UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period ended SEPTEMBER 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-5300
SUNSTATES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-1664434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 MARRIOTT DRIVE, SUITE 200, RALEIGH, NORTH CAROLINA 27612
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919) 781-5611
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 6, 1995
Common Stock, $.33 1/3 Par Value 731,166 shares
Class B Accumulating Convertible
Stock, $.10 Par Value 69,587 shares
TABLE OF CONTENTS
Sunstates Corporation
Form 10-Q Quarterly Report
For the Quarter Ended September 30, 1995
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1995 and December 31, 1994
Consolidated Statements of Operations - For the Three Months
Ended September 30, 1995 and 1994
Consolidated Statements of Operations - For the Nine Months Ended
September 30, 1995 and 1994
Consolidated Statements of Stockholders' Equity - For the Nine Months
Ended September 30, 1995 and 1994
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1995 and 1994
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
(Unaudited)
ASSETS
REAL ESTATE:
Property, plant and equipment $ 33,455,936 31,106,410
Real estate held for
development and sale 28,277,907 28,978,498
Mortgage loans 4,147,211 5,308,939
Land contracts receivable 4,386,982 5,116,720
70,268,036 70,510,567
INVESTMENTS IN SECURITIES:
Short-term investments 5,038,751 14,042,345
Fixed maturities 5,798,977 39,314,135
Equity securities 16,316,509 20,790,717
Investments in affiliates 2,471,869 4,758,706
29,626,106 78,905,903
OPERATING ASSETS:
Cash 353,676 234,875
Restricted cash 3,931,357 5,543,826
Accounts receivable 24,037,659 21,554,292
Premiums receivable 29,617,421 9,145,534
Inventories 44,580,898 42,908,931
Policy acquisition costs 2,747,834 1,097,995
Prepaid expenses 1,595,286 1,295,504
106,864,131 81,780,957
OTHER ASSETS:
Receivable from affiliates 4,662,801 3,234,752
Other assets 9,130,521 5,948,166
Cost in excess of assets acquired 11,412,021 6,194,910
25,205,343 15,377,828
$ 231,963,616 246,575,255
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
DEBT:
Notes payable $ 32,587,515 52,676,514
Mortgage notes 14,314,361 16,111,437
46,901,876 68,787,951
OTHER LIABILITIES:
Insurance reserves 60,462,295 62,681,402
Unearned premiums 45,797,230 18,493,925
Accounts payable 9,199,248 9,793,336
Accrued expenses 13,867,914 18,647,366
Other liabilities 16,439,275 14,037,545
145,765,962 123,653,574
TOTAL LIABILITIES 192,667,838 192,441,525
MINORITY INTERESTS IN SUBSIDIARIES 21,350,836 21,892,721
STOCKHOLDERS' EQUITY:
Preferred Stocks 6,891,375 7,256,275
Common Stock, 731,166 and 797,016
shares outstanding, respectively 243,722 265,672
Class B Accumulating Convertible Stock,
69,587 and 73,581 shares issued and
outstanding, respectively 6,959 7,358
Capital in excess of par value 36,745,631 37,605,196
Accumulated deficit (31,352,963) (16,920,900)
Unrealized gains on marketable
equity securities 5,410,218 4,027,408
TOTAL STOCKHOLDERS' EQUITY 17,944,942 32,241,009
$ 231,963,616 246,575,255
See Accompanying Notes.
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
SEPTEMBER 30,
1995 1994
REVENUES:
Insurance premiums earned $ 22,951,545 11,600,673
Manufacturing sales 33,972,696 32,676,917
Real estate sales 955,997 1,485,432
Investment income 8,249,924 1,184,055
Equity in earnings of affiliates 229,000 305,000
Other income 3,517,457 2,665,484
Total revenues 69,876,619 49,917,561
COSTS AND EXPENSES:
Insurance loss and loss
adjustment expenses 20,684,254 8,269,831
Cost of manufacturing sales 29,464,924 25,419,721
Cost of real estate sales 848,547 699,388
Selling and operating costs 17,874,520 13,047,546
Corporate expenses 513,905 694,917
Furniture writedowns 5,450,000 --
Interest expense 1,739,404 1,004,948
Total costs and expenses 76,575,554 49,136,351
INCOME (LOSS) FROM BEFORE ITEMS SHOWN BELOW (6,698,935) 781,210
(Provision) benefit for income taxes 468,513 (632,845)
Minority interest in (income) loss
of subsidiaries 338,371 (463,794)
NET LOSS $ (5,892,051) $ (315,429)
EARNINGS PER SHARE INFORMATION:
Net Loss Applicable
to Common Stock $ (6,159,789) $(610,543)
Net Loss per Common Share $(2.50) (.25)
See Accompanying Notes
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended
SEPTEMBER 30,
1995 1994
REVENUES:
Insurance premiums earned $ 54,556,234 34,139,467
Manufacturing sales 98,739,585 96,723,748
Real estate sales 1,723,503 14,055,795
Investment income 11,576,819 4,660,800
Equity in earnings of affiliates 718,000 538,000
Other income 8,126,601 7,209,039
Total revenues 175,440,742 157,326,849
COSTS AND EXPENSES:
Insurance loss and loss
adjustment expenses 46,787,224 27,885,727
Cost of manufacturing sales 80,541,135 75,340,568
Cost of real estate sales 1,241,510 9,746,028
Selling and operating costs 49,695,739 38,584,337
Corporate expenses 1,640,928 2,288,066
Furniture writedowns 5,450,000 --
Interest expense 4,933,828 2,920,531
Total costs and expenses 190,290,364 156,765,257
INCOME (LOSS) BEFORE ITEMS SHOWN BELOW (14,849,622) 561,592
(Provision) benefit for income taxes 207,871 (1,678,604)
Minority interest in (income) loss
of subsidiaries 209,688 (1,387,192)
NET LOSS $(14,432,063) $ (2,504,204)
EARNINGS PER SHARE INFORMATION:
Net Loss Applicable to Common Stock $(15,235,276) $ (3,389,545)
Net Loss per Common Share $(6.14) (1.29)
See Accompanying Notes
<PAGE>
SUNSTATES CORPORATION
Consolidated Statement of Stockholders' Equity
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
$3.75 Class B Capital Unrealized Total
Cumulative Class E Accumulating in Gains Stock-holders'
Preferred Preferred Common Convertible Excess of Accumulated (Losses) on EQUITY
STOCK STOCK STOCK STOCK PAR VALUE DEFICIT SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1994, AS
PREVIOUSLY REPORTED $9,008,675 57,300 344,524 8,233 34,956,541 (10,452,194) 5,139,556 39,062,635
Cumulative effect on prior
years of change in method of
inventory valuation 6,245,669 1,104,136 7,349,805
BALANCES, JANUARY 1, 1994, AS
ADJUSTED 9,008,675 57,300 344,524 8,233 41,202,210 (9,348,058) 5,139,556 46,412,440
Net income (2,504,204) (2,504,204)
Conversion of Class B Stock 943 (13) (930)
Adjustment of shares issued
pursuant to merger (1,725) 786 (939)
Purchase of treasury stock (1,442,850) (63,032) (861) (3,136,072) (4,642,815)
Unrealized gains (losses) on
securities (1,136,487) (1,136,487)
Excess of fair market value
paid over seller's historical
cost basis of automobile (109,404) (109,404)
BALANCES, SEPTEMBER 30, 1994 $7,564,100 57,300 282,435 7,359 37,956,590 (11,852,262) 4,003,069 38,018,591
BALANCES, JANUARY 1, 1995 $7,198,975 57,300 265,672 7,358 37,605,196 (16,920,900) 4,027,408 32,241,009
Net loss (14,432,063) (14,432,063)
