-----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, AWTKn5QEXfDDFXKLHDkjPLNTiry86Wc5FFJufr5oIVfV5bTBe7BQTDBuMGsDtqvO cws7hawzSvK3m8mskZHfdQ== /in/edgar/work/20000815/0001005477-00-005812/0001005477-00-005812.txt : 20000922 0001005477-00-005812.hdr.sgml : 20000921 ACCESSION NUMBER: 0001005477-00-005812 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPIRE OF CAROLINA INC CENTRAL INDEX KEY: 0000312840 STANDARD INDUSTRIAL CLASSIFICATION: [3944 ] IRS NUMBER: 132999480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07909 FILM NUMBER: 701321 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-Q 1 0001.txt FROM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File No. 1-7909 ------ EMPIRE OF CAROLINA, INC. ------------------------- (Exact name of Registrant as specified in its charter) Delaware 13-2999480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4731 WEST ATLANTIC BOULEVARD SUITE B1, DELRAY BEACH, FL 33445 --------------------------------------------------------------- (Address of principal executive office) (Zip Code) (561) 498-4000 -------------- Registrant's telephone number, including area code) 5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33848 -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares outstanding of the issuer's Common Stock, $.10 par value, as August 9, 2000 was 21,577,839. EMPIRE OF CAROLINA, INC. INDEX Page ---------- Facing Sheet ...................................................... Cover Page Index ............................................................. 1 Part I - Financial Information .................................... 2 Item 1. Financial Statements Consolidated Condensed Balance Sheets June 30, 2000 and December 31, 1999 ...................... 3 Consolidated Condensed Statements of Operations Six months ended June 30, 2000 and July 4, 1999 .......... 4 Consolidated Condensed Statements of Operations Six months ended June 30, 2000 and July 4, 1999 .......... 5 Consolidated Condensed Statements of Cash Flows Six months ended June 30, 2000 and July 4, 1999 .......... 6 Notes to Consolidated Condensed Financial Statements ........ 7-10 Item 2. Management's Discussion and Analysis of Financial Conditions And Results of Operations ................. 10-12 Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................................... 12 Part II - Other Information Item 1. Legal Proceedings ..................................... 12 Item 3. Defaults Upon Senior Securities ....................... 13 Item 4. Submission of Matters to a Vote of Security Holders ... 13 Item 5. Other Information ..................................... 13 Item 6. Exhibits and Reports on Form 8-K ...................... 13 Signature ......................................................... 14 PART I - FINANCIAL INFORMATION This Form 10-Q contains various forward-looking statements and information, including under the caption "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 and golf 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 and other 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, the availability of financing or availability of refinancing for existing debt, and the Company's ability to obtain additional capital on a timely basis, through the disposition of assets or otherwise, to meet cash flow and working capital needs and 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 Annual Report on Form 10-K for the year ended December 31, 1999 and 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. 2 Item 1. Financial Statements EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands except share amounts)
June 30, December 31, 2000 1999 ----------- ------------ ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 161 $ 1,589 Accounts receivable, net 12,861 16,708 Inventories, net 10,341 12,144 Prepaid expenses and other current assets 654 301 --------- --------- Total current assets 24,017 30,742 Property, plant and equipment, net 2,038 11,413 Excess cost over fair value of net assets acquired, net 10,725 11,392 Trademarks, patents, tradenames and licenses, net 4,813 5,287 Other noncurrent assets 1,052 268 --------- --------- Total Assets $ 42,645 $ 59,102 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt $ 27,004 $ 34,096 Accounts payable - trade 4,925 6,748 Other accrued liabilities 3,545 7,834 --------- --------- Total current liabilities 35,474 48,678 --------- --------- Long-Term Liabilities: Long-term debt 625 625 Other noncurrent liabilities 1,202 1,040 --------- --------- Total long-term liabilities 1,827 1,665 --------- --------- Total liabilities 37,301 50,343 --------- --------- Commitments and Contingencies (Note 3) Stockholders' Equity: Common stock, $.10 par value, 60,000,000 shares authorized, shares Issued and outstanding: 2000 - 21,578,000 and 1999 - 19,667,000 2,158 1,967 Preferred stock, $.01 par value, 5,000,000 shares authorized Issued and outstanding: 2000 - 1,287,000 and 1999 - 1,487,000 Shares of Series A convertible preferred stock and 2000 - 1,451 and 1999 - 1,451 shares of Series C convertible preferred stock 13 15 Additional paid-in capital 115,718 115,824 Deficit (112,545) (109,047) --------- --------- Total stockholders' equity 5,344 8,759 --------- --------- Total Liabilities and Stockholders' Equity $ 42,645 $ 59,102 ========= =========
See notes to consolidated condensed financial statements. 3 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited) Quarter Ended Quarter Ended June 30, July 4, 2000 1999 ------------- ------------- Net Sales $ 11,589 $ 14,453 Cost of Sales 8,254 10,789 -------- -------- Gross Profit 3,335 3,664 Selling and Administrative Expense 2,797 4,175 -------- -------- Operating Earnings (Loss) 538 (511) Interest Expense (875) (932) -------- -------- Loss Before Income Taxes (337) (1,443) Income Tax Expense 38 -- -------- -------- Net Loss ($ 375) ($ 1,443) ======== ======== Loss Per Common Share - Basic and diluted ($ 0.02) ($ 0.08) ======== ======== Weighted average number of common shares outstanding - Basic and diluted 21,061 17,062 ======== ======== See notes to consolidated condensed financial statements. 4 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited) Six Months Six Months Ended Ended June 30, July 4, 2000 1999 ---------- ---------- Net Sales $ 21,250 $ 30,304 Cost of Sales 16,510 22,612 -------- -------- Gross Profit 4,740 7,692 Selling and Administrative Expense 6,721 9,182 -------- -------- Operating Loss (1,981) (1,490) Interest Expense (1,479) (1,776) -------- -------- Loss Before Income Taxes (3,460) (3,266) Income Tax Expense 38 -- -------- -------- Net Loss ($ 3,498) ($ 3,266) ======== ======== Loss Per Common Share - Basic and diluted ($ 0.17) ($ 0.20) ======== ======== Weighted average number of common shares outstanding - Basic and diluted 20,435 16,713 ======== ======== See notes to consolidated condensed financial statements. 5 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)(In Thousands)
Six Months Six Months Ended Ended June 30, July 4, 2000 1999 ---------- ---------- Cash Flows From Operating Activities: Net loss ($3,498) ($3,266) Adjustments to reconcile net loss to net cash used in Operating activities: Depreciation and amortization 1,684 2,400 Other (1,671) 943 Changes in assets and liabilities 1,672 (8,238) ------- ------- Net cash used in operating activities (1,813) (8,161) ------- ------- Cash Flows From Investing Activities: Capital expenditures (20) (1,600) Net proceeds from sale of assets 7,497 ------- ------- Net cash provided by (used in) investing activities 7,477 (1,600) ------- ------- Cash Flows From Financing Activities: Borrowings (repayments) under lines of credit (7,092) 8,715 Repayments of notes payable (625) ------- ------- Net cash provided by (used in) financing activities (7,092) 8,090 ------- ------- Net Decrease in Cash and Cash Equivalents (1,428) (1,671) Cash and Cash Equivalents, Beginning of Period 1,589 4,295 ------- ------- Cash and Cash Equivalents, End of Period $ 161 $ 2,624 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 1,981 $ 1,285 Income taxes, (net of refunds) 21 88
