UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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 No. 1-5300
Sunstates Corporation
(Exact name of registrant as specified in its charter)
Delaware 22-1664434
(State or other jurisdiction (I.R.S.
of incorporation of organization) Employer Identification No.)
4600 Marriott Drive, Raleigh, North Carolina 27612
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919) 781-5611
Securities registered pursuant to Section 12(b) of the Act:
$3.75 Cumulative Preferred Stock, $25 Par Value Nasdaq Stock Market
Common Stock, $.33 1/3 Par Value Nasdaq Stock Market
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Class B Accumulating Convertible Stock, $.10 Par Value
Class E Preferred Stock, $.10 Par Value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
As of March 14, 1995, the aggregate market value of the Registrant's
voting stock held by non-affiliates of the Registrant was $4,036,442.
As of March 14, 1995, the Registrant had outstanding:
Common Stock, $.33 1/3 Par Value - 782,422 shares
Class B Accumulating Convertible Stock, $.10 Par Value - 69,741 shares
DOCUMENTS INCORPORATED BY REFERENCE
(None)
PART I
Item 1. BUSINESS
General Development of Business
The Company is the result of the merger in 1988 of the former
Sunstates Corporation, a real estate and insurance conglomerate, with
Acton Corporation, an owner and operator of cable television
systems. The merger was accounted for as a reverse acquisition: the
surviving legal entity having the name and corporate attributes of
Acton Corporation but the financial accounting and tax attributes of
Sunstates Corporation. Appropriate changes in the capital structure
were made to accommodate the various classes of stock of both
corporations. With the disposition of the last cable television
system (see discussion below), none of the assets of the former cable
television operation remain. At the Company's Annual Shareholders'
Meeting on December 13, 1993, the shareholders approved the changing
of the Company's name to Sunstates Corporation, effective January 1,
1994, in recognition of the fact that the name of Acton Corporation
was associated with its cable television operations.
Sunstates Corporation (herein referred to as "Sunstates" or the
"Company", which reference shall include subsidiaries) is a
majority-owned subsidiary of Wisconsin Real Estate Investment Trust
("WREIT") and WREIT in turn is a direct and indirect majority-owned
subsidiary of the following companies: Hickory Furniture Company
("Hickory"), Telco Capital Corporation ("Telco") and RDIS Corporation
("RDIS"), formerly Libco Corporation.
On January 17, 1989, Sunstates acquired from Hickory, for a cash
payment of $2,000,000, a 99% ownership interest in Sew Simple
Systems, Inc. ("Sew Simple"), a designer and manufacturer of
automated textile machinery located in Fountain Inn, South Carolina.
The results of operations of Sew Simple since January 1, 1989 are
included in the Consolidated Statement of Operations. The Stock
Purchase Agreement provided that if Hickory should find a buyer for
Sew Simple prior to the expiration of the Agreement, then Hickory
would be entitled to additional amounts based upon the excess, if
any, of the sales price over an escalating amount specified in the
contract, which, as of April 13, 1992, was approximately $3.4 million
(the Rights). On April 13, 1992, Sunstates acquired from Hickory its
remaining 1% ownership and its Rights under the Stock Purchase
Agreement for approximately $13.6 million (see Note 1 of the Notes to
Consolidated Financial Statements). The consideration given by
Sunstates included the assignment of approximately $12 million
previously due to Sunstates from Hickory and other affiliates plus a
note payable for approximately $1.6 million.
On June 21, 1990, Hickory White Company ("Hickory White"), a
wholly-owned subsidiary of Sunstates, completed the purchase of
Hickory's furniture manufacturing assets for $44,500,000 plus the
assumption of related operating liabilities and transaction costs.
The consideration given by Hickory White was composed of cash of
$25,315,740 (of which $20,623,807 was borrowed from a major bank
pursuant to a Credit Agreement), the assignment of amounts previously
due from Hickory totalling $11,257,935 and the assignment of
$7,926,325 in Increasing Rate Notes, including accrued interest, due
from Hickory Furniture Group, Inc., a wholly-owned subsidiary of
Hickory. The operating results of Hickory White are included in the
Consolidated Statement of Operations from the date of acquisition.
Alba-Waldensian, Inc. ("Alba"), a manufacturer of women's hosiery
and pantyhose, women's casual hosiery products, women's intimate
apparel, men's hosiery, medical specialty products and warp knit
products located in Valdese, N. C., had been an investee of the
Company accounted for utilizing the equity method of accounting since
May, 1987. Effective June 30, 1993, Alba became a 50.1% owned
subsidiary of the Company's insurance subsidiary, and accordingly,
the financial statements of Alba have been consolidated in the
accompanying financial statements since that date. Prior to June 30,
1993, the Company's share of Alba's earnings, which averaged 49.9%
during the six months ended June 30, 1993, and the year ended
December 31, 1992, was reported as equity in earnings of affiliates
in the Consolidated Statement of Operations.
On December 30, 1993, the Company sold its sole remaining cable
television system comprised of approximately 44,000 subscribers
located in Anne Arundel County, Maryland resulting in after-tax net
income of $46,565,847. With the sale of its sole remaining cable
television system, the Company is no longer engaged in the cable
television business. Accordingly, the Company has presented its
cable television segment as a discontinued operation in the financial
statements presented in Item #8 of this Report. Prior year's
statements have been reclassified to remove the operations of the
cable television segment from income from continuing operations and
the net assets and liabilities have been presented on a single line
in the prior years' balance sheets.
Financial Information About Industry Segments
Sunstates operates in four principal industries; insurance,
manufacturing, real estate and, prior to December 30, 1993, cable
television. See Note 14 of Notes to Consolidated Financial
Statements contained in Item 8 of this report for information
regarding Sunstates' operations in these industry segments.
Narrative Description of Business
Sunstates has been engaged in the development, sale and management
of real estate and in the property and casualty insurance business
for each of the last five years. It has also been engaged in the
cable television business from May 4, 1988 through December 30, 1993,
in the manufacture of automated textile machinery since January 17,
1989, in the manufacture of furniture since June 21, 1990, in the
manufacture of military footwear since September 30, 1990, and the
manufacture of textile apparel since June 30, 1993. Sunstates
conducts its business primarily through the following subsidiaries:
Normandy Insurance Agency, Inc., an Illinois corporation engaged in
property and casualty insurance through its wholly-owned
subsidiaries, principally, Coronet Insurance Company ("Coronet").
Hickory White Company, a North Carolina corporation engaged in the
manufacture of high end home furnishing products encompassing a
broad selection of traditional and transitional wood and
upholstered lines with five production facilities located in
Hickory and High Point, North Carolina.
Alba-Waldensian, Inc., a Delaware corporation engaged in the
manufacture of women's hosiery and pantyhose, women's casual
hosiery products, women's intimate apparel, men's hosiery, medical
specialty products and warp knit products located in Valdese, N. C.
Wellco Enterprises, Inc., a North Carolina corporation engaged in
the manufacturing of military footwear in Waynesville, N. C. with
additional production facilities in Puerto Rico.
Sew Simple Systems, Inc., a South Carolina corporation engaged in the design
and manufacture of automated textile machinery.
Sunstates Realty Group, Inc., Sunstates Equities, Inc., and
Pensacola Holding Corp., Florida corporations engaged in the
development of income-producing properties for sale to others.
Their primary activities are in the states of North Carolina,
Virginia and Florida.
National Development Company, Inc., a Texas corporation engaged in
the development and sale of recreational and second home resort
lots, primarily in the states of Missouri, Tennessee and Oklahoma.
The Springs, Inc., a Wisconsin corporation, engaged in the operation
of a luxury hotel and golf resort and the development of
residential lots and multi-family units in Spring Green, Wisconsin.
Insurance Operations
Operations in the insurance segment include the providing of
property and casualty insurance, primarily confined to the writing of
full coverage non-standard automobile insurance. During 1994,
Coronet's gross writings were 75% classified as auto liability, and 25% as auto
physical damage. Illinois premiums account for 48% of the business;
Arizona, 22%; Tennessee, 7%; Ohio 6%; Nevada, 8%; and all others, 9%.
Coronet generally writes minimum statutory limits of liability
coverage under policies with terms up to one year. Coronet's
customers are typically located in large urban areas and are drivers
with a record of accidents or violations thereby making it difficult
for them to obtain coverage from insurance companies not specializing
in the non-standard automobile business. Types of coverage provided
include both physical damage (collision and comprehensive), which has
a relatively short payout pattern, as well as liability (bodily injury
and property damage) which customarily has a longer payout pattern.
Coverage written in excess of amounts which management deems
reasonable to retain in relation to surplus are reinsured with other
insurance companies.
Normandy and Coronet were both incorporated in Illinois in December,
1962 and commenced business on April 5, 1963 under the Illinois
Insurance Code. Coronet is licensed to transact business in Alabama,
Arizona, Arkansas, Colorado, Florida, Georgia, Idaho, Illinois,
Indiana, Iowa, Kentucky, Minnesota, Mississippi, Missouri, Montana,
Nevada, New Mexico, Ohio, Oklahoma, Oregon, South Dakota, Tennessee,
Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.
Coronet Insurance Company operates three wholly-owned full line
property and casualty insurance subsidiaries; National Assurance
Indemnity Company ("NAIC"), Casualty Insurance Company of Florida
("CIC Florida") and Crown Casualty Company ("Crown"). NAIC was
incorporated in Illinois on April 19, 1988, commenced business on
June 21, 1988, and is licensed only in the State of Illinois. During
1992, NAIC began writing non-standard auto insurance at rates
different than Coronet. CIC Florida was incorporated in Florida on
April 3, 1990, commenced business on April 26, 1990 and is licensed
only in the State of Florida. CIC Florida began writing business in
February, 1994. Crown, a wholly-owned subsidiary of NAIC, was
incorporated in the State of Illinois on March 23, 1990, commenced
business on January 11, 1991, and is licensed only in the State of
Illinois. On November 30, 1992, Coronet ceded 100% of the unearned
premiums on its auto business lines as of that date to NAIC (75%) and
Crown(25%). A reinsurance agreement provides that effective December
1, 1992, Coronet will cede 27% of its new auto business on the
programs existing at that time to NAIC (20%) and Crown (7%). On
December 31, 1994, Casualty Insurance Company of Georgia, formerly a
wholly owned subsidiary of NAIC, was merged into Coronet Insurance
Company.
Coronet operates in Illinois through numerous independent agencies
who in turn deal with the retail customer. Liability and physical
damage claims are adjusted by the home office staff. Written premiums
in Illinois were $23,426,000 in 1994 compared to $19,515,000 in
1993, and $ 25,690,411, in 1992. The decrease in 1993 was primarily
the result of program changes instituted by new management during
1993 that were not well received by certain major Illinois producers.
During the latter part of 1993 and throughout 1994, Coronet has
addressed the issues raised by the producers so as to regain the lost
volume. In addition, Coronet has signed up additional producers, and
developed new marketing programs in 1994.
Florida, Georgia, Tennessee, Arizona and Nevada business is obtained
through managing general agency agreements. Subject to rules,
regulations and rates promulgated by the Company, the agents are
responsible for the production and issuance of policies. Claims have
been handled by the same agents subject to separate agreements until
late December 1993, at which time the Georgia claims were transferred
to Coronet's Tampa claims office. Coronet personnel have conducted
regular underwriting and claims audits in the offices of the agents.
As of October 1, 1991, laws materially affecting automobile
insurance changed in Georgia. These changes have resulted in lower
penetration of the marketplace and a decision was made to stop
accepting new business in August 1993. As a result of these matters,
premium volume declined to $61,769, $2,928,068 and $6,804,681, for
the years of 1994, 1993 and 1992, respectively, as compared
$13,717,709 in 1991.
Based on a review of the Arizona marketplace and rates, a rate
increase of 21.7% was made in April 1993, which resulted in volume
decreasing to $10,693,777 in 1994 as compared to $12,454,787 in 1993
and to $33,092,807 in 1992.
During 1993 and 1992, certain unprofitable programs were terminated.
They include the termination in December 1993 of the Camelback
reinsurance program which had written premiums of $4,800,000 in 1993
and $10,650,000 in 1992. Other programs which were terminated in
late 1992 or early 1993 include the Kansas, Iowa, Kentucky and West
Virginia programs, which had combined written premiums of $7,300,000
in 1992.
Through the end of 1993, substantially all of the premiums produced
in the states of Missouri and Ohio were produced under Managing
General Agency agreements similar to the agreements used to procure
the Georgia, Tennessee and Arizona business. All underwriting for
these programs were done by the Managing General Agents.
Substantially all of the claims handling function for these programs
were transferred from the agents to Coronet's Chicago or Tampa claims
offices during 1993. Coronet personnel have conducted regular
underwriting and claims audits, if appropriate, in the offices of the
agent.
As the result of the factors and circumstances described above,
Coronet has experienced a decline in written premiums from $131
million in 1991 to $119 million in 1992 to $57 million in 1993 and
$48 million in 1994.
Prior to December 30, 1994, Normandy owned 72% of Greater Heritage
Corporation ("Heritage") which in turn owned Florida No-Fault
Insurance Agency, Inc. ("Agency"), an insurance agency business in
the State of Florida. The Agency was sold in August, 1989 at a price
of $2,250,000 with an initial payment of $250,000 and a note of
$2,000,000. The note carries an interest rate of prime plus 1%, with
principal payments being amortized over a twelve year period and a
balloon payment due August 1, 1997. The sale resulted in a gain of
$1,121,674, which is being recognized as the payments under the note
are received. Heritage has no other ongoing operations. The note
which was acquired by Coronet at December 31, 1992, has a remaining
balance of $1,291,491. On December 30, 1994, GHC was merged into a
wholly-owned subsidiary of Normandy.
Competition
The insurance industry is highly competitive and Coronet competes
not only with other stock companies, many of which have substantially
larger capital, but with mutual companies (which may have a
competitive advantage because all profits accrue to policyholders),
and with underwriters operating under insurance exchanges. Many
other companies offer the lines of insurance which Coronet writes now
or may write in the future. Many of these companies have been in
business for long periods of time, have a much larger volume of
business, offer more diversified lines of coverage and have far
greater financial resources than Coronet.
Coronet obtains its underwriting business in three ways: (i)
through insurance agencies who in turn deal with the retail customer,
(ii) through managing general agents who in turn deal with smaller
insurance agencies, and (iii) through reinsurance assumed agreements
with other insurance companies. Assumed reinsurance business accounts
for less than 10% of Coronet's business. Coronet does not directly
market to retail customers. Primary competitive factors in particular
markets are the premium rates for insurance coverage, commission
rates offered to producers of underwriting business and the quality
and responsiveness of services.
Investments
Coronet may invest in numerous different types of
investments as allowed under applicable insurance regulations (see
"Regulation" below): including U. S. Government securities; bonds
and other corporate debt instruments; stocks and stock market
options; income-producing real estate and real estate mortgages; and,
through ownership of certain Sunstates subsidiaries, other
non-insurance operations of Sunstates. Under Coronet's investment
policy, investments may be made in high yield, unrated or less than
investment grade corporate debt securities when it is perceived that
such an investment could produce yields sufficiently greater than
those generated by investment grade securities. Investments in high
yield, unrated or less than investment grade corporate debt
securities have different risks than other investments in corporate
debt securities rated investment grade and held by Coronet. Risk of
loss upon default by the borrower is significantly greater with
respect to such corporate debt securities than with other corporate
debt securities because these issuers usually have high levels of
indebtedness and are more sensitive to adverse economic conditions,
such as recession or increasing interest rates, than are investment
grade issuers. Coronet may from time to time utilize both market as
well as issuer-specific call or put options for various investment
reasons including reducing its portfolio's exposure to stock market
volatility.
Regulation of Insurance Operations
1. General. Coronet, NAIC and Crown are subject to statutory
regulation and supervision by the Illinois Department of Insurance
("IDI") pursuant to the Illinois Insurance Code ("Insurance Code").
The IDI possesses broad administrative powers relating to such
matters as licensing of insurance companies and their agents,
approving policy forms, prescribing the nature of and limitations on
investments, requiring the establishment of reserves, regulating
trade practices, establishing the form and content of financial
statements and reports, and reviewing the rates for insurance, among
other matters. Coronet, NAIC and Crown are required to file detailed
annual statements with IDI and its business and accounts are subject
to periodic examination by IDI.
CIC Florida is subject to statutory regulation and supervision by
the Florida Department of Insurance which possess powers similar to
those possessed by the Illinois Department of Insurance.
2. Holding Company System Regulation. The Insurance Code requires
registration and periodic reporting by insurance companies that are
licensed in Illinois and that are part of an insurance holding
company system. An "insurance holding company system" means two or
more affiliated persons, as defined by the Insurance Code, one or
more of whom is an insurer. Since Coronet is an indirect subsidiary
of Sunstates, Coronet is subject to these regulations. Generally,
Coronet is required to register with the Director of the IDI as a
member of an insurance holding company system and to file an annual
statement and make its books and records available for examination.
Material transactions between Coronet and any other affiliate of
Coronet, which includes RDIS, Telco, Hickory, WREIT and Sunstates are
subject to disclosure and such transactions must be on terms that are
fair and reasonable.
3. Dividends. The Insurance Code permits the declaration and
payment of dividends only out of earned, as distinguished from
contributed, surplus, provided further that the remaining surplus is
not less than the minimum original surplus required for it to
transact business after payment of the dividend. The provisions of
the Insurance Code pertaining to insurance company holding systems
further restrict payment of any extraordinary dividend. Pursuant to
this provision, Coronet will not be permitted to pay any
extraordinary dividend or distribution unless the Director of IDI has
received thirty days prior notice of the declaration and does not
disapprove of such payment within that thirty day period. An
extraordinary dividend or distribution is defined as one whose fair
market value, together with other dividends within the preceding
twelve months, exceeds the greater of (i) ten percent of surplus as
regards policyholders as of the preceding December 31, or (ii) the
net income from operations, as adjusted, for the twelve months ending
on the preceding December 31.
4. Acquisition of Control. The Insurance Code restricts the
ability of any person to acquire control of Coronet or of any company
that directly or indirectly controls Coronet (which includes RDIS,
Telco, Hickory, WREIT and Sunstates) without prior regulatory
approval. Pursuant to the Insurance Code, ownership, control or
holding shareholders' proxies representing ten percent or more of the
voting securities of Coronet, RDIS, Telco, Hickory, WREIT or
Sunstates, will be presumed to constitute control unless rebutted by a
showing made in the manner as the Director of IDI may provide by
rule.
5. Restrictions on Investments. The Insurance Code restricts
investments of Coronet to those set forth in the Insurance Code. The
Insurance Code requires any investment of Coronet to be authorized or
ratified by the Board of Directors or by a committee thereof charged
with the duty of supervising investments and loans. Among the type
of investments permitted are obligations of the United States, states
or political subdivisions of a state; revenue obligations of states
or municipal public utilities; obligations of business corporations;
obligations of not-for-profit corporations; non-demand obligations of
financial institutions; common stock; preferred or guaranteed stock;
equity or index put and call options (other than uncovered call
options); savings and loan association deposits; income producing
real estate; collateral loans; mortgages on real estate and mortgage
pass-through securities as well as other permitted investments. The
Insurance Code provides limitations for each category of investment
as to the percentage of admitted assets or as to the percentage of
surplus of Coronet which may be invested in each category. In
addition, the Insurance Code provides limitations as to the
percentage of admitted assets which may be invested in any one
particular obligation or investment.
6. Restriction on Rates. The Insurance Code, and similar statutes
which govern Coronet in each jurisdiction in which it does business,
sets forth standards with regard to the making and use of rates. The
statutes require generally that the rates not be excessive or
inadequate, nor can they be discriminatory. A rate will not be held
to be excessive unless it is unreasonably high for the insurance
provided and a reasonable degree of competition does not exist in the
area with respect to the classification to which the rate is
applicable. A rate will not be held inadequate unless it is
unreasonably low for the insurance provided and continued use of the
rate would endanger the solvency of Coronet. The statutes generally
permit consideration to be given to past and prospective loss
experience, to a reasonable margin for underwriting profit and
contingencies and to past and prospective expenses.
Every insurance company writing certain lines of insurance must file
its rates and rating schedules with the appropriate governmental
regulators. The filing must be made as often as the rates are
changed or amended.
The consolidated financial statements include the estimated
liability for unpaid losses and loss adjustment expenses ("LAE") of
Coronet. The liabilities for losses and LAE are determined using
case-basis evaluations and statistical projections, including
independent actuarial reviews, and represent estimates of the
ultimate net cost of all unpaid losses and LAE incurred through
December 31 of each year. In estimating the ultimate net cost of
unpaid claims and LAE the impact of inflation is implicitly
considered. Coronet reduces its reserves for any estimated salvage
or subrogation recoveries which may be realized in connection with
settling unpaid claims. These estimates are continually reviewed and,
as experience develops and new information becomes known, the
liability is adjusted as necessary. Such adjustments, if any, are
reflected in current operations.
The accompanying tables present an analysis of losses and LAE. The
following table provides a reconciliation of beginning and ending
liability balances for 1994, 1993 and 1992. The tabular Analysis of
Loss Adjustment and Loss Expense Development shows the development of
the estimated liability for the ten years prior to 1994.
<TABLE>
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
1994 1993 1992
(Amounts in thousands)
<S> <C> <C> <C>
Liability for losses and LAE at beginning of year $ 86,393 111,949 98,987
------ ------- ------
Provision for losses and LAE for claims incurred
in the current year 41,733 64,271 109,000
Increase (decrease) in estimated losses and LAE for
claims incurred in prior years (5,891) 6,772 5,458
----- ----- -----
35,842 71,043 114,458
------ ------ -------
Losses and LAE payments for claims during:
The current year 22,280 33,395 48,053
Prior years 37,274 63,204 53,443
------ ------ ------
59,554 96,599 101,496
------ ------ -------
Liability for losses and LAE at end of year $ 62,681 86,393 111,949
====== ====== =======
</TABLE>
The increase (decrease) in estimated losses and loss adjustment
expenses for claims occurring in prior years, as shown in the
preceding table, is due to settling case-basis reserves established
in prior years at amounts other than originally expected.
The anticipated effect of inflation is implicitly considered when
estimating present liabilities for losses and LAE. Anticipated cost
increases due to inflation are considered in estimating the ultimate
claim costs. Average claim costs (severities) are projected based on
historical trends adjusted for changes in underwriting standards,
policy provisions and general economic trends. These trends are
monitored based on actual development and are modified if necessary.
The limits on risks retained by Coronet vary by type of policy.
Risks in excess of the retention limits are reinsured.
The following table presents the development of balance sheet
liabilities for 1984 through 1994. The top line of the table shows
the estimated liability for unpaid losses and LAE recorded at the
balance sheet date for each of the indicated years. This liability
represents the estimated amounts of losses and LAE for claims arising
in all prior years that are unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to
Coronet. The upper portion of the table shows the reestimated amount
of the previously recorded liability based on experience as of the
end of each succeeding year. The estimate is increased or decreased
as more information becomes known about each individual claim.
The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the 1984
liability has developed a $662,000 deficiency over ten years. That
amount has been reflected in income over the ten years and did not
have a significant effect on income of any one year.
The lower section of the table shows the cumulative amount paid
with respect to the previously recorded liability as of the end of
each succeeding year. For example, in connection with the accident
year of 1985, Coronet had paid as of December 31, 1994, $23,491,000
of the currently estimated $23,660,000 of losses and LAE that had
been incurred; thus, an estimated $169,000, net of salvage and
subrogation receivable, remains to be paid as of the current financial
statement date.
In evaluating this information, it should be noted that each
amount includes the effects of all changes in amounts for prior
periods. For example, the amount of redundancy related to losses
settled in 1989, but incurred in 1983, will be included in the
cumulative redundancy (or deficiency) amount for years 1984 through
1989. This table does not present accident or policy year
development data, which readers may be more accustomed to analyzing.
Conditions and trends that have affected development of the liability
in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
<TABLE>
Analysis of Loss Adjustment and Loss Expense Development:
(AMOUNTS IN THOUSANDS)
Year Ended December 31, 1984 1985 1986 1987 1988 1989
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and loss
adjustment expenses $22,439 21,441 31,487 51,751 69,352 80,779
Liability reestimated as of:
One year later 22,226 22,673 32,784 50,883 69,341 86,252
Two years later 22,791 23,060 33,296 51,659 71,275 83,830
Three years later 23,169 23,735 33,850 53,829 69,589 82,881
Four years later 23,664 23,994 35,077 53,040 67,703 82,741
Five years later 23,653 24,441 34,865 51,659 67,438 83,753
Six years later 23,947 24,393 33,914 51,452 68,373
Seven years later 23,590 23,834 33,563 51,668
Eight years later 23,227 23,524 33,622
Nine years later 23,063 23,660
Ten years later 23,101
----------------------------------------------------
Cumulative redundancy (deficiency) ($662) (2,219) (2,135) 83 979 (2,974)
----------------------------------------------------
Cumulative amount of liability paid through:
One year later 8,587 8,971 13,322 21,031 28,056 37,413
Two years later 13,709 13,640 18,950 31,622 42,827 57,305
Three years later 16,976 16,265 23,391 38,639 53,212 67,951
Four years later 18,689 18,543 26,640 43,848 59,019 75,922
Five years later 20,129 20,298 29,586 47,143 64,053 78,918
Six years later 21,547 21,980 31,423 49,572 65,663
Seven years later 22,383 22,882 32,579 50,444
Eight years later 22,863 23,275 33,106
Nine years later 23,038 23,491
Ten years later 23,101
</TABLE>
<TABLE>
Analysis of Loss Adjustment and Loss Expense Development:
(AMOUNTS IN THOUSANDS)
Year Ended December 31, 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C>
Liability for unpaid losses and loss
adjustment expenses 93,760 98,987 111,949 86,393 62,681
Liability reestimated as of:
One year later 95,826 104,446 118,721 80,502
Two years later 97,233 109,242 115,009
Three years later 98,273 110,063
Four years later 99,100
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
---------------------------------------------
Cumulative redundancy (deficiency)(5,340) (11,076) (3,060) 5,891
---------------------------------------------
Cumulative amount of liability paid through:
One year later 47,909 53,444 63,203 37,274
Two years later 69,396 81,154 84,683
Three years later 83,645 92,645
Four years later 89,332
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
</TABLE>
Furniture Manufacturing
Hickory White Company, through its four divisions, manufactures
and retails wood furniture (also known as "casegoods") consisting of
bedroom, dining room, and occasional pieces as well as upholstered
furniture. Hickory White's furniture generally follows certain period
styles from America, England, France, Italy and the Orient and is
offered in numerous finishes. Recent introductions have also included
contemporary and transitional designs. Designs are acquired from
various independent designers on a retainer or royalty basis under
agreements generally lasting five years.
Casegoods are manufactured at the Company's residential
manufacturing complex in Hickory, NC. Pricing generally falls in the
upper-middle to upper price ranges, either as individual pieces or as
a suite of furniture.
The upholstery division also targets pricing in the upper-middle
to upper price ranges, with products manufactured at the Company's
upholstery plant in High Point, NC. Wood frame parts are made in an
adjacent frame plant. Some frames are imported from Spain and Italy,
and are finished and upholstered at the Company's plant.
The Chaircraft Division, located in Bethlehem, NC, manufactures
and markets occasional chairs and lounge seating which are sold to
the contract, hospitality and health care markets. Their products
are generally priced in the medium price ranges.
The Retail Division consists of two factory outlet stores in
Statesville and Burlington, North Carolina. These stores sell
factory seconds, returns, showroom samples, discontinued lines, etc.
to the general public.
The following table shows the percentage of Hickory White's total sales
(including periods prior to acquisition on June 21, 1990) from operations
attributable to the sale of casegoods, upholstered furniture and occasional
chairs\lounges during each of the periods set forth.
<TABLE>
Percentage of Total Sales
Year Ended
December 31,
Division 1994 1993 1992 1991 1990
<S> <C> <S> <C> <C> <C> <C> <C>
Casegoods 67% 69% 68% 73% 75%
Upholstery 15 15 15 13 13
Occasional/lounge seating 14 16 17 14 12
Retail 4 -- -- -- --
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Manufacturing Process, Raw Materials and Supplies
Hickory White manufactures furniture by combining skilled
craftsmanship with mechanized techniques. The blending of modern
technology and skilled craftsmanship results in volume production
without sacrificing quality. Prices of furniture pieces vary
according to type and quality of wood used in the piece of furniture,
detailed matching of veneers, quality of fabric (if upholstered),
amount of hand work performed by the skilled craftsmen and time
devoted to hand assembling and finishing the product.
Materials and supplies used in the manufacture of Hickory White's product
consists primarily of lumber, veneers, fabrics, finishing material and
various types of hardware. With a few exceptions, such as mahogany
lumber, these items are provided by domestic sources and are offered
by a number of competing suppliers. Hickory White devotes
significant attention to its production scheduling, adequacy of
inventories of materials, and the orderly procurement of a steady
flow of materials and supplies. This stability has been achieved
without the necessity of entering into long-term purchase commitments.
Consequently, while the furniture industry has occasionally
experienced temporary shortages and increased costs of some of its
raw materials, such occurrences have not had any significant effect
on the preponderance of Hickory White's diversified line of products
and management does not expect any significant effect in the future.
Marketing, Sales and Distribution
Hickory White sells its products primarily to furniture retailers,
showrooms and department stores. Furniture is also sold on a
contract basis to customers other than furniture retailers such as
hotels, motels, restaurants, offices, and retirement homes. Hickory
White's products are principally sold in the United States, however,
both the European Common Market and the Japanese Market have produced
some sales to date. Although not currently significant, the volume in
both of these markets is expected to increase in the future.
Residential products are sold through 21 exclusive commissioned sales
agents. In addition, 25 commissioned sales agents sell Hickory
White's products to the contract market and these representatives
also sell the products of other companies.
Hickory White maintains approximately 2,200 active customer accounts.
No single customer accounted for more than 3% of consolidated net
sales during the 1994 fiscal year.
The percentages of consolidated net sales attributable to certain
categories of purchasers during each of the last five years
(including periods prior to acquisition) are as follows:
<TABLE>
Percentage of Total Sales
Year Ended
<CAPTION> December 31,
Products 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Retail Furniture Stores 71% 72% 74% 79% 76%
Wholesale Showrooms 3 3 2 4 4
Department Stores 5 5 4 3 5
Contract Furnishers 15 17 17 9 10
Company Owned Outlets 2 -- -- -- --
Other 4 3 3 5 5
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Backlog
Hickory White's unfilled customer orders (backlog) for furniture was
approximately $7,339,000, $9,084,000 and $7,431,000 as of December 31,
1994, 1993 and 1992, respectively. Backlog is generally filled
within three months.
Environmental and Other Regulation
Hickory White believes it has complied with all federal, state and
local environmental and regulatory requirements and in cooperation
with its insurance carriers, conducts safety programs and makes
capital improvements to reduce risks of injury to employees, loss of
property and the correction of environmental problems.
Hickory White is aware of the vast amount of activity pending on the
federal, state and local levels which would require the expenditure
of unknown amounts should the proposals be adopted. Proposals which
have been advocated include but are not limited to: (a) further
restrictions concerning the amount of wood dust particles in the work
place, (b) increased control of permissible emissions such as smoke
and finishing fumes into the environment, (c) further restrictions on
flammability of upholstered furniture, (d) further restrictions on
above ground and underground storage tanks and (e) bans on use of
toxic substances.
The furniture industry is working with various regulatory bodies in
an effort to see that adequate protection can be provided to
employees, communities and consumers without prohibitive costs to
manufacturers. In the past, the voluntary efforts of the industry,
(including Hickory White) and the cooperative efforts of the industry
and regulatory agencies, have produced reasonable regulation, the
cost of which has not been prohibitive.
Competition and Housing Industry Factors
The furniture industry is highly competitive, with more than 2,000
manufacturers engaged in various phases of the industry. Although
furniture manufactured by Hickory White is marketed primarily in the
upper-middle to high price ranges, such furniture competes with other
manufacturers' furniture in all price ranges. Many other competing
furniture manufacturers have greater resources than Hickory White.
Reputation, price, design and service constitute the principal
methods of competition in the industry.
Imports have become an increasing factor in the furniture market,
primarily in wood furniture. The primary sources of imports include
Taiwan, Korea, Canada and Europe. Imports from Europe are generally
in the upper price range (above Hickory White) and are less
competitive at the lower price points. Hickory White has been
affected in a small way by imports from the Pacific rim.
Competitive factors require that Hickory White and other industry
members carry significant amounts of inventory in order to meet rapid
delivery requirements of customers. Hickory White does not normally
grant extended payment terms to customers, and it follows the normal
practice in the industry of not permitting its customers to return
merchandise unless the return is authorized.
The furniture industry has traditionally benefitted from new housing
construction. Although interest rates have increased during the past
year, they are still within reach of most new homeowners. However,
such increases have resulted in a decline in new housing starts.
Manufacturing Consolidation
In early 1993 the Company closed its casegoods manufacturing
operation in Mebane, NC which was the old White Furniture Company
acquired in 1985. The shutdown was attributed to sagging demand for
upper-end wood furniture, and to the Company's excess production
capacity. Product lines previously manufactured in Mebane were
transferred to the Hickory plant, and service to customers continued
uninterrupted. (See "Management Discussion and Analysis" in Item 7.
of Part II of this Annual Report for further information regarding
this consolidation.)
Textile Apparel
Alba manufactures and markets a variety of knitted apparel and
health care products through four divisions, the Consumer Products
Division, the Health Products Division, the Alba Direct Division and
the Byford Apparel Division. In addition, Alba has created the AWI
retail division to market products directly to the consumer.
Consumer Products Division
Products manufactured and sold by this division include women's
intimate apparel and women's hosiery products. Intimate apparel
includes stretch bikinis, briefs and bodywear, as well as specially
designed briefs for maternity wear. Women's hosiery products include
sheer stockings, pantyhose, and trouser socks, primarily for
large-size women and the maternity market.
Alba has developed a process which makes it possible to knit bras,
tank tops and body suits in seamless knitting equipment. This design
technology, which has a patent pending, has allowed the company to
significantly broaden its product offerings.
Alba uses state of the art computer-controlled circular-knitting
technology. In addition, a significant portion of Alba's consumer
products, including its women's intimate apparel, are produced on
fine gauge full-fashion knitting equipment. Such equipment produces
apparel that management believes is better fitting, therefore more
comfortable. Management believes that, due to the limited
availability of such equipment, few companies have the ability to
produce a significant volume of these full-fashioned products.
Health Products Division
Products manufactured and sold by this division are designed to
assist in healthcare. They include anti-emobolism stockings and
pulsitate anti-embolism systems, an intermittent pneumatic
compression device, both designed to improve circulation and reduce
the incidence of deep vein thrombosis; sterile wound dressings such
as presaturated gauze, petrolatum and xeroform gauze, non-adhering
dressings and gauze strips; XX-Span dressing retainers, an extensible net
tubing designed to hold dressing in place without the use of adhesive
tape. All dressing products are used in wound care therapy,
particularly the treatment of burns.
Knitted stockinette is manufactured in a variety of sizes and used
under fracture casts, and sterile packaged for use as a supplemental
drape in surgical procedures. Heel and elbow pads are XX-Span(R) sleeves
with an inner soft foam pad used to reduce pressure and the incidence
of decubitus ulcers.
Slip-resistant patient treads are knitted, soft patient footwear with
slip-resistant soles to help prevent patient falls while keeping feet
warm even while in bed. Knitted arm sleeves provide protection to the skin of
patients with poor circulation. Blood filter sleeves are a component
used in blood filtering systems manufactured by others. Mesh panties
are inexpensive stretch pants used to hold maternity pads or
incontinent pads in place.
Byford Apparel Division
Byford imports and markets a broad range of better men's hosiery and
sweaters. For the most part, Byford's socks are imported from the
Byford mill in Leicester, England. The men's hosiery incorporates
fully reciprocated and reinforced heels and toes. Sourcing for
Byford sweaters is more broadly based , with products coming from
Coats Viyella mills in the UK, mills in the Far East, and domestic
sweater producers.
Alba Direct Division
Alba Direct distributes products from the Consumer Products Division,
Byford Apparel Division, and Health Products Division to the
independent specialty retail class of trade via telemarketing. It is
also the primary group responsible for building Alba's export
business.
AWI Retail Division
Alba Direct also has responsibility for an outlet store in Branson,
Missouri, thereby providing entry into one of the fastest growing
channels of distribution.
Methods of Distribution
The Consumer Products Division markets its products directly to chain
store organizations, which sell them under their own labels, and to
several companies that market nationally advertised brands. Alba's
products are sold throughout the United States through salaried and
commissioned salesmen. Byford products are marketed primarily through
men's specialty stores, both chain and independents. Products of the
Health Products Division for use in hospitals are marketed to major
distributors supported by Alba's commissioned sales
representatives. These products are sold both under private label
and under Alba's own Life Span(R)label. Alba Direct distributes
branded Consumer Products and Health Products to the independent
retail trade through telemarketing. Sales offices are located in
Valdese, N.C. and in New York. Total expense for marketing and
selling of all products from Alba's continuing operations was 10.0%
of sales in 1994, compared to 12.0% in 1993. The decrease from 1993
was mainly due to better cost control and the absence of incurred
costs associated with a repackaging project and expenses related to
the Leslie Fay(R) line.
