GENERAL
Empire of Carolina, Inc., a Delaware corporation and its subsidiaries
("Empire" or the "Company") design, manufacture and market a broad
variety of toys and plastic decorative holiday products. The Company
manages its business through two strategic business units ("SBUs")
which are accountable for specific product categories. One SBU is
responsible for ride-on products, including Big Wheel(R) and Power
Driver(R) brands, outdoor activities and games such as Snow Works(TM)
winter sleds and Water Works(TM) water slides and pools (including
Crocodile Mile(TM) water slides), and holiday products featuring
plastic decorative holiday display items. The other SBU is comprised
of girls and boys toys featuring Buddy L(R) vehicles, Real Bugs(TM) and
Grand Champions(R) collectible horses.
Empire has been a toy manufacturer for approximately 40 years. The
Company's business experienced significant change in 1993 when
substantial non-toy operations were sold. Following the divestitures
of non-toy businesses, Empire's operations were focused on its toy
business, including the Big Wheel(R) non-powered ride-on product line
which has been sold throughout the United States since 1970, and its
plastic decorative holiday products business. Since mid-1994 the
Company has undergone a change of control and management, established a
new business strategy, and effected two acquisitions which added
established core toy product lines to the Company's business.
In the third quarter of 1994, current principal stockholders of the
Company, led by Steven Geller, the current Chairman and Chief Executive
Officer of the Company, acquired control of Empire as a base from which
to build a diversified toy and plastic products manufacturing company.
In October 1994, Empire acquired Marchon, Inc. ("Marchon") a toy
designer, marketer and manufacturer. Marchon's core toy products
included Grand Champions(R) collectible horses and Crocodile Mile(R)
water slides. Marchon had substantial experience at sourcing toy
products in the Far East. In July 1995, Empire acquired substantially
all of the toy assets of Buddy L Inc. and its Hong Kong subsidiary
("Buddy L"), one of the oldest toy brands in the United States whose
core toy products included plastic and metal toy cars, trucks and other
vehicles and battery-operated ride-ons.
The Company's net sales were $148.9 million, $153.7 million and $58.0
million, respectively, for the years ended December 31, 1996, 1995 and
1994. The Company's toy business net sales were $119.7 million, $121.6
million and $33.0 million, respectively, for the years ended December
31, 1996, 1995 and 1994, and contributed 80%, 79%, and 57%,
respectively, of the Company's consolidated net sales. Net sales of
decorative holiday products were $29.2 million, $32.2 million and $25.0
million, respectively, for the years ended December 31, 1996, 1995, and
1994, and contributed approximately 20% of the Company's consolidated
net sales in 1996, 21% in 1995 and 43% in 1994.
The Company's executive offices are located at 5150 Linton Boulevard,
Delray Beach, Florida 33484, telephone (561) 498-4000.
RECENT DEVELOPMENTS
FISCAL 1996 OVERVIEW
On March 31, 1997, the Company announced that its net sales for the
year ended December 31, 1996 were $148.9 million as compared to $153.7
million for the prior year. The Company incurred a loss before
interest and taxes of $47.3 million. This loss included nonrecurring
and special charges of $21.0 million. The net loss after interest and
taxes was $46.2 million. For fiscal 1995, the loss before interest and
taxes and net l
INDUSTRY
THE TOY INDUSTRY
According to the Toy Manufacturers of America, Inc. ("TMA"), an
industry trade group, total domestic shipments of toys, excluding video
games and accessories, were approximately $13.9 billion in 1996.
According to the TMA, the United States is the world's largest toy
market, followed by Japan and Western Europe. The Company estimates
that the three largest U.S. toy companies in 1996, Mattel, Inc.
("Mattel"), Hasbro, Inc. ("Hasbro") and Tyco Toys, Inc. ("Tyco"),
collectively were responsible for less than half of total domestic toy
shipments in 1996. In addition, hundreds of smaller companies compete
in the design and development of new toys, the procurement of licenses,
the improvement and expansion of previously introduced products and
product lines and the marketing and distribution of toy products.
Many factors influence the success of a given toy or product line
including product design, play value, pricing, marketing, in-store
exposure and product availability. While the success of some toy
categories vary, other categories generally perform well from year to
year. The perennial best sellers, which form the backbone of the toy
business, are referred to as "core" or "staple" toys. Products with
relatively short life cycles are referred to as "fad" or "promotional"
items. Along with providing opportunities for fun and learning, toys
traditionally mirror scientific progress, changes in social attitudes
and topical customs and values from the adult world. Many of the toys
which garner the most attention reflect the latest technological
advances, incorporate characters made popular in other mediums or are
innovative extensions of core products.
Toy production is a labor intensive process requiring molding and
shaping or cutting and sewing, coloring, painting or detailing,
assembling, inspecting, packaging and warehousing. Management believes
that the substantial majority of the toys sold in the U.S. are
manufactured, either in whole or in part, overseas where labor rates
are comparatively low. The largest foreign producer markets are China
and, to a lesser extent, other countries in the Far East. Most foreign
production is performed by independent contractors which utilize tools,
molds and designs provided by U.S. toy companies and which manufacture
products under exclusive contracts. While foreign manufacturing
operations generally have relatively inexpensive labor costs, such
operations require greater lead times than domestic manufacturing and
also result in greater shipping costs, particularly for larger toys.
The design, production and sale of toy products in the U.S. are
subject to various regulations. See "Business - Regulation."
Toy manufacturers sell their products either directly to retailers or
to wholesalers who carry the product lines of many manufacturers.
There are thousands of retail outlets in the United States which sell
toys and games. These outlets include: small, independent toy stores;
large toy specialty retailers; general merchandise discount chains;
department, drug and variety stores; gift and novelty shops; price
clubs and mail order catalogues. Despite the broad number of toy
outlets, retail toy sales have become increasingly concentrated through
a small number of large chains, such as Toys "R" Us, Inc. ("Toys "R"
Us"), Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart Corporation ("Kmart")
and Target Stores, Inc., a division of Dayton-Hudson Corp. ("Target"),
which generally feature a large selection of toys, some at discount
prices, and seek to maintain lean inventories to reduce their own
inventory risk. This concentrationEMPLOYEES
At January 20, 1997, the Company had approximately 600 employees in the
United States approximately 100 of whom were salaried, and
approximately 40 employees in Hong Kong and China. This represents a
significant reduction in both full-time and temporary employees from
December 1996 levels reflecting the seasonality of the Company's
business and a reduction in the Company's permanent work force. If
required by the Company's future operations, the Company believes it
could supplement its work force through the recall of hourly production
employees and the hiring of temporary employees. Two employees of the
Company who work in the Company's button, buckle and novelty item
business are covered by a collective bargaining agreement which expires
on September 30, 1997. The Company is seeking to effect a sale of such
button, buckle and novelty item business. There can be no assurance as
to the timing, terms or consummation of any such sale transaction. The
Company generally considers its employee relations to be good.
