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 March 31, 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 May 10, 1995
Common Stock, $.33 1/3 Par Value 782,414 shares
Class B Accumulating Convertible
Stock, $.10 Par Value 69,741 shares
TABLE OF CONTENTS
Sunstates Corporation
Form 10-Q Quarterly Report
For the Quarter Ended March 31, 1995
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1995 and December 31, 1994
Consolidated Statements of Operations - For the Three Months Ended
March 31, 1995 and 1994
Consolidated Statements of Stockholders' Equity - For the Three
Months Ended March 31, 1995 and 1994
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 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
<TABLE>
SUNSTATES CORPORATION
Consolidated Balance Sheets
March 31,
1995 December 31,
(Unaudited) 1994
ASSETS
<S> <C> <C> <S><C>
REAL ESTATE:
Property, plant and equipment $ 33,400,661 31,106,410
Real estate held for development
and sale 28,891,553 28,978,498
Mortgage loans 4,763,516 5,308,939
Land contracts receivable 4,792,671 5,116,720
---------- ----------
71,848,401 70,510,567
---------- ----------
INVESTMENTS IN SECURITIES:
Short-term investments 1,403,555 14,042,345
Fixed maturities 17,261,454 39,314,135
Equity securities 18,739,537 20,790,717
Investments in affiliates 5,041,211 4,758,706
---------- ----------
42,445,757 78,905,903
---------- ----------
OPERATING ASSETS:
Cash 142,214 234,875
Restricted cash 6,017,949 5,543,826
Accounts receivable 23,059,683 21,554,292
Premiums receivable 14,727,452 9,145,534
Inventories 46,092,673 42,908,931
Policy acquisition costs 1,521,976 1,097,995
Prepaid expenses 1,907,016 1,295,504
---------- ----------
93,468,963 81,780,957
---------- ----------
OTHER ASSETS:
Receivable from affiliates 3,334,094 3,234,752
Other assets 7,240,356 5,948,166
Cost in excess of assets acquired 15,101,405 6,194,910
---------- ----------
25,675,855 15,377,828
----------- -----------
$ 233,438,976 246,575,255
=========== ===========
</TABLE>
See Accompanying Notes
<TABLE>
SUNSTATES CORPORATION
Consolidated Balance Sheets
March 31,
1995 December 31,
(Unaudited) 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <S><C>
DEBT:
Notes payable $ 49,943,020 52,676,514
Mortgage notes 15,007,250 16,111,437
---------- ----------
64,950,270 68,787,951
---------- ----------
OTHER LIABILITIES:
Insurance reserves 60,210,355 62,681,402
Unearned premiums 25,366,271 18,493,925
Accounts payable 10,166,757 9,793,336
Accrued expenses 10,609,091 18,647,366
Other liabilities 14,158,192 14,037,545
----------- -----------
120,510,666 123,653,574
----------- -----------
TOTAL LIABILITIES 185,460,936 192,441,525
----------- -----------
MINORITY INTERESTS IN SUBSIDIARIES 21,800,502 21,892,721
STOCKHOLDERS' EQUITY:
Preferred Stocks 7,161,875 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 37,018,386 37,605,196
Accumulated deficit (22,844,545) (16,920,900)
Unrealized gains on marketable
equity securities 4,574,043 4,027,408
---------- ----------
Total stockholders' equity 26,177,538 32,241,009
---------- ----------
$ 233,438,976 246,575,255
=========== ===========
</TABLE>
See Accompanying Notes.
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Revenues:
Insurance premiums earned $ 13,607,976 11,421,406
Manufacturing sales 32,098,810 30,708,587
Real estate sales 217,567 273,761
Investment income 1,010,359 2,777,901
Equity in earnings of affiliates 257,000 114,000
Other income 1,701,616 1,699,408
---------- ----------
Total revenues 48,893,328 46,995,063
---------- ----------
Costs and expenses:
Insurance loss and loss
adjustment expenses 12,193,520 10,557,310
Cost of manufacturing sales 25,821,573 24,472,809
Cost of real estate sales 151,181 249,465
Selling and operating costs 14,363,191 11,921,687
Corporate expenses 543,985 635,221
Interest expense 1,589,107 927,633
---------- ----------
Total costs and expenses 54,662,557 48,764,125
---------- ----------
Loss before items shown below (5,769,229) (1,769,062)
Provision for income taxes (53,454) (449,602)
Minority interest in
income of subsidiaries (100,962) (328,496)
--------- ---------
NET LOSS $ (5,923,645) $ (2,547,160)
========= =========
EARNINGS PER SHARE INFORMATION:
Net Loss Applicable to Common Stock $ (6,201,527) $ (2,858,286)
========= =========
Net loss per common share: $(2.48) (1.04)
==== ====
</TABLE>
See Accompanying Notes.
