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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995
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Commission File Number 0-10937
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SUN COAST INDUSTRIES, INC.
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(Exact name of Registrant)
Delaware #59-1952968
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(State of Incorporation) (IRS Employer Identification No.)
2700 South Westmoreland Ave., Dallas, TX 75233
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(Address of principal executive offices)
(214) 373-7864
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(Registrant's telephone number)
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
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Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the November 6, 1995, the latest practable date.
Class Outstanding at November 6, 1995
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Common stock $0.01 par value 4,011,629
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SUN COAST INDUSTRIES, INC.
INDEX
Part I. Financial Information
Item I - Financial Statements
Consolidated Balance Sheets -- September 30, 1995
and June 30, 1995 3
Consolidated Statements of Income -- Three Months
ended September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows -- Three
Months ended September 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
Item II - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Items 1 through 6 13
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PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
SUN COAST INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30,
1995 June 30
(unaudited) 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 205 $ 1,173
Accounts receivable, net of allowance for
doubtful accounts of $185 and $312 10,595 9,602
Inventories 13,447 13,248
Other current assets 269 394
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Total current assets 24,516 24,417
Property, plant and equipment, net of accumulated
depreciation of $20,540 and $19,277 29,844 29,739
Intangible assets 1,077 1,026
Other assets 1,868 2,014
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Total assets $ 57,305 $ 57,196
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
September 30,
1995 June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) 1995
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Current liabilities:
Accounts payable $ 5,837 $ 4,456
Accrued expenses 2,200 2,179
Current portion
of long-term debt 2,748 2,958
Deferred income taxes 811 879
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Total current liabilities 11,596 10,472
Other liabilities 42 57
Long-term debt 26,398 27,464
Deferred income taxes 2,386 2,430
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Total liabilities 40,422 40,423
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Stockholders' equity:
Common stock, $.01 par value; 40,000,000
shares authorized; issued and outstanding,
4,009,629 and 4,005,629 40 40
Additional paid-in capital 11,322 11,300
Retained earnings 5,521 5,433
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Total stockholders' equity 16,883 16,773
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Total liabilities and stockholders' equity $ 57,305 $ 57,196
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See accompanying notes to consolidated financial statements.
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Sun COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended
September 30,
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1995 1994
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Sales $ 19,373 $ 22,289
Costs and expenses:
Cost of sales 15,693 16,911
Selling, general and administrative expense 3,108 3,283
Interest, net 436 385
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19,237 20,579
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Income before provision for income taxes 136 1,710
Provision for income taxes (48) (651)
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Net income $ 88 $ 1,059
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Net income per common share $ 0.02 $ 0.26
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
Three Months Ended
September 30,
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1995 1994
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Cash flows from operating activities:
Net income $ 88 $ 1,059
Adjustments to reconcile net income to
net cash provided by (used in) operations:
Depreciation and amortization 1,425 1,285
Deferred taxes (112) 17
Changes in assets and liabilities:
Accounts receivable (993) (2,517)
Inventories (199) (1,227)
Other current assets 125 151
Intangible and other assets (63) 453
Accounts payable and accrued expenses 1,383 (1,373)
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Net cash (used in) provided by operations 1,654 (2,152)
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Cash flows from investing activities:
Capital expenditures (1,368) (2,138)
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Net cash used in investing activities (1,368) (2,138)
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Cash flows from financing activities:
Proceeds from long-term debt - 3,800
Repayments of long-term debt (1,276) (1,173)
Issuance of Common Stock 22 205
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Net cash provided by (used in) financing activities (1,254) 2,832
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Change in cash and cash equivalents (968) (1,458)
Cash and cash equivalents at beginning of period 1,173 1,824
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Cash and cash equivalents at end of period $ 205 $ 366
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's (defined below) interim financial statements are unaudited
and should be read in conjunction with the consolidated financial
statements and notes thereto in its Form 10-K and Annual Report to
Stockholders for the year ended June 30, 1995.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair statement of the results of
operations for the interim periods presented.