Manufacturing
From the 1920's to the 1940's, women's silk stockings were knitted to
the shape of the leg on fine gauge full-fashion machines and were
seamed up the back (because silk is an inelastic yarn). The
introduction of stretch nylon yarn in the early 1950's made it
feasible to knit seamless stockings and, later, pantyhose on tubular
knitting machines. When this occurred, the industry considered fine
gauge full-fashion knitting equipment obsolete and production of this
equipment here and in Europe ceased. Much existing equipment was
destroyed and none has been manufactured since. In the mid-1950's Alba
developed a technique for producing stretch, one-size panty products
for women on this full-fashion knitting equipment. After some years
of marketing development, the stretch panty product became quite
successful, and, subsequently, Alba began using the same equipment to
produce children's leotards and, later, men's underwear. During 1989
and 1990, men's underwear, the remainder of the children's leotards
and tights were discontinued. In past years, Alba sought and acquired
significant number of fine gauge full-fashion knitting machines and
also developed a substantial stock of spare parts. As a result,
management believes that Alba now owns more fine gauge full-fashion
knitting machines than any other manufacturer. Company technicians
have developed the capability of rebuilding and refurbishing the
equipment to meet new equipment efficiency and quality standards.
Alba, through its training programs, has developed a corps of
professional mechanics and knitters to continue efficient operation of
these machines. Alba's present complement of equipment is more than
sufficient to produce the volume of its present sales, and it can
produce or has produced any machine parts required for continuing
operation of these machines. The balance of Alba's products is
manufactured on equipment generally available to the industry (even
though some equipment is modified by Alba). Alba anticipates that
capital expenditures for 1995 will be approximately $2,100,000 for
the renovation of existing plant and equipment and for the purchase
of new, more efficient knitting equipment.
Financial Information About Classes of Similar Products
Alba is in a single line of business: manufacturing, processing and
selling knitted products, consisting of several classes. The table
below illustrates sales as a percentage of net dollar volume from
continuing operations for each product class for each of Alba's last
five years:
<TABLE>
(%): 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Women's Intimate Apparel 40.2 37.4 43.8 48.6 44.3
Men's Wear 4.3 5.5 0.0 0.0 0.0
Women's Hosiery Products 17.4 19.2 19.1 15.7 19.0
Men's Hosiery 7.9 7.3 1.0 1.2 9.7
Health Products 30.2 30.6 36.1 34.5 27.0
---- ---- ---- ---- ----
100 100 100 100 100
=== === === === ===
</TABLE>
Discontinued products are eliminated for the purpose of this table.
The remaining sales percentages of each class were restated after
this elimination to represent sales of each class as a percentage of
net dollar volume from continuing product lines.
New Products or Segments
Alba maintains an active research and development department
that continually evaluates new products and processes. Management
also evaluates new products, business opportunities, and acquisitions
on an on-going basis and could encounter a profitable situation which
would require substantial investment in the future. Such an
investment occurred in 1994 with the purchase of the pulsitate
anti-embolism system from Baxter Healthcare Systems.
On March 6, 1995, the Company's textile apparel manufacturing
subsidiary (Alba) purchased the Balfour Health Care Division and
manufacturing facility in Rockwood, Tennessee from Kayser-Roth
Corporation for approximately $14.5 million, subject to post-closing
adjustments. The acquisition of Balfour will add approximately $15
million in annual sales to Alba. Alba financed 100% of the
acquisition price with a revolving loan agreement provided by a major
bank.
Sources and Availability of Raw Materials
The principal raw materials used by Alba in its manufacturing
processes include various types of yarn, chemicals for dyeing and
finishing and for impregnating medical products and packaging
materials for all products. Alba acquires these materials from a
number of sources and is not dependent on any one source for a
significant amount of its raw materials. Alba anticipates no material
change in either the availability or the cost of its raw materials.
Patents and Licenses
The only material patents held by Alba are (1) for pantyhose with
a terry crotch insert, which expired in 1992; (2) for a device used
to warm wet dressings; and (3) for a process covering the manufacture
of dressings. The latter two expire in 2002. Alba or its subsidiary,
Pilot Research Corporation, holds numerous other patents that,
because of obsolescence or other reasons, are not material to Alba's
current operations. Alba licensed the No-Nonsense(R) trade mark in
1990 for an initial term of 3 years and seven months with renewal
options after the expiration date. Management decided to terminate the
license agreement at the end of 1993.
Working Capital
Differences resulting from seasonal fluctuations have not been
sufficient to materially affect Alba's working capital requirements.
Alba sells merchandise on consignment only on a limited basis.
Returns are permitted when the quality of merchandise sold is below
acceptable standards or when an error in completing an order occurs.
The number and amounts of returns during Fiscal 1994 did not have a
material effect on working capital of Alba. Due to the various
approaches to manufacturing and distribution used by the industry,
Alba is not aware of any industry-wide norms relating to sale and
delivery requirements. During Fiscal 1994 working capital was
adversely affected by the purchase of inventory related to the
pulsitate anti-embloism system from Baxter Healthcare. This purchase
was financed through short term borrowings on a line of credit which
will be converted to a long term note in 1995 with an amortization
schedule of 5 years.
Significant Customers
Major customers for Alba's products and their respective volume
of sales for 1994, 1993 and 1992 are as follows:
1994 1993 1992
Baxter Health
Products Corporation $12,902,722 $13,610,937 $11,074,280
While the loss of Baxter Health Products Corporation would have a
material adverse effect on the business of Alba, management believes
that because of the number of departments within this company to
which it sells, the loss of a material amount of sales is unlikely.
Backlog
Alba's backlog of firm orders at December 31, 1994 was
$2,173,893. A majority of Alba's orders are for delivery within 30
to 60 days. The backlog figures, therefore, are not normally
indicative of orders for the remainder of the year.
Competition
In addition to meeting the demands of the normal hosiery and
intimate apparel markets, Alba specializes in producing garments for
the hard-to-fit woman. Consumer products are sold on a private label
basis through the nation's retail chains and national brands. Health
care products for use in hospitals are marketed under private label
to major distributors, supported by commissioned sales
representatives. In addition, health care products for use in the
home have been introduced under private label and under Alba's own
Life Span(R)label. Byford products are primarily marketed under the
Byford name. Alba encounters severe competition in the sale of its
products from numerous competitors, a few of which are known to have
larger sales and capital resources than Alba. Management is unable
to estimate the number of Alba's competitors or its relative position
among them. Alba believes that the principal methods of competition
in the markets in which it competes include price, delivery,
performance, service and the ability to bring to the market innovative
products. Management believes that Alba is competitive with respect
to these factors but is unable to identify specific positive and
negative aspects of Alba's business pertaining to such factors.
Research and Development
Alba reported that it spent $376,008, $340,663 and $187,000 for
the years ended December 31, 1994, 1993 and 1992, respectively, in
company-sponsored research and development projects through its
wholly-owned subsidiary, Pilot Research Corporation and through
Alba's Quality Control and Research and Development Department.
Environmental Regulations
In the opinion of management, Alba and its subsidiaries are in
substantial compliance with present federal, state and local
regulations regarding the discharge of materials into the
environment. Capital expenditures required to be made in order to
achieve such compliance have had no material effect upon the earnings
or competitive position of Alba or its subsidiaries. Management
believes that continued compliance will require no material
expenditures.
Government Regulation
Alba is subject to various regulations relating to the
maintenance of safe working conditions and manufacturing practices.
In addition, certain of the products manufactured by the Health
Products Division are subject to the requirements of the Food and
Drug Administration with respect to environmentally controlled
facilities. Alba believes that it is currently in compliance with
all such regulations.
Military Footwear
A majority of Wellco's operations relate to military footwear, which
involve the following activities:
Combat Boot Manufacturing
Wellco's largest activity involves the manufacture and sale of
military combat boots under firm fixed price contracts with the
United States government. Boot products are the general issue
all-leather boot, the hot weather boot and the desert boot, all
manufactured using the government specified Direct Molded Sole
("DMS") process.
Military combat boot manufacturing activities in 1994
consisted of production and shipments against a three year contract
awarded in 1993. When this contract was initially awarded, it was
projected that shipments would be spread equally over three years,
with the second and third years being from the award of contract
options. However, actual consumption of combat boots during 1994
(first year) was less than projected, and resulted in the
government's award in August, 1994 of the first option with a
delivery time of sixteen months, one-third longer than the first
year. This reduced the pairs of combat boots shipped in 1994, but the
negative effect of this was somewhat offset by increased sales of
equipment to non-military boot manufacturing customers and foreign
military sales. The government has expressed their intent to also
extend over sixteen months deliveries under the second option of this
contract, at the end of which they are projecting the completion of
their inventory reduction program.
Military Equipment and Technology
Through a subsidiary (Ro-Search, Inc.) Wellco supplies certain
equipment and technology under long-term agreements to U.S. combat
boot manufacturers. The boot makers receive equipment, technology and
service, and Wellco earns fees based on pairs produced. Equipment is
either sold or leased to these customers.
Foreign Military Sales
Ro-Search provides military footwear technology, technical
assistance, training, equipment and materials to other countries.
This may be through private companies who contract with their
government, as is the practice in the U.S., or directly to the
military who run their own factories. This activity can vary from
year to year with the needs and financial resources of these
customers. 1994 developments included the sale of additional
equipment and materials to a long-term customer, the military of El
Salvador.
Research and Development
A significant research and development effort is required in
order to maintain Ro-Search's leading position in military footwear
technology. Ro-Search's own resources committed to such research and
development are supplemented by contracts with various agencies of the
Department of Defense. In 1994, Ro-Search completed development work
for the U. S. Army's Research and Development Laboratories on
improvements to the hot weather boot, which will soon be incorporated
into boot production contracts. Wellco estimates that the cost of
research and development varies from $50,000 to $300,000 per year,
depending on the number of research projects and the specific needs of
its customers.
Non-Military Footwear Activity
Although much smaller than military activity, non-military
footwear is also an important part of Wellco's business, which
involve the following activities:
Ro-Search provides, primarily under long-term licensing
agreements, technical assistance for manufacturing commercial
footwear to customers in the United States and abroad. Under these
agreements licensees receive technology, services and assistance, and
Ro-Search earns fees based primarily on the licensees' sales volume.
In 1994, Ro-Search provided one of its oldest customers with a
significant amount of new equipment, and sold equipment and started
the installation process for one new customer.
Ro-Search also has an ongoing business in the supply of
European-made metal hardware for boots, such as hooks and speed lace
loops and D-rings, and the related automated machinery for applying
such hardware, to North American manufacturers of rugged footwear.
The recent popularity of boots has significantly increased the sales
of these items.
Government Military Boot Contracting Environment
Bidding on contracts is open to any qualified U.S. manufacturer.
In addition to meeting very stringent manufacturing and quality
specifications, contractors are required to comply with precise
delivery schedules and a significant investment in specialized
equipment is required.
Wellco usually competes on U. S. government contracts with three
other companies, no one of which dominates the industry. Many
factors affect the government's demand for combat boots and the
quantity purchased can vary from year to year. Contractors cannot
influence the government's combat boot needs. Price, quality and
manufacturing efficiency are the areas emphasized by Wellco that
strengthen its competitive position. Combat boots contract awards
are presently based on negotiated-price directed awards.
Government contracts are subject to partial or complete
termination under the following circumstances:
1. Convenience of the Government. The government's
contracting officer has the authority to partially or completely
terminate a contract for the convenience of the government only when
it is in the government's interest to terminate. The contracting
officer is responsible for negotiating a settlement with the
contractor.
2. Default of the Contractor. The government's contracting
officer has the authority to partially or completely terminate a
contract because of the contractor's actual or anticipated failure to
perform his contractual obligations.
Under certain circumstances occasioned by the egregious conduct
of a contractor, contracts may be terminated and a contractor may be
prohibited for a certain period of time from receiving government
contracts. Wellco has never had a contract either partially or
completely terminated.
Other Information
Because domestic commercial footwear manufacturers are adversely
affected by imports from low labor cost countries, Wellco targets its
marketing of technology and assistance to military footwear
manufacturers. Wellco competes against several other footwear
construction methods commonly used for heavy-duty footwear with
leather uppers. These methods include the Goodyear Welt
construction, as well as boots bottomed by injection molding. These
methods are used in work shoes, safety shoes, and hiking boots
manufactured both in the U.S. and abroad for the commercial market.
The Goodyear Welt method is also used for certain types of military
boots, although not for the models manufactured by Wellco which are
made only in the government specified Direct Molded Sole
construction. Quality, service and reasonable manufacturing costs are
the most important features used to market Wellco's technology,
assistance and services.
The backlog of all sales, not including license fees and rentals,
as of December 31, 1994 was approximately $4,179,000 compared to
$5,000,000 last year. This decrease is reflective of the U. S.
government's awarding of the first option under the three year combat
boot contract in two equal amounts, with the second half of that
option not being awarded until the 1995 year. Substantially all of
the current year backlog will be shipped by the end of 1995.
Compliance with various existing governmental provisions relating
to protection of the environment has not had a material effect on
Wellco's capital expenditures, earnings or competitive position.
Most of the raw materials used by Wellco can be obtained from at
least two sources and are readily available. Because all materials
in combat boots must meet rigid government specifications and because
quality is the first priority, Wellco purchases most of its raw
materials from vendors who provide the best materials at a reasonable
cost. The loss of some vendors would cause some difficulty for the
entire industry, but Wellco believes a suitable replacement could be
found in a reasonably short period of time. Major raw materials
include leathers, fabrics and chemicals, and by government regulation
all are from manufacturers in the United States.
Textile Equipment Manufacturing
On January 17, 1989, Sunstates acquired from Hickory, for a cash
payment of $2,000,000, a 99% ownership interest in Sew Simple
Systems, Inc. ("Sew Simple"), a designer and manufacturer of
automated textile machinery located in Fountain Inn, South Carolina.
The results of operations of Sew Simple since January 1, 1989 are
included in the Consolidated Statements of Operations. The Stock
Purchase Agreement provided that if Hickory should find a buyer for
Sew Simple prior to the expiration of the Agreement, then Hickory
would be entitled to additional amounts based upon the excess, if
any, of the sales price over an escalating amount specified in the
contract, which, as of April 13, 1992, was approximately $3.4 million
(the Rights). On April 13, 1992, Sunstates acquired from Hickory its
remaining 1% ownership and its Rights under the Stock Purchase
Agreement for approximately $13.6 million (see Note 1 of the Notes to
Consolidated Financial Statements). The consideration given by
Sunstates included the assignment of approximately $12 million
previously due to Sunstates from Hickory and other affiliates plus a
note payable for approximately $1.6 million.
Manufacturing operations began in 1968 with the development of a
cloth cutting and hemming system known as an "Auto Casting System",
which takes rolled material, measures, cuts, sews two ends with an
overcast or purl stitch, trims, labels and stacks the finished
product. Following later was the introduction of other machinery
systems that automated folding hems on dishcloth materials, and for
sewing cross hems and mitering corners of small towels.
The success of these products led to the incorporation in South
Carolina in 1972 of Sew Simple Systems, Inc. to address the growing
need for automation of various textile product fabricating processes
with a broader and more comprehensive product line. Sew Simple has
developed and introduced a broad range of fully automatic machine
systems for fabricating various textile products such as sheets,
pillowcases, towels, washcloths, blankets, drapes, tablecloths,
napkins, etc.
Machines are built to meet a specific customer order and working
capital is partially provided through the product's 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.
Sew Simple has a product line of over 20 different machines used
in the production of various textile products. During 1994, various
quantities of seven different machine products were manufactured and
shipped. The product mix in any year, however, is directly related
to the product line expansion activities of the customers in that
particular year and is not necessarily indicative of future product
mix. Order backlog approximated five months at current production
levels as of December 31, 1994, and four months as of December 31,
1993.
Sew Simple's customers are primarily large domestic producers of
finished textile products. Although 100.0% of machinery sales for
1994 were to eight customers, there is no dependence from year to
year on any one customer. Due to the sales value of certain of Sew
Simple's most popular machines ($475,000 to $675,000 each) a
significant portion of annual sales volume may be to differing
individual customers.
During the past three years, overseas sales have, on a cumulative
basis, represented less than 1% of total revenues. Sew Simple has
focused its efforts on developing the domestic market for its newer
machines, and in expanding its customer base for both existing and
new machine products.
Competition in the domestic marketplace exists in a limited
number of Sew Simple's machine systems and even in those instances
the competitors are principally foreign manufacturers who have
difficulty effectively competing on price, quality, productivity and
service.
Most raw materials are readily available from numerous sources
at competitive prices. Although certain more technologically
advanced parts used in the production process are obtained from one
or two primary suppliers, the success of Sew Simple's operations are
not dependent upon those suppliers. Sew Simple believes that
alternative sources for obtaining such parts are available with only
minor design modifications being necessary to accommodate such
alternative parts.
Most of Sew Simple's machine systems incorporate the application
and use of patented inventions. Current expiration dates of existing
patents range from 1996 through 2009, with additional patents
pending.
Research and development activities are continually underway in
connection with current product line and the development of new
products. Sew Simple is currently dependent upon one individual, who
has been employed by Sew Simple since 1976 and whose employment
agreement continues until 1999, for the invention and development of
new machines. Although the long-term prospects for continued success
are dependent upon the development of new products, operations would
not be materially impacted for a period of three to five years by the
loss of this individual and Sew Simple believes that it could seek
and obtain comparable research and developmental skills within that
time frame. Total research and development expenditures during the
three years ended December 31, 1994, were $218,045, $232,540, and
$248,559, respectively.
Real Estate Operations
Historically, the Company's real estate operations primarily
reflected the development for resale of income producing properties
located in the southeastern United States. Sunstates is also
actively involved in the sale of recreational and second home resort
lots and continues its efforts to sell other real estate assets no
longer under active development.
Sunstates' primary real estate activity has been the development
of income-producing properties with a view to selling these
properties upon completion and lease-up. Projects are generally
located in the southeastern United States with an emphasis on
shopping centers and apartments.
Sunstates has substantially completed the construction phase of
all of its major commercial and multi-family projects. Presently,
Sunstates has five shopping centers which are presently either in
various stages of lease-up or are currently being marketed. Based
upon current market conditions, Sunstates presently does not
anticipate that it will continue to actively seek locations for the
development of new shopping centers or apartment projects.
On August 25, 1992, a subsidiary of Sunstates purchased 100% of
the common stock of The SPRINGS, Inc. ("Springs") for $7,273,183 in
cash (see Note 1 of Notes to Consolidated Financial Statements). The
Springs is an 1,800 acre resort development project located in Spring
Green, Wisconsin encompassing an 80 suite hotel, 27 hole golf course,
ski slopes and trails, condominiums, single family home sites and
other amenities. The hotel and golf course are substantially
complete and real estate development and sales operations should
begin in 1995. On February 23, 1993, the Company acquired from its
Chairman approximately 1,137 additional acres of land near the
Springs. This additional land, which presently contains 9
residential units and one vacation rental house, will provide for
complementary development with the Springs project. (See Item #13 of
this Report for additional information regarding this transaction.)
In the past, Sunstates has also engaged in the development of
three interval ownership (timeshare) projects for sale in the
Sarasota, Orlando and St. Augustine, Florida areas. In the first
quarter of 1986, Sunstates elected to limit any future involvement in
interval ownership (timeshare) development and during 1993 the
Company disposed of substantially all of its remaining assets related
to timeshare.
There are a number of risks inherent in Sunstates' real estate
activities. The availability of short-term and long-term financing,
the demand for space by tenants and the demand for real estate
projects by purchasers are perhaps the major risks. Changes in
federal and state tax laws can have a short-term impact upon the
demand and market for income-producing properties. Additionally, the
development of real estate projects involves substantial time between
inception and completion. Success in real estate development is
dependent upon accurate assessment of these risks. In certain
instances, the risks may be minimized by obtaining financing, leasing
or pre-sale commitments prior to construction. In other instances,
management may deem it prudent not to make any commitments other than
for construction financing prior to commencing construction of a
project in order to take advantage of perceived favorable trends in
given markets or the availability of long-term financing.
Although it has always been Sunstates' intention to obtain
long-term financing or to sell its projects prior to the maturity of
any construction loans, current conditions in the banking and other
financial markets have made it difficult to obtain reasonable
financing for either sales or refinancings. Banks and other financial
institutions are restricting the availability of credit to the real
estate and other industries. This inability to obtain financing has
adversely affected Sunstates' current real estate operations and
could restrict Sunstates' ability to sell its real estate projects.
In its present activities of developing, financing and marketing
real estate, Sunstates is subject to competition from various types
of entities including banks, real estate investment trusts, real
estate developers, governmental agencies and other owners of
income-producing properties.
A number of jurisdictions have adopted laws and regulations
relating to environmental controls on the development of real
estate. Such laws and regulations affect properties currently owned
by Sunstates and will have an effect on the cost and type of
development allowed on the properties. Although the application of
such laws and regulations has not, to date, materially affected
operations, the effect on future operations cannot be predicted.
In October 1993, the Company acquired Bell's Apple Orchard, a 32
acre apple orchard with 12 additional acres of production, retail and
administrative facilities located in Lake Zurich, Illinois. The
orchard is engaged in the growing, manufacture and retail marketing
of apples and apple related products and employs 15 to 20 full time
employees with approximately 45 to 50 seasonal employees during the
harvest season. A portion of the retail facility is leased to
tenants.
Other Investments
Sunstates makes investments in the outstanding common stock of
numerous corporations (sometimes in excess of 5% of the outstanding
common stock of such corporations). When appropriate, Sunstates
accounts for certain of the investments in common stock utilizing the
equity method of accounting. Sunstates continually evaluates the
corporations in which it has made investments and may, subject to
such factors as price of shares, availability of shares and business
prospects, increase or decrease its positions in those corporations.
Factors considered in such analysis include, but are not limited to,
economic prospects of the businesses, availability of investment
opportunities and the potential for a satisfactory return on amounts
invested.
Rocky Mountain Chocolate Factory, Inc. ("Rocky Mountain"),
located in Durango, Colorado, manufactures, from its own recipes, a
line of gourmet chocolates and other premium confectionery products
for sale at company-owned and franchised stores. On December 31,
1989, Sunstates became the owner of 35.12% of the common stock of
Rocky Mountain through the conversion of a note which was held in its
investment portfolio. As of December 31, 1994, Sunstates' owned 55%
of the common stock of Rocky Mountain and also holds additional notes
which are secured by the common stock of Rocky Mountain. Although
Sunstates' present ownership of Rocky Mountain is over 50%, the
financial statements of Rocky Mountain have not been consolidated
with Sunstates' due to immateriality. Sunstates is represented on the
Board of Directors of Rocky Mountain.
Lerner Communications, Inc. ("Lerner"), a publisher of several
neighborhood newspapers in the Chicago area, was acquired on October
13, 1992. Lerner solicits advertising and publishes the newspapers
but subcontracts the printing of the papers with other newspaper
printers. The purchase price of the net assets acquired totalled
$1,078,626 consisting of $475,000 cash at closing and a short-term
note payable of $602,431 paid in early 1993 plus other assumed
liabilities of $1,195. The operations of Lerner are included in the
Sunstates' consolidated financial statements since the date of
acquisition.
The Company also invests in oriental artwork, antique jewelry
and books and other collectibles which are purchased and sold through
dealers and at public auctions.
Seasonality
Sunstates' insurance, manufacturing, and commercial property
operations are generally not subject to significant seasonal
fluctuations. However, sales of resort and recreational lots are
subject to seasonal effects. The peak selling seasons for these
products are during the spring and summer with declining sales
activities during the fall and winter. Sales activities at
Sunstates' recreational and resort lot projects are generally shut
down during the months of November through February.
<TABLE>
Employees
At December 31, 1994, Sunstates employed the following personnel:
<S> <C>
Insurance 171
Manufacturing 1,876
Real Estate 156
Newspaper Publication 97
Corporate Headquarters 13
-----
Total 2,313
=====
</TABLE>
Foreign Operations
Sunstates has no material continuing foreign operations. See
"Furniture Manufacturing, Military Footwear, Textile Apparel and
Textile Equipment Manufacturing" for information regarding foreign
sales.
Item 2. PROPERTIES
The following table presents a description of the real estate
owned by Sunstates at December 31, 1994. The net book value
represents the historical cost of the property, net of accumulated
depreciation, if any, and is not presented net of any related
recourse or non-recourse financing on the property.
Property Name & Location Description Net Book Value
Real Estate Held for Development and Sale
Shopping Centers:
Moratok Shopping Center, 47,870 s.f. $ 1,389,660
Plymouth, NC
Mariner Crossing Shopping Ctr., 74,236 s.f. plus two 4,783,869
Spring Hill, FL outparcels
Patriot's Square Shopping Ctr., 47,231 s.f. plus three
York County, VA outparcels 3,525,699
Ocean Village Square 60,631 s.f.
Shopping Ctr., plus three
New Smyrna Beach FL outparcels 4,990,619
The Market Place at West
Melbourne 52,045 s.f. 1,532,751
Melbourne, FL
Office Buildings:
Anderson Plaza
Raleigh, NC 29,727 s.f 1,104,059
Recreational and Second Home Lots:
Woodland Lakes, Sullivan, MO 1,388 lots 398,488
Hidden Valley Lake, Dixon, TN 314 lots 212,488
Piney Creek OK 271 lots 85,299
Pittsburgh County, OK
Twin Oaks Harbor 367 lots 308,916
Lowry City, MO
Inactive subdivisions 9 inactive subdivisions 25,351
Land:
The Springs 985 acres, primarily suitable
Spring Green, WI for residential lots 2,145,633
Hacienda Hills 128 acres primarily suitable 108,034
New Port Richey, FL for residential lots
Creekside Office Plaza, 5.5 acres suitable for office
Jacksonville, FL building 440,000
Somerset Port 22.5 acres suitable for 313,200
Orange, FL apartments
Mayport Road 13 acres suitable for
Mayport, FL apartments 100,000
Southern Pines 50% undivided interest
Southern Pines, NC in 20 acres 190,523
Westshore 50% undivided interest
St.Petersburg, FL in 23 acres 100,000
Denver, CO 5.98 acres 1,000
Green Meadows Subdivision 91 developed residential lots 91
Omaha, NE
Berryhill Subdivision 8 developed residential lots and
Carrboro, NC acreage suitable for 60
additional lots 1,561,405
Sparrows Walk 3 acres 50,000
Coral Springs, FL
Gastonia Commercial 50% undivided interest in
Gastonia, NC approximately 3 acres 8,843
Chapel Hill Lots 4 developed residential lots 106,031
Chapel Hill, NC
Investment in Partnerships:
Maryland Trade Center 50% general partnership interest
Greenbelt, MD in 208-room hotel (470,861)
Inlet Investors, Ltd., 28.31% Limited partnership
Ponte Vedra Beach, FL interest in hotel and beach
club development 725,848
Amli-Will Ltd. Partnership, 5.5% Limited partnership
Will County, IL interest in 2,505 acres held
for development 730,285
Other Real Estate:
The Springs 6 condominiums and 1 single-
Spring Green, WI family home 719,399
The Springs Winter ski slope held
Spring Green, WI for sale 918,139
Land Lease 84 year lease of land underlying
Boca Raton, FL the recreational amenities of a
condominium project 63,355
Magic Tree Resort 3 timeshare weeks available
Kissimmee, FL for sale 3
Epernay Property 1,137 acres held for
Spring Green, WI development 999,057
Bell's Apple Orchard 32 acre apple orchard plus
Lake Zurich, IL production, retail and
administrative facilities 1,373,441
Coach Horse Property leased to a
Chicago, IL coach horse livery operation
In downtown Chicago 883,350
Property, Plant and Equipment
Operating Properties
The Springs 80 unit hotel and amenities 4,928,224
Spring Green, WI
The Springs 27 hole Robert Trent Jones/
Spring Green, WI Andy North golf course 2,110,400
Manufacturing Facilities
The following table sets forth information regarding production and
showroom facilities of the Company's manufacturing subsidiaries.
Approximate Approximate Lease Primary Use
Facility Name Floor Area Site Size Expiration or Products
Location (Sq. Ft.) (Acres) (Annual Rent) Manufactured
Production Facilities:
Hickory Manufacturing 479,000 29.6 (1) Owned Medium and higher
Hickory, NC priced quality
case goods
Hickory Manufacturing 124,000 6.5 11/15/95 Portion used for
Hickory , NC ($34,400) rough mill,
Two 5 year balance to be
Options used for future
Through expansion
11/15/05
Chaircraft 230,000 25.65 Owned Lower-medium ,
Bethlehem NC priced quality
wood chairs and
upholstered
furniture
KayLyn 129,000 2.3 2/1/96 Medium and
High Point, NC ($179,000) higher priced
quality
upholstered
Furniture
Administrative Office 77,000 3.6 Owned Office and
Oak Street Plant warehouse
High Point, NC
Pendleton Frame 52,000 3.8 1/31/1996 Wood furniture
Building High Point, NC ($69,800) frames
Chair Building 50,400 N/A 10/31/97 Vacant; sublet
Mebane NC ($18,200) in March 1994
Outlet Store 25,000 N/A 1/31/2000 Retail space in
Burlington, NC ($136,800) shopping center
Outlet Store 15,000 N/A 12/31/98 Retail space in
Statesville, NC ($74,000) shopping center
Sew Simple 30,000 7 Owned Textile
Fountain Inn, SC machinery
Wellco and Ro-Search 90,000 3 Owned Manufacturing,
Hazelwood, NC warehousing
and office
facilities
Wellco 22,700 1 6/30/97 Military boot
Aguadilla, Puerto Rico ($54,000) manufacturing
Alba 157,000 8.37 Owned Knitting, yarn
Valdese, NC processing and
finishing
Knitting 18,000 1.22 Owned Knitting
Valdese, NC (intimate
apparel)
John Louis 178,300 7.57 Owned Finishing
Valdese, NC
Pineburr 81,000 19.8 Owned Knitting
Valdese, NC (hosiery &
health care
products)
Offices 3,000 N/A 1998 Sales offices
New York City, NY ($120,000)
Main Office 52,000 3.5 Owned Corporate
Valdese, NC Headquarters
Main Street 69,000 1.4 Owned Knitting and
Valdese, NC Finishing
Outlet Store 1,760 N/A 1999 Retail space in
Branson, MO ($26,400) shopping center
Showroom and other Facilities:
Furniture Market 34,000 N/A 8/31/97 Furniture
Showroom ($248,000) showroom
High Point, NC
World Trade Center 12,906 N/A annually, Furniture showroom
Dallas, TX renewable thru
6/30/96
($63,000)
(1) The Hickory Manufacturing North Carolina production site
includes approximately 13.6 acres of unimproved land, suitable for
plant expansion if and when necessary or desirable.
As a result of Hickory White closing its facility in Mebane, N. C.
early in 1993 and transferring the production requirements to its
plant in Hickory, N. C., Hickory White returned to 90% of capacity.
Hickory White estimates that an increase in production of
approximately 15% of normal capacity could be achieved with only
modest capital expenditures for plant expansion. However, based upon
present economic conditions, there is no anticipated need for such
increased capacity and there are no significant capital expenditures
planned in 1995.
In 1994, both Wellco's Hazelwood and Aguadilla facilities were used
at less than normal capacity. Both facilities have the capability to
significantly increase their production output within a short period
of time.
Management believes all its plants, warehouses and offices are in
good condition and are reasonably suited for the purposes for which
they are presently used. Although there are no current plans for
major expansion, current properties provide ample opportunity for
future growth and there is an adequate and stable work force in all
of Sunstates's manufacturing locations.
Newspaper Publishing:
Sunstates' newspaper publishing business operates out of
approximately 10,000 square feet of leased office space in Chicago,
Illinois. The lease calls for annual lease payments of $130,086 and
expires on January 31, 1998. The printing of the newspapers is
sub-contracted and Sunstates maintains no printing or other facilities
with respect to its newspaper publishing operations.
Item 3. LEGAL PROCEEDINGS
In April of 1988, two essentially similar civil actions styled
Jeremiah P. O'Connor, Sarah M. O'Connor, and Leonore Ballan v. Acton
Corporation, et al., and VR Associates and PJE Associates v. Acton
Corporation, et al., were filed in the Court of Chancery for the
State of Delaware in and for New Castle County. Also named in these
actions are Sunstates Corporation and the directors of Acton prior to
the merger with Sunstates. These actions, along with another
subsequently filed action styled Harry Lewis v. Clyde W. Engle, et
al., have been consolidated into one action entitled In Re Acton
Corporation Shareholders Litigation. All plaintiffs allege to be
holders of common stock of Acton and seek to have the action
designated a class action on behalf of all parties owning common stock
of Acton. The action challenges the merger of Sunstates Corporation
with and into Acton, alleges fraud and breach of fiduciary duty and
seeks unspecified damages plus costs and expenses including
attorney's fees. Acton intends to defend this action vigorously. The
suit is still in the preliminary stages and management is unable to
predict the outcome of the litigation; however, management is of the
opinion that the outcome of the litigation is unlikely to have a
material adverse effect on Sunstates' financial position.
On June 4, 1990, VR Associates and Sonem Partners, L.P. filed a
shareholder derivative action in the Court of Chancery for the State
of Delaware in New Castle County against the directors of Acton and
Hickory. The action alleges that certain transactions entered into
and investments made by Acton constituted waste or a breach of
fiduciary duty by the Board of Directors of Acton. In particular,
the action alleges that Acton's purchase of the furniture operations
of Hickory was not in the best interests of Acton and seeks various
relief, including rescission of the purchase, unspecified damages and
costs. The action also sought to obtain a temporary restraining
order to prevent consummation of the purchase transaction. The
request for a restraining order was denied by the Court on June 8,
1990. An essentially similar action was filed in the State of
Delaware on June 12, 1990 by PJE Associates. These suits are still in
the preliminary stages and management is unable to predict the
outcome of the litigation; however, Sunstates intends to defend these
actions vigorously and does not believe that the outcome of the
litigation is likely to have a material adverse effect on Sunstates'
financial position.
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.
On December 6, 1991, California Federal Bank filed a suit against
Acton in the Circuit Court, Duval County, Florida alleging breach of
a Contract of Guaranty of a $5,100,000 note executed by Jacksonville
Apartment Associates, Ltd. and secured by a mortgage on an apartment
project in Jacksonville, Florida. During 1994 the suit was settled
with the Company making a payment of $230,000.
On December 8, 1993, Richard N. Frank filed a purported derivative
and class action in the Court of Chancery for the State of Delaware
in New Castle County against the directors of Acton, Hickory and
Telco. The action alleges that certain transactions entered into and
investments made by Acton constituted waste or a breach of fiduciary
duty by the Board of Directors of Acton. The complaint also alleges
that the Company and its insurance subsidiary repurchased shares of
the Company's common stock and $3.75 Cumulative Preferred Stock in
violation of the Company's certificate of incorporation. Finally,
the complaint alleges that the proxy statement disseminated in
connection with the Company's December 13, 1993, annual meeting was
materially misleading. This suit is in the preliminary stages and
management is unable to predict the outcome of the litigation;
however, Sunstates intends to defend these actions vigorously and does
not believe that the outcome of the litigation is likely to have a
material adverse effect on Sunstates' financial position.
On January 10, 1994, Robert A. Lee, et al. filed a punitive
derivative action in the Court of Chancery for the State of Delaware
in New Castle County against the directors of Acton, Hickory, Telco,
WREIT, RDIS Corporation and nominally against the Company itself. The
complaint alleges that certain transactions entered into and
investments made by Acton constituted waste or a breach of fiduciary
duty. This suit is in the preliminary stages and management is
unable to predict the outcome of the litigation; however, Sunstates
intends to defend these actions vigorously and does not believe that
the outcome of the litigation is likely to have a material adverse
effect on Sunstates' financial position.
At December 31, 1994, Sunstates and its subsidiaries also were,
and currently are, defendants in other legal proceedings incidental
to their business. Sunstates intends to defend such proceedings
vigorously and, in the opinion of the management, Sunstates' ultimate
liability, if any, in these proceedings will not have a material
adverse effect on the consolidated financial position of Sunstates.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders
during the quarter ended December 31, 1994.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Prior to May 3, 1994, both Sunstates' Common Stock, and $3.75
Cumulative Preferred Stock ("$3.75 Preferred Stock") were traded on
the American Stock Exchange (AMEX) under the symbols "ATN" and
"ATNP", respectively. On May 3, 1994, both Sunstates' Common Stock,
and $3.75 Cumulative Preferred Stock ("$3.75 Preferred Stock") began
trading on the Nasdaq Stock Market (NASDAQ/NMS) under the symbols
"SUST" and "SUSTP", respectively.
