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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-7909
EMPIRE OF CAROLINA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-2999480
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33484
(Address of principal executive office)
(Zip Code)
(561) 498-4000
Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of shares outstanding of the issuer's Common Stock, $.10 par value,
as of August 1, 1997 was 7,653,564.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,049 $ 478
Accounts receivable, less allowances and other
deductions (1997-$6,071; 1996-$8,777) 27,121 39,678
Inventories, net 22,392 25,115
Income taxes receivable 13,004
Prepaid expenses and other current assets 1,549 2,142
Deferred income taxes 2,183 2,183
--------------- ----------------
Total current assets 55,294 82,600
PROPERTY, PLANT AND EQUIPMENT, NET 20,735 24,845
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED 13,691 12,867
TRADEMARKS, PATENTS, TRADENAMES AND LICENSES 6,317 6,567
OTHER NONCURRENT ASSETS 575 981
--------------- -----------------
$ 96,612 $ 127,860
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 28,101 $ 58,712
Convertible subordinated debentures 14,139
Accounts payable - trade 15,686 24,783
Other accrued liabilities 13,175 15,464
-------------- -----------------
Total current liabilities 56,962 113,098
-------------- -----------------
LONG-TERM LIABILITIES:
Long-term debt 5,960 7,870
Deferred income taxes 2,183 2,183
Other noncurrent liabilities 3,355 2,938
--------------- ------------------
Total long-term liabilities 11,498 12,991
-------------- -----------------
Total liabilities 68,460 126,089
-------------- -----------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000 shares authorized, shares
issued and outstanding: 1997 - 7,653,564 and 1996 - 7,403,564 765 740
Preferred stock, $.01 par value, 5,000,000 shares authorized.
Issued and outstanding: 1997 - 1,600,000 shares of Series A
convertible preferred stock and 1,500 shares of Series C
convertible preferred stock. 16
Additional paid-in capital 80,745 50,438
Deficit (52,872) (48,860)
Stockholder loans (502) (547)
--------------- ----------------
Total stockholders' equity 28,152 1,771
-------------- ----------------
$ 96,612 $ 127,860
============== ==============
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------
1997 1996 1997 1996
--------------- -------------- ------------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
NET SALES $ 27,616 $ 33,422 $ 53,302 $ 55,608
SALES DISTRIBUTION SETTLEMENT 2,400 2,400
CAPITALIZED NEGATIVE VARIANCES 1,600
COST OF SALES 22,273 25,907 44,151 43,724
------------- --------------- --------- ------
GROSS PROFIT 7,743 7,515 11,551 13,484
Reserve reversals (800)
SELLING AND ADMINISTRATIVE EXPENSE 6,732 8,268 13,225 16,366
------------- --------------- --------- ------
OPERATING INCOME(LOSS) 1,011 (753) (1,674) (2,082)
INTEREST EXPENSE (2,081) (2,299) (4,087) (4,418)
------------- --------------- ----------- ----------
LOSS BEFORE INCOME TAXES (1,070) (3,052) (5,761) (6,500)
INCOME TAX BENEFIT 309 1,352 1,749 2,644
-------------- --------------- ----------- -----------
NET LOSS $ (761) $ (1,700) $ (4,012) $ (3,856)
============= =============== ============ ==========
LOSS PER COMMON SHARE -
Primary and fully diluted $ (0.10) $ (0.32) $ (0.54) $ (0.73)
============== ================= ========== ============
Weighted average number of common shares
outstanding - primary and fully diluted 7,439 5,321 7,422 5,261
============= ================ ======= =========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,012) $ (3,856)
Adjustments to reconcile net loss to net cash provided by(used in)
operating activities:
Depreciation and amortization 4,712 4,578
Other 1,566 (1,065)
Changes in assets and liabilities 16,957 (5,139)
-------- -------
Net cash provided by(used in) operating activities 19,223 (5,482)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (427) (3,817)
Proceeds from sale of marketable securities 15
Proceeds from sale of fixed assets 512 95
Other 45 (5)
---------- ---------
Net cash provided by(used in) investing activities 130 (3,712)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under lines of credit (30,611) (20,284)
Proceeds from issuance of long term debt 12,100
Repayments of notes payable (1,910) (2,410)
Proceeds from issuance of stock 14,739 17,900
-------- ----------
Net cash provided by(used in) financing activities (17,782) 7,306
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,571 (1,888)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 478 2,568
----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,049 $ 680
============= ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,497 $ 3,665
Income taxes, (net of refunds) (15,784) (1,817)
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
During June 1997, the Company converted the convertible subordinated
debentures and related discount, accrued interest and expenses into 1,500
shares of Series C Preferred Stock, thus increasing preferred stock by $15
and additional paid-in capital by $14,952,584.
