ITEM 1. BUSINESS
GENERAL
Sun Coast Industries, Inc. ("Sun Coast" or 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. Sun Coast's four divisions (see description below) have generated synergies through similar manufacturing processes, combined purchasing of raw materials and developed proprietary technologies, enabling the Company to realize manufacturing efficiencies and a significant presence in markets for many of its products. The Chemical Division manufactures melamine and urea resins and compounds, which it supplies to other manufacturers and uses in producing Suncoast's consumer products and foodservice products. The Consumer Products and Foodservice Divisions manufacture compression molded melamine dinnerware and injection molded plastic drinkware and other household products, which Sun Coast sells to American and Mexican retail and commercial markets. The Closures Division manufactures linerless, foil or foam lined and tamper-evident plastic closures and lids. These closures are used in the U.S. for bottling and packaging of food, beverage, chemical and pharmaceutical products.
CHEMICAL DIVISION
Sun Coast manufactures melamine and urea resins and molding compounds at its facilities in Dallas, Texas, and Murfreesboro, Tennessee. Sun Coast believes that its proprietary formulations and technical expertise enable it to provide consistently high quality chemical products. The Company sells these products directly to its customers, which use them as raw materials in their own manufacturing processes.
Melamine resists scratching, breaking and chipping; it also resists grease and weak acid and it is odorless and easy to clean. Urea is similar in nature but less expensive to produce and less durable than melamine. Sun Coast uses its own melamine compounds to manufacture dinnerware and it supplies melamine compounds to other manufacturers of dinnerware and consumer products. Sun Coast is also a leading supplier of melamine resin to manufacturers of decorative laminate, which is used for countertops and tabletops and other furniture and fixture surfaces. Sun Coast is a leading supplier of urea and melamine molding compounds to U.S. manufacturers of electrical outlet and switch plates.
Melamine resin is made principally from melamine crystals, formaldehyde and water which are combined in a heated reactor. Urea resin is made using a similar process with the same raw materials, with the substitution of urea crystals for melamine crystals. Molding compounds are made from melamine or urea resin and purified cellulose fillers, pigments, plasticizers and curing agents. These materials are combined in a wet mixture, dried and ground to a fine powder.
There are three other major U.S. suppliers of melamine and urea molding compounds similar to those supplied by the Company and many major suppliers of melamine and urea resins. Some of these suppliers have greater resources than the Company and are parts of large, diversified companies. In this highly competitive market, the Company competes on the basis of product quality, customer service and price.
CONSUMER PRODUCTS DIVISION
Sun Coast manufactures and, through Company and independent sales representatives, markets melamine dinnerware and injection molded plastic drinkware and housewares to retail distribution channels. The Company has also recently begun to market imported plastic dinnerware and drinkware.
Melamine dinnerware is considered the top-of-the-line plastic dinnerware. It is harder than other plastic dinnerware and generally more durable than most other dinnerware, including that made of china, pottery, glass and other plastics. Sun Coast offers melamine dinnerware in designer styles and colors that enhance product demand. The Company compression molds melamine dinnerware from its own molding compounds primarily at its Dallas, Texas facility.
During fiscal 1995, the Company acquired all of the issued and outstanding capital stock of Nova Plast, S.A. de C. V. (Nova Plast), a Mexican company. At its plant in Mexico City, Nova Plast manufactures plastic consumer products for sale primarily in Mexico. During the past year a small portion of the Company's domestic dinnerware production has been manufactured at Nova Plast.
Sun Coast also manufactures and distributes injection molded drinkware and other household products at its Dallas, Texas and Mexico City, Mexico facilities, using high speed injection molds and machinery. Injection molded resins, such as styrene, SAN, polypropylene and polyethylene, are molded under heat and pressure and cooled to form the desired shape. Sun Coast's primary market is the United States, with additional sales in Mexico and Canada.
The dinnerware and housewares market includes disposables, china and pottery, glass and permanent plastic. Across all these categories, there are many manufacturers in the U.S. and abroad that have greater resources than the Company and are parts of large, diversified companies. However, the Company is aware of only three principal U.S. competitors that manufacture melamine dinnerware and believes that it has one of the largest market shares. In this highly competitive market, the Company competes on the basis of product quality, price and customer service. Lower labor costs related to manufacture in Mexico are planned to improve the Company's competitive position.
FOODSERVICE DIVISION
Sun Coast manufactures and sells melamine dinnerware and injection molded plastic drinkware to the restaurant and hotel market. The Foodservice Division sells these products directly and through distributors and independent representatives. The Company also sells these products, and insulated meal distribution systems, directly to schools, hospitals, nursing homes and correctional facilities.
