UNITED STATES
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
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period ended JUNE 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to___________________
Commission File Number: 1-5300
SUNSTATES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-1664434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 MARRIOTT DRIVE, SUITE 200, RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919) 781-5611
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 .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 7, 1995
Common Stock, $.33 1/3 Par Value 782,414 shares
Class B Accumulating Convertible
Stock, $.10 Par Value 69,741 shares
<PAGE>
TABLE OF CONTENTS
Sunstates Corporation
Form 10-Q Quarterly Report
For the Quarter Ended June 30, 1995
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1995 and December 31, 1994
Consolidated Statements of Operations - For the Three Months Ended
June 30, 1995 and 1994
Consolidated Statements of Operations - For the Six Months Ended
June 30, 1995 and 1994
Consolidated Statements of Stockholders' Equity - For the Six
Months Ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 1995 and 1994
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
1995 December 31,
(UNAUDITED) 1994
ASSETS
REAL ESTATE:
Property, plant and equipment $ 33,685,372 31,106,410
Real estate held for
development and sale 29,176,437 28,978,498
Mortgage loans 4,252,799 5,308,939
Land contracts receivable 4,595,066 5,116,720
---------- ----------
71,709,674 70,510,567
---------- ----------
INVESTMENTS IN SECURITIES:
Short-term investments 3,317,480 14,042,345
Fixed maturities 46,155,023 39,314,135
Equity securities 16,213,423 20,790,717
Investments in affiliates 4,442,398 4,758,706
---------- ----------
70,128,324 78,905,903
---------- ----------
OPERATING ASSETS:
Cash 37,216 234,875
Restricted cash 5,419,258 5,543,826
Accounts receivable 21,075,225 21,554,292
Premiums receivable 21,923,360 9,145,534
Inventories 48,036,094 42,908,931
Policy acquisition costs 2,168,723 1,097,995
Prepaid expenses 2,063,116 1,295,504
----------- ----------
100,722,992 81,780,957
----------- ----------
OTHER ASSETS:
Receivable from affiliates 4,252,985 3,234,752
Other assets 8,001,122 5,948,166
Cost in excess of assets acquired 14,793,606 6,194,910
---------- ----------
27,047,713 15,377,828
---------- ----------
$ 269,608,703 246,575,255
=========== ===========
See Accompanying Notes
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
1995 December 31,
(UNAUDITED) 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
DEBT:
Notes payable $ 49,551,995 52,676,514
Mortgage notes 14,777,078 16,111,437
---------- ----------
64,329,073 68,787,951
OTHER LIABILITIES:
Insurance reserves 58,413,689 62,681,402
Unearned premiums 36,145,389 18,493,925
Accounts payable 9,315,620 9,793,336
Accrued expenses 41,680,197 18,647,366
Other liabilities 14,615,161 14,037,545
----------- -----------
160,170,056 123,653,574
----------- -----------
TOTAL LIABILITIES 224,499,129 192,441,525
----------- -----------
MINORITY INTERESTS IN SUBSIDIARIES 21,824,773 21,892,721
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stocks 7,003,875 7,256,275
Common Stock, 782,414 and 797,016
shares outstanding, respectively 260,805 265,672
Class B Accumulating Convertible Stock,
69,741 and 73,581 shares issued and
outstanding, respectively 6,974 7,358
Capital in excess of par value 36,996,096 37,605,196
Accumulated deficit (25,460,912) (16,920,900)
Unrealized gains on
marketable equity securities 4,477,963 4,027,408
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 23,284,801 32,241,009
----------- -----------
$ 269,608,703 246,575,255
=========== ===========
See Accompanying Notes.
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
JUNE 30,
1995 1994
REVENUES:
Insurance premiums earned $ 17,996,713 11,117,388
Manufacturing sales 32,668,079 33,338,244
Real estate sales 549,939 12,296,602
Investment income 2,316,536 698,844
Equity in earnings of affiliates 232,000 119,000
Other income 2,907,528 2,844,147
---------- ----------
Total revenues 56,670,795 60,414,225
---------- ----------
COSTS AND EXPENSES:
Insurance loss and loss
adjustment expenses 13,909,450 9,058,586
Cost of manufacturing sales 25,254,638 25,448,038
Cost of real estate sales 241,782 8,797,175
Selling and operating costs 17,458,028 13,738,104
Corporate expenses 583,038 834,928
Interest expense 1,605,317 987,950
---------- ----------
Total costs and expenses 59,052,253 58,864,781
---------- ----------
INCOME (LOSS) FROM BEFORE
ITEMS SHOWN BELOW (2,381,458) 1,549,444
Provision for income taxes (207,188) (596,157)
Minority interest in income
of subsidiaries (27,721) (594,902)
--------- ---------
NET INCOME (LOSS) $ (2,616,367) $ 358,385
========= =======
EARNINGS PER SHARE INFORMATION:
Net Income <Loss> Applicable
to Common Stock $ (2,888,324) $ 55,302
========= ======
Net Income <Loss> per common share $(1.16) .02
==== ===
See Accompanying Notes
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended
JUNE 30,
1995 1994
REVENUES:
Insurance premiums earned $ 31,604,689 22,538,794
Manufacturing sales 64,766,889 64,046,831
Real estate sales 767,506 12,570,363
Investment income 3,326,895 3,476,745
Equity in earnings of affiliates 489,000 233,000
Other income 4,609,144 4,543,555
----------- -----------
Total revenues 105,564,123 107,409,288
----------- -----------
COSTS AND EXPENSES:
Insurance loss and loss
adjustment expenses 26,102,970 19,615,896
Cost of manufacturing sales 51,076,211 49,920,847
Cost of real estate sales 392,963 9,046,640
Selling and operating costs 31,821,219 25,659,791
Corporate expenses 1,127,023 1,470,149
Interest expense 3,194,424 1,915,583
----------- -----------
Total costs and expenses 113,714,810 107,628,906
----------- -----------
LOSS BEFORE ITEMS SHOWN BELOW (8,150,687) (219,618)
Provision for income taxes (260,642) (1,045,759)
Minority interest in income
of subsidiaries (128,683) (923,398)
--------- ---------
NET LOSS $ (8,540,012) $(2,188,775)
========= =========
EARNINGS PER SHARE INFORMATION:
Net Loss Applicable to Common Stock $ (9,083,925) $(2,804,942)
========= =========
Net Loss per common share $(3.65) (1.04)
==== ====
See Accompanying Notes
<PAGE>
<TABLE>
SUNSTATES CORPORATION
Consolidated Statement of Stockholders' Equity
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(Unaudited)
<CAPTION>
$3.75 Class B Capital Unrealized
Cumulative Class E Accumulating in Gains (Losses) Total