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 1995 and 1994
(Unaudited)
$3.75 Class B
Cumulative Class E Accumulating
Preferred Preferred Stock Common Convertible
Stock Series I Series II Stock Stock
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994,
as previously reported $ 9,008,675 32,300 25,000 344,524 8,233
Cumulative effect on prior
years of change in method
of inventory valuation
--------- ------ ------ ------- -----
Balances, January 1, 1994,
as adjusted 9,008,675 32,300 25,000 344,524 8,233
Net loss
Conversion of Class B Stock 282 (3)
Adjustment of shares issued
pursuant to merger (75)
Purchase of treasury stock (1,017,500) (30,467)
Unrealized gains on securities
Excess of fair market value paid
over seller's historical cost
basis of automobile
--------- ------ ------ ------- -----
Balances, March 31, 1994 $ 7,991,100 32,300 25,000 314,339 8,230
========= ====== ====== ======= =====
Balances, January 1, 1995 $ 7,198,975 32,300 25,000 265,672 7,358
Net loss
Adjustment of shares issued
pursuant to merger (2)
Purchase of treasury stock (94,400) (4,865) (384)
Unrealized gains on securities
--------- ------ ------ ------- -----
Balances, March 31, 1995 $ 7,104,575 32,300 25,000 260,805 6,974
========= ====== ====== ======= =====
</TABLE>
See Accompanying Notes.
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 1995 and 1994
(Unaudited)
Capital Unrealized
In Gains Total
Excess of Accumulated on Stockholders'
Par Value Deficit Securities Equity
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994,
as previously reported $ 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 41,202,210 (9,348,058) 5,139,556 46,412,440
Net loss (2,547,160) (2,547,160)
Conversion of Class B Stock (279) --
Adjustment of shares issued
pursuant to merger (863) (938)
Purchase of treasury stock (838,034) (1,886,001)
Unrealized gains on securities (75,658) (75,658)
Excess of fair market value paid
over seller's historical cost
basis of automobile (109,404) (109,404)
---------- ---------- --------- ----------
Balances, March 31, 1994 40,253,630 (11,895,218) 5,063,898 41,793,279
========== ========== ========= ==========
Balances, January 1, 1995 $ 37,605,196 (16,920,900) 4,027,408 32,241,009
Net loss (5,923,645) (5,923,645)
Adjustment of shares issued
pursuant to merger (108) (110)
Purchase of treasury stock (586,702) (686,351)
Unrealized gains on securities 546,635 546,635
---------- ---------- --------- ----------
Balances, March 31, 1995 $ 37,018,386 (22,844,545) 4,574,043 26,177,538
========== ========== ========= ==========
</TABLE>
See Accompanying Notes.
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,923,645) (2,547,160)
Adjustments to reconcile net loss
to net cash utilized in
operating activities:
Depreciation and amortization 1,491,605 1,352,819
Adjustments to interest yields (58,109) (15,021)
Realized gains on investments (344,853) (1,652,170)
Reserves and writedowns 120,882 223,447
Equity in undistributed income (275,179) (136,317)
Addition to minority interest 100,962 328,496
Changes in assets and liabilities:
Real estate held for
development and sale 44,227 (494,446)
Inventories (1,660,630) (2,076,038)
Mortgage loans on real estate
and land contracts receivable 808,112 368,082
Mortgage notes payable on
real estate held (887,412) (271,330)
Insurance reserves and
unearned premiums 4,401,299 (6,019,292)
Operating assets and
other liabilities (5,960,017) (1,052,452)
--------- ---------
Total adjustments (2,219,113) (9,444,222)
--------- ---------
Net cash utilized in
operating activities (8,142,758) (11,991,382)
--------- ----------
INVESTING ACTIVITIES:
Investments in securities
sold or matured 33,258,196 26,267,169
Investments in affiliates sold -- 398,084
Investments in securities purchased (20,901,848) (7,117,509)
Investment in affiliates purchased (153,725) (130,054)
Other investments (645,867) --
Loans to affiliates (1,558) (300,000)
Purchases of property
plant and equipment (714,395) (979,538)
Acquisition of Balfour (14,956,086) --
Repayments of mortgage loans 95,140 968,546
--------- -------
Net cash provided by
(utilized in) investing activities (4,020,143) 19,106,698
--------- ----------
FINANCING ACTIVITIES:
Borrowings under notes payable 15,685,931 --
Repayments of notes and
mortgage notes payable (2,455,106) (6,294,094)
Purchase of Company stock (686,462) (1,886,940)
---------- ---------
Net cash provided by
(utilized in) financing activities 12,544,363 (8,181,034)
---------- ---------
Increase(decrease) in cash 381,462 (1,065,718)
Cash, beginning of period 5,778,701 9,579,236
--------- ---------
Cash, end of period 6,160,163 8,513,518
Less: restricted cash (6,017,949) (7,785,086)
--------- ---------
Unrestricted cash $ 142,214 728,432
======= =======
</TABLE>
See Accompanying Notes.
