, 1997 AND 1996 NONCASH INVESTING AND FINANCING ACTIVITIES On May 28, 1998, the Company acquired all of the common stock of the Apple Companies for an aggregate purchase price of $7,633,000, including expenses, and including the issuance of 5,000,000 shares of common stock and assuming the issuance of an additional 1,153,846 shares of common stock. The components of cash used for the acquisition as reflected in the consolidated statements of cash flows are as follows (in thousands): Fair value of assets acquired, net of cash acquired.......... $15,523 Liabilities assumed.......................................... (9,063) Common stock issued and assumed issued....................... (7,308) ------- Cash paid in acquisition, net of direct expenses............. $ (848) ======= On August 21, 1998, the Company settled a liability with a licensor by making a cash payment and issuing 200,000 shares of common stock in exchange for releasing the Company from an unsatisfied guaranteed minimum royalty obligation, resulting in an increase in common stock of $20,000, additional paid-in capital of $130,000, and a decrease in other liabilities of $150,000. During December 1998, the Company issued 223,656 shares of common stock in lieu of directors and consulting fees resulting in an increase in common stock of $23,000, additional paid-in capital of $90,000 and a decrease in other liabilities of $103,000. 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. Also 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 $14,897,000. In 1997 and pursuant to Emerging Issues Task Force Topic No. D-60, the Company recorded a dividend on its newly issued Series A preferred stock to reflect the effect of a beneficial conversion feature of such stock and the concurrent issuance of 10 million warrants. The recording of this dividend resulted in a transfer from deficit to additional paid-in capital of $24,645,000. During 1996, the Company finalized its allocation of the purchase price of the acquisition of Buddy L Inc. and its subsidiary, Buddy L (Hong Kong) Limited, (exclusive of the contingent earnout liability settled in 1997) by increasing assets acquired and increasing liabilities assumed by $643,000 and $167,000, respectively, and decreasing excess cost over fair value of net assets acquired by $475,000. See notes to consolidated financial statements. F-6 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF BUSINESS OPERATIONS AND GOING CONCERN MATTERS Empire of Carolina, Inc. ("Empire" or the "Company") is engaged in the design, manufacture and marketing of consumer products including toys, plastic decorative holiday products, and golf shoes and accessories through its wholly-owned subsidiaries Empire Industries, Inc. ("Empire Industries"), Empire Toys (Hong Kong) Limited ("Empire Hong Kong") and, since May 28, 1998, Apple Sports, Inc. and Apple Golf Shoes, Inc. (the "Apple Companies"). The Company has experienced operating difficulties during the past several years and sales have declined over this period. The net loss for 1998 was $7,074,000 compared with a net loss of $21,130,000 for 1997 and a net loss of $46,201,000 for 1996. Improvements from 1996 when the Company expanded to absorb two acquisitions (see Note 11) include exiting unprofitable product lines, downsizing of operations through the elimination of underutilized assets and excess overhead, streamlining of manufacturing operations and attaining a higher percentage of on time deliveries. Despite the improvements made during 1998 and 1997, the Company continues to operate under tight cash constraints. The bank lenders under the Company's secured credit facilities have agreed to certain amendments to the credit lines which continue to support the Company, taking into account reduced credit needs because of the reduction in the size of the business. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The factors discussed above, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, and ultimately to attain profitable operations. During 1999, the Company will continue to rationalize its business, which includes focusing on the elimination of products or accounts that are not profitable. In addition, the Company is actively developing new products for 1999, as well as seeking to better utilize plant capacity by securing molding contracts from original equipment manufacturers. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries after elimination of intercompany accounts and transactions. CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include all highly liquid investments having an original maturity of three months or less. INVENTORIES - Inventories are stated at lower of cost or net realizable value. Cost is determined on a first-in, first out ("FIFO") basis. F-7 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED PROPERTY -- Property is stated at original cost, reduced for any identified long-term impairments, and includes expenditures for major betterments and renewals. Depreciation is recorded over the estimated useful lives of the assets using straight-line or accelerated methods. Assets lives by property types are as follows: Buildings and improvements............................... 10-35 years Machinery and equipment.................................. 5-10 years Molds.................................................... 1-3 years Furniture and fixtures................................... 7-10 years Computer equipment....................................... 3-5 years DEBT ISSUE COSTS -- The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. Such amounts are included in other current and noncurrent assets in the consolidated balance sheets. SALES -- Sales generally are recorded by the Company when products are shipped to customers. Sales are recorded net of anticipated returns, discounts and allowances. During 1997, the Company received a $2.4 million settlement upon termination of an international sales distribution agreement. ADVERTISING - The Company expenses the production costs of advertising the first time the advertising takes place. At December 31, 1998 and 1997, $65,000 and $485,00 of advertising production costs were reported as assets. Advertising expense was $2,553,000, $4,684,000 and $2,525,000 in 1998, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT -- Research and development costs, included in selling and administrative expenses (1998 - $1,380,000; 1997 - $1,244,000; 1996 - $3,225,000), are expensed as incurred. DEFERRED INCOME TAXES -- Deferred income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income taxes (benefits) are provided on temporary differences between the financial statement carrying values and the tax basis of assets and liabilities. IDENTIFIABLE AND UNIDENTIFIABLE INTANGIBLE ASSETS -- Excess of cost over fair value of net assets acquired relating to Company acquisitions are being amortized on a straight-line basis over a period of twenty years. Amortization expense for 1998, 1997 and 