OTHER
The Company also manufactures and sells apparel buttons, buckles and
novelty items for use in the garment industry. While the Company is
seeking to effect a sale of such button, buckle and novelty item
business, there can be no assurance as to the timing, terms or
consummation of any such sale transaction.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Annual Report contains various forward-looking statements and
information, including under the captions "Recent Developments" and
"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 close the
proposed transaction described above under "Recent Developments,"
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 decorative holiday products 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 in the event of
adverse industry or other developments, and the Company's ability to
obtain additional capital to fund future commitments and operations.
Certain of these as well as other risks and uncertainties are described
in more detail in the Company's Registration Statement on Form S-1
filed under the Securities Act of 1933, Registration No. 333-4440.
The CITEM 2. PROPERTIES.
BUSINESS GENERAL CHARACTER
LOCATION USING PREMISES AND USE OF PROPERTY
OWNED:
Tarboro, NC Toy & Holiday 1,200,000 sq. ft. of
Business factory, warehouse
and office space
Tarboro, NC Toy Business/ 24,000 sq. ft. of
Button factory space
LEASED:
Gloversville, NY Toy Business 636,000 sq. ft. of
warehouse and factory
space
New York, NY Toy & Holiday 29,000 sq. ft. of
Business showroom space
Delray Beach, FL Executive Offices 16,000 sq. ft. office
space
Hong Kong Toy Business 2,600 sq. ft. office
space
Hong Kong Toy Business 1,200 sq. ft.
11
Hong Kong Toy Business Warehouse space
New York, NY 3,500 sq. ft.
showroom
New York, NY Toy Business/ 3,000 sq. ft. sales
Buttons and distribution
facility
St. Louis, MO 100,000 sq. ft.
warehouse space
The real property owned by the Company is subject to liens in favor of
its senior lenders.
Marchon leased this property from an affiliate of a director. This
facility has not been occupied by the Company since Marchon moved
operations to the main Tarboro plant in the first quarter of 1995.
There is currently a dispute between the Company and the landlord
regarding the lease and there can be no assurance that the Company will
not be obligated for the lease payments.
This location is vacant.
Approximately 11,000 square feet of the location is sub-leased.
The lease on this location was terminated in February 1997.
In the opinion of management, the Company's various properties used in
operations are generally in good condition and adequate for the
purposes for which they are utilized.
ITEM 3. LEGAL PROCEEDINGS.
INTELLECTUAL PROPERTY 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 products. 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 received permission from
the court to file an amended complaint against the Company. Although
the Company believes it has meritorious defenses against the complaint
when filed, the Company is unable at this time to determine the extent
of its financial exposure.
On August 4, 1992, a patent infringement action was filed against
Marchon and Toys "R" Us, entitled Dennis Merino v. Marchon, Inc.
Damages were originally determined by the jury to be $175,802.
Subsequently, the Court overturned the jury verdict in part. The Court
then entered an amended judgment, which included prejudgment interest
in the amount of $33,472; damages in the amount of $112,956; Merino's
expenses, which were eventually found to be $39,336; and an injunction
against the manufacture, use or sale in the United States of Marchon's
Surf City and Super Surf Slide Waterslides or any waterslides merely
colorably different therefrom, by Marchon and Toys "R" Us. On June 3,
1994, Merino filed a Notice of Appeal on the issues of whether
Marchon's Crocodile Mile(R) and Super Crocodile Mile(R) waterslides
infringe plaintiff's patent. On June 17, 1994, Marchon cross-appealed
on the issues of invalidity, patent non-use, non-infringement of the
Surf City and Super Surf Slide waterslides and the scope of the
injunction. On August 5, 1994, the court entered an order granting
Marchon a stay of enforcement of the judgment pending appeal. Empire's
present and past Crocodile Mile(R) waterslides were found
non-infringing, and the two products alleged to be infringing are no
longer marketed. On January 16, 1996, the U.S. Court of Appeals
affirmed the lower court's finding. In August 1996, the Company paid
Merino $198,767 in full satisfaction of the amended judgment.
ENVIRONMENTAL MATTERS. CLR Corporation ("CLR"), a 75%-owned subsidiary
of the Company, is alleged by the EPA to be responsible for disposal
activities of two former subsidiaries at two Superfund sites, located
in Southington, Connecticut and Bennington, Vermont. CLR is among
numerous potentially responsible parties identified by the EPA in
connection with each site. The Company intends to vigorously contest
each of these matters.
On or about May 28, 1996, a complaint was filed in the United States
District Court for the Middle District of Pennsylvania in a Superfund
lawsuit captioned United States of America v. Keystone Sanitation
Company, Inc., et al., and naming as a third-party defendant, among 178
others, Empire of Carolina, Inc., as a successor to or d/b/a or f/d/b/a
Isaly Klondike Company. The complaint also names the Hanover Klondike
Company (a predecessor by merger to Isaly Klondike), Isaly Klondike and
Good Humor Corporation (as a successor to Isaly Klondike). This
Superfund suit seeks recovery of clean-up costs associated with the
Keystone Sanitation site in Pennsylvania. The Isaly Klondike Company
is alleged to have sent materials to the site. Isaly Klondike and
Empire sold certain assets to an affiliate or subsidiary of Good Humor
CorporatiITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The common stock of the Company, par value $.10 per share ("Common
Stock"), is listed on the American Stock Exchange under the symbol EMP.
The following table sets forth, for the fiscal quarters indicated, the
high and low sale prices for the Common Stock on the American Stock
Exchange.
Quarter 1996 1995
------- ------------------- ------------------
High Low High Low
------ ------ ------ ------
1st $12.25 $ 6.88 $12.88 $6.50
2nd 15.00 11.88 12.13 8.50
3rd 12.13 3.56 11.50 7.88
4th 6.81 3.75 9.75 6.00
As of March 14, 1997, the number of holders of record of Common Stock
was approximately 2,000.
The Company has not paid any cash dividends since 1990 and does not
anticipate paying cash dividends in the foreseeable future. The
Company's current policy is to retain earnings to provide funds for the
operation and expansion of its business and for the repayment of
indebtedness. Any determination in the future to pay dividends will
depend upon the Company's financial condition, capital requirements,
results of operations and other factors deemed relevant by the
Company's Board of Directors, including any contractual or statutory
restrictions on the Company's ability to pay dividends. The Company's
bank facility does not restrict the payment of dividends by the
Company; however, that agreement limits the dividends which Empire
Industries, Inc. ("EII"), the Company's principal operating
subsidiary, may pay to the Company. Under the bank facility, EII may
not pay dividends to the Company in excess of the lesser of $3.6
million or 30% of EII's cumulative net income (except for certain items
specifically permitted for purposes other than the payment of dividends
by the Company, such as the payment of taxes). Such restrictions could
limit the funds available for the payment of dividends by the Company.
Item 6.Selected Financial Data.
