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 MARCH 31, 1998
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 April 15, 1998 was 7,848,761.
<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 management's plans and objectives. When used in this document, the words
"expect," "anticipate," estimate," "believe," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
various risks and uncertainties which could cause actual results to vary
materially from those stated. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, estimated, expected or projected. Such
risks and uncertainties include the Company's ability to close the proposed
transaction, the ability to manage inventory production and costs, meeting
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 risk associated with consumer acceptance of
new product introductions, potential increases in raw material prices, potential
delays or production problems associated with foreign sourcing of production and
the impact of pricing policies including providing discounts and allowances,
reliance on key customers, the seasonality of the Company's business, the
ability of the Company to meet existing financial obligations in the event of
adverse industry or other developments, and the Company's ability to obtain
additional capital to fund future commitments and operations. Certain of these
as well as other risks and uncertainties are described in more detail in the
Company's Registration Statement on Form S-1 filed under the Securities Act of
1933, Registration No. 333-4440 and the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The Company undertakes no obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------------- -----------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,487 $ 3,483
Accounts receivable, less allowances and other
deductions (1998-$4,659; 1997-$5,487) 9,647 14,052
Inventories, net 12,522 9,933
Prepaid expenses and other current assets 891 1,980
----------- -------------
Total current assets 26,547 29,448
PROPERTY, PLANT AND EQUIPMENT, NET 13,288 14,135
EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET 13,281 13,491
TRADEMARKS, PATENTS, TRADENAMES AND LICENSES, NET 5,941 6,066
OTHER NONCURRENT ASSETS 477 436
----------- ------------
$ 59,534 $ 63,576
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 16,418 $ 16,988
Accounts payable - trade 10,162 12,317
Other accrued liabilities 10,525 10,751
----------- ------------
Total current liabilities 37,105 40,056
----------- ------------
LONG-TERM LIABILITIES:
Long-term debt 8,275 6,425
Other noncurrent liabilities 1,676 1,642
----------- ------------
Total long-term liabilities 9,951 8,067
----------- ------------
Total liabilities 47,056 48,123
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COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 60,000,000 shares authorized, shares
issued and outstanding: 1998 and 1997 - 7,849,000 785 785
Preferred stock, $.01 par value, 5,000,000 shares authorized. Issued and
outstanding: 1998 and 1997 - 2,100,000 shares of Series A convertible
preferred stock and 1,461 shares of Series C convertible preferred stock.
21 21
Additional paid-in capital 109,282 109,282
Deficit (97,610) (94,635)
----------- ------------
Total stockholders' equity 12,478 15,453
----------- ------------
$ 59,534 $ 63,576
=========== ============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1998 1997
-------------------- --------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
NET SALES $ 11,896 $ 25,686
COST OF SALES 9,391 21,878
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GROSS PROFIT 2,505 3,808
SELLING AND ADMINISTRATIVE EXPENSE 4,493 6,493
------------- -------------
OPERATING LOSS (1,988) (2,685)
INTEREST EXPENSE (987) (2,006)
------------- -------------
LOSS BEFORE INCOME TAXES (2,975) (4,691)
INCOME TAX BENEFIT - 1,440
------------- -------------
NET LOSS $ (2,975) $ (3,251)
============= =============
LOSS PER COMMON SHARE -
Basic and diluted $ (0.38) $ (0.44)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -
Basic and diluted 7,849 7,404
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1998 1997
-------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,975) $ (3,251)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,242 2,356
Other 559 639
Changes in assets and liabilities (42) 25,615
-------------------- --------------------
Net cash provided by(used in) operating activities (1,216) 25,359
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (60) (255)
Other (11)
-------------------- --------------------
Net cash used in investing activities (60) (266)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings(repayments) under lines of credit 1,985 (23,803)
Repayments of notes payable (705) (940)
-------------------- --------------------
Net cash provided by(used in) financing activities 1,280 (24,743)
-------------------- --------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4 350
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,483 478
-------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,487 $ 828
==================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 607 $ 1,365
Income taxes, (net of refunds) (3) (15,786)
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(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
on Form 10-K.
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.
