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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 December 31, 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 February 9, 1996, the latest practable date.
Class Outstanding at February 9, 1996
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Common stock $0.01 par value 4,004,229
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SUN COAST INDUSTRIES, INC.
INDEX
Part I. Financial Information
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Item I - Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 1995
and June 30, 1995 3
Condensed Consolidated Statements of Operations - Six Months
ended December 31, 1995 and 1994
Condensed Consolidated Statements of Operations -- Three Months
ended December 31, 1995 and 1994 5
Condensed Consolidated Statements of Cash Flows -- Six
Months ended December 31, 1995 and 1994 7
Notes to Condensed Consolidated Financial Statements 8
Item II - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
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Items 1 through 6 15
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PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
1995 June 30,
(unaudited) 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 899 $ 1,173
Accounts receivable, net of allowance for
doubtful accounts of $146 and $312 8,439 9,602
Inventories 11,388 13,248
Other current assets 329 394
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Total current assets 21,055 24,417
Property, plant and equipment, net of accumulated
depreciation of $21,798 and $19,277 29,593 29,739
Intangible assets 1,019 1,026
Other assets 1,835 2,014
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Total assets $ 53,502 $ 57,196
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
December 31,
1995 June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) 1995
----------- --------
Current liabilities:
Accounts payable $ 4,246 $ 4,456
Accrued expenses 1,909 2,179
Current portion
of long-term debt 2,865 2,958
Deferred income taxes 812 879
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Total current liabilities 9,832 10,472
Other liabilities 13 57
Long-term debt 25,565 27,464
Deferred income taxes 2,386 2,430
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Total liabilities 37,796 40,423
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Stockholders' equity:
Common stock, $.01 par value; 40,000,000
shares authorized; issued and outstanding,
3,998,229 and 4,005,629 40 40
Additional paid-in capital 11,189 11,300
Currency translation adjustment (703) -
Retained earnings 5,180 5,433
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Total stockholders' equity 15,706 16,773
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Total liabilities and stockholders' equity $ 53,502 $ 57,196
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share data)
Six Months Ended
December 31,
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1995 1994
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Sales $37,951 $43,579
Costs and expenses:
Cost of sales 31,542 33,513
Selling, general and administrative expense 5,872 6,285
Interest, net 943 799
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38,357 40,597
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Income before income taxes (406) 2,982
Provision for income taxes 155 (1,068)
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Net (loss) income $ (251) $ 1,914
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Net (loss) income per common share $ (0.06) $ 0.47
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended
December 31,
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1995 1994
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Sales $18,578 $21,290
Costs and expenses:
Cost of sales 15,849 16,602
Selling, general and administrative expense 2,764 3,002
Interest, net 507 414
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19,120 20,018
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Income before provision for income taxes (542) 1,272
Provision for income taxes 203 (417)
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Net (loss) income $ (339) $ 855
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Net (loss) income per common share ($0.08) $0.21
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
Six Months Ended
December 31,
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1995 1994
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Cash flows from operating activities:
Net (loss) income $ (251) $ 1,914
Adjustments to reconcile net income to
net cash provided by (used in) operations:
Depreciation and amortization 2,840 2,454
Deferred taxes (103) (89)
Changes in assets and liabilities:
Accounts receivable 981 (635)
Inventories 1,744 (2,236)
Other current assets 63 280
Intangible and other assets (117) 525
Accounts payable and accrued expenses (541) (3,325)
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Net cash provided by (used in) operations 4,616 (1,112)
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Cash flows from investing activities:
Capital expenditures (2,641) (4,416)
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Net cash used in investing activities (2,641) (4,416)
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Cash flows from financing activities:
Proceeds from long-term debt 458 6,851
Repayments of long-term debt (2,450) (2,192)
Issuance of Common Stock (111) 245
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Net cash (used in) provided by financing activities (2,103) 4,904
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Effect of exchange rate changes on cash (146) -
Change in cash and cash equivalents (274) (624)
Cash and cash equivalents at beginning of period 1,173 1,824
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Cash and cash equivalents at end of period $ 899 $ 1,200
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See accompanying notes to consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 1995 and June 30, 1995.