Also during June 1997, the Company settled its earnout liability with the
successor to Buddy L, resulting in an increase in common stock of $25,000,
additional paid-in capital of $631,000, goodwill of $1,240,000, and earnout
liability of $993,000 and a decrease in other liabilities of $409,000.
During 1996, the Company adjusted its allocation of the purchase price of the
assets of Buddy L acquired on July 7, 1995 by increasing assets acquired by
$487,000 and decreasing excess cost over fair value of net assets acquired by
$487,000.
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations; however, the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report,
as amended, on Form 10-K/A.
In the opinion of management, the information contained in this report
reflects all adjustments necessary to present fairly the results for the interim
periods presented.
Management responded to the circumstances which gave rise to the loss for
fiscal 1996 by, among other things, restructuring its operations by
consolidating its business units, reducing staffing levels and rationalizing its
product lines. In addition, a new plant organization, including a new plant
manager was put in place. Although these efforts resulted in reduced cash
outflows, the Company had insufficient cash resources to fund its ongoing
operations. In addition, these events necessitated the Company's negotiations of
certain amendments to its senior loan agreement, which included, among other
things, a commitment on the part of the Company to obtain at least $6 million of
additional equity financing by May 31, 1997.
The consolidated condensed financial statements have been prepared on a
going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, as well as the requirement for the Company to raise significant
additional funding prior to June 30, 1997, indicated that, if the Company was
unable to raise significant additional funding, it may have been unable to
continue as a going concern. The independent auditors' report on the December
31, 1996 financial statements stated that "These matters raise substantial doubt
about the Company's ability to continue as a going concern . . . . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty." The consolidated financial
statements do not include adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities, that might be necessary should the Company be unable to continue as
a going concern.
Although management believes the net proceeds from the Preferred Stock
Investments (described below) should be sufficient to fund the Company's
operations through 1997 based on the Company's 1997 operating plan, the Company
may require additional capital to fully finance continued operations after 1997
(earlier if the Additional Investment is not consummated or if the Company's
operating results are below management's expectations). The Company's continued
operations will depend upon revenues and operating cash flows, if any, the
completion of the Additional Investment (if at all), continued support of the
trade and secured senior lenders and the availability of additional equity or
debt financing. Other than the Additional Investment, the Company has no
commitments for additional financing and there can be no assurance that the
Company's operations will be profitable, that the Company will be able to
generate levels of revenues and cash flows sufficient to fund operations, or, if
necessary, that the Company will be able to obtain additional financing on
satisfactory terms, if at all. In addition, the Company may choose to raise
additional capital either through debt or equity financing prior to the date on
which capital is required for the operations of the Company's business.
The Company entered into a definitive Securities Purchase Agreement dated
as of May 5, 1997 (as amended, the "Securities Purchase Agreement") with HPA
Associates, LLC ("HPA") and EMP Associates LLC ("EMP") providing for the
investment by private investors of up to $16 million for newly issued shares of
Series A Preferred Stock. In connection with their entry into the Securities
Purchase Agreement, HPA and EMP funded a $5 million bridge loan bearing interest
at 12% per annum to provide the Company with additional liquidity during the
period prior to the closing of the initial investment. The principals of HPA,
Charles Holmes and James J. Pinto, have substantial experience with investment
in publicly traded companies. Mr. Holmes along with other HPA employees
<PAGE>
are providing the Company with managerial and operational support to help
continue the turnaround of the Company's manufacturing facility in Tarboro,
North Carolina.
On June 17, 1997, pursuant to the Securities Purchase Agreement, the
Company issued to HPA, EMP and other accredited investors, 1,100,000 shares of
the Company's Series A Preferred Stock, $.01 par value per share, $10 face value
per share (the "Series A Preferred Stock") and 5,000,000 warrants to purchase
shares of the Company's common stock, $.10 par value per share. The Series A
Preferred Stock bears no dividend, is convertible into common stock at an
initial conversion price of $1.25 per share (subject to anti-dilution adjustment
in certain circumstances), has the right to designate two members of the Board
of Directors and is entitled to vote on all other matters presented to
stockholders on an as if converted basis. Each warrant has a six-year term and
entitles the holder thereof to purchase one share of common stock at an initial
exercise price of $1.375 per share (subject to anti-dilution adjustment in
certain circumstances) and is callable by the Company in certain circumstances.
On June 18, 1997, the Company issued to HPA and other accredited investors an
additional 500,000 shares of the Series A Preferred Stock and an additional
2,500,000 warrants. The bridge loan was paid out of the proceeds of the
additional Series A preferred stock.
Upon completion of the investment, the investors in the Series A Preferred
Stock own securities convertible into or exercisable for a substantial majority
of the Company's outstanding stock. The Company has also adopted an amendment to
its Stockholder Rights Agreement in order to facilitate the proposed investment.