The consolidated condensed financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Recurring losses
from operations and operating cash constraints are potential factors which,
among others, may indicate that the Company will be unable to continue as a
going concern for a reasonable period of time. The independent auditors' report
on the December 31, 1997 financial statements stated that "... the Company's
recurring losses from operations and current cash constraints raise substantial
doubt about the Company's ability to continue as a going concern . . . . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
The consolidated financial statements do not include adjustments relating
to the recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis and ultimately to attain
profitable operations.
Effective March 30, 1998, the bank lenders under the Company's secured
credit facility agreed to certain amendments to the facility which provide
additional availability during the Company's peak production periods, but which
require that such additional funds be repaid by year end. In addition, this
sixth amendment with respect to the Company's secured bank facility reduced the
maximum borrowings under the agreement to $57,000,000 and extended the loan to
April 1, 2001. Certain financial covenants, including tangible net worth and
interest coverage, as defined, were amended.
In December 1997, the Company filed a registration statement on Form S-3
under the Securities Act of 1933 (the "Registration") on behalf of the
purchasers of the Series A convertible preferred stock and warrants. In
connection with this registration, the Company filed listing applications with
the American Stock Exchange ("AMEX") for the Series A convertible preferred
stock, the warrants, and the common stock underlying these securities. The
Registration was declared effective on April 7, 1998 and the securities were
approved for listing on the AMEX.
EARNINGS PER SHARE - For the calculation of earnings per share for the
first quarter of 1998 and 1997, all of the Company's options, warrants,
convertible securities and contingently issuable shares are excluded from basic
and diluted earnings per share because they are anti-dilutive.
<PAGE>
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 March 31, 1998 and
December 31, 1997 is as follows (in thousands):
1998 1997
---- ----
Finished goods $10,506 $7,336
Raw materials and purchased parts 1,696 1,990
Work-in-process 320 607
------- ------
$12,522 $9,933
======= ======
Inventories are net of writedowns for lower of cost or market reserves of
$7,010,000 and $7,050,000 at March 31, 1998 and December 31, 1997, respectively.
3. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT - The Company had outstanding commitments under letters
of credit totaling approximately $765,000 at March 31, 1998 compared to $701,000
at December 31, 1997.
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.
LITIGATION - George Delaney and Rehkemper I.D., Inc. v. Marchon, Inc., is
an action pending in the Circuit Court of Cook County, Illinois, which was
commenced on December 3, 1990, arising from a business arrangement between the
plaintiffs and Marchon, alleging an interest in one of Marchon's product lines.
On November 22, 1991, the trial court judge issued an opinion and dismissed
plaintiff's complaint with prejudice. Plaintiffs appealed and, on September 23,
1993, the Appellate Court reversed the dismissal and remanded the case for
further proceedings. The plaintiffs have filed an amended complaint against the
Company and the case is set for trial in 1998. The Company is vigorously
contesting the matters set forth in the complaint and believes that it has
meritorious defenses to the plaintiffs' claims.
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.
<PAGE>
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 March 31, 1998 and December 31, 1997,
the Company had reserves for environmental liabilities of $125,000. 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.
4. PROPOSED ACQUISITION
On April 10, 1998, the Company executed a definitive Share Purchase
Agreement (the "Share Purchase Agreement") with the shareholders of Apple
Sports, Inc. and the shareholders of Apple Golf Shoes, Inc. (collectively, the
"Apple Company Shareholders" and with respect to the companies, the "Apple
Companies") whereby the Company agreed to purchase from the Apple Company
Shareholders all of their capital stock representing all of the outstanding
capital stock of the Apple Companies (the "Acquisition").