PREFERRED PREFERRED STOCK Common Convertible Excess of Accumulated on Stockholders'
STOCK SERIES I SERIES II STOCK STOCK PAR VALUE DEFICIT SECURITIES EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1994,
as previously
reported $ 9,008,675 32,300 25,000 344,524 8,233 34,956,541 (10,452,194) 5,139,556 39,062,635
Cumulative effect on prior
years of change in method
of inventory valuation 6,245,669 1,104,136 7,349,805
Balances --------- ------ ------ ------- ------ ---------- --------- --------- ----------
January 1, 1994
as adjusted $ 9,008,675 32,300 25,000 344,524 8,233 41,202,210 (9,348,058) 5,139,556 46,412,440
Net income (2,188,775) (2,188,775)
Conversion of Class B Stock 887 (12) (875)
Adjustment of shares issued
pursuant to merger (75) (864) (939)
Purchase of treasury
stock (1,231,975) (43,027) (1,141,528) (2,416,530)
Unrealized gains (losses)
on securities 111,006 111,006
Excess of fair market value paid
over seller's historical cost
basis of automobile (109,404) (109,404)
Balances, --------- ------ ------ ------- ----- ---------- ---------- --------- ----------
June 30, 1994 $ 7,776,625 32,300 25,000 302,384 8,221 39,949,539 (11,536,833) 5,250,562 41,807,798
========= ====== ====== ======= ===== ========== ========== ========= ==========
Balances,
January 1, 1995 $ 7,198,975 32,300 25,000 265,672 7,358 37,605,196 (16,920,900) 4,027,408 32,241,009
Net loss (8,540,012) (8,540,012)
Adjustment to shares issued
pursuant to merger (2) (108) (110)
Purchase of treasury
stock (252,400) (4,865) (384) (608,992) (866,641)
Unrealized gains
on securities 450,555 450,555
------- -------
Balances, --------- ------ ------ ------- ----- ---------- ---------- --------- ----------
June 30, 1995 $ 6,946,575 32,300 25,000 260,805 6,974 36,996,096 (25,460,912) 4,477,963 23,284,801
========= ====== ====== ======= ===== ========== ========== ========= ==========
</TABLE>
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
JUNE 30,
1995 1994
OPERATING ACTIVITIES:
Net loss $(8,540,012) (2,188,775)
Adjustments to reconcile net loss
to net cash utilized in
operating activities:
Depreciation and amortization 3,282,356 2,886,290
Adjustments to interest yields (234,281) (52,698)
Realized gains on investments (1,537,193) (2,476,734)
Reserves and writedowns 454,849 1,069,822
Loss on investment in
real estate partnerships 37,595 --
Equity in undistributed income (525,357) (277,694)
Addition to minority interest 128,683 923,398
Changes in assets and liabilities:
Real estate held for
development and sale 215,679 7,675,058
Inventories (3,604,051) (3,081,068)
Mortgage loans on real estate
and land contracts receivable 1,461,011 (292,310)
Mortgage notes payable
on real estate held (991,640) (6,737,177)
Insurance reserves and
unearned premiums 13,383,751 (13,040,556)
Operating assets and
other liabilities (13,804,408) (3,271,276)
---------- ----------
Total adjustments (1,733,006) (16,674,945)
------- ----------
NET CASH UTILIZED IN OPERATING
ACTIVITIES (10,273,018) (18,863,720)
--------- ----------
INVESTING ACTIVITIES:
Investments in securities
sold or matured 39,444,521 42,831,294
Investments in affiliates sold 374,188 544,917
Investments in securities
purchased (23,038,562) (14,113,255)
Investment in affiliates
purchased (239,987) (331,379)
Other investments (1,113,286) (832,527)
Loans to affiliates (24,018) (300,000)
Purchases of property
plant and equipment (2,283,289) (2,841,419)
Acquisition of Balfour (14,956,086) --
Repayments of mortgage loans 162,454 1,036,254
------- ---------
NET CASH (UTILITZED IN) PROVIDED
BY INVESTING ACTIVITIES (1,674,065) 25,993,885
FINANCING ACTIVITIES:
Issuance of notes payable 15,481,852 9,511,664
Repayments of notes and
mortgage notes payable (2,944,918) (16,319,125)
Dividends of majority
owned subsidiaries (45,326) (46,151)
Purchase of Company stock (866,752) (2,417,469)
------- ---------
NET CASH PROVIDED BY (UTILIZED IN)
FINANCING ACTIVITIES 11,624,856 (9,271,081)
---------- ---------
DECREASE IN CASH (322,227) (2,140,916)
Cash, beginning of period 5,778,701 9,579,236
--------- ---------
Cash, end of period 5,456,474 7,438,320
Less: restricted cash (5,419,258) (7,125,081)
--------- ---------
Unrestricted cash $ 37,216 313,239
====== =======
See Accompanying Notes
<PAGE>
SUNSTATES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements are unaudited and do
not include certain information and note disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included, which consist solely of adjustments of a
normal recurring nature. These statements should be read in conjunction with
the financial statements, and notes thereto, included in the Form 10-K of
Sunstates Corporation for the year ended December 31, 1994. The results of
operations for the six months ended June 30, 1995, are not necessarily
indicative of the results that may be expected for the full fiscal year.
2. ACQUISITION OF BALFOUR HEALTH CARE
On March 6, 1995, the Company's textile apparel manufacturing subsidiary
(Alba) purchased the Balfour Health Care Division (Balfour) and manufacturing
facility in Rockwood, Tennessee from Kayser-Roth Corporation. Alba financed
100% of the acquisition cost under a variable rate term loan agreement (see
Note 4). The following table presents the Company's investment as allocated
utilizing the purchase method of accounting (subject to possible further
adjustments) to the individual assets and liabilities of Balfour as of March
6, 1995:
Accounts receivable $ 1,956,279
Property, plant and equipment 2,730,830
Inventory 1,523,111
Liabilities assumed (316,929)
---------
Fair value of net
assets acquired 5,893,291
Cash price paid 14,956,085
----------
Cost in excess of assets
acquired (goodwill) $ 9,062,794
=========
The cost in excess of assets acquired ($9,062,794) will be amortized on a
straight-line basis over 15 years. The results of Balfour are included in the
accompanying financial statements since the date of acquisition.
The following unaudited pro forma financial information presents the
information as if the acquisition has occurred at the beginning of 1995 and
1994, after giving effect to certain adjustments, including amortization of
goodwill and interest expense from debt issued to fund the acquisition and
related income tax effects and minority interests. The total interest expense
included in this pro forma is $573,000 and $387,800 in the six months of 1995
and 1994, respectively. Goodwill is amortized at $151,047 per quarter. This
pro forma is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations.