Melamine's durability and other physical qualities make it attractive and cost effective for use in commercial and institutional settings, where heavy use and breakage are common. Melamine weighs less than china, is break resistant and of high quality. Moreover, the ability to incorporate decorative and customized colors, designs and logos in melamine dinnerware also contribute to demand in these markets.
Sun Coast markets its melamine dinnerware and drinkware products to restaurants and institutions as more durable substitutes for china and glass products. Melamine dinnerware is an environmentally friendly alternative to disposables. With respect to Foodservice products, the Company faces many of the same competitive circumstances noted above in connection with consumer products.
CLOSURES DIVISION
Sun Coast manufactures linerless, foil or foam lined and tamper-evident plastic closures and lids. The Company markets these products directly, and through distributors and sales representatives, to manufacturers of packaged food, beverages, pharmaceuticals and chemicals. These plastic closures seal food, beverage, pharmaceutical and chemical containers also made of plastic.
Plastic closures are injection molded from polypropylene or polyethylene. Key factors such as cycle time, the optimal number of mold cavities and the quality of the mold are important in attaining production efficiency and cost control. Sun Coast prototypes custom closures for the purpose of testing and qualifying the closures for use with customers' products.
Plastic closures offer an advantage over metal ones, because metal closures may chemically react with some foods. Plastic closures also allow the use of a foil lined induction inner-seal for tamper evidence -- a feature metal closures lack. Sun Coast's lined closures are used with a variety of food and beverage products, including juices, sauces, dressings and peanut butter. The design of the Company's Sun-Tab foil seal, widely used in peanut butter packaging, incorporates a series of three small tabs that extend over the edge of the container. The consumer grasps any one of the tabs to remove the entire liner. Sun Coast owns several patents encompassing closure and tamper-evident band designs as well as a patent on a plastic closure for hermetic, pressure or vacuum sealing of glass or plastic bottles and jars.
The Company's Sun-Twist closure is used as a tamper-evident, easy-opening seal for "hot-fill" beverages, including fruit juices, teas and isotonic sport drinks. The "hot-fill" market is one of the fastest growing for the Closures Division. This market has developed in connection with beverage packers' replacement of glass bottles with polyethylene terephthalate ("PET") bottles, which are highly attractive to consumers because they are lightweight and have the clarity of glass.
Sun Coast competes with several major corporations and numerous smaller companies in the highly competitive closures market. The Company is a medium size manufacturer in this industry and competes primarily on price, quality, delivery and service.
HISTORICAL BACKLOG
The Company's backlog is comprised of written purchase orders and contracts, substantially all of which are cancelable on short -- generally 30 days' -- notice. There is no assurance that some portion of the backlog may not be canceled or that the level of backlog at any particular time is an appropriate indicator of the future operating performance of the Company.
Backlog for products of the Chemical Division increased 87% to $3,092,000 at June 30, 1996 from $1,655,000 at June 30, 1995. This increase primarily reflects increased volume of orders from existing customers as well as orders from new customers. Management attributes this increase in market share to the consistency of the Chemical Division's product quality and its level of customer service.
Backlog for products of the Consumer Products and Foodservice Divisions decreased 11% to $1,024,000 at June 30, 1996 from $1,150,000 at June 30, 1995. This decrease relates primarily to a decrease of $132,000 in orders in Mexico related to the weak retail economy there.
Backlog for products of the Closures Division decreased 14% to $29,319,000 at June 30, 1996 from $34,163,000 at June 30, 1995. This decrease reflects shorter term purchase commitments as customers attempt to manage inventory levels.
In the Chemical, Consumer Products and Foodservice Divisions, orders are generally shipped within 30 to 60 days of receipt. In the Closures Division, orders are based primarily on customers' annual estimated needs. Other orders are for specific quantities and some are multi-year. Customer commitments require delivery of a quantity of closures per month for a specific number of months, with seasonal variations. These commitments are generally subject to cancellation at the discretion of the customer on 30 days' notice to the Company; however, longer term contracts do include cancellation penalties. Customer written purchase orders for specific quantities are generally filled as received, either out of inventory or current production.
MAJOR CUSTOMERS
The Company frequently bids for large contracts for its chemical products and any such bid, if successful, may result in one customer accounting for more than 10% of the Company's net sales in a given fiscal year. In fiscal 1996, sales of chemical products to Wilsonart International, Inc. and Eagle Plastics, Inc. accounted for approximately $13.9 million or 17.2% and $8.1 million or 10.0%, of the Company's net sales, respectively.