The Sunstates' Class B Accumulating Convertible Stock ("Class B
Stock") is traded through brokers who have registered with the
National Association of Securities Dealers, Inc. to make a market in
these shares. Currently, Mesirow Financial is the only broker who
has registered to buy and sell Sunstates' Class B Stock. There is no
significant trading market for Sunstates' Class E Preferred Stock,
Series I and II.
The following table sets forth for the periods indicated the high
and low closing prices for the Sunstates' Common Stock and $3.75
Preferred Stock, respectively, as reported by the AMEX and
NASDAQ/NMS, as appropriate.
<TABLE>
Sunstates Common Stock
1994 1993
<CAPTION> High Low High Low
<S> <C> <C> <C> <C>
First Quarter $10 7.5 5.75 4.75
Second Quarter 8.125 7 4.625 3.625
Third Quarter 7.75 6.75 15.875 3.5
Fourth Quarter 7.25 5.25 13 8.75
</TABLE>
<TABLE>
Sunstates $3.75 Preferred Stock
1994 1993
<CAPTION> High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 29.25 26.75 24.5 23.25
Second Quarter 29.25 27.875 22.75 20.75
Third Quarter 29.25 28 25.5 18.5
Fourth Quarter 37.75 27.125 27.5 24.5
</TABLE>
The following table sets forth for the periods indicated the
range of high and low bid prices for Sunstates' Class B Stock as
reported by the primary market maker, Mesirow Financial. These
quotations do not reflect retail mark-ups, mark-downs or commissions
and do not represent actual transactions.
<TABLE>
Sunstates Class B Stock
1994 1993
<CAPTION> High Low High Low
<S> <C> <C> <C> <C>
First Quarter $165 160 80 80
Second Quarter 168 150 80 80
Third Quarter 135 126 170 80
Fourth Quarter 130 126 170 170
</TABLE>
The approximate numbers of holders of record for the
respective classes of Sunstates' equity securities at March 6, 1995,
were as follows:
Common Stock 2,718
Class B Stock 104
$3.75 Preferred Stock 1,434
Class E Preferred Stock, Series I & II 58
Dividends
No dividends were paid to holders of Sunstates' Common Stock and
Class B Stock during 1994, 1993 or 1992 nor does the Company
currently anticipate the payment of such dividends in the foreseeable
future. Under the terms of Sunstates' $3.75 Preferred Stock,
dividends may not be paid on common shares while preferred stock
dividends remain in arrears. At March 14, 1995, nine semi-annual
dividend payments aggregating $4,795,588 ($16.875 per share) were in arrears
on Sunstates' $3.75 Preferred Stock.
<TABLE>
Item 6. SELECTED FINANCIAL DATA
For the Years Ended December 31,
<CAPTION> 1994 1993 1992 1991 1990
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Operations Review:
Total revenues $ 209,154 207,194 216,392 213,447 172,719
Income (loss) from continuing operations (7,573) (6,356) (20,177) (18,568) (10,887)
Discontinued operations -- 47,465 499 721 (140)
Change in accounting principle -- 260 -- -- --
Net income (loss) (7,573) 41,369 (19,678) (17,847) (11,027)
Per Share Data:
Primary:
Income (loss) from continuing operations (3.39) (3.07) (8.70) (8.07) (4.90)
Discontinued operations -- 18.81 .20 .29 (.05)
Cumulative effect of change in accounting -- .10 -- -- --
Net income (loss) (3.39) 15.84 (8.50) (7.78) (4.95)
Fully diluted:
Income (loss) from continuing operations (3.39) (2.53) (8.70) (8.07) (4.90)
Discontinued operations -- 15.51 .20 .29 (.05)
Cumulative effect of change in accounting -- .08 -- -- --
Net income (loss) (3.39) 13.06 (8.50) (7.78) (4.95)
Dividends per common share -- -- -- -- --
Asset and Financing Review:
Total assets 246,575 249,280 250,651 269,323 256,844
Notes payable 52,677 19,529 22,448 13,526 21,245
Mortgage notes payable 16,111 24,415 30,243 33,085 36,023
Subordinated debentures -- -- -- 2,097 2,288
Stockholders' equity 32,241 46,412 8,210 39,666 32,420
</TABLE>
The above financial information has been retroactively restated to
reflect the effect of the Company's change in its method of valuing
its furniture manufacturing inventories from the last-in, first-out
method to the first-in, first-out method (see Note 2 of the Notes to
Consolidated Financial Statements contained in Item 8 of this Form).
The effect of this retroactive restatement upon previously reported
balances is as follows:
<TABLE>
For the Years Ended December 31,
1994 1993 1992 1991 1990
<CAPTION> (In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations and net income (loss) $ 731 (284) 44 944 400
Primary Per Share Data:
Income (loss) from continuing operations and net income (loss) .29 (.11) .02 .38 .16
Fully Diluted Per Share Data:
Income (loss) from continuing operations and net income (loss) .29 (.09) .02 .38 .16
Assets and Stockholders' Equity 8,081 7,350 7,634 7,590 6,646
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Litigation
See Note 9 of Notes to Consolidated Financial Statements contained
in Item 8 of this Annual Report for information with respect to
outstanding litigation.
Change in Inventory Valuation
See Note 2 of Notes to Consolidated Financial Statements contained
in Item 8 of this Annual Report 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
Liquidity and capital resources available to the Company during
1994 were greatly enhanced by the sale on December 30, 1993, of the
cable television system. In addition to a reduction in debt of
approximately $32.1 million, the sale generated $43.9 million of cash
in 1993 and 1994. Substantially all of the proceeds from the sale
were invested in the Company's insurance subsidiary.
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 was faced in 1994 with significant demands
upon its liquidity. The Company was able to meet those demands while
still improving the liquidity position of its insurance subsidiary
(see Insurance below). During 1995, the Company will still be faced
with similar, but significantly reduced, liquidity demands as the
impact of previous reductions in insurance volume continues to be
felt. Although, the Company believes that it can meet such future
demands, as it did in 1993 and 1994, through selective liquidations
of securities in its investment portfolio and sales or refinancings
of various real estate and other assets, it cannot predict with
certainty the outcomes of such actions.
Total assets decreased $ 2,704,688 during 1994. However, there
were several major offsetting events which occurred during the year.
Real estate held for development and sale declined $11,927,502 due
primarily to the sale of both an apartment project and the land under
lease to a major hotel in Indianapolis, Indiana. Mortgage loans and
land contracts receivable declined as the result of normal
collections and early payoffs. Investments increased $2,977,124
during 1994, however, this was due to the impact of several
investment transactions which took advantage of interest rate
differences. In December of 1994, the insurance subsidiary acquired
approximately $25.5 million of one and two-year U. S. Government
securities yielding between 7.22% to 7.67% under agreements to resell
at varying dates through April 3, 1995, while at the same time
borrowing approximately $25.3 million against such securities at
rates varying from 5.25% to 6.375% . Without the impact of these
transactions, investments would have shown a $22,545,531 decline
reflective of selling securities to cover negative cash flow from
underwriting and other operating needs (see Insurance below).
Inventories increased $6,182,832 (primarily finished goods) at the
Company's furniture and textile apparel manufacturing subsidiaries.
The increase in premiums receivable was reflective of the increase in
insurance premiums written in the fourth quarter of 1994
($12,910,000) as compared to the fourth quarter of 1993
($10,493,000). Receivables from affiliates declined as the Company
offset $2,470,000 previously advanced to its Chairman against
commissions due him upon the sale of the cable television system and
wrote off $2,957,145 with respect to its receivables from and
investments in WREIT (see Note 12 of Notes to Consolidated Financial
Statements contained in Item 8 of this Report).
Total debt increased $24,843,370 during 1994 primarily due to the
impact of the transactions involving the acquisition of U. S.
Treasury securities as discussed above. Without the effect of those
transactions, debt would have declined $499,675 reflecting a decline
in mortgage loans of $8,303,758 primarily resulting from the sale of
an apartment project during the year partially offset by increased
short-term borrowings at the Company's insurance ($4,000,000) and
manufacturing subsidiaries ($3,228,062).
Other liabilities decreased $15,243,507 during 1994 due primarily
to the decline in insurance reserves of $23,712,032 resulting from
insurance program cutbacks made in 1992 and 1993 (see Insurance
below). This decline was offset by increases in unearned premiums
resulting from the increase in premium volumes in the fourth quarter
of 1994 as discussed above. Accrued expenses increased primarily
because of amounts due to brokers in connection with year end
security transactions.
Approximately 48% of Sunstates' debt of $68,787,951 at December
31, 1994, 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 $14,171,431 during 1994 to
$32,241,009 as the result of operating losses as discussed below,
acquisitions of Company stock by certain subsidiaries totalling
$5,371,036 and a decline in the net unrealized gains and losses in
the Company's investment portfolio of $1,112,148.
At December 31, 1994, Sunstates' assets were deployed 39.8% in
insurance (including 3.6% representing amounts receivable from other
business segments), 40.8% in manufacturing, 19.2% in real estate,
1.6% in equity investees and 2.2% in general corporate assets.
Because of the distinctively different lines of business in which
Sunstates is engaged, each industry segment's operations should be
separately analyzed using measures appropriate to that industry.
Insurance
During the past three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of;
1) the discontinuation of certain general liability reinsurance
programs and several unprofitable direct automotive insurance
programs, and 2) the effect of price increases having been
implemented in other markets which were producing unsatisfactory
results. The combination of the above has resulted in the written
premium volume declining to $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in writings
accelerated in the latter half of 1993 with writings in the fourth
quarter totalling approximately $10,493,000 as compared to
$20,711,000 for the same period in 1992. The decline in premium
volume stabilized during the early part of 1994 and showed modest
increases during the last half of the year as new programs already
established and other planned actions to increase volume started to
become effective. Fourth quarter 1994 writings totalled $12,910,000.
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, continued at disproportionately higher levels. The
Company's negative cash flow from underwriting has begun to decline
as premium volume has stabilized. Negative cash flow from investment
income and underwriting activities of the insurance segment for 1994
was $29,420,549 (declining to only $5,809,566 in the fourth quarter)
compared to $58,258,855 for 1993 and $12,859,008 for 1992.
Accordingly, the Company believes that any required liquidations of
the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced.
On December 30, 1994, certain subsidiaries of Coronet obtained a
$10,000,000 short-term line of credit with a major bank to provide
working capital for the insurance operations. The loan was
collateralized by the stock of Alba, Wellco and Rocky Mountain
Chocolate Factory as well as substantially all of the assets of the
Company's resort development operations (The Springs) and its
automated textile equipment manufacturing operation (Sew Simple). The
line of credit bears interest at prime plus 1% and expires on
December 29, 1995.
Included in fixed maturity investments at December 31, 1994, are
certain one and two-year U. S. Treasury securities yielding 7.22%
to 7.67% with an original cost of $25,522,655 which were acquired
under agreements to resell on various dates through April 3,1995.
Additionally, the Company borrowed $25,343,045 from brokerage firms
against such securities with interest rates ranging from 5.25% to
6.375% and maturing on various dates through April 3, 1995.
The level of liquid assets, as defined by the National Association
of Insurance Commissioners ("NAIC"), of the Company's insurance
subsidiaries was $90,109,196 at December 31, 1994, as compared to
$77,678,160 at December 31, 1993. Included in NAIC-defined liquid
assets are the U. S. Treasury securities referred to above as well as
securities with a reported value of $6,932,590 at December 31, 1994,
which are not publically 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, $33,954,320 ($36,446,728 at December 31, 1993) of
investments in publicly traded equity securities of other companies,
valued at their quoted market prices on December 31, 1994, 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%. The ratio required to be met by December
31, 1995, is 130%. 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.
Income from investments less net decreases in the market value of
the insurance subsidiary's equity securities portfolio more than
offset the underwriting losses of the insurance company such that
statutory net worth increased to $59,483,697 at December 31, 1994, as
compared to $58,605,217 at December 31, 1993. The ratio of premiums
written during the year ended December 31, 1994, to statutory surplus
as of December 31, 1994, was .81 to 1. A ratio of less than 3:1 is
generally considered conservative. In September 1993, the Illinois
Department of Insurance finalized its routine financial examination
of Coronet Insurance Company as of December 31, 1991, which, among
other things, reviews the admissibility of reported assets under
applicable Illinois investment regulations. Based upon the
Department's report, with which the Company does not concur, the
examination adjustments resulted in a revised statutory net worth of
approximately $45 million as of December 31, 1991. The Company
disagrees with many of the findings and conclusions of the report and
has set forth its positions to the Department in relation thereto.
While the Company elected not to contest the report at a hearing, it
specifically reserved the right to raise any and all objections to
the findings and conclusions of the report in any future examination
or proceeding. Only approximately $4 million of the Department's
proposed adjustments would have reduced the valuation of "liquid
assets", as defined, as of December 31, 1991. The adjustments set
forth in the report would not have a material adverse impact upon the
Company's ability to continue to write business at its present
levels. 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.
The insurance subsidiary holds investments in other segments of
Sunstates' business; however, the assets related to such investments
are not reported as part of the insurance segment, but instead are
included in the reported assets of the respective operating
segments. The total assets of the insurance segment have decreased
from $102,772,985 at December 31, 1993, to $100,395,853 at December
31, 1994. This decrease is due primarily to the decline in premium
volume and liquidations of a portion of the investment portfolio
necessitated as the result of the negative underwriting cash flow
discussed above. The combined net worth of the insurance subsidiary,
including net assets invested in other segments of Sunstates'
operations and without consideration of balances receivable from or
payable to Sunstates, totalled $36,904,566 at December 31, 1994.
Insurance regulations restrict the ability of the insurance subsidiary
to transfer its net assets to Sunstates.
The National Association of Insurance Commissioners ("NAIC")
recently adopted risk-based capital guidelines for property/casualty
insurance companies whereby defined risk-based capital would be
based, in part, upon a formulated risk assessment of the type of
assets held in an insurance company's investment portfolio, asset
concentrations and underwriting risks. Such proposed regulations are
anticipated to become effective in 1995, however, a computation of
the Company's risk-based capital was required to be prepared for
informational purposes only as of December 31, 1994. Based upon
this computation, as filed under the NAIC's reporting requirements,
the Company's risk-based capital far exceeds proposed minimum
requirements.
Manufacturing
Hickory White has loans totalling $12,168,115 at December 31, 1994,
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
$11,229,731 at December 31, 1994. The current asset ratio at December
31, 1994, 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 in spite of the fact that it is due on
January 3, 1996. Accordingly, at December 31, 1994, the division
has no long-term debt (excluding intercompany debt). At December 31,
1994, the furniture operation had $639,805 of additional borrowing
capacity under its Credit Agreement. The furniture manufacturing
division is restricted as to the transferring of 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 totalled $19,866,063
at December 31, 1994, yielding a current ratio of 4.6 to 1. In
addition, Alba has a seasonal line of credit of $3,000,000 (of which
$1,821,938 was available at December 31, 1994) and a $2,000,000 term
facility available to cover capital equipment purchases (of which
$500,000 was available at December 31, 1994). The division had
long-term debt of $1,000,000 and had total net assets of $27,780,647
at December 31, 1994, including minority interests.
On March 6, 1995, the Company's textile apparel manufacturing
subsidiary purchased the Balfour Health Care Division and
manufacturing facility in Rockwood, Tennessee from Kayser-Roth
Corporation for approximately $14.5 million, subject to post-closing
adjustments. The acquisition of Balfour will add approximately $15
million in annual sales to Alba's healthcare division. Alba financed
100% of the acquisition price with a revolving loan agreement
provided by a major bank.
Sunstates' military footwear manufacturing division's working
capital, including marketable securities held for investment, is more
than adequate to support current operating levels and totalled
$11,766,015 at December 31, 1994, yielding a current ratio of 3.2 to
1. The division had no long-term debt at December 31, 1994, and had
total net assets of $12,053,084, including minority interests.
Liquidity for Sunstates' automated textile equipment 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 totalled $2,014,406 at December 31, 1994,
yielding a current ratio of 6.9 to 1. Debt totalled $26,420 at
December 31, 1994, with total net assets of $11,117,686.
Real Estate
At December 31, 1994, real estate held for development and sale
totalled $28,978,498, consisting primarily of five shopping centers
which are in various stages of lease-up or marketing, resort
development properties as well as numerous real estate properties
currently held for sale. Sunstates intends that its properties under
development will be sold upon their completion and lease-up.
The real estate segment's debt totalled $15,987,343 at December 31,
1994, with real estate assets of $45,753,558 yielding an asset
leverage ratio of 34.9%. Sunstates has $4,897,150 of mortgage notes
on real estate which will mature in 1995. Loans on these projects as
well as loans on other real estate assets held for sale will have to
be refinanced if the projects are not sold prior to their maturity.
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,
the Company cannot state with any certainty that it will be
successful in obtaining such refinancing.
Based upon current market conditions, Sunstates does not anticipate
that it will continue to actively seek locations for the development
of new shopping centers or apartment projects. Sunstates intends to
devote its efforts to the completion and sale of projects it
currently has under development and to continue to monitor market
conditions with respect to future opportunities in real estate.
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
(see "Insurance" above).
Corporate
Sunstates has numerous corporate obligations for costs such as
personnel, legal, accounting, shareholder relations, directors' fees
and expenses, and other overhead type items. Sunstates has annual
dividend obligations totalling $1,065,686 on its $3.75 Cumulative
Preferred Stock and other 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). These
requirements must be met through cash generated from operations of
operating segments or from financing or the sale of assets. The
ability of the Company's insurance subsidiaries to transfer cash to
Sunstates is restricted by regulatory authorities. The cash of
certain other subsidiaries is restricted by law or contract to
specific purposes and is generally not available for discretionary
use. At December 31, 1994, such restricted cash totalled $5,543,826.
Cash Flows
Operating Activities
The following table presents the net cash flows from operating
activities by industry segment:
<TABLE>
<CAPTION>
Cash Flows Provided By (Utilized In)
Operating Activities
1994 1993 1992
<S> <C> <C> <C>
Insurance $(29,420,549) (58,258,855) (12,859,008)
Manufacturing (1,340,305) 818,830 3,367,412
Real Estate 5,296,515 446,644 (1,138,095)
Cable -- 4,339,792 4,887,276
Equity Investees (4,178) 47,833 48,000
Corporate (4,086,560) (4,886,564) (2,399,563)
----------- ---------- ---------
$(29,555,077) (57,492,320) (8,093,978)
========== ========== =========
</TABLE>
The change in net cash utilized in operations in 1993 and 1994 is
primarily the result of declining insurance premium volume (see
Insurance above). The short-term impact of the drop in written
volume is that the company experiences 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. Negative cash flow from investment income and
underwriting activities of the insurance segment for 1994 was
$29,420,549 (declining to only $5,809,566 in the fourth quarter)
compared to $58,258,855 for 1993 and $12,859,008 for 1992.
Accordingly, the Company believes that any required liquidations of
the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced.
Insurance regulations limit the ability to transfer funds to other
non-insurance segments of Sunstates and set forth investment
guidelines ample protection for policyholders. The maximum dividend
payout which may be made in 1995 without prior approval of the
Insurance Commissioner of the State of Illinois is limited to the
amount of earned surplus from which it can be paid and further
limited to the greater of statutory net income, as adjusted, for the
twelve months last ended or 10% of the subsidiary's statutory surplus
at December 31, 1994. At December 31, 1994, there is no earned
surplus from which dividends can be paid.
During 1994, the furniture manufacturing business utilized
$4,015,838 of cash in its operating activities, including $2,459,868
of interest expense and including $3,180,960 of cash utilized to
increase net operating assets and liabilities (mostly inventories and
accounts receivable). During 1993, the furniture manufacturing
business utilized $2,194,403 of cash in its operating activities,
including $2,409,643 of interest expense and including $1,843,873 of
cash utilized to increase net operating assets and liabilities. This
compares to 1992 cash flow provided by the operating activities of
the furniture manufacturing business totalling $1,366,946 including
$2,386,793 of interest expense and net of $784,405 of cash generated
by decreases in net operating assets and liabilities. The decline in
cash flow in 1994 is due to increased discounts and promotions to
move out slow moving or discontinued product lines coupled with
production inefficiencies at the casegood manufacturing plant. The
decline in cash flow from operating activities in 1993 reflects
expenditures for costs incurred in conjunction with the closing of
the White of Mebane plant in early 1993. The furniture manufacturing
division is restricted as to the transferring of funds to Sunstates
under the terms of its Credit Agreement with Citicorp.
Sunstates' textile manufacturing operation provided $424,637 of
cash from operating activities during 1994 as compared to $284,347
of cash in the last six months of 1993 (since becoming a consolidated
subsidiary). Cash was utilized to increase inventories by $3,115,554
during 1994 reflecting the Company's purchase from a competitor of a
healthcare product line (approximately $2,040,000) as well as a
buildup of approximately $2,008,000 in consumer products inventories
resulting from slowdowns in several customers' orders during the
latter part of 1994.
For the year ended December 31, 1994, the operating activities of
the military footwear division generated $321,187 of cash as compared
to $1,600,582 and $2,931,404 of cash in 1993 and 1992, respectively.
An increase in accounts receivable during 1994 accounted for the
utilization of $1,658,039 of cash and was due to the U. S.
Government paying invoices more slowly (all collected in January
1995) and a significant sale to a new machinery customer. The
significantly higher amount in 1992 was due to a significantly past
due accounts receivable related to 1991 sales on which payment from
the government was delayed because of Operation Desert Shield, which
was collected in 1992.
Textile equipment manufacturing operations provided cash flow of
$1,929,709 in 1994 as compared to $1,128,304 in 1993 and $1,802,954
in 1992 which was sufficient to provide funds necessary for future
research and development and anticipated capital expenditures. The
decline in 1993 is due to a 33% drop in sale volume primarily as the
result of customer delays in the placement of new orders, which did
not represent a loss in market share.
During 1994 and 1993, the real estate segment sold an apartment
project in each year generating cash flow of approximately $4,230,000
and $1,900,000, respectively. There were no significant sales of
real estate projects during 1992. Sunstates has restricted its
activities to the completion and sale of existing properties and has
taken steps to reduce its overhead costs.
The decrease in cable television operating cash flow in 1993
reflects the impact of rate increases implemented in September of
1992 being more than offset by the higher interest expense associated
with the additional financing placed on the cable system in December
of 1992.
The increased cash utilized in the corporate segment in 1993
reflects cash used in the Company's newspaper publishing business,
payment of estimated income taxes and costs incurred in connection
with the closing of an administrative office in Woburn, Ma. Cash
needs relating to corporate overhead and other corporate requirements
are met by Sunstates' operating segments.
Investing Activities
The following table presents the net cash flows from investing
activities by industry segment:
<TABLE>
<CAPTION>
Cash Flows Provided By (Utilized In)
Investing Activities
1994 1993 1992
<S> <C> <C> <C>
Insurance $28,168,554 $38,433,599 22,109,203
Manufacturing (2,817,940) 1,889,228 (2,731,397)
Real Estate (685,579) 154,463 (6,883,139)
Cable -- 22,380,411 (1,322,296)
Equity Investees 598,000 400,966 69,375
Corporate (503,227) (3,820,653) (1,061,751)
---------- ---------- ----------
$24,759,808 59,438,014 10,179,995
========== ========== ==========
</TABLE>
Generally, cash flow from operations not otherwise needed for
operating or financing purposes is utilized in investing activities,
primarily at Sunstates' insurance subsidiaries. However, during the
past three years 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 1993 exceeded their 1992
levels. See discussion in operating activities above regarding
reduced levels of negative cash flow in 1994.
During 1993, the military footwear division received net proceeds
of $2,512,437 from the purchase and sale of securities (see special
dividend discussion in financing activities below). Additionally in
1993, the furniture manufacturing operation received $1,593,928 from
the sale of plant and equipment no longer used in its operations.
The cash utilized by the real estate segment in 1992 was primarily
due to the acquisition of the resort development project in Spring
Green, Wisconsin for cash of $7,273,183.
The large increase in cash from the cable segment reflects the
sale on December 30, 1993, of the Company's sole remaining cable
television system. In connection with the sale of the cable
television system, the Company received a $17,366,614 note receivable
which it contributed to its insurance subsidiary at December 31,
1993. This note was collected in June 1994 and the proceeds are
included in the insurance segment's investing activities.
The cash provided by the equity investee segment reflects the sale
of 46,000 and 62,015 shares of Rocky Mountain Chocolate Factory stock
during 1994 and 1993, respectively.
Loans to affiliates totalled $17,104,635, $4,741,358 and $335,815
during the three years ended December 31, 1994. During 1992 and the
first quarter of 1993, advances totalling $550,000 and $1,150,000,
respectively were made to the Company's Chairman in connection with a
transaction as to which negotiations were completed on February 26,
1993, wherein the Company purchased from the Chairman approximately
1,137 acres of improved and unimproved land located near the
Company's resort development in Spring Green, Wisconsin at a price of
$1,700,000. Additionally, during 1993 amounts totalling $2,456,086
were advanced to the Company's Chairman against commissions due upon
the sale of the cable television system totalling $2,470,000. On
April 13, 1992, Sunstates acquired Hickory's remaining interests in
Sew Simple (see Note 1 of Notes to Consolidated Financial Statements)
in a transaction which involved the cancellation of approximately $12
million of amounts previously loaned to affiliates. (Insurance
investing activities includes $1,673,323 paid to Hickory in 1992 in
connection with the acquisition of Hickory's remaining interest in
Sew Simple.)
Financing Activities
The following table presents the net cash flows from financing
activities by industry segment:
<TABLE>
Cash Flows Provided By (Utilized In)
Financing Activities
1994 1993 1992
<S> <C> <C> <C>
Insurance $(1,405,663) 5,179,260 (1,010,267)
Manufacturing 2,500,792 (4,055,690) (3,814,323)
Real Estate (94,394) (47,282) (12,448)
Cable -- (1,607,204) 3,000,000
Corporate ( 6,001) (606,606) (2,113,817)
------- --------- ---------
$ 994,734 (1,137,522) (3,950,855)
======= ========= =========
</TABLE>
During 1994, subsidiaries of the insurance company purchased
239,597 shares of Sunstates' Common Stock, 8,613 shares of Class B
Stock and 72,319 shares of Sunstates' $3.75 Cumulative Preferred
Stock for an aggregate cost of $5,371,036. With respect to the Class
B Stock, 8,613 shares, which were acquired from brokers and other
non-affiliated owners at a total cost of $1,559,392, had been owned
by the Company's parent prior to their acquisition by the Company.
The insurance subsidiary increased its net borrowings under
short-term working capital loans by $4,000,000 in 1994. Cash
provided from financing activities within the insurance segment in
1993 represents net borrowings under short-term working capital
loans, net of the insurance subsidiaries purchasing 20,600 shares of
Sunstates' $3.75 Cumulative Preferred Stock at a cost of $455,432 and
69,100 shares of Sunstates' common stock for a cost of $333,146.
During the year ended December 31, 1992, Sunstates' insurance
subsidiaries purchased 15,000 shares of its $3.75 Cumulative
Preferred Stock and 160,775 shares of its common stock for an
aggregate cost of $1,273,103.
During 1994, the Company's military footwear manufacturing
subsidiary borrowed $2,050,000 under a short-term borrowing
arrangement which was repaid in January 1995 and in 1993 paid a
special dividend of $6 per share, representing $2,326,937 of funds
paid to minority shareholders.
On December 15, 1992, the cable system borrowed $4,854,162,
increasing the then outstanding balance under its loan to
$33,000,000. These additional proceeds were primarily used to
provide working capital to the Company's insurance operations. The
cash utilized by the cable segment during 1993 represents normal
quarterly principal amortization on the $33,000,000 loan.
The cash utilized in 1993 by the corporate segment represents
payoff of a note payable in connection with the acquisition of the
Company's newspaper business.
On January 30, 1992, the Company retired the remaining $2,096,500
of its 6 3/4% Subordinated Debentures outstanding.
Results of Operations
Sunstates reported a net loss of $7,572,842 ($3.39 per primary and
fully diluted share) as compared to net income in 1993 of
$41,368,715 ($15.84 per share on a primary basis and $13.06 on a
fully diluted basis) and a net loss of $19,678,451 ($8.50 per share
on both a primary and fully diluted basis) in 1992. The 1994 reported
loss resulted primarily from continuing losses at the Company's
insurance, furniture manufacturing and resort development operations
and the write off of $2,957,145 with respect to its receivables from
and investments in WREIT (see Note 12 of Notes to Consolidated
Financial Statements contained in Item 8 of this Report). The 1993
income resulted primarily from the sale of the Company's sole
remaining cable television system on December 30, 1993, offset by
$6,356,278 of losses from continuing operations. The 1992 reported
loss resulted primarily from the Company's insurance, real estate and
furniture manufacturing subsidiaries. The change in the net
unrealized gains (losses) in the Company's investment portfolio
totalled $(1,112,148), $(1,697,006) and $445,913 for the years ended
December 31, 1994, 1993, and 1992, respectively.
Industry Segments
Sunstates operates in three industry segments; insurance,
manufacturing, and real estate development (cable television prior to
December 30, 1993). Information about continuing operations in
different industry segments for the three years ended December 31,
1994 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <S><C> <C>
Revenues
Insurance $ 49,054 88,678 138,314
Manufacturing 130,495 96,454 67,740
Real Estate 24,301 17,362 8,546
Equity Investees 1,496 1,256 1,565
Corporate and Other 3,808 3,444 227
------- ------- -------
$209,154 207,194 216,392
======= ======= =======
Operating Income (Loss)
Insurance $ (6,792) (3,555) (14,302)
Manufacturing 7,929 4,292 1,994
Real Estate 1,377 1,534 (435)
Equity Investees 1,496 1,256 1,565
Corporate and Other (4,826) (4,404) (3,416)
Interest (3,129) (3,700) (2,708)
----- ----- -------
$ (3,945) (4,577) (17,302)
===== ===== ======
Pre-tax Income (Loss)
Insurance $ (6,792) (3,555) (13,432)
Manufacturing 5,680 1,967 (188)
Real Estate (967) (1,000) (2,659)
Equity Investees 1,496 1,256 1,565
Corporate and Other (3,362) (3,245) (2,588)
----- ----- ------
$ (3,945) (4,577) (17,302)
===== ===== ======
Identifiable Assets
Insurance $100,396 102,773 120,142
Manufacturing 100,694 95,481 65,942
Real Estate 47,430 59,700 63,722
Equity Investees 3,804 2,902 12,869
Corporate and Other 3,108 6,701 1,873
Eliminations ( 8,857) (18,277) (13,897)
------- ------- -------
$246,575 249,280 250,651
======= ======= =======
</TABLE>
Insurance
The following is a summary of the results of operations of the
insurance segment for the past three years (amounts in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Premiums written 47,944 57,063 118,930
Premium decline (16%) (52%) (8.9%)
Premiums earned 46,228 69,165 128,295
Losses and loss adjustment expenses 35,843 71,043 114,458
Loss ratio 77.5% 102.7% 89.21%
Underwriting loss (5,006) (23,100) (22,717)
Statutory combined ratio 109.23% 146.83% 121.07%
Investment income recognized 2,773 19,514 10,093
Change in unrealized gains (losses) (1,131) (1,894) 427
Combined investment yield 2.29% 18.89% 11.80%
Operating loss (6,792) (3,555) (14,302)
</TABLE>
During the past three years, the insurance subsidiary has focused
on revamping product mix, pricing and underwriting practices with the
near-term objective of reducing underwriting losses while identifying
new products and markets to enable the insurance business to again go
forward on a profitable basis. To-date, several unprofitable direct
automotive insurance programs, along with certain general liability
reinsurance programs, have been discontinued while price increases
have been implemented in other markets which were producing
unsatisfactory results.
Written premium in Illinois was $22,356,116 in 1994 as compared
to $19,515,000 and $25,690,411 in 1993 and 1992, respectively. This
decrease in 1993 was primarily the result of program changes
instituted by new management during 1993 that were not well received
by certain major Illinois producers. During the latter part of 1993
and early 1994, Coronet has attempted to address the issues raised by
the producers so as to regain the lost volume. In addition, Coronet
has begun to sign up additional producers and implement newly
developed programs. These efforts have shown success as Illinois
volume increased 14.5% in 1994 over 1993 (see above). As of October
1, 1991, laws materially affecting automobile insurance changed in
Georgia. These changes have resulted in lower penetration of the
marketplace and a decision was made to stop accepting new business in
August 1993 resulting in 1993 volume declining to $2,928,068 as
compared to $6,804,681 in 1992. Based on a review of the Arizona
marketplace and rates, a rate increase of 21.7% was made in April
1993, which resulted in a volume decreasing to $9,638,723 in 1994 as
compared to $12,454,787 and $33,092,807 in 1993 and 1992,
respectively. During 1993 and 1992, certain other unprofitable
programs were terminated. They include the termination in December
1993 of the Camelback reinsurance program which had written premium of
$4,800,000 in 1993 and $10,650,000 in 1992. Other programs which
were terminated in late 1992 or early 1993 include the Kansas, Iowa,
Kentucky and West Virginia programs, which had combined written
premiums of $7,300,000 in 1992.
The combination of the above has resulted in the written premium
volume declining to approximately $47,944,000 as compared to
$57,063,000 and $118,930,000 in 1993 and 1992, respectively. The
decline in writings accelerated in the latter half of 1993 with
writings in the fourth quarter dropping to approximately $10,493,000
as compared to $20,711,000 for the same period in 1992. The Company
believes that the decline in premium volume resulting from most of
these program changes has substantially ended. Premium volume began
to increase throughout 1994 as quarterly written premiums increased
to approximately $11,506,000 in the first and second quarters, to
$12,023,000 in the third quarter and to $12,910,000 in the fourth
quarter.
The short-term impact of the drop in written volume is that the
company experiences 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 (see cash flows above). Accordingly,
the Company believes that any required liquidations of the investment
portfolio in order to meet operating cash flow requirements during
1995 will be greatly reduced.
During 1992, the insurance subsidiary continued to experience
increasing unsatisfactory results from three programs in the states
of Kentucky, Tennessee and Florida. The aggregated combined ratio
for these programs, which were discontinued in mid-1992, was 154.5%
in 1992. In comparison, the combined ratio for the Company's
continuing programs was 114.1% during 1992.
During the fourth quarter of 1992, the insurance subsidiary
reevaluated its continuing reserving policy regarding losses incurred
but not yet reported to the Company. Based upon this analysis, the
amount of reserves for these anticipated losses was increased by
approximately $7.4 million. The Company also performed a study of
its reserve for anticipated expenses to be incurred in settling
future claims and increased that reserve by approximately $1.6
million. Further, the Company performed a study which indicated that
its reserves for certain reinsurance assumed programs were materially
understated due to significant deterioration of the programs'
results. Accordingly, additional loss reserves totalling $5.5
million were established in the fourth quarter of 1992 to bring those
reserves to an adequate level. The impact of these strengthenings of
the loss reserves was to increase the reported underwriting losses in
1992 by approximately $14.5 million and increase the combined ratio
by 11.2%.
In order to meet recently applicable statutory requirements of
certain states no longer allowing the use of other qualified loss
reserve experts, the insurance subsidiary engaged the services of an
independent actuary to review the adequacy of the loss reserves of
the Company as of December 31, 1992. The actuary concluded that the
recorded reserves were deficient by approximately $11 million. This
conclusion, about which the actuary initially could only provide
summary information, differed materially from 1991 and prior years'
annual evaluations of reserve adequacy performed by both the
Company's previous independent auditors and the Illinois Department
of Insurance. At December 31, 1992, the Company believed that its
loss reserves were generally adequate and, accordingly, did not
increase its reserves at December 31, 1992, to reflect the $11
million deficiency noted by the actuary. Based upon further analysis
and development experience, the Company did record substantially all
of the actuary's $11 million indicated deficiency. During 1993, the
Company began recording its loss reserves based upon current
actuarial information. The actuary's review of the Company's
reserves as of December 31, 1993, reported that the Company's
reserves were no longer deficient. During 1994, further program
development and continuing actuarial studies indicated that the loss
reserves established in prior years on certain programs were
excessive. Accordingly, during 1994 the Company reduced these prior
year reserves by approximately $5,891,000. The actuary's review of
the Company's reserves as of December 31, 1994, again reported that
the Company's reserves were not deficient. The Company will continue
to monitor its loss reserves and obtain actuarial reviews on a
frequent basis.
