10-Q 1 0001.txt FROM 10-Q 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 June 30, 2000 ------------- 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 (I.R.S. Employer incorporation or organization) Identification Number) 4731 WEST ATLANTIC BOULEVARD SUITE B1, DELRAY BEACH, FL 33445 --------------------------------------------------------------- (Address of principal executive office) (Zip Code) (561) 498-4000 -------------- Registrant's telephone number, including area code) 5150 LINTON BOULEVARD, 5TH FLOOR, DELRAY BEACH, FL 33848 -------------------------------------------------------- (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 August 9, 2000 was 21,577,839. EMPIRE OF CAROLINA, INC. INDEX Page ---------- Facing Sheet ...................................................... Cover Page Index ............................................................. 1 Part I - Financial Information .................................... 2 Item 1. Financial Statements Consolidated Condensed Balance Sheets June 30, 2000 and December 31, 1999 ...................... 3 Consolidated Condensed Statements of Operations Six months ended June 30, 2000 and July 4, 1999 .......... 4 Consolidated Condensed Statements of Operations Six months ended June 30, 2000 and July 4, 1999 .......... 5 Consolidated Condensed Statements of Cash Flows Six months ended June 30, 2000 and July 4, 1999 .......... 6 Notes to Consolidated Condensed Financial Statements ........ 7-10 Item 2. Management's Discussion and Analysis of Financial Conditions And Results of Operations ................. 10-12 Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................................... 12 Part II - Other Information Item 1. Legal Proceedings ..................................... 12 Item 3. Defaults Upon Senior Securities ....................... 13 Item 4. Submission of Matters to a Vote of Security Holders ... 13 Item 5. Other Information ..................................... 13 Item 6. Exhibits and Reports on Form 8-K ...................... 13 Signature ......................................................... 14 PART I - FINANCIAL INFORMATION This Form 10-Q contains various forward-looking statements and information, including under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," that are based on management's beliefs as well as assumptions made by and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources and management's plans and objectives. When used in this document, the words "expect," "anticipate," "estimate," "believe," and similar expressions are intended to identify forward-looking statements. Such statements are subject to various risks and uncertainties which could cause actual results to vary materially from those stated. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. Such risks and uncertainties include the Company's ability to manage inventory production and costs, to meet potential increases or decreases in demand, potential adverse customer impact due to delivery delays including effects on existing and future orders, competitive practices in the toy and golf industries, changing consumer preferences and risks associated with consumer acceptance of new product introductions, potential increases in raw material prices, potential delays or production problems associated with foreign and other sourcing of production and the impact of pricing policies including providing discounts and allowances, reliance on key customers, the seasonality of the Company's business, the ability of the Company to meet existing financial obligations, the availability of financing or availability of refinancing for existing debt, and the Company's ability to obtain additional capital on a timely basis, through the disposition of assets or otherwise, to meet cash flow and working capital needs and to fund future commitments and operations. Certain of these as well as other risks and uncertainties are described in more detail in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and the Company's Registration Statement on Form S-3 filed under the Securities Act of 1933, Registration No. 333-57963. The Company undertakes no obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 2 Item 1. Financial Statements EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands except share amounts)
June 30, December 31, 2000 1999 ----------- ------------ ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 161 $ 1,589 Accounts receivable, net 12,861 16,708 Inventories, net 10,341 12,144 Prepaid expenses and other current assets 654 301 --------- --------- Total current assets 24,017 30,742 Property, plant and equipment, net 2,038 11,413 Excess cost over fair value of net assets acquired, net 10,725 11,392 Trademarks, patents, tradenames and licenses, net 4,813 5,287 Other noncurrent assets 1,052 268 --------- --------- Total Assets $ 42,645 $ 59,102 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt $ 27,004 $ 34,096 Accounts payable - trade 4,925 6,748 Other accrued liabilities 3,545 7,834 --------- --------- Total current liabilities 35,474 48,678 --------- --------- Long-Term Liabilities: Long-term debt 625 625 Other noncurrent liabilities 1,202 1,040 --------- --------- Total long-term liabilities 1,827 1,665 --------- --------- Total liabilities 37,301 50,343 --------- --------- Commitments and Contingencies (Note 3) Stockholders' Equity: Common stock, $.10 par value, 60,000,000 shares authorized, shares Issued and outstanding: 2000 - 21,578,000 and 1999 - 19,667,000 2,158 1,967 Preferred stock, $.01 par value, 5,000,000 shares authorized Issued and outstanding: 2000 - 1,287,000 and 1999 - 1,487,000 Shares of Series A convertible preferred stock and 2000 - 1,451 and 1999 - 1,451 shares of Series C convertible preferred stock 13 15 Additional paid-in capital 115,718 115,824 Deficit (112,545) (109,047) --------- --------- Total stockholders' equity 5,344 8,759 --------- --------- Total Liabilities and Stockholders' Equity $ 42,645 $ 59,102 ========= =========