The Company has sold chemical products to Wilsonart International, Inc. for more than 20 years on the basis, the Company believes, of quality, service, delivery and price. Wilsonart International, Inc. and Eagle Plastics, Inc. buy through purchase orders issued periodically, which can be discontinued at any time. Management believes that the Company has a good relationship with both Wilsonart International, Inc. and Eagle Plastics, Inc.; however, the loss of either of these customers or a significant portion of its business, could adversely affect the business and financial condition of the Company. See Note 11 of Notes to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company has research and development laboratories at its principal manufacturing facilities in Texas and Florida, where it continuously tests its products, engages in product application research and endeavors to develop new products to complement those presently offered. The Company employs five people in research and development, including one Ph.D. and three chemists. Research and development expenditures for fiscal 1994, 1995, and 1996 were $731,000, $1,287,000, and $1,371,000 respectively.
RAW MATERIALS
The principal raw materials used by the Company in manufacturing plastic products and compounds are melamine crystals, urea crystals, styrene acrylonitrile, polypropylene and polyethylene resins, formaldehyde, cellulose fillers, pigments, plasticizers, curing agents and lining material. These materials historically have been available in sufficient quantities for the Company's needs.
Although the cost of raw materials used in the Company's operations was relatively stable during the past five years, their prices increased significantly during fiscal 1995 and the first half of fiscal 1996. The most dramatic change was in the prices of formaldehyde, melamine and pulp. These repeated cost increases have had a significant impact on gross margin and earnings during fiscal 1995 and fiscal 1996. Although some costs began to decline during the second half of fiscal 1996, it is too early to determine their impact on future earnings. See additional discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
EMPLOYEES
At June 30, 1996 Sun Coast had 705 employees, of whom 171 were office or clerical and 534 hourly manufacturing. Local No. 745 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America is the exclusive collective bargaining agent for the approximately 260 hourly manufacturing employees at the Company's Dallas, Texas facility pursuant to a three-year union contract which expires on March 31, 1998. None of the Company's 146 hourly employees at its Sarasota, Florida facility, its 123 hourly employees at its Mexico City facility or the 5 hourly employees at its Murfreesboro, Tennessee facility is represented by a labor union. Management believes that it has a good relationship with its employees.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns a 72,000 square foot office, manufacturing and warehouse building in Sarasota, Florida and in Dallas, Texas, a 348,000 square foot office and manufacturing building and a 75,000 square foot warehouse. At the Florida facility, the Company manufactures closures. At its Texas facility, the Company manufactures melamine and plastic injection molded consumer products and foodservice products and chemical products. Both Texas facilities secure the Company's existing indebtedness. The Company also leases a 40,000 square foot warehouse in Sarasota. In Mexico City, Mexico, the Company leases a 10,000 square foot office, manufacturing and warehouse facility under a lease expiring in April 1999 and has entered into a one year lease for 7,000 square feet of additional warehouse space effective July 1, 1995. In Murfreesboro, Tennessee, the Company leases approximately 5,000 square feet of space to manufacture chemical products. The Company believes that its properties are adequate for current uses.
On September 12, 1996 the Company sold a 60,000 square foot manufacturing building in Dallas, Texas for $525,000 in cash and a note in the principal amount of $200,000. The proceeds were used to repay bank debt.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain legal proceedings that management regards as normal to its business. The Company believes that the disposition of these matters will not have a material impact on the financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 3, 1993, the Common Stock of the Company has been listed on the New York Stock Exchange under the symbol SN. Prior to that date, the Common Stock was listed on the NASDAQ National Market System. The following table sets forth, for the periods indicated, the high and low sales prices per share of the Common Stock.
At September 23, 1996, there were approximately 2,400 record holders of the Common Stock.
The Company has never declared or paid cash dividends on the Common Stock. Management intends to retain any future earnings for the operation and expansion of the Company's business and does not anticipate paying any cash dividends in the foreseeable future. The Company's existing credit facility restricts the Company's ability to pay dividends. See Note 5 of Notes to the Consolidated Financial Statements.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the periods from July 1, 1991 until June 30, 1996 are derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The data should be read in conjunction with the Consolidated Financial Statements, the related notes and the independent auditor's report, Management's Discussion and Analysis of Financial Condition and Results of Operations and the other financial information included herein.
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(1) During the second quarter of fiscal 1994, the Company recorded a restructuring charge related to a reduction in its work force and the consolidation of certain corporate functions. Without this non-recurring restructuring charge, the Company would have reported net income per common share of $.91 for fiscal 1994. See Note 7 of Notes to the Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items from the consolidated statements of income as percentage of sales:
RESULTS OF OPERATIONS FOR FISCAL 1996 COMPARED TO FISCAL 1995
Total sales decreased 6.0% to $80.8 million during 1996 from $86.0 million in 1995. Substantially all of this decrease occurred in the first half of the year and related principally to volume declines in response to the Company's effort to pass through raw material cost increases on the Company's product lines. Sales in the Chemical Division decreased 7.1% to $31.4 million in 1996 from $33.8 million in 1995. The decrease in Chemical Division sales was due to volume decreases as customers declined to accept price increases and instead used the opportunity to reduce their own inventory levels as their markets weakened. Sales in the Consumer Products and Foodservice Divisions decreased 14.8% to $21.9 million in 1996 from $25.7 million in 1995, resulting from volume declines in a weak retail economy and due to competitive pressures from foreign imports. In addition, during the first half of fiscal 1995, the Company recorded approximately $5 million in sales from a children's dinnerware product which did not recur during fiscal 1996. Sales in the Closures Division increased 3.8% to $27.5 million in 1996 from $26.5 million in 1995, resulting from price increases and the addition of new products and customers.