The following selected financial data have been derived from the
consolidated financial statements of the Company for the fiscal years
1996, 1995, 1994, 1993 and 1992. The selected financial data should be
read in conjunction with the audited consolidated financial statements
and notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere
herein. All amounts in the tables and notes below are in thousands,
except per share data.
Year ended December 31,
1996 1995(1) 1994(2)
---------- --------- ---------
Statement of
Operations Data:
Net Sales $ 148,908 $ 153,744 $ 57,964
Cost of Sales 133,464 111,905 40,557
Nonrecurring
inventory charge 12,185 -- --
Gross Profit 3,259 41,839 17,407
Selling and
administrative
expenses 41,751 36,183 16,442
Restructuring and
other charges 8,800 7,550 --
Operating income
(loss) (47,292) (1,894) 965
Interest expense 11,236 5,996 1,407
Other income
(loss) (5) 514 1,839
Net income (loss)
from continuing
operations
before income
taxes,
extraordinary
items and
cumulative
effect of an
accounting
change (58,533) (7,376) 1,397
Income tax expense
(benefit) (12,332) (2,875) 808
Net income (loss)
from continuing
operations
before
extraordinary
items and
cumulative
effect of an
accounting
change (46,201) (4,501) 589
Income from
discontinued
operations, net
of tax -- -- --
Cumulative effect
of change in
accounting for
income taxes -- -- --
Extraordinary
items -- -- --
Net income (loss) $ (46,201) $ (4,501) $ 589
Weighted average
common shares
outstanding -
primary (5) 6,248 4,681 12,159
Income (loss) per
common share
from continuing
operations -
primary (5) $ (7.39) $ (.96) $ .05
Balance Sheet Data
(at period end):
Working Capital $ (30,498) $ 6,837 $ 8,915
Total assets 127,860 140,153 67,956
Total debt 80,721 71,016 22,249
Stockholders'
equity 1,771 30,462 20,577
14
(TABLE CONTINUED)
1993(3) 1992(3)(4)
--------- ----------
Statement of
Operations Data:
Net Sales $ 41,354 $ 42,882
Cost of Sales 29,733 29,443
Nonrecurring
inventory charge -- --
Gross Profit 11,621 13,439
Selling and
administrative
expenses 15,086 12,172
Restructuring and
other charges -- --
Operating income
(loss) (3,465) 1,267
Interest expense 2,937 10,314
Other income
(loss) 5,952 2,713
Net income (loss)
from continuing
operations
before income
taxes,
extraordinary
items and
cumulative
effect of an
accounting
change (450) (6,334)
Income tax expense
(benefit) 1,066 (3,638)
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of the Company's consolidated
results of operations and consolidated financial position should be
read in conjunction with the Selected Consolidated Financial Data and
the Company's consolidated financial statements, including the notes
thereto, appearing elsewhere in this Annual Report.
General
The Company designs, manufactures and markets a broad variety of toys
and plastic decorative holiday products. The Company has been involved
in the toy industry for approximately 40 years, and in the 1980's
diversified into non-toy operations such as food products. The
Company's business focus shifted entirely to toys and holiday products
in 1993 when substantial non-toy operations were sold. Since mid-1994,
the Company has undergone a change of control and management and
effected two significant acquisitions which added established core toy
product lines to the Company.
In the third quarter of 1994, the current principal stockholders of the
Company, led by Steven Geller, the current Chairman and Chief Executive
Officer of the Company, acquired control of the Company. In October
1994, the Company acquired Marchon, Inc. ("Marchon"), a toy designer,
marketer and manufacturer. Marchon's core toy products included Grand
Champions(R) collectible horses and Crocodile Mile(R) water slides.
Marchon had substantial experience at sourcing toy products in the Far
East. In July 1995, the Company acquired substantially all of the toy
product lines of Buddy L Inc. and its Hong Kong subsidiary
(collectively, "Buddy L"), one of the oldest toy brands in the United
States. Buddy L's core toy products included plastic and metal toy
cars, trucks and other vehicles and battery-operated ride-ons.
The Company's 1996 operating results were negatively impacted by
serious difficulties encountered at its Tarboro, NC plant. The 1996
business plan required the plant to significantly increase production
during the third and fourth quarters to meet peak seasonal demand. At
the same time, transfer of the production of acquired Buddy L products,
from Buddy L's facilities in Gloversville, NY to Tarboro, NC, was in
its final stages. Production equipment acquired from Buddy L, as well
as new capital equipment purchased to meet the expanded production
schedule, was still being installed. Difficulties created by the
influx of Buddy L product, delays in the startup of new and transferred
equipment and the training of new employees led to the loss of
production efficiency, product damage, and missed shipping deadlines.
Further, in an effort to meet customer demand, production of some items
was outsourced at an increased cost. Also, during the third quarter,
the Company determined that a substantial amount of work-in-process and
purchased parts inventories, obtained as part of the Buddy L
acquisition, were no longer usable.
As a result of the above problems, the Company recorded $12.2 million
of nonrecurring inventory charges, $8.8 million of restructuring and
other charges and higher than normal reserves for obsolescence and
other items. See also discussion of going concern considerations in
"Liquidity and Capital Resources" and Notes 1 and 3 to Notes to the
consolidated financial statements.
Management has implemented cost cutting measures which it believes will
significantly lower factory overhead and selling and administrative
expenses. The Company has also re-balanced its product mix to reduce
demand on the Tarboro facility and to increase the quantity of higher
margin productItem 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data to be provided pursuant
to this Item 8 are included under Item 14 of this report.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information concerning each of
the Company's directors and executive officers:
Name Age Position(s)
Steven E. Geller 55 Chairman of the Board of Directors
and Chief Executive
Officer
Jeffrey L. Currier 57 Executive Vice President-Finance,
Chief Financial
Officer
J. Artie Rogers 37 Senior Vice President - Finance
and Assistant Secretary
Lawrence A. Geller 33 Vice President -General Counsel
and Secretary
Steven N. Hutchinson 47 Director
Eugene M. Matalene, Jr. 49 Director
Peter B. Pfister 37 Director
Marvin Smollar 51 Director (Former President and
Chief Operating
Officer)
Steven E. Geller has 35 years experience in the toy industry. Mr.
Geller has served as Chairman of the Board and Chief Executive Officer
of the Company since September 1994, and as Chairman of the Board and
Chief Executive Officer of EII since July 1994. Prior to joining the
Company, Mr. Geller served as President of Arco Toys, Inc., a wholly
owned subsidiary of Mattel from December 1986 through December 1991 and
as a consultant for Mattel from January 1991 through December 1993.
From January 1994 to July 1994, Mr. Geller was self-employed, engaged
in structuring, negotiating and financing the acquisition of the
Company. See "Certain Relationships and Transactions."
