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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-7909
EMPIRE OF CAROLINA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2999480
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33484
(Address of principal executive office)
(Zip Code)
(407) 498-4000
Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The number of shares outstanding of the issuer's Common Stock, $.10 par value,
as of April 15, 1996 was 5,205,200.
PART I-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
- - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
(Unaudited)
ASSETS (In Thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 339 $ 2,568
Marketable securities 173 189
Accounts receivable, less allowances and other
deductions (1996-$4,560 ; 1995-$4,290) 29,336 48,957
Inventories, net 39,367 30,178
Prepaid expenses and other current assets 4,174 2,046
Deferred income taxes 4,503 5,596
-------- -------
Total current assets 77,892 89,534
PROPERTY, PLANT AND EQUIPMENT, NET 22,894 23,640
EXCESS COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED 14,965 15,174
TRADEMARKS, PATENTS, TRADENAMES AND
LICENSES 10,052 10,253
OTHER NONCURRENT ASSETS 1,664 1,552
-------- -------
$127,467 $140,153
======== ========
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Concluded)
- - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (In Thousands)
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt $ 46,510 $ 49,206
Accounts payable - trade 13,828 17,516
Accrued liabilities 11,576 15,975
-------- --------
Total current liabilities 71,914 82,697
-------- --------
LONG-TERM LIABILITIES:
Convertible subordinated debentures 13,923 13,851
Senior subordinated notes 8,148 7,959
Deferred income taxes 2,057 2,083
Other noncurrent liabilities 3,054 3,101
-------- --------
Total long-term liabilities 27,182 26,994
-------- --------
Total liabilities 99,096 109,691
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 30,000,000 shares authorized, shares issued and
outstanding:
1996 - 5,205,000; 1995 - 5,195,000 521 519
Preferred stock, $.01 par value, 5,000,000 shares
authorized - 442,264 shares of Series A cumulative
convertible preferred stock authorized, issued and outstanding 4 4
($3,206,000 involuntary liquidation preference)
Additional paid-in capital 33,256 33,193
Retained earnings (deficit) (4,815) (2,659)
Stockholders' loans (595) (595)
-------- --------
Total stockholders' equity
28,371 30,462
-------- --------
$127,467 $140,153
======== ========
See notes to the consolidated condensed financial statements.
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
- - --------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------------
1996 1995
------------------- -------------------
(In Thousands Except Per Share Amounts)
NET SALES $ 22,186 $ 19,088
COST OF GOODS SOLD 16,217 12,937
------------- -------------
GROSS PROFIT 5,969 6,151
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,298 6,804
NONRECURRING RESTRUCTURING AND
RELOCATION CHARGES 0 150
------------- -------------
OPERATING LOSS (1,329) (803)
OTHER INCOME (EXPENSES):
Interest income, dividends and net realized gains 13 54
Interest expense (2,132) (667)
------------- -------------
Total other income (expenses) (2,119) (613)
------------- -------------
LOSS BEFORE INCOME TAXES (3,448) (1,416)
INCOME TAX BENEFIT 1,292 410
------------- -------------
NET LOSS $ (2,156) $ (1,006)
============= =============
LOSS PER COMMON SHARE $ (0.41) $ (0.24)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,201 4,191
============= =============
See notes to the consolidated condensed financial statements.
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
- - --------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------------
1996 1995
-------------------- --------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,156) $ (1,006)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash adjustments 1,713 2,316
Changes in assets and liablilities 1,815 (5,596)
------------- ------------
Net cash provided by (used in) operating
activities 1,372 (4,286)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (970) (1,118)
Proceeds from sale of marketable securities 0 2,099
------------- ------------
Net cash provided by (used in) financing
activities (970) 981
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines-of-credit (1,428) 7,178
Repayment of notes payable (1,268) (2,925)
Proceeds from issuance of common stock 65 0
------------- ------------
Net cash provided by (used in) financing
activities (2,631) 4,253
------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,229) 948
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,568 2,738
------------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 339 $ 3,686
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 1,554 $ 611
Income taxes paid 43 110
See notes to the consolidated condensed financial statements.