Cost of sales as a percentage of sales increased to 84.2% in 1996 from 79.6% in 1995. The decline in gross margin was the result of raw material price increases and related volume declines as customers resisted price pass-throughs from the increased costs of raw materials. Reduced production in the Foodservice and Consumer Products Divisions also resulted in unabsorbed overhead costs and thus lower gross margins. Sales volumes increased in the fourth quarter of fiscal 1996; however, it is too early to predict whether continued increases will continue in fiscal 1997.
Selling, general and administrative expense ("SG&A") decreased 4.7% to $13.3 million in 1996 from $14.0 million in 1995. However, as a percentage of sales, SG&A increased to 16.6% in 1996 from 16.3% in 1995, primarily because of the lower sales base in fiscal 1996.
Interest expense increased 16.3% from 1995 to 1996 due to increased borrowings and higher interest rates toward the end of fiscal 1996. The average outstanding borrowings during 1996 were $ 29.5 million compared to an average of $25.9 million during 1995.
The Company incurred a net loss of $1.8 million ($0.45 per share) in fiscal 1996 versus net income of $1.0 million ($0.26 per share) in fiscal 1995. This decrease is primarily a result of declines in sales volume and gross margin discussed above and the other non-recurring direct and indirect charges described above.
RESULTS OF OPERATIONS FOR FISCAL 1995 COMPARED TO FISCAL 1994.
Total sales increased 17.6% to $86.0 million during 1995 from $73.1 million in 1994. Approximately 5% of this increase relates to volume increases and the remaining 12% to 13% relates to price increases on the Company's product lines throughout the year. Sales in the Chemical Division increased 17.8% to $33.8 million in 1995 from $28.7 million in 1994. This increase resulted from price increases as well as increased market share. Sales in the Consumer Products and Foodservice Divisions increased 21.2% to $25.7 million in 1995 from $21.2 million in 1994, resulting from price increases and exceptional sales of children's dinnerware. The majority of this increase occurred during the first half of the fiscal year as customer resistance to price pass-throughs and a downturn in the retail economy severely impacted sales levels during the fourth quarter. Sales in the Closures Division increased 14.2% to $26.5 million in 1995 from $23.2 million in 1994, resulting from price increases and the addition of new products and customers.
Cost of sales as a percentage of sales increased to 79.6% in 1995 from 77.1% in 1994. The decline in gross margin was the result of raw material price increases primarily in the last six months of the year and volume declines in certain product lines during the fourth quarter. Substantially all of the Company's major raw materials incurred unprecedented and repeated price increases 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.
Because of the significant increases in raw material costs, the Company raised its prices to its customers during the third and fourth quarters and as a result, the volume of anticipated orders declined. 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 fourth quarter volume declines, however, were in the Consumer Products Division which was impacted by a very weak retail economy, in addition to the price increases. The Company's fourth quarter gross margin was also negatively affected by approximately $400,000 in additional reserves for inventory obsolescence. This one-time charge was taken in light of volume declines during the quarter.
Selling, general and administrative expense ("SG&A") increased 35.9% to $14.0 million in 1995 from $10.3 million in 1994. Approximately half of this increase was expected and relates to increased selling and marketing and research and development costs which generally increase proportional to increased sales levels. However, as a percentage of sales, SG&A increased to 16.3% in 1995 from 14.0% in 1994. Approximately half of this increase relates to non-recurring charges such as legal fees, professional costs associated with a canceled equity offering, severance and relocation costs.
Interest expense has increased 52.6% from 1994 to 1995 due to increased borrowings and higher interest rates on outstanding loan amounts. The average borrowing during 1995 was $25.9 million, with higher levels towards the end of the year, compared to an average of $14.2 million during 1994.
Net income decreased 69.7% to $1.0 million ($0.26 per share) for 1995 from $3.3 million ($0.81 per share) for 1994 as a result of higher raw material costs, depressed fourth quarter sales volume and the other non-recurring charges such as the additional obsolescence reserve and legal and professional expenses described above.