Under the terms of the Share Purchase Agreement, Empire will acquire all
of the issued and outstanding shares of capital stock of each of the Apple
Companies, for consideration equal to an aggregate of 5,000,000 shares of the
Company's common stock ( the "Initial Payment Shares"), subject to increase as
described below. In the event that during the Adjustment Period (defined below)
the closing daily market price of the Company's common stock trading on the
American Stock Exchange or on any nationally recognized stock exchange
(including The Nasdaq Stock Market or the New York Stock Exchange) (an
"Exchange") shall not be at a price of $2.00 per share or higher for each of 45
consecutive stock trading days, then Empire shall be obligated to pay additional
consideration in the amount of 1,153,846 shares of Empire Common Stock (the
"Additional Payment Shares", and together with the Initial Payment Shares, the
"Payment Shares"), thereby bringing the number of shares of Empire common stock
paid for the Acquisition to an aggregate of 6,153,846. In addition, pursuant to
the Share Purchase Agreement, the Company has agreed to assume a liability which
management believes to be approximately $5.3 million and reimburse certain
transfer and other fees of approximately $325,000.
Within 90 days from the date of the issuance of any Payment Shares, Empire
shall cause to be filed and use its best efforts to have declared effective, a
registration statement (the "Registration Statement") under the Securities Act
of 1933, as amended, for an offering to be made on a delayed or continuous basis
permitting sales of the Payment Shares in dealer transactions or in any other
transfer for consideration not involving an underwritten public offering, and
Empire shall pay all expenses of registration in connection with the
Registration Statement.
The Adjustment Period is the period of time commencing on the first
trading date after the date on which the Registration Statement is declared
effective by the Securities and Exchange Commission and the Payment Shares in
question are deemed fully transferable on an Exchange (the "Effective Date") and
ending on the first calendar anniversary of the Effective Date; provided,
however, that if the Effective Date shall not have occurred within 90 days of
the closing date of the Acquisition (the "Closing Date"), the Adjustment Period
shall mean a period of 365 days commencing on the 91st day after the Closing
Date.
If the Effective Date shall not have occurred on or prior to 90 days
after the Closing Date, the Apple Company Shareholders shall have the right (the
"Put Right") to require Empire to repurchase up to an aggregate of 500,000 of
the Payment Shares at a net price of $2.00 per share for a total of $1,000,000.
Any exercise of the Put Right will reduce the number of Additional Payment
Shares issuable as consideration in the Acquisition by
<PAGE>
the percentage determined by multiplying (x) 100 by (y) the quotient of the
number of Payment Shares as to which the Put Right is exercised divided by
500,000.
The consideration payable by Empire described above was determined in
arms'-length negotiation by the Board of Directors of Empire and the Apple
Company Shareholders. In determining the consideration, the Board of Directors
and Apple Company Shareholders considered, among other factors, the Apple
Companies' history of growth and profitability, the growth potential of the golf
industry and the prospects of Empire and the Apple Companies on a combined
basis.
It is contemplated that the Closing will occur as soon as practicable
after the Annual meeting, and upon satisfaction or waiver of all of the other
conditions set forth in the Share Purchase Agreement. The Closing is presently
anticipated to occur on May 28, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On April 10, 1998, the Company signed a Share Purchase Agreement with the
shareholders of Apple Sports, Inc. and the shareholders of Apple Golf Shoes,
Inc. to acquire all of the stock of each of Apple Sports, Inc. and Apple Golf
Shoes, Inc. (together, the "Apple Companies"), manufacturers and distributors of
golf equipment sold under license from Wilson Sporting Goods Co., for 5 million
shares of the Company's common stock, subject to adjustment. The Apple Companies
are located in Ronkonkoma, New York and they have manufactured and distributed
Wilson(R) and Staff(R) golf shoes and other Wilson(R) accessories since 1986. In
1997, the Apple Companies had revenues in excess of $24 million. See Note 4 of
notes to consolidated condensed financial statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales for the three months ended March 31, 1998 were $11.9
million compared to $25.7 million for the three months ended March 31, 1997. The
decrease in sales for the first quarter of 1998 as compared to the first quarter
of 1997 was due to the following: sale of the steel-walled pool line in the
fourth quarter of 1997 ($3.2 million); sales of discontinued products and
closeouts in the first quarter of 1997 ($3.9 million); lower sales of Real
Bugs(TM) ($3.8 million) and the overall decrease in sales to a significant
customer ($2.4 million in addition to the above enumerated items.) Sales of the
newly introduced YoYo Balls(R) were approximately $.9 million during the first
quarter of 1998.