Net Income (Loss) 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. There were 4,079,355 and 4,117,347
weighted average shares outstanding for the six months ended December 31,
1995 and 1994, respectively. The weighted average number of common shares
outstanding was 4,082,139 and 4,090,310 for the three months ended
December 31, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
NOTE 2 - INVENTORIES
December 31,
1995 June 30,
(unaudited) 1995
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(in thousands)
Raw Materials $ 4,253 $ 5,224
Work-in-process 302 806
Finished good 7,573 7,792
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12,128 13,822
Obsolescence reserve (740) (574)
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$11,388 $13,248
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Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended December 31, 1995, Compared to the Three Months Ended
December 31, 1994
Sales for the three months ended December 31, 1995, decreased $2,712,000
or 12.7%, when compared to the same period in 1994. Closure Division's
sales decreased 3.1% due to decreased demand. Consumer Products and
Foodservice Divisions' sales decreased 24.4%. as a result of the downturn
in the retail economy and because of significant children's licensed
product sales in the 1994 period that did not recur in the 1995 period.
Chemical Division's sales decreased 16.5% 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 85.3% from 78.0%.
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 most 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 has continued to decline
compared to levels a year ago.
Selling, general and administrative expense ("SG&A") decreased $238,000
but increased to 14.9% of sales for the three months ended December 31,
1995 as compared to 14.1% of sales for the three months ended December 31,
1994.
Interest expense has increased 22.5% to $507,000 for the three months
ended December 31, 1995 from $414,000 for the three months ended December
31, 1994 due to increased borrowings and higher interest rates on
outstanding loan amounts.
Net income decreased $1,194,000 from 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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Six Months Ended December 31, 1995, Compared to the Six Months Ended
December 31, 1994
Sales decreased 12.9% to $37.9 million for the six months ended December
31, 1995, from $43.6 million for the six months ended December 31, 1994.
Sales in the Chemical Division decreased by 12.4% for the six months ended
December 31, 1995 from the same period in 1994, primarily as a result of
decreased industry demand. Sales in the Consumer Products and Foodservice
Divisions decreased by 36.2% for the six months ended December 31, 1995
from the same period in 1994, resulting from a sluggish retail economy and
reduced demand. Sales in the Closures Division increased 1.8% for the six
months ended December 31, 1995 from the same period in 1994.
Cost of sales as a percentage of sales increased to 83.1% for the six
months ended December 31, 1995 from 76.9% in the same period in 1994. The
decrease in gross margin was primarily the result of raw material price
increases and decreased production volumes. While raw materials prices
have increased significantly during the past year and may increase
further, the Company cannot predict future trends with any certainty.
Selling, general and administrative expense ("SG&A") decreased by 6.6% for
the six months ended December 31, 1995 from the same period in 1994. SG&A
increased as a percentage of sales to 15.5% for the six months ended
December 31, 1995 from 14.4% for the six months ended December 31, 1994,
due to certain fixed administrative costs.
Interest expense increased 18.0% for the six months ended December 31,
1995 from the same period in 1994 due to increased borrowing and higher
interest rates on outstanding loan amounts. The average borrowing during
the six months ended December 31, 1995 was $28.9 million compared to $24.5
million during the same period in 1994.
Net income decreased $2,165,000 for the six months ended December 31, 1995
from the six month period ended December 31, 1994 as a result of lower
sales volumes and the other factors described above.
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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 six months ended December 31, 1995,
the Company reduced net borrowings by $2.0 million. Cash flow from
operations generated $4.9 million.
Capital expenditures for the six months ended December 31, 1995 were $2.4
million. Anticipated future capital additions should approximate $1
million for the remainder of fiscal 1996 and management anticipates
current debt capacity and cash flow from operations should be adequate to
fund this level of expenditure.
In December 1995, the Company refinanced its existing debt with a new
lender and increased its credit facility to provide a total of $35.7
million in borrowings secured by substantially all the assets of the
Company. The facility provides for borrowings under three separate
arrangements - (i) two separate one-time term advances in an aggregate
principal amount of $6.7 million payable in quarterly installments
through April 1, 2001, (ii) multiple term advances for capital
expenditures in an aggregate principle amount of $14 million payable in
quarterly installments over 2 to 7 years, and (iii) a $15.0 million
revolving loan, due December 31, 1998. As of December 31, 1995,
outstanding borrowings under the credit facility included $6.7 million
under the two term loans, $8.1 million under the capital expenditure term
loan and $10.2 million under the revolving credit line. At December 31,
1995, based on the Company's borrowing formula incremental borrowing
availability was approximately $4.1 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 leverage and fixed charge coverage.