1996 was $846,000, $833,000, and $832,000, respectively. Accumulated amortization at December 31, 1998 and 1997 was $3,268,000 and $2,410,000, respectively. In June 1997, the Company settled its contingent five-year earnout liability related to its 1995 acquisition, resulting in an adjustment of the purchase price and a corresponding increase of the excess of cost over fair value of net assets acquired of $1,240,000, which amount is being amortized over the remaining useful life. F-8 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Patents, trademarks, trade names, and licensing agreements represent assets acquired relating to the Company's acquisitions and are carried at fair market value on the date of acquisition less accumulated amortization. These assets are being amortized on a straight-line basis over their estimated useful lives, which range from one to fifteen years. Amortization expense for 1998, 1997 and 1996 was $501,000, $501,000, and $686,000, respectively. Accumulated amortization at December 31, 1998 and 1997 was $2,979,000 and $2,478,000, respectively. During 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Accordingly, long-lived assets are reviewed for impairment, generally on a product line by product line basis, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation is required, the projected future cash flows attributable to each product line are compared to the carrying value of the long-lived assets (including an allocation of goodwill, if appropriate) of that product line to determine if a write-down to fair value is required. The Company also evaluates the remaining useful lives to determine whether events and circumstances warrant revised estimates of such lives. FOREIGN CURRENCY -- The financial position and results of operations of Empire Hong Kong are measured using local currency as the functional currency. Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on rates of exchange prevailing at the end of each respective year. Revenue and expense accounts are translated at prevailing exchange rates during the year. Gains and losses, if any, resulting from foreign currency translation are accumulated as a separate component of stockholders' equity. Transactions in foreign currencies are translated at the rates in effect on the dates of the transactions. ACCOUNTING FOR STOCK-BASED COMPENSATION -- The Company accounts for employee stock compensation in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, the total compensation expense is equal to the difference between the award's exercise price and the intrinsic value at the measurement date, which is the first date that both the exercise price and number of shares to be issued is known. SFAS No. 123, "Accounting for Stock-Based Compensation," became effective January 1, 1996. SFAS No. 123 requires expanded disclosures 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, however, permitted to continue to apply APB No. 25. The Company has elected to continue to apply APB No. 25 for accounting purposes of stock-based compensation awards to employees and discloses the required pro forma effect on net income and earnings per share and other information required by SFAS No. 123. EARNINGS PER SHARE -- Earnings per share are computed in accordance with SFAS No. 128 which requires a presentation of basic EPS which is based on the weighted-average shares of common stock. 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. All of the Company's options, warrants, convertible securities and contingently issuable shares are excluded from basic and diluted earnings per share because they are anti-dilutive. For purposes of calculating EPS for the year ended December 31, 1997, "intrinsic" dividends of $24,645,000 representing the accretion of discounts on the Series A preferred stock and warrants issued, have been included in the computation (Note 8). F-9 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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. RECLASSIFICATIONS -- Certain amounts for 1997 and 1996 have been reclassified to conform to 1998 presentation. 3. APPLE COMPANIES ACQUISITION On April 10, 1998, the Company executed a definitive Share Purchase Agreement (the "Share Purchase Agreement") with the shareholders of Apple Sports, Inc. and the shareholders of Apple Golf Shoes, Inc. (collectively, the "Apple Company Shareholders" and with respect to the companies, the "Apple Companies") whereby the Company agreed to purchase from the Apple Company Shareholders all of their capital stock representing all of the outstanding capital stock of the Apple Companies (the "Acquisition"). The Apple Companies have manufactured and distributed Wilson(R) and Wilson Staff(R) golf shoes and other Wilson(R) golf accessories, including gloves, head covers and practice aids, since 1986. At the May 28, 1998 annual meeting, the stockholders of the Company approved the issuance of stock for the Acquisition. Under the terms of the Share Purchase Agreement, Empire acquired all of the issued and outstanding shares of capital stock of each of the Apple Companies, for consideration equal to an aggregate of 5,000,000 shares of the Company's common stock. In the event that during the year following July 10, 1998 the closing daily market price of the Company's common stock trading on any nationally recognized stock exchange shall not be at a price of $2.00 per share or higher for each of 45 consecutive stock trading days, then Empire shall be obligated to pay additional consideration in the amount of 1,153,846 shares of Empire Common Stock., thereby bringing the number of shares of Empire common stock paid for the Acquisition to an aggregate of 6,153,846. If the additional shares are issued under this agreement, $115,385 will be transferred from additional paid-in capital to common stock. In addition, pursuant to the Share Purchase Agreement, the Company had agreed to reimburse certain transfer and other fees of approximately $325,000. The consideration payable by Empire described above was determined in arm's length negotiation by the Board of Directors of Empire and the Apple Company Shareholders. In determining the consideration, the Board of Directors and Apple Company Shareholders considered, among other factors, the Apple Companies' history of growth and profitability, the growth potential of the golf industry and the prospects of Empire and the Apple Companies on a combined basis. The funds used to pay for the transfer fees and other fees due at closing were paid from the Company's working capital. The Company has recorded a negative purchase price adjustment to reduce long-lived assets acquired by approximately $411,000 to reflect the excess of fair values of assets acquired and liabilities assumed in the acquisition over the consideration given which, for accounting purposes, is the 5,000,000 Initial Payment Shares plus the 1,153,846 Additional Payment Shares valued in the aggregate at the average market price of $1.1875 before and after the date that the Share Purchase Agreement was made public. F-10 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. APPLE COMPANIES ACQUISITION - CONTINUED The following unaudited pro forma results of operations assume the transaction described above occurred as of January 1 of the period presented after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts): 1998 1997 ------- -------- Net sales $92,537 $125,936 Loss from operations before income taxes (5,274) (17,779) Net loss applicable to common stock (5,274) (37,059) Loss per share: Basic and diluted (0.37) (2.96) The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods presented or of future results of operations. Net sales of the Apple Companies since the acquisition were $12.9 million. 