See notes to consolidated condensed financial statements. 3 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited) Quarter Ended Quarter Ended June 30, July 4, 2000 1999 ------------- ------------- Net Sales $ 11,589 $ 14,453 Cost of Sales 8,254 10,789 -------- -------- Gross Profit 3,335 3,664 Selling and Administrative Expense 2,797 4,175 -------- -------- Operating Earnings (Loss) 538 (511) Interest Expense (875) (932) -------- -------- Loss Before Income Taxes (337) (1,443) Income Tax Expense 38 -- -------- -------- Net Loss ($ 375) ($ 1,443) ======== ======== Loss Per Common Share - Basic and diluted ($ 0.02) ($ 0.08) ======== ======== Weighted average number of common shares outstanding - Basic and diluted 21,061 17,062 ======== ======== See notes to consolidated condensed financial statements. 4 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited) Six Months Six Months Ended Ended June 30, July 4, 2000 1999 ---------- ---------- Net Sales $ 21,250 $ 30,304 Cost of Sales 16,510 22,612 -------- -------- Gross Profit 4,740 7,692 Selling and Administrative Expense 6,721 9,182 -------- -------- Operating Loss (1,981) (1,490) Interest Expense (1,479) (1,776) -------- -------- Loss Before Income Taxes (3,460) (3,266) Income Tax Expense 38 -- -------- -------- Net Loss ($ 3,498) ($ 3,266) ======== ======== Loss Per Common Share - Basic and diluted ($ 0.17) ($ 0.20) ======== ======== Weighted average number of common shares outstanding - Basic and diluted 20,435 16,713 ======== ======== See notes to consolidated condensed financial statements. 5 EMPIRE OF CAROLINA, INC., AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)(In Thousands)
Six Months Six Months Ended Ended June 30, July 4, 2000 1999 ---------- ---------- Cash Flows From Operating Activities: Net loss ($3,498) ($3,266) Adjustments to reconcile net loss to net cash used in Operating activities: Depreciation and amortization 1,684 2,400 Other (1,671) 943 Changes in assets and liabilities 1,672 (8,238) ------- ------- Net cash used in operating activities (1,813) (8,161) ------- ------- Cash Flows From Investing Activities: Capital expenditures (20) (1,600) Net proceeds from sale of assets 7,497 ------- ------- Net cash provided by (used in) investing activities 7,477 (1,600) ------- ------- Cash Flows From Financing Activities: Borrowings (repayments) under lines of credit (7,092) 8,715 Repayments of notes payable (625) ------- ------- Net cash provided by (used in) financing activities (7,092) 8,090 ------- ------- Net Decrease in Cash and Cash Equivalents (1,428) (1,671) Cash and Cash Equivalents, Beginning of Period 1,589 4,295 ------- ------- Cash and Cash Equivalents, End of Period $ 161 $ 2,624 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 1,981 $ 1,285 Income taxes, (net of refunds) 21 88
See notes to consolidated condensed financial statements. 6 EMPIRE OF CAROLINA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Six Months Ended June 30, 2000 and July 4, 1999 (Unaudited) 1. SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated condensed financial statements have been prepared by the Company pursuant the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The consolidated statements of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the full year. These unaudited financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company's 1999 Annual Report on Form 10-K for the year ended December 31, 1999. The consolidated condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Recurring losses from operations and operating cash constraints are potential factors which, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The independent auditors' report on the December 31, 1999 financial statements stated that "... the Company's recurring losses from operations and current cash constraints raise substantial doubt about the Company's ability to continue as a going concern . . . . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." The consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitable operations. In 2000, the Company implemented a calendar month end monthly closing cycle for the quarter versus a 4-4-5 week monthly closing cycle in the prior year quarter. This change has no significant impact on the comparability of the interim consolidated condensed financial statements presented. Earnings per share - All of the Company's options, warrants and convertible securities are excluded from basic and diluted earnings per share because they are anti-dilutive. Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 7 2. ACCOUNTS RECEIVABLE A summary of accounts receivable at June 30, 2000 and December 31, 1999, is as follows (in thousands): June 30, 2000 December 31, 1999 ------------- ----------------- Gross Receivables $ 18,443 $ 23,986 Less: Allowances and other deductions (5,582) (7,278) -------- -------- Net receivables $ 12,861 $ 16,708 ======== ======== 3. INVENTORIES A summary of inventories, by major classification, at June 30, 2000 and December 31, 1999 is as follows (in thousands): June 30, 2000 December 31, 1999 ------------- ----------------- Finished Goods $ 10,817 $ 10,730 Raw Materials and purchased parts 1,642 3,384 Work-in-process 796 621 -------- -------- Subtotal 13,255 14,735 Less: Reserve for obsolescence (2,914) (2,591) -------- -------- Total Inventory $ 10,341 $ 12,144 ======== ======== 4. COMMITMENTS AND CONTINGENCIES Royalty agreements - The Company is obligated to pay certain minimum royalties under various trademark license agreements that aggregate approximately $4.9 million through their initial minimum terms expiring through June 30, 2002. Letters of credit - The Company had outstanding commitments under letters of credit totaling approximately $1,502,000 at June 30, 2000 compared to $1,064,000 at December 31, 1999. Indemnifications - In connection with the sale of businesses it previously owned, the Company provided certain indemnifications to the purchaser. The Company has established reserves for all claims known to it and for other contingencies in connection with the sale. Although there can be no assurance that claims and other contingencies related to the sale will not exceed established reserves, the Company believes that additional exposure related to the indemnification obligations will not be material to the consolidated financial statements. Litigation - During December 1990, George Delaney and Rehkemper I.D., Inc. filed a lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division, against Marchon, Inc. claiming infringement of various intellectual property rights and failure to pay royalties related to Marchon's development and sale of various toys allegedly designed by plaintiffs. The Company was added as a defendant after its acquisition of Marchon in October 1994. In August 1999, the Company agreed to settle the litigation for $750,000. The Court entered an Order of Dismissal with Prejudice on September 17, 1999. Pursuant to the settlement agreement, the Company paid to the plaintiffs $350,000 on September 28, 1999 and is obligated to pay an additional $400,000 in quarterly payments of $50,000 which payments commenced on March 31, 2000. During October 1998, Industrial Truck Sales & Services, Inc. filed suit in the General Court of Justice, Superior Court Division, of Guilford County, North Carolina, against the Company and its North Carolina subsidiary, Empire Industries, Inc., alleging breach of contract, among other counts, relating to leases for forklifts delivered to the Company's Tarboro, North Carolina, facility and seeking damages of approximately $104,000. The Company and Empire Industries filed a third party complaint against Associates Leasing, Inc., Forklifts, Inc. and Howard Younger alleging fraud and breach of fiduciary duty. Industrial Truck Sales and Forklifts, Inc. were 8 the original lessors of the forklift and Mr. Younger is a former employee of Empire Industries who executed the leases. Associates Leasing is the assignee of the leases. In January 1999, Associates Leasing filed a counterclaim against the Company and Empire Industries alleging breach of contract and demanding judgment in excess of $800,000. During the third quarter of 1999, the Company entered into a preliminary settlement agreement pursuant to which the Company will pay approximately $500,000. The settlement was finalized and the obligation was paid in full in the first quarter of 2000. In March 2000, 200 Fifth Avenue Associates filed an action in the Supreme Court of the State of New York, County of New York against Carolina Enterprises, Inc. (the predecessor company to Empire Industries, Inc.), a subsidiary of the Company, and Empire of Carolina, Inc. This action alleges that the Company breached its lease for premises located at 200 Fifth Avenue, New York, New York. In an amended complaint filed on May 31, 2000, the plaintiff increased the amount of damages claimed from approximately $100,000 to approximately $243,000. The Company is attempting to settle this matter. In mid-1997, Mid-Atlantic Rigging, Inc. filed an action in the Superior Court of New Jersey, Law Division, Gloucester County, New Jersey, against Empire Industries, Inc.. This action alleged damages in excess of $100,000. This matter was referred to arbitration as required under New Jersey statute. On July 19, 2000, a non-binding arbitration award in the amount of $172,095 (inclusive of interest and attorneys' fees) was entered against Empire Industries, Inc. On August 4, 2000, Empire filed a de novo appeal of the non-binding arbitration award. Under New Jersey statute, a trial date will be scheduled within six weeks. The Company is attempting to settle this matter prior to commencement of trial. On July 13, 2000, Frischkorn, Inc. filed an action in the United States District Court, Eastern District of Virginia, Richmond Division, against Empire Industries, Inc. This action alleges that Empire Industries breached its agreement with Frischkorn by failing to pay for goods and materials and demands damages in excess of $214,000. The Company will attempt to settle this matter. The Company's operating subsidiaries and its former operating subsidiaries are subject to various types of consumer claims for personal injury from their products. The Company's subsidiaries maintain product liability insurance. Various product liability claims, each