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- - --------------------------------------------------------------------------------
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report 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.
Earnings per share - For the calculation of earnings per share for the
first quarter of 1996 and 1995, all of the various outstanding stock
options and warrants and convertible debentures are excluded from primary
and fully-diluted earnings per share since they are anti-dilutive.
Accounting for Stock-Based Compensation - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which
was effective for the Company beginning January 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) compensation cost to
be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the
equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock based compensation awards to employees and will
disclose the required pro forma effect on net income and earnings per
share for the year ending December 31, 1996.
2. INVENTORIES
March 31, December 31,
1996 1995
-------- -----------
(unaudited)
Finished goods $ 21,204 $ 14,418
Raw materials 10,980 13,591
Work-in-process 7,183 2,169
------------- -------------
$ 39,367 $ 30,178
============= =============
Inventories are net of writedowns for lower of cost or market reserves of
$3,332,000 and $3,141,000 at March 31, 1996 and December 31, 1995,
respectively.
3. COMMITMENTS AND CONTINGENCIES
Letters of credit - The Company had outstanding commitments under letters
of credit totaling $1,184,000 at March 31, 1996 compared to $1,246,000 at
December 31, 1995.
Leases - Subsequent to March 31, 1996, the Company entered into an
operating lease with a commencement date of June 15, 1996 for new molding
machines having monthly lease payments of $25,000 for 120 months.
Indemnifications - In connection with the sale of the assets used in the
businesses of its wholly-owned subsidiaries, Isaly Klondike Company and
Popsicle Industries Ltd. to Thomas J. Lipton Company and its affiliates in
1993, the Company agreed to certain indemnification obligations. The
Company has established reserves for all claims known to it and for other
contingencies in connection with the sale. During the quarter ended March
31, 1996, the Company reduced the reserves by $600,000 due to the
expiration of time limitations. Although there can be no assurance that
claims and other contingencies related to the sale will not exceed
established reserves, the Company believes that additional exposure
related to the indemnification obligations will not be material to the
consolidated financial statements.
During 1995, the Company and its majority-owned subsidiary, CLR
Corporation ("CLR"), were released from substantially all indemnification
obligations including certain tax matters arising from the December 23,
1988 sale of General Defense Corporation to Olin Corporation by CLR's
predecessor, Clabir Corporation. In exchange for the release, the Company
paid $475,000 and extended the expiration date of the options granted
to Olin Corporation from September 30, 1996 to September 30, 1997. The
Company believes future obligations, if any, related to the
indemnification will not have a material adverse effect on its
consolidated financial statements.
Litigation - An action was commenced on October 19, 1994 in the Court of
Chancery of the State of Delaware (New Castle County) against the Company
as a nominal defendant. The action names Maurice A. Halperin, Barry S.
Halperin, Carol A. Minkin, Jeffrey Swersky, Carl Derman, Steven Geller and
Halco Industries, Inc. as defendants. The complaint includes class and
derivative claims. The Company is only a nominal defendant in the
derivative claims, but the Company has agreed to indemnify the Halperin
Group to the extent permitted by law, with certain exceptions. Certain
defendants in interest (the Halperin Group and Messrs. Swersky and Derman)
have stated that they intend to defend the claims vigorously. A
motion to dismiss the claims was filed on behalf of the Company and Mr.
Geller. The court granted the motion on February 5, 1996, dismissing the
claims against each named defendant. The plaintiff has filed a notice of
appeal which appeal was withdrawn on May 2, 1996.
There are two suits claiming infringement of various intellectual property
rights which have been filed against Marchon, Inc., a wholly-owned
subsidiary of the Company. These claims are in various stages of
litigation. The Company believes that it has meritorious
defenses to the open claims and has provided reserves for its estimated
costs to settle these matters. The Company does not believe that any
additional amounts required to ultimately resolve these matters will have
a material adverse effect on the Company's consolidated financial
statements.
