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, 2000
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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
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EMPIRE OF CAROLINA, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-2999480
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33484
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(Address of principal executive office)
(Zip Code)
(561) 498-4000
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Registrant's telephone number, including area code)
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(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 May 8, 2000 was 21,247,839.
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EMPIRE OF CAROLINA, INC.
INDEX
Page
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Facing Sheet......................................................... Cover Page
Index................................................................ 1
Part I - Financial Information 2
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 2000 and December 31, 1999................... 3
Consolidated Condensed Statements of Operations
Three months ended March 31, 2000 and April 4, 1999.... 4
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 2000 and April 4, 1999.... 5
Notes to Consolidated Condensed Financial Statements........ 6-9
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations................... 10-12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk................................................... 12
Part II - Other Information
Item 1. Legal Proceedings...................................... 12
Item 3. Defaults Upon Senior Securities........................ 13
Item 4. Submission of Matters to a Vote of Security Holders.... 13
Item 5. Other Information...................................... 13
Item 6. Exhibits and Reports on Form 8-K....................... 13
Signature............................................................ 14
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PART I - FINANCIAL INFORMATION
This Form 10-Q contains various forward-looking statements and information,
including under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," that are based on management's beliefs as
well as assumptions made by and information currently available to management,
including statements regarding future economic performance and financial
condition, liquidity and capital resources and management's plans and
objectives. When used in this document, the words "expect," "anticipate,"
"estimate," "believe," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to various risks and
uncertainties which could cause actual results to vary materially from those
stated. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. Such risks
and uncertainties include the Company's ability to manage inventory production
and costs, to meet potential increases or decreases in demand, potential adverse
customer impact due to delivery delays including effects on existing and future
orders, competitive practices in the toy and golf industries, changing consumer
preferences and risks associated with consumer acceptance of new product
introductions, potential increases in raw material prices, potential delays or
production problems associated with foreign sourcing of production and the
impact of pricing policies including providing discounts and allowances,
reliance on key customers, the seasonality of the Company's business, the
ability of the Company to meet existing financial obligations, the availability
of financing or availability of refinancing for existing debt, and the Company's
ability to obtain additional capital to meet cash flow and working capital needs
and to fund future commitments and operations. Certain of these as well as other
risks and uncertainties are described in more detail in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and the Company's
Registration Statement on Form S-3 filed under the Securities Act of 1933,
Registration No. 333-57963. The Company undertakes no obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
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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,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 855 $ 1,589
Accounts receivable, net 10,719 16,708
Inventories, net 13,047 12,144
Prepaid expenses and other current assets 408 301
------------ ------------
Total current assets 25,029 30,742
Property, plant and equipment, net 10,605 11,413
Excess cost over fair value of net assets acquired, net 11,183 11,392
Trademarks, patents, tradenames and licenses, net 5,149 5,287
Other noncurrent assets 326 268
------------ ------------
Total Assets $ 52,292 $ 59,102
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 32,229 $ 34,096
Accounts payable - trade 5,475 6,748
Other accrued liabilities 7,091 7,834
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Total current liabilities 44,795 48,678
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Long-Term Liabilities:
Long-term debt 625 625
Other noncurrent liabilities 1,221 1,040
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Total long-term liabilities 1,846 1,665
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Total liabilities 46,641 50,343
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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: 2000 - 20,063,000 and 1999 - 19,667,000 2,006 1,967
Preferred stock, $.01 par value, 5,000,000 shares authorized
Issued and outstanding: 2000 - 1,436,000 and 1999 - 1,487,000
Shares of Series A convertible preferred stock and 2000 - 1,451 and
1999 - 1,451 shares of Series C convertible preferred stock 14 15
Additional paid-in capital 115,796 115,824
Deficit (112,165) (109,047)
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Total stockholders' equity 5,651 8,759
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Total Liabilities and Stockholders' Equity $ 52,292 $ 59,102
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
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EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands except per share amounts) (Unaudited)
Quarter Ended Quarter Ended
March 31, April 4,
2000 1999
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Net Sales $ 9,661 $ 15,851
Cost of Sales 8,256 11,823
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Gross Profit 1,405 4,028
Selling and Administrative Expense 3,920 5,007
Operating Loss (2,515) (979)
Interest Expense (603) (844)
Loss Before Income Taxes (3,118) (1,823)
Income Tax Benefit -- --
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Net Loss $ (3,118) $ (1,823)
============= =============
Loss Per Common Share -
Basic and diluted $ (0.16) $ (0.11)
============= =============
Weighted average number of common shares
outstanding -
Basic and diluted 19,816 16,261
============= =============
See notes to consolidated condensed financial statements.