Conversion of Class B Stock 1,251 (15) (1,236)
Adjustment to shares issued (2) (108) (110)
pursuant to merger
Purchase of treasury stock (364,900) (23,199) (384) (858,221) (1,246,704)
Unrealized gains on
securities 1,382,810 1,382,810
BALANCES, SEPTEMBER 30, 1995 $6,834,075 57,300 243,722 6,959 36,745,631 (31,352,963) 5,410,218 17,944,942
</TABLE>
<PAGE>
SUNSTATES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
OPERATING ACTIVITIES:
Net loss $(14,432,063) (2,504,204)
Adjustments to reconcile net loss
to net cash utilized in operating
activities:
Depreciation and amortization 4,597,587 4,020,064
Adjustments to interest yields (210,425) (67,889)
Gains from sale of property, plant
and equipment 126,184 (14,000)
Realized gains on investments (9,701,924) (3,228,588)
Reserves and writedowns 7,973,933 1,662,283
Loss on investment in real estate
partnerships 37,595 162,057
Equity in undistributed income (770,512) (606,775)
Addition to (reduction in) minority
interest (209,688) 1,387,192
Changes in assets and liabilities:
Real estate held for development
and sale 703,648 8,022,491
Inventories (2,095,401) (4,114,227)
Mortgage loans on real estate
and land contracts receivable 1,768,958 (744,593)
Mortgage notes payable on real
estate held (1,450,483) (7,130,005)
Insurance reserves and
unearned premiums 25,084,198 (17,879,360)
Operating assets and other
liabilities (23,747,761) (4,340,374)
Total adjustments 2,105,909 (22,871,724)
NET CASH UTILIZED IN OPERATING ACTIVITIES (12,326,154) (25,375,928)
INVESTING ACTIVITIES:
Investments in securities sold
or matured 70,872,569 64,021,121
Investments in affiliates sold 9,286,685 647,697
Investments in securities purchased (52,889,729) (23,165,543)
Investment in affiliates purchased (462,377) (622,162)
Other investments (1,291,240) (1,740,051)
Loans to affiliates (68,901) (300,000)
Purchases of property plant
and equipment (3,132,738) (3,685,482)
Acquisition of Balfour (15,312,436) 14,000
Repayments of mortgage loans 257,772 1,136,291
NET CASH PROVIDED BY
INVESTING ACTIVITIES 7,259,605 36,305,871
FINANCING ACTIVITIES:
Issuance of notes payable 15,106,491 9,511,664
Repayments of notes and mortgage
notes payable (10,241,470) (16,793,272)
Dividends of majority owned
subsidiaries (45,326) (46,151)
Purchase of Company stock (1,246,814) (4,643,754)
NET CASH PROVIDED BY (UTILIZED IN)
FINANCING ACTIVITIES 3,572,881 (11,971,513)
DECREASE IN CASH (1,493,668) (1,041,570)
Cash, beginning of period 5,778,701 9,579,236
Cash, end of period 4,285,033 8,537,666
Less: restricted cash (3,931,357) (8,297,050)
Unrestricted cash $ 353,676 240,616
See Accompanying Notes
<PAGE>
SUNSTATES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements are unaudited and do
not include certain information and note disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included, which consist solely of adjustments of a
normal recurring nature. These statements should be read in conjunction with
the financial statements, and notes thereto, included in the Form 10-K of
Sunstates Corporation for the year ended December 31, 1994. The results of
operations for the nine months ended September 30, 1995, are not necessarily
indicative of the results that may be expected for the full fiscal year.
2. ACQUISITION OF BALFOUR HEALTH CARE
On March 6, 1995, the Company's textile apparel manufacturing subsidiary
(Alba) purchased the Balfour Health Care Division (Balfour) and manufacturing
facility in Rockwood, Tennessee from Kayser-Roth Corporation. Alba financed
100% of the acquisition cost under a variable rate term loan agreement (see
Note 4). The following table presents the Company's investment as allocated
utilizing the purchase method of accounting (subject to possible further
adjustments) to the individual assets and liabilities of Balfour as of March
6, 1995:
Accounts receivable $ 1,956,279
Property, plant and equipment 2,730,830
Inventory 1,523,111
Liabilities assumed (316,928)
Fair value of net assets acquired 5,893,291
Cash price paid 15,312,436
Cost in excess of assets acquired (goodwill) $ 9,419,145
The cost in excess of assets acquired ($9,419,145) will be amortized on a
straight-line basis over 15 years. The results of Balfour are included in the
accompanying financial statements since the date of acquisition.
The following unaudited pro forma financial information presents the
information as if the acquisition has occurred at the beginning of 1995 and
1994, after giving effect to certain adjustments, including amortization of
goodwill and interest expense from debt issued to fund the acquisition and
related income tax effects and minority interests. The total interest expense
included in this pro forma is $934,600 and $647,800 in the nine months of 1995
and 1994, respectively. Goodwill is amortized at $156,986 per quarter. This
pro forma is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations.
Quarter Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Total Revenues $ 69,876,619 53,530,527 178,095,778 168,246,871
Net Income (5,892,051) (242,632) (14,402,208) (2,342,659)
Net Income Per Share $(2.50) (0.22) (6.13) (1.23)
3. INVENTORIES
The principal classifications of inventories were:
September 30, December 31,
1995 1994
Furniture manufacturing -
Materials and supplies $ 3,065,979 2,807,511
Work in progress 6,986,407 6,535,222
Finished goods 12,400,641 12,041,195
22,453,027 21,383,928
Textile apparel manufacturing -
Materials and supplies 3,866,682 3,296,755
Work in progress 5,570,235 5,803,012
Finished goods 7,396,875 8,164,413
16,833,792 17,264,180
Bootwear manufacturing -
Materials and supplies 1,253,666 882,022
Work in progress 1,587,792 1,501,282
Finished goods 1,073,886 542,876
3,915,344 2,926,180
Textile equipment manufacturing 856,783 883,086
Resort development 212,317 164,036
Other 309,635 287,521
$44,580,898 42,908,931
During 1994, the Company changed its method of inventory valuation for
its furniture manufacturing inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method because the FIFO method of
reporting inventories and cost of sales represents a preferable method. The
change is reported in the accompanying financial statements by restating all
prior years to reflect the new method of accounting. The change is
preferable, in part, because under the current economic environment of low
inflation, the Company believes that the FIFO method will result in a better
measurement of operating results. Also, as a result of the recent operating
losses and demands upon its liquidity, the Company believes its financial
position is the primary concern of the readers of its financial statements and
that the accounting change will reflect inventories in the balance sheet at a
value that more closely represents current costs.