4. INVENTORIES A summary of inventories, by major classification, at December 31, 1998 and 1997 is as follows (in thousands): 1998 1997 ----- ----- Finished goods......................................... $9,693 $7,336 Raw materials and purchase parts....................... 871 1,990 Work-in-process........................................ 312 607 -------- -------- $10,876 $9,933 ======== ======== Inventories are net of writedowns for estimated obsolescence and lower of cost or market reserves of $2,800,000 and $7,050,000 at December 31, 1998 and 1997, respectively. 5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment at December 31, 1998 and 1997 consists of the following (in thousands): 1998 1997 ----- ----- Land................................................... $ 223 $ 223 Buildings and improvements............................. 11,638 11,639 Machinery and equipment................................ 17,987 18,883 Molds.................................................. 7,805 8,412 Furniture and fixtures................................. 186 190 ------ ------ Total.................................................. 37,839 39,347 Less accumulated depreciation.......................... 26,268 25,212 ------ ------ Property, plant and equipment, net..................... $11,571 $14,135 ======= ======= F-11 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 6. NOTES PAYABLE AND LONG TERM DEBT The following table summarizes notes payable and long-term debt as of December 31, 1998 and 1997 (in thousands): 1998 1997 ----- ----- Lines of credit........................................ (a)$15,089 $13,540 Bank term note......................................... (a) 6,800 7,370 Four-year note ........................................ (b) 1,875 2,500 Hong Kong facilities................................... (c) 233 3 ------ ------ 23,997 23,413 Less notes payable and current portion of long-term debt...................................... 17,547 16,988 ------ ------ Total long-term debt................................... $ 6,450 $ 6,425 ====== ====== (a) The Company entered into the eighth amendment of its secured bank facility on March 9, 1999. The Company, through its domestic operating subsidiaries, has a series of cross-guaranteed secured bank facilities which currently aggregate up to $50 million ($40 million for Empire Industries and $10 million for the Apple Companies) available for financing. This is reduced from the aggregate of $69 million ($57 million for Empire Industries and $12 million for the Apple Companies) previously available at December 31, 1998, as a result of decreases in the overall size of the business. The facilities are for a three-year term at interest rates of prime (7.75% at December 31, 1998) to prime plus 2% or LIBOR plus 250 or 275 basis points. As part of the Empire Industries facility, there is a three-year term loan of $6.8 million which requires monthly principal payments of $133,000. Also, up to $9 million of Empire Industries' availability is not tied by formula to the underlying assets and requires monthly repayment of $1.5 million commencing September 30, 1999 through February 29, 2000. The amount outstanding under this provision was $2,250,000 at December 31, 1998. The balance of the availability of borrowings for each subsidiary under the facilities is based on, and secured by, all domestic accounts receivable and inventory balances as defined, less outstanding commitments under letters of credit ($1,479,000 at December 31, 1998.) The collateral under the loan agreement is substantially all of the domestic assets of Empire Industries, including all machinery, equipment, real property, accounts receivable, inventories and intangible assets; and the common stock of Empire Hong Kong. (b) In June 1997, Empire Industries issued a $2.5 million 9% note, guaranteed by the Company, to the successor to the seller under the Company's 1995 agreement to purchase the assets of Buddy L, in partial settlement of their claim to certain earnout, price protection and registration rights. The note provides for four $625,000 annual principal payments, plus quarterly interest payments, and includes certain affirmative and negative covenants which could in certain circumstances permit the acceleration of payments with respect to the note. (c) Empire Hong Kong meets its working capital needs through a bank credit facility which is due on demand. Under the loan agreement, Empire Hong Kong can borrow up to $714,000 at interest rates ranging up to 1.5% over the bank's best lending rates (8% to 9% at December 31, 1998). The availability of borrowings under the loan agreement is based on Empire Hong Kong's eligible accounts receivable and inventory balances, as defined. All of Empire Hong Kong's assets are collateral under the loan agreement and it is guaranteed by the Company. F-12 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 6. NOTES PAYABLE AND LONG TERM DEBT - CONTINUED Long-term debt is carried net of any related discount or premium. Certain of the Company's debt arrangements contain requirements as to the maintenance of minimum levels of tangible net worth, net income and debt coverage ratios and prohibit the Company from paying dividends. Also, certain of the debt arrangements contain various security interests and restrictive covenants which limit the ability of the subsidiaries to loan, advance and dividend substantially all of their net assets. For the year ended December 31, 1998, the Company was not in compliance with respect to the net income and interest coverage requirements in the secured bank facility. On March 9, 1999, the Company entered into an amendment to its facility, whereby various loan covenants, including the net income and interest coverage requirements, have been amended based on the Company's current and projected operating results. Consequently, the instance of non-compliance has been cured as of March 9, 1999. All property, plant and equipment, with a net book value of approximately $11,571,000 at December 31, 1998, and inventories and accounts receivable (approximately $22,338,000 at December 31, 1998) have been pledged as collateral for the Company's indebtedness. Principal maturities of notes payable and long-term debt are as follows (in thousands): 1999......................................... $17,547 2000......................................... 