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
three months ended March 31, 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
$267,000 and $197,000 in 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.
Total Revenues $ 2,655,036 3,553,016
Net Income 29,376 15,495
Net Income Per Share $.01 .01
3. Inventories
The principal classifications of inventories were:
March 31, December 31,
1995 1994
Furniture manufacturing -
Materials and supplies $ 3,027,859 2,807,511
Work in progress 6,633,550 6,535,222
Finished goods 12,707,727 12,041,195
---------- ----------
22,369,136 21,383,928
---------- ----------
Textile apparel manufacturing -
Materials and supplies 4,202,850 3,296,755
Work in progress 6,522,184 5,803,012
Finished goods 7,713,294 8,164,413
--------- ---------
18,438,328 17,264,180
---------- ----------
Bootwear manufacturing -
Materials and supplies 1,344,610 882,022
Work in progress 1,487,555 1,501,282
Finished goods 1,070,718 542,876
--------- ---------
3,902,883 2,926,180
--------- ---------
Textile equipment manufacturing 933,602 883,086
Resort development 186,746 164,036
Other 261,978 287,521
--------- ----------
$46,092,673 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 $93,600 ($.03 per primary
and fully diluted share) in the quarter ended March 31, 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 $7,443,405 as
of March 31, 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 March 31, 1995, are
certain one and two-year U. S. Treasury securities yielding 6%
to 6.3% with an original cost of $9,225,936 (approximates market) which
were acquired under agreements to resell on various dates through July 7, 1995.
Additionally, the Company borrowed $9,100,428 from brokerage firms
against such securities with interest rates ranging from 6.05% to
6.375% and maturing on various dates through July 7, 1995.
Notes payable include $12,546,126 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 March 31, 1995, mortgage notes include $4,867,607 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):
Three Months Ended March 31,
1995 1994
Current - Federal $ -- 38
- State (9) 62
--- ---
(9) 100
Provision by majority-owned subsidiaries 62 350
-- ---
Total provision $ 53 450
== ===
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):
Three Months Ended March 31,
1995 1994
Tax computed at statutory rate $ (1,962) (601)
State taxes, net of federal benefit 1 74
Tax exempt income and dividend exclusion (121) (227)
Puerto Rican income not subject to Puerto
Rican or federal tax 7 (35)
Effect of purchase accounting adjustments (201) (91)
Effect of losses not utilized in the provision 2,303 1,249
Alternative minimum tax -- 38
Other 26 43
-- --
Total $ 53 450
== ===
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 three months ended March 31, 1995
and 1994 have been computed based on weighted average common
equivalent shares of 2,496,556 and 2,742,773, 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
$277,882 and $311,126 for the three months ended March 31, 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 Acton
Corporation. This dispute relates 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 has appealed the verdict
based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. On November 7, 1991, the Company filed a
Supersedeas Bond in the amount of the judgment, plus costs and
interest for one year, with the Clerk of the District Court, signed
by the Company as principal and by National Development Company,
Inc., an affiliate of the Company, as surety. The effect of the
filing of the supersedeas bond is to stay any execution of the
judgment against assets of the Company, pending the results on appeal
or any further orders of the District Court regarding the
supersedeas. The plaintiffs have filed a cross-appeal, alleging that
the trial court should have awarded an additional $5 million in
exemplary damages, based upon the jury verdict. The Company believes
that the damages awarded are contrary to the law and facts in this
matter and is vigorously pursuing its rights on appeal. However, at
this time management is not able to predict the Company's ultimate
liability, if any, in this matter and accordingly, no provision for
any such liability has been made in the Company's financial
statements. Should the Company be required to pay all or a
significant portion of this judgment, it could have a material
adverse effect on the financial position and results of operations of
the Company.