<PAGE>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1995 1994 1995 1994
Total Revenues $ 56,670,795 64,168,265 108,219,159 114,716,344
Net Income (2,616,840) 431,638 (8,511,109) (2,100,027)
Net Income Per Share $(1.16) .05 (3.64) (1.00)
3. INVENTORIES
The principal classifications of inventories were:
June 30, December 31,
1995 1994
Furniture manufacturing -
Materials and supplies $ 3,119,745 2,807,511
Work in progress 6,999,734 6,535,222
Finished goods 13,564,265 12,041,195
---------- ----------
23,683,744 21,383,928
---------- ----------
Textile apparel manufacturing -
Materials and supplies 4,040,766 3,296,755
Work in progress 5,781,148 5,803,012
Finished goods 9,034,697 8,164,413
---------- ----------
18,856,611 17,264,180
---------- ----------
Bootwear manufacturing -
Materials and supplies 1,156,649 882,022
Work in progress 1,414,913 1,501,282
Finished goods 1,682,650 542,876
--------- ---------
4,254,212 2,926,180
--------- ---------
Textile equipment manufacturing 770,696 883,086
Resort development 243,219 164,036
Other 227,612 287,521
---------- ----------
$48,036,094 42,908,931
========== ==========
During 1994, the Company changed its method of inventory valuation for its
furniture manufacturing inventories from the last-in, first-out (LIFO) method
to the first-in, first-out (FIFO) method because the FIFO method of reporting
inventories and cost of sales represents a preferable method. The change is
reported in the accompanying financial statements by restating all prior years
to reflect the new method of accounting. The change is preferable, in part,
because under the current economic environment of low inflation, the Company
believes that the FIFO method will result in a better measurement of operating
results. Also, as a result of the recent operating losses and demands upon
its liquidity, the Company believes its financial position is the primary
concern of the readers of its financial statements and that the accounting
change will reflect inventories in the balance sheet at a value that more
closely represents current costs.
Restatement of operating results due to the change decreased cost of
manufacturing sales and the net loss by $387,200 ($.14 per primary and fully
diluted share) in the six months ended June 30, 1994. The cumulative effect
of the change of $7,349,805 represents the reversal of the LIFO reserve as of
January 1, 1994. Of this amount, $6,245,669 represented the LIFO reserve
originally recorded in connection with the acquisition of the furniture assets
from the Company's controlling shareholder in June of 1990. The original
accounting for this acquisition resulted in a charge to paid in capital to
reflect the excess of the purchase price paid over the seller's historical
cost basis of the assets acquired. Accordingly, $6,245,669 has been reflected
in the accompanying financial statements as a retroactive adjustment to paid
in capital. The remaining balance of $1,104,136 has been reported as an
adjustment to the accumulated deficit as of January 1, 1994. The aggregate
effect of the change was to increase stockholders' equity by $7,737,005 as of
June 30, 1994.
4. DEBT
On March 6, 1995, the Company's textile apparel manufacturing subsidiary
entered into a $15,000,000 variable rate term loan, the proceeds from which
were used to acquire Balfour (see Note 2). Interest on this loan accrues at
the rate of LIBOR plus 2% with principal payments to be made quarterly
beginning June 30, 1995, and maturing on March 31, 2000. The note is
collateralized by all of the assets of the textile apparel manufacturing
subsidiary and contains various covenants covering minimum tangible net worth,
cash flow, leverage ratios, capital spending and the payment of dividends.
Included in fixed maturity investments at June 30, 1995, are certain one
and two-year U. S. Treasury securities yielding 5.4% to 6.3% with an original
cost of $39,348,438 (approximates market) which were acquired under agreements
to resell (or placed under agreements to resell subsequent to June 30, 1995) on
various dates through August 7, 1995. Additionally, at June 30, 1995, the
Company had borrowed $9,302,600 from brokerage firms against such securities
(and subsequent to June 30, 1995, borrowed an additional $30,255,799 against
securities acquired prior to June 30, 1995) all with interest rates ranging from
6.0% to 6.75% and maturing on various dates through August 7, 1995.
Notes payable include $12,342,047 due to Citibank and secured by
substantially all of the assets of the Company's furniture manufacturing
operations. The loan has been extended through January 3, 1996, to allow the
Company additional time to obtain refinancing. However, the Company cannot
state with certainty that it will be able to find alternative financing at
terms acceptable to the Company prior to the extended maturity date of the
loan.
At June 30, 1995, mortgage notes include $4,839,149 of loans on real estate
which will mature in 1995. Sunstates is continuing to search for satisfactory
alternative financing for these properties. However, the availability of real
estate financing has been severely curtailed as the result of problems in both
the banking and real estate industries. Accordingly, Sunstates cannot state
with certainty that it will be successful in obtaining such refinancing.
5. INCOME TAXES
The provision for income taxes include the following (amounts in
thousands):
SIX MONTHS ENDED JUNE 30,
1995 1994
Current - Federal $ -- 75
- State 159 146
--- ---
159 221
Provision by majority-owned
subsidiaries 102 825
--- ---
Total provision $ 261 1,046
=== =====
The provisions for federal income taxes differ from the amounts computed by
multiplying income before income taxes and minority interest by the statutory
federal rates as follows (amounts in thousands):
SIX MONTHS ENDED JUNE 30,
1995 1994
Tax computed at statutory rate $ (2,771) (206)
State taxes, net of federal benefit 113 171
Tax exempt income and dividend exclusion (208) (663)
Puerto Rican income not subject to Puerto
Rican or federal tax (19) (197)
Effect of purchase accounting adjustments (82) (91)
Effect of losses not utilized in the provision 3,201 1,882
Alternative minimum tax -- 75
Other 27 75
--- -----
Total $ 261 1,046
=== =====
6. EARNINGS PER SHARE
Primary per share amounts are computed based upon the weighted average
number of common equivalent shares outstanding. Common equivalent shares
consist of common stock, the assumed conversion of the Class B stock at its
current conversion ratio, and any dilutive effect of other convertible
securities deemed to be common stock equivalents. Fully diluted per share
amounts are computed by including the assumed conversion of the Class B stock
at its maximum conversion ratio plus any other convertible securities which
would have a dilutive effect. Fully diluted per share amounts are not
reported if their impact would be to increase income per share or reduce the
reported loss per share.
As of January 1, 1995, the Class B stock has reached its maximum conversion
ratio and therefore is no longer a dilutive security. In addition, there are
no longer any options or warrants outstanding. Accordingly, as of January 1,
1995, the Company no longer presents its per share amounts on both a primary
and fully diluted basis.
Reported per share amounts for the six months ended June 30, 1995 and 1994
have been computed based on weighted average common equivalent shares of
2,489,414 and 2,699,758, respectively. Fully diluted per share amounts for
1994 are not presented since the effect of full dilution would be to reduce
the reported net loss per share. Net income applicable to common stock
reflects the dividend requirements applicable to the Company's preferred
stocks totaling $543,913 and $606,167 for the six months ended June 30, 1995,
and 1994, respectively.
7. LITIGATION AND CONTINGENCIES
On June 14, 1991, a jury in a District Court of Dallas County, Texas
awarded $3.5 million in actual damages and $5 million in punitive damages to
the plaintiffs of a lawsuit filed against the Company. This dispute
related to the amount of additional purchase consideration due plaintiffs
under an agreement made in 1983 whereby the Company purchased National
Development Company, a real estate company based in Dallas. The Company
appealed the verdict based, in part, on the exclusion by the court of evidence
crucial to the Company's defense. The plaintiffs filed a cross-appeal,
alleging that the trial court should have awarded an additional $5 million
in exemplary damages, based upon the jury verdict. On August 9, 1995, the
Court of Appeals Fifth District of Texas at Dallas reversed the trial court's
judgement, denied the plaintiffs' claim for an additional $5 million in
exemplary damages and remanded the case back to the trial court for a new trial.