GROSS PROFIT MARGINS. Gross profit margins were higher for the three
months ended March 31, 1998 (21%) as compared to the three months ended March
31, 1997 (15%). The improvement in gross profit margins is attributable to:
lower sales of discontinued product lines and closeout items; improved margins
on imported items and lower costs of domestic operations.
SELLING AND ADMINISTRATIVE ("S&A"). S & A expenses were $2.0 million lower
for the three months ended March 31, 1998 as compared to the three months ended
March 31, 1997. Contributing to this decrease were reductions in advertising,
sales commissions and royalties ($971,000), commensurate with the reduction in
sales; reduction in executive, marketing, customer support and administrative
staff ($672,000), and lower consulting fees ($264,000). Due to the significant
decrease in first quarter sales, however, S & A expenses as a percentage of net
sales were 37.8% in the first quarter of 1998 as compared to 25.3% in the first
quarter of 1997.
INTEREST EXPENSE. Interest expense was $1.0 million for the three months
ended March 31, 1998 as compared to $2.0 million for the three months ended
March 31, 1997, due to the conversion of debt to equity in
<PAGE>
the second quarter of 1997 and the use of proceeds from the sale of Series A
convertible preferred stock to reduce debt.
INCOME TAXES. Due to the Company's expectation of a tax loss for 1998, no
tax benefits were provided at the federal statutory rate during the first
quarter of 1998. The benefit of $1,440,000 originally provided during the first
quarter of 1997 was reduced to $-0- in the third quarter of 1997.
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 and
June so that by the end of June, the Company has historically received orders or
order indications for a substantial majority of its full year's toy business.
The Company also offers products sold primarily in the spring and summer months
including Water Works(TM) pools, Crocodile Mile(R) water slides and other items,
which are shipped principally in the first and second quarters of the year and
counter some of this seasonality. In addition, Big Wheel(R) ride-ons, Grand
Champions(R) horses and Buddy L(R) vehicles ship year-round. Sales of holiday
products are heavily concentrated in the Christmas and Halloween shopping
seasons with substantially all shipments occurring in the third and fourth
quarters of the year. The Company's production generally is heaviest in the
period from June through September. Typically over 60% of toy product revenues
are generated in the second half of the year with September and October being
the largest shipping months. As a result, a disproportionate amount of
receivables are collected and trade credits are negotiated in the first calendar
quarter of the following year. The Company expects that its quarterly operating
results will vary significantly throughout the year.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated condensed financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Recurring losses
from operations and operating cash constraints are potential factors which,
among others, may indicate that the Company will be unable to continue as a
going concern for a reasonable period of time. The independent auditors' report
on the December 31, 1997 financial statements stated that "...the Company's
recurring losses from operations and current cash constraints raise substantial
doubt about the Company's ability to continue as a going concern . . . . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
The consolidated financial statements do not include adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis and ultimately to attain
profitable operations.
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.
Effective March 30, 1998, the bank lenders under the Company's secured
credit facility agreed to certain amendments to the facility which provide
additional availability during the Company's peak production periods, but which
require that such additional funds be repaid by year end. In addition, this
sixth amendment with respect to the Company's secured bank facility reduced the
maximum borrowings under the agreement to $57,000,000 and extended the loan to
April 1, 2001. Actual availability of borrowings under the agreement is
<PAGE>
based on and secured by the Company's domestic accounts receivable, inventory,
property, plant and equipment, as defined. Certain financial covenants,
including tangible net worth and interest coverage, as defined, were amended.
Capital expenditures, principally for the purchase of tooling for new
products and equipment, were $60,000 for the first quarter of 1998 compared to
$255,000 for the first quarter of 1997.