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EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)(In Thousands)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, April 4,
2000 1999
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<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (3,118) $ (1,823)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,163 1,044
Other 797 314
Changes in assets and liabilities 2,311 (1,256)
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Net cash provided by (used in) operating activities 1,153 (1,721)
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Cash Flows From Investing Activities:
Capital expenditures (20) (709)
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Net cash used in investing activities (20) (709)
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Cash Flows From Financing Activities:
Borrowings (repayments) under lines of credit (1,867) 1,815
Repayments of notes payable -- (400)
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Net cash provided by (used in) financing activities (1,867) 1,415
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Net Decrease in Cash and Cash Equivalents (734) (1,015)
Cash and Cash Equivalents, Beginning of Period 1,589 4,295
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Cash and Cash Equivalents, End of Period $ 855 $ 3,280
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 603 $ 573
Income taxes, (net of refunds) -- 56
</TABLE>
See notes to consolidated condensed financial statements.
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EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Quarter Ended March 31, 2000 and April 4, 1999
(Unaudited)
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated condensed financial statements
have been prepared by the Company pursuant the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of financial position, results of operations and cash flows
for the interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the SEC. The Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. The
consolidated statements of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for the full year.
These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1999 Annual Report on Form 10-K for the year ended December 31, 1999.
The consolidated condensed financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Recurring losses
from operations and operating cash constraints are potential factors which,
among others, may indicate that the Company will be unable to continue as a
going concern for a reasonable period of time. The independent auditors' report
on the December 31, 1999 financial statements stated that "... the Company's
recurring losses from operations and current cash constraints raise substantial
doubt about the Company's ability to continue as a going concern . . . . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
The consolidated financial statements do not include adjustments relating
to the recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis and ultimately to attain
profitable operations.
In 2000, the Company implemented a calendar month end monthly closing
cycle for the quarter versus a 4-4-5 week monthly closing cycle in the prior
year quarter. This change has no significant impact on the comparability of the
interim consolidated condensed financial statements presented.
Earnings per share - All of the Company's options, warrants and
convertible securities are excluded from basic and diluted earnings per share
because they are anti-dilutive.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
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2. ACCOUNTS RECEIVABLE
A summary of accounts receivable at March 31, 2000 and December 31, 1999,
is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Gross Receivables $ 17,966 $ 23,996
Less: Allowances and other deductions (7,247) (7,278)
-------------- -----------------
Net receivables $ 10,719 $ 16,708
============== =================
</TABLE>
3. INVENTORIES
A summary of inventories, by major classification, at March 31, 2000
and December 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Finished Goods $ 12,605 $ 10,730
Raw Materials and purchased parts 2,092 3,384
Work-in-process 898 621
-------------- -----------------
Subtotal 15,595 14,735
Less: Reserve for obsolescence (2,548) (2,591)
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Total Inventory $ 13,047 $ 12,144
============== =================
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Royalty agreements - The Company is obligated to pay certain minimum
royalties under various trademark license agreements that aggregate
approximately $4.9 million through their initial minimum terms expiring through
June 30, 2002.
Letters of credit - The Company had outstanding commitments under letters
of credit totaling approximately $1,335,000 at March 31, 2000 compared to
$1,064,000 at December 31, 1999.
Indemnifications - In connection with the sale of businesses it previously
owned, the Company provided certain indemnifications to the purchaser. The
Company has established reserves for all claims known to it and for other
contingencies in connection with the sale. Although there can be no assurance
that claims and other contingencies related to the sale will not exceed
established reserves, the Company believes that additional exposure related to
the indemnification obligations will not be material to the consolidated
financial statements.