No date for further proceedings in this case has yet been set.
INSURANCE MATTERS
During the previous three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of the
discontinuation of certain general liability reinsurance programs and several
unprofitable direct automotive insurance programs combined with the effect of
price increases having been implemented in other markets which were producing
unsatisfactory results. The combination of the above resulted in the written
premium volume declining to approximately $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in premium volume
stabilized during the early part of 1994 and began to increase during the last
half of the year as new programs already established and other planned actions
to increase volume started to become effective. Premiums written for the
first and second quarters of 1995 totaled $20,480,000 and $28,776,000,
respectively, as compared to $11,506,000 and $11,506,000 in the first and
second quarters of 1994, respectively..
The short-term impact of the drop in written volume was that the Company
experienced a period of negative cash flow from underwriting activities
resulting from relatively immediate declines in collected premiums while claim
payouts, relating primarily to previously written policies, continue at
disproportionately higher levels. The Company's negative cash flow from
underwriting has begun to decline as premium volume has stabilized and started
to increase. Negative cash flow from investment income and underwriting
activities of the insurance segment for the first six months of 1995 was a
negative $6,669,607 in the first quarter and $1,721,524 in the second quarter
for a combined negative cash flow of $8,391,131; as compared to $17,598,002
for the first six months of 1994. The negative cash flow which the Company
has experienced over the past three years has resulted in significant
liquidations of the insurance subsidiary's investment portfolio. At June 30,
1995, the insurance subsidiary's investments in equity and fixed maturity
securities (excluding investments in other segments of the Company's
businesses and those covered or to be covered by reverse repurchase
agreements) totaled $18,485,247. The Company believes that required
liquidations of the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
Included in fixed maturity investments at June 30, 1995, are certain one
and two-year U. S. Treasury securities yielding 5.4% to 6.3% with an original
cost of $39,348,438 (approximates market) which were acquired under agreements
to resell (or placed under agreements to resell subsequent to June 30, 1995) on
various dates through August 7, 1995. Additionally, at June 30, 1995, the
Company had borrowed $9,302,600 from brokerage firms against such securities
(and subsequent to June 30, 1995, borrowed an additional $30,255,799 against
securities acquired prior to June 30, 1995) all with interest rates ranging
from 6.0% to 6.75% and maturing on various dates through August 7, 1995.
The level of liquid assets, as defined by the National Association of
Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was
$84,008,007 at June 30, 1995, as compared to $90,109,196 at December 31,
1994. The decline is due to the liquidation of investments to cover negative
cash flow requirements. Included in NAIC-defined liquid assets are the U. S.
Treasury securities referred to above as well as certain securities with a
reported value of $6,932,590 at June 30, 1995, which are not publicly traded
as well as approximately $8,333,000 of securities and certificates of deposit
which were on deposit pursuant to state laws and various reinsurance
agreements. In addition, $38,850,576 ($33,954,320 at December 31, 1994) of
investments in publicly traded equity securities of other companies, valued at
their quoted market prices on June 30, 1995, do not meet the NAIC definition
of liquid assets solely because of the level of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of
Insurance to decrease Coronet's ratio of liabilities to liquid assets, as
defined by the NAIC, to 105% over a five year period. At June 30, 1995,
Coronet's ratio was 173.3%, as compared to the agreed upon ratio of 178.25% at
June 30, 1995 (130% at December 31, 1995). However, the consolidated ratio of
Coronet and its wholly-owned insurance subsidiaries is 163.4% at June 30,
1995, giving the Company the ability to impact Coronet's separate ratio
through various restructurings or asset transfers. The Company expects to
achieve this objective without any material adverse consequences; however,
such compliance is dependent upon a combination of future premium volumes,
underwriting and investment results, various restructurings and asset
transfers, potential regulatory examination adjustments, if any, and other
factors beyond the Company's control.
In September 1993, the Arizona Department of Insurance notified the Company
that it would be performing a limited examination of the Company's reported
statutory surplus, however, to date no such examination has commenced. The
Illinois Department is currently conducting a financial examination of
Coronet as of December 31, 1993, although the examination has not been
completed, at this time no matters have been brought to the Company's
attention which would have a material adverse impact on the Company.
LIQUIDITY
As the result of negative cash flow from insurance underwriting, operating
losses in certain other segments of the Company's operations, and maturing
debt obligations, all discussed in more detail below, the Company will be
facing various demands upon its liquidity in 1995. Although, the Company
believes that it can meet such demands through selective liquidations of
securities in its investment portfolio, sales or refinancings of various real
estate and other assets, coupled with the anticipated reversal of the
insurance subsidiary's negative cash flow from underwriting later in 1995, it
cannot predict with certainty the outcomes of such matters.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT MATTERS
LITIGATION
See Note 7 of Notes to Consolidated Financial Statements for information
with respect to outstanding litigation.
CHANGE IN INVENTORY VALUATION
See Note 2 of Notes to Consolidated Financial Statements for information
with respect to the Company's change in the method of valuing its furniture
manufacturing inventories from last-in, first-out (LIFO) to first-in, first-
out (FIFO).
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As the result of negative cash flow from insurance underwriting, operating
losses in certain other segments of the Company's operations, and maturing
debt obligations, all discussed in more detail below, the Company will be
facing various demands upon its liquidity in 1995. Although, the Company
believes that it can meet such demands through selective liquidations of
securities in its investment portfolio, sales or refinancing of various real
estate and other assets, coupled with the anticipated reversal of the
insurance subsidiary's negative cash flow from underwriting later in 1995, it
cannot predict with certainty the outcomes of such matters.
Total assets increased $23,033,448 during the six months of 1995, primarily
accounted for by the Balfour acquisition on March 6, 1995 (see Note 2 of Notes
to Consolidated Financial Statements), which is reflected in increases in
property, plant and equipment, accounts receivable, inventories and costs in
excess of assets acquired. Fixed maturity investments increased due to an
increase of approximately $14,000,000 in the amount of securities acquired
under agreements to resell, partially offset by the sale of securities to
cover negative cash flow from underwriting (see Insurance below) The increase
in premiums receivable and policy acquisition costs is related to the increase
in the written premium volume at the Company's insurance subsidiary.
Total debt declined $4,458,878 during the first six months of 1995,
primarily due to the settlement of approximately $16,040,000 of transactions
through which securities were acquired under agreements to resell and the
repayment of $2,050,000 by the military boot manufacturing subsidiary. These
declines were partially offset by $15,000,000 of borrowings in connection with
the Balfour acquisition. The increase in unearned premiums is related to the
increase in written premium volume experienced in the first six months of
1995. The increase in accrued expenses is partially the result of
approximately $30,256,000 due to brokers in connection with securities
purchased at the end of June. Settlement of these amounts, which were not due
until the first week of July, was made by entering into reverse repurchase
agreements whereby substantially all of the amount owed was borrowed from such
brokers against these securities. Approximately 70.2% of Sunstates' debt of
$64,329,073 at June 30, 1995, carries a floating rate of interest which varies
with the prime lending rate. Accordingly, any increase or decrease in
interest rates will have a significant impact on its debt service
requirements.