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 quarter of 1995 totaled
$20,480,000 as compared to $11,506,000 in the first quarter of 1994.
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 quarter of 1995 was $6,669,607
compared to $9,319,591 for the first quarter 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 March 31, 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 by reverse repurchase agreements) totaled
$22,012,668. 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 March 31, 1995, are
certain one and two-year U. S. Treasury securities yielding 6%
to 6.3% with an original cost of $9,225,936 (approximates market) which
were acquired under agreements to resell on various dates through July 7, 1995.
Additionally, the Company borrowed $9,100,428 from brokerage firms
against such securities with interest rates ranging from 6.05% to
6.375% and maturing on various dates through July 7, 1995.
The level of liquid assets, as defined by the National Association
of Insurance Commissioners ("NAIC"), of the Company's insurance
subsidiaries was $52,222,169 as compared to $90,109,196 at December
31, 1994. The decline is due to the settling of transactions through
which securities were acquired under agreements to resell coupled
with the liquidation of approximately $13 million 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 March 31,
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, $34,464,885 ($33,954,320 at December 31, 1994) of
investments in publicly traded equity securities of other companies,
valued at their quoted market prices on March 31, 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
December 31, 1994, Coronet's ratio was 134.6%, as compared to the
agreed upon ratio of 155%. At March 31, 1995, Coronet's ratio was
209.4%, 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 185% at March
31, 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.
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 decreased $13,136,279 during the three months of
1995, primarily accounted for by decreases in the insurance
subsidiary's investment portfolio as securities were sold to cover
negative cash flow from underwriting (see Insurance below). Increases
in property, plant and equipment, accounts receivable, inventories
and costs in excess of assets acquired are primarily the result of
the acquisition of Balfour on March 6, 1995. Of the $22,052,681
decline in fixed maturity investments, approximately $16,300,000 of
this decline was due to the settling of transactions through which
securities were acquired under agreements to resell. The increase in
premiums receivable is related to the increase in the written premium
volume at the Company's insurance subsidiary.
Total debt declined $3,837,681 during the first three months of
1995, primarily due to the settlement of approximately $16,300,000 of
transactions through which securities were acquired under agreements
to resell and repayments of $2,050,000 and $900,000 at the military
boot manufacturing and real estate subsidiaries, respectively. 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 quarter of 1995. The decline in accrued
expenses is the result of the payment of amounts due to brokers in
connection with security purchases prior to December 31, 1994.
Approximately 70.5% of Sunstates' debt of $64,950,270 at March 31,
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 $6,063,471 during the three months
of 1995 primarily due to the net loss of $5,923,645 and treasury
stock purchases totaling $686,351, both partially offset by increases
in unrealized gains in the Company's investment portfolio totaling
$546,635.
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
quarter of 1995 totaled $20,480,000 as compared to $11,506,000 in the
first quarter of 1994.
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 quarter of 1995 was $6,669,607
compared to $9,319,591 for the first quarter 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 March 31, 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 by reverse repurchase agreements) totaled
$22,012,668. 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 March 31, 1995, are
certain one and two-year U. S. Treasury securities yielding 6%
to 6.3% with an original cost of $9,225,936 (approximates market) which
were acquired under agreements to resell on various dates through July 7, 1995.
Additionally, the Company borrowed $9,100,428 from brokerage firms
against such securities with interest rates ranging from 6.05% to
6.375% and maturing on various dates through July 7, 1995.
The level of liquid assets, as defined by the National Association
of Insurance Commissioners ("NAIC"), of the Company's insurance
subsidiaries was $52,222,169 as compared to $90,109,196 at December
31, 1994.The decline is due to the settling of transactions through
which securities were acquired under agreements to resell coupled
with the liquidation of approximately $13 million 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 March 31,
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, $34,464,885 ($33,954,320 at December 31, 1994) of
investments in publicly traded equity securities of other companies,
valued at their quoted market prices on March 31, 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
December 31, 1994, Coronet's ratio was 134.6%, as compared to the
agreed upon ratio of 155%. At March 31, 1995, Coronet's ratio was
209.4%, 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 185% at March
31, 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 $54,574,791 at March 31, 1995, as
compared to $59,483,697 at December 31, 1994, primarily due to
continuing underwriting losses and unrealized losses in the
investment portfolio. The annualized ratio of premiums written
during the quarter ended March 31, 1995, to statutory surplus as of
March 31, 1995, was 1.5 to 1. A ratio of less than 3.0 to 1 is
generally considered conservative.