The Company's operating subsidiaries and its former operating subsidiaries
are subject to various types of consumer claims for personal injury from
their products. The Company's subsidiaries maintain product liability
insurance. Various product liability claims, each of which management
believes is adequately covered by insurance and/or reserves, are currently
pending. The Company does not believe the outcome of any of this
litigation would have a material adverse effect on the Company's
consolidated financial statements.
Contingencies - The Company has been identified as a potentially
responsible party, along with numerous other parties, at various U. S.
Environmental Protection Agency ("EPA") designated superfund sites. It is
the Company's policy to accrue remediation costs when it is probable that
such costs will be incurred and when they can be reasonably estimated.
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 DISCUSSIONS 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 - March 31, 1996 vs. March 31, 1995
The results of operations for the three months ended March 31, 1996
reflects the impact of the Buddy L acquisition (which acquisition occurred on
July 7, 1995). See 1995 Annual Report on Form 10-K for further information
regarding this acquisition.
Net sales for the three months ended March 31, 1996 increased by 16% to
$22,186,000 from $19,088,000 for the three months ended March 31, 1995. The
increase in sales was due primarily to the acquisition of the Buddy L(R) line of
products in July 1995, sales of new products, and an increase in holiday product
sales.
The net loss for the quarter ended March 31, 1996 increased to
$2,156,000 from $1,006,000 for the quarter ended March 31, 1995. The increase in
the net loss is due primarily to higher selling, general and administrative
expenses and higher interest expense.
The following table shows sales and operating income from continuing
operations by the Company's industry segments (in thousands):
Three Months Ended
March 31,
-------------------
Net Sales: 1996 1995
---- ----
Toys $18,285 $16,463
Holiday Products 3,901 2,625
------- -------
Net Sales $22,186 $19,088
======= =======
Operating Income (loss):
Toys $(1,207) $ (484)
Holiday Products (122) (169)
Nonrecurring restructuring
and relocation charges 0 (150)
------- -------
Operating Loss $(1,329) $ (803)
======= =======
Toy sales increased $1,822,000 to $18,285,000 for the three months ended
March 31, 1996 from $16,463,000 for the three months ended March 31, 1995. The
increase was primarily due to approximately $9,805,000 of sales from acquired
Buddy L(R) toy lines, sales of new products such as Big WheelieTM , and
increased sales of ride-on products, in spite of the absence of Power RangerTM
sales of approximately $7,062,000 which occurred during the first quarter of
1995.
The Company's sales of holiday products increased 49% to $3,901,000 for
the three months ended March 31, 1996 from $2,625,000 for the three months ended
March 31, 1995 due to increased sales volume in the Easter product category.
Gross profit margins were lower for the three months ended March 31,
1996 as compared to the three months ended March 31, 1995, due to loss of Power
RangerTM sales, which products sold at higher margins than the Company's
existing lines. However, the impact of the loss of the Power Ranger TM sales on
the current quarter's operating income is reduced by the corresponding decrease
in royalties on the sales of Power RangerTM products. For the quarter ended
March 31, 1996, royalties which are included in selling expenses, were
approximately 1% of sales as compared to approximately 6% of sales for the
quarter ended March 31, 1995.
Despite lower royalty expense, selling, general and administrative
expenses were higher for the three months ended March 31, 1996 as compared to
the three months ended March 31, 1995 primarily due to the continuing
integration of Buddy L, including certain duplicate facilities costs, and the
staffing of four strategic business units ("SBUs"). SBU's are accountable for
the sales and marketing for specific product categories: ride-ons, outdoor
activities and games, girls and boys toys and holiday products. Selling, general
and administrative expenses for the three months ended March 31, 1996 included
the reversal of approximately $600,000 of certain indemnification reserves.
Selling, general and administrative expenses were approximately 33% of sales for
the three months ended March 31, 1996 and 36% of sales for the three months
ended March 31, 1995.