of which management believes is adequately covered by insurance and/or reserves, are currently pending. An unfavorable outcome of any of this litigation either individually or in the aggregate could have a material adverse effect on the Company's consolidated financial statements. Contingencies - The Company has been identified as a potentially responsible party, along with numerous other parties, at various U. S. Environmental Protection Agency ("EPA") designated superfund sites. The Company is vigorously contesting these matters. It is the Company's policy to accrue remediation costs when it is possible that such costs will be incurred and when they can be reasonably estimated. As of December 31, 1999 and March 31, 2000, the Company had reserves for environmental liabilities of $98,000. The amount accrued for environmental liabilities was determined without consideration of probable recoveries from third parties. Estimates of costs for future remediation are necessarily imprecise due to, among other things, the allocation of costs among potentially responsible parties. Although it is possible that additional environmental liability related to these matters could result in amounts that could be material to the Company's consolidated financial statements, a reasonably possible range of such amounts cannot presently be estimated. Based upon the facts presently known, the large number of other potentially responsible parties and potential defenses that exist, the Company believes that its share of the costs of cleanup for its current remediation sites will not, in the aggregate, have a material adverse effect on its consolidated financial statements. 9 5. STOCKHOLDERS' EQUITY During the first six months of 2000, 198,400 shares of Series A Preferred Stock were converted to 1,587,200 shares of Common Stock. The effect of the conversion resulted in an increase in common stock value of $158,000, a decrease in Preferred Stock value of $2,000, and a decrease in additional paid-in capital of $156,000. During June 2000, the Company issued 330,000 shares of Common Stock in lieu of directors and consulting fees, resulting in an increase in Common Stock of 33,000, additional paid in capital of $50,000 and a decrease in other accrued liabilities of $83,000. 6. SUBSEQUENT EVENT As of June 30, 2000, Empire Industries had not made $9.0 million of scheduled payments under its bank facilities and was not in compliance with certain covenants contained in its bank facilities. The bank lenders have waived the payment defaults and the covenant defaults through June 30, 2000. As of the filing of this report, Empire Industries is in default of its bank facility and the Company is in the midst of discussions with the bank on proposed amendments to the credit facilities and waivers of the current defaults. The Company has currently no availability under its line of credit for Empire Industries. Although there is $0.6 million for the Apple Companies, the bank lenders have restricted funding under both facilities. In the event the parties are unable to reach agreement, the bank lenders are entitled, at their discretion, to exercise certain remedies including acceleration of repayment. If these obligations were to be accelerated, in whole or in part, there can be no assurance that the Company would be successful in identifying or consummating financing, or consummating the disposition of assets, to the extent necessary to satisfy the obligations which would become immediately due and payable. At this time, the Company has no other available sources of capital, and such acceleration would have a material adverse effect on the Company, its operations and its financial condition. In the past, the Company has been successful in obtaining necessary waivers and amendments from the bank lenders. There is no assurance that, under the current circumstances, the bank lenders will provide the Company with an amendment or waiver of the current defaults, and they have been noncommittal during the current discussions. If the outcome of negotiations with the bank lenders is unfavorable, the Company will pursue all other available options including the sale or disposition of additional product lines in order to meet its obligations or reorganization pursuant to the federal bankruptcy laws. As a result of the uncertainty related to the defaults and corresponding remedies described above, the bank facilities are shown as current liabilities on the Company's Consolidated Condensed Balance Sheets at June 30, 2000. Accordingly, the Company has a deficit in working capital of $11.5 million at June 30, 2000. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company designs, develops, and markets a broad variety of consumer products including children's toys, golf footwear and accessories, sports boards and accessories, and seasonal outdoor sports activity products. The Company's line of toys includes the classic Big Wheel(R) ride-on toys, Grand Champions(R) collectible horses, and Buddy L(R) cars and trucks. Its consumer sports line includes Wilson(R) golf shoes and accessories and MONGOOSE(R) sports boards and accessories. Sales of the Company's products are seasonal in nature. Products sold primarily in the spring and summer months include golf footwear and accessories, Crocodile Mile(R) water slides and other items, which are shipped principally in the first and second quarters of the year and counter some of the seasonality associated