See notes to consolidated condensed financial statements. 6 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Six Months Ended June 30, 2000 and July 4, 1999 (Unaudited) 1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated condensed financial statements have been prepared by the Company pursuant the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The consolidated statements of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the full year. These unaudited financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company's 1999 Annual Report on Form 10-K for the year ended December 31, 1999. The consolidated condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Recurring losses from operations and operating cash constraints are potential factors which, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The independent auditors' report on the December 31, 1999 financial statements stated that "... the Company's recurring losses from operations and current cash constraints raise substantial doubt about the Company's ability to continue as a going concern . . . . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." The consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded 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. In 2000, the Company implemented a calendar month end monthly closing cycle for the quarter versus a 4-4-5 week monthly closing cycle in the prior year quarter. This change has no significant impact on the comparability of the interim consolidated condensed financial statements presented. Earnings per share - All of the Company's options, warrants and convertible securities are excluded from basic and diluted earnings per share because they are anti-dilutive. 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. 7 2. ACCOUNTS RECEIVABLE A summary of accounts receivable at June 30, 2000 and December 31, 1999, is as follows (in thousands): June 30, 2000 December 31, 1999 ------------- ----------------- Gross Receivables $ 18,443 $ 23,986 Less: Allowances and other deductions (5,582) (7,278) -------- -------- Net receivables $ 12,861 $ 16,708 ======== ======== 3. INVENTORIES A summary of inventories, by major classification, at June 30, 2000 and December 31, 1999 is as follows (in thousands): June 30, 2000 December 31, 1999 ------------- ----------------- Finished Goods $ 10,817 $ 10,730 Raw Materials and purchased parts 1,642 3,384 Work-in-process 796 621 -------- -------- Subtotal 13,255 14,735 Less: Reserve for obsolescence (2,914) (2,591) -------- -------- Total Inventory $ 10,341 $ 12,144 ======== ======== 4. COMMITMENTS AND CONTINGENCIES Royalty agreements - The Company is obligated to pay certain minimum royalties under various trademark license agreements that aggregate approximately $4.9 million through their initial minimum terms expiring through June 30, 2002. Letters of credit - The Company had outstanding commitments under letters of credit totaling approximately $1,502,000 at June 30, 2000 compared to $1,064,000 at December 31, 1999. Indemnifications - In connection with the sale of businesses it previously owned, the Company provided certain indemnifications to the purchaser. The Company has established reserves for all claims known to it and for other contingencies in connection with the sale. Although there can be no assurance that claims and other contingencies related to the sale will not exceed established reserves, the Company believes that additional exposure related to the indemnification obligations will not be material to the consolidated financial statements. Litigation - During December 1990, George Delaney and Rehkemper I.D., Inc. filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division, against Marchon, Inc. claiming infringement of various intellectual property rights and failure to pay royalties related to Marchon's development and sale of various toys allegedly designed by plaintiffs. The Company was added as a defendant after its acquisition of Marchon in October 1994. In August 1999, the Company agreed to settle the litigation for $750,000. The Court entered an Order of Dismissal with Prejudice on September 17, 1999. Pursuant to the settlement agreement, the Company paid to the plaintiffs $350,000 on September 28, 1999 and is obligated to pay an additional $400,000 in quarterly payments of $50,000 which payments commenced on March 31, 2000. During October 1998, Industrial Truck Sales & Services, Inc. filed suit in the General Court of Justice, Superior Court Division, of Guilford County, North Carolina, against the Company and its North Carolina subsidiary, Empire Industries, Inc., alleging breach of contract, among other counts, relating to leases for forklifts delivered to the Company's Tarboro, North Carolina, facility and seeking damages of approximately $104,000. The Company and Empire Industries filed a third party complaint against Associates Leasing, Inc., Forklifts, Inc. and Howard Younger alleging fraud and breach of fiduciary duty. Industrial Truck Sales and Forklifts, Inc. were 8 the original lessors of the forklift and Mr. Younger is a former employee of Empire Industries who executed the leases. Associates Leasing is the assignee of the leases. In January 1999, Associates Leasing filed a counterclaim against the Company and Empire Industries alleging breach of contract and demanding judgment in excess of $800,000. During the third quarter of 1999, the Company entered into a preliminary settlement agreement pursuant to which the Company will pay approximately $500,000. The settlement was finalized and the obligation was paid in full in the first quarter of 2000. In March 2000, 200 Fifth Avenue Associates filed an action in the Supreme Court of the State of New York, County of New York against Carolina Enterprises, Inc. (the predecessor company to Empire Industries, Inc.), a subsidiary of the Company, and Empire of Carolina, Inc. This action alleges that the Company breached its lease for premises located at 200 Fifth Avenue, New York, New York. In an amended complaint filed on May 31, 2000, the plaintiff increased the amount of damages claimed from approximately $100,000 to approximately $243,000. The Company is attempting to settle this matter. In mid-1997, Mid-Atlantic Rigging, Inc. filed an action in the Superior Court of New Jersey, Law Division, Gloucester County, New Jersey, against Empire Industries, Inc.. This action alleged damages in excess of $100,000. This matter was referred to arbitration as required under New Jersey statute. On July 19, 2000, a non-binding arbitration award in the amount of $172,095 (inclusive of interest and attorneys' fees) was entered against Empire Industries, Inc. On August 4, 2000, Empire filed a de novo appeal of the non-binding arbitration award. Under New Jersey statute, a trial date will be scheduled within six weeks. The Company is attempting to settle this matter prior to commencement of trial. On July 13, 2000, Frischkorn, Inc. filed an action in the United States District Court, Eastern District of Virginia, Richmond Division, against Empire Industries, Inc. This action alleges that Empire Industries breached its agreement with Frischkorn by failing to pay for goods and materials and demands damages in excess of $214,000. The Company will attempt to settle this matter. 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. An unfavorable outcome of any of this litigation either individually or in the aggregate could 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. The Company is vigorously contesting these matters. It is the Company's policy to accrue remediation costs when it is possible that such costs will be incurred and when they can be reasonably estimated. As of December 31, 1999 and March 31, 2000, the Company had reserves for environmental liabilities of $98,000. The amount accrued for environmental liabilities was determined without consideration of probable recoveries from third parties. Estimates of costs for future remediation are necessarily imprecise due to, among other things, the allocation of costs among potentially responsible parties. Although it is possible that additional environmental liability related to these matters could result in amounts that could be material to the Company's consolidated financial statements, a reasonably possible range of such amounts cannot presently be estimated. Based upon the facts presently known, the large number of other potentially responsible parties and potential defenses that exist, the Company believes that its share of the costs of cleanup for its current remediation sites will not, in the aggregate, have a material adverse effect on its consolidated financial statements. 9 5. STOCKHOLDERS' EQUITY During the first six months of 2000, 198,400 shares of Series A Preferred Stock were converted to 1,587,200 shares of Common Stock. The effect of the conversion resulted in an increase in common stock value of $158,000, a decrease in Preferred Stock value of $2,000, and a decrease in additional paid-in capital of $156,000. During June 2000, the Company issued 330,000 shares of Common Stock in lieu of directors and consulting fees, resulting in an increase in Common Stock of 33,000, additional paid in capital of $50,000 and a decrease in other accrued liabilities of $83,000. 