UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1998 was 14,862,940.
1
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 manage inventory,
production and costs, potential increases or decreases in demand, potential
adverse customer impact due to import and delivery delays including effects on
existing and future orders, competitive practices in the toy and golf
accessories 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 businesses, unanticipated negative results of litigation or
governmental proceedings, 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 Annual Report on Form 10-K for the
year ended December 31, 1997, the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission ("SEC") on April 7, 1998,
Registration No. 333-57963, the Company's Proxy Statement dated April 29, 1998,
the Company's Current Report on Form 8-K filed with the SEC on June 12, 1998 and
the Company's Registration Statement on Form S-3 filed with the SEC on June 29,
1998, Registration No. 333-42391. 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.
2
Item 1. Financial Statements
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share amounts)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,693 $ 3,483
Accounts receivable, less allowances and other
deductions (1998-$5,062; 1997-$5,487) 21,255 14,052
Inventories, net 16,627 9,933
Prepaid expenses and other current assets 544 1,980
--------- ---------
Total current assets 43,119 29,448
Property, plant and equipment, net 11,970 14,135
Excess cost over fair value of net assets acquired, net 12,892 13,491
Trademarks, patents, tradenames and licenses, net 5,690 6,066
Other noncurrent assets 388 436
--------- ---------
$ 74,059 $ 63,576
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 27,494 $ 16,988
Accounts payable - trade 9,682 12,317
Other accrued liabilities 10,217 10,751
--------- ---------
Total current liabilities 47,393 40,056
--------- ---------
Long-Term Liabilities:
Long-term debt 6,850 6,425
Other noncurrent liabilities 1,686 1,642
--------- ---------
Total long-term liabilities 8,536 8,067
--------- ---------
Total liabilities 55,929 48,123
--------- ---------
Commitments and Contingencies (Note 4)
Stockholders' Equity:
Common stock, $.10 par value, 60,000,000 shares authorized, shares
issued and outstanding: 1998 - 14,863,000 and 1997 - 7,849,000 1,486 785
Preferred stock, $.01 par value, 5,000,000 shares authorized
Issued and outstanding: Series A convertible preferred stock:
1998 - 1,880,000 and 1997 - 2,100,000. Series C convertible
preferred stock: 1998 - 1,451 and 1997 - 1,461 19 21
Additional paid-in capital 115,880 109,282
Deficit (99,255) (94,635)
--------- ---------
Total stockholders' equity 18,130 15,453
--------- ---------
$ 74,059 $ 63,576
========= =========
See notes to consolidated condensed financial statements.
3
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ----------------
(In thousands except per share amounts)
Net Sales $ 29,093 $ 29,390 $ 61,295 $ 82,692
Sales distribution settlement - - - 2,400
Cost of Sales 22,090 23,742 46,313 67,893
-------- -------- -------- --------
Gross Profit 7,003 5,648 14,982 17,199
Selling and Administrative Expense 5,903 5,885 16,281 19,110
-------- -------- -------- --------
Operating Income(Loss) 1,100 (237) (1,299) (1,911)
Interest Expense (1,241) (1,417) (3,321) (5,504)
-------- -------- -------- --------
Loss Before Income Taxes (141) (1,654) (4,620) (7,415)
Income Tax Expense - (1,749) - -
Net Loss (141) (3,403) (4,620) (7,415)
Accretion of noncash preferred stock
dividend - - - (19,270)
-------- -------- -------- --------
Net loss applicable to common stock $ (141) $ (3,403) $ (4,620) $(26,685)
======== ======== ======== ========
Loss Per Common Share -
Basic and diluted $ (0.01) $ (0.44) $ (0.43) $ (3.56)
======== ======== ======== ========
Weighted average number of common
shares outstanding -
Basic and diluted 14,490 7,654 10,865 7,500
======== ======== ======== ========
See notes to consolidated condensed financial statements.