with the Company's toy products. In addition, certain toys such as Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles ship year round. The Company expects that its quarterly operating results will vary significantly throughout the year. Results of Operations Second Quarter Ended June 30, 2000 Compared to Second Quarter Ended July 4, 1999 Net Loss. The net loss for the quarter ended June 30, 2000 was $0.4 million as compared to $1.4 million for the quarter ended July 4, 1999. The decrease in the net loss reflects the company's cost cutting efforts which reduced S&A expenses by $1.4 million as compared to the prior year quarter. Net Sales. The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales for the quarter ended June 30, 2000 decreased by $2.9 million, or 19.8%, to $11.6 million. The Company believes that the decrease in sales is primarily due to increased competition with respect to particular products, the elimination of sales of low margin products, and the sale of the seasonal products line to General Foam Plastics Corp. on May 4, 2000. Gross Profit Margins. Gross profit margins for the quarter ended June 30, 2000 was 28.8% as compared with 25.3% in the quarter ended July 4, 1999. The increase in gross profit margin for the second quarter of 2000 is due to the sale of the Company's manufacturing facility, which had been under-utilized and to a lessor extent, changes in volume and sales mix. Selling and Administrative ("S&A"). Selling and administrative expenses for the quarter ended June 30, 2000 was $2.8 million as compared to $4.2 million for the quarter ended July 4, 1999. Selling and administrative expenses decreased due to the Company's continuing cost cutting efforts and elimination of excess overhead costs. Interest Expense. Interest expense decreased to $0.875 million for the second quarter of 1999 compared to $0.932 million during the second quarter of 1999. This decrease is a result of lower borrowings partially offset by slightly higher interest rates. Six Months Ended June 30, 2000 Compared to Six Months July 4, 1999 Net Loss. The net loss for the six months ended June 30, 2000 was $3.5 million as compared to $3.3 million for the quarter ended July 4, 1999. The net loss reflects increases in the cost of petrochemical plastic resin derivatives and the under-utilization of the Company's manufacturing facility in Tarboro, North Carolina, partially offset by lower selling and administrative expense and interest expense. 11 Net Sales. The nature of the Company's business is such that year to year changes in sales levels are predominantly due to changes in shipping volume or product mix rather than changing sales prices. Net sales for the six months ended June 30, 2000 decreased by $9.1 million, or 29.9%, to $21.2 million. The Company believes that the decrease in sales is primarily due to increased competition with respect to particular products and elimination of sales of low margin products and the sale of the seasonal products line to General Foam Plastics Corp. on May 4, 2000. Gross Profit Margins. Gross profit margins for the six months ended June 30, 2000 was 22.3% as compared with 25.4% in the six months ended July 4, 1999. The decrease in gross profit margin for the six months of 2000 is due to increases in the cost of petrochemical plastic resin derivatives, the under-utilization of the Company's manufacturing facility, the liquidation and clearance of old inventory, and decreases in sales volume and sales mix. Selling and Administrative ("S&A"). Selling and administrative expenses for the six months ended June 30, 2000 was $6.7 million as compared to $9.2 million for the six months ended July 4, 1999. Selling and administrative expenses decreased due to the Company's continuing cost cutting efforts and elimination of excess overhead costs. Interest Expense. Interest expense decreased to $1.5 million for the six months ended June 30, 2000 compared to $1.8 million during the six months ended July 4, 1999. This decrease is a result of lower borrowings partially offset by slightly higher interest rates. Seasonality of Sales Sales of the Company's products are seasonal in nature. Products sold primarily in the spring and summer months include golf footwear and accessories, Crocodile Mile(R) water slides and other items, which are shipped principally in the first and second quarters of the year and counter some of the seasonality associated with the Company's toy products. In addition, certain toys such as Big Wheel(R) ride-ons, Grand Champions(R) horses and Buddy L(R) vehicles ship year round. The Company expects that its quarterly operating results will vary significantly throughout the year. Liquidity and Capital Resources The Company has experienced severe operating difficulties during the past several years and sales have declined over this period. The Company recorded a net loss of $3.5 million for the first six months of 2000 as compared with a net loss of $3.3 million for the first three months of 1999. The Company continues to operate under extremely tight cash constraints. The Company, through its domestic operating subsidiaries, has a series of cross-guaranteed secured bank facilities which currently aggregate up to $50.0 million ($40.0 million for Empire Industries and $10.0 million for the Apple Companies) available for financing. As part of the Empire Industries facility, there is a three-year term loan of $6.8 million, which requires monthly