LIQUIDITY AND CAPITAL RESOURCES
Management reviews the Company's working capital, accounts receivable and the 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. Although the Company's total borrowings were approximately the same at June 30, 1995 and 1996, a significant increase in debt levels occurred towards the end of fiscal 1995 causing the average borrowings during 1995 to be approximately $3.6 million higher than the average borrowings in fiscal 1996. Cash flow from operations generated $5.5 million but $2.0 million of this was required to fund working capital needs. The Company increased accounts receivable by approximately $3.1 million as of June 30, 1996 compared to June 30, 1995, principally due to several large customer orders during June 1996; however, it reduced inventory levels by approximately $3.3 million during 1996, in an attempt to better manage working capital. In addition, current payables and accrued expenses increased approximately $1.9 million due to an increase in business activity during the fourth quarter of fiscal 1996 compared to fiscal 1995.
Capital expenditures for 1996 were approximately $4.5 million. Of such amount, $0.9 million was used to purchase new machinery, equipment, molds and tooling to support incremental sales growth in the Closures Division, approximately $1.0 million was used to acquire machinery for a new process in the Chemical Division, approximately $1.2 million was used for new computer systems and other miscellaneous capital additions totaled approximately $1.4 million.
Anticipated future capital additions should approximate $2 to $7 million during 1997, primarily in the Closures Division. Management will monitor spending closely and only authorize levels that can be funded through existing debt capacity, cash flow from operations, or other additional financing.
At June 30, 1996, the Company's cash and cash equivalents were $1.9 million and negative working capital of ($11.1)million due to the classification of the majority of its debt as current. In addition, the Company had total debt outstanding of $30.3 million (including current portion), with a weighted average interest rate at June 30, 1996 of 8.4% .
In December 1995, the Company refinanced its existing indebtedness with a new lender and increased its credit facility to provide for 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 subfacilities - (1) two separate one-time term advances in an aggregate principal amount of $6.7 million payable in quarterly installments through April 1, 2001; (2) multiple term advances for capital expenditures in an aggregate principal amount of $14.0 million payable in quarterly installments over 2 to 7 years, and (3) a $15.0 million revolving loan, due December 31, 1998. As of June 30, 1996, outstanding borrowing under the credit facility included $5.8 million under the two term loans, $8.4 million under the capital expenditure term loan and $12.7 million under the revolving credit line. At June 30, 1996, based on the Company's borrowing formula incremental borrowing availability was approximately $2.0 million under the revolving credit line. The Company may fund principal repayments on portions of its term debt through advances on 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, and limitations 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, fixed charge coverage and tangible net worth.
The Company was not in compliance with two of its loan covenants at June 30, 1996: (1) The Company's Tangible Net Worth (as defined in the Credit Facility) was below the required minimum of $14,650,000 and (2) the Company's Fixed Charge Coverage Ratio (as defined in the Credit Facility) was below the required minimum of 1.3 to 1.0. On September 26, 1996, the Company obtained a waiver of these covenants as of June 30, 1996. However, the same or more restrictive covenants must be met in future periods. As a result, the debt is subject to acceleration at future dates in the absence of refinancing, additional equity or additional covenant waivers or loan modifications and , therefore, has been classified as a current liability on the consolidated balance sheet at June 30, 1996. Management is currently pursuing various strategic and financing alternatives to address the current situation. These alternatives include current discussions with other potential lenders regarding the possibility of refinancing the existing debt and evaluation of other potential debt and equity arrangements. Management believes that the Company will be able to obtain new financing with alternative sources. However, such new financing may be on terms less favorable than under the current arrangement. See also Note 5 to Notes to Consolidated Financial Statements.
INFLATION
The effect of inflation on operating costs has been minimal in prior years. However, the cost of raw materials used in the Company's operations increased significantly during 1995 and early 1996. These increased raw material costs had a material impact upon the Company's gross margin and earnings during fiscal 1995 and 1996. While some raw materials are currently experiencing declines in price, the overall future impact is not predictable at this time.
AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and No. 123 "Accounting for Stock-Based Compensation". The Company is required to adopt both of these pronouncements in fiscal 1997. Effect of these pronouncements on the financial statements is not expected to be material.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, statements contained in this "Management's Discussion and Analysis of Financial Condition and Result of Operations" regarding the Company's financing alternatives, financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business, including but not limited to, the intense competition in its markets, its recent experience of increasing raw material prices, the absence of assurance of strategic and financing alternatives, Mexican currency fluctuations and its reliance on certain key customers; all of which may be beyond the control of the Company. Any one or more of these factors could cause actual results to differ materially from those expressed in any forward-looking statement. All subsequent written and oral forward-looking statements attributable to the Company or person acting on its behalf are expressly qualified in their entirety by the cautionary statements disclosed in this paragraph and otherwise in this report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedule of the Company as of June 30, 1995 and 1996, and for each of the years in the three-year period ended June 30, 1996, are included as part of this report beginning on Page hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III.