On the basis of its current forecast of financial position and results of
operations through December 31, 1996, the Company believes that it will
maintain compliance with its restrictive covenants through that date;
however, risks inherent in the Company's business -- including the high
level of competition in its markets, Mexican currency fluctuations, its
reliance on certain key customers, management disruption including any
resulting from the resignation of Carter Pate as CEO and the recent trend
of increasing raw materials prices -- may negatively impact the Company's
performance and result in non-compliance with the covenants. In the event
of non-compliance, management intends to seek the necessary waivers or
amendments such that the loan agreement will continue to be available to
fund its working capital requirements. However, no assurances can be given
that such waivers or amendments will be granted.
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SUN COAST INDUSTRIES, INC.
DECEMBER 31, 1995
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
On June 6, 1995, the Board of Directors of the Company declared a dividend
of one common stock purchase right (a "Right") for each outstanding share
of common stock, par value $.01 per share (the "Common Stock"), of the
Company. The dividend was paid on July 6, 1995, to stockholders of record
of the Common Stock on that date. The description and terms of the Rights
are set forth in a Rights Agreement (the "Rights Agreement") between the
Company and American Stock Transfer & Trust Company, as Rights Agent (the
"Rights Agent"), a copy of which has been filed with the Securities and
Exchange Commission as an Exhibit to a Current Report on Form 8-K; Date of
Report (Date of earliest event reported: June 6, 1995).
On December 5, 1995, the Board of Directors of the Company approved
Amendment No. 1 to the Rights Agreement between the Company and the Rights
Agent (the "Amendment"). The Amendment amends the Rights Agreement in two
ways. First, James M. Hoak has been excluded from the definition of
"Acquiring Person" as set forth in Section 1(a) of the Rights Agreement
unless and until Mr. Hoak, together with any of his affiliates or
associates, acquires twenty percent (20%) or more of the outstanding
Common Stock of the Company. Second, the Amendment otherwise lowers the
threshold of beneficial ownership of an "Acquiring Person" for triggering
the flip-in provisions of the Rights Agreement from twenty percent (20%)
to fifteen percent (15%). Under the Rights Agreement before the
Amendment, the flip-in provisions of the Rights Agreement were not
triggered until an Acquiring Person owned twenty percent (20%) or more of
the outstanding Common Stock of the Company. A copy of the Amendment has
been filed with the Securities and Exchange Commission as an Exhibit to a
Current Report on Form 8-K; Date of Report (Date of earliest event
reported: December 5, 1995).
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
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Item 5 - Other Information
On February 1, 1996 the President and Chief Executive Officer, R. Carter
Pate, resigned. In connection with his resignation, Mr. Pate received a
payment of $350,000. James H. Miller has been appointed interim President
and Chief Executive Officer.
Item 6 - Exhibits and Reports in Form 8K
(a) Exhibits:
10.1 Loan Agreement Among Comerica Bank - Texas, Sun Coast
Holdings, Inc., the Company, Sun Coast Closures, Inc., Plastics
Manufacturing Company and Sun Coast Acquisitions, Inc. dated
December 20, 1995 (the "Loan Agreement").
10.2 Letter dated February 12, 1996, amending Loan Agreement.
27 Financial Data Schedule
(b) A Form 8-K was filed on December 20, 1995 reporting Amendment No. 1
to the Company's Stockholder Rights Agreement. See Item 2 above.
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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
2/13/96 By: /s/ JAMES H. MILLER
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Date James H. Miller, Chief Executive Officer and President
2/13/96 By: /s/ CYNTHIA R. MORRIS
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Date Cynthia R. Morris, CFO, Secretary and Treasurer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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10.1 Loan Agreement Among Comerica Bank
10.2 Letter dated February 12, 1996 amending Loan Agreement
27 Financial Data Schedule