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 $12.2 million and $27.3 million as
of March 31, 1998 and March 31, 1997, respectively. Open orders at March 31,
1998 reflect a reduction from the prior year due to the sale of the steel-walled
pool line in the fourth quarter of 1997, as well as reductions in orders for
boys and girls toys and waterslides. 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. Orders
placed in the first quarter are at the forefront of orders to be received for
fall toy and holiday product sales.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Marvin Smollar, a former director of the Company, was the defendant in a
suit filed by the Company in January 1997 which sought to enforce a certain
guarantee by Mr. Smollar of debt owed to the Company by 555 Corporate Woods
Parkway, Inc. Mr. Smollar denied the allegations in the Company's complaint. On
February 24, 1997, Mr. Smollar commenced a separate in the Circuit Court of Palm
Beach County, Florida captioned Marvin Smollar v. Empire of Carolina, Inc.
claiming (a) breach of his employment agreement, (b) breach of a Marchon phantom
stock plan agreement and (c) breach of an oral agreement to pay relocation
expenses, and seeking injunctive relief enjoining the Executive Committee of the
Board of Directors from taking certain actions. Mr. Smollar's claims arose in
part from his termination as President and Chief Operating Officer of the
Company in January 1997. The complaint sought unspecified damages in excess of
$1 million in respect of his employment agreement. During January 1998, the
Company and Mr. Smollar entered into a settlement agreement resolving each of
these claims in addition to a claim that had been brought by 1431 Kingsland
Avenue, L.P., alleging that the Company had breached a lease at 1431 Kingsland
Avenue in Pagedale, Missouri.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In December 1997, the Company filed a registration statement on Form S-3
under the Securities Act of 1933 (the "Registration") on behalf of the
purchasers of the Series A convertible preferred stock and warrants. In
connection with this registration, the Company filed listing applications with
the American Stock Exchange ("AMEX") for the Series A convertible preferred
stock, the warrants, and the common stock underlying these securities. The
Registration was declared effective on April 7, 1998 and the securities were
approved for listing on the AMEX.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index and Exhibits
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated July 29, 1988, by and among Clabir, Clabir
Corporation (California), HMW Industries, Inc. and Olin Corporation. (1)
2.2 Agreement and Plan of Merger, dated as of November 14, 1989, between AmBrit, Inc.
("AmBrit") and Empire of Carolina, Inc. (the "Company"), including amendment thereto,
dated as of December 4, 1989. (2)
2.3 Agreement and Plan of Merger, dated as of November 14, 1989, by and among the
Company, Clabir Corporation ("Clabir") and CLR Corporation, including amendment
thereto, dated as of December 4, 1989. (2)
2.4 Sale and Purchase Agreement between the Company and Cargill, Incorporated, dated
September 30, 1992.(3)
2.5 Purchase Agreement among Conopco, Inc., the Company, The Isaly Klondike Company,
Inc., The Isaly Company, Popsicle Industries, Ltd., Ice Cream Novelties, Inc. and Smith
& O'Flaherty Limited, dated as of January 27, 1993.(4)
2.6 Agreement and Plan of Reorganization, dated October 13, 1994, by and among the
Company, Marchon, Inc. ("Marchon") and the stockholders of Marchon.(5)
2.7 Agreement dated August 31, 1995, among the Company, CLR Corporation, Clabir Corporation,
Olin Corporation and General Defense Corporation.(7)
3.1 Restated Certificate of Incorporation of the Company.(6)
3.2 First Amendment to Restated Certificate of Incorporation of the Company.(8)
3.3 Amended and Restated By-Laws of the Company.(9)
3.4 Certificate of Designation of the Series B Junior Participating Preferred
Stock.(10)
3.5 Certificate of Designation Relating to Series A Preferred Stock.(11)
3.6 Certificate of Designation Relating to Series C Preferred Stock.(11)
4.1 Form of specimen certificate representing the Company's Common Stock.(12)
4.2 Excerpts from the Company's amended By-Laws and the Company's Restated Certificate
of Incorporation relating to rights of holders of the Company's Common Stock.(6)
4.3 Rights Agreement, dated as of September 11, 1996, between Empire of Carolina, Inc. and
American Stock Transfer & Trust Company as Rights Agent, which includes (i) as Exhibit
A thereto the form of Certificate of Designation of the Series B Junior Participating
Preferred Stock, (ii) as Exhibit B thereto the form of Right certificate
(separate certificates for the Rights will not be issued until
after the Distribution Date) and (iii) as Exhibit C thereto
the Summary of Stockholder Rights Agreement.(10)
4.4 Warrant Agreement dated as of June 17, 1997 between the Company and the
holders from time to time of the warrants.(11)
4.5 Second Amendment dated as of June 12, 1997 to Rights Agreement, dated as of
September 11, 1996 between Empire of Carolina, Inc. and American Stock Transfer & Trust
Company as Rights Agent.(11)
4.6 Promissory Note from the Company to Smedley Industries, Inc. Liquidating Trust in the
amount of $2,500,000.(11)
4.7 First Amendment dated as of May 5, 1997 to Rights Agreement of September 11, 1996,
between Empire of Carolina, Inc. and American Stock Transfer and Trust Company as
Rights Agent.(13)