Manufacturing
Hickory White has loans totaling $12,668,346 at March 31, 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
$11,753,375 at March 31, 1995. The current asset ratio at March 31,
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 March 31, 1995, the division has
no long-term debt (excluding intercompany debt). Also, at March 31,
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 $20,535,648
at March 31, 1995, yielding a current ratio of 3.2 to 1. In
addition, Alba has a short-term line of credit of $5,000,000, of
which $3,770,185 was available at March 31, 1995. The division had
long-term debt of $13,075,000 and had total net assets of $27,866,190
at March 31, 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
$11,826,213 at March 31, 1995, yielding a current ratio of 4.7 to 1.
The division had no long-term debt at March 31, 1995, and had total
net assets of $11,989,264, 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 $2,865,472 at March 31, 1995,
yielding a current ratio of 2.99 to 1. There was no debt at March 31,
1995, and total net assets were $11,319,864.
Real Estate
The real estate segment's debt totaled $15,083,480 at March 31,
1995 with real estate assets of $44,846,369 yielding an asset
leverage ratio of 34%. At March 31, 1995, mortgage notes include
$4,867,607 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
$1,065,686 on its $3.75 Cumulative Preferred Stocks. Sunstates is
currently in arrears nine semi-annual dividend payments on its $3.75
Cumulative Preferred Stock aggregating $4,795,588 ($16.875/share).
Cash Flows
Operating Activities
The following table presents the net cash flows from operating
activities by industry segment for the three month periods indicated:
Cash Flows Provided By (Utilized In)
Operating Activities
1995 1994
Insurance $ (6,669,607) (9,319,591)
Manufacturing 1,379,430 240,288
Real Estate (1,643,075) (1,197,718)
Corporate (1,209,506) ( 1,714,361)
--------- ----------
$ (8,142,758) (11,991,382)
========= ==========
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 quarter of 1995 was $6,669,607
compared to $9,319,591 for the first quarter 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 three months of 1995, the furniture manufacturing
business utilized $1,379,912 of cash in its operating activities,
including $424,165 of interest expense and including $1,070,131 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 quarter of 1994, the furniture manufacturing business
utilized $251,365 of cash in its operating activities, including
$330,608 of interest expense and including $556,327 of cash provided
by a decrease in net operating assets and liabilities (mostly due to
an increase in accounts payable). At March 31, 1995, Hickory White
had no additional borrowing capacity under its Credit Agreement.
Cash flow from the remaining operations within the manufacturing
segment totaled $2,759,342 in the first quarter of 1995 as compared
to $491,653 for the first three 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 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 three month periods indicated:
Cash Flows Provided By (Utilized In)
Investing Activities
1995 1994
Insurance $ 10,608,249 18,930,879
Manufacturing (14,521,132) (400,782)
Real Estate (110,954) 629,148
Equity Investees -- 260,000
Corporate 3,694 (312,547)
--------- ----------
$(4,020,143) 19,106,698
========= ==========
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 the first quarter of 1994, the collection of a mortgage
loan was included in the real estate segment's cash flow.
The first quarter of 1994 reflected $260,000 of proceeds from the
sale of a small portion of the Company's investment in the common
stock of Rocky Mountain Chocolate Factory.
Financing Activities
The following table presents the net cash flows from financing
activities by industry segment for the three month periods indicated:
Cash Flows Provided By (Utilized In)
Financing Activities
1995 1994
Insurance $ (752,529) (7,893,281)
Manufacturing 13,319,403 (286,773)
Real Estate (22,401) (41)
Corporate (110) (939)
---------- ---------
$ 12,544,363 (8,181,034)
========== =========
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, 3,776 shares of Sunstates' $3.75 Cumulative
Preferred Stock and 3,840 shares of Sunstates' Class B Stock for an
aggregate cost of $686,352. With respect to the Class B Stock, 3,776
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 91,400 shares of Sunstates' Common
Stock and 40,700 shares of Sunstates' $3.75 Cumulative Preferred
Stock for an aggregate cost of $1,886,001.