Stockholders' equity decreased $8,956,208 during the six months of 1995
primarily due to the net loss of $8,540,012 and treasury stock purchases
totaling $866,641, both partially offset by increases in unrealized gains in
the Company's investment portfolio totaling $450,555.
INSURANCE
During the previous three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of the
discontinuation of certain general liability reinsurance programs and several
unprofitable direct automotive insurance programs combined with the effect of
price increases having been implemented in other markets which were producing
unsatisfactory results. The combination of the above resulted in the written
premium volume declining to approximately $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in premium volume
stabilized during the early part of 1994 and began to increase during the last
half of the year as new programs already established and other planned actions
to increase volume started to become effective. Premiums written for the
first and second quarters of 1995 totaled $20,480,000 and $28,776,000,
respectively, as compared to $11,506,000 and $11,506,000 in the first and
second quarters of 1994, respectively..
The short-term impact of the drop in written volume was that the Company
experienced a period of negative cash flow from underwriting activities
resulting from relatively immediate declines in collected premiums while claim
payouts, relating primarily to previously written policies, continue at
disproportionately higher levels. The Company's negative cash flow from
underwriting has begun to decline as premium volume has stabilized and started
to increase. Negative cash flow from investment income and underwriting
activities of the insurance segment for the first six months of 1995 was a
negative $6,669,607 in the first quarter and $1,721,524 in the second quarter
for a combined negative cash flow of $8,391,131; as compared to $17,598,002
for the first six months of 1994. The negative cash flow which the Company
has experienced over the past three years has resulted in significant
liquidations of the insurance subsidiary's investment portfolio. At June 30,
1995, the insurance subsidiary's investments in equity and fixed maturity
securities (excluding investments in other segments of the Company's
businesses and those covered or to be covered by reverse repurchase
agreements) totaled $18,485,247. The Company believes that required
liquidations of the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
Included in fixed maturity investments at June 30, 1995, are certain one
and two-year U. S. Treasury securities yielding 5.4% to 6.3% with an original
cost of $39,348,438 (approximates market) which were acquired under agreements
to resell (or placed under agreements to resell subsequent to June 30, 1995) on
various dates through August 7, 1995. Additionally, at June 30, 1995, the
Company had borrowed $9,302,600 from brokerage firms against such securities
(and subsequent to June 30, 1995, borrowed an additional $30,255,799 against
securities acquired prior to June 30, 1995) all with interest rates ranging from
6.0% to 6.75% and maturing on various dates through August 7, 1995.
The level of liquid assets, as defined by the National Association of
Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was
$84,008,007 at June 30, 1995, as compared to $90,109,196 at December 31,
1994. The decline is due to the liquidation of investments to cover negative
cash flow requirements. Included in NAIC-defined liquid assets are the U. S.
Treasury securities referred to above as well as certain securities with a
reported value of $6,932,590 at June 30, 1995, which are not publicly traded
as well as approximately $8,333,000 of securities and certificates of deposit
which were on deposit pursuant to state laws and various reinsurance
agreements. In addition, $38,850,576 ($33,954,320 at December 31, 1994) of
investments in publicly traded equity securities of other companies, valued at
their quoted market prices on June 30, 1995, do not meet the NAIC definition
of liquid assets solely because of the level of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of Insurance
to decrease Coronet's ratio of liabilities to liquid assets, as defined by the
NAIC, to 105% over a five year period. At June 30, 1995, Coronet's ratio was
173.3%, as compared to the agreed upon ratio of 178.25% at June 30, 1995 (130%
at December 31, 1995). However, the consolidated ratio of Coronet and its
wholly-owned insurance subsidiaries is 163.4% at June 30, 1995, giving the
Company the ability to impact Coronet's separate ratio through various
restructurings or asset transfers. The Company expects to achieve this
objective without any material adverse consequences; however, such compliance
is dependent upon a combination of future premium volumes, underwriting and
investment results, various restructurings and asset transfers, potential
regulatory examination adjustments, if any, and other factors beyond the
Company's control.
In September 1993, the Arizona Department of Insurance notified the Company
that it would be performing a limited examination of the Company's reported
statutory surplus, however, to date no such examination has commenced. The
Illinois Department is currently conducting a financial examination of
Coronet as of December 31, 1993, although the examination has not been
completed, at this time no matters have been brought to the Company's
attention which would have a material adverse impact on the Company.
Statutory net worth decreased to $58,764,877 at June 30, 1995, as compared
to $59,483,697 at December 31, 1994, primarily due to continuing under-
writing losses and unrealized losses in the investment portfolio partially
offset by a contribution to capital. The annualized ratio of premiums
written during the quarter ended June 30, 1995, to statutory surplus as of
June 30, 1995, was 1.7 to 1. A ratio of less than 3.0 to 1 is generally
considered conservative.
MANUFACTURING
Hickory White has loans totaling $12,342,047 at June 30, 1995, with a major
bank which are secured by substantially all of the assets of the furniture
manufacturing division and which have been extended until January 3, 1996, to
provide time necessary to find refinancing. Management has begun discussions
with potential lenders but cannot state with certainty that such refinancing
will be available or in an amount sufficient to totally retire the outstanding
balance.
The working capital of the furniture manufacturing operation was $11,938,488
at June 30, 1995. The current asset ratio at June 30, 1995, was 1.6 to 1.
This ratio reflects the characterization of all of the bank financing of the
furniture manufacturing operations as a current liability. Accordingly, at
June 30, 1995, the division has no long-term debt (excluding intercompany
debt). Also, at June 30, 1995, Hickory White had no additional borrowing
capacity under its Credit Agreement. The furniture manufacturing division is
restricted in its ability to transfer funds to Sunstates under the terms of
its Credit Agreement with Citicorp.
Working capital of the Company's textile manufacturing operation (Alba) is
adequate to support its operations and totaled $21,020,777 at June 30, 1995,
yielding a current ratio of 3.5 to 1. In addition, Alba has a short-term line
of credit of $5,000,000, of which $3,529,524 was available at June 30, 1995.
The division had long-term debt of $13,437,500 and had total net assets of
$28,043,043 at June 30, 1995, including minority interests.
Sunstates' military footwear manufacturing division's working capital,
including marketable securities held for investment, is more than adequate to
support current operating levels and totaled $12,012,093 at June 30, 1995,
yielding a current ratio of 5.4 to 1. The division had no long-term debt at
June 30, 1995, and had total net assets of $12,112,612, including minority
interests.