6. SUBSEQUENT EVENT As of June 30, 2000, Empire Industries had not made $9.0 million of scheduled payments under its bank facilities and was not in compliance with certain covenants contained in its bank facilities. The bank lenders have waived the payment defaults and the covenant defaults through June 30, 2000. As of the filing of this report, Empire Industries is in default of its bank facility and the Company is in the midst of discussions with the bank on proposed amendments to the credit facilities and waivers of the current defaults. The Company has currently no availability under its line of credit for Empire Industries. Although there is $0.6 million for the Apple Companies, the bank lenders have restricted funding under both facilities. In the event the parties are unable to reach agreement, the bank lenders are entitled, at their discretion, to exercise certain remedies including acceleration of repayment. If these obligations were to be accelerated, in whole or in part, there can be no assurance that the Company would be successful in identifying or consummating financing, or consummating the disposition of assets, to the extent necessary to satisfy the obligations which would become immediately due and payable. At this time, the Company has no other available sources of capital, and such acceleration would have a material adverse effect on the Company, its operations and its financial condition. In the past, the Company has been successful in obtaining necessary waivers and amendments from the bank lenders. There is no assurance that, under the current circumstances, the bank lenders will provide the Company with an amendment or waiver of the current defaults, and they have been noncommittal during the current discussions. If the outcome of negotiations with the bank lenders is unfavorable, the Company will pursue all other available options including the sale or disposition of additional product lines in order to meet its obligations or reorganization pursuant to the federal bankruptcy laws. As a result of the uncertainty related to the defaults and corresponding remedies described above, the bank facilities are shown as current liabilities on the Company's Consolidated Condensed Balance Sheets at June 30, 2000. Accordingly, the Company has a deficit in working capital of $11.5 million at June 30, 2000. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company designs, develops, and markets a broad variety of consumer products including children's toys, golf footwear and accessories, sports boards and accessories, and seasonal outdoor sports activity products. The Company's line of toys includes the classic Big Wheel(R) ride-on toys, Grand Champions(R) collectible horses, and Buddy L(R) cars and trucks. Its consumer sports line includes Wilson(R) golf shoes and accessories and MONGOOSE(R) sports boards and accessories. Sales of the Company's products are seasonal in nature. Products sold primarily in the spring and summer months include golf footwear and accessories, 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. The Company expects that its quarterly operating results will vary significantly throughout the year. Results of Operations Second Quarter Ended June 30, 2000 Compared to Second Quarter Ended July 4, 1999 Net Loss. The net loss for the quarter ended June 30, 2000 was $0.4 million as compared to $1.4 million for the quarter ended July 4, 1999. The decrease in the net loss reflects the company's cost cutting efforts which reduced S&A expenses by $1.4 million as compared to the prior year quarter. Net Sales. The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales for the quarter ended June 30, 2000 decreased by $2.9 million, or 19.8%, to $11.6 million. The Company believes that the decrease in sales is primarily due to increased competition with respect to particular products, the elimination of sales of low margin products, and the sale of the seasonal products line to General Foam Plastics Corp. on May 4, 2000. Gross Profit Margins. Gross profit margins for the quarter ended June 30, 2000 was 28.8% as compared with 25.3% in the quarter ended July 4, 1999. The increase in gross profit margin for the second quarter of 2000 is due to the sale of the Company's manufacturing facility, which had been under-utilized and to a lessor extent, changes in volume and sales mix. Selling and Administrative ("S&A"). Selling and administrative expenses for the quarter ended June 30, 2000 was $2.8 million as compared to $4.2 million for the quarter ended July 4, 1999. Selling and administrative expenses decreased due to the Company's continuing cost cutting efforts and elimination of excess overhead costs. Interest Expense. Interest expense decreased to $0.875 million for the second quarter of 1999 compared to $0.932 million during the second quarter of 1999. This decrease is a result of lower borrowings partially offset by slightly higher interest rates. Six Months Ended June 30, 2000 Compared to Six Months July 4, 1999 Net Loss. The net loss for the six months ended June 30, 2000 was $3.5 million as compared to $3.3 million for the quarter ended July 4, 1999. The net loss reflects increases in the cost of petrochemical plastic resin derivatives and the under-utilization of the Company's manufacturing facility in Tarboro, North Carolina, partially offset by lower selling and administrative expense and interest expense. 11 Net Sales. The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales for the six months ended June 30, 2000 decreased by $9.1 million, or 29.9%, to $21.2 million. The Company believes that the decrease in sales is primarily due to increased competition with respect to particular products and elimination of sales of low margin products and the sale of the seasonal products line to General Foam Plastics Corp. on May 4, 2000. Gross Profit Margins. Gross profit margins for the six months ended June 30, 2000 was 22.3% as compared with 25.4% in the six months ended July 4, 1999. The decrease in gross profit margin for the six months of 2000 is due to increases in the cost of petrochemical plastic resin derivatives, the under-utilization of the Company's manufacturing facility, the liquidation and clearance of old inventory, and decreases in sales volume and sales mix. Selling and Administrative ("S&A"). Selling and administrative expenses for the six months ended June 30, 2000 was $6.7 million as compared to $9.2 million for the six months ended July 4, 1999. Selling and administrative expenses decreased due to the Company's continuing cost cutting efforts and elimination of excess overhead costs. Interest Expense. Interest expense decreased to $1.5 million for the six months ended June 30, 2000 compared to $1.8 million during the six months ended July 4, 1999. This decrease is a result of lower borrowings partially offset by slightly higher interest rates. Seasonality of Sales Sales of the Company's products are seasonal in nature. Products sold primarily in the spring and summer months include golf footwear and accessories, 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. The Company expects that its quarterly operating results will vary significantly throughout the year. Liquidity and Capital Resources The Company has experienced severe operating difficulties during the past several years and sales have declined over this period. The Company recorded a net loss of $3.5 million for the first six months of 2000 as compared with a net loss of $3.3 million for the first three months of 1999. The Company continues to operate under extremely tight cash constraints. The Company, through its domestic operating subsidiaries, has a series of cross-guaranteed secured bank facilities which currently aggregate up to $50.0 million ($40.0 million for Empire Industries and $10.0 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 $9.0 million of Empire Industries' availability is not tied by formula to the underlying assets and requires monthly repayments of $1.5 million which commenced on September 30, 1999 through February 29, 2000. The balance of the availability of borrowing 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. The Company has financed its losses primarily by additional borrowings under its existing bank facilities. At June 30, 2000, the Company's Empire Industries and Apple subsidiaries had borrowed $20.7 million and $5.7 million, respectively, under those facilities. As of June 30, 2000, Empire Industries had an overadvance from the bank lenders of $6.7 million, which is included in the $20.7 million. As of July 12, 2000, the overadvance was $7.1 million. As of June 30, 2000, Empire Industries had not made $9.0 million of scheduled payments under its bank facilities and was not in compliance with certain covenants contained in its bank facilities. The bank lenders have waived the payment defaults and the covenant defaults through June 30, 2000. As of the filing of this 12 report, Empire Industries is in default of its bank facility and the Company is in the midst of discussions