Description of Business
Sun Coast Industries, Inc. (the "Company") manufactures and sells melamine
and urea resins and compounds and, from these and other materials, molds
consumer products and commercial plastic products, including dinnerware,
drinkware and closures. The Company has manufacturing facilities in
Texas, Florida, Tennessee and Mexico and offers its products through five
divisions. The Chemical Division manufactures melamine and urea resins
and compounds, which it supplies to other manufacturers and uses in
producing its own Consumer Products and Foodservice products. The
Consumer Products and Foodservice Divisions manufacture compression molded
melamine dinnerware and injection molded plastic drinkware, which the
Company sells to retail and commercial markets. The Closures Division
manufactures linerless, foil or foam lined and tamper-evident plastic
closures and lids. These closures are used to bottle or package food,
beverage, chemical and pharmaceutical products. The Custom Laminates
Division is a start-up division employing the Company's proprietary
process that permits lamination of images in a range of design, color and
detail for use in furniture and countertops. No significant sales have
been generated for this latest division to date.
Industry Segment
The Company operates in a single industry segment, supplying consumer
products and commercial related plastic products on a direct and indirect
basis, utilizing similar production processes and methods.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in previously issued financial statements
have been reclassified to conform with the current period financial
statement presentation.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined utilizing the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the related
assets. Lives assigned to asset categories are 5 to 15 years for
machinery and equipment, 30 to 35 years for buildings and 5 years for
molds. Machinery and equipment under capital leases are stated at the
present value of minimum lease payments. Renewals and improvements that
significantly add to the productive capacity or extend the useful life of
an asset are capitalized. Repairs and maintenance are charged to expense
as incurred.
Intangible Assets
Intangible assets are stated at cost and consist primarily of patents and
goodwill. Intangible assets are amortized on the straight-line method over
their estimated useful lives. The carrying values and amortization periods
of intangibles are periodically evaluated by the Company to determine
whether current events and circumstances warrant adjustment.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Advertising Costs
The Company expenses the costs of advertising as incurred, except for
direct-response advertising and catalog costs which are capitalized and
amortized over their expected periods of future benefit (generally six
months). Direct response advertising and catalog costs consist primarily
of printing and contract services for catalogs to market the Company's
products.
Income Taxes
Deferred income taxes are provided for temporary differences between
financial and tax reporting. Income taxes are provided for taxes
currently payable based on taxable income.
Environmental Costs
A liability for environmental assessments and/or cleanup is accrued when
it is probable a loss has been incurred and is estimable. No significant
liabilities were in existence at September 30, 1995 and June 30, 1995.
Net Income Per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during each period
after giving effect to stock options and warrants considered to be
dilutive common stock equivalents. The weighted average number of common
shares outstanding was 4,078,483 and 4,066,105 for the three months ended
September 30, 1995 and 1994, respectively. Primary and fully diluted net
income per common share amounts are the same.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Revenue Recognition
Sales are recognized when the product is shipped.
Research and Development
Research and development costs associated with new product development and
testing are expensed as incurred.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents.
Foreign Currency Translation and Transactions
The Company's foreign subsidiary uses the local currency as the functional
currency. Translation gains or losses are included as a component of
stockholders' equity. Gains or losses from foreign currency transactions
are included in net income. There were no material gains and losses from
foreign currency translation or transactions for the periods ended
September 30, 1995 and June 30, 1995.
NOTE 2 - INVENTORIES
September 30,
1995 June 30,
(unaudited) 1995
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(in thousands)
Raw Materials $5,559 $5,224
Work-in-process 562 806
Finished good 8,002 7,792
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14,123 13,822
Obsolescence reserve (676) (574)
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$13,447 $13,248
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Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995, Compared to the
Three Months Ended September 30, 1994
Sales for the three months ended September 30, 1995, decreased
$2,916,000 or 13.1%, when compared to the same period in 1994.
Closure sales increased 7.0%, resulting from the addition of new
products and customers. Consumer Products and Foodservice
Divisions' sales decreased 34.0%. as a result of the downturn in
the retail economy and customer resistance to price pass throughs.
Chemical Division sales decreased 8.3% due to a weak housing market
and customer efforts to better manage their inventory to lower
levels.
Cost of sales as a percentage of net sales increased to 81.0% from
75.9%. The decline in gross margin was the direct result of raw
material price increases in the current quarter over the comparable
prior year quarter as well as volume declines in certain product
lines. Substantially all of the Company's major raw materials
incurred unprecedented and repeated price increases over the past
nine months ranging from 10% to 110%. The most dramatic increases
occurred in the prices of melamine and formaldehyde. Increased
foreign demand for melamine due to the weakening of the dollar
affected the domestic price of melamine and a world- wide shortage
of methanol, a key component of formaldehyde, caused formaldehyde
price increases. Pulp also experienced significant increases in
price due to paper industry shortages. While the Company is
currently experiencing some declines in raw material costs, other
costs continue to increase and the overall impact to future
earnings is not predictable.