During 1994, the Company recorded an underwriting loss of
$5,006,000, which was net of $1,939,000 of income recognized on
inactive programs, primarily as the result of favorable development
of loss reserves related to prior years. The Company's continuing
active programs reported underwriting losses in 1994 of $6,201,000,
composed of $9,498,000 of losses on the current accident year and
$3,297,000 of income related to excess reserves on accident years
prior to 1994. The combined ratio for the 1994 accident year on the
Company's continuing active programs was 120.2%. This compares to
1993 when the Company recorded an underwriting loss of $23,100,000,
of which $4,483,000 emanated from inactive programs which had been
previously discontinued due to their unsatisfactory results. The
Company's continuing active programs reported underwriting losses in
1993 of $18,617,000, of which approximately $7,839,000 represented
amounts applicable to prior accident years. Recently enacted price
increases and other loss reduction steps taken are expected to have a
positive impact upon the future profitability of these continuing
programs.
The statutory combined ratio is a measure, computed on a statutory
basis of accounting, which reflects the underwriting results of the
insurance business. For example, a ratio of 100% indicates that a
company's underwriting activities are breaking even over the life of
the policies written, whereas a ratio of greater than 100% would
indicate that the company's underwriting activities are generating
losses.
The investment income for 1992 is primarily the result of the
improved performance of the equity security portfolio with realized
gains from the sale of equity securities totalling $12,528,332 in
1992. The increase in investment income in 1993 is primarily the
result of realized gains totalling $17,781,238 from the liquidation
of a significant portion of the insurance subsidiary's investment
portfolio during 1993 to meet the negative cash flow requirements
emanating from the drop in premium volume discussed above. As the
result of declining negative cash flow (see Cash Flows above), the
need to liquidate portfolio investments was significantly less in
1994 and realized gains from such liquidations declined to
$2,324,781. During 1994 and 1992, Sunstates wrote down the
carrying value of certain of its corporate debt securities by
$361,863 and $4,236,730, respectively, to recognize what it believed
to be other than temporary declines in the value of its fixed
maturity portfolio. Sunstates also recorded writedowns totalling
$571,800 and $1,394,322 during 1994 and 1992, respectively, to
recognize what it believed to be other than temporary declines in the
value of its equity security portfolio. There were no comparable
writedowns required in 1993.
Subsequent to December 31, 1994, the Company determined that due
to a decline in the value of the Company's Class B Stock owned by
WREIT and the fact that substantially all of WREIT's assets were
pledged to secure other obligations,the repayment of amounts owed to
the insurance subsidiary by WREIT is doubtful. Accordingly, as of
December 31, 1994, the insurance subsidiary has written off its
receivable from and its investment in the shares of beneficial
interest of WREIT in the amounts of $2,287,750 and $605,915,
respectively.
The Illinois Insurance Department completed their Market Conduct
Examination and the Company received high praise for the dramatic
improvement over prior examinations. The primary emphasis was in the
claims area and the Department validated the efforts of improved time
service and quality settlements in all areas reviewed.
Manufacturing
Furniture Manufacturing
In general, the furniture industry suffered slowed sales during
the fourth quarter of 1990 due to uncertainty in the economy and the
world situation. These depressed sales levels continued throughout
1991 as the depth of the economic recession became evident. Although
the economy has improved somewhat in 1992 and 1993 and 1994, the high
end furniture segment's sales have not recovered to their pre-1990
levels, nor has their recovery been as strong as the middle and lower
end segments of the industry.
Net furniture revenues increased by $2.5 million or 5.7% in 1994
as compared to an increase of $1.9 million or 4.5% in 1993 and a
decline of $0.4 million or 1% in 1992. Furniture cost of sales as a
percent of revenue increased by 2.1% in 1994 as compared to having
declined in 1993 (decreasing 4.3% as compared to 1992). In
aggregate, 1994 gross margins decreased by $490,013 or 5.8% as
compared to an increase of $2,224,659 or 35.6% in 1993. This decline
in profitability reflects the impact of increased discounting and
promotions necessary to move out slow moving or discontinued product
lines. Promotional discounts were up 21.6% in 1994 as compared to
1993 (which was down 6.3% from 1992). Additionally, certain
production inefficiencies being experienced at the casegoods
manufacturing plant contributed to the profitability decline in 1994.
Orders entered during the fourth quarter of 1994 were 11% below the
prior year as the Company's new product showings were not well
received in the fall furniture market. The 1993 results were
favorably impacted by cost reductions and productivity enhancements
which had been implemented, including the closing of one of its
furniture manufacturing plants in early 1993 and the transfer of the
production to other existing facilities. During the third quarter of
1992, a provision of $1,800,000 was recorded to cover the anticipated
costs of the plant closing.
During 1994, selling and administrative expenses declined by
$34,752 as compared to an increase of $919,774 in 1993.
Textile Apparel Manufacturing
Alba-Waldensian became a consolidated subsidiary on June 30, 1993
(see discussion above) , and accordingly, Alba's results of
operations have been consolidated in Sunstates' consolidated
financial statements subsequent to that date. The following
discussion covers Alba's operations for the full year of 1993,
including those operations reported as equity earnings before its
consolidation with Sunstates (see Equity Investees below).
Alba's net sales increased $5,651,189 or 11.1% in 1994 as compared
to an increase of $10,287,952 or 25.4% in 1993. The 1994 net sales
increase over 1993 was due to increases in intimate apparel, ladies
hosiery, surgical footwear, stockinette, Byford socks and
telemarketing operations. The 1993 increase was primarily the result
of the acquisition of the U. S. operations of Byford Apparel which
markets a line of better men's sweaters and socks. Excluding Byford,
which generated net sales of $6,375,995 in 1993 ($6,353,371 in 1994),
the net sales increase for the year of 1993 was 9.7%. Annual sales
per employee, an indicator of productivity, increased from $58,000
per employee in 1993 ($51,400 in 1992) to $67,000 per employee in
1994, a 15.5% increase.
Gross margins decreased from 26.5% in 1993 to 25.2% in 1994 (
25.1% in 1992). The decline in gross margins in 1994 primarily
reflects the impact of discounting of slow moving and discontinued
Byford sweater and sock lines. Excluding the decline in the gross
margins of the Byford division, the Company's gross margins would
have remained relatively constant with the prior year. The Byford
division normally carries a higher gross margin (34.9% in 1993) than
Alba's average and coupled with a sales mix shift toward health
products and telemarketing operations, both of which carry higher
margins, was responsible for the increase in gross margins reported
in 1993.
Selling, general and administrative expenses decreased from 22.8%
of net sales in 1993 to 19.5% in 1994 due to marketing expenses
incurred in 1993 to redesign packaging and to launch new product
lines. Alba's operating income increased from $1,884,245 or 3.7% of
net sales to $3,246,646 or 5.7% of net sales in 1994.
During the fourth quarter of 1993, Alba incurred unusual
non-recurring charges of $556,205 for the writeoff of a receivable
from a major customer which filed for bankruptcy as well as $428,652
of costs incurred in connection with investigation of a potential
acquisition.
Military Footwear
The military footwear business reported revenues of approximately
$20,285,000 for the year ended December 31, 1994, as compared to
$19,562,000 and $17,532,000 for the years ended December 31, 1993
and 1992, respectively.
The 1994 increase reflects the sale of combat boot manufacturing
materials and machinery to a factory in El Salvador, and the sale of
machinery to one new and one long-term customer. From time to time,
Wellco provides materials and machinery for the manufacture of combat
boots to customers in foreign countries. Wellco also sells certain
machinery to military and commercial footwear manufacturers, located
in both the United States and abroad, as a part of technology and
technical assistance agreements. The volume of these sales in any
particular period can vary significantly with the needs of these
customers. The production and shipments of combat boots in the last
few months of 1994 decreased, and this partially offset the increased
machinery and material sales. The combat boot decrease was caused by
the U. S. Government extending by one-third the delivery schedule of
an exercised option under the exist production contract. The
delivery extension and the situation leading up to it is discussed
below. The 1993 increase reflects sales of combat boots to
commercial accounts and sales of machinery to a military boot
manufacturing plant in Columbia, South America.
On August 6, 1993, Wellco was awarded an annual combat boot
pairage of 277,000 from the U. S. Government. This represents a 25%
award level under the Government's new three-year "Best Value"
contracting method (35%, 25%, 20% and 20% award levels) and the
contract contained two one-year options for the same pairs. The
pairs awarded can be increased by up to 50% at the option of the
government. This volume of pairs and the related prices will enable
Wellco to continue a viable military boot contracting operation. This
awarded volume is slightly more than Wellco's 1992 and 1993 pairs
shipped to the U. S. Government. Production under the contract
started in August 1993 with the first shipments being made in October
1993. In November 1994, Wellco started shipping boots against the
first option award under this contract. Because the U. S. Government
is reducing its inventory of combat boots, delivery under this option
will be over a sixteen month period instead of twelve months as was
anticipated when the contract was awarded. This extension of
delivery will result in combat boot sales in 1995 being less than in
1994.
Included in the results of the military footwear business was
$505,307, $1,082,008, and $901,714 of income from investment
transactions, primarily gains realized upon the sale of certain
investment securities, for the years ended December 31, 1994, 1993
and 1992, respectively. The 1994 and 1992 investment income is net
of $341,790 and $947,815 of writedowns to market value of certain
securities to reflect what the Company believes to be other than
temporary declines in their market value.
Textile Equipment Manufacturing
Textile machinery's revenues increased $1,623,948 or 36.8% in 1994
as compared to a decrease of $2,193,532 or 33% in 1993 (compared to
an decrease of $468,981 or 6.6% in 1992). The declines in 1993 and
1992 reflected the delay or curtailment of customer capital outlay
plans for machinery orders and did not represent a loss of market
share. Order backlog at December 31, 1994, was approximately five
months at current production levels as compared to approximately four
months at both year end 1993 and 1992. Gross margin percentages
increased 4.9% in 1994 (primarily as the result of reductions in
manufacturing overhead) as compared to a decrease of 7.2% in 1993.
Recognized profits were reduced by $369,231 in the year ended
December 31, 1992, representing a contingent participation interest
of Hickory in the division's income as provided for under the Sew
Simple Stock Purchase Agreement (See Note 1 of Notes to Consolidated
Financial Statements). On April 13, 1992, Sunstates acquired
Hickory's remaining interest in Sew Simple and accordingly, there was
no comparable reduction in the 1993 or 1994 periods.
Real Estate
Resort Lots
Net sales for the three years ended December 31, 1994, 1993 and
1992, were $2,526,603, $2,581,412 and $3,357,196, respectively. Net
sales have been declining as projects approach sellout of their
premium higher priced lots. Gross margins have approximated 65.7%,
77.5% and 74.8% for the three years ended December 31, 1994, 1993 and
1992, respectively. At the present time, Sunstates does not
anticipate that it will continue to actively seek locations for the
development of new resort lot projects and intends to devote its
efforts to the completion and sale of projects it currently has under
development.
Commercial
During 1994 and 1993, the Company sold an apartment project in
each year generating net sales prices of $10,644,000 and $6,235,175,
respectively, and profits of $2,729,000 and $518,803, respectively.
There were no significant sales of real estate projects in 1992 and
reported revenues primarily represented sales of outparcels, rental
income, and interest income.
Resort Development
The Company's resort development in Spring Green, Wisconsin
reported losses of $2,646,778 and $1,600,000 during 1994 and 1993,
respectively, representing primarily property taxes, operating
expenses and overhead costs. The project generated operating
revenues of $2,308,280 and $2,324,579 during 1994 and 1993,
respectivly. The increased losses in 1994 primarily reflect the
impact of start-up costs associated with real estate marketing and
residential activities as well as higher interest expense relating to
amounts borrowed from its parent in connection with ongoing operating
losses and a $1,700,000 land acquisition in February of 1993.
Subsequent to its acquisition on August 25, 1992, the resort
development project ("The Springs"), recorded a loss of $627,234 in
1992 representing primarily property taxes, operating expenses and
overhead costs. The project generated minimal revenues during this
period in that the golf course's season ended in October and did not
reopen until May of 1993 and the hotel did not begin operations until
the spring of 1993.
Equity Investees
The following table sets forth Sunstates' share of the earnings
(losses) 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):
<TABLE>
<CAPTION>
For The Year Ended December 31,
<S> <C> <C> <S><C> <C>
Equity Investee 1994 1993 1992
Alba $ -- 435 1,274
Rocky Mountain 891 382 101
--- --- -----
Equity in earnings of affiliates 891 817 1,375
Interest - Rocky Mountain notes 79 68 137
Sale of Rocky Mountain stock 526 371 53
----- ----- -----
$1,496 1,256 1,565
===== ===== =====
</TABLE>
Alba became a consolidated subsidiary of Sunstates on June 30,
1993. The following discussion covers only the first six months of
1993 during which time Sunstates' share of Alba's earnings were
reflected as equity in earnings as shown above. (See Manufacturing
above for discussion of Alba's results subsequent to June 30, 1993.)
Alba's sales increased 25% in the first six months of 1993 as
compared to the same period of 1992. Approximately 50% of this
increase is due to the acquisition of the U. S. operations of Byford
Apparel, which markets a line of better men's sweaters and socks.
Excluding Byford, the net sales increase for the first six months of
1993 was 11%. Gross margins improved from 24.3% in 1992 to 25.4% in
1993. Although the newly acquired Byford business has a gross margin
percentage that is higher than Alba's average, the primary reason for
the margin increase was an improvement in consumer products' margins.
Selling, general and administrative expenses as a percent of sales
were up 3.6% in the first six months of 1993 due primarily to costs
associated with the Byford acquisition, certain licensing costs and
new packaging costs.
Rocky Mountain Chocolate Factory, Inc. ("Rocky Mountain"), located
in Durango, Colorado, manufactures, from its own recipes, a line of
gourmet chocolates and other premium confectionery products for sale
at company-owned and franchised stores. On December 31, 1989,
Sunstates became the owner of 35.12% of the common stock of Rocky
Mountain through the conversion of a note which was held in its
investment portfolio and thereby commenced equity accounting for its
investment at that date. In addition to the 55% of Rocky Mountain
owned at December 31, 1994, Sunstates also holds additional notes
with a carrying value of $1,124,926, which are secured by the common
stock of Rocky Mountain. Although Sunstates' present ownership of
Rocky Mountain is over 50%, the financial statements of Rocky
Mountain have not been consolidated with Sunstates' due to
immateriality. Sunstates sold a small amount of its common stock
holdings of Rocky Mountain during 1994, 1993 and 1992.
The increase in the earnings of Rocky Mountain are the result of a
24.4% increase in the number of stores in operation at November 30,
1994, as compared to November 30, 1993 (40% increase over November
30, 1992) , many of which have been opened in factory outlet malls.
Corporate and Other
A loss of approximately $568,000 and $470,000 was recorded by the
Company's newspaper publication business in 1994 and 1993,
respectively, as compared to a loss of $122,000 in the three months
of 1992 subsequent to its purchase.
During the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes". The primary effect of adopting this statement resulted from
the recognition of deferred tax assets attributable to pension
expense of the Company's majority owned subsidiary, Wellco
Enterprises, Inc. Since the Company elected not to restate prior
years' financial statements, the cumulative effect on prior years of
this change in accounting principle of $260,000 has been reflected in
1993. Additionally, under FAS #109 the Company no longer reports the
benefit from the utilization of its net operating loss carryforwards
as an extraordinary item.
The Company records deferred tax assets and liabilities to reflect
the anticipated future tax effect of temporary differences in the
timing of the recognition of income and expenses for tax purposes as
compared to financial reporting purposes. The Company's policy is
to establish a valuation reserve in an amount necessary to reduce the
value of any such deferred tax assets to an amount estimated by
management which will more likely than not be realized in future
years, primarily through the reversal of taxable temporary
differences within the carryforward period of the Company's net
operating losses. During 1994, the Company's valuation allowance was
increased from $25,959,000 to $26,676,000, while gross deferred tax
assets declined from $33,532,000 to $32,290,000. (See Note 10 of
Notes to Consolidated Financial Statements included in Item 8 of this
Report for further information on income taxes.)
Economic Environment
During 1990, the United States economy entered what most
economists have now characterized as a recession. The real estate
markets began to feel the effects of excessive development activities
partially fueled by liberal lending policies, changes in tax laws and
downturns in local economies in 1989; the effects of which only
increased and became more widespread during 1990 and 1991,
particularly in the markets in which Sunstates operates. Sunstates'
furniture manufacturing business was adversely impacted in 1990 and
1991 by the recession as consumers' demand for durable goods was
severely curtailed. The effect of declines in consumer spending took
longer to have an impact upon Sunstates' textile equipment
manufacturing business with the first decline in revenues coming in
1992 and deepening in 1993. Textile manufacturers were
significantly impacted by the recession which caused future expansion
and capital expenditure plans to be curtailed. However, the textile
equipment manufacturing business experienced a significant recovery
during 1994. Backlog at December 31, 1994 was back up to five months
as compared to four months at December 31, 1993 and 1992.
It is now generally believed that the economic recession ended in
1992 and that a recovery began in that year.
The rate of inflation has remained relatively low during the three
years ended December 31, 1994. However, in its attempt to ensure
that significant inflation does not return to the U. S. economy, the
Federal Reserve System has begun to push up short-term interest rates
that has resulted in the prime rate of interest from 6% at December
31, 1993 to its present level of 9%. A significant percentage of
Sunstates' debt (48.2% at December 31, 1994) carries a floating
interest rate based upon the prime lending rate. Accordingly, debt
service requirements have been significantly impacted by the increase
in the prime lending rate.
Sunstates' insurance operations could be affected by inflation
with respect to its underwriting income and its investment
portfolio. Increases in the cost of settling claims would reduce
underwriting income. As policies are written for terms of six and
twelve months, this impact could be offset for future periods by rate
increases. However, there can be no assurance that rate increases
can be obtained due to the various regulatory environments and
competitive pressures. Significant increases in interest rates could
represent opportunities for increased yields on its portfolio while
at the same time having a negative impact on the market value of its
fixed maturity investments. However, if Sunstates continued to hold
such investments to maturity, the investment yield would not be
impaired. In general, equity markets are adversely impacted by high
escalations in interest rates. Sunstates' equity investments could
possibly be affected by such a market reaction.
The real estate segment's primary source of revenue is generated
from the sale of developed real estate and any significant increase
in inflation could have an adverse effect on the operations of the
real estate segment through its impact upon mortgage interest rates
and the availability of conventional types of financing.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to Item 8 is submitted as a separate section of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in and disagreements with accountants on
accounting and financial disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Year Shares and
First Class of
Positions with Sunstates; Became Equity
Principal occupations Director Securities
Name During Past Five Years; other of Beneficially
(Age) Directorships Sunstates owned (1)(2)
William D. Principal (since January, 1989)
Schubert of Advanced Management Concepts, 1991 -O-
(71) a management consulting firm to
the textile and apparel
industries; Director (from 1973
to May, 1991), Chairman of the
Board of Directors (from
December, 1985 to December,
1988) and President and Chief
Executive Officer (from April,
1974 to July, 1988) of Alba-
Waldensian, Inc., a manufacturer
of textile apparel and medical
specialty products; Director
(since November, 199O) of Wellco
Enterprises, Inc.
Robert J.
Spiller Director (from 1981 to May,
(64) 1988) of Sunstates Corporation; 1988 148 shares
retired Chairman and Chief of Class B
Executive Officer (197O - 199O) Stock; 3,607
of The Boston Five Bancorp. shares of
Common Stock
issuable upon
conversion of
Class B Stock
Clyde Wm. Chairman of the Board (since 1985 See "Security
Engle(3) December, 1985) and Chief ownership of
(52) Executive Officer (since Certain
December, 199O); President and Beneficial
Chief Executive Officer (from Owners,".
December, 1985 to May, 1988) of
Acton; Director (from 1981 to
May, 1988) of Sunstates
Corporation. Other than as
noted below, during the past 5
years Mr. Engle has served as:
Chairman of the Board and Chief
Executive Officer of Telco
Capital Corporation (a
diversified financial services
and manufacturing company and an
indirect parent of Sunstates);
General Partner of Sierra
Associates, itself the general
partner of Sierra-Capital Group
(an investment partnership);
Chairman of the Board and Chief
Executive Officer of GSC
Enterprises, Inc. (a one-bank
holding company), and Chairman
of the Board of its subsidiary,
Bank of Lincolnwood; Chairman of
the Board and President of RDIS
Corporation (a diversified
financial services and
manufacturing company), Director
and since 199O, Chairman of the
Board, President and Chief
Executive Officer of Hickory
Furniture Company; Director and
Chairman of the Board of NRG,
Inc.; Trustee and Chairman of
the Board of Wisconsin Real
Estate Investment Trust;
Director of Wellco Enterprises,
Inc.; Director and Chairman
(since May, 1991) of Alba-
Waldensian, Inc.; Director of
Indiana Financial Investors,
Inc.; Director (since November,
1987) of Rocky Mountain
Chocolate Factory, Inc.
Howard Friedman Partner (since 1971) in the law 1986 50O shares of
(55) firm of Altheimer & Gray, Common Stock
Chicago, Illinois; Director
(since 1984) of Bank of
Lincolnwood.
Lee N. Mortenson President (since May, 1988), 1988 5OO shares of
(59) Chief Operating Officer (since Common Stock,
December, 199O) and Chief 8OO shares of
Executive Officer (May, 1988 to $3.75
December, 199O) of Sunstates; Preferred
President and Chief Executive Stock
Officer (from July, 1984 to May,
1988) and Director (from
February, 1985 to May, 1988) of
Sunstates Corporation;
President, Chief Operating
Officer and Director of Telco
Capital Corporation (since
January, 1984); Director (since
April, 1984) of Alba-Waldensian,
Inc.; Director (since March,
1987) of NRG, Inc.; Director
(January, 1988 to October, 1992)
of Sun Electric Corporation;
Director (since November, 1987)
of Rocky Mountain Chocolate
Factory, Inc.; Director of
Wellco Enterprises, Inc. (since
December 1993).
Harold Sampson Director (from 1982 to May, 1988 -O-
(76) 1988) of Sunstates Corporation;
Chairman of the Board (since
1981) of Sampson Investments (a
real estate holding company);
Trustee (since 198O) of
Wisconsin Real Estate Investment
Trust; Director (since 1986) of
Indiana Financial Investors,
Inc; Chairman of the Board of
Diginet Communications, Inc.
(since 1985); Director of Mt.
Sinai Hospital (since 196O).
(1) All stock information is as of March 3, 1995. Unless otherwise noted,
all shares are owned directly, with sole voting and dispositive power.
(2) Unless otherwise noted, the shares of equity securities owned by each
director represents less than 1% of the class so owned.
(3) The following information is provided voluntarily by Mr. Engle
although it is not deemed material information as that term is used
in Item 401 of Regulation S-K. Mr. Engle is the subject of a Cease
and Desist Order dated October 7, 1993, issued by the Securities and
Exchange Commission (the Commission) requiring Mr. Engle and certain of
his affiliated companies to permanently cease and desist from committing
any further violations of Section 16(a) of the Securities Exchange Act of
1934 as amended and the rules promulgated thereunder, which requires
monthly and other periodic reports of transactions in certain securities.
The Commission found some of the reports of such transactions to have
been filed delinquently although many of these transactions were
between affiliated entities or had been publicly reported in other
reports filed with the Commission or had been otherwise publicly
announced.
Executive Officers
Name Age Positions and Offices Business Experience During
with Company Last Five Years
Clyde Wm. Engle 52 Chairman of the See "DIRECTORS" above
Board and Chief
Executive Officer
Lee N. Mortenson 59 Director, See "DIRECTORS" above
President and
Chief Operating
Officer
Glenn J. Kennedy 43 Vice President, Vice President (since July
Treasurer and 1988) and Treasurer and Chief
Chief Financial Financial Officer (since May
Officer 1988) of the company,
Treasurer and Chief Financial
Officer of Sunstates
Corporation (from September
1986 to May 1988); Chief
Financial Officer of Simms
Investment Company (May 1984
to August 1986); Senior Audit
Manager, Price Waterhouse
(1978 to May 1984)
Richard A. Leonard 48 Vice President and Vice President (since July 1988)
Secretary and Secretary (since May 1988)
of the Company; Vice President
(from April 1986 to May 1988)
and Secretary (from September
1986 to May 1988) of Sunstates
Corporation; Administrative
Vice President and Counsel
(from June 1984 to April 1986)
of Sunstates Properties, Inc.,
a wholly-owned subsidiary of
Sunstates Corporation; President
and Counsel of AMIC Title
Insurance Company (January 1982
to June 1984)
For information on security ownership of the Company's executive
officers, see above sections captioned "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS". Mr. Kennedy and Mr. Leonard do not own any
securities of Sunstates.
COMPLIANCE WITH SECTION 16(a) OF SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to the Company during the fiscal year ended
December 31, 1994, and Forms 5 and amendments thereto furnished to
the Company with respect to the fiscal year ended December 31, 1994,
and any written representations from a reporting person that no Form
5 is required, to the best of the Company's knowledge, no person who
was a director, officer or beneficial owner of more than ten percent
of any class of equity securities of the Company (a reporting person)
failed to file on a timely basis, as disclosed in the above Forms,
reports required by Section 16(a) of the Securities Exchange Act of
1934 during the most recent fiscal year. However, Mr. Engle has not
furnished the Company with copies of any Form 5 or written
representation with respect to reporting during the fiscal year ended
December 31, 1994.
Item 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors
The following summarizes the director compensation paid by the
Company during the year ended December 31, 1994.
Each director other than Messrs. Engle and Mortenson is paid
$5,000 per quarter for serving in such capacity. In addition,
directors other than Messrs. Engle and Mortenson, receive $1,500 for
each Board meeting attended ($1,000 prior to June 1994) and $600 for
each standing committee meeting attended which is not held on the day
of a regularly scheduled Board of Directors meeting. Directors are
also compensated from time to time for special assignments, including
serving on special committees, at the rate of $200 per hour ($1,600
per day maximum) plus expenses. Each director is reimbursed for his
actual expenses in attending meetings of the Board or any of its
committees.
Employment Agreements
Mr. Engle has entered into an employment agreement effective
January 1, 1991, and initially extending through 1995, whereby Mr.
Engle received a base salary of $500,000. Such amount will increase
in each subsequent year by at least the increase in the Chicago
Consumer Price Index. In addition, under the terms of the employment
agreement, Mr. Engle received a bonus in the amount of $2,470,000
(3.25% of the gross sales price) in connection with the sale of the
cable television system. There are no other employment agreements
between the Company and any of its other executive officers.
The following table sets forth a summary of the compensation
earned by the Company's executive officers during 1994, 1993 and
1992:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation All Other
Name and Principal Other Annual Compensation
Position Year Salary ($) Bonus ($) Compensation ($) ($)
(a) (b) (c) (d) (e) (i)
<S> <C> <C> <C> <C> <C> <C>
Clyde Wm. Engle 1994 505,091 230,000
Chairman and Chief 1993 504,006 2,470,000 210,000
Executive Officer 1992 510,431 210,000
Lee N. Mortenson 1994 132,800 150,000 260,000 3,830
President and Chief 1993 122,416 306,584 2,189
Operating Officer 1992 112,013 277,000 1,982
Glenn J. Kennedy 1994 128,750 3,451
Vice President, 1993 120,000 70,000 2,887
Treasurer and Chief 1992 105,680 52,500 3,232
Financial Officer
Richard A. Leonard 1994 126,750 3,663
Vice President and 1993 116,250 24,000 3,214
Secretary 1992 105,326 52,500 2,326
</TABLE>
(c) Salary: Total base salary paid by the Company during the calendar
year. Mr. Engle became an employee of the Company on September 16,
1991 under an employment agreement extending initially through 1995 and
providing for an initial annual salary of $500,000 retroactive to
January 1, 1991. Prior to 1991, Mr. Engle served the Company as its
Chairman and Chief Executive Officer without compensation. Mr. Engle
and Mr. Mortenson are also employees of the Company's parent, Hickory,
and receive compensation from Hickory for services rendered to the
Company. The Company pays Hickory an annual management fee and the
compensation received by Mr. Engle and Mr. Mortenson from Hickory
attributable to services rendered to the Company is included in Other
Annual Compensation (column "e").
(d) Bonus: With respect to Mr. Kennedy and Mr. Leonard, represents annual
incentive compensation awarded on a discretionary basis for results
achieved during the calendar year under a plan approved by the Board
of Directors. Up to one-half of the bonus amount is paid when awarded
and the remainder is paid over the succeeding five years on a prorata
basis. Should the officer voluntarily leave the Company during that
five-year period, he will forfeit all rights to any unpaid balance.
The award for 1994 has not yet been determined. With respect to Mr.
Mortenson, the 1994 bonus was a special cash bonus awarded by the
Compensation Committee of the Board of Directors for services rendered
during 1993 and 1994. With respect to Mr. Engle, the bonus in 1993
represents amounts payable to Mr. Engle under the terms of his
employment agreement as the result of the sale of the cable television
system.
(e) Other Annual Compensation: All additional forms of cash and non-cash
compensation paid, awarded or earned. The amounts shown for Mr. Engle
and Mr. Mortenson represent salary paid by the Company's parent, Telco,
attributable to services rendered to the Company (see "a" above). The
value of all other personal benefits and perquisites received by the
Company's executive officers in 1992 and 1993 was less than the
required reporting threshold.
(i) All Other Compensation: All other compensation that does not fall
under any of the aforementioned categories. The amounts shown in this
column for 1994 comprise the following payments made by the Company:
(i) Mr. Mortenson: $2,914 - matching contribution to 401(k) plan and
$916 - premium for term life insurance policy; (ii) Mr. Kennedy: $2,254
- matching contribution to 401(k) plan and $1,197 - premium for term
life insurance policy; and (iii) Mr. Leonard: $2,464 - matching
contribution to 401(k) plan and $1,199 - premium for term life
insurance policy.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the name, address and beneficial ownership,
as of March 14, 1995, of each person known to the Company to be the
beneficial owner of more than 5% of any class of its outstanding
securities entitled to vote. Information presented in this table and
related notes has been obtained from the Company's shareholder lists,
the beneficial owner or from reports filed by the beneficial owner
with the Securities and Exchange Commission pursuant to Section 13 of
the Securities Exchange Act of 1934 as amended, (the "Exchange Act").
Percent
Name and Address of Amount and Class of Equity Percent of of Voting
Beneficial owner Securities Beneficially Class (1) Power(3)
owned (8)
COMMON AND CLASS B COMBINED (3):
A group consisting of:
Wisconsin Real Estate 63,O43 Shares of Class B 9O.4% 79.9%
Investment Trust Stock (2)
("WREIT")
55 East Monroe
P. O. Box 17
Chicago, Illinois 6O6O3 (7)
and and
Hickory Furniture 91,3O1 Shares of Common 11.67% 1.36%
Company ("Hickory") Stock (2)
55 East Monroe
P. O. Box 17
Chicago, Illinois 6O6O3 (8)
and or
Indiana Financial 1,627,974 Shares of Common 7O.2% 56.3%
Investors, Inc. Stock issuable upon
("Indiana") conversion of Class B Stock
55 East Monroe (4)
P. O. Box 17
Chicago, Illinois 6O6O3
and
Telco Capital
Corporation ("Telco")
55 East Monroe
P. O. Box 17
Chicago, Illinois 6O6O3
and
RDIS Corporation
("RDIS")
55 East Monroe
P. O. Box 17
Chicago, Illinois 6O6O3 (6)
and
GSC Enterprises
55 East Monroe
P. O. Box 17
Chicago, Illinois 6O6O3 (5)
and
Clyde Wm. Engle
55 East Monroe
P. O. Box 17
Chicago, Illinois 6O6O3 (5)
Dimensional Fund 52,5O4 Shares of Common 6.71% O.78%
Advisors, Inc. Stock
1299 Ocean Avenue
Santa Monica,
California 9O4O1 (9)
$3.75 PREFERRED STOCK (3):
John D. Weil 84,668 Shares of $3.75 29.8% 29.8%
5O9 Olive St Preferred Stock
Suite 7O5
St. Louis, Mo 631O1
The Employees' 17,8OO Shares of $3.75 6.26% 6.26%
Retirement Plan of Preferred Stock
Consolidated Electrical
Disributors, Inc.
1516 Pontius Avenue
Los Angeles, California
9OO25
(1) At March 14, 1995, there were 782,422 shares of Common Stock
outstanding, net of 1,046,966 shares held by subsidiaries and
therefore deemed to be treasury shares, 69,471 shares of Class B
Stock outstanding, net of 12,453 shares held by subsidiaries and
therefore deemed to be treasury shares, and 284,183 shares of $3.75
Preferred Stock outstanding, net of 178,795 shares held by
subsidiaries and therefore deemed to be treasury shares.
(2) Hickory owns directly 31,913 shares of Common Stock, Indiana owns
directly 1,340 shares of Class B Stock and 43,988 shares of Common
Stock, WREIT owns directly 61,703 shares of Class B Stock, and GSC
owns directly 15,400 shares of Common Stock.
(3) Holders of Common Stock are entitled to one vote per share and
holders of Class B Stock are entitled to 85.3125 votes per
share, voting together as a single class. Percentages indicated
are based upon the combined total number of votes available to
holders of Common Stock and Class B Stock, a total of 6,732,201
on March 14, 1995. Common Stock and $3.75 Preferred Stock are each
entitled to one vote per share when voting as a separate class.
(4) Each share of Class B Stock is convertible immediately into
24.375 shares of Common Stock. Were only Hickory, Indiana and
WREIT to immediately convert their shares of Class B Stock into
Common Stock, the group would then hold 56.3% of the voting
power of the outstanding securities regularly entitled to vote.
(5) Mr. Engle may be deemed the beneficial owner of the shares of
Class B Stock beneficially owned by Hickory, Indiana and WREIT
by virtue of his ownership of RDIS. According to information
filed with the Commission, Mr. Engle, Chairman of the Board of
Directors of RDIS, possesses beneficial ownership in excess of
50% of the outstanding shares of common stock of RDIS. RDIS
owns 100% of the outstanding common stock of Telco; Telco owns
approximately 92.9% of the outstanding common stock of Hickory;
and Hickory owns approximately 76.6% of the outstanding shares
of beneficial interest of WREIT and approximately 70.6% of the
outstanding common stock of Indiana. Mr. Engle may be deemed
the beneficial owner of the shares of Common Stock owned by GSC
Enterprises, a one bank holding company, of which Mr. Engle is the
majority owner.
(6) Although RDIS is not in the business of making loans, at the
request of Mr. Engle, RDIS has made a loan to Mr. Engle on a
non-preferential basis secured by a lien on the shares of RDIS
owned by Mr. Engle. In addition, all of the shares of common
stock of Hickory owned by Telco have been pledged to an
unaffiliated bank in Chicago to secure a loan to Telco by that bank.
(7) WREIT has pledged its 61,703 shares of Sunstates' Class B Stock
to secure a loan from Hickory.
(8) The amounts included do not include 14,300 shares of Sunstates
Common Stock held directly by or in trust for members of Mr.
Engle's immediate family. Mr. Engle specifically disavows
beneficial ownership of such shares.
(9) Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of
52,504 shares of Sunstates Corporation common stock as of
December 31, 1994, all of which shares are held in portfolios of
DFA Investment Dimensions Group Inc., a registered open-end
investment company, the DFA Investment Trust Company and the DFA
Participating Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves
as investment manager. Dimensional disclaims beneficial ownership
of such shares.
As of March 14, 1995, all officers and directors of the Company
as a group, a total of 8 persons, owned beneficially 92,301 shares of
Common Stock, or 11.8% of the total shares of Common Stock
outstanding, 63,191 shares of Class B Stock, or 90.61% of the total
shares of Class B Stock outstanding, 800 shares of $3.75 Preferred
Stock or 0.28% of the total shares of $3.75 Preferred Stock
outstanding and 49,000 shares of Class E Preferred Stock or 8.55% of
the total shares of Class E Preferred Stock outstanding. If the
group were to presently convert its Class B Stock into Common Stock,
they would receive an additional 1,540,281 shares of Common Stock for
a total ownership of 1,632,582 shares of Common Stock, or 70.29% of
the total shares of Common Stock outstanding. Each share of Class B
Stock is entitled to 85.3125 votes and votes together with the Common
Stock as a single class, with respect to all matters to be voted upon
by shareholders except with respect to the election of one director
to be elected solely by the holders of Common Stock, voting as a
separate class, and as otherwise provided by law. Officers and
directors as a group are currently the beneficial owners of 81.45% of
the voting power of all Common Stock and Class B Stock presently
outstanding when these shares vote as a single class. (See Item 10
of this Report for information as to securities ownership of
individual directors and officers.)<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Engle and Sampson serve as trustees and Mr. Engle is also
Chairman of the Board of Trustees of WREIT. Messrs. Engle and
Sampson serve as directors of Indiana Financial Investors, Inc.
Messrs. Engle and Mortenson serve as directors, and Mr. Engle is
Chairman of the Board of Directors, President and Chief Executive
Officer, of Hickory Furniture Company. Mr. Engle is Chairman of the
Board and Chief Executive Officer and Mr. Mortenson is a director,
President and Chief Operating Officer of Telco Capital Corporation.
Please see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" for
additional information regarding the relationship of the Company and
management to these entities.