2,225 2001......................................... 4,225 7. INCOME TAXES The balances of deferred income tax assets and liabilities at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------- ------ Current deferred income tax assets relate to: Reserves for indemnification obligations of companies sold........ $ 255 $ 271 Accruals to related parties...................................... 89 128 Other accruals not currently deductible.......................... 917 1,033 Inventories....................................................... 1,530 3,047 Allowances for accounts receivable................................ 897 722 Other............................................................. 290 444 -------- -------- Less valuation allowance............................................ 3,978 5,645 3,978 5,645 -------- -------- Net current deferred tax assets..................................... $ -- $ -- -------- -------- Noncurrent deferred income taxes assets(liabilities) relate to: Basis in the stock of a majority-owned subsidiary................. $ 3,472 $ 3,472 Net operating loss carryforwards.................................. 17,772 12,707 Accruals and reserves not currently deductible.................... 585 586 Basis and depreciation differences................................ (1,908) (2,063) Other............................................................. (55) (72) -------- -------- 19,866 14,630 Less valuation allowance............................................ 19,866 14,630 -------- -------- Net noncurrent deferred tax assets.................................. $ -- $ -- -------- --------
F-13 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The components of income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands): 1998 1997 1996 ------ ------ ------- Current income taxes (benefits): Federal tax (benefit) at the statutory rate.... $ -- $ -- $(15,845) State.......................................... -- -- (1,821) ------ ------ --------- Total current income taxes (benefits).......... -- -- (17,666) Deferred income taxes (benefits)............... -- -- 5,334 ----- ------ -------- Total.......................................... $ -- $ -- $(12,332) ----- ------ -------- The following is a reconciliation of income tax expense (benefit) to that computed by applying the federal statutory rate of 34% to income (loss) before income taxes for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ------ ------ ------- Federal tax (benefit) at the statutory rate...... $ (2,405) $(7,180) $( 19,901) Equity earnings (loss) of foreign subsidiary..... 82 110 (88) Amortization of goodwill......................... 195 209 576 Change in valuation allowance.................... 2,738 7,336 9,272 State income taxes, net of federal tax benefit... -- -- (1,821) Other............................................ (610) (475) (370) -------- ------- -------- Total............................................ $ -- $ -- $(12,332) -------- ------- --------
The Company files a consolidated federal income tax return with its subsidiaries for any period that it possesses the required ownership. Management has determined, based on the Company's recent history of earnings and alternative tax strategies that the Company's future earnings may not be sufficient to realize its net deferred tax assets. Accordingly, the Company increased its valuation allowance to approximately $23,844,000 and $20,275,000 at December 31, 1998 and 1997, respectively. The Company is subject to various federal and state income tax examinations. The Company believes it has adequate reserves for the potential impact of such examinations; however, such estimates are subject to change. The Company's federal net operating loss carryforwards at December 31, 1998 of approximately $39 million expire in 2013. State economic loss carryforwards at December 31, 1998 expire at various years through 2013. 8. STOCKHOLDERS' EQUITY CAPITAL STOCK -- The Company has 65,000,000 shares of capital stock authorized, comprised of (i) 60,000,000 shares of common stock, $.10 par value and (ii) 5,000,000 shares of preferred stock, $.01 par value. In 1995, the Board of Directors designated 442,264 shares of preferred stock as Series A cumulative convertible preferred stock (with a stated liquidation value of $7.25 per share) and, as of December 31, 1995, 442,264 shares of Series A cumulative convertible preferred stock were issued and outstanding. On September 11, 1996, upon the approval by F-14 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 8. STOCKHOLDERS' EQUITY - CONTINUED the stockholders of the Company, the then outstanding shares of Series A preferred stock were converted into common stock on a share for share basis. The conversion resulted in the issuance of 442,264 shares of common stock to the holders of Series A preferred stock. The holders of Series A preferred were not entitled to receive any dividend during the period such shares were outstanding. On June 25, 1996, the Company sold 1,400,000 shares of its common stock in a public offering (the "Offering") which resulted in net proceeds to the Company of approximately $17,396,000 (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). In June and October, 1997 pursuant to the Securities Purchase Agreement, the Company issued to HPA Associates, LLC ("HPA") and EMP Associates LLC ("EMP"), and other accredited investors, 2,100,000 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 10,000,000 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 a 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 exercise price of $1.375 per share (subject to anti-dilution adjustment in certain circumstances) and is callable by the Company in certain circumstances. The total gross proceeds from the sale of Series A preferred stock and warrants was $21 million. In June 1997, the Company issued 1,500 shares of Series C preferred stock with an aggregate Stated Value (as defined in the Series C preferred stock certificate of designation) of $15 million in exchange for the retirement of the Company's $15 million 9% convertible debentures. 