Jeffrey L. Currier joined the Company in July 1996 as Executive Vice
President-Finance and Chief Financial Officer. Prior to joining the
Company, Mr. Currier was Chief Financial Officer of Foamex
International, Inc. (Nasdaq: FMXI), a manufacturer and marketer of
foam products, from August 1994 to January 1996 and served as Vice
President and Controller of Crystal Brands, Inc., a manufacturer of
clothing and jewelry from January 1993 to August 1994. In January
1994, Crystal Brands, Inc. filed for bankruptcy protection under
Chapter 11 of the Federal Bankruptcy Law. Prior to January 1993, he
held various executive positions during a 15-year tenure with Babcock
Industries, Inc., a British-owned, U. S.-based, diversified
manufacturing company, including ten years as the Company's Chief
Financial Officer. Mr. Currier is a Certified Public Accountant
beginning his career in public accounting for nine years with Price
Waterhouse & Co.
J. Artie Rogers has 11 years experience in the toy industry. Mr.
Rogers has served as Senior Vice President - Finance of the Company
since December 1994. From 1987 to December 1994, Mr. Rogers served as
Vice President - Finance of the Company. From 1987 to December 1995,
Mr. Rogers served as Secretary of the Company, and has served as
Assistant Secretary since December 1995. Mr. Rogers is a certified
public accountant, and prior to joining the Company in 1986, he worked
for Deloitte Haskins & Sells, predecessor to the Company's current
independent public accountants, for six years.
24
Lawrence A. Geller has served as Vice President-General Counsel since
January 1997 and as Secretary of the Company since December 1995. Mr.
Geller joined the Company in April 1995 as corporate counsel. Prior to
joining the Company, Mr. Geller was engaged in the practice of law with
an emphasis on litigation as a partner with the firm of Imhoff & Geller
in Norwalk, Connecticut from 1993 to 1995. During 1991 and 1992, Mr.
Geller was an assocItem 11. Executive Compensation.
The following summary compensation table (the "Compensation Table")
summarizes compensation information with respect to the President and
Chief Executive Officer of the Company and each of the Company's most
highly compensated executive officers who earned more than $100,000 for
services rendered during the year ended December 31, 1996
(collectively, the "Named Executive Officers").
Summary Compensation Table
Compensation
Annual Compensation
Name and Fiscal Salary Bonus
Principal Position(s) Year $ $
Steven E. Geller 1996 $325,000 --
(Chairman of the 1995 324,519 --
Board and Chief 1994(5) 132,692 150,000
Executive Officer)
Jeffrey L. Currier 1996(10) 83,192 --
(Executive Vice
President-Finance, Chief
Financial Officer)
J. Artie Rogers 1996 132,500 --
(Senior Vice President- 1995 132,211 15,000
Finance) 1994 95,385 35,000
Marvin Smollar 1996 325,000 --
(Former President and 1995 318,750 --
Chief Operating 1994(9) 69,230 32,699
Officer)
(TABLE CONTINUED)
Awards
Securities
Underlying
Name and Other Annual Options
Principal Position(s) Compensation #
Steven E. Geller -- 250,000(2)
(Chairman of the 83,028(3) 200,000(2)
Board and Chief 500,000(6)
Executive Officer) -- 325,000(7)
Jeffrey L. Currier -- 30,000(2)
(Executive Vice
President-Finance, Chief
Financial Officer)
J. Artie Rogers -- 5,000(2)
(Senior Vice President- -- --
Finance) -- 35,000(2)
Marvin Smollar -- --
(Former President and -- 200,000(2)
Chief Operating -- --
Officer)
(TABLE CONTINUED)
All Other
Name and Compensation
Principal Position(s) $
Steven E. Geller $ --
(Chairman of the 508,075(4)
Board and Chief
Executive Officer) --
Jeffrey L. Currier 9,841(11)
(Executive Vice
President-Finance, Chief
Financial Officer)
J. Artie Rogers --
(Senior Vice President- --
Finance) 1,190(1)
Marvin Smollar --
(Former President and 290,338(8)
Chief Operating --
Officer)
25
(1) Includes Company contributions to the Employee Stock Bonus Plan.
(2) Options granted pursuant to the Company's 1994 Employee Stock
Option Plan.
(3) Includes $70,000 paid to Mr. Geller in lieu of reimbursement of
expenses incurred for the benefit of the Company and allowances of
$13,028 for automobile expenses and club dues.
(4) Relocation expenses including a gross-up for individual income
taxes.
(5) Includes compensation paid to Mr. Geller from July 15, 1994 through
December 31, 1994.
(6) Includes 60,376 incentive stock options and 439,624 non-qualified
stock options granted pursuant to the Company's 1994 Employee Stock
Option Plan.
(7) Represents warrants granted in connection with services rendered
with respect to the Debenture Purchase Agreement.
(8) Includes $287,908 for relocation expenses grossed up for individual
income taxes and $2,430 of life insurance premiums. Excludes $122,265
paid to Mr. SItem 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth, as of March 14, 1997, certain
information concerning those persons known to the Company, based on
information obtained from such persons, with respect to the beneficial
ownership (as such is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, hereinafter referred to as the "Exchange Act") of
Common Stock by (i) each person known by the Company to be the owner of
more than 5% of the outstanding Common Stock, (ii) each Director, (iii)
each executive officer named in the Summary Compensation Table and (iv)
all Directors, and executive officers as a group:
Shares Beneficially
Owned (2)
Name and Address of
Beneficial Owner(1) Number Percent(3)
Directors and Executive
Officers Steven
Geller(4)(5) 1,605,001 19.9
Marvin Smollar(5)(6) 969,283 13.1
16469 Bridlewood Circle,
Delray Beach, FL 33445
Steven N. Hutchinson(7) 3,016,321 31.8
One New York Plaza, New York,
NY 10004
Eugene M. Matalene, Jr.(8) 7,667 *
Peter B. Pfister(5)(9) 2,041 *
One New York Plaza, New York,
NY 10004
Jeffrey L. Currier -- --
J. Artie Rogers(10) 8,750 *
Other 5% Stockholders Halco
Industries, Inc.(11) 734,039 9.9
441 South Federal Highway,
Deerfield Beach, FL 33441
The Autumn Glory Trust(5)(6) 819,283 11.1
P.O. Box 11, Avarua,
Rarotonga, Cook Islands
WPG Corporate Development
Associates IV, L.P. (5)(12) 2,454,741 27.2
One New York Plaza, New York,
NY 10004
WPG Corporate Development
Asociates IV (Overseas),
Ltd.(5)(13) 542,151 7.0
One New York Plaza, New York,
NY 10004
Smedley Industries, Inc.
(formerly Buddy L, Inc.)
(14) 416,467 5.6
30 Rockefeller Plaza, Suite
4314, New York, NY 10112
All directors and officers as
a group (7 persons)(15) 5,609,063 55.1
* Less than 1%.
31
(1) Unless otherwise indicated, the business address of the 5%
beneficial owners named in the above table is care of Empire of
Carolina, Inc., 5150 Linton Boulevard, Delray Beach, Florida 33484.
(2) Unless otherwise indicated, each person has sole investment and
voting power with respect to the shares listed in the table, subject to
community property laws, where applicable. For purposes of this table,
a person or group of persons is deemed to have "beneficial ownership"
of any shares which such person has the right to acquire within 60
days. For purposes of computing the percentage of outstanding shares
held by each person or group of persons named above, any security which
such person or group of persons has the right to acquire within 60 days
is deemed to be outstanding for the purpose of computing the percentage
ownership for such person or persons, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person.
(3) Based upon 7,403,564 shares of Common Stock outstanding plus shares
issuable upon exercise of options, warrants and convertible securities
which are included in the number of shares beneficially owned by such
person.
(4) Includes 734,039 shares of Common Stock with respect to which
Steven Geller has held voting power pursuant to the Halco Voting
Agreement, which shares include 17,501 shares of Common StockItem 13. Certain Relationships and Transactions.
To provide a portion of the funds needed to finance the Buddy L
acquisition, the Company issued $7.58 million of three-year 12% senior
subordinated notes. Mr. Geller and Mr. Matalene acquired $500,000 and
$100,000 principal amount of these senior subordinated notes,
respectively. In addition, Mr. Matalene serves as a non-employee
director of American Bankers Insurance Company of Florida, which
together with one of its affiliates, acquired an aggregate of $5
million principal amount of these senior subordinated notes. During
July 1996, the Company repaid in full the 12% senior subordinated
notes.
Also in connection with the financing of the Company's acquisition of
Buddy L, affiliates of WPG purchased 247,392 shares of Common Stock at
$7.25 per share and 442,264 shares of Series A cumulative convertible
preferred stock at $7.25 per share for an aggregate purchase price of
approximately $5 million. See Note 4 to notes to consolidated
financial statements. Two principals of WPG, Messrs. Hutchinson and
Pfister, are members of the Company's Board of Directors. See
"Management." On September 11, 1996, all outstanding shares of the
Series A Preferred Stock, upon approval by the stockholders of the
Company, were converted into common stock on a share for share basis.
WPG, on behalf of investment funds for which they are managers, is the
holder of approximately $14,900,000 of the Company's 9%, five-year,
subordinated convertible debentures and a party to the Shareholders'
Agreement dated December 22, 1994. See Notes 5 and 9 to notes to
consolidated financial statements. Concurrent with the closing of this
debenture financing in December 1994, the Geller Group was issued
warrants to purchase 1,000,000 shares of common stock at the exercise
price of $7.50 per share.
At December 31, 1996 and 1995, the Company had an unsecured receivable
from the owner of its facility in Vernon Hills, Illinois of $538,000
and $506,000, respectively, related to costs incurred during its
construction, which receivable is guaranteed by Marvin Smollar, a
Company director and former President and Chief Operating Officer. See
"Legal Proceedings." This receivable bears interest at an annual rate
of 7.5% and is due on December 31, 1998. Subsequent to December 31,
1994, the operations of Marchon were moved to the Company's facilities
in Tarboro, North Carolina. Marchon terminated the lease on the
Illinois facility effective June 1995. The Company also had an
unsecured receivable of $55,000 at December 31, 1995, from an entity of
which Mr. Smollar is a principal, related to Marchon's Pagedale,
Missouri facility. This borrowing was repaid during 1996. These
receivables are included in the consolidated financial statements as a
reduction of consolidated stockholders' equity.
In connection with the Marchon acquisition, the Company assumed a lease
related to Marchon's Pagedale, Missouri facility from an entity of
which Mr. Smollar is a principal. The lease provides for a monthly
rental of $15,000 through December 15, 1995 and $20,000 thereafter.
The lease per its terms, expires during 2013. This facility has not
been occupied by the Company since Marchon moved operations to the main
Tarboro plant in the first quarter of 1995. There is currently a
dispute between the Company and the landlord regarding the lease and
there can be no assurance that the Company will not be obligated for
the lease payments.
During 1996, the Company agreed to pay PaineWebber Incorporated
("PaineWebber"), of which Mr. Matalene, a director of the Company, was
a managing director, an adPART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
10-K.
(a) Documents filed as a part of this Report.
(1) Financial Statements:
Report of Independent Auditors F-1
Consolidated balance sheets as of
December 31, 1996 and 1995. F-2
Consolidated statements of operations
for the years ended December 31,
1996, 1995 and 1994. F-4
Consolidated statements of
stockholders' equity for the years ended
December 31, 1996, 1995 and 1994. F-5
Consolidated statements of cash flows
for the years ended December 31,
1996, 1995 and 1994. F-6
Notes to consolidated financial statements F-9
Supplementary Financial Data F-37
(2) Financial Statement Schedules:
Report of Independent Auditors S-1
Schedule I - Condensed Financial
Information of Registrant S-2
The financial statement schedule should be read in conjunction with the
consolidated financial statements Financial statement schedules not
included in this Annual Report on Form 10-K have been omitted because
they are not applicable or the required information is shown in the
financial statements or notes thereto
(3) Exhibits filed as part of this Report:
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.
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.
2.3 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.
2.4 Sale and Purchase Agreement between the Company and Cargill,
Incorporated, dated September 30, 1992.
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.
2.6 Agreement and Plan of Reorganization, dated October 13, 1994, by
and among the Company, Marchon, Inc. ("Marchon") and the stockholders
of Marchon.
2.7 Amended and Restated Asset Purchase Agreement (the "Asset Purchase
Agreement") dated as of May 19, 1995 by and among the Company, Buddy L
Inc., Debtor-in-Possession ("Buddy L") and Buddy L (Hong Kong) Limited
("BLHK").
34
2.8 Agreement dated June 2, 1995 amending the Asset Purchase Agreement,
by and among the Company and Buddy L and acknowledged and agreed to by
BLHK.
2.9 Second Amendment dated June 30, 1995 further amending the Asset
Purchase Agreement.
2.10 Third Amendment dated July 7, 1995 further amending the Asset
Purchase Agreement.
2.11 Agreement dated August 31, 1995, among the Company, CLR
Corporation, Clabir Corporation, Olin Corporation and General Defense
Corporation.
3.1 Restated Certificate of Incorporation of the Company.
3.2 First Amendment to Restated Certificate of Incorporation of the
Company.
3.3 Amended and Restated By-Laws of the Company.
3.4 Certificate of Designation of the Series B JSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Empire of Carolina, Inc. has duly caused this
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 10, 1997.
EMPIRE OF CAROLINA, INC.
By: /s/ Steven Geller
Chairman of the Board
and Chief Executive Officer
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Empire of Carolina, Inc.
We have audited the accompanying consolidated balance sheets of Empire
of Carolina, Inc. and its subsidiaries (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Empire of Carolina,
Inc. and its subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 in accordance with
generally accepted accounting principles.
The Company's consolidated financial statements for the year ended
December 31, 1996 have been prepared assuming that the Company will
continue as a going concern. During 1996, the Company incurred a net
loss of $46,201,000. As discussed in Note 1 to the financial
statements, the Company's current lines of credit are insufficient to
fund operations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in Notes 2 and 3 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," in 1996.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 26, 1997
41
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (CONTINUED)
ASSETS 1996 1995
(In Thousands)
CURRENT ASSETS:
Cash and cash
equivalents $ 478 $ 2,568
Marketable securities --- 189
Accounts receivable,
less allowances and 39,678 48,957
other deductions
(1996 - $8,777;
1995 - $4,290)
Inventories, net 25,115 30,178
Income taxes
receivable 13,004 ---
Prepaid expenses and
other current
assets 2,142 2,046
Deferred income taxes 2,183 5,596
--------------- ------------
Total current assets 82,600 89,534
PROPERTY, PLANT AND
EQUIPMENT, NET 24,845 23,640
EXCESS COST OVER FAIR
VALUE OF 12,867 15,174
NET ASSETS ACQUIRED
TRADEMARKS, PATENTS,
TRADENAMES 6,567 10,253
AND LICENSES
OTHER NONCURRENT
ASSETS 981 1,552
-------------- ------------
TOTAL $ 127,860 $ 140,153
See notes to consolidated financial statements
42
EMPIRE OF CAROLINA, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (CONCLUDED)
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
(In Thousands, except share amounts)
CURRENT LIABILITIES:
Notes payable and
current portion of
long-term debt $ 58,712 $ 49,206
Convertible
subordinated
debentures 14,139 ---
Accounts payable -
trade 24,783 17,516
Accrued income taxes --- 1,575
Accrued employee
compensation 310 1,293
Accrued royalties 1,217 3,705
Accrued restructuring
and relocation
expenses 739 3,227
Indemnification
obligations related
to sales of
subsidiaries 1,263 1,926
Other accrued
liabilities 11,935 4,249
------------------ ---------------
Total current
liabilities 113,098 82,697
LONG-TERM LIABILITIES:
Convertible
subordinated
debentures --- 13,851
Senior subordinated
notes --- 7,959
Long-term debt 7,870 -
Deferred income taxes 2,183 2,083
Other noncurrent
liabilities 2,938 3,101
------------------ ---------------
Total long-term
liabilities 12,991 26,994
------------------ ---------------
Total liabilities 126,089 109,691
------------------ ---------------
COMMITMENTS AND
CONTINGENCIES (Note
13) STOCKHOLDERS'
EQUITY:
Common stock, $.10 par
value, 30,000,000
shares authorized;
shares issued and
outstanding: 740 519
1996 - 7,404,000; 1995
- 5,195,000.
Preferred stock, $.01
par value, 5,000,000
shares authorized;
shares of Series A
cumulative
convertible preferred
stock authorized,
issued and
outstanding: 1996 -
0; 1995 - 442,264. --- 4
Additional paid-in
cEMPIRE OF CAROLINA, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995
(In Thousands,
except per
share amounts)
NET SALES $148,908 $153,744
COST OF SALES 133,464 111,905
NONRECURRING
INVENTORY
CHARGES 12,185 ---
-------------------- --------------------
GROSS PROFIT 3,259 41,839
SELLING AND
ADMINISTRATIVE
EXPENSE 41,751 36,183
RESTRUCTURING AND
OTHER CHARGES 8,800 7,550
-------------------- --------------------
OPERATING INCOME
(LOSS) (47,292) (1,894)
-------------------- --------------------
OTHER INCOME
(EXPENSE):
Interest income,
dividends and
net realized
gains (losses) (5) 514
Unrealized loss
on marketable
securities --- ---
Interest expense (11,236) (5,996)
-------------------- ------------------
Total other
income
(expense) (11,241) (5,482)
-------------------- ------------------
INCOME (LOSS)
BEFORE INCOME
TAXES (58,533) (7,376)
INCOME TAX
EXPENSE
(BENEFIT) (12,332) (2,875)
NET INCOME (LOSS) $ (46,201) $ (4,501)
==================== ==================
EARNINGS (LOSS)
PER COMMON
SHARE -
Primary and fully
diluted $ (7.39) $ (0.96)
==================== ==================
DIVIDENDS PER
COMMON SHARE $ 0 $ 0
==================== ==================
Weighted average
number of
common shares
outstanding-
primary and
fully diluted 6,248 4,681
==================== ==================
44
(TABLE CONTINUED)
1994
(In Thousands,
except per
share amounts)
NET SALES $ 57,964
COST OF SALES 40,557
NONRECURRING
INVENTORY
CHARGES ---
---------------
GROSS PROFIT 17,407
SELLING AND
ADMINISTRATIVE
EXPENSE 16,442
RESTRUCTURING AND
OTHER CHARGES ---
---------------
OPERATING INCOME
(LOSS) 965
---------------
OTHER INCOME
(EXPENSE):
Interest income,
dividends and
net realized
gains (losses) 2,612
Unrealized loss
on marketable
securities (773)
Interest expense (1,407)
-----------------
Total other
income
(expense) 432
-----------------
INCOME (LOSS)
BEFORE INCOME
TAXES 1,397
INCOME TAX
EXPENSE
(BENEFIT) 808
NET INCOME (LOSS) $ 589
=================
EARNINGS (LOSS)
PER COMMON
SHARE -
Primary and fully
diluted $ 0.05
=================
DIVIDENDS PER
COMMON SHARE $ 0
=================
Weighted average
number of
common shares
outstanding-
primary and
fully diluted 12,158
=================
See notes to consolidated financial statements.
45
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONVERTIBLE ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID-IN
(in thousands) SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------- ------ -------- ---------
BALANCE, JANUARY
1, 1994. 16,400 $1,640 --- --- $56,581
Net income --- --- --- --- ---
Purchase of
treasury stock --- --- --- --- ---
Cancellation of
treasury stock (13,286) (1,329) --- --- (45,837)
Issuance of common
stock in Marchon
acquisition 1,077 108 --- --- 6,488
Net stockholder
loan --- --- --- --- ---
Issuance of common
stock warrants --- --- --- --- 1,740
-------- ------- ------ -------- ---------
BALANCE, DECEMBER
31, 1994. 4,191 419 --- --- 18,972
Net loss --- --- --- --- ---
Issuance of common
stock in Buddy L
acquisition 757 76 --- --- 9,004
Issuance of common
stock 247 24 --- --- 1,770
Issuance of
preferred stock --- --- 442 4 3,202
Collections on
stockholder
loans --- --- --- --- ---
Other capital
transactions --- --- --- --- 245
-------- ------- ------ -------- ---------
BALANCE, DECEMBER
31, 1995. 5,195 519 442 $4 33,193
Net loss --- --- --- --- ---
Exercise of stock
options and
warrants 367 37 --- --- 2,940
Issuance of common
stock in public
offering 1,400 140 --- --- 14,345
Conversion of
preferred stock 442 44 (442) (4) (40)
Collections on
stockholder
loans --- --- --- --- ---
-------- ------- ------ -------- ---------
BALANCE, DECEMBER
31, 1996. 7,404 $740 --- $--- $50,438
======== ======= ====== ======== =========
46
(TABLE CONTINUED)
RETAINED STOCK-
EARNINGS TREASURY STOCK HOLDER
(in thousands) (DEFICIT) SHARES AMOUNT LOANS TOTAL
---------- -------- -------- -------- --------
BALANCE, JANUARY
1, 1994. $40,987 (105) ($789) $--- $98,419
Net income 589 --- --- --- 589
Purchase of
treasury stock --- (13,181) (86,111) --- (86,111)
Cancellation of
treasury stock (39,734) 13,286 86,900 --- ---
Issuance of common
stock in Marchon
acquisition --- --- --- --- 6,596
Net stockholder
loan --- --- --- (656) (656)
Issuance of common
stock warrants --- --- --- --- 1,740
---------- -------- -------- -------- --------
BALANCE, DECEMBER
31, 1994. 1,842 --- --- (656) 20,577
Net loss (4,501) --- --- --- (4,501)
Issuance of common
stock in Buddy L
acquisition --- --- --- --- 9,080
Issuance ofEMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
1996 1995 1994
---------------- --------------- --------------
(In
Thousands)
CASH FLOWS
FROM
OPERATING
ACTIVITIES:
Net income
(loss) $(46,201) $ (4,501) $ 589
Adjustments
to
reconcile
net income
(loss) to
net cash
used in
operating
activities:
Depreciation
and
amortization 9,674 7,211 2,283
Net increases
in
allowances
for losses
on assets 12,300 1,329 1,444
Changes in
allowance
for
deferred
income
taxes 9,272 (626) ---
Net losses on
sales of
securities
and
property
and
equipment 86 3 141
Writedown of
assets 5,275 17 773
Other --- --- 163
Changes in
assets and
liabilities,
net of
acquisitions
and
dispositions
of
businesses:
Accounts
receivable 4,947 (31,422) 6,294
Inventories (2,750) (5,095) (1,312)
Prepaid
expenses
and other
current
assets (96) 135 84
Other
noncurrent
assets 571 (58) (749)
Accounts
payable -
trade 7,267 11,436 (8,754)
Accrued and
other
liabilities 514 (1,368) 589
Current and
deferred
income
taxes (20,338) (3,434) (1,528)
Other
noncurrent
liabilities (163) 1,541 (352)
---------------- --------------- --------------
Net cash used
in
operating
activities (19,642) (24,832) (335)
---------------- --------------- --------------
CASH FLOWS
FROM
INVESTING
ACTIVITIES:
Capital
expenditures (8,296) (5,750) (4,453)
Acquisition
of Marchon,
net of cash
acquired --- --- (2,618)
Acquisition
of Buddy L --- (20,092) ---
Loans to
Halco
Industries,
Inc --- --- (3,825)
Repayment of
loans by
Halco
Industries,
Inc --- --- 25,825
Proceeds from
sales of
marketable
securities 85 2,096 68,538
Other 155 61 139
---------------- --------------- --------------
Net cash
provided by
(used in)
investing
activities (8,056) (23,685) 83,606
---------------- --------------- --------------
CASH FLOWS
FROM
FINANCING
ACTIVITIES:
Net
borrowings
(repayments)
under
lines-of-credit 9,514 35,767 (11,538)
Proceeds from
issuance of
common
stock 14,485 1,794 ---
Proceeds from
stock
options and
warrants
exercised 2,977 --- ---
Proceeds from
issuance of
preferred
stock --- 3,206 ---
Repayments of
notes
payable and
long-term
debt (12,193) --- (204)
PEMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF BUSINESS OPERATIONS, GOING CONCERN MATTERS AND
SUBSEQUENT EVENTS
Business Operations - Empire of Carolina, Inc. ("Empire" or the
"Company") is engaged in the design, manufacture and marketing of toys
and plastic decorative holiday products through its wholly-owned
subsidiaries Empire Industries, Inc. ("Empire Industries") and Marchon
Toys Limited ("Marchon Toys").
On July 7, 1995, two wholly-owned subsidiaries of Empire, acquired
certain of the toy business assets and assumed certain liabilities of
Buddy L Inc., a Delaware corporation and a wholly-owned subsidiary of
SLM International, Inc., and Buddy L (Hong Kong) Limited, a Hong Kong
corporation and a subsidiary of Buddy L Inc. (the toy business of
Buddy L Inc. and Buddy L (Hong Kong) Limited, collectively referred to
as "Buddy L").
The 1995 acquisition of Buddy L and the 1994 acquisition of Marchon,
Inc. ("Marchon") are discussed in Note 4.
The Company's 1996 business plan required it to significantly ramp up
production during the third quarter to meet peak seasonal demand. At
the same time, transfer of the production of acquired Buddy L products,
from Buddy L's facilities in Gloversville, NY, to Tarboro, NC, was in
its final stages. In addition, production equipment included with the
acquisition, as well as new equipment acquired to meet the expanded
production schedule, was being installed. Difficulties associated with
integrating the manufacture of Buddy L products, including the influx
of transferred product and machines, lead to product damage, loss of
production efficiency and missed shipping deadlines. The situation was
exacerbated by the loss of the Plant Manager due to a critical illness,
delays in installation and start-up of production equipment and delays
resulting from two hurricanes. Primarily as a result of these
circumstances, the Company incurred a net loss of $46,201,000 and had
negative operating cash flows of $19,642,000 during 1996.
In response to these circumstances, management has restructured its
operations by consolidating its previous four Strategic Business Units
("SBU") into two, reducing staffing levels, rationalizing its product
lines and amending borrowing arrangements with its primary lenders.
The mix of products has been changed to emphasize higher margin product
sourced through the Company's Hong Kong operation and introduction of
new Tarboro sourced products has been limited for 1997. In addition, a
new plant organization, including a new plant manager, has been put in
place. Transferred and new equipment is now installed and operational.
Although management's actions have reduced the outflow of cash, the
Company's current lines of credit are insufficient to fund operations.
As a result, management believes that without a significant capital
infusion, either by completing the transaction described below, or an
alternative transaction, the Company's cash resources will not be
sufficient to fund continued operations.
53
The consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
factors discussed above as well as the requirement for the Company to
raise additional funding prior to April 30, 1997, (see Note 9),
indicate that, if the Company, is unable to raise significant
additional funding, it may be unable to continue as a going concern.