with the bank on proposed amendments to the credit facilities and waivers of the current defaults. The Company has currently no availability under its line of credit for Empire Industries, although there is $0.6 million for the Apple Companies, the bank lenders have restricted funding under both facilities. In the event the parties are unable to reach agreement, the bank lenders are entitled, at their discretion, to exercise certain remedies including acceleration of repayment. If these obligations were to be accelerated, in whole or in part, there can be no assurance that the Company would be successful in identifying or consummating financing, or consummating the disposition of assets, to the extent necessary to satisfy the obligations which would become immediately due and payable. At this time, the Company has no other available sources of capital, and such acceleration would have a material adverse effect on the Company, its operations and its financial condition. In the past, the Company has been successful in obtaining necessary waivers and amendments from the bank lenders. There is no assurance that, under the current circumstances, the bank lenders will provide the Company with an amendment or waiver of the current defaults, and they have been noncommittal during the current discussions. If the outcome of negotiations with the bank lenders is unfavorable, the Company will pursue all other available options including the sale or disposition of additional product lines in order to meet its obligations or reorganization pursuant to the federal bankruptcy laws. As a result of the uncertainty related to the defaults and corresponding remedies described above, the bank facilities are shown as current liabilities on the Company's Consolidated Condensed Balance Sheets at June 30, 2000. Accordingly, the Company has a deficit in working capital of $11.5 million at June 30, 2000. On May 4, 2000, the Company completed the sale of its domestically manufactured decorative Holiday and Seasonal products including all machinery and equipment to General Foam Plastics Corporation ("General Foam") for approximately $3.7 million in cash. On May 8, 2000, the Company sold related finished goods inventory for the Holiday and Seasonal products to General Foam for approximately $0.8 million in cash. On June 6, 2000 the Company sold its 1.2 million square foot manufacturing facility in Tarboro, North Carolina to General Foam for approximately $3.1 million in cash. Substantially, all of the net proceeds from these sales have been used to reduce the Company's bank debt by $7.1 million. As a result of the transaction's with General Foam, the Company has sold its manufacturing equipment and has begun to outsource the manufacturing of its remaining domestic products. As a result of the preceding transactions, the Company utilized its reserves for the sale of its manufacturing facilities in the amount of $1.8 million. The consolidated condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Recurring losses from operations and operating cash constraints are potential factors which, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The independent auditors' report on the December 31, 1999 financial statements stated that "... the Company's recurring losses from operations and current cash constraints raise substantial doubt about the Company's ability to continue as a going concern . . . . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." The consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded 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. Because of the seasonality of its revenues, the Company's working capital requirements fluctuate significantly during the year. The Company's seasonal financing requirements are highest during the fourth quarter and lowest during the first quarter. The Company's inventories, accounts receivable, accounts payable, notes payable and current portion of long-term debt vary significantly by quarter due to the seasonal nature of the Company's business. The Company is subject to various actions and proceedings, including those relating to intellectual property matters, environmental matters and product liability matters. See notes to consolidated condensed financial statements. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to certain market risks that 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 rate, the Company does not believe that any adverse or positive affect would be material. PART II - OTHER INFORMATION Item 1. Legal Proceedings In March 2000, 200 Fifth Avenue Associates filed an action in the Supreme Court of the State of New York, County of New York against Carolina Enterprises, Inc. (the predecessor company to Empire Industries, Inc.), a subsidiary of the Company, and Empire of Carolina, Inc. This action alleges that the Company breached its lease for premises located at 200 Fifth Avenue, New York, New York. In an amended complaint filed on May 31, 2000, the plaintiff increased the amount of damages claimed from approximately $100,000 to approximately $243,000. The Company is attempting to settle this matter. In mid-1997, Mid-Atlantic Rigging, Inc. filed an action in the Superior Court of New Jersey, Law Division, Gloucester County, New Jersey, against Empire Industries, Inc.. This action alleged damages in excess of $100,000. This matter was referred to arbitration as required under New Jersey statute. On July 19, 2000, a non-binding arbitration award in the amount of $172,095 (inclusive of interest and attorneys' fees) was entered against Empire Industries, Inc. On August 4, 2000, Empire filed a de novo appeal of the non-binding arbitration award. Under New Jersey statute, a trial date will be scheduled within six weeks. The Company is attempting to settle this matter prior to commencement of trial. On July 13, 2000, Frischkorn, Inc. filed an action in the United States District Court, Eastern District of Virginia, Richmond Division, against Empire Industries, Inc. This action alleges that Empire Industries breached its agreement with Frischkorn by failing to pay for goods and materials and demands damages in excess of $214,000. The Company will attempt to settle this matter. 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. An unfavorable outcome of any of this litigation either individually or in the aggregate could 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. The Company is vigorously contesting these matters. It is the Company's policy to accrue remediation costs when it is possible that such costs will be incurred and when they can be reasonably estimated. As of December 31, 1999 and March 31, 2000, the Company had reserves for environmental liabilities of $98,000. The amount accrued for 14 environmental liabilities was determined without consideration of probable recoveries from third parties. Estimates of costs for future remediation are necessarily imprecise due to, among other things, the allocation of costs among potentially responsible parties. Although it is possible that additional environmental liability related to these matters could result in amounts that could be material to the Company's consolidated financial statements, a reasonably possible range of such amounts cannot presently be estimated. Based upon the facts presently known, the large number of other potentially responsible parties and potential defenses that exist, the Company believes that its share of the costs of cleanup for its current remediation sites will not, in the aggregate, have a material adverse impact on its consolidated financial statements. Item 3. Defaults Upon Senior Securities The Company has financed its losses primarily by additional borrowings under its existing bank facilities. At June 30, 2000, the Company's Empire Industries and Apple subsidiaries had borrowed $20.7 million and $5.7 million, respectively, under those facilities. As of June 30, 2000, Empire Industries had not made $9.0 million of scheduled payments under its bank facilities and was not in compliance with certain covenants contained in its bank facilities. The bank lenders have waived the payment defaults and the covenant defaults through June 30, 2000. As of the filing of this report, Empire Industries is in default of its bank facility and the Company is in the midst of discussions with the bank on proposed amendments to the credit facilities and waivers of the current defaults. The Company has currently no availability under its line of credit for Empire Industries. Although there is $0.6 million for the Apple Companies, the bank lenders have restricted funding under both facilities. In the event the parties are unable to reach agreement, the bank lenders are entitled, at their discretion, to exercise certain remedies including acceleration of repayment. If these