The American Stock Exchange has advised the Company that the proposed
transactions did not require stockholder approval under applicable Exchange
rules. At June 30, 1997, (upon completion of the stock transaction), there were
1,600,000 shares of Series A Preferred Stock, 8,229,900 warrants, of which
7,500,000 relate to the new investment, 1,500 shares of Series C Preferred Stock
(discussed below), 7,653,564 shares of common stock outstanding and options to
acquire 1,768,250 shares of common stock.
The Securities Purchase Agreement also provided that, in addition to the
$16 million of convertible preferred stock discussed above, the Company could
elect to issue an additional $5 million of the Series A Preferred Stock to the
investors, on the same terms and conditions as the $16 million, subject to
shareholder approval. If this additional sale is approved, the total investment
may reach up to $21 million.
Pursuant to the Securities Purchase Agreement, all closing conditions set
forth therein were met or waived prior to the Principal Investment, including
the following:
o The Company's 9% convertible debentures issued to affiliates of Weiss,
Peck & Greer in the original principal amount of $15 million were exchanged
by the holders thereof for newly-issued shares of the Company with an
aggregate stated value of $15 million. Such holders also released, among
other things, their claims to accrued and unpaid interest, fees and
expenses. Each share of Series C Preferred Stock is convertible at any
time, at the option of the holder thereof, into fully paid and
nonassessable shares of common stock at a rate of one share of common stock
for each $2.00 of Stated value of Series C Preferred Stock (subject to
adjustment in certain circumstances). Thus, the initially outstanding
shares of Series C Preferred Stock are currently convertible into an
aggregated of 7.5 million shares of common stock. The Series C Preferred
Stock is generally non-voting, and has no right to vote as to any of the
matters to be considered at the annual meeting.
o The successor to the seller under the Company's agreement to purchase the
assets of Buddy L waived or released their claim to certain earnout, price
protection and registration rights in exchange for: (i) $100,000 in cash;
(ii) 250,000 shares of Common Stock of the Company; (iii) a $2.5 million 9%
note from the Company's major subsidiary, and guaranteed by the Company,
providing for $625,000 principal payments on the first four anniversaries
of the June 18th closing date of the initial investment, which note
includes certain affirmative and negative covenants which could in certain
circumstances permit the acceleration of payments with respect to such
note); and (iv) certain other benefits, including registration rights.
o The bank lenders under the Company's Credit Agreement were to agree to
certain amendments to the Credit Agreement as a closing condition. This
condition was waived by HPA. The Company's senior lenders agreed, however,
to extend the May 31, 1997 deadline for receipt of $6 million of additional
equity financing to June 30, 1997, which deadline was satisfied upon the
June 18th closing of the investment, and have orally advised the Company
that they will agree to the adoption of a proposed amendment to the Credit
Agreement to convert the current portion of the term loan to a one year and
a day obligation.
<PAGE>
o The bank lenders have continued to engage in further discussions with the
Company since the completion of the initial investment.
EARNINGS PER SHARE - For the calculation of earnings per share for
the three months and six months ended June 30, 1997 and 1996, all of the various
common stock equivalents, convertible securities and contingently issuable
shares are excluded from primary and fully diluted earnings per share because
they are anti-dilutive. In February 1997, SFAS No. 128, "Earnings Per Share",
was issued. This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This Statement simplifies the standards for computing
EPS previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This Statement requires
restatement of all prior-period EPS data presented. Earnings per share, as
calculated in accordance with the provision of SFAS No. 128, are not materially
different from that presented for the quarters ended June 30, 1997 and 1996.
On June 18, 1997, the Company issued 250,000 shares of its common stock in
connection with the settlement of the Company's liability with the successor to
the seller in connection with the Company's agreement to purchase the assets of
Buddy L. Supplemental loss per share assuming the issuance had taken place on
January 1, 1997 would be $(.10) and $(.52) for the three and six months ended
June 30, 1997, respectively.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
2. INVENTORIES
A summary of inventories, by major classification, at June 30, 1997 and
December 31, 1996 is as follows (in thousands):
June 30, December 31,
1997 1996
------------ -------------
Raw materials and purchased parts $ 3,382 $ 8,658
Work-in-process 5,132 4,593
Finished goods 13,878 11,864
============ =============
$ 22,392 $ 25,115
============ =============
Inventories are net of writedowns for lower of cost or market reserves of
$9,756,000 and $10,954,000 at June 30, 1997 and December 31, 1996, respectively.
3. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT - The Company had outstanding commitments under letters
of credit totaling approximately $1,072,000 at June 30, 1997 compared to
$1,532,000 at December 31, 1996.