Litigation - During December 1990, George Delaney and Rehkemper I.D., Inc.
filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery
Division, against Marchon, Inc. claiming infringement of various intellectual
property rights and failure to pay royalties related to Marchon's development
and sale of various toys allegedly designed by plaintiffs. The Company was added
as a defendant after its acquisition of Marchon in October 1994. In August 1999,
the Company agreed to settle the litigation for $750,000. Pursuant to the
settlement agreement, the Company paid to the plaintiffs $350,000 on September
28, 1999 and is obligated to pay an additional $400,000 in quarterly payments of
$50,000 commencing March 31, 2000. The Court entered an Order of Dismissal with
Prejudice on September 17, 1999.
During October 1998, Industrial Truck Sales & Services, Inc. filed suit in
the General Court of Justice, Superior Court Division, of Guilford County, North
Carolina, against the Company and its North Carolina subsidiary, Empire
Industries, Inc., alleging breach of contract, among other counts, relating to
leases for forklifts delivered to the Company's Tarboro, North Carolina,
facility and seeking damages of approximately $104,000. The Company and Empire
Industries filed a third party complaint against Associates Leasing, Inc.,
Forklifts, Inc.
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and Howard Younger alleging fraud and breach of fiduciary duty. Industrial Truck
Sales and Forklifts, Inc. were the original lessors of the forklift and Mr.
Younger is a former employee of Empire Industries who executed the leases.
Associates Leasing is the assignee of the leases. In January 1999, Associates
Leasing filed a counterclaim against the Company and Empire Industries alleging
breach of contract and demanding judgment in excess of $800,000. During the
third quarter of 1999, the Company entered into a preliminary settlement
agreement pursuant to which the Company will pay approximately $500,000. The
settlement was finalized and the obligation was paid in full in the first
quarter of 2000.
In March 2000, 200 Fifth Avenue Associates filed an action in the Supreme
Court of the State of New York, County of New York against Carolina Enterprises,
Inc. (the predecessor company to Empire Industries, Inc.), a subsidiary of the
Company, and Empire of Carolina, Inc. This action alleges that the Company
breached its lease for premises located at 200 Fifth Avenue, New York, New York,
and demands damages of approximately $100,000. The Company is attempting to work
out an amicable settlement in this matter.
The Company's operating subsidiaries and its former operating subsidiaries
are subject to various types of consumer claims for personal injury from their
products. The Company's subsidiaries maintain product liability insurance.
Various product liability claims, each of which management believes is
adequately covered by insurance and/or reserves, are currently pending. The
Company does not believe the outcome of any of this litigation either
individually or in the aggregate would have a material adverse effect on the
Company's consolidated financial statements.
Contingencies - The Company has been identified as a potentially
responsible party, along with numerous other parties, at various U. S.
Environmental Protection Agency ("EPA") designated superfund sites. The Company
is vigorously contesting these matters. It is the Company's policy to accrue
remediation costs when it is possible that such costs will be incurred and when
they can be reasonably estimated. As of December 31, 1999 and March 31, 2000,
the Company had reserves for environmental liabilities of $98,000. The amount
accrued for environmental liabilities was determined without consideration of
probable recoveries from third parties. Estimates of costs for future
remediation are necessarily imprecise due to, among other things, the allocation
of costs among potentially responsible parties. Although it is possible that
additional environmental liability related to these matters could result in
amounts that could be material to the Company's consolidated financial
statements, a reasonably possible range of such amounts cannot presently be
estimated. Based upon the facts presently known, the large number of other
potentially responsible parties and potential defenses that exist, the Company
believes that its share of the costs of cleanup for its current remediation
sites will not, in the aggregate, have a material adverse impact on its
consolidated financial statements.
5. STOCKHOLDERS' EQUITY
During the first quarter of 2000, 50,250 shares of Series A Preferred
Stock were converted to 402,000 shares of Common Stock. The effect of the
conversion resulted in an increase in common stock value of $39,000, a decrease
in Preferred Stock value of $1,000, and a decrease in additional paid-in capital
of $38,000.
