<PAGE>
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-7909
EMPIRE OF CAROLINA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2999480
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33484
(Address of principal executive office)
(Zip Code)
(407) 498-4000
Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of shares outstanding of the issuer's Common Stock, $.10 par value,
as of July 15, 1996 was 6,961,300.
<PAGE>
PART I - FINANCIAL INFORMATION
This Form 10-Q contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. Statements in this document that
are not historical, including those under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent Events"
and the last paragraph of "--Liquidity and Capital Resources" are forward-
looking. Such statements are subject to various risks and uncertainties which
could cause actual results to vary materially from those stated.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, expected or or projected. Such risks and
uncertainties include the Company's ability to manage inventory production and
costs, to meet potential increases or decreases in demand, potential adverse
customer impact
due to delivery delays including effects on existing and future orders,
competitive practices in the toy and decorative holiday products industries,
changing consumer preferences and risks associated with acceptance of new
product introductions, potential increases in raw material prices, potential
delays or production problems associated with foreign sourcing of production and
the impact of pricing policies including providing discounts and allowances.
Certain of these as well as other risks and uncertainties are described in more
detail in the Company's Registration Statement on Form S-1 filed under the
Securities Act of 1933, Registration No. 333-4440, dated June 25, 1996.
Item 1. Financial Statements
<TABLE>
<CAPTION>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 680 $ 2,568
Marketable securities 157 189
Accounts receivable, less allowances and other
deductions (1996-$4,598; 1995-$4,290) 36,471 48,957
Inventories, net 44,262 30,178
Prepaid expenses and other current assets 3,646 2,046
Deferred income taxes 4,191 5,596
Total current assets 89,407 89,534
PROPERTY, PLANT AND EQUIPMENT, NET 24,432 23,640
EXCESS COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED 14,269 15,174
TRADEMARKS, PATENTS, TRADENAMES AND
LICENSES 9,870 10,253
OTHER NONCURRENT ASSETS 1,670 1,552
$139,648 $140,153
</TABLE>
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Share Amounts)
- ---------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1996 1995
----------- ----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt $ 29,331 $ 49,206
Accounts payable - trade 19,861 17,516
Accrued liabilities 9,242 15,975
Total current liabilities 58,434 82,697
LONG-TERM LIABILITIES:
Long-term debt 9,280 --
Convertible subordinated debentures 13,995 13,851
Senior subordinated notes 8,338 7,959
Deferred income taxes 2,018 2,083
Other noncurrent liabilities 3,082 3,101
Total long-term liabilities 36,713 26,994
Total liabilities 95,147 109,691
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000 shares authorized, shares issued and
outstanding:
1996 - 6,961,300; 1995 - 5,195,000 696 519
Preferred stock, $.01 par value, 5,000,000 shares
authorized - 442,264 shares of Series A cumulative
convertible preferred stock authorized, issued and outstanding
($3,206,000 involuntary liquidation preference) 4 4
Additional paid-in capital 50,917 33,193
Deficit (6,516) (2,659)
Stockholders' loans (600) (595)
Total stockholders' equity 44,501 30,462
$ 139,648 $ 140,153
</TABLE>
See notes to the consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Amounts)
- ----------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------- ---------------------
1996 1995 1996 1995
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 33,422 $ 19,631 $ 55,608 $ 38,719
COST OF GOODS SOLD 25,907 12,939 42,124 25,876
GROSS PROFIT 7,515 6,692 13,484 12,843
SELLING AND ADMINISTRATIVE
EXPENSES 8,268 7,612 15,566 14,416
NONRECURRING RESTRUCTURING AND
RELOCATION CHARGES 0 409 0 559
OPERATING LOSS (753) (1,329) (2,082) (2,132)
OTHER INCOME (EXPENSES):
Interest income, dividends and net realized 3 371 16 425
gains
Interest expense (2,302) (894) (4,434) (1,561)
Total other income (expenses) (2,299) (523) (4,418) (1,136)
LOSS BEFORE INCOME TAXES (3,052) (1,852) (6,500) (3,268)
INCOME TAX BENEFIT 1,352 590 2,644 1,000