4
EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------------------
1998 1997
-------------------- --------------------
(In thousands)
Cash Flows From Operating Activities:
Net loss $ (4,620) $ (7,415)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,525 7,218
Other 1,826 2,015
Changes in assets and liabilities (3,393) 17,487
------------ -----------
Net cash provided by(used in) operating activities (2,662) 19,305
------------ -----------
Cash Flows From Investing Activities:
Capital expenditures (468) (694)
Acquisition of Apple Companies 893
Proceeds from sale of fixed assets 513
Other 45
--
------------ -----------
Net cash provided by(used in) investing activities 425 (136)
------------ -----------
Cash Flows From Financing Activities:
Borrowings(repayments) under lines of credit 5,656 (26,996)
Repayments of notes payable (2,130) (2,615)
Proceeds from (costs of) issuance of stock (79) 14,059
------------ -----------
Net cash provided by(used in) financing activities 3,447 (15,552)
------------ -----------
Net Increase in Cash and Cash Equivalents 1,210 3,617
Cash and Cash Equivalents, Beginning of Period 3,483 478
------------ -----------
Cash and Cash Equivalents, End of Period $ 4,693 $ 4,095
============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,330 $ 3,439
Income taxes, (net of refunds) 276 (15,784)
NONCASH INVESTING AND FINANCING ACTIVITIES
On May 28, 1998, the Company acquired all of the common stock of the Apple
Companies for an aggregate purchase price of $7,633,000, including expenses,
and including the issuance of 5,000,000 shares of common stock. The
components of cash used for the acquisition as reflected in the consolidated
statements of cash flows are as follows (in thousands):
Fair value of assets acquired, net of cash acquired $ 15,478
Liabilities assumed (9,063)
Common stock issued (5,000,000 shares) (7,308)
-------------
Cash received in acquisition, net of direct expenses $ (893)
=============
5
On August 21, 1998, the Company settled a liability with a royaltor by making
a cash payment and issuing 200,000 shares of common stock in exchange for
releasing the Company from an unsatisfied guaranteed minimum royalty
obligation.
During June 1997, the Company converted the convertible subordinated
debentures and related discount, accrued interest and expenses into 1,500
shares of Series C Preferred Stock, thus increasing preferred stock by $15
and additional paid-in capital by $14,952,584.
Also during June 1997, the Company settled its earnout liability with the
successor to Buddy L, resulting in an increase in common stock of $25,000,
additional paid-in capital of $631,000, goodwill of $1,240,000, and earnout
liability of $993,000 and a decrease in other liabilities of $409,000.
Pursuant to Emerging Issues Task Force Announcement No. D-60, the Company
during June 1997 recorded a dividend on its newly-issued Series A Preferred
Stock to reflect the effect of a beneficial conversion feature of such stock
and the concurrent issuance of 7.5 million warrants. The recording of this
dividend resulted in a transfer from deficit to additional paid-in capital of
$19,270,000.
See notes to consolidated condensed financial statements.
6
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
During the second quarter of 1998, Empire of Carolina, Inc. ("Empire" or
the "Company") completed the acquisition of all of the outstanding capital stock
of Apple Sports, Inc. and Apple Golf Shoes, Inc. (See Note 2.) The consolidated
condensed statements of operations include the results of the acquired companies
for the four months from the acquisition date.
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 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 renegotiate its
secured credit facility, 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 secured credit
facility of Empire Industries, Inc., a wholly-owned subsidiary of the Company,
agreed to certain amendments to the facility which provided additional
availability during the Company's peak production periods, but which require
that such additional funds be repaid by year end. Certain financial covenants,
including tangible net worth and interest coverage, as defined, were amended. On
November 11, 1998, the bank lenders waived a breach of the tangible net worth
covenant at September 30, 1998, and reset that covenant to bring the Company
into compliance with the loan agreement. The Company is actively engaged with
the bank lenders in renegotiating the terms of the secured credit facility.
Earnings per share - For the calculation of earnings per share for the
three and nine months ended September 30, 1998 and 1997, all of the Company's
options, warrants, convertible securities and contingently issuable shares are
excluded from diluted earnings per share because they are anti-dilutive.
7
Stock Options - In the second quarter of 1998, the Company adopted its
1998 Stock Option Plan which makes available 2 million shares for grant to
employees as incentive stock options or non-qualified options, as determined by
the board of directors.
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. APPLE COMPANIES 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"), in exchange for the
issuance of 5 million shares of the Company's common stock, reimbursement of
certain transfer and other fees of approximately $325,000 and, under certain
circumstances, the issuance of additional shares of Common Stock. The Apple
Companies have manufactured and distributed Wilson(R) and Staff(R) golf shoes
and other Wilson(R) accessories, including gloves, head covers and practice
aids, since 1986.
At the May 28, 1998 annual meeting, the stockholders of the Company
approved the issuance of stock for the Acquisition. In anticipation of the
consummation of the Acquisition, on May 27, 1998 the Apple Companies' existing
$15 million credit facility with Citibank, N.A. was replaced with a $12 million
facility from LaSalle National Bank on substantially similar terms.
Under the terms of the Share Purchase Agreement, Empire acquired 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 had agreed to reimburse certain
transfer and other fees of approximately $325,000.