The law firm of Altheimer & Gray, of which Mr. Friedman is a
member, has rendered legal services to the Company during 1994
(approximately $308,000) and the current fiscal year (approximately
$78,000).
See Note 12 to Consolidated Financial Statements contained in
Part IV, Item 14 of this Report for information regarding other
related transactions.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
1. Financial Statements
The response to this portion of Item 14 is submitted as
a separate section of this report.
2. Financial Statement Schedules
The response to this portion of Item 14 is submitted as
a separate section of this report.
3. Exhibits
The response to this portion of Item 14 is submitted as
a separate section of this report.
(b) Reports on Form 8-K
There we no filings on Form 8-K during the quarter ended
December 31, 1994.
(c) Exhibits
The response to this portion of Item 14 is submitted as
a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as
a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 31, 1995 Sunstates Corporation
by /s/ Clyde Wm. Engle
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Clyde Wm. Engle Director March 31, 1995
Clyde Wm. Engle (Chairman of the Board
and Chief Executive Officer)
/s/ Lee N. Mortenson President and Director March 31, 1995
Lee N. Mortenson (Chief Operating Officer)
/s/ Glenn J. Kennedy Vice President and Treasurer March 31, 1995
Glenn J. Kennedy (Chief Financial Officer)
/s/ Dean F. Shaver Controller March 31, 1995
Dean F. Shaver
/s/ Howard Friedman Director March 31, 1995
Howard Friedman
/s/ Harold Sampson Director March 31, 1995
Harold Sampson
/s/ William D. Schubert Director March 31, 1995
William D. Schubert
/s/ Robert J. Spiller Director March 31, 1995
Robert J. Spiller
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1994
SUNSTATES CORPORATION AND SUBSIDIARIES
RALEIGH, NORTH CAROLINA
Form 10-K - Item 8, Item 14(a)(1) and (2) and Item 14(d)
Sunstates Corporation and Subsidiaries
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Sunstates
Corporation and Subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1994 and 1993
Consolidated Statements of Operations for the
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the
Years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Independent Auditors' Reports
The following consolidated financial statement schedules of Sunstates
Corporation and Subsidiaries are included in Item 14(d):
Schedule I - Condensed Financial Information of
Registrant - December 31, 1994 and 1993 and for
the Years Ended December 31, 1994, 1993, and 1992
Schedule II - Valuation and Qualifying Accounts -
For the Years Ended December 31, 1994, 1993 and 1992
Schedule III - Real Estate Held for Development
and Sale and Accumulated Depreciation - December 31, 1994
Schedule V - Supplemental Information Concerning
Property/Casualty Insurance Operations - For the
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
SUNSTATES CORPORATION
Consolidated Balance Sheets
<CAPTION>
December 31,
1994 1993
ASSETS
<S> <C> <S> <C> <S><C>
REAL ESTATE:
Property, plant and equipment $ 31,106,410 29,564,204
Real estate held for development and sale 28,978,498 40,906,000
Mortgage loans 5,308,939 6,208,060
Land contracts receivable 5,116,720 6,484,181
---------- ----------
70,510,567 83,162,445
---------- ----------
INVESTMENTS:
Short-term investments 14,042,345 21,934,448
Fixed maturities 39,314,135 30,630,532
Equity securities 20,790,717 18,936,524
Investments in affiliates 4,758,706 4,427,275
---------- ----------
78,905,903 75,928,779
---------- ----------
OPERATING ASSETS:
Cash 234,875 1,419,052
Restricted cash 5,543,826 8,160,184
Accounts receivable 21,554,292 17,430,184
Premiums receivable 9,145,534 5,925,150
Inventories 42,908,931 36,726,099
Policy acquisition costs 1,097,995 1,670,889
Prepaid expenses 1,295,504 1,136,560
---------- ----------
81,780,957 72,468,118
---------- ----------
OTHER ASSETS:
Receivable from affiliates 3,234,752 7,170,874
Other assets 5,948,166 4,100,419
Cost in excess of assets acquired 6,194,910 6,449,308
---------- ----------
15,377,828 17,720,601
----------- -----------
$ 246,575,255 249,279,943
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Consolidated Balance Sheets
<CAPTION>
December 31,
1994 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <S><C>
DEBT:
Notes payable $ 52,676,514 19,529,386
Mortgage notes 16,111,437 24,415,195
---------- ----------
68,787,951 43,944,581
---------- ----------
OTHER LIABILITIES:
Insurance reserves 62,681,402 86,393,434
Unearned premiums 18,493,925 16,777,784
Accounts payable 9,793,336 8,660,733
Accrued expenses 18,647,366 11,581,918
Other liabilities 14,037,545 15,483,212
----------- -----------
123,653,574 138,897,081
----------- -----------
TOTAL LIABILITIES 192,441,525 182,841,662
----------- -----------
MINORITY INTERESTS IN SUBSIDIARIES 21,892,721 20,025,841
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stocks 7,256,275 9,065,975
Common Stock, 797,016 and 1,033,572
shares outstanding, respectively 265,672 344,524
Class B Accumulating Convertible Stock,
73,581 and 82,334 shares
outstanding, respectively 7,358 8,233
Capital in excess of par value 37,605,196 41,202,210
Accumulated deficit (16,920,900) (9,348,058)
Unrealized gains on marketable
securities 4,027,408 5,139,556
---------- ----------
Total stockholders' equity 32,241,009 46,412,440
----------- -----------
$ 246,575,255 249,279,943
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Operations
<CAPTION>
For the Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Revenues:
Insurance premiums earned $ 46,228,281 69,165,138 128,294,934
Manufacturing sales 129,375,671 94,950,575 66,503,652
Real estate sales 18,896,322 10,185,808 3,780,746
Investment income 4,038,380 21,614,573 12,712,096
Equity in earnings of affiliates 891,000 817,000 1,375,000
Other income 9,724,259 10,460,690 3,725,822
----------- ----------- -----------
Total revenues 209,153,913 207,193,784 216,392,250
----------- ----------- -----------
Costs and expenses:
Insurance loss and loss adjustment expenses 35,842,500 71,043,049 114,457,847
Cost of manufacturing sales 100,337,396 73,719,959 52,956,419
Cost of real estate sales 13,900,758 7,523,339 1,939,329
Selling and operating costs 56,106,801 52,757,927 57,854,013
Corporate expenses 2,966,020 2,422,278 2,629,487
Interest expense 3,945,271 4,304,127 3,857,465
----------- ----------- -----------
Total costs and expenses 213,098,746 211,770,679 233,694,560
----------- ----------- -----------
Loss from continuing operations before
items shown below (3,944,833) (4,576,895) (17,302,310)
Provision for income taxes (2,039,074) (727,939) (1,658,719)
Minority interest in income of
subsidiaries (1,588,935) (1,051,444) (1,216,287)
--------- --------- ---------
Loss from continuing operations (7,572,842) (6,356,278) (20,177,316)
Discontinued operations:
Income from cable television operations, net of
tax -- 899,146 498,865
Income from sale of cable television system,
net of tax -- 46,565,847 --
-------- ---------- -------
-- 47,464,993 498,865
Income (loss) before cumulative change in
accounting principle (7,572,842) 41,108,715 (19,678,451)
Cumulative effect on prior years of a change in
accounting for income taxes -- 260,000 --
--------- ---------- ----------
NET INCOME (LOSS) $ (7,572,842) 41,368,715 (19,678,451)
========= ========== ==========
EARNINGS PER SHARE INFORMATION:
Net Income (Loss) Applicable to Common Stock $ (8,698,528) 39,971,574 (21,154,627)
========= ========== ==========
Income (loss) per common share:
Primary -
Loss from continuing operations $ (3.39) (3.07) (8.70)
Discontinued operations -- 18.81 .20
Cumulative effect of accounting change -- .10 --
---- ----- ----
Net income (loss) $ (3.39) 15.84 (8.50)
==== ===== ====
Fully diluted -
Loss from continuing operations $ (3.39) (2.53) (8.70)
Discontinued operations -- 15.51 .20
Cumulative effect of accounting change -- .08 --
---- ----- ----
Net income (loss) $ (3.39) 13.06 (8.50)
==== ===== ====
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1994, 1993, and 1992
<CAPTION> $3.75 Class E Class B
Cumulative Preferred Stock Accumulating
Preferred Common Convertible
Stock Series I Series II Stock Stock
<S> <C> <S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1992, as previously reported $ 9,919,675 32,300 25,000 420,027 8,261
Cumulative effect on prior years of change in method
of inventory valuation
--------- ------ ------ ------- -----
Balances, January 1, 1992, as adjusted 9,919,675 32,300 25,000 420,027 8,261
Net loss
Conversion of Class B Stock 257 (5)
Adjustment of shares issued
pursuant to prior merger (9,100) (74)
Purchase of treasury stock (375,000) (53,592)
Unrealized gains on securities
Excess of fair market value paid
over seller's historical cost basis
of Sew Simple Systems, Inc.
--------- ------ ------ ------- -----
Balances, December 31, 1992 $ 9,535,575 32,300 25,000 366,618 8,256
--------- ------ ------ ------- -----
Balances, January 1, 1993, as previously reported $ 9,535,575 32,300 25,000 366,618 8,256
Cumulative effect on prior years of change in method
of inventory valuation
--------- ------ ------ ------- -----
Balances, January 1, 1993, as adjusted 9,535,575 32,300 25,000 366,618 8,256
Net income
Conversion of Class B Stock 1,323 (23)
Adjustment of shares issued
pursuant to prior merger (11,900) (384)
Purchase of treasury stock (515,000) (23,033)
Unrealized losses on securities
Excess of fair market value paid
over seller's historical cost basis
of Epernay Properties, Inc.
--------- ------ ------- ------- -----
Balances, December 31, 1993 $ 9,008,675 32,300 25,000 344,524 8,233
--------- ------ ------ ------- -----
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 income
Conversion of Class B Stock 1,013 (14)
Adjustment of shares issued
pursuant to prior merger (1,725)
Purchase of treasury stock (1,807,975) (79,865) (861)
Unrealized losses on securities
Excess of fair market value paid
over seller's historical cost basis
of automobile
--------- ------ ------ ------- -----
Balances, December 31, 1994 $ 7,198,975 32,300 25,000 265,672 7,358
--------- ------ ------ ------- -----
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1994, 1993, and 1992
<CAPTION> Capital
In Unrealized Total
Excess of Accumulated Gains (Losses) Stockholders'
Par Value Deficit On Securities Equity
<S> <C> <S> <C> <C> <C> <C> <C>
Balances, January 1, 1992, as previously reported $ 47,663,139 (32,382,539) 6,390,649 32,076,512
Cumulative effect on prior years of change in method
of inventory valuation 6,245,669 1,344,217 7,589,886
---------- ---------- --------- ----------
Balances, January 1, 1992, as adjusted 53,908,808 (31,038,322) 6,390,649 39,666,398
Net loss (19,678,451) (19,678,451)
Conversion of Class B Stock (252) --
Adjustment of shares issued
pursuant to prior merger (7,727) (16,901)
Purchase of treasury stock (844,511) (1,273,103)
Unrealized gains on securities 445,913 445,913
Excess of fair market value paid
over seller's historical cost basis
of Sew Simple Systems, Inc. (10,933,955) (10,933,955)
---------- ---------- --------- ----------
Balances, December 31, 1992 $ 42,122,363 (50,716,773) 6,836,562 8,209,901
---------- ---------- --------- ---------
Balances, January 1, 1993, as previously reported $ 35,876,694 (52,105,270) 6,836,562 575,735
Cumulative effect on prior years of change in method
of inventory valuation 6,245,669 1,388,497 7,634,166
--------- --------- --------- ---------
Balances, January 1, 1993, as adjusted 42,122,363 (50,716,773) 6,836,562 8,209,901
Net income 41,368,715 41,368,715
Conversion of Class B Stock (1,300) --
Adjustment of shares issued
pursuant to prior merger 7,692 (4,592)
Purchase of treasury stock (250,545) (788,578)
Unrealized losses on securities (1,697,006) (1,697,006)
Excess of fair market value paid
over seller's historical cost basis
of Epernay Properties, Inc. (676,000) (676,000)
---------- --------- --------- ----------
Balances, December 31, 1993 $ 41,202,210 (9,348,058) 5,139,556 46,412,440
---------- --------- --------- ---------
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 income (7,572,842) (7,572,842)
Conversion of Class B Stock (999)
Adjustment of shares issued
pursuant to prior merger (4,276) (6,001)
Purchase of treasury stock (3,482,335) (5,371,036)
Unrealized losses on securities (1,112,148) (1,112,148)
Excess of fair market value paid
over seller's historical cost basis
of automobile (109,404) (109,404)
---------- ---------- --------- ----------
Balances, December 31, 1994 $ 37,605,196 (16,920,900) 4,027,408 32,241,009
---------- ---------- --------- ----------
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Consolidated Statements of Cash Flows
<CAPTION> For the Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,572,842) 41,368,715 (19,678,451)
Adjustments to reconcile net loss
to net cash provided by (utilized in)
operating activities:
Depreciation and amortization 5,331,635 7,224,238 6,011,065
Adjustments to interest yields (120,896) (1,530,917) (759,090)
Gain on sale of cable television system -- (47,581,293) --
Loss from sale of property, plant
and equipment 11,056 -- --
Realized gains on investments (3,171,509) (18,630,257) (13,694,391)
Reserves and writedowns 6,127,927 1,897,741 10,354,137
Loss on investment in real estate
partnerships 162,057 245,081 548,477
Equity in undistributed income (977,953) (839,740) (1,463,768)
Addition to minority interest 1,588,935 1,051,444 1,216,287
Changes in assets and liabilities:
Real estate held for development
and sale 11,154,090 5,160,866 742,198
Inventories (6,182,832) (1,820,080) (1,419,340)
Mortgage loans on real estate and land
contracts receivable (285,882) 759,827 400,754
Mortgage notes payable on real
estate held (7,285,337) (5,902,481) (1,221,801)
Insurance reserves and unearned
premiums (21,995,891) (37,657,216) 3,597,167
Operating assets and other liabilities (6,337,635) (1,238,248) 7,272,778
---------- ---------- ----------
Total adjustments (21,982,235) (98,861,035) 11,584,473
---------- ---------- ----------
Net cash utilized in operating activities (29,555,077) (57,492,320) (8,093,978)
---------- ---------- ---------
INVESTING ACTIVITIES:
Investments in securities sold or matured 59,426,083 84,488,742 116,101,387
Investments in securities purchased (28,636,511) (44,848,950) (91,052,863)
Investments in affiliates sold (purchased) 705,411 695,518 (553,875)
Loans to affiliates (508,935) (3,754,967) (1,548,736)
Additional investment in subsidiaries -- -- (1,637,323)
Purchases of property, plant and equipment (5,617,113) (6,255,105) (2,187,826)
Repayments of (issuances of) mortgage loans 1,254,692 3,575,152 (1,407,693)
Proceeds from sale of cable television system -- 26,250,000 --
Cash acquired (disposed of) through
acquisitions -- (2,306,304) 215,107
Other investments (1,999,080) -- --
Acquisition of resort development assets -- -- (7,273,183)
Acquisition of newspaper publication assets -- -- (475,000)
Sale of idle furniture manufacturing
plant and equipment 135,261 1,593,928 --
---------- ---------- ----------
Net cash provided by investing activities 24,759,808 59,438,014 10,179,995
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes and mortgage
notes payable 29,791,132 13,250,000 5,004,162
Repayments of notes and mortgage
notes payable (23,327,384) (11,267,415) (5,476,161)
Redemption of subordinated debentures -- -- (2,096,500)
Dividends of majority-owned subsidiary (91,977) (2,326,937) (92,352)
Purchase of Company stock (5,377,037) ( 793,170) (1,290,004)
--------- --------- ---------
Net cash provided by (utilized in)
financing activities 994,734 (1,137,522) (3,950,855)
------- --------- ---------
Increase (decrease) in cash (3,800,535) 808,172 (1,864,838)
Cash, beginning of year 9,579,236 8,771,064 10,635,902
--------- --------- ----------
Cash, end of year 5,778,701 9,579,236 8,771,064
Less: cash included in net assets of
discontinued segment -- -- (1,637,184)
Less: restricted cash (5,543,826) (8,160,184) (7,133,880)
--------- --------- ---------
Unrestricted cash $ 234,875 1,419,052 --
======= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
On December 13, 1993, the shareholders voted to change the name of the
Company from Acton Corporation to Sunstates Corporation, effective
January 1, 1994.
Parent Company
Sunstates Corporation ("Sunstates" and/or the "Company") is a
majority-owned subsidiary of Wisconsin Real Estate Investment Trust
("WREIT") and WREIT in turn is a direct and indirect majority-owned
subsidiary of the following companies: Hickory Furniture Company
("Hickory"), Telco Capital Corporation ("Telco") and RDIS Corporation
("RDIS").
Sale of Cable Television System
On December 30, 1993, Sunstates Corporation completed the sale of
its sole remaining cable television system comprised of approximately
44,000 subscribers located in Anne Arundel County, Maryland to
InterMedia Partners of San Francisco, California. The $76 million
sale price produced after-tax net income of $46.5 million or $18.45
per share on a primary basis and $15.22 per share on a fully diluted
basis.
The $76 million consideration consisted of $26.5 million in cash,
the assumption of approximately $32.1 million of debt (without
recourse to the Company) which was outstanding against the system and
a $17.4 million secured note initially bearing interest at LIBOR plus
3% and paid in June 1994.
With the sale of its sole remaining cable television system, the
Company is no longer engaged in the cable television business and
accordingly the Company has presented its cable television segment as
a discontinued operation in the accompanying financial statements.
Prior years' statements have been reclassified to remove the
operations of the cable television segment from income from
continuing operations and to present the segment's net assets and
liabilities on a single line in the balance sheet. Revenues from the
operations of the cable television system totalled $17,189,152 and
$16,385,939 for the years ended December 31, 1993 and 1992,
respectively.
Alba-Waldensian Consolidation
Alba-Waldensian, Inc. ("Alba"), a manufacturer of women's hosiery
and pantyhose, women's casual hosiery products, women's intimate
apparel, men's hosiery, medical specialty products and warp knit
products located in Valdese, N. C., has been an investee of the
Company accounted for utilizing the equity method of accounting since
May, 1987. Effective June 30, 1993, Alba became a 50.1% owned
subsidiary of the Company's insurance subsidiary, and accordingly,
the accounts of Alba have been consolidated in the accompanying
financial statements as of that date.
The following table presents the Company's investment as allocated
utilizing the purchase method of accounting to the individual assets
and liabilities of Alba as of June 30, 1993 (amounts in thousands):
Property, plant and equipment $9,682
Restricted cash 77
Accounts receivable 7,703
Inventories 11,354
Prepaid expenses 1,463
Notes payable (1,291)
Mortgage notes payable (150)
Accounts payable (1,554)
Accrued expenses (1,553)
Other liabilities (1,845)
Minority interest in net assets (13,112)
------
Consolidated net assets $ 10,774
======
Prior to June 30, 1993, the Company's investment in Alba was
presented in the Balance Sheet as an investment in affiliates and the
Company's share of Alba's earnings, which averaged 49.9% during the
six months ended June 30, 1993, and the years ended December 31, 1992
and 1991, was reported as equity in earnings of affiliates in the
Statement of Operations. Accordingly, there would be no material
change to reported net income or earnings per share had the
acquisition been consummated at the beginning of either 1993 or
1992. Commencing July 1, 1993, the operating revenues and expenses
of Alba are included in the Company's Consolidated Statements of
Operations and contributed $26,798,277 of revenues and $1,004,407 of
pre-tax income before minority interests of $287,878 during the year.
Sew Simple Systems, Inc.
On January 17, 1989, Sunstates acquired from Hickory, for a cash
payment of $2,000,000, a 99% ownership interest in Sew Simple
Systems, Inc. ("Sew Simple"), a designer and manufacturer of
automated textile machinery located in Fountain Inn, South
Carolina. Accordingly, Sew Simple has been included in Sunstates'
consolidated financial statements since that date. The Stock Purchase
Agreement provided that if Hickory should find a buyer for Sew Simple
prior to the expiration of the Agreement, then Hickory would be
entitled to additional amounts based upon the excess, if any, of the
sales price over an escalating amount specified in the contract,
which, as of April 13, 1992, was approximately $3.4 million (the
Rights).
On April 13, 1992, Sunstates acquired from Hickory its remaining
1% ownership and its Rights under the Stock Purchase Agreement for
approximately $13.6 million. The consideration given by Sunstates
included the assignment of approximately $12 million previously due
to Sunstates from Hickory and other affiliates plus a note payable
for the remaining $1.6 million.
At April 13, 1992, Hickory beneficially owned approximately 52% of
the common equity interests of Sunstates (61% on a fully diluted
basis) and controlled approximately 79% of its voting interests.
Generally accepted accounting principles applicable to purchases of
businesses in transactions between entities under common voting
control require that the assets acquired be recorded at their
historical cost basis as previously reflected on the books of the
seller. Accordingly, approximately $11 million, representing the
excess of the fair market value paid for Hickory's remaining interest
in Sew Simple over Hickory's historical cost basis, was reflected as
a reduction to Sunstates' capital in excess of par value as of the
date of the transaction. Future reported results of operations will
be favorably impacted as the result of the elimination of Hickory's
Rights under the Stock Purchase Agreement.
Subsequent Event - Balfour Acquisition
On March 6, 1995, the Company's textile apparel manufacturing
subsidiary (Alba) purchased the Balfour Health Care Division and
manufacturing facility in Rockwood, Tennessee from Kayser-Roth
Corporation for approximately $14.5 million, subject to post-closing
adjustments. The acquisition of Balfour will add approximately $15
million in annual sales to Alba. Alba financed 100% of the
acquisition price with a revolving loan agreement provided by a major
bank.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Sunstates and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Hickory White is included based on its 52/53 week fiscal year
which ended on January 2, 1993, January 1, 1994 and December 31,
1994. Wellco is included based upon its four fiscal quarters ended
January 2, 1993, January 1, 1994 and December 31, 1994. The accounts
of Hickory White and Wellco have been included in the accompanying
consolidated financial statements as of those dates. There were no
material transactions during the periods from those dates to December
31st of each year.
The accounts of Sunstates' insurance subsidiaries are included
based upon generally accepted accounting principles which differ from
statutory accounting practices required by regulatory authorities.
Property, Plant and Equipment
Property, plant and equipment consists of investment in productive
facilities and equipment, including (prior to December 30, 1993) the
cost of acquired cable television franchises. Such assets are stated
at cost and are depreciated and amortized over their estimated useful
lives (ranging from 3 to 40 years, 15 years for cable television)
primarily on a straight-line basis.
Certain shoe-making machinery is leased to licensees under
cancelable operating leases. Such activity is accounted for by the
operating method whereby leased assets are capitalized and
depreciated over their estimated useful lives (5 to 20 years) and
rentals, based primarily on the volume of shoes produced or shipped
by the lessees, are recorded during the period earned.
Real Estate Held for Development and Sale
Real estate held for development and sale is recorded at the lower
of cost or net realizable value. Depreciation, where appropriate, is
provided using the straight-line method over the estimated useful
lives of the assets (not exceeding forty years).
During the construction and development phase of real estate
development certain costs are capitalized, including the cost of
land, land improvements, construction, amenities, and certain
indirect costs such as interest and real estate taxes. Construction
and development costs are allocated to cost of sales using specific
identification or other methods, as appropriate. During the sell-out
or rent-up period, which is limited to a period no longer than one
year after construction completion, the net results of incidental
operations are reflected as an adjustment to the construction cost of
the project.
Investments
On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("Accounting for Certain Investments in
Debt and Equity Securities"). Under this Statement the Company began
reporting its investment in debt securities, which are all classified
as available for sale, at fair value, with unrealized gains or losses
(other than permanent declines in value) excluded from earnings and
reported in a separate component of stockholders' equity. Prior to
December 31, 1993, the Company accounted for investments in debt
securities at original cost, adjusted for amortization of premium or
discount and permanent declines in value. Furthermore, under
Statement No. 115, the Company began reporting marketable equity
securities available for sale which are owned by other than its
insurance subsidiary at their fair value, with unrealized gains or
losses (other than permanent declines in value) reported in a
separate component of stockholders' equity. Prior to December 31,
1993, marketable equity securities not owned by Sunstates' insurance
subsidiaries were carried at the lower of aggregate cost or market
value, whereas marketable equity securities owned by its insurance
subsidiary have always been reported at fair value in a manner
similar to that now required under Statement No. 115.
A summary of the Company's accounting policies for investments are
as follows:
Short-term investments are carried at cost, which
approximates market, and represent the temporary investment of excess
cash balances within the insurance investment portfolio. These
investments are composed of interest-bearing deposits and other
investments in short-term financial instruments.
Fixed maturities investments representing debt securities are
available for sale and are reported at their fair value. In addition
to debt securities as described above, fixed maturity investments
include certain collateralized notes receivable which are accounted
for at original cost, as adjusted for amortization of premium or
discount and permanent declines in value.
Equity securities are available for sale and are carried at
current market value.
Investments in affiliates represent investments which are
accounted for utilizing the equity method of accounting and the
common stocks of certain of Sunstates' direct and indirect parent
companies which are carried at cost.
Realized gains and losses on the sale of investments are
recognized in net income on the specific identification basis.
Changes in market values of debt and equity securities available for
sale are reflected as unrealized gains (losses) directly in
stockholders' equity and accordingly have no effect on net income.
Unrealized losses which are deemed to be other than temporary are
charged to operations. The Company may also invest in equity or index
put or call options which are carried at their current market values
with any change in such values being immediately recognized in the
income statement.
Cash
Sunstates may invest cash in excess of operating requirements in
income producing investments including certificates of deposit and
money market accounts which have original maturities of three months
or less. Such short-term investments, other than those which are a
part of the insurance investment portfolio, are included in the cash
balances reported in the accompanying financial statements. The
carrying amount approximates fair value because of the short maturity
of those instruments.
Restricted Cash
Restricted cash primarily represents cash of the insurance
subsidiaries, whose ability to transfer cash to Sunstates is
restricted by regulatory authorities. Restricted cash also represents
cash of other subsidiaries which is restricted by law or by contract
to specific purposes and is generally not available for other
discretionary use. The carrying amount approximates fair value
because of the short maturity of those instruments.
Receivables
Accounts receivable result primarily from the Company's furniture,
textile apparel and military footwear manufacturing businesses and
represent amounts receivable under normal trade terms. No single
customer accounted for more than 3% of sales in 1994 except for the
Company's textile apparel manufacturing division's sales to Baxter
Health Care Corporation which totalled $12,902,722, $13,610,937 and
$11,074,280 for the years ended December 31, 1994, 1993 and 1992,
respectively. Military footwear sales are primarily to the U. S.
government. Accounts receivable are net of a reserve for possible
uncollectible amounts of $804,047 and $737,036 at December 31, 1994
and 1993, respectively.
The Company conducts its insurance business in certain states
through managing general agents who issue the Company's policies to
and collect premiums from other agents and retail customers. These
managing general agents are given normal trade credit terms of
between 45 to 60 days and at December 31, 1994, the Company had
$2,027,270 of premium receivables from 5 different managing general
agents, the largest of which totalled $1,640,955. Premiums receivable
are net of a reserve for possible uncollectible amounts of $500,000
at both December 31, 1994 and 1993.
Inventories
Textile apparel manufacturing inventories are stated at the lower
of cost as determined by the first-in, first-out (FIFO) method or
market.
Raw materials and supplies of the military footwear manufacturing
subsidiary are valued at the lower of first-in, first-out cost or
market. Finished goods and work in progress of this subsidiary are
valued at the lower of actual cost, determined on a specific basis,
or market. Such inventories have been reduced by progress payments
received on United States government contracts since title to all
inventories related to these contracts vests in the U. S. government.
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 $731,197 ($.29 per primary
and fully diluted share) in 1994, increased cost of manufacturing
sales and decreased net income by $284,361 ($.11 per primary share
and $.09 per fully diluted share) in 1993 and decreased cost of
manufacturing sales and the net loss by $44,280 ($.02 per primary and
fully diluted share) in 1992. The cumulative effect of the change of
$7,589,886 represents the reversal of the LIFO reserve as of January
1, 1992. 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 $1,344,217 has been reported as an
adjustment to the accumulated deficit as of January 1, 1992. The
aggregate effect of the change was to increase stockholders' equity
by $8,081,002 as of December 31, 1994.
Other inventories, consisting mainly of raw materials and work in
process related to the textile equipment manufacturing business are
stated at the lower of cost (determined on a first-in, first-out
method) or market.
Policy Acquisition Costs
Commissions and other variable costs related to the production of
profitable new insurance underwriting business are deferred at the
time of policy issuance. The Company may reduce such deferred costs
when necessary to ensure that when combined with estimated costs of
future claims and claims adjustment expenses, such costs do not
exceed the amount of unearned premiums relating to the new business.
Policy acquisition costs are amortized against income over the term
of the related insurance policy and amortization totalled $1,670,889,
$4,314,649, and $6,060,029 for the years ended December 31, 1994,
1993, and 1992, respectively.
Other Assets
The Company also invests in oriental artwork, antique jewelry
and books and other collectibles which are purchased and sold through
dealers and at public auctions. Such collectible investments are
carried at cost (which does not exceed market) and are saleable.
At December 31, 1994, other assets included $2,256,909 of such
collectible investments.
Costs in Excess of Assets Acquired
Costs in excess of net assets acquired represents the excess of
the purchase price over the fair value of net assets acquired in
connection with the acquisition of the insurance, manufacturing and
newspaper publishing businesses. The Company evaluates the continued
recoverability of its tangible assets, including cost in excess of assets
acquired, whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Factors which
would trigger such an evaluation would include, but not limited to
a significant decrease in the market value of an asset or operation,
a significant change in the extent or manner in which an asset is being used,
a significant change in legal factors or business climate and an expectation of
continuing future losses. The Company evaluates the realizability of goodwill
based upon expectations of nondiscounted cash flows and operating income for
each subsidiary having a material amount of goodwill recorded.
These costs are being amortized on a straight-line basis over a 20 and
10-year period, respectively, except with respect to $3,706,258 related to
furniture acquisitions prior to 1970 which is not being amortized since, in
the opinion of management, there has not been any diminution in its value.
Cumulative amortization totalled $1,883,409 and $1,649,004 at December 31,
1994 and 1993, respectively.
Insurance Reserves
Reserve for losses represents the estimated liability on all
claims outstanding plus a reserve for losses incurred but not yet
reported. An amount for both future overhead and external expenses
expected to be incurred in processing and settling such claims is
also estimated and added to the reserves for claims. Case-basis
evaluations and other statistical and judgmental methods, including
independent actuarial reviews, are used to establish and continually
evaluate the adequacy of the reserves. The ultimate amount of losses
and loss adjustment expenses paid may differ from previously recorded
reserves and any adjustments which may thereby be determined to be
necessary are reflected in current operations at the time such
differences are identified.
Unearned Premiums
Premium revenue is recognized in income on a pro-rata basis over
the terms of the related insurance policies.
Reinsurance
Sunstates is involved in both the cession and assumption of
reinsurance with other insurance companies. Reinsurance is assumed
primarily on a quota share, or dollar for dollar sharing basis, on
business which is essentially the same type of business which is
written directly. Reinsurance premiums, commissions, claim
processing expense reimbursements, and reserves related to reinsurance
business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the
reinsurance contracts. Earned premiums related to assumed
reinsurance totalled $481,841, $5,655,727, and $19,402,040 for the
years ended December 31, 1994, 1993 and 1992, respectively.
To the extent that a portion of the Company's liabilities under
its insurance policies have been ceded to other insurance companies,
these policy risks are treated as though they are risks for which the
Company is not liable. A contingent liability exists with respect to
such reinsurance in the event the reinsurer is unable to meet its
obligations. At December 31, 1994, reinsured unpaid losses and
unearned premiums totalled $1,261,774.
Manufacturing Revenue
Sales of furniture, textile apparel and automated textile
machinery are recorded at the time the inventory is shipped. Military
footwear is sold primarily under contracts with the United States
government and revenue is recognized at the time the goods are
inspected and accepted by the United States government.
Real Estate Revenue
Profits on sales of real estate are recorded under the full
accrual method or other generally accepted methods, as appropriate.
Interest, rent and other operating income is recorded when earned,
except that interest is not accrued on loans which are in excess of
sixty days past due and other income is not recognized if
collectability is doubtful.
Pensions
Certain of Sunstates' manufacturing operations maintain defined
benefit pension plans covering substantially all of their employees.
The benefits under these plans are based upon years of service and
employee compensation. Sunstates' policy is to fund the minimum
amount required by the Employee Retirement Income Security Act.
Income Taxes
Sunstates and its eligible United States subsidiaries file
consolidated federal income tax returns. Income earned by its Puerto
Rican subsidiary is not subject to United States federal income tax
and is 90% exempt from Puerto Rican income taxes through the year
2000.
Income taxes for both federal and state tax purposes are provided
based on both income reported for financial statement purposes and
the applicable tax laws and rates in effect for the years presented.
Significant net operating loss carryforwards for federal income tax
purposes are available which may be utilized to eliminate, except for
alternative minimum tax, substantially all federal income taxes.
The Company adopted prospectively Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes",
effective January 1, 1993. This Statement affects methods of
accounting for deferred tax assets and liabilities, recognizing
benefits of existing net operating loss carryforwards, and the
accounting for income tax effects of business combinations accounted
for under the purchase method. The utilization of net operating loss
carryforwards is no longer reported as an extraordinary item in the
statement of operations but instead the current provision for income
tax expense is presented net of any benefit recognized from the
utilization of existing net operating loss carryforwards. The
Statement also requires the use of the asset and liability method of
accounting for income taxes wherein deferred income taxes are
recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. A valuation allowance
is provided when it is more likely than not that some portion or all
of the deferred tax assets will not be realized. In establishing
such an allowance, the Company considers all available information,
including but not limited to, its historical taxable income record,
the likelihood of future taxable income, the availability of tax
planning strategies and the existence of taxable temporary
differences which will reverse during periods in which the Company's
net operating loss carryforwards will be available to offset such
taxable items.
Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Mortgage Loans - estimated by discounting future cash flows using
the current rates at which similar loans would be made to
borrowers with similar credit risks and for the same remaining
maturities.
Land Contracts Receivable - by discounting future cash flows using the
current rates at which the Company is now making such loans (12%).
Short-term Investments - the carrying amount approximates fair value
because of the short-term maturity of those instruments.
Fixed Maturity Investments - marketable debt securities are valued at
their quoted market prices or dealer quotes. Other debt securities are
valued by discounting future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit risks and for
the same remaining maturities.
Equity Security Investments - valued at their quoted market prices or
dealer quotes.
Investments in Affiliates - valued at their quoted market prices or dealer
quotes.
Receivables from Affiliates - due to their related party nature and terms
of the receivables from affiliates, the Company cannot estimate the fair
market value of such financial instruments.
Notes Payable - these notes substantially bear interest at a floating
rate of interest based upon the lending institution's prime lending rate.
Accordingly, the fair value approximates their reported carrying amount at
December 31, 1994.
Mortgage Notes - estimated based upon current market borrowing rates for
loans with similar terms and maturities.
<TABLE>
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1994 December 31, 1993
<CAPTION> Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C> <C>
Financial Assets:
Mortgage Loans $ 5,308,939 5,326,000 6,208,060 6,520,000
Land Contracts Receivable 5,116,720 6,769,000 6,484,181 7,844,000
Short-term Investments 14,042,345 14,042,345 21,934,448 21,934,448
Fixed Maturity Investments 39,314,135 39,314,135 30,630,532 30,630,532
Equity Security Investments 20,790,717 20,790,717 18,936,524 18,936,524
Investment in Affiliates 4,758,706 21,165,222 4,427,275 16,158,867
Financial Liabilities:
Notes Payable 52,676,514 52,676,514 19,529,386 19,529,386
Mortgage Notes 16,111,437 15,769,000 24,415,195 24,913,000
</TABLE>
Reclassifications
Certain amounts in the financial statements for prior years have
been reclassified to conform to current year presentation. Such
reclassifications had no effect on previously reported net income or
stockholders' equity.
3. Real Estate
Property, Plant and Equipment
<TABLE>
Investment in property, plant and equipment is summarized as follows:
<CAPTION> December 31,
1994 1993
<S> <C> <C>
Manufacturing -
Productive facilities and equipment $20,314,779 19,901,006
Machinery leased to licensees 144,199 218,842
Insurance -
Office facilities 1,490,874 1,438,512
Equipment and fixtures 1,283,879 1,508,542
Real Estate Operations -
Equipment and fixtures 257,125 57,744
Hotel Operations -
Hotel 4,928,224 4,397,846
Golf course 2,110,400 1,801,680
Corporate and other -
Equipment and fixtures 576,930 240,032
------- -------
Total $ 31,106,410 29,564,204
========== ==========
</TABLE>
Property, plant and equipment is shown net of accumulated
depreciation and amortization of $41,084,496 and $37,616,828 at
December 31, 1994 and 1993, respectively. Included therein is
$1,374,609 and $1,303,521 of accumulated depreciation related to
machinery leased to licensees at December 31, 1994 and 1993,
respectively. Rental revenue on such leased machinery, substantially
all of which vary with lessee's production or shipments, totalled
$132,355, $139,083 and $127,845 for the years ended December 31, 1994,
1993 and 1992, respectively.