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.
Results of Operations
The Company's net loss totaled $5,923,645 in the first quarter of
1995 or $2.48 per share, compared to a loss of $2,547,160 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 three months
ended March 31, 1995 and 1994 is as follows (amounts in thousands):
1995 1994
Revenues:
Insurance $ 14,312 13,863
Manufacturing 32,300 31,095
Real Estate 1,053 1,316
Equity Investees 275 372
Corporate & Eliminations 953 349
------ ------
$48,893 46,995
====== ======
Pre-tax Income (Loss):
Insurance $ (4,062) (739)
Manufacturing (72) 405
Real Estate (1,089) (979)
Equity Investees 257 372
Corporate (803) (828)
----- -----
$(5,769) (1,769)
===== =====
Insurance
Following is a summary of the results of operations of the
insurance segment for the three months ended March 31, 1995 and 1994
(amounts in thousands):
1995 1994
Premiums written $ 20,480 11,506
Premium growth (decline) 78% (36.8%)
Premiums earned 13,608 11,421
Losses and loss adjustment expenses 12,194 10,557
Loss ratio 89.6% 92.4%
Underwriting loss (3,831) (2,610)
Statutory combined ratio 118% 122.6%
Investment income recognized 714 2,284
Change in unrealized gains 581 114
Combined annual investment yield 0.6% 12%
Pre-tax income (loss) (4,062) (739)
(See "Liquidity and Capital Resources - Insurance" above for a
discussion of premium volume.)
During the first quarter of 1995, the Company recorded an
underwriting loss of $3,831,000, which included $586,000 of losses
recognized on inactive programs and losses on continuing active
programs of $3,245,000. The combined ratio for the 1995 accident
year on the Company's continuing active programs was 113.9%. This
compares to 1994 when the Company recorded an underwriting loss of
$2,610,000 on current active programs for a combined ratio of 122.6%.
The combined ratio for the first quarter of 1995 continues to be at
an unacceptable level, but does compare favorably to the combined
ratio for the first quarter of 1994 of 122.6%. 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 $324,000 in the quarter compared to $1,376,000 in the
comparable 1994 quarter.
Interest expense totaled $678,208 in the 1995 quarter ($109,406 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 increased by $375,405 or 3.1% in the first
quarter of 1994 compared against the increase of $164,105 or 1.4%
experienced in the first quarter of 1994. The furniture cost of
sales, as a percent of net sales, decreased approximately 4.2% in
1995 as compared to an increase of approximately 5.2% in the
comparable 1994 quarter. 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 $561,912 or 37.1% as
compared to a decrease of $591,908 or 28.1% in the prior year
quarter. Selling and administrative expenses remained relatively
stable between the two quarters.
Net textile apparel manufacturing sales for the first quarter of
1995 increased $983,379 or 7.4% compared to the same quarter in
1994. This increase was primarily due to the acquisition of the
Balfour Health Care operation which added $1,585,172 of net sales to
the 1995 quarter. Without this acquisition, sales for the quarter
would have declined $601,793 or 4.5% during the quarter 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 for
the first quarter of 1995, as compared to the first quarter of 1994,
by $24,302 or 0.7%. Selling, general and administrative expenses
increased from 19.6% for the first three months of 1994 to 21.7% for
the same period in 1995. Operating income decreased by $459,326 or
75% as compared to the first quarter 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. Sunstates' share of Alba' net income totaled
approximately $2,500 in 1994 as compared to $245,000 in 1994.
Operating revenues from Sunstates' military footwear division
decreased by approximately $141,000 or 3.2% from their first quarter
1994 levels. This reflects almost a 20% decrease in the number of
pairs of combat boots sold in first quarter 1995 as compared to the
first quarter 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 80.1% to 88.7% between the two quarters due to
increases in manufacturing costs such as health insurance and workers
compensation insurance. General and administrative costs decreased
$47,000 or 9.2% primarily reflecting bonuses which vary with income.
Textile machinery's net sales increased $172,398 or 18.6% in the
first quarter of 1995 as compared to the same quarter of 1994. Gross
margin percentages decreased 1.6% in 1995 as compared to 1994.
Real Estate
Resort Development
The Company's resort development in Spring Green, Wisconsin
reported a loss of $1,033,349 during the first quarter of 1995 as
compared to $750,855 in 1994, both years representing primarily
property taxes, operating expenses and overhead costs. However, the
1995 quarter 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.