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). Except as otherwise expressly provided in the Charter or the By-laws of the Company, the Certificate of Designation relating to the Series C preferred stock, or as may otherwise be required by law, the Series C Stockholders, by virtue of their ownership thereof, have no voting rights. In June 1997, the Company issued 250,000 shares of common stock to the successor to the seller under the Company's 1995 agreement to purchase the assets of Buddy L in partial settlement of their claim to certain earnout, price protection and registration rights, increasing common stock and additional paid-in capital by $25,000 and $631,0000, respectively. In May 1997, the staff of the Securities and Exchange Commission ("SEC") issued an announcement regarding accounting for the issuance of convertible preferred stock and debt securities. The announcement dealt with, among other things, the belief by the SEC staff that the issuance of convertible preferred stock that contains a beneficial conversion feature should be recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid- in capital, and that any discount resulting from such allocation is analogous to a dividend and should be recognized as a return to the preferred shareholders. The SEC position is discussed in Emerging Issues Task Force Topic D-60, "Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Non-detachable Conversion Feature,." F-15 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 8. STOCKHOLDERS' EQUITY - CONTINUED Under this accounting treatment, the intrinsic value of the beneficial conversion feature of the Series A preferred stock issued in the second and fourth quarters of 1997, as well as a discount resulting from the concurrent issuance of detachable warrants, totaling $24,645,000, has been reflected in the consolidated financial statements as preferred dividends. The dividends on the Series A preferred stock, representing the accretion of these issuance discounts, are considered in the calculation of net loss per share. These dividends have no effect on the net loss of the Company or on its cash flows. At the May 28, 1998 annual meeting, the stockholders of the Company approved the issuance of 5,000,000 shares of stock for the acquisition of the Apple Companies (Note 3). To the knowledge of the Company, no purchaser of the Series A preferred stock and warrants beneficially owns securities representing 10% or more of the voting power on matters to be presented to the Company's stockholders. If however, the individual Purchasers of the preferred stock and warrants were to vote together as a group, the transaction could be deemed to have resulted in a change in control of the Company. DIVIDENDS -- The Company has not paid any cash dividends in 1998, 1997 or 1996. WARRANTS -- In connection with the Series A preferred stock transactions referred to above, warrants to purchase a total of 10,000,000 shares of common stock were issued. On August 21, 1997, the Company issued 200,000 warrants to Gerard Klauer Mattison & Co., Inc. ("GKM") in connection with the Company's settlement of fees owed to GKM for services rendered with respect to certain financings and sales transactions. The warrants are exercisable at $1.375 per share for a term of six years from date of issuance. STOCK OPTIONS -- The Company currently has three stock option plans: the Amended and Restated 1994 Stock Option Plan (the "1994 Plan"); the 1998 Stock Option Plan (the "1998 Plan") (collectively, the "Employee Plans") and the Non-Employee Directors Stock Option Plan (the "Directors Plan"). Options to acquire shares of the Company's common stock under the Employee Plans are granted to key employees or consultants at prices equal to the market price at the close of the market on the date of the grant. Vesting of options under the Employee Plans is determined by the Compensation Committee at the time of the grant, and has generally been set at two to four years. The 1998 Plan was authorized by the shareholders at the 1998 Annual Meeting. The Directors Plan grants options to each outside director at the conclusion of every Annual Meeting of Stockholders. Eligible directors shall receive up to 5,000 options in the first year after their election, and 2,500 options each year thereafter. The Company is authorized to grant options to acquire up to 2,000,000 shares under the 1994 plan, up to 2,000,000 shares under the 1998 Plan, and up to 75,000 shares under the Directors Plan. In May 1997, the Compensation Committee approved (i) the retirement of significantly all options outstanding at exercise prices ranging between $4.50 and $9.25 and (ii) their subsequent reissuance at $2.00, to better enhance incentives to management in light of reduced market prices of the Company's common stock. F-16 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 8. STOCKHOLDERS' EQUITY - CONTINUED A summary of the status of the plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is as follows:
Weighted Average Exercise Shares Price --------- -------- Balance, January 1, 1996.............................................. 1,837,500 $6.55 Exercised............................................................. (9,940) 6.63 Expired............................................................... (707,060) 6.54 Granted............................................................... 564,500 4.99 --------- Balance, December 31, 1996............................................ 1,685,000 5.99 Expired or canceled................................................... (1,947,208) 5.41 Granted or reissued................................................... 2,130,750 2.14 --------- Balance, December 31, 1997............................................ 1,868,542 2.05 Expired............................................................... (522,542) 2.03 Granted............................................................... 767,500 1.32 --------- Balance, December 31, 1998............................................ 2,113,500 1.79 ---------
The following table summarizes information about stock options outstanding at December 31, 1998:
Currently Exercisable --------------------------- Range of Number Average Remaining Weighted Weighted Exercise of Shares Contractual Average Number Average Prices Outstanding Life (Years) Exercise Price of Shares Exercise Price ----------- ------------ --------------- -------------- --------- --------------- $1.00 - $4.94 2,113,500 4.1 $1.79 650,829 $2.04
The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its plans. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS No. 123, the Company's net loss and loss per share for the years ended December 31, 1998, 1997 and 1996 would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):
1998 1997 1996 ------- ------- ------- Net loss: As reported ............................................ $ (7,074) $(21,130) $ (46,021) Pro forma............................................... (7,538) (22,530) (47,309) Loss per share - basic and diluted: As reported............................................. (.59) (6.04) (7.39) Pro forma............................................... (.62) (6.22) (7.57)