Liquidity for Sunstates' textile machinery manufacturing operations has
historically been provided through its sales terms. Normally, 50% of the sales
price is paid at the time of the order, 40% at the time the production of the
machine is completed, with the final 10% paid upon installation in the
customer's facility. Working capital of the division totaled $1,598,389 at
June 30, 1995, yielding a current ratio of 4.69 to 1. There was no debt at
June 30, 1995, and total net assets were $12,220,121.
REAL ESTATE
The real estate segment's debt totaled $14,970,971 at June 30, 1995 with
real estate assets of $44,817,416 yielding an asset leverage ratio of 33.4%.
At June 30, 1995, mortgage notes include $4,839,149 of loans on real estate
which will mature in 1995. Sunstates is continuing to search for satisfactory
alternative financing for these properties. However, the availability of real
estate financing has been severely curtailed as the result of problems in both
the banking and real estate industries. Accordingly, Sunstates cannot state
with certainty that it will be successful in obtaining such refinancing.
EQUITY INVESTEES
Equity investees do not represent a significant source of cash flow to
Sunstates. The stock of Rocky Mountain is publicly traded and could provide
potential liquidity to Sunstates in the future. This equity investment is
held by Sunstates' insurance subsidiary (is pledged against a $10 million
working capital loan) and is therefore subject to restrictions regarding the
transfer of funds to Sunstates.
CORPORATE
Sunstates has annual dividend obligations currently totaling $1,041,986 on
its $3.75 Cumulative Preferred Stocks. Sunstates is currently in arrears ten
semi-annual dividend payments on its $3.75 Cumulative Preferred Stock
aggregating $5,209,931 ($18.75/share).
CASH FLOWS
OPERATING ACTIVITIES
The following table presents the net cash flows from operating activities by
industry segment for the six month periods indicated:
Cash Flows Provided By (Utilized In)
OPERATING ACTIVITIES
1995 1994
Insurance $ (8,391,131) (17,598,002)
Manufacturing 1,301,226 (1,429,418)
Real Estate (1,303,430) 2,421,747
Equity Investees (36,501) 14,000
Corporate (1,843,182) ( 2,272,047)
---------- ----------
$ (10,273,018) (18,863,720)
========== ==========
The net cash utilized by insurance operations is primarily the result of
declining premium volume resulting in increased negative cash flow from
underwriting activities (see Insurance above). The short-term impact of the
drop in written volume is that the company will experience a period of
negative cash flow from underwriting activities resulting from relatively
immediate declines in collected premiums while claim payouts, relating
primarily to previously written policies, continue at disproportionately
higher levels. The negative cash flow can be expected to continue throughout
the payout period related to the lost business or until new programs and other
planned actions to increase premium volume can become effective. The
Company's negative cash flow from underwriting has begun to decline as premium
volume has stabilized and started to increase. Negative cash flow from
investment income and underwriting activities of the insurance segment for the
first six months of 1995 was a negative $6,669,607 in the first quarter and
$1,721,524 in the second quarter for a combined negative cash flow of
$8,391,131; as compared to $17,598,002 for the first six months of 1994. The
Company believes that required operating cash flow requirements during 1995
will be greatly reduced. However, such reductions are dependent upon future
premium volumes and claim payments, which, to a great extent, are beyond the
control of the Company.
During the first six months of 1995, the furniture manufacturing business
utilized $1,935,307 of cash in its operating activities, including $845,349 of
interest expense and including $1,052,175 of cash utilized to increase net
operating assets and liabilities (mostly inventories and accounts receivable).
This compares to $4,015,838 and $2,194,403 of cash utilized during the full
twelve month periods ended December 31, 1994 and 1993, respectively. During
the first six months of 1994, the furniture manufacturing business utilized
$2,281,807 of cash in its operating activities, including $681,018 of interest
expense and including $593,117 of cash utilized to increase net operating
assets and liabilities (mostly due to an increase in inventories). At June
30, 1995, Hickory White had no additional borrowing capacity under its Credit
Agreement.
Cash flow from the remaining operations within the manufacturing segment
totaled $3,236,533 in the first six months of 1995 as compared to $852,389 for
the first six months of 1994. The higher cash flow in 1995 is primarily
attributable to collections of accounts receivable at the Company's military
boot manufacturing subsidiary.
The cash utilized in real estate increased in 1995 due primarily to an
$800,000 principal reduction made in connection with the restructuring of a
loan on one of the Company's shopping centers. The cash provided by real
estate in 1994 was due primarily to the sale of an apartment complex.
The higher cash utilized in the corporate segment in 1994 reflects cash used
in the payment of estimated income taxes.
INVESTING ACTIVITIES
The following table presents the net cash flows from investing activities by
industry segment for the six month periods indicated:
Cash Flows Provided By (Utilized In)
INVESTING ACTIVITIES
1995 1994
Insurance $ 12,003,381 26,880,591
Manufacturing (13,434,691) (16,965)
Real Estate (579,178) 1,926
Equity Investees 374,188 260,000
Corporate (37,765) (1,131,667)
--------- ----------
$(1,674,065) 25,993,885
========= ==========
Generally, cash flow from operations not otherwise needed for operating or
financing purposes is utilized in investing activities, primarily at
Sunstates' insurance subsidiaries. However, declines in premium volumes
required that securities be sold from the insurance subsidiary's investment
portfolio to cover the negative cash flow from underwriting activities
discussed above as well as provide funds needed by other segments of
Sunstates' business. As discussed above in Insurance, due to cash
requirements needed to cover anticipated negative cash flow from underwriting,
liquidations of the investment portfolio in 1995 are expected to continue,
although at a reduced level from that of 1994.
The higher utilization of cash in the manufacturing segment in 1995
represents the approximately $15 million acquisition cost of the Balfour
operations by the Company's textile manufacturing subsidiary. The utilization
of cash in the manufacturing segment in 1994 primarily represents additions to
property, plant and equipment.
During 1994, the collection of a mortgage loan was included in the real
estate segment's cash flow.
Cash from equity investees represents proceeds from the sale of a small
portion of the Company's investment in the common stock of Rocky Mountain
Chocolate Factory.
During the two periods ended June 30, 1995 and 1994, a subsidiary of the
Company invested approximately $1,113,000 and $832,500, respectively, in
various oriental artworks, antique jewelry and other collectibles.
FINANCING ACTIVITIES
The following table presents the net cash flows from financing activities by
industry segment for the six month periods indicated:
Cash Flows Provided By (Utilized In)
FINANCING ACTIVITIES
1995 1994
Insurance $ (887,024) (8,433,917)
Manufacturing 12,572,996 (804,847)
Real Estate (61,006) (31,378)
Corporate (110) (939)
---------- ---------
$ 11,624,856 (9,271,081)
========== =========
The insurance segment's utilization of cash in 1994 reflects the repayment
of a $6,000,000 short-term line of credit. During 1995, subsidiaries of the
insurance company purchased 14,594 shares of Sunstates' Common Stock, 10,096
shares of Sunstates' $3.75 Cumulative Preferred Stock and 3,840 shares of
Sunstates' Class B Stock for an aggregate cost of $866,641. With respect to
the Class B Stock, 3,840 shares, which were acquired from brokers and other
non-affiliated owners at a total cost of $503,140, had been owned by the
Company's parents prior to their acquisition by the Company. During 1994,
subsidiaries of the insurance company purchased 129,080 shares of Sunstates'
Common Stock and 49,279 shares of Sunstates' $3.75 Cumulative Preferred Stock
for an aggregate cost of $2,416,530.