6. SUBSEQUENT EVENT
On May 4, 2000 the Company completed the sale of its domestically
manufactured decorative Holiday and Seasonal products including all machinery
and equipment to General Foam Plastics Corporation ("General Foam") for
approximately $3.7 million in cash. On May 8, 2000, the Company sold related
finished goods inventory for the Holiday and Seasonal products to General Foam
for approximately $0.8 million in cash. The net proceeds of both sales have been
used to reduce the Company's bank debt. The Company has signed a contract to
sell to General Foam its 1.2 million square foot manufacturing facility in
Tarboro, North Carolina for approximately $3.0 million in cash, subject to
satisfaction of certain conditions to closing. In the event the sale has not
closed by May 30, 2000, General Foam has agreed to lease the facility until the
earlier to occur of (i) the closing of the sale; and (ii), if closing conditions
are not met to General Foam's satisfaction, General Foam's election to lease a
significant portion of the facility for a five-year term. As a result of the
transaction with General Foam, the Company has sold its manufacturing equipment
and has begun to outsource the manufacturing
8
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of its remaining domestic products. At this time, management has not been able
to determine the full effect of this transaction on the financial statements of
the Company.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company designs, develops, and markets a broad variety of consumer
products including children's toys, golf footwear and accessories, sports boards
and accessories, and seasonal outdoor sports activity products. The Company's
line of toys includes the classic Big Wheel(R) ride-on toys, Grand Champions(R)
collectible horses, and Buddy L(R) cars and trucks. Its consumer sports line
includes Wilson(R) golf shoes and accessories and MONGOOSE(R) sports boards and
accessories.
Sales of the Company's products are seasonal in nature. Products sold
primarily in the spring and summer months include golf footwear and accessories,
Crocodile Mile(R) water slides and other items, which are shipped principally in
the first and second quarters of the year and counter some of the seasonality
associated with the Company's toy products. In addition, certain toys such as
Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles ship
year round. The Company expects that its quarterly operating results will vary
significantly throughout the year.
Results of Operations
First Quarter Ended March 31, 2000 Compared to First Quarter Ended April 4, 1999
Net Loss. The net loss for the quarter ended March 31, 2000 was $3.1
million as compared to $1.8 million for the quarter ended April 4, 1999. The net
loss reflects large increases in the cost of petrochemical plastic resin
derivatives and the under-utilization of the Company's manufacturing facility in
Tarboro, North Carolina, partially offset by lower selling and administrative
expense and interest expense.
Net Sales. The nature of the Company's business is such that year to year
changes in sales levels are predominantly due to changes in shipping volume or
product mix rather than changing sales prices. Net sales for the quarter ended
March 31, 2000 decreased by $6.2 million, or 39.0%, to $9.7 million. The Company
believes that the decrease in sales is primarily due to increased competition
with respect to particular products and elimination of sales of low margin
products.
Gross Profit Margins. Gross profit margins for the quarter ended March 31,
2000 was 14.5% as compared with 25.4% in the quarter ended April 4, 1999. The
decrease in gross profit margin for the first quarter of 2000 is due to large
increases in the cost of petrochemical plastic resin derivatives, the
under-utilization of the Company's manufacturing facility, the liquidation and
clearance of old inventory, and decreases in sales volume and sales mix.
Selling and Administrative ("S&A"). Selling and administrative expenses
for the quarter ended March 31, 2000 was $3.9 million as compared to $5.0
million for the quarter ended April 4, 1999. Selling and administrative expenses
decreased due to the Company's continuing cost cutting efforts and elimination
of excess overhead costs.
Interest Expense. Interest expense has decreased to $0.6 million for the
first quarter of 1999 compared to $0.8 million during the first quarter of 1999.
This decrease is a result of lower borrowings offset by slightly higher interest
rates.
Seasonality of Sales
Sales of the Company's products are seasonal in nature. Products sold
primarily in the spring and summer months include golf footwear and accessories,
Crocodile Mile(R) water slides and other items, which are shipped principally in
the first and second quarters of the year and counter some of the seasonality
associated with the Company's toy products. In addition, certain toys such as
Big Wheel(R) ride-ons, Grand Champions(R) horses and
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Buddy L(R) vehicles ship year round. The Company expects that its quarterly
operating results will vary significantly throughout the year.