INDEMNIFICATIONS - In connection with the sale of the assets used in the
businesses of its wholly-owned subsidiaries, Isaly Klondike Company and Popsicle
Industries Ltd. to Thomas J. Lipton Company and its affiliates in 1993, the
Company agreed to certain indemnification obligations. The Company has
established reserves for all claims known to it and for other contingencies in
connection with the sale. Although there can be no assurance that claims and
other contingencies related to the sale will not exceed established reserves,
the Company believes that additional exposure related to the indemnification
obligations will not be material to the consolidated financial statements.
<PAGE>
LITIGATION - There is a suit claiming infringement of various intellectual
property rights which has been filed against Marchon, Inc., a wholly-owned
subsidiary of the Company. The Company asserted meritorious defenses and is
contesting the plaintiff's claims.
During February 1997, Mr. Marvin Smollar, former President, Chief
Operating Officer and director of the Company, commenced an action against the
Company claiming (a) breach of his employment agreement, (b) breach of a phantom
stock plan maintained by Marchon, Inc. prior to its acquisition by the Company
and (c) breach of an oral agreement to pay relocation expenses, and seeking
injunctive relief enjoining the Executive committee of the Company's Board of
Directors from taking certain actions. The complaint seeks unspecified damages
in excess of $1 million in respect to his employment agreement, certain amounts
alleged to be owed by reason of such phantom stock plan and relocation expenses.
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 its litigation either
individually or in the aggregate would have a material adverse effect on the
Company's consolidated financial statements.
Mr. Smollar was terminated as President and Chief Operating Officer of the
Company in January 1997. He is the defendant in a suit filed by the Company in
January 1997 which seeks to enforce a certain guarantee by him of debt owed to
the Company by 555 Corporate Woods Parkway, Inc. Mr. Smollar has denied the
allegations in the Company's complaint.
On July 18, 1997, the Company filed a complaint against Amloid
Corporation, Come Play Products Company and certain individuals. The complaint
claims that Amloid's "Super Trike" product infringes upon the Company's Big
Wheel(R) line of products, and seeks injunctive and other relief. The company
intends to vigorously pursue this action.
On August 1, 1997, the Company filed a complaint against MAC Plastics,
Inc., Grand Venture, Ltd., and certain individuals. The complaint claims that
the defendants copied certain of the Company's manufacturing processes and seeks
injunctive and other relief. The Company intends to vigorously pursue this
action.
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 June 30, 1997 and December 31, 1996, the Company had
reserves for environmental liabilities of $500,000. The amount accrued for
environmental liabilities was determined without consideration of possible
recoveries from third parties. Estimates of costs for future remediation are
necessarily imprecise due to, among other things, the allocation of costs among
potentially responsible parties. Although it is possible that additional
environmental liability related to these matters could result in amounts that
could be material to the Company's consolidated financial statements, a
reasonably possible range of such amounts cannot presently be estimated. Based
upon the facts presently known, the large number of other potentially
responsible parties and potential defenses that exist, the Company believes that
its share of the costs of cleanup for its current remediation sites will not, in
the aggregate, have a material adverse impact on its consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales of 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 June through September. Management expects that the
Company's quarterly operating results will vary significantly throughout the
year.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND
SIX MONTHS ENDED JUNE 30, 1996
<PAGE>
NET SALES AND NET LOSS. Net sales for the three and six months ended
June 30, 1997 decreased by $5.8 million, or 17.4%, to $27.6 million and
decreased by $2.3 million, or 4.1%, to $53.3 million, respectively, compared to
the three and six months ended June 30, 1996. The net loss for the three months
ended June 30, 1997 was $.8 million compared to $1.7 million for the three
months ended June 30, 1996 and was $4.0 million compared to $3.9 million for the
six month periods ended June 30, 1997 and 1996, respectively. During the three
and six months ended June 30, 1997, the Company recognized a $2.4 million
settlement upon termination of an international sales distribution agreement.
The following table shows the Company's net sales and operating loss from
continuing operations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales:
Toys $ 27,265 $ 32,621 $ 51,335 $ 50,906
Holiday Products 351 801 1,967 4,702
------------- -------------- ------------- -------------
Total Net Sales $ 27,616 $ 33,422 $ 53,302 $ 55,608
============= ============== ============= =============
Operating Income(Loss):
Toys $ 987 $ (786) $ (1,640) $ (1,993)
Holiday Products 24 33 (34) (89)
------------- ------------- ------------- -------------
Total Operating Income(Loss) $ 1,011 $ (753) $ (1,674) $ (2,082)
============= ============== ============= =============
</TABLE>
The $5.4 million decrease in toy sales for the three months ended June 30,
1997 primarily reflects decreases in sales of pools and Big Wheelies(TM) when
compared to the three months ended June 30, 1996, partially offset by sales of
new product such as Real Bugs(TM) and Record `N Play(TM) toys. The slight
increase in toy sales for the six months ended June 30, 1997 when compared to
the six months ended June 30, 1996 again reflects the decreases in sale of pools
and Big Wheelies(TM), more than offset by the sales of Real Bugs(TM) and Record
`N Play(TM) products as well as sales increases of Grand Champions(R) horses and
Crocodile Mile(R) waterslides. Net sales during 1997 also decreased
internationally due to the termination of an international sales distribution
agreement.