The significant source of cash in the manufacturing segment in 1995 relates
to the $15,000,000 in financing obtained by the Company's textile apparel
manufacturing subsidiary in connection with its acquisition of the Balfour
Health Care operations.
<PAGE>
RESULTS OF OPERATIONS
The Company's net loss totaled $8,540,012 in the first six months of 1995 or
$3.65 per share, compared to a loss of $2,188,775 or $1.04 per share in 1994.
Losses at the Company's insurance, resort development and furniture
manufacturing operations contributed to the higher loss in 1995. All per
share amounts are after considering preferred stock dividend requirements for
the applicable periods.
INDUSTRY SEGMENTS
Sunstates operates in three industry segments; insurance, manufacturing and
real estate development. Information about the operations of the different
industry segments for the six months ended June 30, 1995 and 1994 is as
follows (amounts in thousands):
1995 1994
Revenues:
Insurance $ 34,048 25,340
Manufacturing 65,101 64,737
Real Estate 3,350 14,998
Equity Investees 847 517
Corporate & Eliminations 2,218 1,817
------- -------
$105,564 107,409
======= =======
Pre-tax Income (Loss):
Insurance $ (5,847) (2,002)
Manufacturing 86 1,823
Real Estate (1,701) 1,152
Equity Investees 810 517
Corporate (1,499) (1,710)
----- ---
$(8,151) ( 220)
===== ===
INSURANCE
Following is a summary of the results of operations of the insurance segment
for the six months ended June 30, 1995 and 1994 (amounts in thousands):
1995 1994
Premiums written $ 49,256 23,012
Premium growth (decline) 114% (32.3%)
Premiums earned 31,605 22,539
Losses and loss adjustment expenses 26,103 19,616
Loss ratio 82.6% 87.0%
Underwriting loss (6,728) (4,081)
Statutory combined ratio 110.4% 117.5%
Investment income recognized 2.316 2,794
Change in unrealized gains 388 186
Combined annual investment yield 11.75% 6.7%
Pre-tax loss (5,847) (2,002)
(See "Liquidity and Capital Resources - Insurance" above for a discussion of
premium volume.)
During the first six months of 1995, the Company recorded an underwriting
loss of $6,728,365, which included $2,100,696 of losses recognized on in-
active programs and losses on continuing active programs of $4,627,669. The
combined ratio for the 1995 accident year on the Company's continuing active
programs was 113.2% as compared to 1994 when the Company recorded a current
accident year combined ratio of 120.2% for the full year on continuing active
programs. The combined ratio of 110.4% for the first six months of 1995
continues to be at an unacceptable level, but does compare favorably to the
combined ratio for the first six months of 1994 of 117.5%. The Company
anticipates significant improvement in its combined ratio throughout 1995,
as it continues to rebuild its premium base in continuing programs, continued
revisions to its existing programs and the underwriting selection process,
continued improvement in the loss ratio through processing efficiencies and
through the implementation of additional expense controls.
Investment income recognized was lower in 1995 as there were fewer sales of
securities to meet cash flow requirements in the current year. Realized gains
from the sale of equity securities totaled approximately $726,000 in the six
months of 1995 as compared to $1,914,000 in the 1994 period.
Interest expense totaled $1,111,629 in the six months of 1995 ($325,357 in
1994) reflecting the insurance subsidiary's $10,000,000 working capital loan
obtained in December of 1994, as well as borrowings incurred in connection
with certain investment transactions by which the Company acquired U. S.
Treasury securities under agreements to resell - see "Liquidity and Capital
Resources - Insurance" above.
MANUFACTURING
Net furniture sales decreased by $150,567 or 0.6% in the first six months of
1995 compared against the increase of $1,171,630 or 5.3% experienced in the
first six months of 1994. The furniture cost of sales, as a percent of net
sales, decreased approximately 3.6% in 1995 as compared to an increase of
approximately 4.2% in the comparable 1994 period. The 1994 results reflect
the impact of increased discounting and promotions necessary to move out slow
moving or discontinued product lines as well as certain production
inefficiencies experienced at the casegoods manufacturing plant. In
aggregate, the 1995 gross profit increased by $820,860 or 26.4% as compared
to a decrease of $773,357 or 19.9% in the prior year. Selling and
administrative expenses remained relatively stable between the two periods.
Net textile apparel manufacturing sales for the first six months of 1995
increased $2,491,368 or 8.1% compared to the same period in 1994. This
increase was primarily due to the acquisition of the Balfour Health Care
operation which added $5,724,172 of net sales to the 1995 quarter. Without
this acquisition, sales for the six months of 1995 would have declined
$3,232,804 or 11.5% as the result of weakness in the consumer products line as
major customers experienced overstock positions in retail inventories and two
Japanese distributors were terminated. Gross margins decreased to 22.8% of
sales as compared to 24.9% in 1994. This decrease in margins is due to
decreased sales in the Consumer and Alba Direct Divisions and an increase in
manufacturing cost resulting from overhead cost not being reduced
proportionate to the reduction in sales volume. Selling, general and
administrative expenses increased from 19.5% for the first six months of 1994
to 20.2% for the same period in 1995, due primarily to the addition of
$151,000 (0.4%) of goodwill related to the acquisition of Balfour. Operating
income decreased by $738,615 or 48.2% as compared to the first six months of
1994. Increased interest expense in 1995 related to the $15,000,000 of long-
term debt obtained to finance the Balfour acquisition also contributed to the
lower earnings in 1995. During the second quarter, a writedown of $170,000
was recorded in connection with the Company's shutdown of one of its plants
whose operations were consolidated with the newly acquired Balfour production
facility in Rockwood, Tennessee. Sunstates' share of Alba' net income totaled
$142,794 in 1995 as compared to $616,434 in 1994.
Operating revenues from Sunstates' military footwear division decreased by
$2,323,401 or 21.9% from their six month 1994 levels. This reflects almost a
35% decrease in the number of pairs of combat boots sold in the first six
months of 1995 as compared to the first six months of last year. The current
period reflects delivery of combat boots to the U. S. government under the
sixteen month schedule whereas the prior period was on a twelve month schedule
for the same total pairs. Also, the prior period included a significant sale
of combat boots to a foreign customer. Cost of military boot sales and
services as a percent of revenues increased from 77.7% to 86.3% between the
two years due to increases in manufacturing costs such as health insurance and
workers compensation insurance.
Textile machinery's net sales increased $661,412 in the first six months of
1995 as compared to an increase of $496,655 experienced in the same six months
of 1994. Gross margin percentages decreased 0.2% in 1995 as compared to 1994.