The Adjustment Period is the period of time commencing on the first
trading date after the date on which the Registration Statement under the
Securities Act of 1933 filed June 29, 1998 was declared effective by the
Securities and Exchange Commission and the Payment Shares in question are deemed
fully transferable on an Exchange (July 10, 1998, the "Effective Date") and
ending on the first calendar anniversary of the Effective Date.
The consideration payable by Empire described above was determined in
arm's 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. The funds used to pay for the transfer fees and other fees due at closing
were paid from the Company's working capital.
The Company has recorded a negative purchase price adjustment to reduce
long-lived assets acquired by approximately $396,000 to reflect the excess of
net values of assets acquired and liabilities assumed in the acquisition over
the consideration given which, for accounting purposes, is the 5,000,000 Initial
Payment Shares
8
plus the 1,153,846 Additional Payment Shares valued in the aggregate at the
average market price of $1.1875 before and after the date that the Share
Purchase Agreement was made public. The negative adjustment of the net assets
acquired is being amortized on a straight-line basis over a period of twenty
years. Such allocation of the purchase price has been based on preliminary
estimates which may be revised at a later date.
The following unaudited pro forma results of operations assume the
transaction described above occurred as of January 1 of the period presented
after giving effect to certain adjustments, including amortization of the
negative excess of net assets purchased over cost:
1998 1997
---- ----
Net sales $ 73,310 $ 103,159
Loss from operations before income taxes (2,818) (4,741)
Net loss applicable to common stock (2,818) (24,011)
Loss per share:
Basic and diluted (0.21) (1.92)
The pro forma financial information does not purport to be indicative
of the results of operations that would have occurred had the transactions taken
place at the beginning of the periods presented or of future results of
operations. Net sales of the Apple Companies since the acquisition were $8.2
million.
3 INVENTORIES
A summary of inventories, by major classification, at September 30, 1998
and December 31, 1997 is as follows (in thousands):
September 30, December 31,
1998 1997
---- ----
Finished goods $ 14,101 $ 7,336
Raw materials and purchased parts 2,092 1,990
Work-in-process 434 607
---------- ---------
$ 16,627 $ 9,933
========== =========
Inventories are net of writedowns for lower of cost or market reserves of
$7,211,000 and $7,050,000 at September 30, 1998 and December 31, 1997,
respectively.
4. COMMITMENTS AND CONTINGENCIES
Royalty agreements - The Company is obligated to pay certain minimum
royalties under various trademark license agreements which aggregate
approximately $6.2 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 $1,186,000 at September 30, 1998.
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
9
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 in discovery. 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.
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. The Company had reserves for environmental
liabilities of $98,000 as of September 30, 1998 and $125,000 as of December 31,
1997. 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.
5. NOTE PAYABLE
The Apple Companies have banking facilities providing a line of credit
up to $12,000,000 based on the Apple Companies accounts receivable and inventory
balances, as defined, and secured by all assets of the Apple Companies. The
facilities are for a three-year term at an interest rate of LIBOR plus 2 1/2% or
prime at the Apple Companies' option and require adherence to certain financial
covenants.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On May 28, 1998, the Company acquired all of the stock of each of Apple
Sports, Inc. and Apple Golf Shoes, Inc. (together, the "Apple Companies"),
manufacturers and distributors of golf accessories sold under license from
Wilson Sporting Goods Co., for 5 million shares of the Company's common stock,
subject to adjustment. The Apple Companies continue to operate from their leased
facility in Ronkonkoma, New York. They have manufactured and distributed
Wilson(R) and Staff(R) golf shoes and other Wilson(R) accessories, including
gloves, head covers and practice aids, since 1986. In 1997, the Apple Companies
had revenues in excess of $24 million. See Note 2 of notes to consolidated
condensed financial statements.
10
Results of Operations
The 1998 amounts in the ensuing discussion include the results of
operations of the Apple Companies for the period May 28, 1998 (date of
acquisition) to September 30, 1998.
Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months
Ended September 30, 1997
Net Loss. The net loss applicable to common stockholders for the three
months ended September 30, 1998 was $141,000 compared to $3.4 million for the
three months ended September 30, 1997 and $4.6 million compared to $26.7 million
for the nine month periods ended September 30, 1998 and 1997, respectively. In
the prior year second quarter, the Company recorded a dividend of $19,720,000 on
its then newly-issued Series A preferred stock to reflect the effect of a
beneficial conversion feature of such stock as well as a discount resulting from
the concurrent issuance of detachable warrants. Also in the prior year second
quarter, the Company recognized a settlement benefit of $2.4 million upon
termination of an international sales distribution agreement.