Net sales of holiday products in the second quarter are traditionally at
their low point during the year. Shipments of Halloween and Christmas products
generally begin during the third quarter while first quarter sales primarily
reflect shipments of Easter products. Net sales for the six months ended June
30, 1997 reflect the significant decline in sales of Easter products when
compared to the six months ended June 30, 1996.
GROSS PROFIT MARGINS. Gross profit margins increased during the three
months ended June 30, 1997 as compared to the three months ended June 30, 1996
due to the inclusion of the settlement upon termination of the international
sales distribution agreement during the second quarter of 1997. Gross profit
margins were lower for the six months ended June 30, 1997 compared to the
similar period of the prior year. Though total manufacturing overhead costs are
lower in 1997 than in like periods of 1996, gross profit margins are adversely
impacted by allocating domestic manufacturing costs over lower production
levels, and by competitive sales pressure. These decreases were partially offset
by the proceeds from the settlement of the international sales distribution
agreement and greater profit contribution on certain new products sourced
through the Company's Hong Kong subsidiary.
SELLING AND ADMINISTRATIVE ("S&A"). S&A expenses were lower for the three
and six months ended June 30, 1997 as compared to the three and six months ended
June 30, 1996, primarily as a result of cost cutting measures begun in the last
quarter of 1996, partially offset by higher advertising expenditures during the
first six months of 1997 ($1,334,000 increase). Cost cutting measures include
the reduction of strategic business units, which are accountable for the sales
and marketing of specific product categories ($780,000 decrease for the first
six months of 1997 compared to the first six months of 1996), reductions in new
product development costs ($995,000 decrease),
<PAGE>
reductions in selling, customer service and distribution expenses ($1,989,000
decrease) and reductions in administrative expenses ($992,000 decrease).
S&A expenses for the six months ended June 30, 1996 reflected the reversal
of approximately $600,000 of certain indemnification reserves due to the
expiration of certain time limitations and the reversal of $200,000 of
environmental reserves. S&A expenses were approximately 24.8% of sales for the
six months ended June 30, 1997 as compared to 29.4% of sales for the six months
ended June 30, 1996, excluding the impact of the reversal of the indemnification
reserves.
INTEREST EXPENSE. Interest expense was $2.1 million and $4.1 million for
the three and six months ended June 30, 1997 as compared to $2.3 million and
$4.4 million for the three and six months ended June 30, 1996.
INCOME TAXES. The tax benefit for the three and six months ended June 30,
1997, approximates the federal statutory rate net of certain nondeductible
expenses, primarily amortization of goodwill. The tax benefit for 1997 reflects
the Company's anticipated ability to generate taxable income in the future.
SEASONALITY OF SALES
Sales of many toy products are seasonal in nature. Purchase orders for the
Christmas selling season are typically secured in the months of April, May,
June, and July so that by the end of July, the Company has historically received
orders or order indications for a substantial majority of its full year's toy
business. The Company also offers products sold primarily in the spring and
summer months including Water Works pools, Crocodile Mile(R) water slides and
other items, which are shipped principally in the first and second quarters of
the year and counter some of this seasonality. In addition, Big Wheel(R) and
Power Drivers(TM) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles
ship year-round. The Company's production generally is heaviest in the period
from June through September. Typically over 60% of toy product revenues are
generated in the second half of the year with September and October being the
largest shipping months. As a result, a disproportionate amount of receivables
are collected and trade credits are negotiated in the first calendar quarter of
the following year. The Company expects that its quarterly operating results
will vary significantly throughout the year.
Sales of holiday products, which are also seasonal in nature, are heavily
concentrated in the Christmas and Halloween shopping seasons. Therefore,
substantially all shipments and operating income of the holiday products segment
occur in the third and fourth quarters of the year. Sales of Easter products are
made in the first quarter. Holiday products can be manufactured throughout the
year in anticipation of seasonal demand, because of the more stable nature of
the product line, and dependent upon financial resources.