NET LOSS $ (1,700) $ (1,262) $ (3,856) $ (2,268)
LOSS PER COMMON SHARE $ (0.32) $ (0.30) $ (0.73) $ (0.54)
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,321 4,191 5,261 4,191
</TABLE>
See notes to the consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
- -----------------------------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------
1996 1995
------------ --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (3,856) (2,286)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,578 2,572
Other non-cash adjustments, net (1,065) 54
Changes in assets and liabilities (5,139) (16,374)
Net cash used in operating activities (5,482) (16,034)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,817) (1,966)
Proceeds from sale of marketable securities 15 2,099
Escrow deposits made relating to Buddy L acquisition -- 5,000)
Change in shareholder loans (5) --
Proceeds from sale of fixed assets 95 525
Net cash used in financing activities (3,712) (4,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit (20,284) 18,121
Equity offering proceeds held in escrow pending
Buddy L close -- 4,865
Proceeds from issuance of long term debt 12,100 --
Repayments of notes payable (2,410) --
Net proceeds from issuance of common stock 17,900 ______-___
Net cash provided by financing activities 7,306 22,986
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,888) 2,610
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,568 2,738
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 680 $ 5,348
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 3,665 $ 1,298
Income taxes paid (refunded) (1,817) 1,317
NONCASH INVESTING AND FINANCING ACTIVITIES
During 1996, the Company adjusted its allocation of the purchase price of the
assets of Buddy L acquired on July 7, 1995 by increasing assets acquired by
$487,000 and decreasing excess cost over fair value of net assets acquired by
$487,000.
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations;
however, the Company believes that the disclosures are adequate to make
the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report, as amended, on Form 10-K/A.
In the opinion of management, the information contained in this report
reflects all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results for the interim
periods presented.
Earnings per share - For the calculation of earnings per share for the
three and six months ended June 30, 1996 and 1995, all outstanding stock
options and warrants and convertible debentures are excluded from primary
and fully-diluted earnings per share since they are anti-dilutive.
Accounting for Stock-Based Compensation - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock- Based Compensation,"
which was effective for the Company beginning January 1, 1996. SFAS No.
123 requires expanded disclosure of stock-based compensation arrangements
with employees and encourages (but does not require) compensation cost to
be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No.
25, which recognizes compensation cost based on the intrinsic value of
the equity instrument awarded. The Company will continue to apply APB
Opinion No. 25 to its stock based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings
per share for the year ending December 31, 1996.
2. INVENTORIES
1996 1995
(UNAUDITED)
-------- -------
Finished goods $23,618 $14,418
Raw materials 14,899 13,591
Work-in-process 5,745 2,169
-------- -------
$44,262 $30,178
======= =======
<PAGE>
3. NOTES PAYABLE AND LONG-TERM DEBT
During May 1996, Empire Industries, Inc. ("EII") a wholly-owned subsidiary
of the Company, entered into a new secured bank facility which provides up
to $85,000,000 in financing. The financing is for a three-year term at an
interest rate of prime plus 1% or LIBOR plus 2.75%. Of the $85,000,000,
$12,100,000 is in the form of a three-year term loan which requires
monthly payments of $235,000. The balance of the availability under the
loan agreement is based on EII's domestic accounts receivable and
inventory balances, as defined, less outstanding commitments under letters
of credit ($1,319,000 at June 30, 1996). The loan is collateralized by
substantially all of the domestic assets of EII, including all machinery,
equipment, real property, accounts receivable, inventories, and
intangibles, with an aggregate book value of approximately $130 million at
June 30, 1996. This facility replaces two domestic facilities of
$25,000,000 each.