Restatement of operating results due to the change decreased cost of
manufacturing sales and the net loss by $593,600 ($.23 per primary and fully
diluted share) in the nine months ended September 30, 1994. The cumulative
effect of the change of $7,349,805 represents the reversal of the LIFO reserve
as of January 1, 1994. Of this amount, $6,245,669 represented the LIFO
reserve originally recorded in connection with the acquisition of the
furniture assets from the Company's controlling shareholder in June of 1990.
The original accounting for this acquisition resulted in a charge to paid in
capital to reflect the excess of the purchase price paid over the seller's
historical cost basis of the assets acquired. Accordingly, $6,245,669 has
been reflected in the accompanying financial statements as a retroactive
adjustment to paid in capital. The remaining balance of $1,104,136 has been
reported as an adjustment to the accumulated deficit as of January 1, 1994.
The aggregate effect of the change was to increase stockholders' equity by
$7,943,405 as of September 30, 1994.
4. DEBT
On March 6, 1995, the Company's textile apparel manufacturing subsidiary
entered into a $15,000,000 variable rate term loan, the proceeds from which
were used to acquire Balfour (see Note 2). Interest on this loan accrues at
the rate of LIBOR plus 2% with principal payments to be made quarterly
beginning June 30, 1995, and maturing on March 31, 2000. The note is
collateralized by all of the assets of the textile apparel manufacturing
subsidiary and contains various covenants covering minimum tangible net worth,
cash flow, leverage ratios, capital spending and the payment of dividends.
Notes payable include $11,966,686 due to Citibank and secured by
substantially all of the assets of the Company's furniture manufacturing
operations. The loan has been extended through January 3, 1996, to allow the
Company additional time to obtain refinancing. However, the Company cannot
state with certainty that it will be able to find alternative financing at
terms acceptable to the Company prior to the extended maturity date of the
loan.
At September 30, 1995, mortgage notes include $4,813,037 of loans on real
estate which have or will mature in 1995. One of these loans in the amount of
$1,382,749 is in the process of being foreclosed and will result in no loss to
the Company. Sunstates is continuing to search for satisfactory alternative
financing for the remaining properties. However, the availability of real
estate financing has been severely curtailed as the result of problems in both
the banking and real estate industries. Accordingly, Sunstates cannot state
with certainty that it will be successful in obtaining such refinancing.
5. INCOME TAXES
The provision for income taxes include the following (amounts in
thousands):
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
Current
- Federal $ -- 113
- State 211 191
211 304
Provision (benefit) by
majority-owned subsidiaries (419) 1,375
Total provision (benefit) $(208) 1,679
The provisions for federal income taxes differ from the amounts computed by
multiplying income before income taxes and minority interest by the statutory
federal rates as follows (amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
Tax computed at statutory rate $ (5,049) (11)
State taxes, net of federal benefit 110 246
Tax exempt income and dividend exclusion (148) (1,033)
Puerto Rican income not subject to Puerto
Rican or federal tax (124) (247)
Effect of purchase accounting adjustments 842 (331)
Effect of losses not utilized
in the provision 4,154 2,825
Alternative minimum tax -- 113
Other 7 117
Total $ (208) 1,679
6. EARNINGS PER SHARE
Primary per share amounts are computed based upon the weighted average
number of common equivalent shares outstanding. Common equivalent shares
consist of common stock, the assumed conversion of the Class B stock at its
current conversion ratio, and any dilutive effect of other convertible
securities deemed to be common stock equivalents. Fully diluted per share
amounts are computed by including the assumed conversion of the Class B stock
at its maximum conversion ratio plus any other convertible securities which
would have a dilutive effect. Fully diluted per share amounts are not
reported if their impact would be to increase income per share or reduce the
reported loss per share.
As of January 1, 1995, the Class B stock has reached its maximum
conversion ratio and therefore is no longer a dilutive security. In addition,
there are no longer any options or warrants outstanding. Accordingly, as of
January 1, 1995, the Company no longer presents its per share amounts on both
a primary and fully diluted basis.
Reported per share amounts for the nine months ended September 30, 1995
and 1994 have been computed based on weighted average common equivalent shares
of 2,480,367 and 2,629,506, respectively. Fully diluted per share amounts for
1994 are not presented since the effect of full dilution would be to reduce
the reported net loss per share. Net income applicable to common stock
reflects the dividend requirements applicable to the Company's preferred
stocks totaling $803,213 and $885,341 for the nine months ended September 30,
1995, and 1994, respectively.
7. LITIGATION AND CONTINGENCIES
On June 14, 1991, a jury in a District Court of Dallas County, Texas
awarded $3.5 million in actual damages and $5 million in punitive damages to
the plaintiffs of a lawsuit filed against the Company. This dispute related
to the amount of additional purchase consideration due plaintiffs under an
agreement made in 1983 whereby the Company purchased National Development
Company, a real estate company based in Dallas. The Company appealed the
verdict based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. On August 9, 1995, the Court of Appeals Fifth District
of Texas at Dallas reversed the trial court's judgement and remanded the case
back to the trial court for a new trial. Subsequently, the Court of Appeals
denied the plaintiffs' motion for rehearing and the plaintiffs have filed an
application for Writ of Error with the Supreme Court of Texas. The Company
will file its response during November 1995. No date for a new trial has yet
been set.
INSURANCE MATTERS
During the previous three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of the
discontinuation of certain general liability reinsurance programs and several
unprofitable direct automotive insurance programs combined with the effect of
price increases having been implemented in other markets which were producing
unsatisfactory results. The combination of the above resulted in the written
premium volume declining to approximately $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in premium volume
stabilized during the early part of 1994 and began to increase during the last
half of the year as new programs already established and other planned actions
to increase volume started to become effective. Premiums written for the
first three quarters of 1995 totaled $20,480,000, $28,776,000 and 32,603,000,
respectively, as compared to $11,506,000, $11,506,000 and $12,023,000 in
respective quarters of 1994.
The short-term impact of the drop in written volume was that the Company
experienced a period of negative cash flow from underwriting activities
resulting from relatively immediate declines in collected premiums while claim
payouts, relating primarily to previously written policies, continue at
disproportionately higher levels. The Company's negative cash flow from
underwriting has begun to decline as premium volume has stabilized and started
to increase. Negative cash flow from investment income and underwriting
activities of the insurance segment for the first nine months of 1995 was a
negative $6,669,607, $1,721,524 and $2,044,021 in the first three quarters of
1995 for a combined negative cash flow of $10,435,152; as compared to
$23,610,983 for the first nine months of 1994. The negative cash flow which
the Company has experienced over the past three years has resulted in
significant liquidations of the insurance subsidiary's investment portfolio.