LIQUIDITY AND CAPITAL RESOURCES
Management responded to the circumstances which gave rise to the loss
for fiscal 1996 by, among other things, restructuring its operations by
consolidating its business units, reducing staffing levels and rationalizing its
product lines. In addition, a new plant organization, including a new plant
manager was put in place. Although these efforts resulted in reduced cash
outflows, the Company had insufficient cash resources to fund its ongoing
operations. In addition, these events necessitated the Company's negotiations of
certain amendments to its senior loan agreement, which included, among other
things, a commitment on the part of the Company to obtain at least $6 million of
additional equity financing by May 31, 1997.
The consolidated condensed financial statements have been prepared on a
going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, as well as the requirement for the Company to raise significant
additional funding prior to June 30, 1997, indicate that, if the Company was
unable to raise significant additional funding, it may have been unable to
continue as a going concern. The independent auditors' report on the December
31, 1996 financial statements stated that "These matters raise substantial doubt
about the Company's ability to continue as a going concern . . . . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty." The consolidated financial
statements do not include adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities, that might be necessary should the Company be unable to continue as
a going concern.
The Company retained investment bankers to assist the Company in
identifying and evaluating various alternatives, including the sale of certain
product lines or fixed assets, and the potential recapitalization of the
<PAGE>
Company. During March 1997, after exploring various possibilities, including the
sale of some of its assets and product lines, the Company entered into a
non-binding letter of intent in March 1997 with a company that proposed to
invest in the Company, which proposal was withdrawn in April 1997. Following the
withdrawal of such proposal, the Board of Directors, after presentations by the
Company's legal and financial advisors and consideration of the Company's
liquidity and operational requirements, concluded that it was in the best
interests of the Company to pursue alternative financing pursuant to a proposal
made by HPA Associates, LLC ("HPA") and EMP Associates LLC ("EMP"), described
under "Summary of Business Operations and Significant Accounting Policies" of
notes to consolidated condensed financial statements.
The Company intends to use substantially all of the $14,739,000 net
proceeds of the $16 million preferred stock investment for working capital
purposes, including the repayment of existing trade indebtedness and short-term
bank debt.
The Securities Purchase Agreement also provided that, in addition to the
$16 million of convertible preferred stock discussed above, the Company could
elect to issue an additional $5 million of the Series A Preferred Stock to the
investors, on the same terms and conditions as the $16 million, subject to
shareholder approval. If this additional sale is approved, the total investment
may reach up to $21 million.
Under the amended terms of the secured bank facility (the "Credit
Agreement") of Empire Industries, Inc., a wholly-owned subsidiary of the
Company, the Company is not currently in compliance with certain provisions,
including compliance with certain financial covenant requirements. The Company's
senior lenders have orally advised the Company that it will agree to the
adoption of a proposed amendment to the Credit Agreement to convert the current
portion of the term loan to a one year and a day obligation and have agreed to
engage in further discussions with the Company following the completion of the
Preferred Stock Investment, but have not waived the Company's non-compliance
with the terms of the Credit Agreement or agreed to amend the terms of the
Credit Agreement to bring the company into compliance. Moreover, HPA has waived
the condition to the closing of the sale of the units under the Securities
Purchase Agreement that the Company's term and revolving loan facilities under
the Credit Agreement be restructured to the satisfaction of HPA.
Accordingly, while the Company's senior lenders have orally advised the
Company they will continue discussions with the Company and presently intend to
finance the Company's operations, there can be no assurance as to the timing,
terms or occurrence of any further amendment of the Credit Agreement and such
lenders have the right to declare the Company in default under the terms of the
Credit Agreement at any time, which would permit acceleration of the related
debt and acceleration of debt under the instruments that contain
cross-acceleration or cross-default provisions. Accordingly, if the Company is
unable to reach agreement regarding an amendment to the Company's Credit
Agreement, there can be no assurance that the Company's senior lenders will not
declare an event of default under the Credit Agreement, that the Company would
be able to arrange for alternative financing at all, on terms acceptable to it,
or in time to meet the Company's short-terms liquidity requirements. If the
Company cannot reach an agreement or arrange for alternative financing in a
timely fashion on terms acceptable to it, the Company may be forced to cease
operations
Although management believes the net proceeds from the Preferred Stock
Investments should be sufficient to fund the Company's operations through 1997
based on the Company's 1997 operating plan the Company may require additional
capital to fully finance continued operations after 1997 (earlier if the
Additional Investment is not consummated or if the Company's operating results
are below management's expectations). The Company's continued operations will
depend upon revenues and operating cash flows, if any, the completion of the
Additional Investment (if at all) continued support of the trade and secured
senior lenders and the availability of additional equity or debt financing.
Other than the Additional Investment, the Company has no commitments for
additional financing and there can be no assurance that the Company's operations
will be profitable, that the Company will be able to generate levels of revenues
and cash flows sufficient to fund operations, or, if necessary, that the Company
will be able to obtain additional financing on satisfactory terms, if at all. In
addition, the Company may choose to raise additional capital either through debt
or equity financing prior to the date on which capital is required for the
operations of the Company's business.