Because of the significant increases in raw material costs, the
Company raised its prices to its customers during the third and
fourth quarters of fiscal 1995 and as a result, the volume of
orders declined in relation to expectations. Decreases in volume
were also experienced in the Chemical Division due to a slow- down
in housing starts which affected the Company's electrical
components customers. The most significant volume declines,
however, were in the Consumer Products Division which was impacted
by a very weak retail economy, in addition to the price increases.
Selling, general and administrative expense ("SG&A") decreased
$175,000 but increased as a percentage of sales to 16.0% for the
three months ended September 30, 1995 from 14.7% in 1994. This
increase was expected and relates to increased selling and
marketing and research and development costs.
Interest expense has increased 13.2% to $436,000 for the three
months ended September 30, 1995 from $385,000 for the three months
ended September 30, 1994 due to increased borrowings and higher
interest rates on outstanding loan amounts.
Net income decreased $971,000 (91.7%) to $88,000 ($0.02 per share)
for the three months ended September 30, 1995 from $1,059,000
($0.26 per share) recorded in the comparable prior fiscal period
primarily because of the impact on gross margin of raw material
price increases and depressed sales volumes.
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Liquidity and Capital Resources
Management reviews the Company's working capital, accounts receivable and
relationship of debt to equity on a continuing basis. The Company's growth
has been financed through long-term debt financing and cash generated from
operations. During the first quarter of fiscal 1995, the Company reduced
net borrowings by an additional $1.3 million. Cash flow from operations
generated $1.7 million. The Company invested $1.0 million in accounts
receivable during the first quarter of fiscal 1995, primarily because of
increased sales in the later months of the first quarter. In addition,
current payables and accrued expenses increased approximately $1.4 million
as the Company is managing its payables well.
Capital expenditures for the first quarter of fiscal 1996 were $1.4
million. Anticipated future capital additions should approximate $3 million
during fiscal 1996 and management anticipates current debt capacity and
cash flow from operations should be adequate to fund this level of
expenditure.
In September 1995, the Company and its lender agreed to amend the existing
credit facility to provide a total of $31.3 million in borrowings secured
by substantially all the assets of the Company. The facility provides for
borrowings under three separate note arrangements - (i) a $3.8 million term
loan payable in quarterly installments through April 1, 2001, plus an
additional $3.5 million, three year amortizing secured term loan (ii) a
$9.0 million capital expenditure term loan payable in quarterly
installments through April 1, 2000, and (iii) a $15.0 million revolving
loan, due January 31, 1997. As of September 30, 1995, outstanding
borrowings under the credit facility included $7.1 million under the term
loan, $8.6 million under the capital expenditure term loan and $9.9 million
under the revolving credit line. At September 30, 1995, incremental
borrowing availability was approximately $2.6 million under the revolving
credit line. The credit facility provides for the issuance of up to $2.0
million of letters of credit, subject to the borrowing availability under
the revolving credit line. The loan agreement contains various covenants,
including maintaining certain financial ratios and tests, limitation on the
issuance of debt and the amount of capital expenditures, capital leases,
investments and dividends. The primary financial covenants include quarter
end calculations of ratios of cash flow to the current portion of long-term
debt, total debt to tangible net worth, current assets to current
liabilities and the maintenance of minimum tangible net worth, all as
defined. In connection with the credit facility amendment, the Company has
retained an investment banking firm to review various strategic
alternatives available to it, including access to capital markets and
alternative sources of financing.
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SUN COAST INDUSTRIES, INC.
SEPTEMBER 30, 1995
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Items 2 and 3 - Modification of Rights of Registrants' Securities and
Details on Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Subsequent Event
None.
Item 6 - Exhibits and Reports in Form 8K
(a) Exhibit 27 - Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
ended September 30, 1995.
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SIGNATURES
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.
Sun Coast Industries, Inc.
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Registrant
11/6/95 By:
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Date R. Carter Pate, Chief Executive
Officer and President
11/6/95 By:
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Date Cynthia R. Morris, CFO,
Secretary and Treasurer
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INDEX TO EXHIBITS
Exhibit
No. Description
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27 Financial Data Schedule