F-17 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 8. STOCKHOLDERS' EQUITY - CONTINUED The fair value of options granted under the Company's plans during 1998, 1997 and 1996 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 1998 1997 1996 ------- ------- ------- Dividend yield........................ 0.00% 0.00% 0.00% Expected volatility................... 114.98% 112.10% 56.33% Risk free interest rate............... 5.05% 5.50% 6.10% Expected lives(years)................. 3.0 3.0 2.5 9. EMPLOYEE BENEFIT PLANS Prior to January 1, 1999, Empire Industries had a 401(k) plan in which all employees with greater than one year of service could participate. This plan allowed for voluntary contributions by employees as well as an employer matching contribution. The employer's contribution was determined each year by the Board of Directors. Participants are 100% vested in their tax-deferred, rollover, and after-tax accounts. Employer contributions are subject to a vesting schedule by which employees were 100% vested after five years of employment. Company contributions to the 401(k) plan were $8,000, $3,000 and $41,000 in 1998, 1997 and 1996, respectively. Empire Hong Kong has an employee benefit plan under which the subsidiary is required to make annual contributions equal to 5% or 7.5% of each employee's individual annual contributions based on employee compensation. At the time of acquisition by the Company, the Apple Companies had a 401(k) plan in which employees with greater than one year of service could participate. This plan allowed for voluntary contributions by employees as well as an employer 25% matching contribution. Participants were 100% vested immediately upon entering the plan. Company contributions to the 401(k) plan were $8,000 in 1998. Effective January 1, 1999, the Company combined the Apple Companies 401 (k) plan into the Empire Industries 401 (k) plan, and amended the plan terms. The new plan allows employees with greater than 90 days of service to participate, and provides for a 25% matching contribution. Participants are 100% vested after one year of service. With respect to a former business, the Company retained sponsorship of its pension plan, which was effectively terminated at the closing of the sale. The Company has distributed to the participants the assets of that plan. The Company has assumed the liability for postretirement health care and life insurance benefits to former employees of a CLR subsidiary. The benefits will be funded as they are paid. The present value of the projected benefits due these former employees has been accrued, using a discount rate of 8.5% for 1998 and 1997, in the consolidated financial statements in accordance with SFAS No. 106, "Employers' Accounting For Postretirement Benefits Other Than Pensions." The Company has accrued $715,000 and $755,000 as of December 31, 1998 and 1997, respectively, for these benefits. The net postretirement benefit cost for each of the three years ended December 31, 1998 is not material to the consolidated financial statements. F-18 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 10. COMMITMENTS AND CONTINGENCIES ROYALTY AGREEMENTS - The Company is obligated to pay certain minimum royalties under various trademark license agreements which aggregate approximately $6.2 million through their initial minimum terms expiring through June 30, 2002. LETTERS OF CREDIT -- At December 31, 1998, the Company had outstanding commitments under letters of credit totaling $1,479,000. LEASES -- The Company is committed under various noncancelable operating leases. Future minimum lease obligations under these operating leases by year are as follows: 1999 -- $1,488,000; 2000 -- $1,092,000; 2001 -- $830,000; 2002 -- $619,000; 2003 -- $436,000; thereafter -- $754,000. The net rental expense for operating leases was approximately $1,542,000 in 1998, $1,586,000 in 1997, and $1,641,000 in 1996. INDEMNIFICATIONS -- In connection with the sales of businesses it previously owned, the Company provided certain indemnifications to the purchasers. The Company has established reserves for all claims known to it and for other contingencies in connection with the sales. 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 -- During December 1990, George Delaney and Rehkemper I.D., Inc. commenced a suit against an acquired company claiming infringement of various intellectual property rights. The plaintiffs have filed an amended complaint against the Company and a trial is scheduled for August 1999. Although the Company is vigorously contesting the matters set forth in the amended complaint, it is unable to determine at this time the extent of its financial exposure. 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. During 1997, the Company entered into consent decrees in regard to various of these matters and made payments totaling $335,000. 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, 1998 and 1997, the Company had reserves for environmental liabilities of $98,000 and $125,000, respectively. 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 F-19 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 10. COMMITMENTS AND CONTINGENCIES - CONTINUED 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. 11. NONRECURRING INVENTORY AND RESTRUCTURING AND OTHER CHARGES NONRECURRING INVENTORY CHARGES -- During 1996, difficulties experienced at the Company's Tarboro, NC plant, resulted in significant nonrecurring costs. These costs included the excess cost of temporarily outsourcing production of certain products and an increase in scrap and damaged inventory at the Tarboro plant. In addition, the Company determined that a substantial amount of work in process and parts inventory, was no longer usable. Furthermore, the Company decided to discontinue the production and sale of certain toys. These nonrecurring inventory charges are summarized as follows (in thousands):
1996 ------ Provisions for, write-offs of unsaleable, scrapped and damaged inventories........ $ 9,285 Costs related to outsourcing certain production................................... 2,400 Write-offs of inventories associated with discontinued product lines.............. 500 ------- Total............................................................................. $12,185 =======
RESTRUCTURING AND OTHER CHARGES -- During 1997, the Company determined that a substantial amount of machinery, equipment and molds, much of which was received during a 1995 acquisition, was no longer necessary to support the current product line or future operations. Such assets disposed of were written off with a charge of $3,531,000. Also during 1997, the Company decided to dispose of the steel-walled pool product line acquired in 1995. Assets, primarily inventory, machinery and equipment, with a book value of $3,243,000 were sold, resulting in a loss of $1,008,000 of which $800,000 is included in cost of sales. The restructuring costs and other charges incurred during the year ended December 31, 1996, resulted from actions taken in response to the reduction in operating margins experienced. The Company had restructured its operations and reduced costs by eliminating administrative and manufacturing jobs and curtailing non-essential spending. The Company has also provided additional amounts for costs related to (i) exiting the Gloversville, New York facility, (ii) lease termination costs for duplicate facilities and (iii) chargebacks by customers for late or missed shipping dates. Additionally, a review of the carrying value of long-lived and intangible assets related to the discontinued products has been made in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Based on this evaluation, the Company wrote off patents, trademarks and trade names associated with the discontinued products, including a pro-rata portion of goodwill attributed to them. F-20 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 11. NONRECURRING INVENTORY AND RESTRUCTURING AND OTHER CHARGES - CONTINUED Restructuring costs and other charges for the years ended December 31, 1997 and 1996 are summarized as follows (in thousands):