Due to the seasonality of its revenues, the Company's working capital
requirements fluctuate significantly during the year. The Company's seasonal
financing requirements are highest during the fourth quarter and lowest during
the first quarter. The Company's inventories, accounts receivable, accounts
payable, notes payable and current portion of long-term debt vary significantly
by quarter due to the seasonal nature of the Company's business.
<PAGE>
During the first quarter of 1997, the Company received its 1996 federal
income tax refund of $15.6 million which was applied to general working capital
needs.
Capital expenditures, principally for the purchase of tooling for new
products and equipment, were $427,000 for the six months ended June 30, 1997
compared to $3,817,000 for the six months ended June 30, 1996. The Company's
capital forecast for 1997 provides for expenditures of approximately $2 million
to acquire new equipment and tooling.
The Company is subject to various actions and proceedings, including those
relating to intellectual property matters, environmental matters and product
liability matters. See notes to consolidated condensed financial statements.
BACKLOG
The Company had open orders for toys of $15.8 million and $23.7 million as
of June 30, 1997 and June 30, 1996, respectively. Open orders at June 30, 1997
mainly reflected orders for boys and girls toys and ride-ons. Open orders at
June 30, 1996 included over $3.4 million of orders for battery powered ride-ons
which were de-emphasized for 1997. The Company believes that because order
patterns in the retail industry vary from time to time, open orders on any date
in a given year are not a meaningful indication of the future sales.
The Company had open orders of $4.5 million and $9.6 million as of June
30, 1997 and 1996, respectively, for holiday products. The decrease in orders at
June 30, 1997 reflects increased competition in the Company's traditional
Halloween and Christmas products.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
COLLECTION MATTERS - Due to the cash flow constraints experienced during
the latter part of 1996 and the early part of 1997, several actions have been
brought against the Company seeking payment of past due accounts. In each
instance, the Company has either structured a payment plan with the plaintiff or
denied the allegations in the complaint. The Company believes that none of these
actions, either individually or in the aggregate, will have a material adverse
effect on the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
Item 5 ("Other Events") of the Company's Report on Form 8-K filed June 30,
1997 is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Under the amended terms of the secured bank facility (the "Credit
Agreement") of Empire Industries, Inc., a wholly-owned subsidiary of the
Company, the Company is not currently in compliance with certain provisions,
including compliance with certain financial covenant requirements. The Company's
senior lenders have orally advised the Company that it will agree to the
adoption of a proposed amendment to the Credit Agreement to convert the current
portion of the term loan to a one year and a day obligation and have agreed to
engage in further discussions with the Company following the completion of the
Preferred Stock Investment, but have not waived the Company's non-compliance
with the terms of the Credit Agreement or agreed to amend the terms of the
Credit Agreement to bring the company into compliance. Moreover, HPA has waived
the condition to the closing of the sale of the units under the Securities
Purchase Agreement that the Company's term and revolving loan facilities under
the Credit Agreement be restructured to the satisfaction of HPA.
Accordingly, while the Company's senior lenders have orally advised the
Company they will continue discussions with the Company and presently intend to
finance the Company's operations, there can be no assurance as to the timing,
terms or occurrence of any further amendment of the Credit Agreement and such
lenders have the right to declare the Company in default under the terms of the
Credit Agreement at any time, which would permit acceleration of the related
debt and acceleration of debt under the instruments that contain
cross-acceleration or cross-default provisions. Accordingly, if the Company is
unable to reach agreement regarding an amendment to the Company's Credit
Agreement, there can be no assurance that the Company's senior lenders will not
declare an event of default under the Credit Agreement, that the Company would
be able to arrange for alternative financing at all, on terms acceptable to it,
or in time to meet the Company's short-terms liquidity requirements. If the
Company cannot reach an agreement or arrange for alternative financing in a
timely fashion on terms acceptable to it, the Company may be forced to cease
operations.