Property, plant and equipment totalling $27,413,700 is pledged as
collateral under various notes and mortgages outstanding at December
31, 1994 (see Note 6).
Real Estate Held For Development and Sale
<TABLE>
Real estate held for development and sale is summarized in the
following table:
December 31,
<CAPTION> 1994 1993
<S> <C> <C>
Shopping centers $16,222,598 17,019,585
Office buildings 1,104,059 1,140,887
Motel -- 850,000
Apartments -- 8,618,889
Residential land 1,667,436 1,715,666
Recreational lots 1,030,542 1,232,204
Other land 1,311,691 5,162,726
Interest in partnerships 985,272 1,146,692
Resort properties 4,782,228 3,657,009
Other 2,320,149 1,442,153
---------- ----------
29,423,975 41,985,811
Adjustment to historical cost (445,477) (1,079,811)
---------- ----------
$ 28,978,498 40,906,000
========== ==========
</TABLE>
Certain of the assets shown above are stated at their fair values as
established in connection with a 1985 merger. The adjustment to
historical cost represents the difference between such fair values and
the cost which was allocated to those assets in connection with the
merger.
Approximately $17,721,000 of the real estate was pledged to secure
various mortgage notes payable at December 31, 1994 (see Note 6).
Interest capitalized on the above assets during the years ended
December 31, 1994, 1993 and 1992 totalled $6,096, $9,907, and
$316,506, respectively.
Real estate presented above is net of accumulated depreciation of
$2,516,956 and $2,621,464 at December 31, 1994 and 1993,
respectively.
Mortgage Loans
Certain mortgage loans are stated at their fair values as established
in connection with a 1985 merger. An adjustment to historical cost
was established representing the difference between such fair values
and the cost allocated to those mortgage loans in connection with the
merger. At December 31, 1994 and 1993 the remaining balance of this
adjustment to historical cost was $21,292 and $43,308 respectively.
Mortgage loans at December 31, 1994 and 1993 are net of unamortized
discount of $272,824 and $332,747 and allowances for possible losses
of $165,036 and $153,092, respectively. The effective interest rates
used to discount these loans range from 8.25% to 20%. The weighted
average interest rates on the mortgage loan portfolio were 11.13% and
9.8% for the years ended December 31, 1994 and 1993, respectively.
Estimated collections of principal on mortgage loans at December 31,
1994 are as follows:
Years Ending Principal
December 31, Collections
1995 $ 937,117
1996 318,486
1997 1,406,850
1998 1,625,811
1999 110,273
2000 and thereafter 1,369,554
---------
Total gross receivables 5,768,091
Less: Unamortized interest discounts (272,824)
Allowance for possible losses (165,036)
---------
5,330,231
Adjustment to historical cost (21,292)
---------
$ 5,308,939
=========
Land Contracts Receivable
NDC typically finances its sales of recreational and second home
resort lots, after a 10% down payment, over a period of three to
seven years with an interest rate of 12%. Estimated collections of
principal on land contracts receivable at December 31, 1994 are as
follows:
Years Ending Principal
December 31, Collections
1995 $3,088,140
1996 1,280,822
1997 1,083,409
1998 825,140
1999 527,223
2000 and thereafter 138,415
---------
Total gross receivables 6,943,149
Less: Unamortized interest discounts (246,004)
Allowance for cancellation and
uncollectible accounts (1,580,425)
---------
$ 5,116,720
=========
Land contracts receivable are discounted to reflect market rates of
interest prevailing at the date of sale, primarily 12-15%. The
discounts are amortized to operations using the interest method over
the term of the respective notes.
4. Investments
Fixed Maturities
In addition to marketable debt securities available for sale, fixed
maturity investments include certain collateralized notes receivable
which are accounted for at original cost, as adjusted for amortization
of premium or discount and permanent declines in value ("carrying
amount"). In 1993, the Company adopted Statement of Financial
Accounting Standards No. 114 ("Accounting by Creditors for Impairment
of a Loan"). Under this Statement an impaired loan is valued at the
lower of its carrying amount or its net realizable value, including
interest to be collected. Any changes in its estimated net realizable
value, up to but not exceeding the loan's carrying amount, are
reported as an adjustment to bad debt expense for the period. At
December 31, 1994 and 1993, the Company had one collateralized note
receivable which had previously been impaired. During 1993, the
estimated net realizable value of the loan increased as the result of
bankruptcy court's approval for the sale of the debtor's business,
which was completed in February 1994. The following presents the
activity in the allowance for credit losses during 1993 and 1994:
Balance, January 1, 1993 $575,803
Reduction to bad debt expense 575,803
-------
Balance, December 31, 1993 and 1994 $ --
=======
<TABLE>
The amortized cost and estimated market values (based upon quoted
market prices, dealer quotes and other sources) of fixed maturity
investments are as follows:
December 31, 1994
Gross Gross Estimated
<CAPTION> Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
Debt Securities Available for Sale:
US Treasury securities and obligations
of US government corporations and agencies $31,363,751 -- (133,517) 31,230,234
Debt securities issued by foreign governments 29,781 -- (1,981) 27,800
Corporate securities 7,509,468 188,477 (20,376) 7,677,569
Collateralized Notes Receivable 378,532 -- -- 378,532
---------- ------- ------- ----------
Totals $ 39,281,532 188,477 (155,874) 39,314,135
========== ======= ======= ==========
</TABLE>
<TABLE>
December 31, 1993
<CAPTION> Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Debt Securities Available for Sale:
US Treasury securities and obligations
of US government corporations and agencies $3,519,610 21,376 -- 3,540,986
Obligations of states and political
subdivisions 5,000 -- -- 5,000
Debt securities issued by foreign governments 35,000 -- -- 35,000
Corporate securities 3,647,072 742,927 (155,878) 4,234,121
Collateralized Notes Receivable 22,815,425 -- -- 22,815,425
---------- ------- ------- ----------
Totals $ 30,022,107 764,303 (155,878) 30,630,532
========== ======= ======= ==========
</TABLE>
Included in fixed maturity investments at December 31, 1994, are
certain one and two-year U. S. Treasury securities yielding 7.22%
to 7.67% with an original cost of $25,522,655 (approximates market)
which were acquired under agreements to resell on various dates
through April 3,1995. Due to the short-term nature of the
agreements, the Company did not take possession of the securities
which were instead held in custody by the Company's brokerage firms.
Additionally, the Company borrowed $25,343,045 from these brokerage
firms against such securities with interest rates ranging from 5.25%
to 6.375% and maturing on various dates through April 3, 1995 (see
Note 6).
The amortized cost and estimated market value of debt securities at
December 31, 1994, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Estimated
Amortized Market
Cost Value
Due in one year or less $ 23,358,463 23,425,184
Due after one year through five years 13,852,877 13,675,012
Due after five years through ten years 1,619,823 1,763,570
Due after ten years 71,837 71,837
---------- ----------
38,903,000 38,935,603
Collateralized notes receivable (due in 1995) 378,532 378,532
---------- ----------
$ 39,281,532 39,314,135
========== ==========
<TABLE>
The following information relates to debt security transactions
during the years indicated:
For the Year Ended December 31,
<CAPTION> 1994 1993 1992
<S> <C> <C> <C> <C>
Proceeds from sales $ 51,786,402 33,104,115 16,604,493
Gross gains realized $ 549,522 2,904,018 1,151,038
Gross losses realized $ (171,701) (66,906) (23,287)
Market writedowns recognized $ (361,863) (14,284) (5,184,545)
</TABLE>
At December 31, 1994, investments in high yield, unrated or
non-investment grade securities and notes totalled $1,946,506 with an
aggregate market value of $1,946,506. Included in this category at
December 31, 1994, is a receivable of $378,532 remaining from a
bankruptcy filed during 1993. During 1993 the bankruptcy court
approved the sale of the debtor's assets (which closed in 1994)
wherein the Company received distributions totalling $5,923,320,
which were sufficient to realize all but $378,532 of the carrying
value of the note at December 31, 1993. The Company anticipates
receiving additional distributions from the bankruptcy which will
exceed the carrying value of the receivable at December 31, 1994.
As required by law, bonds and certificates of deposit carried at
$6,433,045 and $4,244,606 at December 31, 1994 and 1993,
respectively, were on deposit with the various states in which the
insurance subsidiaries are doing business.
Equity Securities
The cost of marketable equity securities available for sale totalled
$16,382,784 and $14,266,424 at December 31, 1994, and 1993,
respectively.
At December 31, 1994, the net pre-tax unrealized gains on marketable
equity securities of $4,407,933 included in stockholders' equity was
comprised of $5,313,461 of unrealized gains and $905,528 of unrealized
losses.
Net realized gains related to sales of equity securities which are
included in investment income in the accompanying financial
statements totalled $12,528,332, $15,434,405, and $2,338,276 for the
three years ended December 31, 1994. In addition, writedowns to
reflect what the Company believed to be other than temporary declines
in the market value of equity securities totalled $913,590 and
$1,394,322 during the years ended December 31, 1994 and 1992,
respectively.
Investments in Affiliates
During the period from 1987 through 1991, Normandy acquired from
Hickory and on the open market a 49.94% interest in Alba-Waldensian,
Inc. ("Alba"), a manufacturer of knitted apparel and health care
products. Accordingly, Alba has been an investee of the Company
accounted for utilizing the equity method of accounting since May,
1987. Effective June 30, 1993, Alba became a 50.1% owned subsidiary
of the Company's insurance subsidiary, and accordingly, the accounts
of Alba have been consolidated in the accompanying financial
statements since that date (see Note 1).
Rocky Mountain Chocolate Factory, Inc. ("Rocky Mountain"), located
in Durango, Colorado, manufactures, from its own recipes, a line of
gourmet chocolates and other premium confectionery products for sale
at company-owned and franchised stores. On December 31, 1989,
Sunstates became the owner of 35.12% of the common stock of Rocky
Mountain through the conversion of a note which was held in its
investment portfolio and thereby commenced equity accounting for its
investment at that date. In addition to the $2,678,715 carrying value
of Sunstates' investment in 55% of the common stock of Rocky Mountain
indicated below (which represents an equity in the underlying net
assets of Rocky Mountain totalling $3,041,000), Sunstates also holds
additional notes with a carrying value of $1,124,996, which are
secured by the common stock of Rocky Mountain. Although Sunstates'
present ownership of Rocky Mountain is over 50%, the financial
statements of Rocky Mountain have not been consolidated with
Sunstates' due to immateriality. At December 31, 1994, the
Company's investment in Rocky Mountain stock, which has a carrying
value of $2,678,715 and a market value of $19,537,970, was pledged to
secure a note payable to a bank (see Note 6).
The following is a summary of the equity in earnings of equity
investees recognized by the Company during the three years ended
December 31, 1994:
Rocky
Year Alba Mountain
1992 $ 1,274 101
1993 435 382
1994 -- 891
The difference between the cost of the investments and the underlying
net assets of investees is allocated to the property, plant and
equipment of the investee and amortized over the depreciable life of
the assets. At December 31, 1994, consolidated stockholders' equity
included $1,566,221 of cumulative undistributed earnings of equity
investees.
Also included in investment in affiliates on the accompanying
Consolidated Balance Sheet at December 31, 1994, is the common stock
of certain of Sunstates' direct and indirect parent companies which
was purchased on the open market at an aggregate cost of $954,995.
(See Note 12 regarding the writeoff at December 31, 1994, of the
Company's investment in WREIT.)
5. Inventories
The principal classifications of inventories are:
December 31,
1994 1993
Furniture manufacturing -
Materials and supplies $ 2,807,511 2,718,289
Work in process 6,535,222 6,452,802
Finished goods 12,041,195 8,838,599
---------- ----------
21,383,928 18,009,690
---------- ----------
Textile apparel manufacturing -
Materials and supplies 3,296,755 2,548,836
Work in progress 5,803,012 5,870,073
Finished goods 8,164,413 5,729,717
---------- ----------
17,264,180 14,148,626
---------- ----------
Bootwear manufacturing -
Materials and supplies 882,022 1,314,587
Work in progress 1,501,282 1,608,896
Finished goods 542,876 146,647
--------- ---------
2,926,180 3,070,130
--------- ---------
Textile equipment manufacturing 883,086 1,254,300
Resort development 164,036 124,834
Other 287,521 118,519
---------- ----------
$42,908,931 36,726,099
========== ==========
(See Note 2 for information regarding a change in method of valuing
the furniture subsidiary's inventories.)
6. Debt
Notes Payable
The following table summarizes notes payable:
December 31,
1994 1993
Notes payable to bank $10,000,000 6,000,000
Investment financing 25,343,045 --
Revolving credit line 11,860,195 10,706,789
Equipment loan 1,500,000 2,000,000
Capitalized lease obligations 715,186 802,597
Short-term borrowings 3,248,062 20,000
Other 10,026 --
---------- ----------
$ 52,676,514 19,529,386
========== ==========
The Company's note payable to a bank matures December 29, 1995, bears
interest at Prime + 1% and is secured by the Company's investment in
its textile apparel, military footwear manufacturing subsidiaries and
its investment in Rocky Mountain (see Note 4). Additionally, the
Company has pledged substantially all of the assets of its hotel and
golf resort and its automated textile equipment manufacturing
operations as collateral under this note.
On October 27, 1993, the Company's insurance subsidiary entered into
a $10,000,000 loan agreement with a bank bearing interest at Prime
plus 0.5% and due on January 26, 1994. The outstanding balance of
$6,000,000 at December 31, 1993, was secured by the Company's
investment in its textile apparel and military footwear manufacturing
subsidiaries and its investment in Rocky Mountain (see Note 4) and
was repaid on January 3, 1994, with a portion of the proceeds from
the sale of the cable television system.
During December 1994, the insurance subsidiary borrowed $25,343,045
from various brokerage firms at rates varying from 5.25% to 6.375%,
with maturities through April 3, 1995. These borrowings were secured
by certain one and two-year U. S. Treasury securities with an
original cost of $25,522,655 (approximates market) yielding 7.22% to
7.67% which were acquired under agreements to resell on various dates
through April 3,1995.
The furniture subsidiary's revolving credit agreement with a major
bank provides for borrowings of up to $12.5 million based upon the
levels of eligible (as defined) accounts receivable and inventories.
The credit agreement carries interest at the lender's "alternative
base rate", as defined, plus 2% (10.5% at December 31, 1994). At
December 31, 1994, borrowings under the revolving credit agreement
were $11,860,195 and there was approximately $640,000 available under
the agreement. Borrowings pursuant to the credit agreement are
secured by substantially all of the assets of Hickory White and the
loan is guaranteed by Hickory Furniture Company, Sunstates' parent.
However, Sunstates is not obligated under the credit agreement. At
December 31, 1994, the net worth of Hickory Furniture Company,
Sunstates' parent, did not meet the minimum requirement under the loan
covenants. The furniture subsidiary requested and obtained from the
bank a waiver of the violation.
The credit agreement has previously matured and 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. The credit agreement contains various covenants by Hickory
White, the more restrictive of which include: (i) maintenance of; (a)
minimum earnings, (b) tangible net worth levels and, (c) minimum
ratios of earnings to fixed charges, all as defined, (ii) limitation
of cash dividends on the common stock of Hickory White, (iii)
prohibition on investments in and advances to other companies and
affiliates and (iv) limitations on indebtedness of Hickory White.
The Company's textile apparel manufacturing subsidiary has a
$2,000,000 term loan agreement with a bank that provides for
equipment purchases of $250,000 up to $2,000,000, collateralized by
the equipment purchased. Interest on the loan is 6.3% and as of
December 31, 1994, there was $1,500,000 outstanding under this loan
agreement.
The Company has leased certain computer, golf course and telephone
equipment at its various operations under capital leases at inherent
interest rates varying from 8% to 13.75% under varying terms
extending through April 1999.
Short-term borrowings primarily represent balances owed under various
seasonal and annually renewable bank lines of credit. The textile
apparel manufacturing subsidiary has a $3,000,000 seasonal line of
credit under which $1,821,938 was available at December 31, 1994.
This line of credit bears interest at prime and is secured by liens
on equipment and accounts receivable and contains covenants which
relate to the maintenance of working capital and net worth, the
purchase of fixed assets and the payment of dividends. At December
31, 1994, the military footwear manufacturing subsidiary had borrowed
$2,050,000 at the bank's prime rate of interest which was secured by
marketable securities and repaid in January 1995. The military
footwear manufacturing subsidiary also has a $1,500,000 unsecured
bank line of credit which bears interest at the bank's prime rate and
expires December 30, 1995, but can be renewed annually at the bank's
discretion. At December 31, 1994, $1,480,000 was available under this
line.
At December 31, 1994, the prime rate of interest was 8.5%. Effective
weighted average interest rates for notes payable was 8.44%, 9.01%,
and 8.43% for the years ended December 31, 1994, 1993 and 1992,
respectively.
Mortgage Notes
<TABLE>
The following table summarizes mortgage notes payable:
December 31,
<CAPTION> 1993 1994
<S> <C> <C> <C>
Furniture term loan with interest at Prime + 2% and
maturing on January 3, 1996 $ 307,920 1,171,481
Mortgage notes to financial institutions with maturities 4,356,621 4,428,073
ranging from 1995 to 2001 at interest rates ranging from
Prime + 0.5% to 13%
Mortgage notes to individuals maturing in 1999 202,306 158,529
at interest rates ranging from 7% to 12%
Construction and development loans from financial 11,244,590 18,657,112
institutions with maturities ranging from 1995
to 1996 at interest rates of Prime + 1%.
---------- ----------
$ 16,111,437 24,415,195
========== ==========
</TABLE>
The above mortgage notes are collateralized by approximately
$17,721,000 of real estate (see Note 3).
At December 31, 1994, the prime rate of interest was 8.5%. Effective
weighted average interest rates for mortgage notes payable
approximated 8.75%, 7.9%, 7.93% for the years ended December 31, 1994,
1993 and 1992, respectively.
Five Year Maturity Schedule
The following table reflects the required principal payments on debt,
including notes payable and mortgage notes which would be made if the
debt outstanding at December 31, 1994, was held to maturity:
Years Ending Principal
December 31, Payments
1995 $57,542,677
1996 7,606,592
1997 773,100
1998 2,747,710
1999 99,693
2000 and thereafter 182,644
----------
68,952,416
Unamortized discounts (164,465)
---------
Net carrying value $ 68,787,951
==========
With respect to the notes maturing 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.
Interest paid for the years ended December 31, 1994, 1993 and 1992
totalled $3,954,096, $7,755,005 and, $6,309,934, respectively.
7. Minority Interest in Subsidiaries
Included in the minority interest in subsidiaries is the minority
stockholders' proportionate share of Alba's net assets (49.6% and
49.9% at December 31, 1994 and 1993, respectively), and Wellco's net
assets (41.4% and 43% at December 31, 1994 and 1993, respectively).
8. Stockholders' Equity
Preferred Stocks
Sunstates has the following issues of preferred stock:
December 31,
1994 1993
$3.75 Cumulative Preferred Stock $ 7,198,975 9,008,675
Class E Preferred Stock 57,300 57,300
--------- --------
Total Preferred Stock $ 7,256,275 9,065,975
========= =========
Class B Preferred Stock - $1.00 par value; preference in liquidation
$100; authorized and issued one share at December 31, 1994 and 1993.
The one share issued is held by a 100% owned subsidiary of Sunstates
and is thereby deemed to be treasury stock and not outstanding. If
the Class B Preferred were outstanding, it would have a voting
equivalency of 400,000 shares and vote with the common stock as a
single class.
$3.75 Cumulative Preferred Stock - $25 par value per share, 471,100
shares authorized; 287,959 and 360,347 issued and outstanding at
December 31, 1994 and 1993, respectively. The $3.75 Cumulative
Preferred Stock has no conversion, exchange, mandatory redemption,
preemptive or other subscription rights or sinking fund provisions
and is currently callable at $25 per share, in whole or in part, at
the option of Sunstates. Dividends are cumulative and payable
semi-annually, when and as declared. 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. At December 31, 1994, Sunstates was eight semi-annual
dividends in arrears on its $3.75 Cumulative Preferred Stock.
During the three years ended December 31, 1994, Sunstates' insurance
subsidiary purchased 15,000, 20,600 and 72,319 shares, respectively,
of $3.75 Cumulative Preferred Stock at a cost of $329,618, $455,432
and $2,020,629, respectively. These shares are deemed to be treasury
shares on a consolidated basis and deducted from outstanding shares
in the accompanying financial statements.
Class E Preferred Stock, Series I and II - $.10 par value per share;
589,000 shares authorized; 573,000 issued and outstanding at December
31, 1994 and 1993, with a $1.00 per share liquidation preference.
Class E Preferred Stock has no conversion, exchange, mandatory
redemption, preemptive or general voting rights and may be redeemed in
whole or in part by action of Sunstates' Board of Directors.
Non-cumulative dividends are payable on the Class E Preferred Stock
at the annual rate of $.08 per share, when and as declared. There
were no dividends declared during the three years ended December 31,
1994.
Common Stock - $.33 1/3 par value per share; 5,000,000 shares
authorized; 1,829,388 shares issued as of December 31, 1994
(1,826,347 shares at December 31, 1993) of which 1,032,372 and 792,775
shares were held in treasury at December 31, 1994 and 1993,
respectively. During the three years ended December 31, 1994,
Sunstates' insurance subsidiaries purchased 160,775, 69,100 and
239,597 shares, respectively, of its Common Stock at a cost of
$943,485, $333,184 and $1,791,015, respectively. These shares are
deemed to be treasury shares on a consolidated basis and deducted
from outstanding shares in the accompanying financial statements.
Class B Accumulating Convertible Stock ("Class B Stock") $.10 par
value, 84,800 shares authorized. Class B Stock has the same rights as
Common Stock other than with respect to voting rights and conversion
privileges. Each share of Class B Stock has 85.3125 votes per share
on each matter submitted to a vote of Sunstates' stockholders.
Holders of Class B Stock also have the right, at their option, to
convert Class B Stock into Common Stock at a rate of 21.125 shares of
Common Stock per share of Class B Stock at December 31, 1994. The
conversion rate increases annually to a maximum conversion rate in
1995 of 24.375 shares of Common Stock per share of Class B Stock.
During 1994 and 1993, 140 and 222 shares of Class B Stock were
converted into 3,041 and 3,968 shares of Common Stock, respectively.
During the year ended December 31, 1994, Sunstates' insurance
subsidiaries purchased 8,613 shares of its Class B Stock at a cost of
$1,559,392.
Dividends
Under the terms of Sunstates' $3.75 Preferred Stock, dividends may
not be paid on common shares while preferred stock dividends remain
in arrears. At December 31, 1994, Sunstates was in arrears eight
semi-annual dividends on its $3.75 Cumulative Preferred Stock
aggregating $4,319,385 ($15 per share).
Options and Warrants
In May 1982 shareholders approved the adoption of an Incentive Stock
Option Plan pursuant to which options to purchase the common stock of
Sunstates may be granted to key employees at a price not less than
fair market value at date of grant, up to a maximum of 32,994
additional shares of Sunstates' common stock. Options under this
Plan were issued in 1982 through 1984 and became exercisable at the
rate of 25% per year beginning one year from the date of grant and
expired in ten years. No charges were made to income with respect to
these options. During the three years ended December 31, 1994, there
were no exercises of outstanding options and all previously
outstanding options have now expired. The Company has no plans to
issue any new options under the Incentive Stock Option Plan.
All previously issued warrants under Sunstates' 1979 compensatory
warrant plan have expired unexercised.
9. Commitments and Contingencies
Litigation
In April of 1988, two essentially similar civil actions styled
Jeremiah P. O'Connor, Sarah M. O'Connor, and Leonore Ballan v. Acton
Corporation, et al., and VR Associates and PJE Associates v. Acton
Corporation, et al., were filed in the Court of Chancery for the
State of Delaware in and for New Castle County. Also named in these
actions are Sunstates Corporation and the directors of Acton prior to
the merger with Sunstates. These actions, along with another
subsequently filed action styled Harry Lewis v. Clyde W. Engle, et
al., have been consolidated into one action entitled In Re Acton
Corporation Shareholders Litigation. All plaintiffs allege to be
holders of common stock of Acton and seek to have the action
designated a class action on behalf of all parties owning common
stock of Acton. The action challenges the merger of Sunstates
Corporation with and into Acton, alleges fraud and breach of
fiduciary duty and seeks unspecified damages plus costs and expenses
including attorney's fees. Acton intends to defend this action
vigorously. The suit is still in the preliminary stages and
management is unable to predict the outcome of the litigation;
however, management is of the opinion that the outcome of the
litigation is unlikely to have a material adverse effect on
Sunstates' financial position.
On June 4, 1990, VR Associates and Sonem Partners, L.P. filed a
shareholder derivative action in the Court of Chancery for the State
of Delaware in New Castle County against the directors of Acton and
Hickory. The action alleges that certain transactions entered into
and investments made by Acton constituted waste or a breach of
fiduciary duty by the Board of Directors of Acton. In particular, the
action alleges that Acton's purchase of the furniture operations of
Hickory was not in the best interests of Acton and seeks various
relief, including rescission of the purchase, unspecified damages and
costs. The action also sought to obtain a temporary restraining
order to prevent consummation of the purchase transaction. The
request for a restraining order was denied by the Court on June 8,
1990. An essentially similar action was filed in the State of
Delaware on June 12, 1990 by PJE Associates. These suits are still in
the preliminary stages and management is unable to predict the
outcome of the litigation; however, Sunstates intends to defend these
actions vigorously and does not believe that the outcome of the
litigation is likely to have a material adverse effect on Sunstates'
financial position.
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.
On December 6, 1991, California Federal Bank filed a suit against
Acton in the Circuit Court, Duval County, Florida alleging breach of
a Contract of Guaranty of a $5,100,000 note executed by Jacksonville
Apartment Associates, Ltd. and secured by a mortgage on an apartment
project in Jacksonville, Florida. During 1994 the suit was settled
with the Company making a payment of $230,000.
On December 8, 1993, Richard N. Frank filed a purported derivative
and class action in the Court of Chancery for the State of Delaware
in New Castle County against the directors of Acton, Hickory and
Telco. The action alleges that certain transactions entered into
and investments made by Acton constituted waste or a breach of
fiduciary duty by the Board of Directors of Acton. The complaint also
alleges that the Company and its insurance subsidiary repurchased
shares of the Company's common stock and $3.75 Cumulative Preferred
Stock in violation of the Company's certificate of incorporation.
Finally, the complaint alleges that the proxy statement disseminated
in connection with the Company's December 13, 1993, annual meeting
was materially misleading. This suit is in the preliminary stages
and management is unable to predict the outcome of the litigation;
however, Sunstates intends to defend these actions vigorously and
does not believe that the outcome of the litigation is likely to have
a material adverse effect on Sunstates' financial position.
On January 10, 1994, Robert A. Lee, et al. filed a punitive
derivative action in the Court of Chancery for the State of Delaware
in New Castle County against the directors of Acton, Hickory, Telco,
WREIT, RDIS Corporation and nominally against the Company itself. The
complaint alleges that certain transactions entered into and
investments made by Acton constituted waste or a breach of fiduciary
duty. This suit is in the preliminary stages and management is
unable to predict the outcome of the litigation; however, Sunstates
intends to defend these actions vigorously and does not believe that
the outcome of the litigation is likely to have a material adverse
effect on Sunstates' financial position.
At December 31, 1994, Sunstates and its subsidiaries also were,
and currently are, defendants in other legal proceedings incidental
to their business. Sunstates intends to defend such proceedings
vigorously and, in the opinion of the management, Sunstates' ultimate
liability, if any, in these proceedings will not have a material
adverse effect on the consolidated financial position of Sunstates.
Insurance Matters
During the past 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 has 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
writings accelerated in the latter half of 1993 with writings in the
fourth quarter totalling approximately $10,493,000 as compared to
$20,711,000 for the same period in 1992. The decline in premium
volume stabilized during the early part of 1994 and showed modest
increases during the last half of the year as new programs already
established and other planned actions to increase volume started to
become effective resulting in fourth quarter 1994 writings totalling
$12,910,000.
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. Negative cash flow from investment
income and underwriting activities of the insurance segment for 1994
was $29,162,720 (declining to only $5,551,737 in the fourth quarter)
compared to $54,819,238 for 1993 and $12,859,008 for 1992.
Accordingly, the Company believes that any required liquidations of
the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced.
The level of liquid assets, as defined by the National Association
of Insurance Commissioners ("NAIC"), of the Company's insurance
subsidiaries was $90,109,196 at December 31, 1994, as compared to
$77,678,160 at December 31, 1993. Included in NAIC-defined liquid
assets are U. S. Treasury securities with approximately $25,500,000
which were acquired under agreements to resell (see Note 4) as well
as certain securities with a reported value of $6,932,590 at December
31, 1994, which are not publically 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, $33,954,320 ($36,446,728 at December 31, 1993) of
investments in publicly traded equity securities of other companies,
valued at their quoted market prices on December 31, 1994, 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%. The ratio required to be met by December
31, 1995, is 130%. 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.
The National Association of Insurance Commissioners ("NAIC")
recently adopted risk-based capital guidelines for property/casualty
insurance companies whereby defined risk-based capital would be
based, in part, upon a formulated risk assessment of the type of
assets held in an insurance company's investment portfolio, asset
concentrations and underwriting risks. Such proposed regulations are
anticipated to become effective in 1995, however, a computation of
the Company's risk-based capital was required to be prepared for
informational purposes only as of December 31, 1994. Based upon this
computation, as filed under the NAIC's reporting requirements, the
Company's risk-based capital far exceeds proposed minimum
requirements.
The consolidated financial statements include the estimated
liability for unpaid losses and loss adjustment expenses ("LAE") of
Coronet. The liabilities for losses and LAE are determined using
case-basis evaluations and statistical projections, including
independent actuarial reviews, and represent estimates of the ultimate
net cost of all unpaid losses and LAE incurred through December 31 of
each year. In estimating the ultimate net cost of unpaid claims and
LAE the impact of inflation is implicitly considered. Coronet
reduces its reserves for any estimated salvage or subrogation
recoveries which may be realized in connection with settling unpaid
claims. These estimates are continually reviewed and, as experience
develops and new information becomes known, the liability is adjusted
as necessary. Such adjustments, if any, are reflected in current
operations.
<TABLE>
The following table provides a reconciliation of beginning and
ending liability balances for 1994, 1993 and 1992.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
<CAPTION> 1994 1993 1992
(Amounts in thousands)
<S> <C> <S> <C> <C> <C>
Liability for losses and LAE at beginning of year $ 86,393 111,949 98,987
------ ------- ------
Provision for losses and LAE for claims incurred
in the current year 41,733 64,271 109,000
Increase (decrease) in estimated losses and LAE for
claims incurred in prior years (5,891) 6,772 5,458
----- ----- -----
35,842 71,043 114,458
------ ------ -------
Losses and LAE payments for claims during:
The current year 22,280 33,395 48,053
Prior Years 37,274 63,204 53,443
------ ------ ------
59,554 96,599 104,496
------ ------ -------
Liability for losses and LAE at end of year $ 62,681 86,393 111,949
====== ====== =======
</TABLE>
The increase (decrease) in estimated losses and loss adjustment
expenses for claims occurring in prior years, as shown in the
preceding table, is due to settling case-basis reserves established in
prior years at amounts other than originally expected and no
additional premiums have been accrued as a result of these prior-year
effects.
Liquidity
As the result of negative cash flow from insurance underwriting
(see discussion above), operating losses in certain other segments of
the Company's operations (see Note 14), and maturing debt obligations
(see Note 6), 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 and the refinancing of its furniture business, it
cannot predict with certainty the outcomes of such actions.
10. Income Taxes
The provision for income taxes includes the following (amounts in
thousands):
1994 1993 1992
Current - Federal $150 (322) 268
- State 123 212 614
--- --- ---
273 (110) 882
Provision by majority-owned subsidiaries 1,766 838 777
----- --- ---
Total provision $ 2,039 728 1,659
===== === =====
<TABLE>
The provision for federal income taxes differs from the amounts
computed by multiplying income before income taxes, minority interest
and cumulative effect of accounting change by the statutory federal
rates as follows (amounts in thousands):
<CAPTION> 1994 1993 1992
<S> <C> <C> <C>
Tax computed at statutory rate $ (1,341) (1,459) (5,898)
State taxes, net of federal benefit 244 239 585
Tax exempt income and dividend exclusion (1,483) (1,639) (1,132)
Puerto Rican income not subject to Puerto
Rican or federal tax (212) (216) (328)
Effect of purchase accounting adjustments (102) (81) 118
Effect of losses not utilized in the provision 4,620 3,828 7,715
Alternative minimum tax 150 -- 510
Other 163 56 89
----- --- -----
Total $ 2,039 728 1,659
===== === =====
</TABLE>
In 1993 the provision for federal taxes reflects a benefit
attributable to current operating losses which were utilized to
reduce the amount of alternative minimum tax which would have
otherwise been payable on the taxable income generated in connection
with the sale of the cable television system (see Note 1). Income
from discontinued operations is presented net of income taxes
totalling $35,173 and $256,990 which have been allocated to the
operations of the cable television system for the years ended December
31, 1993 and 1992, respectively. The amount of income taxes
allocated to income from discontinued operations in 1993 is net of a
benefit of $282,495 from the utilization of the Company's net
operating loss carryforwards. Income from the sale of the cable
television system in 1993 is presented net of $1,015,446 of income
taxes which reflects a benefit of $12,196,279 from the utilization of
the Company's net operating loss carryforwards.
<TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows (amounts in thousands):
<CAPTION> 1994 1993
<S> <C> <S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 1,292 1,238
Real estate basis differences 2,235 2,675
Deferred compensation 867 930
Unearned insurance premiums 1,258 1,141
Insurance reserve discounting 2,944 4,030
Investment security writedowns 875 1,148
Net operating loss carryforwards 19,368 18,014
Alternative minimum tax credit carryforwards 1,006 1,542
Other 2,445 2,814
------ ------
Total gross deferred tax assets 32,290 33,532
Less - valuation allowance (26,676) (25,959)
------ ------
Net deferred tax assets 5,614 7,573
----- -----
Deferred tax liabilities:
Installment treatment on contracts receivable 1,041 1,785
Deferred acquisition costs 373 568
Net unrealized gains on securities available for sale 1,574 1,780
Real estate partnerships 1,312 1,257
Property, plant and equipment basis differences 2,141 2,223
Other 25 258
----- -----
Total gross deferred tax liabilities 6,466 7,871
----- -----
Net deferred tax liabilities $ 852 298
=== ===
</TABLE>
A valuation allowance has been provided to reduce the deferred tax
assets to a level which management estimates will more likely than
not be realized, primarily through the reversal of taxable temporary
differences within the net operating loss carryforward periods.
Certain subsidiaries do not file consolidated tax returns with the
Company and thereby the Company's net operating loss carryforwards
are not available to offset future deferred tax liabilities of these
subsidiaries. As of December 31, 1994 and 1993, these subsidiaries
had net deferred tax liabilities of $852,000 and $298,000,
respectively, which are included in the Company's consolidated
balance sheet.
Net operating loss carryforwards of approximately $57,000,000 are
available to offset future taxable income which, if not used, will
expire in 1995 through 2009. The tax returns for the years during
which these operating losses were generated have not been examined by
the Internal Revenue Service and such returns could be examined at
the time the loss carryforwards are utilized. Additionally,
approximately $26,700,000 of these tax loss carryforwards were
generated by subsidiaries prior to their acquisition and are thereby
restricted to offsetting only future taxable income of the
subsidiaries which generated the losses. Any future utilization of
these pre-acquisition loss carryforwards may be treated for financial
reporting purposes as a retroactive adjustment to the original purchase cost
assigned to certain assets of such subsidiaries.
State and federal income taxes paid for the years ended December 31,
1994, 1993 and 1992 totalled $924,035, $1,403,205 and $1,542,830,
respectively.
11. Per Share Amounts
Per share amounts are computed based upon the weighted average number
of common and common equivalent shares outstanding. Common
equivalent shares consist of the assumed conversion of the Class B
stock (21.125 to 1 in 1994; 17.875 to 1 in 1993 and 15.4375 to 1 in
1992) and any dilutive effect of stock options and warrants.
Primary per share amounts for 1994, 1993 and 1992 have been computed
based on weighted average common and common equivalent shares of
2,564,584, 2,523,962, and 2,488,466, respectively. Fully diluted
earnings per share for 1994, 1993 and 1992 have been computed based
on the weighted average number of common and common equivalent shares
of 2,564,584, 3,060,359, and 2,488,466, respectively.