At September 30, 1995, the insurance subsidiary's investments in equity and
fixed maturity securities (excluding investments in other segments of the
Company's businesses) totaled $17,865,153. The Company believes that required
liquidations of the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
The level of liquid assets, as defined by the National Association of
Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was
$59,431,739 at September 30, 1995, as compared to $90,109,196 at December 31,
1994. The decline is due to the liquidation of investments to cover negative
cash flow requirements. Included in NAIC-defined liquid assets are certain
securities with a reported value of $6,932,590 at September 30, 1995, which
are not publicly traded as well as approximately $8,333,000 of securities and
certificates of deposit which were on deposit pursuant to state laws and
various reinsurance agreements. In addition, $31,246,647 ($33,954,320 at
December 31, 1994) of investments in publicly traded equity securities of
other companies, valued at their quoted market prices on September 30, 1995,
do not meet the NAIC definition of liquid assets solely because of the level
of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of
Insurance to decrease Coronet's ratio of liabilities to liquid assets, as
defined by the NAIC, to 105% over a five year period. At June 30, 1995,
Coronet's liquidity ratio was 173.3%, as compared to the agreed upon ratio of
178.25% at June 30, 1995 (130% at December 31, 1995). The Illinois Department
of Insurance has issued a Corrective Order amending the terms of the original
agreement whereby Coronet may make no new investments in affiliates (including
other business segments of the Company) and the liquidity ratio calculation
may no longer include the effect of any type of borrowing, reverse repurchase
or lending of securities or any other similar type of leverage transaction.
At September 30, 1995, under the terms of the Corrective Order, Coronet's
ratio was 233.7%, as compared to the agreed upon ratio of 130% at December 31,
1995. Inasmuch as the consolidated ratio of Coronet and its wholly-owned
insurance subsidiaries is 186.3% at September 30, 1995, the Company thereby
has the ability to impact Coronet's separate ratio through various
restructurings or asset transfers. However, compliance will be dependent upon
numerous factors, including but not limited to; the 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. Accordingly, the Company cannot
state with certainty that it will be able to achieve the agreed upon ratio at
December 31, 1995.
On October 10, 1995, the Arizona Department of Insurance issued a
Suspension Order prohibiting Coronet from writing any further business in the
State. The Company immediately appealed the order and the Arizona courts
issued a stay of the Order and the Company is allowed to continue its
activities in Arizona unimpeded pending the outcome of an administrative
hearing before the Arizona Department of Insurance. The Company is currently
engaged in settlement discussions with the Arizona Department of Insurance and
believes that it will be allowed to continue to write business in the State.
Through September 30, 1995, Coronet's written premium in the State of Arizona
totaled $15,679,000.
The Illinois Department is currently conducting a financial examination
of Coronet as of December 31, 1993, although the examination has not been
completed, at this time no matters have been brought to the Company's
attention which would have a material adverse impact on the Company.
LIQUIDITY
As the result of negative cash flow from insurance underwriting,
operating losses in certain other segments of the Company's operations, and
maturing debt obligations, all discussed in more detail below, the Company
will be facing various demands upon its liquidity in 1995 and 1996. The
Illinois Department of Insurance has issued a Corrective Order specifying that
Coronet may make no new investments in or advances to affiliates (including
other business segments of the Company). Accordingly, Coronet's non-insurance
operations may be required to obtain necessary funds entirely from external
financing or disposition of assets. Although the Company believes that it can
meet such demands upon its liquidity through selective liquidations of
securities in its investment portfolio, sales or refinancings of various real
estate and other assets, coupled with the anticipated reversal of the
insurance subsidiary's negative cash flow from underwriting, it cannot predict
with certainty the outcomes of such matters.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT MATTERS
LITIGATION
See Note 7 of Notes to Consolidated Financial Statements for information
with respect to outstanding litigation.
CHANGE IN INVENTORY VALUATION
See Note 2 of Notes to Consolidated Financial Statements for information
with respect to the Company's change in the method of valuing its furniture
manufacturing inventories from last-in, first-out (LIFO) to first-in, first-
out (FIFO).
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As the result of negative cash flow from insurance underwriting,
operating losses in certain other segments of the Company's operations, and
maturing debt obligations, all discussed in more detail below, the Company
will be facing various demands upon its liquidity in 1995 and 1996. The
Illinois Department of Insurance has issued a Corrective Order specifying that
Coronet may make no new investments in or advances to affiliates (including
other business segments of the Company). Accordingly, Coronet's non-insurance
operations may be required to obtain necessary funds entirely from external
financing or disposition of assets. Although, the Company believes that it
can meet such demands through selective liquidations of securities in its
investment portfolio, sales or refinancing of various real estate and other
assets, coupled with the anticipated reversal of the insurance subsidiary's
negative cash flow from underwriting, it cannot predict with certainty the
outcomes of such matters.
Total assets decreased $14,611,639 during the nine months of 1995 as the
result of several factors. Assets increased significantly due to the Balfour
acquisition on March 6, 1995, (see Note 2 of Notes to Consolidated Financial
Statements), which is reflected in increases in property, plant and equipment,
accounts receivable, inventories and costs in excess of assets acquired.
Investments in securities decreased due to the disposition of a significant
investment in U. S. Government securities acquired under agreements to resell,
and by the sale of securities to cover negative cash flow from underwriting
(see Insurance below). The increase in premiums receivable and policy
acquisition costs is related to the increase in the written premium volume at
the Company's insurance subsidiary.
Total debt declined $21,886,075 during the first nine months of 1995,
primarily due to the settlement of approximately $25,343,000 of transactions
through which securities were acquired under agreements to resell, the
repayment of approximately $7,654,000 against the Company's $10,000,000
working capital loan from the proceeds received in connection with the sale of
a portion of the Company's investment in Rocky Mountain Chocolate Factory,
Inc. and the repayment of $2,050,000 by the military boot manufacturing
subsidiary. These declines were partially offset by $15,000,000 of borrowings
in connection with the Balfour acquisition. The increase in unearned premiums
is related to the increase in written premium volume experienced in the first
nine months of 1995. The decrease in accrued expenses is partially the result
of approximately $8,170,000 due to brokers in connection with securities
purchased at the end of December 1994. Approximately 79.6% of Sunstates' debt
of $46,901,876 at September 30, 1995, carries a floating rate of interest
which varies with the prime lending rate. Accordingly, any increase or
decrease in interest rates will have a significant impact on its debt service
requirements.
Stockholders' equity decreased $14,296,067 during the nine months of 1995
primarily due to the net loss of $14,432,063 and treasury stock purchases
totaling $1,246,704, both partially offset by increases in unrealized gains in
the Company's investment portfolio totaling $1,382,810.
INSURANCE
During the previous three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of the
discontinuation of certain general liability reinsurance programs and several
unprofitable direct automotive insurance programs combined with the effect of
price increases having been implemented in other markets which were producing
unsatisfactory results. The combination of the above resulted in the written
premium volume declining to approximately $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in premium volume
stabilized during the early part of 1994 and began to increase during the last
half of the year as new programs already established and other planned actions
to increase volume started to become effective. Premiums written for the
first three quarters of 1995 totaled $20,480,000, $28,776,000 and 32,603,000,
respectively, as compared to $11,506,000, $11,506,000 and $12,023,000 in
respective quarters of 1994.
