<PAGE> 1
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
For the Quarter Ended September 30, 1996
----------------------------------------
Commission File Number 0-10937
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SUN COAST INDUSTRIES, INC.
--------------------------
(Exact name of Registrant)
Delaware #59-1952968
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
2700 South Westmoreland Ave., Dallas, TX 75233
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(Address of principal executive offices)
(214) 373-7864
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(Registrant's telephone number)
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 issuers' classes of
common stock, as of November 6, 1996, the latest practicable date.
Class Outstanding at November 6, 1996
----- -------------------------------
Common stock $0.01 par value 4,004,229
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SUN COAST INDUSTRIES, INC.
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item I - Financial Statements
Condensed Consolidated Balance Sheets --September 30, 1996
and June 30, 1996 3
Condensed Consolidated Statements of Income - Three Months
ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows -- Three
Months ended September 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item II - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Items 1 through 6 15
</TABLE>
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PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30,
1996 June 30,
(unaudited) 1996
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,630 1,947
Accounts receivable, net of allowance for
doubtful accounts of $313 and $286 11,084 12,495
Inventories 10,452 9,875
Other current assets 480 461
-------- --------
Total current assets 24,646 24,778
Property, plant and equipment, net of accumulated
depreciation of $25,371 and $24,183 27,481 28,711
Intangible assets 864 906
Other assets 1,978 1,405
-------- --------
Total assets $ 54,969 $ 55,800
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
<TABLE>
<CAPTION>
September 30,
1996 June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) 1996
-------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,408 $ 5,660
Accrued expenses 2,824 2,923
Current portion
of long-term debt 27,306 27,157
Deferred income taxes 182 120
-------- --------
Total current liabilities 35,720 35,860
Other liabilities 11 12
Long-term debt 2,240 3,124
Deferred income taxes 2,582 2,595
-------- --------
Total liabilities 40,553 41,591
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 40,000,000
shares authorized; 4,017,629 issued and
4,004,229 outstanding 40 40
Additional paid-in capital 11,222 11,219
Currency translation adjustment (653) (668)
Retained earnings 3,807 3,618
-------- --------
Total stockholders' equity 14,416 14,209
-------- --------
Total liabilities and stockholders' equity $ 54,969 $ 55,800
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1996 1995
------- --------
<S> <C> <C>
Sales $20,667 $ 19,373
Costs and expenses:
Cost of sales 16,787 15,693
Selling, general and administrative 2,987 3,108
Interest, net 590 436
------- --------
20,364 19,237
------- --------
Income before provision for income taxes 303 136
Provision for income taxes (113) (48)
------- --------
Net income $ 190 $ 88
======= ========
Net income per common share $ 0.05 $ 0.02
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 190 $ 88
Adjustments to reconcile net income to
net cash provided by (used in) operations:
Depreciation and amortization 1,505 1,425
Deferred income taxes 49 (112)
Changes in assets and liabilities:
Accounts receivable 1,422 (993)
Inventories (570) (199)
Other current assets (20) 125
Intangible and other assets (595) (63)
Accounts payable and accrued expenses (369) 1,383
------ ------
Net cash provided by operations 1,612 1,654
------ ------
Cash flows from investing activities:
Capital expenditures (196) (1,368)
------ ------
Net cash used in investing activities (196) (1,368)
------ ------
Cash flows from financing activities:
Repayments of long-term debt (735) (1,276)
Issuance of Common Stock - 22
------ ------
Net cash used in provided by financing activities (735) (1,254)
------ ------
Effect of exchange rate changes on cash 2 -
------ ------
Change in cash and cash equivalents 683 (968)
Cash and cash equivalents at beginning of period 1,947 1,173
------ ------
Cash and cash equivalents at end of period $2,630 $ 205
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's (defined below) interim financial statements are unaudited
and should be read in conjunction with the consolidated financial
statements and notes thereto in its Form 10-K and Annual Report to
Stockholders for the year ended June 30, 1996.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair statement of the results of
operations for the interim periods presented.
Description of Business
Sun Coast Industries, Inc. (the "Company") manufactures and sells melamine
and urea resins and compounds and, from these and other materials, molds
consumer products and commercial plastic products, including dinnerware,
drinkware and closures. The Company's four divisions have generated
synergies through similar manufacturing processes, combined purchasing of
raw materials and developed proprietary technologies, enabling the Company
to realize manufacturing efficiencies and a significant presence in
markets for many of its products. The Chemical Division manufactures
melamine and urea resins and compounds, which it supplies to other
manufacturers and uses in producing its own consumer products and
foodservice products. The Consumer Products and Foodservice Divisions
manufacture compression molded melamine dinnerware and injection molded
plastic drinkware and other houseware products, which the Company sells to
American, Canadian and Mexican retail and commercial markets. The Closures
Division manufactures linerless, foil or foam lined and tamper-evident
plastic closures and lids. These closures are used in the U.S. for
bottling and packaging of food, beverage, chemical and pharmaceutical
products.
Industry Segment
The Company operates in a single industry segment, supplying consumer and
commercial related plastic products on a direct and indirect basis,
utilizing similar production processes and methods.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont'd)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in previously issued financial statements
have been reclassified to conform with the current period financial
statement presentation. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from the estimates.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined utilizing the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the related
assets. Lives assigned to asset categories are 5 to 15 years for machinery
and equipment, 30 to 35 years for buildings and 5 years for molds.