The current year loss reflects improvements in gross margin, lower
interest expense, and, for the nine months, lower selling and administrative
expense, when compared to the 1997 loss of $3.4 million and $9.8 million for the
three and nine months ended September 30, 1997, respectively, excluding the
items noted above which impacted the second quarter of 1997.
Net Sales. Net sales for the three and nine months ended September 30,
1998 decreased by $0.3 million, or 1.0%, to $29.0 million and decreased by $21.4
million, or 25.9%, to $61.3 million, respectively, compared to the three and
nine months ended September 30, 1997. Decreases in sales result in part from
management's plan to focus on more profitable lines and items in 1998. Sales of
marginally profitable lines including the steel-walled pool product line and
products closed out in 1997 or discontinued thereafter, decreased from 1997
levels by approximately $0.7 million for the three months and $9.3 million for
the nine months ended September 30, 1998, respectively. Decreased sales of Real
Bugs(TM) ($0.1 million for the three months and $5.2 million for the nine
months), decreased sales of seasonal product ($4.6 million for the three months
and $5.3 million for the nine months) and the overall decrease in sales to a
significant customer ($2.8 million for the three months and $7.9 million for the
nine months ended September 30, 1998, respectively) adversely impacted the
current year in comparison to the corresponding periods in the prior year.
Offsetting the declines were sales of the newly reintroduced YoYo Balls(R) of
approximately $3.5 million during the nine months ($1.0 million during the third
quarter) of 1998 and net sales of the Apple Companies since their acquisition in
May 1998 of $8.2 million ($5.8 million during the third quarter).
Gross Profit Margins. Gross profit margins were higher for the three
months (24.1%) and nine months (24.4%) ended September 30, 1998 as compared to
the three months (19.2%) and nine months (17.9%) ended September 30, 1997,
respectively, calculated by excluding the sales distribution settlement of $2.4
million that was recognized in the second quarter of 1997. The improvement in
gross margins is attributable to lower costs of domestic operations, improved
margins on imported items, the inclusion of Apple operations since June of 1998,
and the reduction in 1998 sales of marginally profitable or discontinued product
lines.
Selling and Administrative ("S&A"). S & A expenses were comparable for
the three months ended September 30, 1998 and 1997 at approximately 20% of net
sales. S & A expenses were $2.8 million lower for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997.
Contributing to the decrease for the first nine months were reductions in
advertising, sales commissions and royalties ($1,588,000), commensurate with the
reduction in sales; reductions in executive, marketing, customer support and
administrative staff ($487,000), and elimination of consulting fees which had
been $412,000 during the first nine months of 1997. Due to the decrease in sales
for the nine months, however, S & A expenses as a percentage of net sales were
26.6% for the nine months of 1998 as compared to 23.1% for the nine months of
1997.
11
Interest Expense. Interest expense was $1.2 million and $3.3 million
for the three and nine months ended September 30, 1998 as compared to $1.4
million and $5.5 million for the three and nine months ended September 30, 1997.
Interest expense was lower due to the conversion of debt to equity in 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
nine months of 1998. The benefit of $1,749,000 originally provided during the
first six months 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) waterslides 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 of toys
generally is heaviest in the period from June through September. Sales of golf
shoes and accessories, which are approximately equal in each half of the year,
will complement toy sales which are more concentrated in the second half of the
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 renegotiate its
secured credit facility, 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 secured credit
facility of Empire Industries, Inc., a wholly-owned subsidiary of the Company,
agreed to certain amendments to the facility which provided additional
availability during the Company's peak production periods, but which require
that such additional funds be repaid by year end. Certain financial covenants,
including tangible net worth and interest coverage, as defined, were amended. On
November 11, 1998, the bank lenders waived a breach of the tangible net worth
covenant at September 30, 1998, and reset that covenant to bring the Company
into compliance with the loan agreement. The Company is actively engaged with
the bank lenders in renegotiating the terms of the secured credit facility.
12
As the Apple Companies were acquired for company stock, the Company has
not committed its capital resources to the acquisition. The Apple Companies will
finance their business with a $12,000,000 credit facility with the lead lender
under the Company's secured credit facility. The loan agreement does not
prohibit intercompany loans with Empire.
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.
Capital expenditures, principally for the purchase of tooling for new
products and equipment, were $468,000 for the first nine months of 1998 compared
to $694,000 for the first nine months 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.
Year 2000 Readiness Disclosure
The inability of computers, software and other equipment to recognize
and properly process data fields containing a two-digit year is commonly
referred to as the Year 2000 Readiness Issue. As in the case with most companies
using computers, the Company is in the process of addressing its Year 2000
Readiness.