The short-term impact of the drop in written volume was that the Company
experienced a period of negative cash flow from underwriting activities
resulting from relatively immediate declines in collected premiums while claim
payouts, relating primarily to previously written policies, continue at
disproportionately higher levels. The Company's negative cash flow from
underwriting has begun to decline as premium volume has stabilized and started
to increase. Negative cash flow from investment income and underwriting
activities of the insurance segment for the first nine months of 1995 was a
negative $6,669,607, $1,721,524 and $2,044,021 in the first three quarters of
1995 for a combined negative cash flow of $10,435,152; as compared to
$23,610,983 for the first nine months of 1994. The negative cash flow which
the Company has experienced over the past three years has resulted in
significant liquidations of the insurance subsidiary's investment portfolio.
At September 30, 1995, the insurance subsidiary's investments in equity and
fixed maturity securities (excluding investments in other segments of the
Company's businesses) totaled $17,865,153. The Company believes that required
liquidations of the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
The level of liquid assets, as defined by the National Association of
Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was
$59,431,739 at September 30, 1995, as compared to $90,109,196 at December 31,
1994. The decline is due to the liquidation of investments to cover negative
cash flow requirements. Included in NAIC-defined liquid assets are certain
securities with a reported value of $6,932,590 at September 30, 1995, which
are not publicly traded as well as approximately $8,333,000 of securities and
certificates of deposit which were on deposit pursuant to state laws and
various reinsurance agreements. In addition, $31,246,647 ($33,954,320 at
December 31, 1994) of investments in publicly traded equity securities of
other companies, valued at their quoted market prices on September 30, 1995,
do not meet the NAIC definition of liquid assets solely because of the level
of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of
Insurance to decrease Coronet's ratio of liabilities to liquid assets, as
defined by the NAIC, to 105% over a five year period. At June 30, 1995,
Coronet's liquidity ratio was 173.3%, as compared to the agreed upon ratio of
178.25% at June 30, 1995 (130% at December 31, 1995). The Illinois Department
of Insurance has issued a Corrective Order amending the terms of the original
agreement whereby Coronet may make no new investments in affiliates (including
other business segments of the Company) and the liquidity ratio calculation
may no longer include the effect of any type of borrowing, reverse repurchase
or lending of securities or any other similar type of leverage transaction.
At September 30, 1995, under the terms of the Corrective Order, Coronet's
ratio was 233.7%, as compared to the agreed upon ratio of 130% at December 31,
1995. Inasmuch as the consolidated ratio of Coronet and its wholly-owned
insurance subsidiaries is 186.3% at September 30, 1995, the Company thereby
has the ability to impact Coronet's separate ratio through various
restructurings or asset transfers. However, compliance will be dependent upon
numerous factors, including but not limited to; the 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. Accordingly, the Company cannot
state with certainty that it will be able to achieve the agreed upon ratio at
December 31, 1995.
On October 10, 1995, the Arizona Department of Insurance issued a
Suspension Order prohibiting Coronet from writing any further business in the
State. The Company immediately appealed the order and the Arizona courts
issued a stay of the Order and the Company is allowed to continue its
activities in Arizona unimpeded pending the outcome of an administrative
hearing before the Arizona Department of Insurance. The Company is currently
engaged in settlement discussions with the Arizona Department of Insurance and
believes that it will be allowed to continue to write business in the State.
Through September 30, 1995, Coronet's written premium in the State of Arizona
totaled $15,679,000.
The Illinois Department is currently conducting a financial examination
of Coronet as of December 31, 1993, although the examination has not been
completed, at this time no matters have been brought to the Company's
attention which would have a material adverse impact on the Company.
Statutory net worth decreased to $54,000,583 at September 30, 1995, as
compared to $59,483,697 at December 31, 1994, primarily due to continuing
underwriting losses and unrealized losses in the investment portfolio,
partially offset by a contribution to capital. The annualized ratio of
premiums written during the nine months ended September 30, 1995, to statutory
surplus as of September 30, 1995, was 2.02 to 1. A ratio of less than 3.0 to
1 is generally considered conservative.
MANUFACTURING
Hickory White has loans totaling $11,966,686 at September 30, 1995, with
a major bank which are secured by substantially all of the assets of the
furniture manufacturing division and which have been extended until January 3,
1996, to provide time necessary to find refinancing. Management has begun
discussions with potential lenders but cannot state with certainty that such
refinancing will be available or in an amount sufficient to totally retire the
outstanding balance.
The working capital of the furniture manufacturing operation was
$9,756,880 at September 30, 1995. The current asset ratio at September 30,
1995, was 1.5 to 1. This ratio reflects the characterization of all of the
bank financing of the furniture manufacturing operations as a current
liability. Accordingly, at September 30, 1995, the division has no long-term
debt (excluding intercompany debt). Also, at September 30, 1995, Hickory
White had no additional borrowing capacity under its Credit Agreement. The
furniture manufacturing division is restricted in its ability to transfer
funds to Sunstates under the terms of its Credit Agreement with Citicorp.
Working capital of the Company's textile manufacturing operation (Alba)
is adequate to support its operations and totaled $19,423,104 at September 30,
1995, yielding a current ratio of 3.05 to 1. In addition, Alba has a short-
term line of credit of $5,000,000, of which $2,494,744 was available at
September 30, 1995. The division had long-term debt of $12,850,000 and had
total net assets of $27,396,610 at September 30, 1995, including minority
interests.
Sunstates' military footwear manufacturing division's working capital,
including marketable securities held for investment, is more than adequate to
support current operating levels and totaled $12,455,324 at September 30,
1995, yielding a current ratio of 5 to 1. The division had no long-term debt
at September 30, 1995, and had total net assets of $12,547,077, including
minority interests.
Liquidity for Sunstates' textile machinery manufacturing operations has
historically been provided through its sales terms. Normally, 50% of the sales
price is paid at the time of the order, 40% at the time the production of the
machine is completed, with the final 10% paid upon installation in the
customer's facility. Working capital of the division totaled $1,065,500 at
September 30, 1995, yielding a current ratio of 1.97 to 1. There was no debt
at September 30, 1995, and total net assets were $12,799,771.
REAL ESTATE
The real estate segment's debt totaled $14,464,371 at September 30, 1995
with real estate assets of $43,554,358 yielding an asset leverage ratio of
33.2%. At September 30, 1995, mortgage notes include $4,813,037 of loans on
real estate which have or will mature in 1995. One of these loans in the
amount of $1,382,749 is in the process of being foreclosed and will result in
no loss to the Company. Sunstates is continuing to search for satisfactory
alternative financing for the remaining properties. However, the availability
of real estate financing has been severely curtailed as the result of problems
in both the banking and real estate industries. Accordingly, Sunstates cannot
state with certainty that it will be successful in obtaining such refinancing.