obligations were to be accelerated, in whole or in part, there can be no assurance that the Company would be successful in identifying or consummating financing, or consummating the disposition of assets, to the extent necessary to satisfy the obligations which would become immediately due and payable. At this time, the Company has no other available sources of capital, and such acceleration would have a material adverse effect on the Company, its operations and its financial condition. In the past, the Company has been successful in obtaining necessary waivers and amendments from the bank lenders. There is no assurance that, under the current circumstances, the bank lenders will provide the Company with an amendment or waiver of the current defaults, and they have been noncommittal during the current discussions. If the outcome of negotiations with the bank lenders is unfavorable, the Company will pursue all other available options including the sale or disposition of additional product lines in order to meet its obligations or reorganization pursuant to the federal bankruptcy laws. As a result of the uncertainty related to the defaults and corresponding remedies described above, the bank facilities are shown as current liabilities on the Company's Consolidated Condensed Balance Sheets at June 30, 2000. Accordingly, the Company has a deficit in working capital of $11.5 million at June 30, 2000. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held May 25, 2000. The following matters were voted upon at the meeting: 1. Election by Series A Preferred Stockholders ("Series A Holders") of two members (Charles S. Holmes and James J. Pinto) to the Board of Directors and the Series A Holders and the holders of Common Stock (collectively, the "Voting Holders"), voting together, to elect five members to the Board, all such persons being elected to hold office for a one-year term and until their respective successors are duly elected and qualified. All of the nominees were re-elected to the Board. 15 WITHHELD FOR AUTHORITY --- --------- Series A Preferred Voting Charles S. Holmes......................... 717,100 -- James J. Pinto............................ 717,100 -- Preferred and Common Voting Holders Timothy Moran............................. 11,275,102 27,962 John J. Doran............................. 11,274,102 28,962 Mark S. Rose.............................. 11,274,102 28,962 Frederick W. Rosenbauer, Jr............... 11,274.102 28,962 Lenore Schupak............................ 11,275,303 27,761 2. Ratification of Deloitte & Touche LLP as the Company's independent certified public accountants to audit the books of account of the Company for the year ending December 31, 2000. This proposal was voted upon by all Voting Holders. For.................................. 11,289,782 Against.............................. 4,650 Abstain.............................. 8,632 Item 5. Other Information The American Stock Exchange notified the Company on August 2, 1999 that it had fallen below certain of the Exchange's continuing listing guidelines with regard to its common stock. The Company is in discussions with the Exchange as to the continued listing eligibility of the common stock. If we are unable to maintain the listing of our common stock with the Exchange, the effects of delisting could include, among other things, the limited release of the market price of the common stock and limited news coverage of the Company. These effects could materially adversely affect the trading market, liquidity and prices for our common stock. On May 4, 2000 the Company completed the sale of its domestically manufactured decorative Holiday and Seasonal products including all machinery and equipment to General Foam Plastics Corporation ("General Foam") for approximately $3.7 million in cash. On May 8, 2000, the Company sold related finished goods inventory for the Holiday and Seasonal products to General Foam for approximately $0.8 million in cash. On June 6, 2000 the Company sold its 1.2 million square foot manufacturing facility in Tarboro, North Carolina to General Foam for approximately $3.1 million in cash. Substantially, all of the net proceeds from these sales have been used to reduce the Company's bank debt by $7.1 million. As a result of the transaction's with General Foam, the Company has sold its manufacturing equipment and has begun to outsource the manufacturing of its remaining domestic products. As a result of the preceding transactions, the Company utilized its reserves for the sale of the manufacturing facilities in the amount of $1.8 million. Item 6. Exhibits and Reports on Form 8-K (a) Index and Exhibits Exhibit No. Description - ----------- ----------- 10.1 Asset Purchase Agreement dated May 4, 2000 between the Company and General Foam Plastics Corp. 27 Financial Data Schedule. 99 Audit Committee Charter 16 (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 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2000 EMPIRE OF CAROLINA, INC. /s/ Thomas MacDougall ----------------------------- Thomas MacDougall Chief Financial Officer EX-10.1 2 0002.txt ASSET PURCHASE AGREEMENT Exhibit 10-1 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is made this 4th day of May, 2000, by and between Empire Industries, Inc., a North Carolina corporation and Empire of Carolina, Inc., a Delaware corporation (collectively "Seller"), and General Foam Plastics Corp., a Virginia corporation ("Buyer"). W I T N E S S E T H: WHEREAS, Seller desires to sell and Buyer desires to purchase certain assets of Seller, including both real property and personal property, used by Seller at its industrial facility located at 501 Daniel Street, Tarboro, North Caroline 27886; and WHEREAS, the parties desire to set forth herein the terms and conditions of Seller's sale of such assets to Buyer; and NOW, THEREFORE, is consideration of the mutual promises of the parties contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties agree to the following: 1. ASSETS. Seller agrees to sell, lease, license or assign, as the case may be, and Buyer agrees to purchase, lease, license or be an assignee, as the case may be, of the following assets: 1.1 Real Property. Fee simple interest in that certain real property described on Exhibit 1.1 hereto (the "Facility") and all easements, licenses, permits, variances, and agreements, to the extent transferable, relating to the Facility. The Facility includes all of the improvements located thereon and modifications, additions, restorations, repairs and replacements thereof; and all right, title, and interest of Seller in and to all inchoate rights, easements and appurtenances adjoining the Facility. If the purchase of the Facility is consummated by Buyer, Buyer and Seller agree that Seller shall lease form Buyer 100,000 square feet for one year rent free and the Seller is to have two separate one year options to lease 100,000 square feet at $1.00 per square foot. In addition, in the event of such a lease, Seller shall pay its pro rata share of the real estate taxes on the Facility, and there shall be no subleases by Seller of any portion of the leased area described in this paragraph. The Seller and Buyer agree to enter into a lease reflecting such terms as well as other terms and conditions which are customary for such leases. 1.2 Property Lines and Unfilled Purchase Orders. The sale to Seller by Buyer of the following product lines: the Blowmold Halloween Line, Blowmold Easter Line, Blowmold Christmas Line, Injection Halloween Line, Injection Easter Line, Injection Christmas Line, Summer Pool Line and Winter Sled Line (excluding the Mongoose Sled) known collectively as the "Product Lines" as set forth on Exhibit 1.2 hereto and assignment of all of Seller's right, title and interest in and to all of Seller's unfilled purchase orders as of the date hereof with respect to the Product Lines. The Product Lines being sold and the unfilled purchase orders being assigned shall be free of all liens and encumbrances. 1.3 Assignment of Name. The assignment by Seller to Buyer of a non-exclusive right to use the name "Empire" on all sales of the Product Lines for a period of two (2) years from the date hereof. The assignment shall be contained in Exhibit 1.3 hereto. 1.4 Intellectual Property. The assignment of all of by Seller's right, title and interest in and to all of the patents and trademarks set forth in Exhibit 1.4 hereto. 1.5 Specific Items of Equipment. The sale by Seller to Buyer of the equipment and vehicles set forth on Exhibit 1.5 (the "Equipment") hereto free and clear of all liens and encumbrances. 