Portions of the registrant's definitive proxy statement prepared for use in connection with the 1996 Annual Meeting of shareholders to be held December 6, 1996, dated on or about October 27, 1996, have been incorporated by reference as listed below. The proxy is expected to be filed with the Securities and Exchange Commission on or about October 28, 1996.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and executive officers is included in the Election of Directors Section of the Company's definitive proxy statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in the Executive Compensation Section of the Company's definitive proxy statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and management in included in the Stock Ownership Section of the Company's definitive proxy statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is included in the Certain Transactions Section of the Company's definitive proxy statement and is incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Schedules other than as listed above are omitted because they are not required or are not applicable or the information is immaterial in relation to the registrant's consolidated financial statements.
3. Exhibits
The information required by this Item 14(a)(3) is set forth in the index to Exhibits accompanying this Annual Report on Form 10-K.
B. REPORTS ON FORM 8-K
Not applicable.
The Board of Directors Sun Coast Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Sun Coast Industries, Inc. and subsidiaries as of June 30, 1995 and 1996 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended June 30, 1996. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sun Coast Industries, Inc. and subsidiaries as of June 30, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas August 23, 1996, except as to Note 5 which is as of September 26, 1996
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
See accompanying Notes to Consolidated Financial Statements.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See Notes 5, 6, and 10 for supplementary disclosures. See accompanying Notes to Consolidated Financial Statements.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE YEARS ENDED JUNE 30, 1996 (DOLLARS IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1994, 1995 AND 1996
NOTE 1 -- THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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's four divisions have generated synergies through similar manufacturing processes, combined purchasing of raw materials and developed proprietary technologies, enabling the Company to realize manufacturing efficiencies and a significant presence in markets for many of its products. 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 and other houseware products, which the Company sells to American, Canadian and Mexican retail and commercial markets. The Closures Division manufactures linerless, foil or foam lined and tamper-evident plastic closures and lids. These closures are used in the U.S. for bottling and packaging of food, beverage, chemical and pharmaceutical products.
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.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
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 year consolidated financial statement presentation. The preparation of consolidated 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 at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from the estimates.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined utilizing the first-in, first-out (FIFO) method. See Note 2.
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.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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 ranging from 5 to 20 years. The carrying values and amortization periods of intangibles are periodically evaluated by the Company to determine whether current events and circumstances warrant adjustment.
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.
The total advertising costs reported as an asset were $63,000 and $27,000 at June 30, 1995 and 1996, respectively. Advertising expense for fiscal years 1994, 1995, and 1996 was $921,000, $1,047,000 and $615,000, respectively.
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 (loss). The principal temporary differences are described in Note 6.
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 liability exists at June 30, 1996.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income by the weighted average number of common shares outstanding during each year after giving effect to stock options and warrants considered to be dilutive common stock equivalents. The weighted average number of common shares outstanding was 4,032,554 in 1994, 4,076,792 in 1995 and 4,005,394 in 1996. Primary and fully diluted net income (loss) per common share amounts are the same.
REVENUE RECOGNITION
Sales are recognized when the product is shipped. Sales are shown net of returns and allowances.
RESEARCH AND DEVELOPMENT
Research and development costs associated with new product development, application and testing are expensed as incurred. Research and development costs amounted to $731,000, $1,287,000 and $1,371,000 in fiscal years 1994, 1995 and 1996, respectively.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
STATEMENTS 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. Noncash capital lease financing transactions totaled $121,000 in fiscal 1995 and a noncash treasury stock transaction totaled $153,000 in fiscal 1996. See Note 10 for additional noncash transactions.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's foreign subsidiary (See Note 10) 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 (loss). There were no material gains and losses from foreign currency translation or transactions prior to 1996 and there were $668,000 in translation losses in 1996.
NOTE 2 -- INVENTORIES
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Accumulated amortization of machinery and equipment under capital leases was $200,000 and $267,000 at June 30, 1995 and 1996, respectively.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 5 -- LONG-TERM DEBT
In December 1995, the Company refinanced its existing indebtedness with a new lender and increased its credit facility to provide for 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 subfacilities - (1) two separate one-time term advances in an aggregate principal amount of $6.7 million payable in quarterly installments through April 1, 2001; (2) multiple term advances for capital expenditures in an aggregate principal amount of $14.0 million payable in quarterly installments over 2 to 7 years, limited to 80% of the orderly liquidation value of equipment, as defined; and (3) a $15.0 million revolving loan, due December 31, 1998, with availability determined by reference to a borrowing base of eligible accounts receivable and inventory of the Company. As of June 30, 1996, outstanding borrowing under the credit facility included $5.8 million under the two term loans, $8.4 million under the capital expenditure term loan and $12.7 million under the revolving credit line. At June 30, 1996, based on the Company's borrowing formula incremental borrowing availability was approximately $2.0 million under the revolving credit line. The Company may fund principal repayments on portions of its term debt through advances on 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. Interest rates on the loans approximate the prime rate (8.41% weighted average at June 30, 1996).