<PAGE>
On March 31, 1997 and December 31, 1996, the Company did not make the
quarterly interest payments on its 9% five-year subordinated debentures and was
not in compliance with certain financial covenants. As a result, the convertible
subordinated debentures were classified as current on the December 1996
consolidated balance sheet. In connection with the Securities Purchase Agreement
and the closing of the preferred stock investment, the holders of the
convertible debentures exchanged all of such debentures for 1,500 shares Series
C Preferred Stock of the Company and released among other things, their claim to
accrued and unpaid interest, fees and expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index and Exhibits
EXHIBIT NO. DESCRIPTION
<TABLE>
<CAPTION>
<S> <C>
3.5 Certificate of Designation relating to Series A Preferred Stock.(1)
3.6 Certificate of Designation relating to Series C Preferred Stock. (1)
4.6 First Amendment as of May 5, 1997, to Rights Agreement dated as of September 11, 1996,
between Empire of Carolina, Inc. and American Stock Transfer & Trust Company as Rights
Agent. (2)
4.7 Warrant Amendment dated May 6, 1997 to Warrant Certificate issued May 6, 1997 among
the Company, HPA Associates, LLC and EMP Associates LLC. (1)
4.8 Warrant Agreement dated as of June 17, 1997 between the Company and the holders from
time to time of the warrants. (1)
4.9 Second Amendment dated as of June 12, 1997, to Rights Agreement, dated as of
September 11, 1996, between Empire of Carolina, Inc. and American Stock Transfer & Trust
Company as Rights Agent. (1)
4.10 Promissory Note from the Company to Smedley Industries, Inc. Liquidating Trust in the amount
of $2,500,000.(1)
10.39 Third Amendment to Loan and Security Agreement among Empire Industries, Inc., LaSalle
National Bank and the lenders named therein. (3)
10.40 Securities Purchase Agreement dated as of May 5, 1997 among the Company, HPA Associates,
LLC and EMP Associates LLC.(4)
10.41 Amendment No. 1 dated as of June 5, 1997 to Securities Purchase Agreement dated as of May 5,
1997 among the Company, HPA Associates, LLC and EMP Associates LLC.(1)
10.42 Buddy L Settlement Agreement, dated as of June 17, 1997 between the Company and Smedley
Industries, Inc. Liquidating Trust. (1)
10.43 Letter of the Company to Pallinore Securities Corp., Axiom Capital Management, Inc.,
and Commonwealth Associates, Inc., regarding the registration rights provisions
affecting the Series A Preferred Stock.(1)
10.44 Buddy L Registration Rights Agreement dated as of June 17, 1997 between the Company and
Smedley Industries, Inc. Liquidating Trust.(1)
10.45 WPG Registration Rights Agreement dated as of June 17, 1997 between the Company and
WPG Corporate Development Associates IV, L.P., WPG corporate Development Associates
IV (Overseas), Ltd., Weiss, Peck & Greer, as trustee under Craig Whiting
IRA, Peter B. Pfister,
<PAGE>
Weiss, Peck & Greer, as Trustee under Nora Kerppola
IRA, Westpool Investment Trust Plc, Eugene M. Matalene,
Jr., Richard Hochman, and Glenbrook Partners, L.P.
(collectively, the "WPG-Affiliated Entities).(1)
10.46 WPG Release Agreement dated as of June 17, 1997 between the Company and the WPG-
Affiliated Entities.(1)
27 Financial Data Schedule
- -----------
1 Previously filed as an exhibit to the Company's Current Report on Form 8-K filed June 30, 1997
and incorporated by reference.
2 Previously filed as an exhibit to the Company's Current Report on Form 8-K filed May 8, 1997
and incorporated by reference.
3 Previously filed as an exhibit to the Company's Current Report on Form 8-K filed May 5, 1997
and incorporated by reference.
4 Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1997 and incorporated by reference.
</TABLE>
(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:
Form 8-K filed April 23, 1997 (relating to the Company's press
release dated April 23, 1997)
Form 8-K filed May 5, 1997 (relating to the Company's press
release dated May 1, 1997 and filing an amendment to the
Company's senior credit agreement)
Form 8-K filed May 6, 1997 (relating to the Company's press
release dated May 5, 1997)
Form 8-K filed May 8, 1997 (relating to the Company's press
release dated May 8, 1997 and filing an amendment to the
Company's stockholder rights agreement)
Form 8-K filed June 30, 1997 (relating to the Company's sale
of securities pursuant to the Securities Purchase Agreement
dated as of May 5, 1997 among the company, HPA Associates, LLC
and EMP Associates LLC.)
<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/ William H. Craig
-----------------------------------
William H. Craig
Chief Financial Officer
Dated: August 8, 1997
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,049
<SECURITIES> 0
<RECEIVABLES> 27,121
<ALLOWANCES> 6,071
<INVENTORY> 22,392
<CURRENT-ASSETS> 55,294
<PP&E> 56,584
<DEPRECIATION> 35,849
<TOTAL-ASSETS> 96,612
<CURRENT-LIABILITIES> 56,962
<BONDS> 0
765
0
<COMMON> 16
<OTHER-SE> 27,371
<TOTAL-LIABILITY-AND-EQUITY> 96,612
<SALES> 53,302
<TOTAL-REVENUES> 55,702
<CGS> 44,151
<TOTAL-COSTS> 44,151
<OTHER-EXPENSES> 13,225
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 2,012
<INCOME-PRETAX> (5,761)
<INCOME-TAX> 1,749
<INCOME-CONTINUING> (4,012)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,012)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
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