During the second quarter of 1998, the Company assigned a manager to
the Year 2000 project and engaged consultants to help evaluate the overall
business requirements of its systems. The Company anticipates achieving Year
2000 readiness for its information technology systems in addition to meeting
other customer requirements through the implementation of new software as a
result of this evaluation. The time frame of the overall process, which began in
the second quarter of 1998, is expected to result in software selection before
the end of 1998, and full implementation by the end of the second quarter of
1999.
Also during the second quarter of 1998, the Company began evaluating
the Year 2000 readiness of its non-information technology systems. The Company
believes that the majority of these systems will not be affected by the Year
2000 issue, and is evaluating options to address any non-information technology
systems that will be so effected.
The Company has not definitively quantified the potential cost for the
new management information software, or the portion which relates to Year 2000
readiness, but estimates that modifications to existing software to achieve Year
2000 compliance would cost approximately $300,000. During the first nine months
of 1998, the Company has spent $40,000 for consulting fees relating to the
evaluation of the business requirements of its management information system and
its Year 2000 readiness.
Because of the nature of its business and seasonality, the Company
feels its exposure to Year 2000 problems could be contained to specific areas.
However, in the event that the new management software is not fully functional
or if certain non-information technology systems have not been updated by the
end of 1999, the Company would handle any such scenarios by using manual
overrides, outsourcing services, or relying upon its current PC based software.
13
Backlog
The Company had open orders of $9.0 million and $6.7 million as of
September 30, 1998 and September 30, 1997, respectively. Open orders at
September 30, 1998 mainly reflected orders for boys and girls toys and seasonal
products. Fulfillment of toy orders is also dependent on timely receipt of goods
manufactured in Asia. Recent shipments from Asia have experienced delays or
backlog caused by lack of marine containers, delays at the Panama Canal and
problems with air shipments from Hong Kong, among other reasons. 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 6. Exhibits and Reports on Form 8-K
(a) Index and Exhibits
Exhibit No. Description
- ---------- -----------
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)
14
Exhibit No. Description
---------- -----------
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)
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)
15
Exhibit No. Description
- ---------- -----------
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
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. 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)
10.23 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)
10.24 Amendment No. 1 to Registration Rights Agreement.(6)
10.25 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)
10.26 First Amendment to Amended and Restated Loan and Security
Agreement among LaSalle, BTCC, Congress Financial Corporation
(Central) ("Congress") and EII, with exhibits.(19)
10.27 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)
10.28 Third Amendment to Loan and Security Agreement among LaSalle,
BTCC, Congress, CIT, Finova and EII.(21)
10.29 Securities Purchase Agreement dated as of May 5, 1997 among
the Company, HPA Associates, LLC and EMP Associates, LLC.(22)
10.30 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)
10.31 Buddy L Settlement Agreement, dated as of June 17, 1997
between the Company and Smedley Industries Inc. Liquidating
Trusts ("SLM").(11)
10.32 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)
10.33 Buddy L Registration Rights Agreement dated as of June 17,
1997 between the Company and SLM.(11)
16
Exhibit No. Description
- ---------- -----------
10.34 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)
10.35 WPG Release Agreement dated as of June 17, 1997 between the
Company and the WPG Affiliated Entities.(11)
10.36 Fourth Amendment to Loan and Security Agreement among LaSalle,
BTCC, Congress, CIT, Finova and EII.(23)
10.37 Fifth Amendment to Loan and Security Agreement among LaSalle,
BTCC, Congress, CIT, Finova and EII.(24)
10.38 Sixth Amendment to Loan and Security Agreement among LaSalle,
Congress, CIT, Finova and EII.(25)
10.39 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)
10.40 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)
10.41 Empire of Carolina, Inc. 1998 Stock Option Plan. (26)
10.42 Loan and Security Agreement dated May 27, 1998 among LaSalle
National Bank and Apple Sports, Inc.(27)
10.43 Loan and Security Agreement dated May 27, 1998 among LaSalle
National Bank and Apple Golf Shoes, Inc.(27)
10.44 Loan and Security Agreement dated May 27, 1998 among LaSalle
National bank and Dorson Sports, Inc.(27)
10.45 Seventh Amendment to Loan and Security Agreement dated
November 11, 1998.
21 Subsidiaries of the Company.(27)
27 Financial Data Schedule.
(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.
17
(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.
(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.
18
(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.
(27) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 and incorporated by
reference.
(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
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: November 12, 1998
-----------------