The effect of stock options and warrants were not included in the
computation of fully diluted per share amounts in 1993 or 1992
because their inclusion would have been anti-dilutive. At December
31, 1994, all such stock options and warrants had expired and were no
longer outstanding. The maximum conversion of Class B Stock was not
included in the computation of fully diluted per share amounts in
1994 and 1992 because its inclusion would have been anti-dilutive.
Net income applicable to common stock reflects the dividend
requirements applicable to preferred stocks totalling $1,125,686,
$1,397,141, and $1,476,176 for the years ended December 31, 1994, 1993
and 1992, respectively.
12. Related Party Transactions
Following is a summary of the amounts receivable from (payable to)
affiliates:
December 31,
1994 1993
Telco $ 2,304,404 1,917,995
Hickory 777,584 710,779
WREIT -- 2,086,014
Chairman 152,764 2,456,086
--------- ---------
$ 3,234,752 7,170,874
========= =========
During 1993, the Company advanced $40,720 to Telco on an
unsecured basis which, along with all amounts previously advanced, is
due on demand and bears interest at prime plus two percent.
On April 13, 1992, Sunstates acquired Hickory's remaining
interest in Sew Simple in a transaction whereby approximately $12
million of balances due from Hickory and Telco were satisfied (see
Note 1), including all amounts due under the Intercompany Credit
Agreement which expired simultaneously with the transaction. The
transaction also created an unsecured note payable at prime +2% to
Hickory in the amount of $1,637,323. Subsequent to the transaction,
Sunstates made payments to Hickory such that the entire balance due
under the note was paid off in 1992.
During the years ended December 31, 1993 and 1992, the Company
loaned Hickory $108,161 and $895,000, respectively, which amounts
were due on demand and provide for interest at a rate of Prime + 2%.
No additional amounts were loaned during the year ending December 31,
1994. All of the amounts advanced prior to 1993 were either assigned
to Hickory in conjunction with the acquisition on June 21, 1990, of
Hickory's furniture manufacturing business or were satisfied in the
Sew Simple acquisition transaction referred to above (see Note 1).
During 1992, the Company purchased $108,700 (par value) of 12%
Debentures of Hickory Furniture Company at a cost of $103,736. At
December 31, 1994, the Company held a total of $474,900 par value
(with a carrying value of $651,350, including interest) of these
debentures which were due in January 1992 and remain in default.
Subsequent to December 31, 1994, the Company determined that due
to a decline in the value of the Company's Class B Stock owned by
WREIT and the fact that substantially all of WREIT's assets were
pledged to secure other obligations, the repayment of amounts owed to
the Company by WREIT is doubtful. Accordingly, as of December 31,
1994, the Company has written off its receivable from and its
investment in the shares of beneficial interest of WREIT in the
amounts of $2,287,750 and $669,395, respectively.
The advances to Sunstates' Chairman as of December 31, 1994, are
unsecured, non-interest bearing and due on demand. During 1993,
$1,150,000 was advanced to the Chairman under similar terms. These
advances to the Chairman were in connection with a transaction as to
which negotiations were completed on February 26, 1993, whereby
Sunstates' Board of Directors approved the purchase from the Chairman
of Epernay Properties, Inc., which owns approximately 1,137 acres of
improved and unimproved land located near the Company's resort
development in Spring Green, Wisconsin, at a price of $1,700,000.
Generally accepted accounting principles applicable to purchases of
businesses in transactions between entities under common voting
control require that the assets acquired be recorded at their
historical cost basis as previously reflected on the books of the
seller. Accordingly, $676,000, representing the excess of the fair
market value paid over the Chairman's historical cost basis of
Epernay Properties, Inc. was reflected as a reduction to Sunstates'
capital in excess of par value as of the date of the transaction.
Additionally, during 1993 amounts totalling $2,456,086 were
advanced to the Company's Chairman against commissions due upon the
sale of the cable television system totalling $2,470,000 (see Note 1).
During 1994 such commissions were paid and the receivable from the
Chairman was reduced by $2,470,000.
During early 1994 amounts totalling $309,008 were paid to the
Company's Chairman in full satisfaction of salary due for the year of
1994. Subsequent to December 31, 1994, $432,210 was paid to the
Chairman in full satisfaction of salary due for the year of 1995.
Both amounts reflect a discount of 10%.
On March 4, 1994, the Company purchased from its parent, RDIS, an
automobile for $109,404. Although the purchase price did not exceed
the fair market value of the automobile, the depreciated carrying
value of the car on the books of RDIS was zero on the date of the
transaction. Generally accepted accounting principles applicable to
transactions between entities under common voting control require that
the assets acquired be recorded at their historical cost basis as
previously reflected on the books of the seller. Accordingly the
$109,404, representing the excess of the amount paid for the
automobile over RDIS's historical cost basis, was reflected as a
reduction to Sunstates' capital in excess of par value as of the date
of the transaction.
Since January 1, 1990, the Company has purchased on the open
market, 84,842 shares of beneficial interest of WREIT, representing
5.5% on the outstanding shares of beneficial interest of WREIT, for a
total cost of $669,395 (see discussion above where this amount has
been written off as of December 31, 1994). Also, since January 1,
1990, the Company purchased on the open market 9,330 shares of common
stock of Hickory, representing 1.2% of the outstanding shares of
Hickory, at a total cost of $166,113. Since January 1, 1990, the
Company has purchased on the open market 134,445 shares of common
stock of Indiana Financial Investors, Inc. ("IFII"), representing
16.2% of the issued shares of IFII, at a total cost of $788,882.
Subsequent to December 31, 1994, the Company purchased 2,255 shares
of common stock of IFII at a cost of $7,329.
During 1994, subsidiaries of the insurance company purchased,
from brokers and other non-affiliated owners, 8,613 shares of Class B
Stock of Sunstates (at a total cost of $1,559,392) which had been
owned by the Company's parent prior to their acquisition by the
Company. Subsequent to December 31, 1994, subsidiaries of the
insurance company purchased, from non-affiliated owners, an
additional 3,840 shares of Class B Stock of Sunstates (at a total
cost of $503,140) which had been owned by the Company's parent prior
to their acquisition by the Company.
During the years ended December 31, 1994, 1993 and 1992 Sunstates
earned interest income from affiliates of $359,453, $295,787, and
$495,926, respectively.
During 1994, 1993 and 1992, Telco invoiced Sunstates $1,856,000,
$1,945,000, and $2,069,000, respectively for various professional
services primarily related to the insurance operations and to various
corporate activities. As of December 31, 1994, the Company had
advanced Telco $1,255,250 on an unsecured, non-interest bearing basis
as a prepayment of fees for such professional services to be rendered
in 1995. On February 4, 1994, the Company's insurance subsidiary
entered into a ten year lease agreement for office space to be
occupied largely by employees of Hickory. The lease calls for
initial monthly payments of $4,096, which will be offset against
amounts billed to the Company for professional services discussed
above.
<TABLE>
13. Quarterly Financial Information (Unaudited)
<CAPTION> Quarter Ended
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues $ 46,995 60,414 49,917 51,828
Net income (loss) (2,547) 358(g) (315) (5,069)(h)
Per share data:
Primary:
Net income (loss) (1.04) .02 (.25) (2.26)
Fully diluted:
Net income (loss) (1.04) .02 (.25) (2.26)
</TABLE>
<TABLE>
Quarter Ended
<CAPTION> March 31, June 30, September 30, December 31,
1993 1993 1993 1993
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues $ 49,775 53,229 54,240 49,950
Loss from continuing operations (704)(c) (890)(d) (2,947)(e) (1,815)(f)
Discontinued operations 285 161 287 46,732(a)
Cumulative effect of accounting change 260(b)
Net income (loss) (159) (729) (2,660) 44,917
Per share data:
Primary:
Loss from continuing operations (.41) (.49) (1.31) (.86)
Discontinued operations .11 .06 .11 18.65
Cumulative effect of accounting change .10
Net income (loss) (.20) (.43) (1.20) 17.79
Fully diluted:
Loss from continuing operations (.41) (.49) (1.31) (.71)
Discontinued operations .11 .06 .11 15.37
Cumulative effect of accounting change .10
Net income (loss) (.20) (.43) (1.20) 14.66
</TABLE>
The above financial information has been retroactively restated to
reflect the effect of the Company's change in its method of valuing
its furniture manufacturing inventories from the last-in, first-out
method to the first-in, first-out method (see Note 2). The effect of
this change was to increase net income by $94,000 ($.04 per primary
and fully diluted share), $294,000 ($.11 per primary and fully diluted
share), $206,000 ($.08 per primary and fully diluted share) and
$137,000 ($.06 per primary and fully diluted share) in the first
through fourth quarters of 1994, respectively. For 1993, the effect
of this change was to increase net income by $94,000 ($.04 per
primary and fully diluted share), $10,000 ($.01 per primary and fully
diluted share), and $17,000 ($.01 per primary and fully diluted
share) in the first three quarters, respectively, while decreasing
net income by $405,000 ($.16 per primary and $.13 per fully diluted
share) during the fourth quarter.
(a) See Note 1 for information regarding the sale of the cable
television business.
(b) See Note 2 for information regarding the adoption of Statement
No. 109 "Accounting for Income Taxes".
(c) Includes net gains of approximately $6,182,000 realized from the
insurance subsidiary's equity security investment portfolio. Also
includes $3,930,000 of underwriting loss emanating from programs
which had been previously discontinued due to their unsatisfactory
results.
(d) Includes net gains of approximately $3,926,000 realized from the
insurance subsidiary's equity security investment portfolio. Also
includes $2,442,000 of underwriting loss related to prior accident
years, primarily on the Company's continuing programs.
(e) Includes $2,166,000 of underwriting loss related to prior
accident years, primarily on the Company's continuing programs. Also
includes $3,296,000 of gains realized from the insurance subsidiary's
equity security investment portfolio.
(f) Includes bad debt writeoff of $556,205 relating to textile
apparel manufacturing customer which filed for bankruptcy as well as
$428,652 of costs incurred in connection with investigation of a
potential acquisition.
(g) Includes $2,728,693 of profit from the sale of an apartment
project.
(h) Writedowns totalling $571,800 were recorded to reflect what
Sunstates believes to be other than temporary declines in the value
of securities in its investment portfolio. Also, see Note 12
regarding the writeoff at December 31, 1994, of the Company's
receivables from and investments in WREIT.
14. Industry Segments
Sunstates operates in four industry segments: insurance,
manufacturing, real estate development and, prior to December 30,
1993, cable television (see Note 1).
Operations of the insurance segment include the providing of property
and casualty insurance, primarily confined to the writing of full
coverage non-standard automobile insurance in Arizona, Illinois,
Nevada, Ohio and Tennessee and several other states, and the
financing of premiums on policies issued by the Company.
Manufacturing represents operations in the furniture, textile
apparel, military footwear and textile equipment manufacturing
businesses. The furniture operations encompass the manufacture of
high end home furnishing products covering a broad selection of
traditional and transitional wood and upholstered lines which are
marketed to furniture retailers throughout the country. The Company's
textile apparel manufacturing subsidiary produces and sells an
extensive line of men's and women's hosiery and knitted intimate
apparel products as well as a variety of surgical products for the
health care industry. Military footwear operations include the
manufacture and sale of military combat boots under fixed price
contracts, primarily to the United States government. Automated
textile machinery is designed and produced in South Carolina and is
marketed to large textile producers located primarily in the United
States.
Real estate operations primarily reflect the development for resale
of income producing properties located in the southeastern United
States. The Company is also actively involved in the development of
a resort in Spring Green, Wisconsin and in the development and sale
of recreational and second home resort lots and continues its efforts
to sell other real estate assets no longer under active development.
Cable represents the Company's involvement in the development,
management and operation of a cable television system in Maryland
(which was sold on December 30, 1993).
Equity investees represent less than 50% investments in Alba (until
June 30, 1993) and Rocky Mountain.
Included in corporate and other is the Company's newspaper production
operation which was acquired in October 1992. The assets and results
of operations of the newspaper operation are not significant.
During 1994, 1993 and 1992, insurance premium production from one
broker approximated 29%, 44% and 46% respectively, of direct written
premiums and 29%, 43% and 39%, respectively, of total written
premiums.
The reported statutory net worth of Coronet at December 31, 1994 and
1993 was $59,483,697 and $58,605,217, respectively. Statutory net
income (loss) for the three years ended December 31, 1994, totalled
$2,843,245, $(5,975,327) and $7,256,796, respectively. The maximum
amount of dividends which can be paid by the insurance subsidiary
without prior approval of the Insurance Commissioner of the State of
Illinois is subject to restrictions. The maximum dividend payment
which may be made without prior approval is subject to the
availability of earned surplus from which it can be paid and further
limited to the greater of statutory net income, as adjusted, for the
twelve months last ended or 10% of the subsidiary's statutory surplus.
At December 31, 1994, there was no earned surplus from which
dividends can be paid.
The financial statements of Normandy Insurance Agency, Inc. and its
subsidiaries are included in the consolidated financial statements
pursuant to FASB Statement No. 94 "Consolidation of All
Majority-Owned Subsidiaries"; prior to 1988, such financial
statements were not consolidated. Subsequent to 1987, Normandy has
invested in manufacturing and other segments of Sunstates'
operations. As a result, the current Normandy financial statements
are no longer comparable to those formerly not consolidated.
Management believes that the disaggregated information provided in
this segment note and elsewhere in the consolidated financial
statements presents the most meaningful information.
Information about operations in different industry segments for the
three years ending December 31 is as follows (amounts in thousands):
1994 1993 1992
Revenues
Insurance $ 49,054 88,678 138,314
Manufacturing 130,495 96,454 67,740
Real Estate 24,301 17,362 8,546
Equity Investees 1,496 1,256 1,565
Corporate and Other 3,808 3,444 227
------- ------- -------
$209,154 207,194 216,392
======= ======= =======
Operating Income (Loss)
Insurance $ (6,792) (3,555) (14,302)
Manufacturing 7,929 4,292 1,994
Real Estate 1,377 1,534 (435)
Equity Investees 1,496 1,256 1,565
Corporate and Other (4,826) (4,404) (3,416)
Interest (3,129) (3,700) (2,708)
----- ----- ------
$ (3,945) (4,577) (17,302)
===== ===== ======
Identifiable Assets
Insurance $100,396 102,773 120,142
Manufacturing 100,694 95,481 65,942
Real Estate 47,430 59,700 63,722
Equity Investees 3,804 2,902 12,869
Corporate and Other 3,108 6,701 1,873
Eliminations ( 8,857) (18,277) (13,897)
------- ------- -------
$246,575 249,280 250,651
======= ======= =======
Depreciation and Amortization
Insurance $ 842 685 491
Manufacturing 3,119 2,592 1,900
Real Estate 1,320 1,071 817
Corporate and Other 51 59 43
----- ----- -----
$ 5,332 4,407 3,251
===== ===== =====
Capital Expenditures
Insurance $ 523 1,328 312
Manufacturing 3,135 2,580 637
Real Estate 1,986 1,406 178
Corporate and Other 89 41 56
----- ----- -----
$ 5,733 5,355 1,183
===== ===== =====
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
Sunstates Corporation
We have audited the consolidated balance sheets of Sunstates
Corporation and subsidiaries as of December 31, 1994 and 1993 and the
related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended
December 31, 1994. We have also audited the schedules listed in the
accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based
on our audits. We did not audit the financial statements of Wellco
Enterprises, Inc., a 58.6% owned subsidiary, which statements reflect
total assets of $24,788,000 and $20,058,000 as of December 31, 1994
and 1993 and total revenues of $20,790,000, $20,644,000 and
$18,434,000 for each of the three years in the period ended December
31, 1994. We also did not audit the 1993 and 1992 financial
statements of Alba-Waldensian, Inc. a 50.4% owned subsidiary in which
Sunstates' statements reflect total assets of $33,141,000 as of
December 31, 1993 and total revenues of $26,798,000 for the year then
ended. In 1992, Sunstates' statements reflected an investment in
Alba-Waldensian, Inc. of $10,279,000 at December 31, 1992 and equity
in $1,274,000 for the year then ended. Those statements were audited
by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to amounts included for Wellco
Enterprises, Inc. and Alba-Waldensian, Inc. is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements and schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and schedules. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the financial statements and schedules. We
believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all
material respects, the financial position of Sunstates Corporation
and subsidiaries at December 31, 1994 and 1993 and the results of
their operations and their cash flows for each of the three years in
the period ended December 31, 1994 in conformity with general accepted
accounting principles.
Also, in our opinion, the schedules present fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of inventory valuation for its furniture
manufacturing inventories.
As discussed in Note 9 to the consolidated financial statements, the
Company is involved in various lawsuits, including a lawsuit which is
being appealed where a jury has awarded $8,500,000 in actual and
punitive damages against the Company, and the Company's insurance
subsidiary is involved in certain regulatory matters, including a
requirement to further reduce its ratio of liabilities to liquid
assets over the next two years. While the Company cannot predict the
outcome of the lawsuit which is being appealed, it believes that the
other lawsuits and the regulatory matters will not have a material
adverse impact on the consolidated financial statements or on its
ability to continue to write new insurance at anticipated 1995
levels. Accordingly, no provision for any liability or other
adjustments which may result, if any, have been recorded in the
accompanying consolidated financial statements.
BDO SEIDMAN
Greensboro, North Carolina
March 30, 1995
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of
Wellco Enterprises, Inc. and subsidiaries as of July 2, 1994 and July
3, 1993, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in
the period ended July 2, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Wellco
Enterprises, Inc. and subsidiaries as of July 2, 1994 and July 3,
1993, and the results of their operations and their cash flows for
each of the three years in the period ended July 2, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, the
Company changed its method of accounting for income taxes during
fiscal year 1993 to conform with Statement of Financial Accounting
Standards No. 109.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 31, 1994
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alba-Waldensian, Inc.
Valdese, North Carolina
We have audited the accompanying consolidated balance sheet of
Alba-Waldensian, Inc. and subsidiaries as of December 31, 1993,
and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the two years in the period
ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Alba-Waldensian, Inc. and subsidiaries as of December 31, 1993, and
the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1993 in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial
statements, in 1992 the Company changed its method of accounting
for income taxes effective January 1, 1992 to conform with
Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
February 11, 1994
<TABLE>
SUNSTATES CORPORATION
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
<CAPTION>
December 31,
1994 1993
ASSETS
<C> <C>
REAL ESTATE:
Property, plant and equipment $ 112,470 114,837
Real estate held for development and sale 4,710,517 4,513,486
Mortgage loans 26,744 44,712
Land contracts receivable -- 6,484,181
--------- ----------
4,849,731 11,157,216
--------- ----------
INVESTMENTS IN SECURITIES:
Investments in affiliates 38,551,991 46,066,574
---------- ----------
38,551,991 46,066,574
---------- ----------
OPERATING ASSETS:
Cash 182,660 1,356,833
Restricted cash 1,497 1,497
Accounts receivable 240,225 245,413
Prepaid expenses 36,544 58,968
------- ---------
460,926 1,662,711
------- ---------
OTHER ASSETS:
Receivable from affiliates 1,319,490 3,445,663
Other assets 150,292 174,075
--------- ---------
1,469,782 3,619,738
---------- ----------
$ 45,332,430 62,506,239
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
The statements presented on Schedule I include the accounts of the
Company and its unrestricted subsidiaries. This statement does not
include the individual accounts of Normandy Insurance Agency, Inc.,
(including Sew Simple Systems, Inc., Wellco Enterprises, Inc. and
Alba Waldensian, Inc.), Hickory White Company, nor, prior to December
30, 1993, Acton Cable Partnership inasmuch as the ability of those
entities to transfer assets to Sunstates is restricted by
governmental regulation with respect to Normandy and by contract
otherwise. The Company's investment in these entities is reflected
utilizing the equity method of accounting and presented as an
investment in affiliates.
<TABLE>
SUNSTATES CORPORATION
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
<CAPTION>
December 31,
1994 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
DEBT:
Mortgage notes $ 3,999,551 4,040,425
--------- ---------
3,999,551 4,040,425
--------- ---------
OTHER LIABILITIES:
Accounts payable 276,589 290,239
Accrued expenses 2,645,458 5,293,260
Other liabilities 6,169,823 6,469,875
--------- ----------
9,091,870 12,053,374
--------- ----------
TOTAL LIABILITIES 13,091,421 16,093,799
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stocks 7,256,275 9,065,975
Common Stock, 797,016 and 1,033,572
shares outstanding, respectively 265,672 344,524
Class B Accumulating Convertible Stock,
73,581 and 82,334 shares issued and
outstanding, respectively 7,358 8,233
Capital in excess of par value 37,605,196 41,202,210
Accumulated deficit (16,920,900) (9,348,058)
Unrealized gains on marketable
equity securities 4,027,408 5,139,556
---------- ----------
Total stockholders' equity 32,241,009 46,412,440
---------- ----------
$ 45,332,430 62,506,239
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule I - Condensed Financial Information of Registrant
Statements of Operations
<CAPTION>
For the Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C> <C>
Revenues:
Real estate sales $ 2,557,579 2,818,282 3,433,668
Investment income 1,656,004 1,130,617 1,734,050
Other income 881,097 1,647,794 (345,500)
--------- --------- ---------
Total revenues 5,094,680 5,596,693 4,822,218
--------- --------- ---------
Costs and expenses:
Cost of real estate sales 262,371 579,906 1,219,656
Selling and operating costs 2,625,167 4,591,145 4,846,518
Corporate expenses 2,832,520 2,341,406 2,575,571
Interest expense 994,289 2,622,522 2,390,089
--------- ---------- ----------
Total Costs and Expenses 6,714,347 10,134,979 11,031,834
--------- ---------- ----------
Loss from continuing operations before
items shown below (1,619,667) (4,538,286) (6,209,616)
Equity in losses of affiliates (5,688,311) (1,692,160)(14,291,403)
Benefit (provision) for income taxes (264,864) 134,168 (250,716)
--------- --------- ----------
Loss from continuing operations (7,572,842) (6,096,278)(20,751,735)
Discontinued operations:
Income from cable television operations,
net of tax -- 899,146 1,073,284
Income from sale of cable television system,
net of tax -- 46,565,847 --
--------- ---------- ----------
NET INCOME (LOSS) $ (7,572,842) 41,368,715 (19,678,451)
========= ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule I - Condensed Financial Information of Registrant
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1994, 1993, and 1992
<CAPTION>
$3.75 Class E Class B
Cumulative Preferred Stock Accumulating
Preferred Common Convertible
Stock Series I Series II Stock Stock
<S> <C> <S> <C> <C> <C> <C> <C>
Balances, January 1, 1992, as previously reported $ 9,919,675 32,300 25,000 420,027 8,261
Cumulative effect on prior years of change in method
of inventory valuation
--------- ------ ------ ------- -----
Balances, January 1, 1992, as adjusted 9,919,675 32,300 25,000 420,027 8,261
Net loss
Conversion of Class B Stock 257 (5)
Adjustment of shares issued
pursuant to prior merger (9,100) (74)
Purchase of treasury stock (375,000) (53,592)
Unrealized gains on securities
Excess of fair market value paid
over seller's historical cost basis
of Sew Simple Systems, Inc.
--------- ------ ------ ------- -----
Balances, December 31, 1992 $ 9,535,575 32,300 25,000 366,618 8,256
--------- ------ ------ ------- -----
Balances, January 1, 1993, as previously reported $ 9,535,575 32,300 25,000 366,618 8,256
Cumulative effect on prior years of change in method
of inventory valuation
--------- ------ ------ ------- -----
Balances, January 1, 1993, as adjusted 9,535,575 32,300 25,000 366,618 8,256
Net income
Conversion of Class B Stock 1,323 (23)
Adjustment of shares issued
pursuant to prior merger (11,900) (384)
Purchase of treasury stock (515,000) (23,033)
Unrealized losses on securities
Excess of fair market value paid
over seller's historical cost basis
of Epernay Properties, Inc.
--------- ------ ------ ------- -----
Balances, December 31, 1993 $ 9,008,675 32,300 25,000 344,524 8,233
--------- ------ ------ ------- -----
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 income
Conversion of Class B Stock 1,013 (14)
Adjustment of shares issued
pursuant to prior merger (1,725)
Purchase of treasury stock (1,807,975) (79,865) (861)
Unrealized losses on securities
Excess of fair market value paid
over seller's historical cost basis
of automobile
--------- ------ ------ ------- -----
Balances, December 31, 1994 $ 7,198,975 32,300 25,000 265,672 7,358
--------- ------ ------ ------- -----
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule I - Condensed Financial Information of Registrant
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1994, 1993, and 1992
<CAPTION>
Capital
In Unrealized Total
Excess of Accumulated Gains (Losses) Stockholders'
Par Value Deficit On Securities Equity
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1992, as previously reported $ 47,663,139 (32,382,539) 6,390,649 32,076,512
Cumulative effect on prior years of change in method
of inventory valuation 6,245,669 1,344,217 7,589,886
---------- ---------- --------- ----------
Balances, January 1, 1992, as adjusted 53,908,808 (31,038,322) 6,390,649 39,666,398
Net loss (19,678,451) (19,678,451)
Conversion of Class B Stock (252) --
Adjustment of shares issued
pursuant to prior merger (7,727) (16,901)
Purchase of treasury stock (844,511) (1,273,103)
Unrealized gains on securities 445,913 445,913
Excess of fair market value paid
over seller's historical cost basis
of Sew Simple Systems, Inc. (10,933,955) (10,933,955)
---------- ---------- --------- ---------
Balances, December 31, 1992 $ 42,122,363 (50,716,773) 6,836,562 8,209,901
---------- ---------- --------- ---------
Balances, January 1, 1993, as previously reported $ 35,876,694 (52,105,270) 6,836,562 575,735
Cumulative effect on prior years of change in method
of inventory valuation 6,245,669 1,388,497 7,634,166
---------- ---------- --------- ---------
Balances, January 1, 1993, as adjusted 42,122,363 (50,716,773) 6,836,562 8,209,901
Net income 41,368,715 41,368,715
Conversion of Class B Stock (1,300) --
Adjustment of shares issued
pursuant to prior merger 7,692 (4,592)
Purchase of treasury stock (250,545) (788,578)
Unrealized losses on securities (1,697,006) (1,697,006)
Excess of fair market value paid
over seller's historical cost basis
of Epernay Properties, Inc. (676,000) (676,000)
---------- --------- --------- ----------
Balances, December 31, 1993 $ 41,202,210 (9,348,058) 5,139,556 46,412,440
---------- --------- --------- ----------
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 income (7,572,842) (7,572,842)
Conversion of Class B Stock (999)
Adjustment of shares issued
pursuant to prior merger (4,276) (6,001)
Purchase of treasury stock (3,482,335) (5,371,036)
Unrealized losses on securities (1,112,148) (1,112,148)
Excess of fair market value paid
over seller's historical cost basis
of automobile (109,404) (109,404)
---------- ---------- --------- ----------
Balances, December 31, 1994 $ 37,605,196 (16,920,900) 4,027,408 32,241,009
========== ========== ========= ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
<CAPTION>
For the Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,572,842) 41,368,715 (19,678,451)
Adjustments to reconcile net loss
to net cash utilized in operating
activities:
Depreciation and amortization 174,218 199,030 235,047
Adjustments to interest yields (37,916) (191,607) (314,320)
Gain on sale of cable television system -- (47,581,293) --
Reserves and writedowns 1,011,989 614,053 1,980,235
Loss on investment in real estate partnerships 8,400 32,249 257,823
Equity in undistributed loss 5,064,311 1,096,608 12,619,647
Changes in assets and liabilities:
Real estate held for development and sale 433,659 551,875 528,100
Mortgage loans on real estate held
and land contracts receivable 171,987 762,823 442,603
Mortgage notes payable on real estate held (62,400) (56,299) (136,168)
Operating assets and other liabilities (2,274,399) (972,744) 1,161,142
--------- ---------- ----------
Total adjustments 4,489,849 (45,545,305) 16,774,109
--------- ---------- ----------
Net cash utilized in operating activities (3,082,993) (4,176,590) (2,904,342)
--------- --------- ---------
INVESTING ACTIVITIES:
Investments sold 20,000 -- --
Repayments from (loans to) affiliates 1,186,929 (18,829,802) (3,024,350)
Distribution from subsidiary -- -- 4,974 174
Additional investment in subsidiary -- (2,511,786) --
Purchases of property, plant and equipment (43,090) (35,955) (17,155)
Repayments of mortgage loans 980 890 14,966
Cash acquired through acquisitions -- 8,550 --
Proceeds from sale of cable television system -- 26,250,000 --
--------- --------- ---------
Net cash provided by
investing activities 1,164,819 4,881,897 1,947,635
--------- --------- ---------
FINANCING ACTIVITIES:
Repayments of debt -- -- (2,300,500)
Purchase of Company stock (6,001) (4,592) (16,900)
Affiliate's payment of federal tax liabilities
under tax treaty 750,002 504,392 1,132,845
------- ------- ---------
Net cash provided by (utilized in)
financing activities 744,001 499,800 (1,184,555)
------- ------- ---------
Increase (decrease) in cash (1,174,173) 1,205,107 (2,141,262)
Cash, beginning of year 1,358,330 153,223 2,294,485
--------- --------- ---------
Cash, end of year 184,157 1,358,330 153,223
Less: restricted cash (1,497) (1,497) (153,223)
------- --------- -------
Unrestricted cash $ 182,660 1,356,833 --
======= ========= ========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1994, 1993, and 1992
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at
Beginning Charged to Costs Charged to Other Balance at
Description of Period and Expense Accounts Deductions End of Period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for cancellations
and uncollectibles on land
contracts receivable:
Year ended December 31, 1992 2,357,469 675,793 447,131(b) 1,844,616(a) 1,635,777
Year ended December 31, 1993 1,635,777 614,053 349,576(b) 1,008,553(a) 1,590,853
Year ended December 31, 1994 1,590,853 791,481 256,727(b) 1,058,636(a) 1,580,425
Allowance for possible losses on
mortgage loans:
Year ended December 31, 1992 2,894,719 72,725 -- 833,291 2,134,153
Year ended December 31, 1993 2,134,153 -- -- 1,981,061 153,092
Year ended December 31, 1994 153,092 -- 18,558 6,614 165,036
Allowance for uncollectibles on
accounts receivable:
Year ended December 31, 1992 553,074 190,878 271,379 270,744 744,587
Year ended December 31, 1993 744,587 432,329 136,609 576,489 737,036
Year ended December 31, 1994 737,036 259,854 -- 192,843 804,047
Allowance for uncollectibles on
premiums receivable:
Year ended December 31, 1992 900,000 -- -- -- 900,000
Year ended December 31, 1993 900,000 (400,000) -- -- 500,000
Year ended December 31, 1994 500,000 -- -- -- 500,000
(a) Cancellations and uncollectibles charged off.
(b) Cancellations and transfers charged against sales.