The loan agreement contains various covenants, including maintaining certain financial ratios and tests, and limitations 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, fixed charge coverage and tangible net worth.
The Company was not in compliance with two of its loan covenants at June 30, 1996: (1) The Company's Tangible Net Worth (as defined in the Credit Facility) was below the required minimum of $14,650,000 and (2) the Company's Fixed Charge Coverage Ratio (as defined in the Credit Facility) was below the required minimum of 1.3 to 1.0. On September 26, 1996, the Company obtained a waiver of these covenants as of June 30, 1996. However, the same or more restrictive covenants must be met in future periods. As a result, the debt is subject to acceleration at future dates in the absence of refinancing, additional equity or additional covenant waivers or loan modifications and , therefore, has been classified as a current liability on the consolidated balance sheet at June 30, 1996. Management is currently pursuing various strategic and financing alternatives to address the current situation. These alternatives include current discussions with other potential lenders regarding the possibility of refinancing the existing debt and evaluation of potential equity arrangements. Management believes that they will be able either to restructure the terms of the existing indebtedness or obtain new financing with alternative sources. However, such revisions may be on terms less favorable than under the current arrangement.
The industrial development revenue bonds were used to finance the cost of a production and office facility (completed during 1988) and certain machinery in Florida. The bonds bear interest at 78% of prime, are payable in monthly installments of $12,500 through 2011, and are secured by the underlying facility and equipment.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The estimated fair value of the Company's debt approximates the carrying value at June 30, 1995 and 1996. Interest paid (net of $226,000 and $206,000 capitalized in 1995 and 1996, respectively) amounted to $983,000 in 1994, $1,692,000 in 1995 and $1,801,000 in 1996.
Scheduled debt maturities (excluding capital lease obligations) subsequent to June 30, 1996 are as follows: $3,049,000 in 1997, $5,598,000 in 1998, $15,444 in 1999, $2,763,000 in 2000, $1,475,000 in 2001 and $1,580,000 thereafter.
NOTE 6 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities follow:
No valuation allowance related to deferred tax assets was necessary for any of the periods presented as management believes it is more likely than not that such deferred tax assets will be realized.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 7 -- RESTRUCTURING CHARGE
During the second quarter of fiscal year 1994, the Company recorded a restructuring charge related to an approximate 8% reduction in the number of Texas employees and the consolidation of certain corporate functions such as management information systems, insurance coverage and benefit plans. The charge included costs to reduce personnel levels ($370,000), consolidate manufacturing operations ($80,000) and outsource and consolidate certain corporate functions ($192,000). The restructuring reserve was fully utilized as of June 30, 1994.
NOTE 8 -- STOCKHOLDERS' EQUITY
STOCK WARRANTS
The Company has outstanding warrants at June 30, 1996 to purchase 115,830 shares of common stock at $12.95 per share which were issued in connection with obtaining financing for the purchase of a subsidiary. The warrants are exercisable through 2002 and contain antidilution provisions which cause both the number of warrants and the exercise price to change as certain events occur.
STOCK OPTIONS
The 1994 Long Term Incentive Plan provides that officers and key employees may be granted stock appreciation rights, restricted stock, performance share awards, nonqualified stock options or incentive stock options for the purchase of the Company's common stock. Up to 250,000 shares of the Company's common stock may be issued on exercise of options and rights granted under this plan. The type, terms and timing of options granted will be determined at the discretion of the Board of Directors.
No future grants will be made under the Company's previous incentive stock option plans. At June 30, 1996, previously granted options for 189,705 shares remain outstanding under these plans.
The Directors Formula Stock Option Plan provides for each non-employee director and Chairman to be granted 1,000 options initially and 500 options each fiscal year for purchase of the Company's common stock at the fair market value at the date of grant.
Transactions in stock options under these plans are summarized as follows:
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
During fiscal 1994, the Company offered to settle options held by certain employees of the Company by issuing shares of stock equal in value to the appreciation of the Company's stock over the stated option price. A total of 9,140 options were exercised in 1994 resulting in the issuance of 3,233 shares.
STOCKHOLDER RIGHTS PLAN
On June 6, 1995, the Company adopted a Stockholder Rights Plan and, in connection with such plan, declared a dividend distribution of one right for each outstanding share of the Company's $0.01 par value common stock, payable on July 6, 1995 to stockholders of record on that date. Each right entitles the stockholders to buy from the Company one share of common stock at a price of $50.00 per share. The rights will not be exercisable or separable from the common stock until ten business days after a party acquires beneficial ownership of 20 percent or more of the Company's common shares or announces a tender offer for at least 20 percent of its common shares outstanding.