1.6 Finished Goods Inventory. Buyer shall purchase from Seller the Finished Goods Inventory items listed on Exhibit 1.6. Prior to the transfer of such Finished Goods Inventory, Seller shall afford the Buyer the opportunity and Buyer shall complete a physical count and inspection at the Facility. All such Finished Goods Inventory shall be free and clear of all liens and encumbrances. Seller represents that the total Finished Goods Inventory owned by Empire Industries, Inc. at the Facility as of the date of the sale to Buyer has a value of approximately $9,000,000 of which $800,000 of Finished Goods Inventory is being purchased by Buyer. Buyer acknowledges that the Seller shall not be required to pay any sales tax levied by any governmental agencies and authorities in connection with the sale to Buyer of the Finished Goods Inventory and Buyer will instead tender to Seller a Certificate of Resale, a form of which is attached hereto as Exhibit 1.6A. In connection with the issuance by Buyer of the Certificate of Resale, Buyer represents that it has registered as a dealer with the North Carolina Department of Revenue. 1.7 Other Assets. Those other tangible assets of the Seller, including, but not limited to, an assignment of Seller's business records, sales information, brochures, maintenance manuals and maintenance records relating to the Product Lines or Equipment, as described in the Quitclaim Bill of Sale attached as Exhibit 1.7 and excluding the Excluded Assets described and set forth on Exhibit 3 hereto. The assets set forth in Exhibits 1.1, 1.2, 1.3, 1.4, 1.5, 1.6 and 1.7 are collectively the "Assets." 2. USE OF OTHER ASSETS. Seller agrees that in consideration for the Purchase Price set forth herein, Buyer shall have the use of the following equipment under the following terms and conditions: 2.1 Use of Cincinnati Milcron Blowmolder Machines with Serial Nos. SN#B80A0196003, SN#B80A0194008 and SN#B75A0196001. Seller agrees that Buyer shall have the exclusive use of the above-listed machines and equipment for the period from Closing through June 1, 2006. Seller further agrees that it will effect the purchase of such machines from General Electric Capital Corporation on or before June 30, 2006 and concurrent therewith will convey title to the machines, free and clear of all encumbrances, to Buyer for the sum of $1.00. As security for Seller's performance of the above, Seller shall deliver at Closing to Buyer a letter of credit, in form attached hereto as Exhibit 2.1, issued by LaSalle National Bank for the sum of $675,000.00 to be drawn upon, as Buyer's sole and exclusive remedy, if Seller defaults under its 2 lease related to these machines and such default results in the repossession of such machines or Seller fails to deliver the bills of sale transferring title to the machines and equipment on or before June 30, 2006 in the form attached hereto as Exhibit 2.1A. From the date of this Agreement through June 30, 2006, Seller agrees to provide by facsimile to Buyer, on the same day as received by Seller, copies of any and all default notices Seller may receive concerning Seller's lease related to these machines. In addition, Seller agrees to provide Buyer each month through June 30, 2006, or until the lease is earlier terminated, canceled checks reflecting monthly payments on such lease. 2.2 Use of Cincinnati Milcron Blowmolder Machines with Serial Nos. SN#B75A0195002 and SN#B80A0196001. Seller agrees that Buyer may, from the date hereof until October 31, 2000, use either of the above listed machines on an as needed basis for which Buyer agrees that for each month or part thereof that both such machines are used, Buyer shall pay to Seller the sum of $4,988.00 representing one-half of Seller's lease payments on said machines. For those months where Buyer uses only one of such machines, Buyer shall pay Seller $2,494.00. For those months where Buyer uses neither of such machines, Buyer shall make no payment to seller. 2.3 Sullair Equipment Set Forth on Exhibit 2.3. Seller agrees that Buyer may, from the date hereof until October 31, 2000, use the Sullair machines and equipment listed on Exhibit 2.3 on an as needed basis for which Buyer agrees that for each month or part thereof Buyer uses any one or more of such machines and equipment, Buyer shall pay to Seller the sum of $6,611.50 representing one-half of Seller's lease payments on said machines. Seller makes no representations and warranties as to the condition of any of the above-referenced equipment. 3. EXCLUDED ASSETS. The assets of Seller set forth on Exhibit 3 hereto are not to be sold or transferred to Buyer. 4. EXCLUDED LIABILITIES. Except as expressly set forth herein, Buyer does not assume, does not agree to pay or discharge and shall not be liable for any other debts, obligations, expenses, responsibilities or liabilities of the Seller (collectively, the "Excluded Liabilities") and nothing in the Agreement or otherwise shall be construed to the contrary. All Excluded Liabilities, whether known or unknown, direct or contingent, in litigation or threatened or not yet asserted with respect to any aspect of the Seller's business are and shall remain the responsibility of Seller. Without limiting the generality of the foregoing, Seller shall remain specifically responsible for the following: 4.1 Taxes. All of Seller's liabilities and obligations attributable to periods prior to the Closing Date for taxes of any kind related to the Facility. 3 4.2 Accounts Payable. Liabilities to trade creditors for accounts payable which arose in the course of Seller's business for goods and services received by Seller prior to the date of Closing. 4.3 Costs of Consummation. In no event shall Buyer assume or incur any liability or obligation with respect to any income, sales or other tax payable by Seller incident to or arising as a consequence of the consummation by Seller of this Agreement or any cost or expense incurred by Seller incident to or arising as a consequence of such consummation of the negotiations in connection with this Agreement. 5. CLOSING AND PURCHASE PRICE. The consummation of the transactions contemplated by this Agreement are hereinafter referred to as the "Closing." The First State ("First Stage") of the Closing for the non-real estate Assets shall occur on May 4, 2000,. At the First Stage, Seller shall deliver to Buyer Bills of Sale and Assignment, as the case may be, for all of the Assets described in Paragraphs 1.2, 1.3, 1.4, 1.5 and 1.7. In addition, Seller shall deliver to Buyer the fully executed Letter of Credit from LaSalle Bank N.A. in form and content set forth in Exhibit 2.1 hereto and a letter from LaSalle Bank N.A., satisfactory to Buyer, concerning the release by LaSalle Bank N.A. of its liens affecting the Assets being transferred by Seller to Buyer. In conjunction with the delivery of all of the foregoing, Buyer shall wire to LaSalle Bank N.A. for the benefit of Seller the sum of Three Million Seven Hundred Thirty Two Thousand and no/100 Dollars ($3,732,000.00). At the Second State ("Second Stage") of the Closing, which shall occur on May 8, 2000, Seller shall deliver to Buyer a Bill of Sale in the form and content as set forth on Exhibit 1.6 hereto with an attached list of Finished Goods Inventory being purchased by Buyer. In conjunction with the delivery of the Bill of Sale by Seller, Buyer shall wire to LaSalle Bank N.A. for the benefit of Seller the sum of $800,000. The Third Stage ("Third Stage") of the Closing shall occur on or before May 30, 2000 or as soon thereafter as practicable based upon any tile and or environmental issues that may be discovered. At the Third State, Seller shall deliver its Special Warranty Deed to Buyer and in conjunction therewith, following a title update and recordation of said deed, Buyer shall wire the sum of Three Million Sixty Eight Thousand and no/100 Dollars ($3,068,000.00) to LaSalle Bank N.A. for the benefit of Seller. If the Third Stage has not occurred on or before May 30, 2000, Buyer agrees commencing June 1, 2000 to make monthly lease payments to Seller for the space within the facility used by Buyer at the annual rate of $1.00 per square foot plus the pro rata share of real estate taxes related to the space used by Buyer until the Third Stage is consummated or until the election in Paragraph 7.7 of this Agreement has been made by Buyer. Seller and Buyer agree to comply with the applicable IRS Regulations regarding the reporting of the sale of the Assets. 6. INTENTIONALLY OMITTED. 4 7. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Buyer that, as of the date hereof, except to the extent of the information, exceptions, modifications, descriptions and disclosures set forth in the Exhibits hereto, and as of the Closing Date: 7.1 Authority. Seller has full legal right, power and authority to execute and deliver this Agreement, to carry out the transactions contemplated hereby, and to convey the Assets (as defined herein) to Buyer. All company and other actions required to be taken by Seller to authorize the execution, delivery and performance of this Agreement and all transactions contemplated hereby will be duly and properly taken prior to the Closing Date. 7.2 Validity. This Agreement and the other documents to be delivered at the Closing have been, or will be, duly executed and delivered and are, or will be, the lawful, valid and legally binding obligations of Seller, enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, rearrangement, reorganization or similar debtor relief legislation affecting the rights of creditors generally, and subject to the applicable of general principles of equity. 7.3 Due Organization. Seller is duly organized, validly existing and in good standing under the laws of the State of their organization with full power and authority to own or lese its properties and to carry on its business. 7.4 Facility. Empire Industries, Inc. is the sole fee simple owner of the Facility. There are no outstanding contracts for sale or options involving the Facility and no other party has any right, title or interest in the Facility except as set forth in the title commitment received by Buyer, and except for the leases set forth below. Seller shall deliver to Buyer at Closing a special warranty deed for the Facility. The cost of a physical survey and the title insurance premium shall be borne by Buyer. In addition to the foregoing, with respect to the Facility, Seller represents and warrants the following to Buyer: (a) Seller will not between the date hereof and the Closing initiate, consent to, or acquiesce in any action to change the present zoning of the Facility or any of the conditions applicable to the Facility pursuant to such zoning without Buyer's prior written consent, which consent may be withheld for any reason. (b) There is no pending litigation against Seller relating to the Facility. (c) Seller has not received written notice of any eminent domain or condemnation proceedings pending and threatened against the Facility. (d) Seller has not received written notice from any federal, state or municipal authority of any change in the zoning of the Facility within the last twelve (12) months. (e) With the exception of leases with Kanban Industries and E-B Grain Co., Inc., there are no leases of or affecting any portion of the Facility. 5 (f) To the best of Seller's knowledge, connections for utility services (water, sewer, telephone, gas, and electricity) are available at the boundary of the Facility. (g) On the Closing Date, the Facility shall be in substantially the same condition as of the date of this Agreement. Seller assumes until Closing, all risks of loss or damage to the Facility by fire or other casualty. 7.5 Survival of Representations and Warranties. All of the foregoing warranties and representations, including those set forth in the transfer documents described in Paragraph 8, shall be true at Closing and shall survive the Closing for a period of six (6) months. 7.6 Mechanic's Liens. Seller agrees to execute and deliver at Closing such affidavits or indemnities as Buyer's or Buyer's lender's title insurance company shall reasonably require in order to delete from Buyer's or its lender's title insurance policy all standard exceptions for unfiled mechanic's or materialmen's liens. 7.7 Title and Environmental Defects. If any matters as to tile to the Facility revealed by Buyer's review of the title records of the Facility and/or the results of an environmental assessment being undertaken on behalf of Buyer are unsatisfactory to Buyer in its sole discretion, Buyer shall promptly inform Seller of such matters. Seller shall, within 10 days after such notice from Buyer (the "Notice"), elect by written notice to Buyer to either cure such matters within 14 days of the Note (the "Cure Period") or to notify Buyer that it declines to cure such matters. In the event the Seller elects to cure such matters and is proceeding diligently to cure such matters, the Cure Period shall be extended for such additional periods as may be necessary for Seller to complete the cure of such matters, but in no event longer than one hundred twenty (120) days from the Notice. If Seller elects not to cure such matters or has not cured the matters to Buyer's sole satisfaction by the expiration of the Cure Period, Buyer shall, at his sole option neither (i) proceed to Closing with such title defect(s) and/or environmental issues unremedied or (ii) lease 450,000-800,000 square feet of such portion of the Facility, as Buyer may elect, for a lease term of five (5) years at the annual rate of $1.00 per square foot plus a pro-rata share of the real estate taxes on the Facility, without deduction or set off of any kind. Seller and Buyer agree to enter into a lease reflecting such terms as well as other terms and conditions usual and customary for such leases. 7.8 "As Is" Transfer. With the exception of the representations and warranties specifically set forth herein and in the transfer documents described in Paragraph 8, Seller is transferring and conveying the Assets, including without limitation, the Facility to Buyer "as is", "where is" and "how is". 8. DELIVERY BY SELLER. At the respective Closings, Seller shall deliver to Buyer: 8.1 Facility Deed. At the Third State of the Closing, with respect to the Facility: (a) A Special Warranty Deed ("Deed") conveying to Buyer title to the Facility in accordance with the terms of this Agreement. 6 (b) A duly executed affidavit establishing that Seller is not a "foreign person" within the meaning of the Foreign Investment in Real Property Tax Act of 1980, as amended, relieving Buyer of any withholding requirements imposed by that code section. (c) A duly executed affidavit that provides all information necessary for the satisfaction of the reporting requirements under Section 6045(e) of the Internal Revenue Code of 1986, as amended. (d) Such other documents as may be reasonably requested by Buyer's title insurance company or lender, or as may be required by applicable law or any taxing authorities, or as may be reasonably necessary to effectuate the transactions contemplated by this Agreement. 8.2 Bills of Sale, Assignments and Indemnity Agreement. At the First Stage and Second Stage Closings, Bills of Sale and/or Assignments and the Indemnity Agreements as set forth in Exhibit 8.2, as the case may be, effecting the sale and transfer of the remaining Assets from Seller to Buyer. 9. CASUALTY; RISK OF LOSS. The Seller shall bear the risk of all loss or damage to any of the Assets from all causes, and all loss or damage arising out of or related to the operation of Seller's business from the date hereof until the respective Closing. If at any time prior to the respective Closing with respect to such Assets, any material portion of such Assets are damaged or destroyed as a result of fire, other casualty or for any reason whatsoever, or in the event condemnation or eminent domain proceedings (or private purchase in lieu thereof) shall be commenced by any public or quasi-public authority having jurisdiction against all or any part of such Assets, Seller shall immediately give notice thereof to Buyer. Buyer shall have the right, in its sole and absolute discretion, within 10 days of receipt of such notice, to (i) elect not to proceed with the Closing with respect to such Assets and terminate this Agreement with respect to such Assets, or (ii) proceed to Closing with respect to such Assets and consummate the transactions contemplated hereby and receive any and all insurance proceeds received by the Company on account of any such casualty. 10. MISCELLANEOUS PROVISIONS. 10.1 Notices. All notices hereunder shall be in writing and shall be deemed to have been duly given upon receipt, whether personally delivered, by nationally recognized overnight courier, or by certified or registered mail, postage prepaid, deposited in the United States Mail, return receipt requested, addressed to the parties at the addresses set forth below or at such other addresses as shall be specified in writing: If to Seller: Empire Industries, Inc. 5150 Linton Boulevard, 5th Floor Delray Beach, FL 33484 7 With a copy to: Marc I. Sinensky, Esquire Greenberg Traurig 2255 Glades Road Boca Raton, FL 33431 If to Buyer: General Foam Products Corp. 3321 East Princess Anne Road Norfolk, Virginia 23502 Attention: Mr. Ascher Chase With a copy to: Geoffrey F. Birkhead, Esquire Vandevener Black LLP 500 World Trade Center Norfolk, Virginia 23510 10.2 Severability. Should any one or more of the provisions of this Agreement or any of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each such other agreement shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 10.3 Counterparts. This Agreement and the other agreements contemplated hereby may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 10.4 Construction of Agreement. This Agreement is the product of negotiations between the Seller and Buyer and their respective attorneys, and no provision shall be construed for or against either party by reason of ambiguity in language. To the extent that there is a conflict between the terms in this Agreement and the transfer documents delivered pursuant to Paragraph 8 hereof, the language of the transfer documents shall control. 