9.1 Voting Agreement, dated September 30, 1994, by and between Halco Industries, Inc.
("Halco") and Steve Geller.(5)
10.1 Amended and Restated 1994 Stock Option Plan of the Company.(9)
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2 Empire of Carolina, Inc. 1996 Outside Directors Stock Option Plan.(14)
10.3 Empire of Carolina, Inc. 1996 Employee Stock Purchase Plan.(14)
10.4 Employment Agreement, dated July 15, 1994, by and among the Company, Empire
Industries, Inc. ("EII") and Steven Geller.(15)
10.5 Employment Agreement, dated July 15, 1994, by and among the Company, EII and
Neil Saul.(15)
10.6 Settlement and Termination Agreement with Neil Saul.(7)
10.7 Stock Purchase Agreement, dated July 15, 1994, among Steven Geller, Maurice A.
Halperin, individually and as custodian for the benefit of Lauren Halperin and Heather
Halperin, Carol A. Minkin, individually and as custodian for the benefit of Joshua
Minkin and Rebecca Minkin, and Halco (the Halperins and Minkins, collectively, the
"Halperin Group").(5)
10.8 Redemption Agreement, dated September 30, 1994, by and between the Company and the
Halperin Group.(5)
10.9 Omnibus Agreement, dated September 30, 1994, by and among the
Halperin Group, Steven Geller, the Company and EII.(5)
10.10 Stockholders' Agreement, dated October 13, 1994, by and among
Steven Geller, Marvin Smollar and Neil Saul.(5)
10.11 Investor's Rights Agreement, dated October 13, 1994, by and among the Company,
Marvin Smollar, Kar Ye Yeung, Tyler Bulkley and Harvey Katz.(5)
10.12 Stockholders' Agreement dated October 13, 1994, among Steven Geller,
Marvin Smollar and Neil Saul.(5)
10.13 Debenture Purchase Agreement, dated as of December 2, 1994, among the Company,
WPG Corporate Development Associates IV (Overseas), Ltd., Westpool Investment
Trust PLC, Glenbrook Partners, L.P., Eugene Matalene, Jr., Richard Hockman, Weiss, Peck &
Greer, as Trustee under Nora E. Kerppola IRA, Peter B. Pfister and Weiss, Peck & Greer,
as Trustee under Craig S. Whiting IRA and WPG Corporate Development Associates IV, L.P.
(all of such parties, other than the Company, collectively, the "WPG Group").(16)
10.14 Registration Rights Agreement, dated as of December 22, 1994, by and between the
Company, and the WPG Group.(16)
10.15 Shareholders' Agreement, dated December 22, 1994, by and among the WPG Group,
Steven Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited
Partnership.(16)
10.16 Stock Purchase Agreement, dated as of December 22, 1994, between WPG Corporate
Development Associates IV (Overseas), Ltd. and Steven Geller.(16)
10.17 Assignment and Assumption Agreement dated as of June 21, 1995 between the
Company and EAC.(6)
10.18 Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(6)
10.19 Lease dated July 7, 1995 between Buddy L Inc. Debtor-in-Possession ("Buddy L") and Empire
Acquisition Corp., Inc. ("EAC").(6)
10.20 Form of Subscription Agreement executed in connection with subscription of Common
Stock and Preferred Stock by WPG Corporate Development Associates IV (Overseas), L.P.,
Westpool Investment Trust PLC, Glenbrook Partners, L.P., and WPG Corporate
Development Associates IV, L.P.(6)
10.21 Shareholders' Agreement ("Shareholders' Agreement") dated December 22, 1994 among WPG
Corporate Development Associates IV, L.P., WPG Corporate Development
Associates IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee under Craig S. Whiting
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
IRA, Peter Pfister, Weiss, Peck & Greer, as Trustee under Nora E. Kerppola IRA
Westpool Investment Trust, PLC, Glenbrook Partners, L.P., Steve Geller, Neil Saul,
Marvin Smollar and Champ Enterprises Limited Partnership.(17)
10.22 Amendment No. 1 to Shareholders' Agreement dated as of April 10, 1995 among WPG
Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV
(Overseas), Ltd., as the exempt transferee of WPG Corporate Development Associates IV
(Overseas), Ltd., certain persons identified on Schedule I of Amendment No. 1 to the
Shareholders' Agreement, Steven E. Geller ("Geller"), Neil B. Saul ("Saul") and The
Autumn Glory Trust, a Cook Islands Registered International Trust ("Trust") as the
permitted transferee of Champ Enterprises Limited Partnership.