4. STOCKHOLDERS' EQUITY
On June 25, 1996, the Company completed a public offering of 1,400,000
shares of its common stock which resulted in net proceeds to the Company
of approximately $17,900,000 (including proceeds to the Company upon the
exercise by certain selling stockholders of stock options and warrants to
acquire 356,100 shares of common stock). The proceeds from the offering
were used to reduce the outstanding balance under EII's revolving line of
credit and to redeem the senior subordinated notes. See Note 6. At June
30, 1996 (after completion of this offering), there were 6,961,300 shares
of common stock outstanding.
5. COMMITMENTS AND CONTINGENCIES
Letters of credit - The Company had outstanding commitments under letters
of credit totaling $1,319,000 at June 30, 1996 compared to $1,246,000 at
December 31, 1995.
Leases - During the second quarter ending June 30, 1996, the Company
entered into a 10-year operating lease for new molding machines having
monthly lease payments of $25,000.
Indemnifications - In connection with the sale of the assets used in the
businesses of its wholly-owned subsidiaries, Isaly Klondike Company and
Popsicle Industries Ltd. to Thomas J. Lipton Company and its affiliates in
1993, the Company agreed to certain indemnification obligations. The
Company has established reserves for all claims known to it and for other
contingencies in connection with the sale. During the quarter ended March
31, 1996, the Company reduced the reserves by $600,000 due to the
expiration of certain time limitations. Although there can be no assurance
that claims and other contingencies related to the sale will not exceed
established reserves, the Company believes that any additional exposure
related to the indemnification obligations will not be material to the
consolidated financial statements.
During 1995, the Company and majority-owned subsidiary, CLR Corporation
("CLR"), were released from substantially all indemnification obligations
including certain tax matters arising from the December 23, 1988 sale of
General Defense Corporation to Olin Corporation by CLR's predecessor,
Clabir Corporation. In exchange for the release, the Company paid $475,000
and extended the expiration date of the options granted to Olin
Corporation from September 30, 1996 to September 30, 1997. The options
were exercised on June 25, 1996. The Company believes future obligations,
if any, related to the indemnification will not have a material adverse
effect on its consolidated financial statements.
Litigation - There are two suits claiming infringement of various
intellectual property rights which have been filed against Marchon, Inc.,
a wholly-owned subsidiary of the Company. These claims are in
<PAGE>
various stages of litigation. The Company believes that it has meritorious
defenses to the open claims and has provided reserves for its estimated
costs to settle these matters. The Company does not believe that any
additional amounts required to ultimately resolve these matters will have
a material adverse effect on the Company's consolidated financial
statements.
The Company's operating subsidiaries and its former operating subsidiaries
are subject to various types of consumer claims for personal injury from
their products. The Company's subsidiaries maintain product liability
insurance. Various product liability claims, each of which management
believes is adequately covered by insurance and/or reserves, are currently
pending. The Company does not believe the outcome of any of this
litigation either individually or in the aggregate would have a material
adverse effect on the Company's consolidated financial statements.
Contingencies - The Company has been identified as a potentially
responsible party, along with numerous other parties, at various U. S.
Environmental Protection Agency ("EPA") designated superfund sites. It is
the Company's policy to accrue remediation costs when it is probable that
such costs will be incurred and when they can be reasonably estimated. As
of December 31, 1995 and June 30, 1996, the Company had reserves for
environmental liabilities of $600,000 and $400,000 respectively. Estimates
of costs for future remediation are necessarily imprecise due, among other
things, to the allocation of costs among potentially responsible parties.
Although it is possible that additional environmental liability related to
these matters could result in amounts that could be material to the
Company's consolidated financial statements, a reasonably possible range
of such amounts cannot presently be estimated. Based upon the facts
presently known, the large number of other potentially responsible parties
and potential defenses that exist, the Company believes that its share of
the costs of cleanup for its current remediation sites will not, in the
aggregate, have a material adverse impact on its consolidated financial
statements.
6. SUBSEQUENT EVENTS
On July 5, 1996 the Company exercised its option to redeem all $7,580,000
senior subordinated notes at 110% of the original principal amount and
thereby retired the related 758,000 warrants to purchase common stock. In
connection with the redemption, $323,000 of unamortized loan fees will be
written off in the third quarter of 1996.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Sales of the Company's products are seasonal in nature. Generally, the
Company's largest sales occur in the third and fourth quarters of the year when
it ships its toys for the Christmas shopping season and holiday products for the
Christmas and Halloween shopping seasons. The Company's production generally is
heaviest in the period from July through October. Management expects that the
Company's quarterly operating results will vary significantly throughout the
year.
Recent Events
The Company's production schedule was adversely affected by delays in
the installation and start-up of new equipment, a plant shutdown necessitated by
hurricane Bertha and the recently diagnosed serious illness of the Company's
Senior Vice President of Manufacturing, who commenced medical leave on July 12,
1996. These events arose while the Company was ramping up to meet peak seasonal
production demands. To satisfy customer requirements, the Company has made the
decision to temporarily outsource production of certain
<PAGE>
components to independent contract molders. The Company expects that the
extra costs associated with these events will have an adverse impact on
earnings, in the third and fourth quarters. Shipments of merchandise sourced
through the Hong Kong office, which represent approximately 25% of the Company's
business, have not been affected by these events.
Marvin Smollar, the Company's President and Chief Operating Officer,
has temporarily assumed direct responsibility for the manufacturing operations.
The Company remains committed to its goal of becoming a leading supplier of toys
and plastic decorative holiday products and does not expect that these
developments will have a long term affect on achieving its goals.
On August 7, 1996, the Company issued a press release announcing the
Company's second quarter results of operations and such developments relating to
operations at the Company's Tarboro, North Carolina facility. Such press release
is an exhibit to a Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 7, 1996. For further information, reference is
made to the Form 8-K filed by the Company with the Securities and Exchange
Commission on August 7, 1996.
Results of Operations - Three and Six Months Ended June 30, 1996 Compared to
Three and Six Months Ended June 30, 1995
The results of operations for the three and six months ended June 30,
1996 reflects the impact of the Buddy L acquisition (which acquisition occurred
on July 7, 1995). See the Company's 1995 Annual Report, as amended, on Form
10-K/A for further information regarding this acquisition.
Net sales increased $13,791,000 and $16,889,000 for the three and six
months ended June 30, 1996 as compared to the three and six months ended June
30, 1995. The increase in sales was due primarily to the acquisition of the
Buddy L(R) line of products in July 1995, sales of new products, an increase in
sales of certain of the Company's historical toy product lines, and an increase
in holiday product sales.
The operating loss decreased to $753,000 and $2,082,000 for the three
and six months ended June 30, 1996 as compared to $1,329,000 and $2,132,000 for
the three and six months ended June 30, 1995. The improvement in operating
losses is primarily due to the absence of nonrecurring restructuring and
relocation charges.
Earnings (losses) before interest, taxes, depreciation and amortization
("EBITDA") was $1,551,000 and $2,496,000 for the three and six months ended June
30, 1996 as compared to $(42,000) and $440,000 for the three and six months
ended June 30, 1995.
The net loss for the three and six months ended June 30, 1996 increased
by $438,000 and $1,588,000 as compared to the three and six months ended June
30, 1995. The increase in the net loss was due primarily to lower gross profit
margins, higher selling and administrative ("S&A") expenses, and higher interest
expense, partially offset by the resulting income tax benefit.
<PAGE>
The following table shows sales and operating income by the Company's
product segments (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Net Sales: 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Toys $ 32,621 $ 19,223 $ 50,906 $ 35,686
Holiday Products 801 408 4,702 3,033
--------------- --------------- --------- ------ -------- -----
Net Sales $ 33,422 $ 19,631 $ 55,608 $ 38,719
- ----------- - ----------- - ------------ - ----------
Operating Income (loss):
Toys $ (786) $ (820) $ (1,993) $ (1,304)
Holiday Products 33 (100) (89) (269)
Nonrecurring restructuring
and relocation charges 0 (409) 0 (559)
--------------- --------------- ---------------- ----------------
Operating Loss $ (753) $ (1,329) $ (2,082) $ (2,132)
=============== =============== ================ ================
</TABLE>
Toy sales increased $13,389,000 and $15,220,000 for the three and six
months ended June 30, 1996 as compared to the three and six months ended June
30, 1995. The increases were primarily due to sales from acquired Buddy L(R) toy
lines, which sales were $13,607,000 and $23,100,000 for the three and six months
ended June 30, 1996, increased sales of new products such as Big WheelieTM, and
increased sales of water slides and ride-ons. These increases were partially
offset by the virtual elimination of Power RangerTM sales which were
approximately $9,400,000 and $16,600,000 for the three and six months ended June
30, 1995.
The Company's sales of holiday products increased $393,000 and $1,669,000
for the three and six months ended June 30, 1996 as compared to the three and
six months ended June 30, 1995 due to increased sales volume in the Easter
product category.
Gross profits were lower for the three and six months ended June 30, 1996
as compared to the three and six months ended June 30, 1995, due to unfavorable
production cost variances and due to loss of Power RangerTM sales, which
products sold at higher margins than the Company's existing lines. In addition,
gross profit has been adversely affected by the integration of domestic
manufacturing at the Company's Tarboro, North Carolina manufacturing facility
and due to the installation and start up of new equipment. The impact of the
loss of the Power RangerTM sales on operating income for the three and six
months ended June 30, 1996 was reduced by the corresponding decrease in
royalties on the sales of Power RangerTM products. For the three and six months
ended June 30, 1996, royalties which are included in selling expenses, were
approximately 1% of sales as compared to approximately 5.8% and 5.7% of sales
for the three and six months ended June 30, 1995.
Despite lower royalty expense, S&A expenses were higher for the three and
six months ended June 30, 1996, as compared to the three and six months ended
June 30, 1995 primarily due to the continuing integration of Buddy L, including
duplicate facilities costs of approximately $193,000 and $686,000, respectively,
and the
<PAGE>
incremental cost of approximately $582,000 and $1,149,000, respectively,
for staffing of four strategic business units ("SBUs"). SBU's are accountable
for the sales and marketing for specific product categories: ride-ons, outdoor
activities and games, girls and boys toys and holiday products. S&A expenses for
the six months ended June 30, 1996 reflect the reversal of approximately
$600,000 of indemnification reserves due to the expiration of time limitations
and the reversal of $200,000 of environmental reserves. In addition, for the
three and six months ended June 30, 1996 S&A expenses reflect a $796,000 gain
relating to a favorable settlement of disputed 1995 royalty expenses. Excluding
the impact of the reversal of the indemnification reserves and the gain on
settlement of royalties, S&A expenses were approximately 27% and 31% of sales
for the three and six months ended June 30, 1996 as compared to 39% and 37% of
sales for the three and six months ended June 30, 1995.
In the toy segment, the operating loss was $786,000 and $1,993,000 for
the three and six months ended June 30, 1996 as compared to $820,000 and
$1,304,000 for the three and six months ended June 30, 1995. The increase in
operating loss for the six months ended June 30, 1996 was due to lower gross
profit margins, and higher S&A expenses.
In the holiday products segment, the operating income was $33,000 for the
quarter ended June 30, 1996 as compared to an operating loss of $100,000 for the
quarter ended June 30, 1995. The increase in operating profit was due primarily
to higher sales and profit margins. For the six months ended June 30, 1996 the
operating loss decreased $180,000 to $89,000 from $269,000 for the six months
ended June 30, 1995 due to higher sales and profit margins.
Nonrecurring restructuring and relocation charges were $409,000 and
$559,000 for the three and six months ended June 30, 1995 and related primarily
to establishment of corporate headquarters in Delray Beach, Florida.
Interest expense was $2,302,000 and $4,434,000 for the three and six
months ended June 30, 1996 as compared to $894,000 and $1,561,000 for the three
and six months ended June 30, 1995. Interest expense was higher due to the
issuance of $7.6 million of senior subordinated notes during the third quarter
of 1995 to finance the Buddy L acquisition, and due to higher balances of the
Company's revolving credit lines resulting from increased sales, inventory, and
accounts receivable levels over the prior year levels.
The tax benefit for the three and six months ended June 30, 1996 and the
three and six months ended June 30, 1995 approximates the federal, state and
foreign statutory rates, net of certain nondeductible expenses, primarily
amortization of goodwill. The effective tax rate for the quarter ended June 30,
1996 is higher than the expected statutory rates due to taxable income in Hong
Kong which is taxed at a lower rate.
Liquidity and Capital Resources
Due to the sesonality 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.
During May 1996, Empire Industries, Inc. ("EII") a wholly-owned subsidiary
of the Company, entered into a new secured bank facility which provides up to
$85,000,000 in financing. The financing is for a three-year term at an interest
rate of prime plus 1% or LIBOR plus 2.75%. Of the $85,000,000, $12,100,000 is in
the form of a three-year term loan which requires monthly payments of $235,000.
The balance of the availability under the loan agreement is based on EII's
domestic accounts receivable and inventory balances, as defined, less
outstanding commitments under letters of credit ($1,319,000 at June 30, 1996).
The loan is
<PAGE>
collateralized by substantially all of the domestic assets of EII, including all
domestic machinery, equipment, real property, accounts receivable, inventories,
and intangibles, with an aggregate book value of approximately $130 million at
June 30, 1996. This facility replaces two domestic facilities of $25,000,000
each.
On June 28, 1996 the Company completed a public offering of 1,400,000
shares of its common stock which resulted in net proceeds to the Company of
approximately $17,900,000 (including proceeds to the Company upon the exercise
by certain selling stockholders of stock options and warrants to acquire 356,100
shares of common stock). The proceeds from the offering were used to reduce the
outstanding balance under EII's revolving line of credit (and to redeem the
senior subordinated notes described in the following paragraph.). At June 30,
1996, (upon completion of the offering), there were 6,961,300 shares of common
stock outstanding at June 30, 1996.
On July 5, 1996 the Company exercised its option to redeem all $7,580,000
of the senior subordinated notes at 110% of the original principal amount and
thereby retired the related 758,000 warrants to purchase common stock. In
connection with the redemption, $323,000 of unamortized loan fees will be
written off in the third quarter of 1996.
Marchon Toys, Ltd., a subsidiary of the Company located in Hong Kong,
meets its working capital needs through two bank credit facilities which are due
on demand. Marchon Toys, Ltd. can borrow up to approximately $2,500,000 at
interest rates ranging from 0.5% to 1.75% over the banks' prime rate. The
availability of borrowings is primarily based on Marchon Toys, Ltd.'s accounts
receivable and inventory balances. All of Marchon Toys, Ltd.'s assets are
collateralized under the loan agreements.
The Company's inventory and accounts payable balances were higher at June
30, 1996 as compared to December 31, 1995, due to the seasonal nature of the
Company's business. The proceeds from the June 1996 stock offering and proceeds
from the new term loan facility were used to reduce the balance outstanding
under EII's revolving line of credit.
Capital expenditures, principally for the purchase of tooling for new
products and equipment, were $3,817,000 for the six months ended June 30, 1996
as compared to $1,966,000 for the six months ended June 30, 1995. During the
second quarter of 1996, the Company entered into a 10-year operating lease for
new molding machines having monthly lease payments of $25,000. The Company's
capital budget for 1996 provides for expenditures of approximately $7.5 million
to acquire new equipment and tooling and generally upgrade the Tarboro, North
Carolina manufacturing facility.
Certain of the Company's debt arrangements contain requirements as to
the maintenance of minimum levels of working capital, leverage ratios and
tangible net worth, and prohibit the Company from paying dividends. Also,
certain debt arrangements, including the Company's new bank facility, grant
various security interests and contain restrictive covenants which limit the
ability of the subsidiaries to loan, advance and dividend amounts to the
Company, and limit repayment of advances by the Company to such subsidiaries.
The Company currently is in compliance with the covenants and other requirements
under such debt arrangements.
At June 30, 1996, the Company had letters of credit outstanding totaling
$1,319,000. Letters of credit reduce the amount available under the Company's
bank facility.
The Company is subject to various actions and proceedings, including
those relating to intellectual property matters and product liability matters.
See Note 3 to Consolidated Condensed Financial Statements.
<PAGE>
The Company believes that cash generated from operations, amounts
available under the new bank credit facility and the net proceeds to the Company
from the public offering of common stock will be adequate to finance its
anticipated operating needs for the next 12 to 24 months. It is likely that any
significant future acquisition would require additional debt or equity
financing.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
An action was commenced on October 19, 1994 in the Court of Chancery of
the State of Delaware (New Castle County) against the Company as a nominal
defendant. The action names Maurice A. Halperin, Barry S. Halperin, Carol A.
Minkin, Halco Industries, Inc. (collectively, the "Halperin Group"), Jeffrey
Swersky, Carl Derman and Steven Geller as defendants. The complaint includes
class and derivative claims. The Company is only a nominal defendant in the
derivative claims, but the Company has agreed to indemnify the Halperin Group to
the extent permitted by law, with certain exceptions. Certain defendants in
interest (the Halperin Group and Messrs. Swersky and Derman) have stated that
they intend to defend the claims vigorously. A motion to dismiss the claims was
filed on behalf of the Company and Mr. Geller. The court granted the motion on
February 5, 1996, dismissing the claims against each named defendant The
plaintiff filed a notice of appeal, and on May 2, 1996 filed a voluntary
dismissal of his appeal.
Item 2. Changes in Securities
During May 1996, Empire Industries, Inc., ("EII"), a wholly-owned
subsidiary and principal operating subsidiary of the Company, entered into a new
secured bank facility which provides up to $85,000,000 in financing. This bank
facility does not restrict the payment of dividends by the Company; however, the
agreement limits the dividends which EII may pay to the Company. Under the bank
facility, EII may not pay dividends to the Company in excess of the lesser of
$3.6 million or 30% of EII's cumulative net income (except for certain items
specifically permitted for purposes other than the payment of dividends by the
Company, such as the payment of taxes). Such restrictions could limit the funds
available for the payment of dividends by the Company.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Index and Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Restated Certificate of Incorporation of the Company. (1)
3.2 Amended and Restated By-Laws of the Company. (2)
3.3 Certificate of Designation, Preference and Rights of the Company filed
June 30, 1995. (1)
4.1 Form of specimen certificate representing the Company's common Stock.(3)
4.2 Excerpts from the Company's amended By-Laws and the Company's
amended Certificate of Incorporation relating to rights of holders of
the Company's Common Stock. (1)
4.3 Form of 9% Convertible Debentures, issued December 22, 1994. (4)
4.4 Form of Warrant Certificate of purchase common stock of the Company,
issued December 22, 1994. (5)
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
- ------------------------------
1 Previously filed as an exhibit to the Company's Current
Report on Form 8-K dated July 21, 1995, and incorporated
by reference.
2 Previously filed as an exhibit to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
3 Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by
reference.
4 Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated by
reference.
5 Previously filed as an exhibit to the Company's Current
Report on Form 8-K for December 22, 1994 and incorporated
by reference.
(b) No reports on Form 8-K were filed by the Company during the
period covered by this report. However, subsequent to June 30, 1996, the
Company filed on August 7, 1996, a Current Report on Form 8-K.
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMPIRE OF CAROLINA, INC.
By: /s/ Jeff Currier
----------------------------
Jeff Currier
Executive Vice President - Finance,
Chief Financial Officer
Dated: August 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
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<SECURITIES> 157
<RECEIVABLES> 36,471
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<PP&E> 53,738
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0
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<COMMON> 696
<OTHER-SE> 43,801
<TOTAL-LIABILITY-AND-EQUITY> 139,648
<SALES> 55,608
<TOTAL-REVENUES> 55,608
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<INCOME-PRETAX> (6,500)
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