Liquidity and Capital Resources
The Company has experienced severe operating difficulties during the past
several years and sales have declined over this period. The Company recorded a
net loss of $3.1 million for the first three months of 2000 as compared with a
net loss of $1.8 million for the first three months of 1999. The Company
continues to operate under tight cash constraints.
The Company entered into the eighth amendment of its secured bank facility
on March 9, 1999. The Company, through its domestic operating subsidiaries, has
a series of cross-guaranteed secured bank facilities which currently aggregate
up to $50.0 million ($40.0 million for Empire Industries and $10.0 million for
the Apple Companies) available for financing. As part of the Empire Industries
facility, there is a three-year term loan of $6.8 million, which requires
monthly principal payments of $133,000. Also, up to $9.0 million of Empire
Industries' availability is not tied by formula to the underlying assets and
requires monthly repayments of $1.5 million commencing September 30, 1999
through February 29, 2000. The balance of the availability of borrowing for each
subsidiary under the facilities is based on all domestic accounts receivable and
inventory balances as defined, less outstanding commitments under letters of
credit.
The Company has financed its losses primarily by additional borrowings
under its existing bank credit facilities. At March 31, 2000, the Company's
Empire Industries and Apple subsidiaries had borrowed $29.0 million and $3.0
million, respectively, under those facilities. As of March 31, 2000, Empire
Industries had an overadvance from its bank lenders of $5.0 million, which is
included in the $29.0 million. As of April 30, 2000, the overadvance was $6.9
million. As of March 31, 2000, Empire Industries had not made $9.0 million of
scheduled payments under its bank facilities and was not in compliance with
certain covenants contained in its bank facilities. Empire Industries is
currently in default of its bank facility. The bank lenders have not waived the
payment defaults or the covenant defaults. As of the filing of this report, the
Company is in the midst of discussions with the bank on proposed amendments to
the credit facilities. The Company cannot anticipate the outcome of its
negotiations and if unfavorable, the Company will seek other capital sources and
pursue all available options including the sale or disposition of additional
product lines in order to meet its obligations. At this time, the Company has no
other available sources of capital.
On May 4, 2000 the Company completed the sale of its domestically
manufactured decorative Holiday and Seasonal products including all machinery
and equipment to General Foam Plastics Corporation ("General Foam") for
approximately $3.7 million in cash. On May 8, 2000, the Company sold related
finished goods inventory for the Holiday and Seasonal products to General Foam
for approximately $0.8 million in cash. The net proceeds of both sales have been
used to reduce the Company's bank debt. The Company has signed a contract to
sell to General Foam its 1.2 million square foot manufacturing facility in
Tarboro, North Carolina for approximately $3.0 million in cash, subject to
satisfaction of certain conditions to closing. In the event the sale has not
closed by May 30, 2000, General Foam has agreed to lease the facility until the
earlier to occur of (i) the closing of the sale; and (ii), if closing conditions
are not met to General Foam's satisfaction, General Foam's election to lease a
significant portion of the facility for a five-year term. As a result of the
transaction with General Foam, the Company has sold its manufacturing equipment
and has begun to outsource the manufacturing of its remaining domestic products.
At this time, management has not been able to determine the full effect of this
transaction on the financial statements of the Company.
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
11
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going concern for a reasonable period of time. The independent auditors' report
on the December 31, 1999 financial statements stated that "... the Company's
recurring losses from operations and current cash constraints raise substantial
doubt about the Company's ability to continue as a going concern . . . . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
The consolidated financial statements do not include adjustments relating
to the recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis and ultimately to attain
profitable operations.
Because of the seasonality of its revenues, the Company's working capital
requirements fluctuate significantly during the year. The Company's seasonal
financing requirements are highest during the fourth quarter and lowest during
the first quarter. The Company's inventories, accounts receivable, accounts
payable, notes payable and current portion of long-term debt vary significantly
by quarter due to the seasonal nature of the Company's business.