REAL ESTATE
RESORT DEVELOPMENT
The Company's resort development in Spring Green, Wisconsin reported a loss
of $1,737,052 during the first six months of 1995 as compared to $1,317,039 in
1994, both years representing primarily property taxes, operating expenses and
overhead costs. However, the 1995 period reflected additional overhead for
the real estate development operation not present in the first quarter of
1994. The project generates minimal revenues during its first quarter of the
year in that the golf course's season has not yet begun and hotel occupancy is
seasonally at its lowest level. Furthermore, the resort just enters its
"season" during the latter part of the second quarter. There have been no
significant real estate sales to date.
COMMERCIAL AND RESORT LOTS
During the second quarter or 1994, the Company sold an apartment project
generating net sales of $10,643,988 and profit of $2,728,693. There was no
other significant or unusual activity in these divisions of the Company's real
estate segment during the first six months of either 1995 or 1994.
EQUITY INVESTEES
The following table sets forth for the six months ended June 30, 1995 and
1994, the Company's share of the earnings of entities in which it has an
ownership level whereby it has the opportunity to exert significant influence,
but not control, over those entities and thereby accounts for its investment
utilizing the equity method of accounting (amounts in thousands):
EQUITY INVESTEE 1995 1994
Rocky Mountain Chocolate Factory:
- Operations $ 489 233
- General expenses (37)
- Sale of stock and interest 358 284
--- ---
$ 810 517
=== ===
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 14, 1991, a jury in a District Court of Dallas County, Texas awarded
$3.5 million in actual damages and $5 million in punitive damages to the
plaintiffs of a lawsuit filed against the Company. This dispute related
to the amount of additional purchase consideration due plaintiffs under an
agreement made in 1983 whereby the Company purchased National Development
Company, a real estate company based in Dallas. The Company appealed the
verdict based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. The plaintiffs filed a cross-appeal, alleging that
the trial court should have awarded an additional $5 million in exemplary
damages, based upon the jury verdict. On August 9, 1995, the Court of Appeals
Fifth District of Texas at Dallas reversed the trial court's judgement, denied
the plaintiffs' claim for an additional $5 million in exemplary damages and
remanded the case back to the trial court for a new trial. No date for further
proceedings in this case has yet been set.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Dividends on the Company's $3.75 Cumulative Preferred Stock are payable
semi-annually at the annual rate of $3.75 per share, when and as declared, and
such dividends are cumulative. The $3.75 Cumulative Preferred Stock has no
voting rights, except if two semi-annual dividend payments are unpaid and in
arrears at the date of the Company's annual meeting, the holders of the $3.75
Cumulative Preferred Stock have the right to elect fifty percent of the
members of the Company's board of directors. Sunstates is currently in
arrears ten semi-annual dividend payments on its $3.75 Cumulative Preferred
Stock aggregating $5,209,931 ($18.75/share).
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
(11) Statement re computation of per share earnings
(a) Primary
(b) Fully diluted
(27) Financial data schedules (electronic filing only)
(B) Reports on Form 8-K:
The Company filed a current report on Form 8-K disclosing the acquisition
by its textile manufacturing subsidiary of the Balfour Health Products
Division from Kayser-Roth Corporation on March 20, 1995. No financial
statements or pro forma financial information was filed with such Form 8-
K but was filed by amendment on Form 8-K/A on May 22, 1995.
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.
SUNSTATES CORPORATION
\S\ GLENN J. KENNEDY
Glenn J. Kennedy
Vice President, Treasurer and
Chief Financial Officer
Date: August 11, 1995
<PAGE>
EXHIBIT INDEX
Sunstates Corporation
Form 10-Q Quarterly Report
For the Quarter Ended June 30, 1995
EXHIBIT NO EXHIBIT
11 Statement re computation of per share earnings
(a) Primary
(b) Fully diluted
27 Financial data schedules (electronic filing only)
<PAGE>
<TABLE>
EXHIBIT (11)
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(a) Primary
(UNAUDITED)
For the Six Months Ended
JUNE 30,
1995 1994
<S> <C> <C> <C>
Shares used in calculations:
Weighted average common shares outstanding 786,342 961,402
Weighted average Class B Shares at
24.375 to 1 and 21.125 to 1 conversion
rate in 1995 and 1994, respectively 1,703,072 1,738,356
Shares issuable upon conversion of
warrants and options * *
--------- ---------
Adjusted weighted average shares outstanding 2,489,414 2,699,758
========= =========
Net income (loss) $ (8,540,012) (2,188,775)
Preferred Stock dividends (543,913) (606,167)
--------- ---------
Adjusted net income (loss) $ (9,083,925) (2,804,942)
========= =========
Primary net income (loss) per share and common
share equivalent (adjusted net income divided
by adjusted weighted average common and
equivalent shares outstanding) $ (3.65) (1.04)
==== ====
*Anti-dilutive in 1994. All warrants and options outstanding expired prior to
January 1, 1995.
</TABLE>
<PAGE>
<TABLE>
EXHIBIT (11)
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(b) Fully diluted
(UNAUDITED)
For the Six
Months Ended
June 30,
1994
<S> <C> <C>
Shares used in calculations:
Weighted average common shares outstanding 961,402
Weighted average Class B Shares at
24.375 to 1 conversion rate** 1,738,356
Shares issuable upon conversion of warrants and options *
---------
Adjusted weighted average shares outstanding 2,699,758
=========
Net income (loss) $(2,188,775)
Preferred Stock dividends (606,167)
---------
Adjusted net income (loss) $(2,699,758)
=========
Primary net income (loss) per share and common
share equivalent (adjusted net income divided
by adjusted weighted average common and
equivalent shares outstanding) $(1.04)
====
*Anti-dilutive
** 21.125 to 1 in 1994 due to anti-dilutive effect in that year.
Note - Beginning January 1, 1995, the Company no longer has any outstanding
options or warrants and the Class B Stock has reached
its maximum conversion ratio of 24.375 to 1. Accordingly, the Company no
longer has a capital structure which could result an
any additional dilution of the Common and Class B shareholders.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Sunstates Corporation for the quarter ended
June 30, 1995, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 5,456,474
<SECURITIES> 70,128,324
<RECEIVABLES> 44,561,866
<ALLOWANCES> 1,563,281
<INVENTORY> 48,036,094
<CURRENT-ASSETS> 0
<PP&E> 77,119,491
<DEPRECIATION> 43,434,119
<TOTAL-ASSETS> 269,608,703
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 260,805
0
7,003,875
<OTHER-SE> 16,020,121
<TOTAL-LIABILITY-AND-EQUITY> 269,608,703
<SALES> 97,139,084
<TOTAL-REVENUES> 105,564,123
<CGS> 77,572,144
<TOTAL-COSTS> 110,520,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,194,424
<INCOME-PRETAX> (8,150,687)
<INCOME-TAX> (260,642)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,540,012)
<EPS-PRIMARY> (3.65)
<EPS-DILUTED> 0
</TABLE>