principal payments of $133,000. Also, up to $9.0 million of Empire Industries' availability is not tied by formula to the underlying assets and requires monthly repayments of $1.5 million which commenced on September 30, 1999 through February 29, 2000. The balance of the availability of borrowing for each subsidiary under the facilities is based on all domestic accounts receivable and inventory balances as defined, less outstanding commitments under letters of credit. The Company has financed its losses primarily by additional borrowings under its existing bank facilities. At June 30, 2000, the Company's Empire Industries and Apple subsidiaries had borrowed $20.7 million and $5.7 million, respectively, under those facilities. As of June 30, 2000, Empire Industries had an overadvance from the bank lenders of $6.7 million, which is included in the $20.7 million. As of July 12, 2000, the overadvance was $7.1 million. As of June 30, 2000, Empire Industries had not made $9.0 million of scheduled payments under its bank facilities and was not in compliance with certain covenants contained in its bank facilities. The bank lenders have waived the payment defaults and the covenant defaults through June 30, 2000. As of the filing of this 12 report, Empire Industries is in default of its bank facility and the Company is in the midst of discussions with the bank on proposed amendments to the credit facilities and waivers of the current defaults. The Company has currently no availability under its line of credit for Empire Industries, although there is $0.6 million for the Apple Companies, the bank lenders have restricted funding under both facilities. In the event the parties are unable to reach agreement, the bank lenders are entitled, at their discretion, to exercise certain remedies including acceleration of repayment. If these obligations were to be accelerated, in whole or in part, there can be no assurance that the Company would be successful in identifying or consummating financing, or consummating the disposition of assets, to the extent necessary to satisfy the obligations which would become immediately due and payable. At this time, the Company has no other available sources of capital, and such acceleration would have a material adverse effect on the Company, its operations and its financial condition. In the past, the Company has been successful in obtaining necessary waivers and amendments from the bank lenders. There is no assurance that, under the current circumstances, the bank lenders will provide the Company with an amendment or waiver of the current defaults, and they have been noncommittal during the current discussions. If the outcome of negotiations with the bank lenders is unfavorable, the Company will pursue all other available options including the sale or disposition of additional product lines in order to meet its obligations or reorganization pursuant to the federal bankruptcy laws. As a result of the uncertainty related to the defaults and corresponding remedies described above, the bank facilities are shown as current liabilities on the Company's Consolidated Condensed Balance Sheets at June 30, 2000. Accordingly, the Company has a deficit in working capital of $11.5 million at June 30, 2000. On May 4, 2000, the Company completed the sale of its domestically manufactured decorative Holiday and Seasonal products including all machinery and equipment to General Foam Plastics Corporation ("General Foam") for approximately $3.7 million in cash. On May 8, 2000, the Company sold related finished goods inventory for the Holiday and Seasonal products to General Foam for approximately $0.8 million in cash. On June 6, 2000 the Company sold its 1.2 million square foot manufacturing facility in Tarboro, North Carolina to General Foam for approximately $3.1 million in cash. Substantially, all of the net proceeds from these sales have been used to reduce the Company's bank debt by $7.1 million. As a result of the transaction's with General Foam, the Company has sold its manufacturing equipment and has begun to outsource the manufacturing of its remaining domestic products. As a result of the preceding transactions, the Company utilized its reserves for the sale of its manufacturing facilities in the amount of $1.8 million. The consolidated condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Recurring losses from operations and operating cash constraints are potential factors which, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The independent auditors' report on the December 31, 1999 financial statements stated that "... the Company's recurring losses from operations and current cash constraints raise substantial doubt about the Company's ability to continue as a going concern . . . . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." The consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitable operations. Because of the seasonality of its revenues, the Company's working capital requirements fluctuate significantly during the year. The Company's seasonal financing requirements are highest during the fourth quarter and lowest during the first quarter. The Company's inventories, accounts receivable, accounts payable, notes payable and current portion of long-term debt vary significantly by quarter due to the seasonal nature of the Company's business. The Company is subject to various actions and proceedings, including those relating to intellectual property matters, environmental matters and product liability matters. See notes to consolidated condensed financial statements. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to certain market risks that arise from transactions entered into in the normal course of business. The Company's primary exposures are changes in interest rates with respect to its debt and foreign currency exchange fluctuations. The Company finances its working capital needs primarily through a variable rate loan facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company's results may be adversely or positively affected by fluctuations in interest rates. The Company sources products from various manufacturers in the Far East. The purchases are generally made in Hong Kong dollars while goods are sold in U. S. dollars. Due to the small levels of inventory, and the historical consistency of the Hong Kong dollar/U.S. dollar exchange rate, the Company does not believe that any adverse or positive affect would be material. PART II - OTHER INFORMATION Item 1. Legal Proceedings In March 2000, 200 Fifth Avenue Associates filed an action in the Supreme Court of the State of New York, County of New York against Carolina Enterprises, Inc. (the predecessor company to Empire Industries, Inc.), a subsidiary of the Company, and Empire of Carolina, Inc. This action alleges that the Company breached its lease for premises located at 200 Fifth Avenue, New York, New York. In an amended complaint filed on May 31, 2000, the plaintiff increased the amount of damages claimed from approximately $100,000 to approximately $243,000. The Company is attempting to settle this matter. In mid-1997, Mid-Atlantic Rigging, Inc. filed an action in the Superior Court of New Jersey, Law Division, Gloucester County, New Jersey, against Empire Industries, Inc.. This action alleged damages in excess of $100,000. This matter was referred to arbitration as required under New Jersey statute. On July 19, 2000, a non-binding arbitration award in the amount of $172,095 (inclusive of interest and attorneys' fees) was entered against Empire Industries, Inc. On August 4, 2000, Empire filed a de novo appeal of the non-binding arbitration award. Under New Jersey statute, a trial date will be scheduled within six weeks. The Company is attempting to settle this matter prior to commencement of trial. On July 13, 2000, Frischkorn, Inc. filed an action in the United States District Court, Eastern District of Virginia, Richmond Division, against Empire Industries, Inc. This action alleges that Empire Industries breached its agreement with Frischkorn by failing to pay for goods and materials and demands damages in excess of $214,000. The Company will attempt to settle this matter. The Company's operating subsidiaries and its former operating subsidiaries are subject to various types of consumer claims for personal injury from their products. The Company's subsidiaries maintain product liability insurance. Various product liability claims, each of which management believes is adequately covered by insurance and/or reserves, are currently pending. An unfavorable outcome of any of this litigation either individually or in the aggregate could have a material adverse effect on the Company's consolidated financial statements. Contingencies - The Company has been identified as a potentially responsible party, along with numerous other parties, at various U. S. Environmental Protection Agency ("EPA") designated superfund sites. The Company is vigorously contesting these matters. It is the Company's policy to accrue remediation costs when it is possible that such costs will be incurred and when they can be reasonably estimated. As of December 31, 1999 and March 31, 2000, the Company had reserves for environmental liabilities of $98,000. The amount accrued for 14 environmental liabilities was determined without consideration of probable recoveries from third parties. Estimates of costs for future remediation are necessarily imprecise due to, among other things, the allocation of costs among potentially responsible parties. Although it is possible that additional environmental liability related to these matters could result in amounts that could be material to the Company's consolidated financial statements, a reasonably possible range of such amounts cannot presently be estimated. Based upon the facts presently known, the large number of other potentially responsible parties and potential defenses that exist, the Company believes that its share of the costs of cleanup for its current remediation sites will not, in the aggregate, have a material adverse impact on its consolidated financial statements. Item 3. Defaults Upon Senior Securities The Company has financed its losses primarily by additional borrowings under its existing bank facilities. At June 30, 2000, the Company's Empire Industries and Apple subsidiaries had borrowed $20.7 million and $5.7 million, respectively, under those facilities. As of June 30, 2000, Empire Industries had not made $9.0 million of scheduled payments under its bank facilities and was not in compliance with certain covenants contained in its bank facilities. The bank lenders have waived the payment defaults and the covenant defaults through June 30, 2000. As of the filing of this report, Empire Industries is in default of its bank facility and the Company is in the midst of discussions with the bank on proposed amendments to the credit facilities and waivers of the