EQUITY INVESTEES
Equity investees do not normally 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
working capital loan with an outstanding balance of $2,346,260 at September
30, 1995) and is therefore subject to restrictions regarding the transfer of
funds to Sunstates. (See Results of Operations - Equity Investees for
information concerning the sale of 500,000 shares of Rocky Mountain common
stock in the third quarter of 1995.)
CORPORATE
Sunstates has annual dividend obligations currently totaling $1,025,111
on its $3.75 Cumulative Preferred Stocks. Sunstates is currently in arrears
ten semi-annual dividend payments on its $3.75 Cumulative Preferred Stock
aggregating $5,209,931 ($18.75/share).
CASH FLOWS
OPERATING ACTIVITIES
The following table presents the net cash flows from operating activities
by industry segment for the nine month periods indicated:
Cash Flows Provided By (Utilized In)
OPERATING ACTIVITIES
1995 1994
Insurance $ (10,435,152) (23,610,983)
Manufacturing 2,216,660 108,857
Real Estate (1,459,326) 1,319,466
Equity Investees (54,751) 14,000
Corporate (2,593,585) ( 3,207,268)
$ (12,326,154) (25,375,928)
The net cash utilized by insurance operations is primarily the result of
declining premium volume in 1993 and 1994 resulting in increased negative cash
flow from underwriting activities (see Insurance above). The short-term
impact of the drop in written volume is that the company will experience a
period of negative cash flow from underwriting activities resulting from
relatively immediate declines in collected premiums while claim payouts,
relating primarily to previously written policies, continue at
disproportionately higher levels. The negative cash flow can be expected to
continue throughout the payout period related to the lost business or until
new programs and other planned actions to increase premium volume can become
effective. The Company's negative cash flow from underwriting has begun to
decline as premium volume has stabilized and started to increase. Negative
cash flow from investment income and underwriting activities of the insurance
segment for the first nine months of 1995 was a negative $6,669,607,
$1,721,524 and $2,044,021 in the first three quarters of 1995 for a combined
negative cash flow of $10,435,152; as compared to $23,610,983 for the first
nine months of 1994. The Company believes that required operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
During the first nine months of 1995, the furniture manufacturing
business utilized $2,589,442 of cash in its operating activities, including
$1,802,420 of interest expense and including $511,997 of cash utilized to
increase net operating assets and liabilities (mostly inventories and accounts
receivable). This compares to $4,015,838 and $2,194,403 of cash utilized
during the full twelve month periods ended December 31, 1994 and 1993,
respectively. During the first nine months of 1994, the furniture
manufacturing business utilized $2,726,355 of cash in its operating
activities, including $1,866,619 of interest expense and including $996,742 of
cash utilized to increase net operating assets and liabilities (mostly due to
an increase in inventories). At September 30, 1995, Hickory White had no
additional borrowing capacity under its Credit Agreement.
Cash flow from the remaining operations within the manufacturing segment
totaled $4,806,102 in the first nine months of 1995 as compared to $2,835,212
for the first nine months of 1994. The higher cash flow in 1995 is primarily
attributable to collections of accounts receivable at the Company's military
boot manufacturing subsidiary.
The cash utilized in real estate increased in 1995 due primarily to an
$800,000 principal reduction made in connection with the restructuring of a
loan on one of the Company's shopping centers. The cash provided by real
estate in 1994 was due primarily to the sale of an apartment complex.
The higher cash utilized in the corporate segment in 1994 reflects cash
used in the payment of estimated income taxes.
INVESTING ACTIVITIES
The following table presents the net cash flows from investing activities
by industry segment for the nine month periods indicated:
Cash Flows Provided By (Utilized In)
INVESTING ACTIVITIES
1995 1994
Insurance $ 13,299,048 39,455,444
Manufacturing (14,666,507) (896,481)
Real Estate (606,899) (346,856)
Equity Investees 9,286,685 260,000
Corporate (52,722) (2,166,236)
$ 7,259,605 36,305,871
Generally, cash flow from operations not otherwise needed for operating
or financing purposes is utilized in investing activities, primarily at
Sunstates' insurance subsidiaries. However, declines in premium volumes
required that securities be sold from the insurance subsidiary's investment
portfolio to cover the negative cash flow from underwriting activities
discussed above as well as provide funds needed by other segments of
Sunstates' business. As discussed above in Insurance, due to cash
requirements needed to cover anticipated negative cash flow from underwriting,
liquidations of the investment portfolio in 1995 are expected to continue,
although at a reduced level from that of 1994.
The higher utilization of cash in the manufacturing segment in 1995
represents the approximately $15 million acquisition cost of the Balfour
operations by the Company's textile manufacturing subsidiary. The utilization
of cash in the manufacturing segment in 1994 primarily represents additions to
property, plant and equipment.
During 1994, the collection of a mortgage loan was included in the real
estate segment's cash flow.
Cash from equity investees represents proceeds from the sale of a portion
of the Company's investment in the common stock of Rocky Mountain Chocolate
Factory. (See "Results of Operations - Equity Investees" below.)
FINANCING ACTIVITIES
The following table presents the net cash flows from financing activities
by industry segment for the nine month periods indicated:
Cash Flows Provided By (Utilized In)
FINANCING ACTIVITIES
1995 1994
Insurance $ (8,930,858) (10,669,242)
Manufacturing 12,618,770 (1,230,762)
Real Estate (114,921) (70,570)
Corporate (110) (939)
$ 3,572,881 (11,971,513)
In the third quarter of 1995, proceeds totaling $7,735,000 from the sale
of 500,000 shares of common stock of Rocky Mountain were used to reduce the
principal outstanding under a $10,000,000 working capital loan. (See "Results
of Operations - Equity Investees" below.) The insurance segment's utilization
of cash in 1994 reflects the repayment of a $6,000,000 short-term line of
credit. During 1995, subsidiaries of the insurance company purchased 69,594
shares of Sunstates' Common Stock, 14,596 shares of Sunstates' $3.75
Cumulative Preferred Stock and 3,840 shares of Sunstates' Class B Stock for an
aggregate cost of $1,246,704. During 1994, subsidiaries of the insurance
company purchased 189,097 shares of Sunstates' Common Stock, 8,613 shares of
Class B Stock and 57,714 shares of Sunstates' $3.75 Cumulative Preferred Stock
for an aggregate cost of $4,642,815. With respect to the Class B Stock, 3,840
shares and 7,843 shares in 1995 and 1994, respectively, which were acquired
from non-affiliated owners at a total cost of $503,140 and $1,424,451,
respectively, had been owned by the Company's parent prior to their
acquisition by the Company.
The significant source of cash in the manufacturing segment in 1995
relates to the $15,000,000 in financing obtained by the Company's textile
apparel manufacturing subsidiary in connection with its acquisition of the
Balfour Health Care operations.