The Company is subject to various actions and proceedings, including those
relating to intellectual property matters, environmental matters and product
liability matters. See notes to consolidated condensed financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks that arise from
transactions entered into in the normal course of business. The Company's
primary exposures are changes in interest rates with respect to its debt and
foreign currency exchange fluctuations.
The Company finances its working capital needs primarily through a
variable rate loan facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." The Company's results may be adversely or positively affected by
fluctuations in interest rates.
The Company sources products from various manufacturers in the Far East.
The purchases are generally made in Hong Kong dollars while goods are sold in U.
S. dollars. Due to the small levels of inventory, and the historical consistency
of the Hong Kong dollar/U.S. dollar exchange rate, the Company does not believe
that any adverse or positive affect would be material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In March 2000, 200 Fifth Avenue Associates filed an action in the Supreme
Court of the State of New York, County of New York against Carolina Enterprises,
Inc. (the predecessor company to Empire Industries, Inc.), a subsidiary of the
Company, and Empire of Carolina, Inc. This action alleges that the Company
breached its lease for premises located at 200 Fifth Avenue, New York, New York,
and demands damages of approximately $100,000. The Company is attempting to work
out an amicable settlement in this matter.
The Company's operating subsidiaries and its former operating subsidiaries
are subject to various types of consumer claims for personal injury from their
products. The Company's subsidiaries maintain product liability insurance.
Various product liability claims, each of which management believes is
adequately covered by insurance and/or reserves, are currently pending. 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.
12
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Contingencies - The Company has been identified as a potentially
responsible party, along with numerous other parties, at various U. S.
Environmental Protection Agency ("EPA") designated superfund sites. The Company
is vigorously contesting these matters. It is the Company's policy to accrue
remediation costs when it is possible that such costs will be incurred and when
they can be reasonably estimated. As of December 31, 1999 and March 31, 2000,
the Company had reserves for environmental liabilities of $98,000. The amount
accrued for environmental liabilities was determined without consideration of
probable recoveries from third parties. Estimates of costs for future
remediation are necessarily imprecise due to, among other things, the allocation
of costs among potentially responsible parties. Although it is possible that
additional environmental liability related to these matters could result in
amounts that could be material to the Company's consolidated financial
statements, a reasonably possible range of such amounts cannot presently be
estimated. Based upon the facts presently known, the large number of other
potentially responsible parties and potential defenses that exist, the Company
believes that its share of the costs of cleanup for its current remediation
sites will not, in the aggregate, have a material adverse impact on its
consolidated financial statements.
Item 3. Defaults Upon Senior Securities
The Company has financed its losses primarily by additional borrowings
under its existing bank credit facilities. At March 31, 2000, the Company's
Empire Industries and Apple subsidiaries had borrowed $29.0 million and $3.0
million, respectively, under those facilities. As of March 31, 2000, Empire
Industries had an overadvance from its bank lenders of $5.0 million, which is
included in the $29.0 million. As of April 30, 2000, the overadvance was $6.9
million. As of March 31, 2000, Empire Industries had not made $9.0 million of
scheduled payments under its bank facilities and was not in compliance with
certain covenants contained in its bank facilities. Empire Industries is
currently in default of its bank facility. The bank lenders have not waived the
payment defaults or the covenant defaults. As of the filing of this report, the
Company is in the midst of discussions with the bank on proposed amendments to
the credit facilities. The Company cannot anticipate the outcome of its
negotiations and if unfavorable, the Company will seek other capital sources and
pursue all available options including the sale or disposition of additional
product lines in order to meet its obligations. At this time, the Company has no
other available sources of capital.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The American Stock Exchange notified the Company on August 2, 1999 that it
had fallen below certain of the Exchange's continuing listing guidelines with
regard to its common stock. The Company is in discussions with the Exchange as
to the continued listing eligibility of the common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Index and Exhibits
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
(b) The following reports on Form 8-K have been filed by the Company
during the last quarter of the period covered by this report:
None
13
<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.
Dated: May 15, 2000
EMPIRE OF CAROLINA, INC.
/s/ Thomas MacDougall
-----------------------
Thomas MacDougall
Chief Financial Officer
14
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