current defaults. The Company has currently no availability under its line of credit for Empire Industries. Although there is $0.6 million for the Apple Companies, the bank lenders have restricted funding under both facilities. In the event the parties are unable to reach agreement, the bank lenders are entitled, at their discretion, to exercise certain remedies including acceleration of repayment. If these obligations were to be accelerated, in whole or in part, there can be no assurance that the Company would be successful in identifying or consummating financing, or consummating the disposition of assets, to the extent necessary to satisfy the obligations which would become immediately due and payable. At this time, the Company has no other available sources of capital, and such acceleration would have a material adverse effect on the Company, its operations and its financial condition. In the past, the Company has been successful in obtaining necessary waivers and amendments from the bank lenders. There is no assurance that, under the current circumstances, the bank lenders will provide the Company with an amendment or waiver of the current defaults, and they have been noncommittal during the current discussions. If the outcome of negotiations with the bank lenders is unfavorable, the Company will pursue all other available options including the sale or disposition of additional product lines in order to meet its obligations or reorganization pursuant to the federal bankruptcy laws. As a result of the uncertainty related to the defaults and corresponding remedies described above, the bank facilities are shown as current liabilities on the Company's Consolidated Condensed Balance Sheets at June 30, 2000. Accordingly, the Company has a deficit in working capital of $11.5 million at June 30, 2000. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held May 25, 2000. The following matters were voted upon at the meeting: 1. Election by Series A Preferred Stockholders ("Series A Holders") of two members (Charles S. Holmes and James J. Pinto) to the Board of Directors and the Series A Holders and the holders of Common Stock (collectively, the "Voting Holders"), voting together, to elect five members to the Board, all such persons being elected to hold office for a one-year term and until their respective successors are duly elected and qualified. All of the nominees were re-elected to the Board. 15 WITHHELD FOR AUTHORITY --- --------- Series A Preferred Voting Charles S. Holmes......................... 717,100 -- James J. Pinto............................ 717,100 -- Preferred and Common Voting Holders Timothy Moran............................. 11,275,102 27,962 John J. Doran............................. 11,274,102 28,962 Mark S. Rose.............................. 11,274,102 28,962 Frederick W. Rosenbauer, Jr............... 11,274.102 28,962 Lenore Schupak............................ 11,275,303 27,761 2. Ratification of Deloitte & Touche LLP as the Company's independent certified public accountants to audit the books of account of the Company for the year ending December 31, 2000. This proposal was voted upon by all Voting Holders. For.................................. 11,289,782 Against.............................. 4,650 Abstain.............................. 8,632 Item 5. Other Information The American Stock Exchange notified the Company on August 2, 1999 that it had fallen below certain of the Exchange's continuing listing guidelines with regard to its common stock. The Company is in discussions with the Exchange as to the continued listing eligibility of the common stock. If we are unable to maintain the listing of our common stock with the Exchange, the effects of delisting could include, among other things, the limited release of the market price of the common stock and limited news coverage of the Company. These effects could materially adversely affect the trading market, liquidity and prices for our common stock. On May 4, 2000 the Company completed the sale of its domestically manufactured decorative Holiday and Seasonal products including all machinery and equipment to General Foam Plastics Corporation ("General Foam") for approximately $3.7 million in cash. On May 8, 2000, the Company sold related finished goods inventory for the Holiday and Seasonal products to General Foam for approximately $0.8 million in cash. On June 6, 2000 the Company sold its 1.2 million square foot manufacturing facility in Tarboro, North Carolina to General Foam for approximately $3.1 million in cash. Substantially, all of the net proceeds from these sales have been used to reduce the Company's bank debt by $7.1 million. As a result of the transaction's with General Foam, the Company has sold its manufacturing equipment and has begun to outsource the manufacturing of its remaining domestic products. As a result of the preceding transactions, the Company utilized its reserves for the sale of the manufacturing facilities in the amount of $1.8 million. Item 6. Exhibits and Reports on Form 8-K (a) Index and Exhibits Exhibit No. Description ----------- ----------- 10.1 Asset Purchase Agreement dated May 4, 2000 between the Company and General Foam Plastics Corp. 27 Financial Data Schedule. 99 Audit Committee Charter 16 (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. Dated: August 14, 2000 EMPIRE OF CAROLINA, INC. /s/ Thomas MacDougall ----------------------------- Thomas MacDougall Chief Financial Officer