10.5 Expenses. Seller at its cost, shall prepare the deed to the Facility. Buyer shall pay other costs and expenses relating to the transfer of the Facility, equipment or other assets including without limitation all recording costs, recording taxes, survey and environmental costs. Except as otherwise set forth in this Agreement, Seller and Buyer shall each bear their own expenses in connection with this Agreement. 10.6 Headings. The section and other headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of the Agreement. 10.7 Attorneys. In any action between Seller and Buyer at law or in equity arising out of or related to this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and court costs, in addition to any other relief to which that party may be entitled. 10.8 Entire Agreement. Except as may otherwise be specifically provided herein, this Agreement, including any schedules and exhibits hereto, constitutes the entire agreement of the 8 parties and all prior representations, covenants, proposals and understandings, whether written or oral, are superseded and merged herein. This Agreement may be modified or amended only by an instrument in writing executed by the parties hereto and specifically stating that is intended as a modification or amendment to this Agreement. No oral statements or representations not contained herein shall have any force or effect. IN WITNESS WHEREOF, the parties executed this Agreement to be duly executed, as of the date first above written. BUYER: GENERAL FOAM PLASTICS CORP., a Virginia corporation By: /s/ George Diffenbach ------------------------------------ Name: George Diffenbach ---------------------------------- Title: --------------------------------- SELLER: EMPIRE INDUSTRIES, INC., a North Carolina corporation By: /s/ Tim Moran ------------------------------------ Name: /s/ Tim Moran ---------------------------------- Title: President/CEO --------------------------------- SELLER: EMPIRE OF CAROLINA, INC., a Delaware corporation By: /s/ Tim Moran ------------------------------------ Name: Tim Moran ---------------------------------- Title: President/CEO --------------------------------- 9 EX-99 3 0003.txt AUDIT COMMITTEE CHARTER EXHIBIT 99 EMPIRE OF CAROLINA, INC. Charter of the Audit Committee of the Board of Directors I. Audit Committee Purpose The Audit Committee is appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities. The Audit Committee's primary duties and responsibilities are to: o Monitor the integrity of the Company's financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance. o Monitor the independence and performance of the Company's independent auditors. o Provide an avenue of communication among the independent auditors, management, and the Board of Directors. The Audit Committee has the authority to conduct an investigation appropriate to fulfilling its responsibilities, and it has direct access to the independent auditors as well as anyone in the organization. The Audit Committee has the ability to retain, at the Company's expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties. II. Audit Committee Composition and Meetings Audit Committee members shall meet the requirements for AMEX. The Audit Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent non-executive directors, free from any relationship that would interface with the exercise of his or her independent judgment. All members of the Committee shall have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, and at least one member of the Committee shall have accounting or related financial management expertise. Audit Committee members shall be appointed by the Board on recommendation of the Executive Committee. If an Audit Committee Chair is not designated or present, the members of the Committee may designate a Chair by majority vote of the Committee membership. The Committee shall meet privately in executive session at least annually with the management, the independent auditors, and as a committee to discuss any matters that the Committee or each of these groups believe should be discussed. In addition, the Committee, or at least its Chair, should communicate with the management and the independent auditors quarterly to review the Company's financial statements and significant finding based upon the auditors limited review procedures. III. Audit Committee Responsibilities and Duties Review Procedures 1. Review and reassess the adequacy of this Charter at least annually. Submit the charter to the Board of Directors for approval and have the document published at least every three years in accordance with SEC regulations. 2. Review the Company's annual audited financial statements prior to filing or distribution. Review should include discussion with management and independent auditors of significant issues regarding accounting principles, practices, and judgements. Empire of Carolina Audit Committee Charter Page 2 of 2 3. In consultation with the management and the independent auditors, consider the integrity of the Company's financial reporting processes and controls. Discuss significant financial risk exposures and the steps management has taken to monitor, control, and report such exposures. Review significant findings prepared by the independent auditors together with management's responses. 4. Review with financial management and the independent auditors the Company's quarterly financial results prior to release of earnings and/or the company's quarterly financial statement's prior to filing or distribution. Discuss any significant changes to the Company's accounting principles and any items required to be communicated by the independent auditors in accordance with SAS 61 ( see item 9). The Chair of the Committee may represent the entire Audit Committee for purposes of this review. Independent Auditors 5. The independent auditors are ultimately accountable to the Audit Committee and the Board of Directors. The Audit Committee shall review the independence and performance of the auditors and annually recommended to the Board of Directors the appointment of the independent auditors or approve any discharge of auditors when circumstances warrant. 6. Approve the fees and other significant compensation to be paid to the independent auditors. 7. On an annual basis, the Committee should review and discuss with the independent auditors all significant relationships they have with the Company that could impair the auditors' independence. In so doing, the Committee will request from the auditor a written affirmation that the auditor is in fact independent. 8. Review the independent auditors audit plan and engagement letter-discuss scope, staffing, locations, reliance upon management, and internal audit and general audit apporach. 9. Prior to releasing the year-end earnings, discuss the results of the audit with the independent auditors. Discuss certain matters required to be communicated to audit committees in accordance with AICPA SAS 61. 10. Consider the independent auditors' judgments about the quality and appropriateness of the Company's accounting principles as applied in its financial reporting. Legal Compliance 11. On at least an annual basis, review the Company's counsel, any legal matters that could have significant impact on the organization's financial statements, the Company's compliance with applicable laws and regulations, and inquires received from regulators or governmental agencies. Other Audit Committee Responsibilities 12. Annually prepare a report to shareholders as required by the Securities and Exchange Commission. The report should be included in the Company's annual proxy statement. 13. Perform any other activities consistent with this Charter, the Company's by-law's, and governing law, as the Committee or the Board deems necessary or appropriate. 14. Periodically report to the Board of Directors on significant results of the foregoing activities. 15. Annually review a summary of director and officers' related party transactions and potential conflicts of interest. EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AND THE UNAUDITED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 161 0 18,443 5,582 10,341 24,017 8,172 6,134 42,645 35,474 0 0 13 2,158 3,173 42,645 21,250 21,250 16,510 16,510 6,721 0 1,479 (3,460) 38 (3,498) 0 0 0 (3,498) (0.17) (0.17)
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