<PAGE>
RESULTS OF OPERATIONS
The Company's net loss totaled $14,432,063 in the first nine months of
1995 or $6.14 per share, compared to a loss of $2,504,204 or $1.29 per share
in 1994. Losses at the Company's insurance, resort development and furniture
manufacturing operations contributed to the higher loss in 1995. Additionally,
the Company recorded writedowns totaling $5,450,000 or $2.20 per share related
to the Company's furniture operations (see "Manufacturing" below). Partially
offsetting these losses was a gain of $6,697,000 or $2.70 per share resulting
from the sale of a portion of the Company's investment in Rocky Mountain
Chocolate Factory (see "Equity Investees" below). All net income per share
amounts are after considering preferred stock dividend requirements for the
applicable periods.
INDUSTRY SEGMENTS
Sunstates operates in three industry segments; insurance, manufacturing
and real estate development. Information about the operations of the
different industry segments for the nine months ended September 30, 1995 and
1994 is as follows (amounts in thousands):
1995 1994
Revenues:
Insurance $ 58,502 37,901
Manufacturing 99,222 97,645
Real Estate 6,713 18,265
Equity Investees 7,789 846
Corporate & Eliminations 3,215 2,670
$175,441 157,327
Pre-tax Income (Loss):
Insurance $ (10,598) (1,745)
Manufacturing (7,334) 3,817
Real Estate (2,402) 321
Equity Investees 7,734 846
Corporate (2,250) (2,677)
$(14,850) 562
INSURANCE
Following is a summary of the results of operations of the insurance segment
for the nine months ended September 30, 1995 and 1994 (amounts in thousands):
1995 1994
Premiums written $ 81,860 35,035
Premium growth (decline) 134% (24.8%)
Premiums earned 54,556 34,139
Losses and loss adjustment expenses 46,787 27,886
Loss ratio 85.8% 81.7%
Underwriting loss (12,635) (4,520)
Statutory combined ratio 113.1% 113.3%
Investment income recognized 3.756 3,807
Change in unrealized gains (393) (1,127)
Combined annual investment yield 9.51% 4.4%
Pre-tax loss (10,598) (1,745)
(See "Liquidity and Capital Resources - Insurance" above for a discussion
of premium volume.)
During the first nine months of 1995, the Company recorded an
underwriting loss of $12,635,000, which included $3,522,000 of losses
recognized on inactive programs and losses on continuing active programs of
$9,113,000. The combined ratio for the 1995 accident year on the Company's
continuing active programs was 116.6% as compared to 1994 when the Company
recorded a current accident year combined ratio of 120.0% for the full year on
continuing active programs. The combined ratio of 113.1% for the first nine
months of 1995 continues to be at an unacceptable level.
Investment income recognized was lower in 1995 as there were fewer sales
of securities to meet cash flow requirements in the current year. Realized
gains from the sale of equity securities totaled approximately $2,054,000 in
the nine months of 1995 as compared to $2,577,000 in the 1994 period.
Interest expense totaled $1,746,892 in the nine months of 1995 ($605,084
in 1994) reflecting the insurance subsidiary's $10,000,000 working capital
loan obtained in December of 1994, as well as borrowings incurred in
connection with certain investment transactions by which the Company acquired
U. S. Treasury securities under agreements to resell - see "Liquidity and
Capital Resources - Insurance" above.
MANUFACTURING
Net furniture sales decreased by $276,023 or 0.3% in the first nine
months of 1995 compared against the increase of $1,549,443 or 4.7% experienced
in the first nine months of 1994. The furniture cost of sales, as a percent
of net sales, decreased approximately 0.5% in 1995 as compared to an increase
of approximately 5% in the comparable 1994 period. The 1995 results reflect
the impact of increased discounting and promotions necessary to move out slow
moving or discontinued product lines. In aggregate, the 1995 gross profit
increased by $156,834 or 3.3% as compared to a increase of $820,860 or 26.4%
in the prior year. Selling and administrative expenses increased 2% between
the two periods.
During the third quarter the Company recognized a one-time charge of
$5,450,000 ($2.20 per share), primarily to writeoff unamortized goodwill
which had been recorded in connection with a pre-1970 acquisition of certain
furniture operations. Additionally, the charge provided for writing down
various assets at its non-residential furniture operations (which are
currently being offered for sale) to more closely reflect their current values
as well as the cost of certain administrative and operational restructurings.
The Company is taking these steps in response to softness in high-end
furniture retail markets, which have not recovered to their pre-recession
levels of 1990.
Net textile apparel manufacturing sales for the first nine months of 1995
increased $4,560,375 or 10.7% compared to the same period in 1994. This
increase was primarily due to the acquisition of the Balfour Health Care
operation which added $9,738,578 of net sales to the 1995 period. Without
this acquisition, sales for the nine months of 1995 would have declined
$5,178,203 or 12.1% as the result of weakness in the consumer products line as
major customers experienced overstock positions in retail inventories, the
termination of two Japanese distributors in its direct marketing operation and
softness in its Byford division as the result of softness in the sweater
market. Gross margins decreased to 19.7% of sales as compared to 25.9% in
1994. This decrease in margins is due to decreased sales in the Consumer and
Alba Direct Divisions and an increase in manufacturing cost resulting from
overhead cost not being reduced proportionate to the reduction in sales
volume. In addition, during the third quarter a writedown of $1,200,000 was
recorded to reflect close-outs and irregular inventory. Although the Company
writes down close-outs and irregular inventory on a regular basis, the fact
that consumer products sales volume has been soft for the last year and
product prices are being depressed by other manufacturers closing out excess
inventories necessitated these additional writedowns. Selling, general and
administrative expenses increased from 19.2% for the first nine months of 1994
to 19.7% for the same period in 1995, due primarily to the addition of
$305,000 (0.6%) of goodwill related to the acquisition of Balfour. Operating
income decreased by $2,812,920 or 99% as compared to the first nine months of
1994. Increased interest expense in 1995 related to the $15,000,000 of long-
term debt obtained to finance the Balfour acquisition also contributed to the
lower earnings in 1995. Sunstates' share of Alba' net loss totaled $162,869
in 1995 as compared to income of $1,103,733 in 1994.
Operating revenues from Sunstates' military footwear division decreased
by $2,889,571 or 18.4% from their nine month 1994 levels. This reflects
almost a 22% decrease in the number of pairs of combat boots sold in the first
nine months of 1995 as compared to the first nine months of last year. The
current period reflects delivery of combat boots to the U. S. government under
the sixteen month schedule whereas the prior period was on a twelve month
schedule for the same total pairs. Also, the prior period included a
significant sale of machinery and combat boot manufacturing materials to a
foreign customer, and significant sales to two domestic customers. Cost of
military boot sales and services as a percent of revenues increased from 80.1%
to 87.4% between the two years due to increases in manufacturing costs such as
health insurance and workers compensation insurance.
Textile machinery's net sales increased $543,925 in the first nine months
of 1995 as compared to an increase of $644,864 experienced in the same nine
months of 1994. Gross margin percentages increased 9.8% in 1995 as compared
to 1994.