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule III - Part I
Real Estate Held for Development and Sale and Accumulated Depreciation
December 31, 1994
<CAPTION>
Column A Column B Column C Column D
-------- -------- -------- --------
Costs
Initial Cost to Company Capitalized
----------------------------------- Subsequent
Description Encumbrances Land Building and to Write-
Improvement Acquisition Dispositions Downs
--------------------------------------------------------------------------------------------------
<S> <C> <C> <S><C> <C> <C> <C> <C>
Shopping Centers:
Plymouth, NC 1,388,550 59,750 1,272,677 1,961,537 (1,136,333) (400,000)
York County, VA 3,577,657 1,775,351 - 4,306,101 (662,058) (1,490,000)
Spring Hill, FL 4,158,333 1,400,000 - 4,653,453 (696,800) (180,000)
New Smyrna Beach, FL 3,508,600 1,435,000 - 3,897,286 - -
West Melbourne, FL 1,850,000 992,940 1,374,521 - - (780,705)
--------- ---------- --------- --------- --------- ---------
14,483,140 5,663,041 2,647,198 14,818,377 (2,495,191) (2,850,705)
--------- ---------- --------- --------- --------- ---------
Office Buildings:
Raleigh, NC 632,844 100,000 1,350,758 21,605 - -
--------- --------- --------- --------- --------- ---------
Residential land
New Port Richey, FL - 201,009 - - (136,020) (64,989)
Chapel Hill, NC - 415,805 - - (309,774) -
Carrboro, NC - 1,041,000 - 1,830,060 (1,309,655) -
--------- ---------- --------- --------- --------- ---------
- 1,657,814 - - 1,830,060 (1,755,449) (64,989)
--------- ---------- --------- --------- --------- ---------
Recreation lots:
Checotah, OK - 190,856 - 194,009 (360,840) -
Polo, MO - 233,378 - 665,121 (821,303) (76,967)
Sullivan, MO - 674,035 - 1,646,135 (1,921,682) -
Warsaw, MO - 399,737 - 324,235 (693,274) (30,463)
Lowry City, MD - 163,491 - 1,980,490 (1,835,065) -
Murfreesboro, TN - 577,493 - 1,786,087 (2,267,556) (95,799)
Dixon, TN - 237,056 - 3,629,306 (3,653,874) -
Pittsburgh County, OK - 16,008 - 1,841,833 (1,772,542) -
Inactive subdivisions - 1,250 - 36,710 (20,043) (17,280)
--------- ---------- --------- --------- --------- ---------
- 2,493,304 - 12,103,926 (13,346,179) (220,509)
--------- ---------- --------- --------- --------- ---------
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule III - Part I
Real Estate Held for Development and Sale and Accumulated Depreciation
December 31, 1994
<CAPTION>
Column A Column E Column F Column G Column H Column I
-------- -------- -------- -------- -------- --------
Gross Amount at Which Carried
at Close of Period
-------------------------------------- Life on Which
Description Buildings & Accumulated Date of Date Depreciation
Land Improvements Total Depreciation Construction Acquired Computed
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <S><C> <S> <C> <C>
Shopping Centers:
Plymouth, NC 59,750 1,697,881 1,757,631 367,971 Various 12/31/84 31.5
York County, VA 1,359,522 2,569,872 3,929,394 403,695 Various 02/12/88 31.5
Spring Hill, FL 1,244,208 3,932,445 5,176,653 392,784 Various 06/01/88 31.5
New Smyrna Beach, FL 1,435,000 3,897,286 5,332,286 341,667 Various 10/01/89 31.5
West Melbourne, FL 992,940 593,816 1,586,756 54,005 Various
--------- --------- --------- ---------
5,091,420 12,691,300 17,782,720 1,560,122
--------- --------- --------- ---------
Office Buildings:
Raleigh, NC 100,000 1,372,363 1,472,363 368,304 Various 12/31/84 40
--------- --------- --------- ---------
Residential land
New Port Richey, FL - - 0 - Various 11/29/83 N/A
Chapel Hill, NC 106,031 - 106,031 - Various 12/31/84 N/A
Carrboro, NC 1,561,405 - 1,561,405 - Various 12/21/88 N/A
--------- --------- --------- ---------
1,667,436 - 1,667,436 - -
--------- --------- --------- ---------
Recreation lots:
Checotah, OK 24,025 - 24,025 - Various 10/31/83 N/A
Polo, MO 229 - 229 - Various 10/31/83 N/A
Sullivan, MO 292,658 105,830 398,488 - Various 10/31/83 N/A
Warsaw, MO 235 - 235 - Various 10/31/83 N/A
Lowry City, MD 308,916 - 308,916 - Various 06/01/89 N/A
Murfreesboro, TN 225 - 225 - Various 10/31/83 N/A
Dixon, TN 161,712 50,776 212,488 - Various 08/03/85 N/A
Pittsburgh County, OK 49,482 35,817 85,299 - Various 10/21/85 N/A
Inactive subdivisions 637 - 637 - N/A 06/01/86 N/A
--------- --------- --------- ---------
838,119 192,423 1,030,542 -
--------- --------- --------- ---------
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule III - Part I
Real Estate Held for Development and Sale and Accumulated Depreciation
<CAPTION>
December 31, 1994
Column A Column B Column C Column D
-------- -------- -------- --------
Initial Cost to Company Costs
----------------------------------- Capitalized
Description Encumbrance Land Building and Subsequent to Write-
Improvements Acquisition Dispositions Downs
-------------------------------------------------------------------------------------------------------
<S> <C> <S> <C> <S><C> <C> <C> <C>
Land:
Denver, CO - 1,000 - - - -
Gastonia, NC - 60,000 - - (51,157) -
Mayport, FL - 535,069 - 66,016 (107,000) (394,085)
St. Petersburg, FL - 954,541 - 68,722 (235,584) (687,679)
Southern Pines, NC 128,157 307,968 - 44,555 - (162,000)
Port Orange, FL - 615,573 - 141,307 - (443,680)
Coral Springs, FL - 236,014 - - - (186,014)
New Port Richey, FL - 370,611 - - (262,577) -
Jacksonville, FL - 727,704 - - - (287,704)
Omaha, NE - 91 - - - -
--------- ---------- --------- --------- --------- ---------
128,157 3,808,571 - 320,600 (656,318)(2,161,162)
--------- ---------- --------- --------- --------- ---------
Interest in Limited Partnerships:
Greenbelt, MD - - 850,000 (530,835) - (790,026)
Ponte Vedra, FL - - 2,250,000 (43,852) - (1,480,300)
Will City, IL - - 980,000 (249,715) - -
Jacksonville, FL - 182,000 - 75,189 (28,067) (229,122)
Gretna, LA - - 448,000 - - (448,000)
--------- ---------- --------- --------- --------- ---------
- - 182,000 4,528,000 (749,213) (28,067)(2,947,448)
--------- ---------- --------- --------- --------- ---------
Resort Development Properties:
Spring Green, WI - 1,929,387 3,063,698 1,394,019 (1,022,708) -
--------- ---------- --------- --------- --------- ---------
- - 1,929,387 3,063,698 1,394,019 (1,022,708) -
--------- ---------- --------- --------- --------- ---------
Investment in Other Real Estate:
Boca Raton, FL - - 130,000 - (66,645) -
Lake Zurich, IL - 1,373,441 - - - -
Kissimmee, FL - - 1,721,549 7,091,155 (8,503,240) (309,461)
Chicago, IL 189,585 889,712 - - - -
--------- ---------- --------- --------- --------- ---------
189,585 2,263,153 1,851,549 7,091,155 (8,569,885) (309,461)
--------- ---------- --------- --------- --------- ---------
Total Real Estate and
Accumulated Depreciation 15,433,726 18,097,270 13,441,203 36,830,529 (27,873,797)(8,554,274)
========== ========== =========== =========== ========== ===========
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule III - Part I
Real Estate Held for Development and Sale and Accumulated Depreciation
December 31, 1994
<CAPTION>
Column A Column E Column F Column G Column H Column I
-------- -------- -------- -------- -------- --------
Gross Amount at Which Carried
at Close of Period
------------------------------------- Life on Which
Description Buildings & Accumulated Date of Date Depreciation
Land Improvements Total Depreciation Construction Acquired Computed
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <S> <C> <C> <S>
Land:
Denver, CO 1,000 - 1,000 - N/A 12/31/84 N/A
Gastonia, NC 8,843 - 8,843 - N/A 12/31/84 N/A
Mayport, FL 100,000 - 100,000 - N/A 03/19/86 N/A
St. Petersburg, FL 100,000 - 100,000 - N/A 11/17/76 N/A
Southern Pines, NC 190,523 - 190,523 - N/A 12/31/84 N/A
Port Orange, FL 313,200 - 313,200 - N/A 07/01/85 N/A
Coral Springs, FL 50,000 - 50,000 - N/A 07/05/77 N/A
New Port Richey, FL 108,034 - 108,034 - N/A 08/14/78 N/A
Jacksonville, FL 440,000 - 440,000 - N/A 06/20/85 N/A
Omaha, NE 91 - 91 - N/A N/A
--------- --------- --------- ---------
1,311,691 - 1,311,691 - -
--------- --------- --------- ---------
Interest in Limited Partnerships:
Greenbelt, MD - (470,861) (470,861) - N/A 12/31/84 N/A
Ponte Vedra, FL - 725,848 725,848 - N/A 09/01/88 N/A
Will City, IL - 730,285 730,285 - N/A N/A
Jacksonville, FL - - - - N/A 06/19/85 N/A
Gretna, LA - - - -
--------- --------- --------- ---------
- 985,272 985,272 - -
--------- --------- --------- ---------
Resort Development Properties:
Spring Green, WI 1,686,223 3,678,173 5,364,396 582,168 Various Various 40
--------- --------- --------- ---------
1,686,223 3,678,173 5,364,396 582,168
--------- --------- --------- ---------
Investment in Other Real Estate:
Boca Raton, FL - 63,355 63,355 - N/A 12/31/84 N/A
Lake Zurich, IL 1,373,441 - 1,373,441 -
Kissimmee, FL - 3 3 - Various 09/15/75 N/A
Chicago, IL 889,712 - 889,712 6,362 2/22/94 40
--------- --------- --------- ---------
2,263,153 63,358 2,326,511 6,362
--------- --------- --------- ---------
Total Real Estate and
Accumulated Depreciation 12,958,042 18,982,889 31,940,931 2,516,956
========== ========== ========== =========
</TABLE>
<TABLE>
Notes to Schedule III - Real Estate and Accumulated Depreciation
1. Reconcilation of Real Estate:
<CAPTION>
For The Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C> <C>
Balance, beginning of year $ 41,985,811 44,912,948 44,820,490
---------- ---------- ---------
Additions during year:
Acquisition of real estate 889,712 5,734,327 3,325,000
Improvements, etc. 1,498,313 378,859 361,705
Investments in limited
partnerships (162,057) (212,832) (498,477)
Acquisition through fore-
closure/reconveyance 439,607 411,230 824,063
--------- --------- ---------
Total additions 2,665,575 6,311,584 4,012,291
--------- --------- ---------
Deductions during period:
Cost of sales 14,069,557 7,417,795 1,457,038
Write down of real estate 523,508 1,166,738 1,854,959
Depreciation 633,347 654,188 607,836
Other 999 -- --
---------- --------- ---------
Total deductions 15,227,411 9,238,721 3,919,833
---------- --------- ---------
Balance, end of year $ 29,423,975 41,985,811 44,912,948
========== ========== ==========
</TABLE>
<TABLE>
Notes to Schedule III - Real Estate and Accumulated Depreciation (continued)
2. Reconciliation of Accumulated Depreciation on Real Estate:
<CAPTION>
For The Years Ended December 31,
1994 1993 1992
<S> <C> <S> <C> <C> <C>
Balance, beginning of year $2,621,464 1,398,784 790,948
Additions during year:
Depreciation expense 633,347 654,188 607,836
Consolidation of joint venture -- 382,139 --
Acquisition of real estate -- 445,481 --
Deductions during year:
Assets sold/transferred 737,855 259,128 --
--------- --------- ---------
Balance, end of year $2,516,956 2,621,464 1,398,784
========= ========= =========
</TABLE>
3. Depreciation of operating properties is computed on the
straight-line method over the remaining useful lives of the
properties, which are generally thirty-one and one-half to forty
years for buildings and five to twelve years for furniture and
equipment.
4. Aggregate cost as of December 31, 1994 for federal income tax
purposes has not yet been determined.
<TABLE>
SUNSTATES CORPORATION
Schedule V - Supplemental Information Concerning
Property - Casualty Insurance Operations
Normandy Insurance Agency, Inc. and Subsidiaries
<CAPTION>
Column A Column B Column C Column D Column E Column F
Reserves for
Unpaid Discount
Deferred Claims if any,
Affiliation Policy and Claim deducted
with Acquisition Adjustment in Unearned Earned
Registrant Costs Expenses Column C Premiums Premiums
---------- ------------ ----------- -------- -------- --------
Normandy is a wholly-owned
consolidated subsidiary of
Sunstates Corporation
(Registrant)
<C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994 $ 1,097,995 62,681,402 - 18,493,925 46,228,281
----------------- ========= ========== =========== ========== ==========
Year Ended
December 31, 1993 $ 1,670,889 86,393,434 - 16,777,784 69,165,138
----------------- ========= ========== =========== ========== ==========
Year Ended
December 31, 1992 $ 4,314,649 111,948,590 - 28,879,844 128,294,934
----------------- ========= =========== =========== ========== ===========
</TABLE>
<TABLE>
SUNSTATES CORPORATION
Schedule V - Supplemental Information Concerning
Property - Casualty Insurance Operations
Normandy Insurance Agency, Inc. and Subsidiaries
<CAPTION>
Column A Column G Column H Column I Column J Column K
Claims and Claim
Adjustment Expenses Amortization Paid
Incurred Related to Of Deferred Claims
Affiliation Net (1) (2) Policy and Claim
with Investment Current Prior Acquisiton Adjustment Premiums
Registrant Income Year Year Costs Expenses Written
---------- ---------- ------------------ ------------ --------- --------
Normandy is a wholly-owned
consolidated subsidiary of
Sunstates Corporation
(Registrant)
<C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994 $ 6,916,127 41,733,454 (5,890,954) 1,670,889 59,554,532 47,944,423
----------------- ========= ========== ========= ========= ========== ==========
Year Ended
December 31, 1993 $ 22,686,387 64,271,003 6,772,046 4,314,649 96,598,203 57,063,078
----------------- ========== ========== ========= ========= ========== ==========
Year Ended
December 31, 1992 $ 12,267,011 109,000,602 5,457,245 6,060,029 101,495,998 118,930,251
----------------- ========== =========== ========= ========= =========== ===========
</TABLE>
EXHIBIT INDEX
Sunstates Corporation
Form 10-K Annual Report
For the Year Ended December 31, 1994
All Exhibits except Exhibits 3.1, 3.2, 3.3, 3.4, 4.1, 4.2,
4.3, 4.4, 4.5,10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8,
10.9, 10.10, and 10.11 are filed herewith and included in Item
14. Exhibit 10.1 is incorporated by reference to Acton's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1990. Exhibits 4.1 and 10.4 are incorporated by reference to
Acton's Current Report on Form 8-K dated July 5, 1990. Exhibits
3.1 and 10.2 are incorporated by reference to Acton's Form 10-K
for the year ended December 31, 1989. Exhibits 3.2, and 10.3
are incorporated by reference to Acton's Form 10-K for the year
ended December 31, 1990. Exhibit 4.2 is incorporated by reference to
Acton's Form 10-Q for the quarter ended March 31, 1991. Exhibits
4.3, 4.4, 10.5, 10.6, 10.7 and 10.8 are incorporated by
reference to Acton's Form 10-K for the year ended December 31,
1991. Exhibits 4.4 and 10.8 are incorporated by reference to
Acton's Form 10-K for the year ended December 31, 1992. Exhibits 3.3,
3.4, 4.5, 10.9 and 10.10 are incorporated by reference to
Sunstates Corporation's Form 10-K for the year ended December
31, 1993. Exhibit 10.11 is incorporated by reference to
Sunstates Corporation's Form 8-K dated March 6, 1995.
(3) Amended and Restated Certificate of Incorporation and By-Laws
(3.1) Restated Certificate of Incorporation
(3.2) Certificate of Amendment of Restated Certificate of
Incorporation
(3.3) Certificate of Amendment to Restated Certificate of
Incorporation dated December 28, 1993
(3.4) Amended and Restated By-Laws of Sunstates Corporation
(4) Instruments Defining the Rights of Security Holders, Including
Debentures
(4.1) Credit Agreement dated June 15, 1990 by and between Hickory
White Company and Citicorp North America, Inc.
(4.2) First Amendment to Credit Agreement dated April 1, 1991, by
and between Hickory White Company and Citicorp North America, Inc.
(4.3) Second Amendment to Credit Agreement dated January 30, 1992,
by and between Hickory White Company and Citicorp North America,
Inc.
(4.4) Third Amendment to Credit agreement dated January 31, 1993, by
and between Hickory White Company and Citicorp North America, Inc.
(4.5) Fourth Amendment to Credit Agreement dated November
30, 1993, by and between Hickory White Company and
Citicorp North America, Inc.
(4.6) Fifth Amendment to Credit Agreement dated December 21, 1994, by
and between Hickory White Company and Citicorp North
America, Inc.
(10) Material Contracts
(10.1) Form of Indemnification Agreement between Acton Corporation
and each officer and director, respectively.
(10.2) Stock Purchase Agreement dated January 17, 1989, both by and
between Normandy Insurance Agency, Inc. and Hickory Furniture
Company.
(10.3) Asset Purchase Agreement dated June 15, 1990, by and between
Hickory White Company and Hickory Furniture Company et. al.
(10.4) Extension Agreement dated February 28, 1992, both by and
between Normandy Insurance Agency, Inc. and Hickory Furniture
Company.
(10.5) Executive Employment Agreement dated September 16, 1991, by
and between Acton Corporation and Clyde Wm. Engle.
(10.6) Corporate Officers Discretionary Bonus Plan.
(10.7) Purchase of Stock and Assignment of Contract Rights dated
April 13, 1992, by and between Normandy Insurance Agency, Inc. and
Hickory Furniture Company.
(10.8) Stock Purchase Agreement dated July, 28, 1992, by and
between Coronet Insurance Company and Euroactividade Corporation,
et. al., covering the acquisition of all of the outstanding capital
stock of Euroactividade Spring Green, Inc.
(10.9) Amended and Restated Purchase and Sale Agreement
dated as of December 30, 1993, by and between Acton
Corporation and Acton Cable Investors, N.V. as sellers and
InterMedia Partners of Maryland, L.P. and InterMedia
Partners, III, L.P. as buyers
(10.10) Note payable to Acton Corporation and Acton Cable Investors,
N.V. in the amount of $17,366,614 dated December 30, 1993,
by InterMedia Partners of Maryland, L.P. and InterMedia
Partners III, L.P.
(10.11) Asset Purchase Agreement dated as of March 6, 1995, by and
between Alba-Waldensian, Inc. and Kayser-Roth Corporation
for the purchase of the Balfour Healthcare Division.
(11) Statement re Computation of Per Share Earnings
(11.1) Primary
(11.2) Fully diluted
(18) Letter re Change in Accounting Principle
(21) Subsidiaries of the Company
(27) Financial Data Schedules
(28P) Information from Reports Furnished to State Regulatory
Authorities. Schedules P of the 1994 Annual Statement of
Coronet Insurance Company of Chicago to the Insurance
Department of the State of Illinois.
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT (this "Amendment"), made and entered
into as of the 21st day of December, 1994 by and between HICKORY
WHITE COMPANY, a North Carolina corporation ("Borrower"), and
CITICORP NORTH AMERICA, INC., a Delaware corporation ("Lender");
W I T N E S S E T H:
WHEREAS, Borrower and Lender are parties to a certain Credit
Agreement, dated as of June 15, 1990, as amended by a First Amend-
ment to Credit Agreement, dated as of April 1, 1991, a Second
Amendment to Credit Agreement, dated as of January 30, 1992, a
Third Amendment to Credit Agreement, dated as of January 31, 1993
and a Fourth Amendment to Credit Agreement, dated as of Novem-
ber 30, 1993 (the "Credit Aqreement"), pursuant to which Lender
has made certain financial accommodations to Borrower; and
WHEREAS, Borrower and Lender have agreed to an extension of
the maturity date of the credit facility established under the
Credit Agreement from January 3, 1995 to January 3, 1996 and cer-
tain other modifications to the terms of the Credit Agreement in
connection therewith; and
WHEREAS, Borrower and Lender wish to enter into this Amend-
ment to. memorialize their agreements in regard to the foregoing
matters;
NOW, THEREFORE, in consideration of the premises, the terms
and conditions contained herein and other good and valuable con-
sideration, the receipt and sufficiency of which are hereby ac-
knowledged, the parties hereby agree as follows:
1. Incorporation by Reference of Defined Terms. Any capi-
talized terms used in this Amendment, but not expressly defined
herein, shall have the meanings given to such terms in the Credit
Agreement.
2. Amendment to Borrowinq Base Definition. The definition
of the "Borrowing Base" appearing in Section 1.1 of the Credit
Agreement, is hereby amended as follows:
(a) The introduction to clause (c) of
such definition (which reads "(c) up to the lesser
of (A) Twelve Million Five Hundred Thousand Dollars
($12,500,000), or (B) the sum of:") shall be de-
leted and the following revised introduction sub-
stituted in lieu thereof:
(c) up to the lessor of (A) Eleven Mil-
lion Dollars ($11,000,000) or (B) the sum of:
(b) Existing, revised clause (c)(1) of
the definition of "Borrowing Base" shall be deleted
and the following revised clause (c)(1) shall be
substituted in lieu thereof:
"(1) fifty-six percent (56%) of the value of the
Eligible Lumber Inventory at the Hickory and White
divisions of the Borrower; provided, however, that,
in addition to the other provisions hereof affect-
ing such percentage, such percentage shall be re-
duced, on a cumulative basis, by two percent (2%)
in the aggregate, at the rate of one-half of one
percent (1/2%) on March 31, 1995, June 30, 1995, Sep-
tember 30, 1995 and December 31, 1995; plus"
(c) Existing clause (c)(9) of the definition of "Bor-
rowing Base" (as revised in previous amendments to the Credit
Agreement) shall be deleted and the following revised clause
(c)(9) shall be substituted in lieu thereof:
"(9) forty-four percent (44%) of the value of the
Eligible Finished Goods Inventory at and to be sold
by either of the Hickory or White divisions of the
Borrower, provided, however, that, in addition to
the other provisions hereof affecting such percent-
age, such percentage shall be reduced, on a cumula-
tive basis, by two percent (2%) in the aggregate,
at the rate of one-half of one percent (1/2%) on
March 31, 1995, June 30, 1995, September 30, 1995
and December 31, 1995; plus "
3. Amendment to Definition of Borrowinq Base Loan Commit-
ment Termination Date. The definition of the "Borrowing Base Loan
Commitment Termination Date," appearing in Section 1.1 of the
Credit Agreement, is hereby amended by deleting the date "'Janu-
ary 3, 1995" appearing in clause (a) thereof and substituting
therefor the date "January 3, 1996."
4. Amendment to Borrowinq Base Loan Commutment Amount.
Section 2.2.2 of the Credit Agreement (as revised in previous
amendments to the Credit Agreement) is hereby amended by deleting
the words and figure "Fifteen Million Dollars ($15,000,000)"
therein and substituting in lieu thereof the words and figure
"Thirteen Million Dollars ($13,000,000)".
5. Amendment to Facility Fee. Existing clause (a) of Sec-
tion 2.3 of the Credit Agreement is hereby deleted and the follow-
ing revised clause (a) substituted in lieu thereof:
(a) Facility Fee. The Borrower agrees
to pay to the Lender a non-refundable facility fee
in the amount of Seventy-Five Thousand Dollars
($75,000) per annum, payable by Borrower quarterly
in arrears in the amount of Eighteen Thousand Seven
Hundred Fifty Dollars ($18,750) on each Quarterly
Payment Date.
6. Amendment to Term Loan Repayments. Sec-
tion 3.3.1.A of the Credit Agreement is amended by
deleting the dates "January 3, 1995" and "Janu-
ary 1, 1995" set forth therein and substituting
therefor, respectively, the dates "January 3, 1996"
and "January 1, 1996." The Term Note shall be
deemed amended accordingly to reflect the foregoing
amendment to maturity and amortization dates.
7. Amendment to Section 7.2.4 of the Credit Aqreement.
Section 7.2.4 of the Credit Agreement shall be deemed to be
amended by adding thereto the provisions set forth on Schedule
hereto with respect to Borrower's financial condition as of and
for the period commencing on January 1, 1995 and ending on Decem-
ber 31, 1995. All other provisions of said Section 7.2.4 shall
remain unchanged.
8. Extension Fee. In consideration of Lender's agreement
to extend the maturity date of the Commitment through January 3,
1996, Borrower shall pay to Lender a non-refundable extension fee
in the amount of Two Hundred Thirty-Four Thousand Nine Hundred
Ninty-Three Dollars and 50/100 ($234,993.50), being equal to one
and three-fourths percent (1 3/4%) of the Commitment on the date
of this Amendment, which fee shall be fully earned as of such
date. Such fee shall be payable as follows: (a) Sixty-Seven
Thousand One Hundred Forty-One Dollars ($67,141) shall be payable
on the date of this Amendment, (b) an additional Sixty-Seven
Thousand One Hundred Forty-One dollars ($67,141) shall be payable
on June 30, 1995, (c) an additional Fifty Thousand Three Hundred
Fifty-Five and 75/100 Dollars ($50,355.75) shall be payable on
September 30, 1995, and (d) an additional Fifty Thousand Three
Hundred Fifty-Five and 75/100 Dollars ($50,355.75) shall be pay-
able on December 31, 1995. Notwithstanding the foregoing, if
Borrower repays the Obligations in full on or prior to Decem-
ber 31, 1995 payment of the balance of such fee payable on or
subsequent to such prepayment date shall be waived.
9. Restatement of Representations and Warranties. Borrower
hereby restates and renews each and every representation and war-
ranty heretofore made by it under, or in connection with, the ex-
ecution and delivery of, the Credit Agreement and the other Loan
Documents.
10. Effect of Amendment. Except as set forth expressly
herein, all terms of the Credit Agreement, as amended hereby, and
the other Loan Documents, shall be and remain in full force and
effect and shall constitute the legal, valid, binding and enforce-
able obligations of Borrower to Lender. To the extent any terms
and conditions in any of the Loan Documents shall contradict or be
in conflict with any terms or conditions of the Credit Agreement,
after giving effect to this Amendment, such terms and conditions
are hereby deemed modified and amended accordingly to reflect the
terms and conditions of the Credit Agreement as modified and
amended hereby.
11. Ratification. Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the
Credit Agreement, as amended hereby, and the Loan Documents effec-
tive as of the date hereof.
12. Estoppel. To induce Lender to enter into this Amendment
and to continue to make advances to Borrower under the Credit
Agreement, Borrower hereby acknowledges and agrees that, as of the
date hereof, there exists no right of offset, defense, counter-
claim or objection in favor of Borrower as against Lender with
respect to the Obligations.
13. Governinq Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of Ohio and
all applicable federal laws of the United States of America.
14. Costs and ExPenses. Borrower agrees to pay on demand
all costs and expenses of Lender in connection with the prepara-
tion, execution, delivery and enforcement of this Amendment and
all other Loan Documents executed in connection herewith, the
closing hereof, and any other transactions contemplated hereby,
including the fees and out-of-pocket expenses of Lender's counsel.
In the event of Borrower's failure to pay such fees on demand,
Lender may make a Revolving Loan for Borrower's account in the
amount of such fees and use the proceeds thereof to pay such fees.
IN WITNESS WHEREOF, the parties hereto have cause this Amend-
ment to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
HICKORY WHITE COMPANY
By: /s/ Michael Robinson
Name: Michael Robinson
Title: Vice President / CFO
Attest: /s/ Randy Austin
Name: Randy Austin
Title: President
[CORPORATE SEAL]
CITICORP NORTH AMERICA, INC.
By: /s/ John Podkowsky
Name: John Podkowsky
Title: Vice President
ACKNOWLEDGMENT OF HICKORY FURNITURE COMPANY
The undersigned, being a guarantor of the "Obligations" under
the Credit Agreement, dated as of June 15, 1990, between Hickory
White Company ("Borrower") and Citicorp North America, Inc.
("Lender"), as amended, acknowledges receipt of a copy of the
within and foregoing Fifth Amendment to Credit Agreement dated as
of even date herewith ("Fifth Amendment"), between Borrower and
Lender, and, in connection therewith, the undersigned further (a)
acknowledges and consents to the execution and delivery of said
Fifth Amendment by Borrower, (b) agrees to be bound by the terms
thereof and (c) agrees that its guarantee of the Obligations shall
continue in full force and effect, without discharge, release,
diminution or impairment, notwithstanding the execution, delivery
and performance of the Fifth Amendment.
IN WITNESS WHEREOF, the undersigned has caused this Acknowl-
edgment to be executed by an officer thereunto duly authorized as
of the 21st day of December, 1994.
HICKORY FURNITURE COMPANY
By: /s/ Gerald M. Tierney, Jr.
Name: Gerald M. Tierney, Jr.
Title: Vice President
ACRNOWLEDGMENT OF ACTON CORPORATION
The undersigned, having pledged all of the stock of Hickory
White Company ("Borrower") to Citicorp North America, Inc.
("Lender"), as security for the "Obligations" of Borrower to
Lender under the Credit Agreement, dated as of June 15, 1990, be-
tween Borrower and Lender (as amended, the "Credit Agreement"),
acknowledges receipt of a copy of the within and foregoing Fifth
Amendment to Credit Agreement ("Fifth Amendment"), between Bor-
rower and Lender, and, in connection therewith, the undersigned
further (a) acknowledges and consents to the execution and deliv-
ery of said Fifth Amendment by Borrower, (b) agrees to be bound by
the terms thereof and (c) agrees that its aforesaid pledge shall
continue in full force and effect, without discharge, release,
diminution or impairment, notwithstanding the execution, delivery
and performance of the Fifth Amendment.
IN WITNESS WHEREOF, the undersigned has caused this Acknowl-
edgment to be executed by an officer thereunto duly authorized as
of the 21st day of December, 1994.
SUNSTATES CORPORATION,
f/k/a Acton Corporation
By /s/ Glenn J. Kennedy
Name: Glenn J. Kennedy
Title: Vice President and Treasurer
ACKNOWLEDGMENT OF SUBORDINATORS
Each of the undersigned hereby acknowlodges receipt of a copy
of the within and foregoing Fifth Amendment to Credit Agreement,
dated as of even date herewith, between Hickory White Company
("Borrower") and Citicorp North America, Inc. (the "Fifth Amend-
ment"), and, in connection therewith, each of the undersigned fur-
ther (a) acknowledges and consents to the execution and delivery
of the Fifth Amendment by Borrower, (b) agrees to be bound by the
terms thereof and (c) agrees that the terms of subordination set
forth in the "Subordinated Loan Agreement" (as that term is de-
fined in the "Credit Agreement" referenced in the Fifth amend-
ment), shall continue in full force and effect, without discharge,
release, diminution or impairment, notwithstanding the execution,
delivery and performance of the Fifth Amendment.
IN WITNESS WHEREOF, each of the undersigned has caused this
Acknowledgment to be executed by its officer thereunto duly autho-
rized, as of the 21st day of December, 1994.
NORMANDY INSURANCE AGENCY, INC.
By:
Name:
Title:
SUNSTATES FINANCIAL SERVICES, INC.
By: /s/ Glenn J. Kennedy
Name: Glenn J. Kennedy
Title E.V.P
SUNSTATES EQUITIES, INC.
By: /s/ Glenn J. Kennedy
Name: Glenn J. Kennedy
Title: E.V.P.
ACKNOWLEDGMENT OF SUBORDINATORS
Each of the undersigned hereby acknowledges receipt of a copy
of the within and foregoing Fifth Amendment to Credit Agreement,
dated as of even date herewith, between Hickory White Company
("Borrower") and Citicorp North America, Inc. (the "Fifth Amend-
ment"), and, in connection therewith, each of the undersigned fur-
ther (a) acknowledges and consents to the execution and delivery
of the Fifth Amendment by Borrower, (b) agrees to be bound by the
terms thereof and (c) agrees that the terms of subordination set
forth in the "Subordinated Loan Agreement" (as that term is de-
fined in the "Credit Agreement" referenced in the Fifth Amend-
ment), shall continue in full force and effect, without discharge,
release, diminution or impairment, notwithstanding the execution,
delivery and performance of the Fifth Amendment.
IN WITNESS WHEREOF, each of the undersigned has caused this
Acknowledgment to be executed by its officer thereunto duly autho-
rized, as of the 21st day of December, 1994.
NORMANDY INSURANCE/AGENCY, INC.
By: /s/ Mark C. Riess
Name: Mark C. Riess
Title: Treasurer
SUNSTATES FINANCIAL SERVICES, INC.
By:
Name:
Title:
SUNSTATES EQUITIES, INC.
By:
Name:
Title:
SCHEDULE I
SECTION 7.2.4. Financial Condition. The Borrower will not
permit:
(a) the sum of (i) its consolidated earnings before in-
come taxes and any interest expense, plus (ii) depreciation
expense, plus (iii) Consolidated Contributions (whether or
not reflected on Borrower's income statement for the ap-
plicable period), Plus (iv) amortization of any Purchase Ac-
counting Adjustment, Plus (v) any cash interest income, plus
(vi) any increase in LIFO reserves, minus (vii) any decrease
in LIFO reserves, Plus (viii) any increase in accrued de-
ferred compensation, less (ix) any decrease in accrued de-
ferred compensation, plus (x) any increase in the accrued
equity plan, minus (xi) any decrease in the accrued equity
plan, plus (xii) amortization of all legal fees and bank fees
and charges incurred in connection with the consummation of
this financing transaction and the Acquisition minus (xiii)
charges to the consolidation reserve established specifically
for the closing of the White Plant in Mebane, North Carolina
(the "Consolidation Reserve") for each of the fiscal periods
set forth below, to be less than (or, if negative, to exceed)
the amount set opposite each such period below:
<TABLE>
Fiscal Month Ended Amount
<S> <C> <C>
One month ending January 31, 1995 $ 197,100
Two months ending February 28, 1995 $ 449,100
Three months ending March 31, 1995 $ 738,000
Four months ending April 30, 1995 $ 743,400
Five months ending May 31, 1995 $ 891,000
Six months ending June 30, 1995 $ 1,251,900
Seven months ending July 31, 1995 $ 1,333,800
Eight months ending August 31, 1995 $ 1,611,900
Nine months ending September 30, 1995 $ 1,802,700
Ten months ending October 31, 1995 $ 2,211,300
Eleven months ending November 30, 1995 $ 2,379,600
Twelve months ending December 31, 1995 $ 2,612,700
</TABLE>
(b) its Consolidated Fixed Charge Coverage Ratio during
each of the periods set forth below to be less than the
ratio (or more than the negative ratio, if negative) set op-
posite each such period below:
<TABLE>
Period Ratio
<S> <C> <C>
One month ending January 31, 1995 .65:1
Two months ending February 28, 1995 .79:1
Three months ending March 31, 1995 .89:1
Four months ending April 30, 1995 .64:1
Five months ending May 31, 1995 .63:1
Six months ending June 30 1995 .76:1
Seven months ending July 31, 1995 .73:1
Eight months ending August 31, 1995 .81:1
Nine months ending September 30, 1995 .84:1
Ten months ending October 31, 1995 .95:1
Eleven months ending November 30, 1995 .97:1
Twelve months ending December 31, 1995 1.0:1
</TABLE>
(c) its Consolidated Tangible Net Worth (inclusive of the
unused balance of the Consolidation Reserve) as of Decem-
ber 31, 1995 shall be not less than $15,000,000.
In connection with the foregoing, Borrower and Lender hereby
agree that in the event of Borrower's noncompliance with any of
the financial covenants set forth above the Borrower shall have
forty-five (45) days after the last day of the period as to which
such noncompliance occurred, with respect to the financial cov-
enants set forth in clauses (a) and (b) above, and forty-five (45)
days after the date as of which such noncompliance occurred, with
respect to the financial covenants set forth in clause (c) above,
to cure such noncompliance either by obtaining additional subordi-
nated loans from Normandy pursuant to the Subordinated Loan Agree-
ment in form and substance satisfactory to Lender or by obtaining
capital contributions from Acton, in each instance in an amount
equal to the amount of dollars which, on the last day of the pe-
riod as to which such noncompliance occurred, in the case of the
financial covenants set forth in clauses (a) and (b) above, or on
the date as of which such noncompliance occurred, in the case of
the financial covenants set forth in clause (c) above, would have
been required to cure such noncompliance on such date (such loans
or capital contributions, hereinafter individually a "Curing Con-
tribution" and collectively, the "Curing Contributions"); pro-
vided, however, that any such noncompliance which is not so cured
on or prior to the last day of such forty-five (45) day period
shall become an Event of Default on such date. In connection
with the foregoing, Lender hereby further agrees that if any cure
period described hereinabove ends on a day other than a Business
Day, Borrower shall have until the next succeeding Business Day to
effect such cure.
<TABLE>
Item 14(c)
EXHIBIT (11) Page 1 of 2
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(11.1) Primary
<CAPTION> For the Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C> <C>
Shares used in calculations:
Weighted average Common Shares outstanding 902,589 1,048,869 1,213,830
Weighted average Class B Shares outstanding ** 1,661,995 1,475,093 1,274,636
--------- --------- ---------
Adjusted weighted average shares outstanding 2,564,584 2,523,962 2,488,466
========= ========= =========
Net income (loss) $ (7,572,842) 41,368,715 (19,678,451)
Preferred Stock dividends (1,125,686) (1,397,141) (1,476,176)
--------- ---------- ----------
Adjusted net income (loss) $ (8,698,528) 39,971,574 (21,154,627)
========= ========== ==========
Primary net income (loss) per share and common share equivalent
(adjusted net income (loss) divided by adjusted weighted
average common and equivalent shares outstanding) $ (3.39) 15.84 (8.50)
==== ===== ====
** Class B Shares converted at 21.125 to 1 conversion rate(17.875 to 1
in 1993 and 15.4375 to 1 in 1992)
</TABLE>
<TABLE>
Item 14(c)
EXHIBIT (11) Page 2 of 2
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(11.2) Fully diluted
<CAPTION> For the Years Ended December 31,
1994 1993 1992
<S> <C> <S> <C> <C> <C>
Shares used in calculations:
Weighted average Common Shares outstanding 902,589 1,048,869 1,213,830
Weighted average Class B Shares outstanding ** 1,661,995 2,011,490 1,274,636
--------- --------- ---------
Adjusted weighted average common and equivalent shares outstanding 2,564,584 3,060,359 2,488,466
========= ========= =========
Net income (loss) $ (7,572,842) 41,368,715 (19,678,451)
Preferred Stock dividends (1,125,686) (1,397,141) (1,476,176)
--------- ---------- ----------
Adjusted net income (loss) $ (8,698,528) 39,971,574 (21,154,627)
========= ========== ==========
Fully diluted net income (loss) per share (adjusted net income (loss)
divided by adjusted weighted average common and equivalent shares
outstanding) $ (3.39) 13.06 (8.50)
==== ===== ====
** 24.375 conversion rate (21.125 to 1 in 1994 and 15.4375 to 1 in
1992) due to anti-dilutive effect in those years.
</TABLE>
EXHIBIT 18
March 30, 1995
Mr. Glenn Kennedy, Vice President
Treasurer and Chief Financial Officer
Sunstates Corporation
4600 Marriott Drive
Raleigh, North Carolina 27612
Dear Mr. Kennedy:
As stated in Note 2 to the consolidated financial statements of Sunstates
Corporation and Subsidiaries for the year ended December 31, 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 and states that the newly adopted
accounting principle is preferable in the circumstances 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. In connection with our
audit of the above mentioned financial statements, we have evaluated the
circumstances and the business judgment and planning which formulated
your basis to make the change in accounting principle.
It should be understood that criteria have not been established by the
Financial Accounting Standards Board for selecting from among the
alternative accounting principles that exist in this area. Further, the
American Institute of Certified Public Accountants has not established
the standards by which an auditor can evaluate the preferability of one
accounting principle among a series of alternatives. However, for
purposes of the Company's compliance with the requirements of the
Securities and Exchange Commission, we are furnishing this letter.
Based on our audit, we concur in management's judgment that the newly
adopted accounting principle described in Note 2 is preferable in the
circumstances. In formulating this position, we are relying on
management's business planning and judgment, which we do not find to be
unreasonable.
Very truly yours,
BDO SEIDMAN
Greensboro, North Carolina
Item 14(c)
EXHIBIT 21
Sunstates Corporation
Subsidiaries of the Company
December 31, 1994
The following is a listing of the major subsidiaries of the
Company, all of which are included in the Consolidated Financial
Statements of the Company at December 31, 1994:
SUBSIDIARY STATE OF INCORPORATION
Hickory White Company North Carolina
Sunstates Realty Group, Inc. Florida
National Development Company, Inc. Texas
Normandy Insurance Agency, Inc. Illinois
Subsidiaries of Normandy:
Coronet Insurance Company Illinois
Subsidiaries of Coronet Insurance Company:
Sunstates Equities, Inc. Florida
Pensacola Holding Corp. Florida
Sunstates Financial Services Florida
Casualty Insurance Company of Florida Florida
National Assurance Indemnity Company Illinois
Subsidiaries of National Assurance Indemnity Company:
Crown Casualty Company Illinois
Sew Simple Systems, Inc. South Carolina
Coronet Financial Group Florida
Subsidiaries of Coronet Financial Group:
The Springs, Inc. Wisconsin
Wellco Enterprises, Inc. North Carolina
Alba-Waldensian, Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLDIDATED FINANCIAL STATEMENTS OF SUNSTATES CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 5,778,701
<SECURITIES> 78,905,903
<RECEIVABLES> 32,003,873
<ALLOWANCES> 1,304,047
<INVENTORY> 42,908,931
<CURRENT-ASSETS> 0
<PP&E> 72,190,906
<DEPRECIATION> 41,084,496
<TOTAL-ASSETS> 246,575,255
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 265,672
0
7,256,275
<OTHER-SE> 24,719,062
<TOTAL-LIABILITY-AND-EQUITY> 246,575,255
<SALES> 194,500,274
<TOTAL-REVENUES> 209,153,913
<CGS> 150,080,654
<TOTAL-COSTS> 209,153,475
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,945,271
<INCOME-PRETAX> (3,944,833)
<INCOME-TAX> (2,039,074)
<INCOME-CONTINUING> (7,572,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,572,842)
<EPS-PRIMARY> (3.39)
<EPS-DILUTED> (3.39)
</TABLE>