In the toy segment, the operating loss was $1,207,000 for the quarter
ended March 31, 1996 as compared to an operating loss of $484,000 for the
quarter ended March 31, 1995. The increase in operating loss was due primarily
to higher selling, general and administrative expenses.
In the holiday product segment, operating loss was $122,000 for the
quarter ended March 31, 1996 as compared to an operating loss of $169,000 for
the quarter ended March 31, 1995. The decrease in operating loss was due to
higher sales and profit margins.
Nonrecurring restructuring and relocation charges were $150,000 for the
quarter ended March 31, 1995 and related primarily to establishment of corporate
headquarters in Delray Beach, Florida.
Interest expense was $2,132,000 for the three months ended March 31,
1996 as compared to $667,000 for the three months ended March 31, 1995. Interest
expense was higher due to the issuance of $7,580,000 of senior subordinated
notes during the third quarter of 1995 to finance the Buddy L acquisition, and
higher balances of the Company's revolving credit lines resulting from increased
sales, inventory, and accounts receivable levels.
The tax benefit for the three months ended March 31, 1996 and the three
months ended March 31, 1995 approximates the federal statutory rate net of
certain nondeductible expenses, primarily amortization of goodwill.
Liquidity and Capital Resources - March 31, 1996
During April 1996, a bank issued a commitment to the Company to provide
up to $85,000,000 in financing subject to documentation. The financing is for a
three-year term at an interest rate of prime plus 1% or LIBOR plus 275 basis
points. Of the $85,000,000, $12,000,000 will be in the form of a three-year term
loan secured by the Company's domestic machinery, equipment and real property.
The balance of the availability of borrowings under the proposed loan agreement
is based on the Company's domestic accounts receivable and inventory balances as
defined. The collateral under the proposed loan agreement is substantially all
of the domestic assets of the Company. The facility will replace two existing
domestic facilities of $25,000,000 each. The Company expects this facility to be
available during the second quarter of 1996.
The Company's accounts receivable decreased by $19,621,000 during the
three months ended March 31, 1996. The cash generated from accounts receivable
primarily funded the increase in inventory of $9,189,000, the decrease in
accounts payable of $3,688,000, and the decrease of notes payable and current
portion of long-term debt of $2,696,000. The Company's inventory, accounts
receivable, accounts payable, and notes payable and current portion of long-term
debt vary significantly by quarter due to the seasonal nature of the Company's
business.
Capital expenditures, principally the purchase of tooling for new
products, were $970,000 for the first quarter of 1996 as compared to $1,118,000
for the first quarter of 1995.
Subsequent to March 31, 1996, the Company entered into an operating
lease with a commencement date of June 15, 1996 for new molding machines having
monthly lease payments of $25,000 for 120 months.
At March 31, 1996, the Company had letters of credit outstanding
totaling $1,184,000.
The Company intends to exercise its option to redeem all of the senior
subordinated notes on July 7, 1996 (for 110% of the original principal amount)
and thereby retire the related warrants to purchase common stock. The Company is
currently reviewing financing alternatives available to it to accomplish this,
and has filed a registration statement with the Securities and Exchange
Commission on May 3, 1996 covering a proposed public offering of its common
stock, a portion of the proceeds of which would be used principally for such
purpose. There can be no assurance that any such financing will be available to
the Company on terms acceptable to it or that the senior subordinated notes will
be so redeemed.
The Company believes that cash generated from operations, amounts
expected to be available under the new bank credit facility and the net proceeds
to the Company from the purposed public offering of common stock will be
adequate to finance its anticipated operating needs for the foreseeable future,
including the July 1996 repayment of the senior subordinated notes and the
repayment of approximately $4,800,000 of notes issued in connection with the
Buddy L acquisition. Early redemption of the senior subordinated notes will
require the receipt of additional financing as described above.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Exhibit No. Description
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed
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/ J. Artie Rogers
J. Artie Rogers
Senior Vice President - Finance, Assistant Secretary,
Principal Financial Officer
Dated: May 14, 1996