Restructuring Charges: 1997 1996 ------ ------ Employee severance costs...................................... $ -- $1,100 Relocation of operations....................................... -- 2,000 Lease termination costs for duplicate facilities............... -- 400 Impairment of long-lived assets related to discontinued product lines, including pro-rata portion of goodwill.................... 3,531 4,000 Loss on dispositon of product lines.............................. 208 -- Other: Provision for chargebacks by customers for late or missed shipping deadlines........................................... -- 1,000 Miscellaneous.................................................. -- 300 -------- -------- Total ($3,739,000 and $1,300,000 incurred in the fourth quarters of 1997 and 1996, respectively)......................... $3,739 $8,800 ======== ========
12. SEGMENT INFORMATION The Company considers itself to be of one operating segment in the consumer products industry. Three product categories, toys, holiday products and golf accessories, share similar distribution channels and are marketed and sold to similar customers. These products are generally manufactured from plastic resins and other materials using equivalent manufacturing processes. Items for all product lines are manufactured in varying combinations through the Company's facility in Tarboro, NC, by domestic subcontractors, or sourced through the Company's buying office in Hong Kong. The Company does not review operating results separately to make decisions about resources to be allocated among these products. Consequently, the Company has aggregated all operating results as one segment. Geographic information and net sales by product category are as follows (in thousands):
As of and for the years ended December 31, 1998 1997 1996 ------- ------- ------- Net sales to foreign customers............................ $ 5,128 $6,836 $14,942 Long-lived assets located in the Far East................. 3,861 5,595 5,585 Net sales: Toys................................................... $55,007 $82,840 $119,706 Holiday products....................................... 12,606 19,076 29,202 Golf accessories (*since acquisition only)............. 12,884 * * ------- -------- -------- Total .............................................. $80,497 $101,916 $148,908 ======= ======== ========
F-21 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 12. SEGMENT INFORMATION - CONTINUED The Company has a Hong Kong based subsidiary which oversees the sourcing of products from manufacturers in the Far East. Sales of products sourced through the Company's Hong Kong based subsidiary in each of the last three years ended December 31 were: 1998 -- $31,273,000; 1997 -- $36,075,000; and 1996 -- $42,891,000, respectively. Intercompany sales between the Company's foreign and domestic operations for the years ended December 31, 1998, 1997 and 1996 were $4,414,000, $6,654,000 and $12,700,000, respectively. Sales to significant customers, individually, were 22%, 17%, 13% and 9% of sales, respectively, in 1998; 26%, 21%, and 13% of sales, respectively, in 1997; and 25%, 19%, and 9% of sales, respectively, in 1996. No other customer accounted for more than 10% of the Company's sales in those years. 13. RELATED PARTIES In connection with the Series A preferred stock transactions described in Note 8, the following members of the Company's Board of Directors made investments in the Company during 1997, which balances may subsequently have changed through December 31, 1998: SHARES OF WARRANTS TO SERIES A ACQUIRE PREFERRED COMMON STOCK STOCK ------------- ------------- Charles S. Holmes 125,000 2,753,752 James J. Pinto 100,000 2,678,752 Lenore H. Schupak 22,500 22,500 John Doran 10,000 10,000 Timothy Moran, the Company's President and Chief Operating Officer, who was a significant shareholder of the Apple Companies, and Mark Rose, the majority shareholder of the Apple Companies, participated in the Series A preferred stock transactions, acquiring 50,000 shares of Series A preferred stock and warrants to acquire 50,000 shares of common stock, each. Mark Rose is the father-in-law of Timothy Moran. Weiss, Peck & Greer, L.L.C. ("WPG"), on behalf of investment funds for which they were managers, in June 1997 exchanged $14,900,000 of debentures for 1,490 newly-issued Series C preferred stock of the Company. See Note 8. WPG released, among other things, their claims to accrued and unpaid interest, fees and expenses. Two principals of WPG were members of the Company's Board of Directors from 1994 through November 1997. Steven Geller, former Chief Executive Officer and director of the Company, has the right to vote 734,039 shares of common stock of the Company owned by Barry Halperin. Mr. Geller's right to vote such shares terminates upon Mr. Halperin's disposal thereof. Mr. Geller has certain rights of first refusal relative to Mr. Halperin's disposal of their remaining shares. Mr. Geller has a one year consulting agreement with the Company which expires May 1999. F-22 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES SUPPLEMENTARY FINANCIAL DATA SELECTED QUARTERLY DATA UNAUDITED (in thousands, except per share data)
1998 --------------------------------------- First Second Third Fourth ------- ------- ------- -------- Net sales........................................... $11,896 $20,306 $29,093 $19,202 Gross profit........................................ 2,505 5,474 7,003 3,395 Net income (loss)................................... (2,975) (1,504) (141) (2,454) Net Income (loss) per common share: Basic and diluted earnings per share................ (.38) (.15) (.01) (.16) 1997 --------------------------------------- Net sales .......................................... $25,686 $27,616 $29,390 $16,824 Gross profit (loss)................................. 3,808 7,743 5,648 (2,807) Restructuring and other charges..................... -- -- -- 3,739 Net income (loss)................................... (3,251) (761) (3,403) (13,715) Net Income (loss) per common share: Basic and diluted earnings per share ............... (.44) (2.69) (.44) (2.44)