The consolidated financial statement
EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY DATA
UNAUDITED
(in thousands, except per share data)
1996
FIRST SECOND THIRD FOURTH
Net sales $ 22,186 $ 33,422 $ 50,453 $ 42,847
Nonrecurring
inventory
charges -- -- 10,325 1,860
Gross profit
(loss) 5,969 7,515 (890) (9,335)
Restructuring
and other
charges -- -- 7,497 1,303
Net income
(loss) (2,156) (1,700) (12,884) (29,461)
Net Income
(loss) per
Common share:
Primary and
fully diluted
earnings
per share (.41) (.32) (1.82) (3.98)
1995
FIRST SECOND THIRD(1) FOURTH
Net sales $ 19,088 $ 19,631 $ 53,621 $ 61,404
Gross profit 6,151 6,692 13,975 15,021
Nonrecurring
restructuring
and
relocation
charges (150) (409) (540) (6,451)
Net income
(loss) (1,006) (1,262) 53 (2,286)
Net Income
(loss) per
Common share:
Primary and
fully diluted
earnings
per share (.24) (.30) .01 (.44)
(1) During the third quarter of 1995, the Company acquired certain
assets and assumed certain liabilities of Buddy L. See Note 4 to notes
to consolidated financial statements.
7172
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Empire of Carolina, Inc.
We have audited the consolidated financial statements of Empire of
Carolina, Inc. and its subsidiaries as of December 31, 1996 and 1995
and each of the three years in the period ended December 31, 1996, and
have issued our report thereon dated March 26, 1997, which included an
explanatory paragraph as to an uncertainty regarding the Company's
ability to continue as a going concern; such report is included
elsewhere in this Form 10-K/A. Our audits also included the
consolidated financial statement schedule of Empire of Carolina, Inc.
and its subsidiaries, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our
opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 26, 1997
73
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARENT)
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ----- -----
(IN THOUSANDS)
ADMINISTRATIVE
INCOME (EXPENSES) $ 401 $ (710) $ (2,243)
-------- --------- ---------
OTHER INCOME
(EXPENSES):
Interest income,
dividends and net
realized gains (82) 1,241 2,459
Unrealized loss on
marketable
securities -- (670)
Interest expense (2,816) (1,912) (61)
Equity in earnings
of subsidiaries (44,232) (5,621) 310
Management fee
income 60 3,060 1,100
Other (197) -- --
-------- --------- ---------
Total other income
(expenses) (47,267) (3,232) 3,138
-------- --------- ---------
INCOME (LOSS)
BEFORE TAXES (46,866) (3,942) 895
INCOME TAX EXPENSE
(BENEFIT) (665) 559 306
-------- --------- ---------
NET INCOME (LOSS) $(46,201) $ (4,501) $ 589
======== ========= =========
74
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
EMPIRE OF CAROLINA, INC. (PARENT)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (CONTINUED)
1996 1995
----- ----
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents $ 90 $ 1,416
Marketable
securities -- 189
Receivables from
subsidiaries -- 23,952
Prepaid expenses
and other
current assets 29 920
------- -------
Total current
assets 119 26,477
NOTE RECEIVABLE
FROM SUBSIDIARY 18,513 9,580
INVESTMENT IN
SUBSIDIARIES -- 21,947
OTHER NONCURRENT
ASSETS 416 1,695
------- -------
TOTAL ASSETS $19,048 $59,699
======= =======
The note receivable from subsidiary is subordinated to the subsidiary's
bank facility and bears interest at the prime rate.
Note: The Parent accounts for its investment in its majority-owned
subsidiaries using the equity method of accounting. Under the equity
method, original investments are recorded at cost and adjusted by the
Parent's share of undistributed earnings or losses for these companies.
75
1996 1995
-------- --------
(IN THOUSANDS)
LIABILITIES AND
STOCKHOLDERS'
EQUITY CURRENT
LIABILITIES:
Accounts payable and
accrued expenses $ 562 $ 1,040
Federal and state
taxes payable 967 3,685
Indemnification
obligations related
to sales of
subsidiaries 393 1,326
-------- --------
Total current
liabilities 1,922 6,051
CONVERTIBLE
SUBORDINATED
DEBENTURES 14,139 13,851
SENIOR SUBORDINATED
NOTES -- 7,959
OTHER NONCURRENT
LIABILITIES 669 781
-------- --------
Total Liabilities 16,730 28,642
-------- --------
STOCKHO79
*****
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-93284 of Empire of Carolina, Inc. on Form S-8 of our reports
dated March 26, 1997, appearing in this Annual Report on Form 10-K/A of
Empire of Carolina, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
April 9, 1997
80
Exhibit 99.2
Empire Of Carolina Comments On Proposed Investment
DELRAY BEACH, Fla., April 9 --Empire of Carolina Inc announced today
that EDT Toys, L.L.C. a subsidiary of Knowledge Universe, L.L.C.
(formerly known as Education Technology, L.L.C.), has proposed to
invest $50 million in the company. As announced on March 31, 1997, the
parties have entered into a non-binding letter of intent pursuant to
which EDT proposes to invest $50 million by purchasing from the Company
$20 million in exchangeable convertible preferred stock and $30 million
in principle amount of seven-year 10% senior convertible debentures.
These securities are convertible into common stock at a conversion
price of $3.25 per share, the trading price of the Company's common
stock on the date that the parties agreed to the terms of the letter of
intent.
Knowledge Universe, a Los Angeles based company, has interests in
education companies and corporate employee and vocational training and
staffing companies. Knowledge Universe's president, Tom Kalinske,
previously served as Chief Executive Officer of SEGA of the Americas,
President of Universal Matchbox Group and President and C.E.O. of
Mattel, Inc.
Pursuant to the terms of the proposed agreement, Mr. Kalinske will be
elected chairman of the Board of Empire and will manage the day to day
operations of the Company along with Steve Geller, the current Chairman
and Chief Executive Officer.
Steve Geller, Chairman and Chief Executive Officer, commented, "We are
excited about this proposed investment by EDT. This significant
infusion of capital should help relieve the Company of its current
constraints and allow us to re-focus on satisfying our customer's
needs, product development and expansion opportunities. In addition,
the management expertise and relationships that Tom Kalinske and EDT
bring to Empire should further enable the Company to enhance
shareholder value. EDT is completing its due diligence and, although
no assurances can be given, we are optimistic that we will sign
definitive agreements shortly."
The EDT transaction is subject to a number of substantial conditions,
including satisfactory completion of due diligence, and the negotiation
and execution of definitive agreements. The Company can give no
assurance that the transaction will be consummated, or, if consummated,
that it will be on the terms and conditions described above. In the
event that this transaction is not consummated, there is no assurance
that the Company will obtain the $6 million required by the December 6,
1996 amendment to its senior loan agreement or that cash generated from
operations will be sufficient to fund the Company's continued
operations.
The Company also reported that the financial table accompanying its
March 31, 1996 press release stated that the Company's 1996 loss per
share as $7.89. The actual loss was $7.39. A corrected table follows.
This press release 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. 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 pEDGARPLUS 10-K and 20-F Filings
© 1997 Disclosure Incorporated. All rights reserved.
Dialog® File Number 778 Accession Number 7859860
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