10.23 Amendment No. 2 to Shareholders' Agreement dated as of June 29, 1995 among WPG Corporate
Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd.,
as the exempt transferee of WPG Corporate Development Associates IV (Overseas), Ltd.,
certain persons identified on Schedule I of Amendment No. 2 to the Shareholders' Agreement,
Geller, Saul and the Trust as the permitted transferee of Champ Enterprises Limited
Partnership.(6)
10.24 Registration Rights Agreement ("Registration Rights Agreement") dated as of December 22,
1994 by and among Empire of Carolina, Inc., WPG Corporate Development Associates IV, L.P.,
WPG Corporate Development Associates IV (Overseas), Ltd., Weiss Peck & Greer, as Trustee
under Craig Whiting IRA, Peter B. Pfister, Weiss, Peck & Greer, as Trustee under Nora
Kerppola IRA, Westpool Investment Trust PLC and Glenbrook Partners, L.P.(17)
10.25 Amendment No. 1 to Registration Rights Agreement.(6)
10.26 Loan and Security Agreement dated May 29, 1996 among LaSalle National Bank ("LaSalle"), BT
Commercial Corporation ("BTCC") and EII, with exhibits and security instruments.(18)
10.27 First Amendment to Amended and Restated Loan and Security Agreement among LaSalle, BTCC,
Congress Financial Corporation (Central) ("Congress") and EII, with exhibits.(19)
10.28 Consent and Second Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress,
the CIT Group/Credit Finance, Inc. ("CIT"), Finova Capital Corporation ("Finova") and
EII.(20)
10.29 Third Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, CIT, Finova
and EII.(21)
10.30 Securities Purchase Agreement dated as of May 5, 1997 among the Company, HPA Associates, LLC
and EMP Associates, LLC.(22)
10.31 Amendment No. 1 dated as of June 5, 1997 to Securities Purchase Agreement dated as of May 5,
1997 among the Company, HPA Associates, LLC and EMP Associates, LLC.(11)
10.32 Buddy L Settlement Agreement, dated as of June 17, 1997 between the Company and Smedley
Industries Inc. Liquidating Trusts ("SLM").(11)
10.33 Letter of the Company to Pellinore Securities Corp., Axiom Capital Management, Inc. and
Commonwealth Associates, Inc. regarding the registration rights provisions affecting the
Series A Preferred Stock.(11)
10.34 Buddy L Registration Rights Agreement dated as of June 17, 1997 between the Company and
SLM.(11)
10.35 WPG Registration Rights Agreement dated as of June 17, 1997 among the Company and WPG
Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV
(Overseas), Ltd., Weiss, Peck & Greer, as trustee under Craig Whiting IRA, Peter B. Pfister,
Weiss, Peck & Greer as Trustee under Nora Kerppola IRA, Westpool Investment Trust, PLC,
Eugene M. Matalene, Jr., Richard Hochman, and Glenbrook Partners, L.P. (collectively the
"WPG Affiliated Entities").(11)
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.36 WPG Release Agreement dated as of June 17, 1997 between the Company and the WPG Affiliated
Entities.(11)
10.37 Fourth Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, CIT, Finova
and EII.(23)
10.38 Fifth Amendment to Loan and Security Agreement among LaSalle, BTCC, Congress, CIT, Finova
and EII.(24)
10.39 Sixth Amendment to Loan and Security Agreement amount LaSalle, Congress, CIT, Finova and
EII.(25)
10.40 First Amendment dated January 22, 1998 to the Warrant Agreement dated June 17, 1997 between
Empire of Carolina, Inc. and the holders from time to time of the Warrants.(23)
10.41 Share Purchase Agreement by and between the Shareholders of Apple Sports, Inc. and
the Shareholders of Apple Golf Shoes, Inc. as Sellers and Empire of Carolina, Inc. as
Purchaser, dated April 10, 1997. (26)