REAL ESTATE
RESORT DEVELOPMENT
The Company's resort development in Spring Green, Wisconsin reported a
loss of $1,772,594 during the first nine months of 1995 as compared to
$1,584,159 in 1994, both years representing primarily property taxes,
operating expenses and overhead costs. However, the 1995 period reflected
additional overhead for the real estate development operation not present in
the first quarter of 1994 and higher interest cost relating to amounts
borrowed from its parent in connection with ongoing operating losses. There
have been no significant real estate sales to date.
COMMERCIAL AND RESORT LOTS
During the second quarter or 1994, the Company sold an apartment project
generating net sales of $10,643,988 and profit of $2,728,693. There was no
other significant or unusual activity in these divisions of the Company's real
estate segment during the first nine months of either 1995 or 1994.
EQUITY INVESTEES
The following table sets forth for the nine months ended September 30,
1995 and 1994, the Company's share of the earnings Rocky Mountain Chocolate
Factory, Inc., in which it has an ownership level whereby it has the
opportunity to exert significant influence, but not control and thereby
accounts for its investment utilizing the equity method of accounting (amounts
in thousands):
1995 1994
- Operations $ 718 538
- General expenses (55)
- Sale of stock and interest 7,071 308
$ 7,734 846
On September 20, 1995, the Company sold 500,000 shares of Rocky Mountain
Chocolate Factory, Inc. common stock in a public offering for net proceeds of
$7,735,000, resulting in a pre-tax gain of $6,697,000 or $2.70 per share. The
proceeds from the sale were used to retire corporate debt. The Company also
received payment in full under a note receivable from the president of Rocky
Mountain Chocolate Factory totaling $1,177,507, including accrued interest.
In connection with the public offering, Sunstates had granted the underwriter
a 30-day option to purchase up to an additional 84,375 shares of common stock
for the purpose of covering over-allotments, if any. On October 18, 1995, the
underwriter exercised its option and purchased an additional 62,500 shares
resulting in additional proceeds of $966,875, which were also used to retire
corporate debt. Sunstates' insurance subsidiary still owns 858,757 shares of
the common stock of Rocky Mountain Chocolate Factory representing
approximately 29% of the outstanding shares.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 14, 1991, a jury in a District Court of Dallas County, Texas
awarded $3.5 million in actual damages and $5 million in punitive damages to
the plaintiffs of a lawsuit filed against the Company. This dispute related
to the amount of additional purchase consideration due plaintiffs under an
agreement made in 1983 whereby the Company purchased National Development
Company, a real estate company based in Dallas. The Company appealed the
verdict based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. On August 9, 1995, the Court of Appeals Fifth
District of Texas at Dallas reversed the trial court's judgement and remanded
the case back to the trial court for a new trial. Subsequently, the Court of
Appeals denied the plaintiffs' motion for rehearing and the plaintiffs have
filed an application for Writ of Error with the Supreme Court of Texas. The
Company will file its response during November 1995. No date for a new trial
has yet been set.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Dividends on the Company's $3.75 Cumulative Preferred Stock are payable
semi-annually at the annual rate of $3.75 per share, when and as declared, and
such dividends are cumulative. The $3.75 Cumulative Preferred Stock has no
voting rights, except if two semi-annual dividend payments are unpaid and in
arrears at the date of the Company's annual meeting, the holders of the $3.75
Cumulative Preferred Stock have the right to elect fifty percent of the
members of the Company's board of directors. Sunstates is currently in
arrears ten semi-annual dividend payments on its $3.75 Cumulative Preferred
Stock aggregating $5,209,931 ($18.75/share).
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
(11) Statement re computation of per share earnings
(a) Primary
(b) Fully diluted
(27) Financial data schedules
(electronic filing only)
(B) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNSTATES CORPORATION
\S\ GLENN J. KENNEDY
Glenn J. Kennedy
Vice President, Treasurer and
Chief Financial Officer
Date: November 14, 1995
<PAGE>
EXHIBIT INDEX
Sunstates Corporation
Form 10-Q Quarterly Report
For the Quarter Ended September 30, 1995
EXHIBIT NO EXHIBIT
11 Statement re computation of per share earnings
(a) Primary
(b) Fully diluted
27 Financial data schedules (electronic filing only)
<PAGE>
EXHIBIT (11)
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(a) Primary
(UNAUDITED)
For the Nine Months Ended
SEPTEMBER 30,
1995 1994
Shares used in calculations:
Weighted average common shares outstanding 779,436 931,301
Weighted average Class B Shares at 24.375 to 1
and 21.125 to 1 conversion rate in 1995 and
1994, respectively 1,700,931 1,698,205
Shares issuable upon conversion of warrants
and options * *
Adjusted weighted average shares outstanding 2,480,367 2,629,506
Net income (loss) $ (14,432,063) (2,504,204)
Preferred Stock dividends (803,213) (885,341)
Adjusted net income (loss) $ (15,235,276) (3,389,545)
Primary net income (loss) per share and common share
equivalent (adjusted net income divided by adjusted
weighted average common and equivalent shares
outstanding) $ (6.14) (1.29)
*Anti-dilutive in 1994. All warrants and options outstanding expired prior to
January 1, 1995.
<PAGE>
EXHIBIT (11)
SUNSTATES CORPORATION
STATEMENT RE COMPUTATIONS
OF PER SHARE EARNINGS
(b) Fully diluted
(UNAUDITED)
For the Nine
Months Ended
September 30,
1994
Shares used in calculations:
Weighted average common shares outstanding 931,301
Weighted average Class B Shares at 24.375 to 1 conversion rate**
1,698,205
Shares issuable upon conversion of warrants and options
*
Adjusted weighted average shares outstanding 2,629,506
Net income (loss) $(2,504,204)
Preferred Stock dividends (885,341)
Adjusted net income (loss) $(3,389,545)
Primary net income (loss) per share and common share equivalent
(adjusted net income divided by adjusted weighted average
common and equivalent shares outstanding) $(1.29)
*Anti-dilutive
** 21.125 to 1 in 1994 due to anti-dilutive effect in that year.
Note - Beginning January 1, 1995, the Company no longer has any outstanding
options or warrants and the Class B Stock has reached its maximum conversion
ratio of 24.375 to 1. Accordingly, the Company no longer has a capital
structure which could result any additional dilution of the Common and Class B
shareholders.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Sunstates Corporation for the quarter
ended September 30, 1995, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,285,033
<SECURITIES> 29,626,106
<RECEIVABLES> 55,258,103
<ALLOWANCES> 1,603,023
<INVENTORY> 44,580,898
<CURRENT-ASSETS> 0
<PP&E> 76,956,143
<DEPRECIATION> 43,500,207
<TOTAL-ASSETS> 231,963,616
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 243,722
0
6,891,375
<OTHER-SE> 10,809,845
<TOTAL-LIABILITY-AND-EQUITY> 231,963,616
<SALES> 155,019,322
<TOTAL-REVENUES> 175,440,742
<CGS> 128,569,869
<TOTAL-COSTS> 185,356,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,933,828
<INCOME-PRETAX> (14,849,622)
<INCOME-TAX> (207,871)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,432,063)
<EPS-PRIMARY> (6.14)
<EPS-DILUTED> 0
</TABLE>