Commercial and Resort Lots
There was no significant or unusual activity in these divisions of
the Company's real estate segment during either the first quarter of
1995 or 1994.
Equity Investees
The following table sets forth for the three months ended March
31, 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 $ 257 114
- General expenses (18)
- Sale of stock and interest 18 258
--- ---
$ 257 372
=== ===
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 Acton
Corporation. This dispute relates 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 has appealed the verdict
based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. On November 7, 1991, the Company filed a
Supersedeas Bond in the amount of the judgment, plus costs and
interest for one year, with the Clerk of the District Court, signed
by the Company as principal and by National Development Company,
Inc., an affiliate of the Company, as surety. The effect of the
filing of the supersedeas bond is to stay any execution of the
judgment against assets of the Company, pending the results on appeal
or any further orders of the District Court regarding the
supersedeas. The plaintiffs have filed a cross-appeal, alleging that
the trial court should have awarded an additional $5 million in
exemplary damages, based upon the jury verdict. The Company believes
that the damages awarded are contrary to the law and facts in this
matter and is vigorously pursuing its rights on appeal. However, at
this time management is not able to predict the Company's ultimate
liability, if any, in this matter and accordingly, no provision for
any such liability has been made in the Company's financial
statements. Should the Company be required to pay all or a
significant portion of this judgment, it could have a material
adverse effect on the financial position and results of operations of
the Company.
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 nine semi-annual
dividend payments on its $3.75 Cumulative Preferred Stock aggregating
$4,795,588 ($16.875/share).
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 such statements and financial information will be filed as an
amendment to the Form no later than May 19, 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: May 15, 1995
EXHIBIT INDEX
Sunstates Corporation
Form 10-Q Quarterly Report
For the Quarter Ended March 31, 1995
Exhibit No Exhibit
11 Statement re computation of per share earnings
(a) Primary
(b) Fully diluted
27 Financial data schedules (electronic filing only)
<TABLE>
EXHIBIT (11)
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(a) Primary
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
<S> <C> <C> <C>
Shares used in calculations:
Weighted average common shares outstanding 790,314 1,003,495
Weighted average Class B Shares at 24.375 to 1 and 21.125
to 1 conversion rate in 1995 and 1994, respectively 1,706,242 1,739,278
Shares issuable upon conversion of warrants and options * *
--------- ---------
Adjusted weighted average shares outstanding 2,496,556 2,742,773
========= =========
Net income (loss) $ (5,923,645) (2,547,160)
Preferred Stock dividends (277,882) (311,126)
--------- ---------
Adjusted net income (loss) $ (6,201,527) (2,858,286)
========= =========
Primary net income (loss) per share and common share equivalent
(adjusted net income divided by adjusted weighted average common
and equivalent shares outstanding) $ (2.48) (1.04)
==== ====
*Anti-dilutive in 1994. All warrants and options outstanding expired
prior to January 1, 1995.
</TABLE>
<TABLE>
EXHIBIT (11)
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(b) Fully diluted
(Unaudited)
For the Three
Months Ended
March 31,
1994
<S> <C> <S> <C> <C>
Shares used in calculations:
Weighted average common shares outstanding 1,003,495
Weighted average Class B Shares at 24.375 to 1 conversion rate** 1,739,276
Shares issuable upon conversion of warrants and options *
---------
Adjusted weighted average shares outstanding 2,742,773
=========
Net income (loss) $(2,547,160)
Preferred Stock dividends (311,126)
----------
Adjusted net income (loss) $(2,858,286)
=========
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
March 31, 1995, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 6,160,163
<SECURITIES> 42,445,757
<RECEIVABLES> 39,313,090
<ALLOWANCES> 1,525,955
<INVENTORY> 46,092,673
<CURRENT-ASSETS> 0
<PP&E> 75,874,481
<DEPRECIATION> 42,473,820
<TOTAL-ASSETS> 233,438,976
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 260,805
0
7,161,875
<OTHER-SE> 18,754,858
<TOTAL-LIABILITY-AND-EQUITY> 233,438,976
<SALES> 45,924,353
<TOTAL-REVENUES> 48,893,328
<CGS> 38,166,274
<TOTAL-COSTS> 53,073,450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,589,107
<INCOME-PRETAX> (5,769,229)
<INCOME-TAX> (53,454)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,923,645)
<EPS-PRIMARY> (2.48)
<EPS-DILUTED> 0
</TABLE>