F-23 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF EMPIRE OF CAROLINA, INC. We have audited the consolidated financial statements of Empire of Carolina, Inc. and its subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated March 25, 1999, which report includes an explanatory paragraph as to an uncertainty regarding the Company's ability to continue as a going concern; such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Empire of Carolina, Inc. and its subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Raleigh, North Carolina March 25, 1999 S-1 SCHEDULE 1 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT EMPIRE OF CAROLINA, INC., (PARENT) STATEMENTS OF OPERATIONS Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------ ------ ------ (In thousands) ADMINISTRATIVE INCOME $ 66 $ 129 $ 401 OTHER INCOME(EXPENSE): Interest income, dividends and net realized gains(losses) 5 6 (82) Interest expense -- (930) (2,816) Equity in earnings of subsidiaries (7,205) (20,395) (44,232) Management fee income 60 60 60 Other -- -- (197) -------- -------- -------- Total other income(expense) (7,140) (21,259) (47,267) -------- -------- -------- LOSS BEFORE INCOME TAXES (7,074) (21,130) (46,866) INCOME TAX BENEFIT -- -- 665 -------- -------- -------- NET LOSS $ (7,074) $(21,130) $(46,201) ======== ======== ========
S-2 SCHEDULE 1 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT EMPIRE OF CAROLINA, INC., (PARENT) BALANCE SHEETS December 31, 1998 and 1997 (In thousands)
1998 1997 --------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 207 $ 31 Receivables from subsidiaries -- -- Prepaid expenses and other current assets 1 1 --------- -------- Total current assets 208 32 INVESTMENT IN AND NOTE RECEIVABLE FROM SUBSIDIARIES 17,834 17,727 --------- -------- $ 18,042 $ 17,759 --------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,344 $ 1,325 Indemification obligations related to sales of subsidiaries 379 380 --------- -------- Total current liabilities 1,723 1,705 --------- -------- OTHER NONCURRENT LIABILITIES 562 601 --------- -------- Total liabilities 2,285 2,306 --------- -------- STOCKHOLDERS' EQUITY: Common stock, $.10 par value, 60,000,000 shares authorized. Shares issued and outstanding: 1998 - 16,117,000 and 1997 - 7,849,000 1,612 785 Preferred stock, $.01 par value, 5,000,000 shares authorized. Shares issued and outstanding: Series A convertible preferred stock: 1998 - 1,751,000 and 1997 - 2,100,000; Series C convertible preferred stock: 1998 - 1,451 and 1997 - 1,461. 18 21 Additional paid-in capital 115,813 109,282 Deficit (101,686) (94,635) --------- -------- Total stockholders' equity 15,757 15,453 --------- -------- $ 18,042 $ 17,759 ========= ========
The note receivable from subsidiary is subordinated to the subsidiary's bank facility and bears interest at the prime rate. Note: The Parent accounts for its investment in its majority-owned subsidiaries using the equity method of accounting. Under the equity method, original investments are recorded at cost and adjusted by the Parent's share of undistributed earnings or losses for these companies. S-3 SCHEDULE 1 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT EMPIRE OF CAROLINA, INC., (PARENT) STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,074) $(21,130) $(46,201) Adjustments to reconcile net loss to net cash provided by(used in) operating activities: Non-cash adjustments (60) 21,226 43,403 Changes in assets and liabilities 255 738 (471) -------- -------- -------- Net cash provided by(used in) operating activities (6,879) 834 (3,269) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable securities -- -- 85 Note receivable from subsidiary (107) (19,609) (8,933) Net advances to subsidiaries -- -- 1,607 Management fees received from subsidiaries 60 60 60 -------- -------- -------- Net cash used in investing activities (47) (19,549) (7,181) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Investment in subsidiary 7,181 -- -- Repayment of senior subordinated notes -- -- (8,338) Proceeds from issuance of common stock -- -- 14,485 Net proceeds from(expenses of) issuance of preferred stock (86) 18,656 -- Proceeds from stock options and warrants exercised 7 -- 2,977 -------- -------- -------- Net cash provided by financing activities 7,102 18,656 9,124 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 176 (59) (1,326) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 31 90 1,416 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 207 $ 31 $ 90 ======== ======== ========
S-4 SCHEDULE 1 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT EMPIRE OF CAROLINA, INC., (PARENT) STATEMENTS OF CASH FLOWS - Continued Years Ended December 31, 1998, 1997 and 1996 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ -- $ -- $ 3,301 Income taxes, (net of refunds) (131) (94) (1,834) NONCASH INVESTING AND FINANCING ACTIVITIES On May 28, 1998, the Company acquired all of the common stock of the Apple Companies for an aggregate purchase price of $7,633,000, including expenses, and including the issuance of 5,000,000 shares of common stock and assuming the issuance of an additional 1,153,846 shares of common stock. On August 21, 1998, the Company settled a liability with a licensor by making a cash payment and issuing 200,000 shares of common stock in exchange for releasing the Company from an unsatisfied guaranteed minimum royalty obligation, resulting in an increase in common stock of $20,000, additional paid-in capital of $130,000, and a decrease in other liabilities of $150,000. During December 1998, the Company issued 223,656 shares of common stock in lieu of directors and consulting fees, resulting in an increase in common stock of $23,000, additional paid-in capital of $90,000 and a decrease in other liabilities of $103,000. 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. Also 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 $14,897,000. Pursuant to Emerging Issues Task Force Topic No.D-60, the Company during 1997 recorded a dividend on its newly-issued Series A preferred stock to reflect the effect of a beneficial conversion feature of such stock and the concurrent issuance of 10 million warrants. The recording of this dividend resulted in a transfer from deficit to additional paid-in capital of $24,645,000. S-5 EX-23 2 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-42391 on Form S-3, No. 333-57963 on Form S-3 and No. 333-70707 on Form S-8 of Empire of Carolina, Inc. of our report dated March 25, 1999 (which reports include an explanatory paragraph as to an uncertainty regarding the Company's ability to continue as a going concern), appearing in this Annual Report on Form 10-K of Empire of Carolina, Inc. for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Raleigh, North Carolina March 29, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AND THE AUDITED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 4,295 0 11,462 5,083 10,876 27,450 37,839 26,268 57,646 33,800 0 0 18 1,612 14,127 57,646 80,497 80,497 (62,120) (62,120) 0 65 (4,154) (7,074) 0 (7,074) 0 0 0 (7,074) (0.59) (0.59)
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