The rights, which are subject to adjustment, may be redeemed by the Company at a price of $0.01 per right at any time prior to expiration on July 6, 2005 or the point at which they become exercisable. In the event the Company is acquired in a merger or other business combination transaction, each right will entitle its holder to purchase, at the right's then current exercise price, that number of acquiring company's common shares having a market value of two times the exercise price of the right.
The Stockholder Rights Plan is designed to assure that the Company's stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers and other abusive takeover tactics to gain control of the Company without paying all stockholders a fair price.
NOTE 9 -- PENSION, RETIREMENT, PROFIT SHARING AND SAVINGS PLANS
The Company has separate pension plans covering bargaining unit employees and substantially all other employees. Benefits under the bargaining unit plan are set by contract with the union at a fixed amount per year of service, which also requires contributions at certain intervals, as stipulated in the union contract. Benefits under the other plan were frozen effective February 1, 1994.
Pension cost and significant assumptions follow:
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
A summary of the plans' funded status and amounts recognized in the Company's consolidated balance sheets follow:
The Company and its subsidiaries have defined contribution profit sharing and savings plans for the benefit of employees. Company contributions to the profit sharing and savings plans were $231,000, $111,000 and $141,000 for fiscal years 1994, 1995 and 1996, respectively. Effective July 1, 1994, the above described profit sharing and savings plans were merged into one Company-wide plan.
NOTE 10 -- ACQUISITION AND DIVESTITURE
Effective May 17, 1995, the Company acquired all of the issued and outstanding capital stock of Nova Plast, S. A. de C.V. (Nova Plast), a Mexican company, through a newly formed and wholly-owned Mexican subsidiary for consideration of approximately $1,935,000, consisting of cash of $500,000, direct costs of $135,000, notes payable of $1,000,000 bearing interest at 10% per annum and due in May 1997 and non-interest bearing notes payable of $300,000 due and paid in August 1995. The acquisition of Nova Plast has been accounted for as a purchase, and accordingly, results of its operations have been included in the consolidated statement of operations since the acquisition date. In addition, Nova Plast's operations in 1995 are not significant to the Company and pro-forma results are not presented. Goodwill of $537,000 from the purchase will be amortized over a 20 year period.
On June 5, 1995, the Company, in exchange for a collateralized ten year note receivable of $615,000, bearing a 10% interest rate, sold all of the issued and outstanding capital stock of Alliance Manufacturing, Inc. (a wholly-owned subsidiary) to a former employee, with no significant gain or loss arising from the sale.
NOTE 11 -- BUSINESS AND CREDIT CONCENTRATION
The Company frequently bids for large contracts for its products which may result in individual customers accounting for more than 10% of its net sales in a given fiscal year. Sales to a single customer were approximately $10,649,000, $12,275,000 and $13,882,000 for fiscal years 1994, 1995 and 1996, respectively. Sales to a second customer were approximately $8,401,000, $9,374,000 and $8,114,000 in fiscal years 1994, 1995 and 1996, respectively. No other customers represented more than 10% of the Company's net sales in 1994, 1995 or 1996. The Company had accounts receivable balances from these major customers of approximately $2,072,000 and $3,655,000 as of June 30, 1995 and 1996, respectively. Customers from many geographic locations are granted credit on an unsecured basis. Management believes that sufficient allowances for doubtful accounts have been provided as of June 30, 1995 and 1996.
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment used in the manufacturing of products. Rental expense under operating leases was $448,000, $797,000 and $1,154,000 in fiscal years 1994, 1995 and 1996, respectively. Future minimum lease payments under capital and operating leases with initial or remaining terms of one year or more at the end of fiscal year 1996 follow:
Under the Company's insurance programs, coverage is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. The Company is responsible for certain expected losses related primarily to workers' compensation. Provisions for losses expected under this program are actuarially determined based upon estimates of the aggregate liability for claims incurred. Such estimates utilize certain actuarial assumptions followed in the insurance industry.
The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. Management believes that the disposition of these matters will not have a material impact on the financial condition or results of operations of the Company.
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are summarized as follows (dollars in thousands, except per share data):
During the fourth quarter of fiscal 1995, the Company recorded additional reserves for obsolete inventory of approximately $400,000 and additional allowances for doubtful accounts of approximately $100,000. These amounts were recorded in regards to the decline in sales volumes and customer resistance to increased prices caused by raw material cost increases.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THREE YEARS ENDED JUNE 30, 1996 (DOLLARS IN THOUSANDS)
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(1) Write-offs against allowance (2) Nova Plast acquisition and other
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
SUN COAST INDUSTRIES, INC.
Date September 27,1996 By: /s/ EDDIE LESOK ----------------------------------- Eddie Lesok President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS