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