10.42 Empire of Carolina, Inc. 1998 Stock Option Plan. (26)
21 Subsidiaries of the Company.(18)
27 Financial Data Schedule.
99.1 Press Release dated February 12, 1998. (27)
</TABLE>
(1) Previously filed as an exhibit to Clabir's Current Report on Form 8-K,
dated December 23, 1988 (File No.1-7769) and incorporated by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33- 32186, dated November 17, 1989 and incorporated by
reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated October 6, 1992 and incorporated by reference.
(4) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 1, 1993 and incorporated by reference.
(5) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated September 30, 1994 and incorporated by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated July 21, 1995 and incorporated by reference.
(7) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated by reference.
(8) Previously filed as an exhibit to the Company's Annual Report on Form
10-K/A for the year ended December 31, 1996 and incorporated by reference.
(9) Previously filed as an exhibit to Amendment No. 1 to the Company's
Annual Report on Form 10- K for the year ended December 31, 1994 and
incorporated by reference.
(10) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated September 12, 1996 and incorporated by reference.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated June 17, 1997 and incorporated by reference.
<PAGE>
(12) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 2- 73208), dated July 13, 1981 and incorporated by
reference.
(13) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated May 8, 1997 and incorporated by reference.
(14) Previously filed as an appendix to the Company's definitive Proxy
Statement filed with the Commission on August 27, 1996 and incorporated by
reference.
(15) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994 and incorporated by reference.
(16) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D
filed by the WPG Group, dated December 23, 1994 and incorporated by reference.
(17) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D
filed by WPG Corporate Development Associates IV., L.P., WPG Private Equity
Partners, L. P., WPG Corporate Development Associates IV (Overseas), L.P., WPG
Private Equity Partners (Overseas), L P., Steven Hutchinson, Wesley Lang, Peter
Pfister, Craig Whiting, Nora Kerppola, Glenbrook Partners, L.P., Prim Ventures,
Inc., Westpool Investment Trust PLC and Weiss, Peck & Greer with the Securities
and Exchange Commission on December 23, 1994, and incorporated by reference.
(18) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 for (Reg. No.333-4440) declared effective by the Commission on June
25, 1996 and incorporated by reference.
(19) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated December 11, 1996 and incorporated by reference.
(20) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 5, 1997 and incorporated by reference.
(21) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated May 1, 1997 and incorporated by reference.
(22) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated by reference.
(23) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated March 30, 1998 and incorporated by reference.
(24) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated August 25, 1997 and incorporated by reference.
(25) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated March 31, 1998.
(26) Previously filed as an exhibit to the Company's Proxy Statement
pursuant to Section 14(A) of the Securities Exchange Act of 1934 as filed with
the Securities and Exchange Commission on April 28, 1998.
<PAGE>
(27) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 24, 1998.
(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 February 24, 1998( relating to the Company's press
release announcing signing of letter of intent to purchase stock of
the Apple Companies.)
Form 8-K filed March 20, 1998(relating to the Company's press release
announcing amendment of quarterly statements.)
Form 8-K filed on March 30, 1998(relating to Third and Fourth
Amendments to Loan and Security Agreement, First Amendment to Warrant
Agreement.)
Form 8-K filed on March 31, 1998 (relating to Sixth Amendment to
Loan and Security Agreement.)
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.
/s/ William H. Craig
-----------------------------------
William H. Craig
Executive Vice President and
Chief Financial Officer
Dated: May 4, 1998
<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>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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0
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<COMMON> 785
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