Machinery and equipment under capital leases are stated at the present
value of minimum lease payments. Renewals and improvements that
significantly add to the productive capacity or extend the useful life of
an asset are capitalized. Repairs and maintenance are charged to expense
as incurred.
Intangible Assets
Intangible assets are stated at cost and consist primarily of patents and
goodwill. Intangible assets are amortized on the straight-line method over
their estimated useful lives ranging from 5 to 20 years. The carrying
values and amortization periods of intangibles are periodically evaluated
by the Company to determine whether current events and circumstances
warrant adjustment.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont'd)
Advertising Costs
The Company expenses the costs of advertising as incurred, except for
direct-response advertising and catalog costs which are capitalized and
amortized over their expected periods of future benefit (generally six
months). Direct response advertising and catalog costs consist primarily
of printing and contract services for catalogs to market the Company's
products.
Income Taxes
Deferred income taxes are provided for temporary differences between
financial and tax reporting. Income taxes are provided for taxes currently
payable based on taxable income.
Environmental Costs
A liability for environmental assessments and/or cleanup is accrued when
it is probable a loss has been incurred and is estimable. No significant
liabilities were in existence at September 30, 1996 and June 30, 1996.
Net Income Per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during each period
after giving effect to stock options and warrants considered to be
dilutive common stock equivalents.
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SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1926
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont'd)
Revenue Recognition
Sales are recognized when the product is shipped. Sales are shown net of
returns and allowances.
Research and Development
Research and development costs associated with new product development,
application and testing are expensed as incurred.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents.
Foreign Currency Translation and Transactions
The Company's foreign subsidiary uses the local currency as the functional
currency. Translation gains or losses are included as a component of
stockholders' equity. Gains or losses from foreign currency transactions
are included in net income. There were no material gains or losses from
foreign currency translation or transactions prior to 1996. There was a
$15,000 translation gain and a $668,000 translation loss for the three
months ended September 30, 1996 and for fiscal 1996, respectively.
NOTE 2 - INVENTORIES
<TABLE>
<CAPTION>
September 30,
1996 June 30,
(unaudited) 1996
---------- --------
(in thousands)
<S> <C> <C>
Raw Materials $ 4,027 $ 2,859
Work-in-process 629 1,070
Finished good 6,647 6,712
---------- --------
11,303 10,641
Obsolescence reserve (851) (766)
---------- --------
$ 10,452 $ 9,875
========== ========
</TABLE>
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NOTE 3 - LONG TERM DEBT
<TABLE>
<CAPTION>
September 30,
1996 June 30,
(unaudited) 1996
---------- --------
(in thousands)
<S> <C> <C>
Term Loan $ 5,390 $ 5,818
Revolving credit line 12,212 12,659
Capital expenditures term loan 7,898 8,437
Industrial development revenue bonds 2,137 2,175
Subordinated notes payable 1,000 1,000
Capitalized lease obligations 909 192
---------- --------
29,546 30,281
Current maturities on original
maturity schedule (4,267) (3,277)
Long term debt classified as current (23,039) (23,880)
---------- --------
$ 2,240 $ 3,124
========== ========
</TABLE>
In December 1995, the Company refinanced its existing debt with a new
lender and increased its credit facility to provide a total of $35.7
million in borrowings secured by substantially all the assets of the
Company. The facility provides for borrowings under three separate
arrangements - (i) two separate one-time term advances in an aggregate
principal amount of $6.7 million payable in quarterly installments through
April 1, 2001, (ii) multiple term advances for capital expenditures in an
aggregate principle amount of $14 million payable in quarterly
installments over 2 to 7 years, and (iii) a $15.0 million revolving loan,
due December 31, 1998. As of September 30, 1996, based on the Company's
borrowing formula incremental borrowing availability was approximately
$1.4 million under the revolving credit line. The credit facility provides
for the issuance of up to $2.0 million of letters of credit, subject to
the borrowing availability under the revolving credit line. The loan
agreement contains various covenants, including maintaining certain
financial ratios and tests, limitation on the issuance of debt and the
amount of capital expenditures, capital leases, investments and dividends.
The primary financial covenants include quarter end calculations of
leverage and fixed charge coverage.
The Company was not in compliance with two of its loan covenants at
September 30, 1996: (1) The Company's Tangible Net Worth (as defined in
the credit facility) was below the required minimum $14,650,000 and (2)
the Company's Fixed Charge Coverage Ratio (as defined in the Credit
Facility) was below the required minimum of 1.3 to 1.0. The Company has
not obtained a waiver of these covenants as of September 30, 1996 and it
has not received a letter of default from its lender. The same or more
restrictive covenants must be met in future periods. As a result, the debt
will be subject to accelerated maturity at future dates in the absence of
refinancing and, therefore, has been classified as a current liability on
the consolidated balance sheet at September 30, 1996.
The Company is currently pursuing various strategic and financing
alternatives, including a refinancing of the existing senior lender,
although there is no assurance that such alternatives will be in place by
December 31, 1996, the next measurement date for the loan covenant
compliance. In the event of noncompliance, management intends to seek the
necessary waivers such that the loan agreement will remain in force;
however, currently the Company's lender is unwilling to grant additional
waivers or amendments.
11
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Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1996, Compared to the Three Months
Ended September 30, 1995
Sales for the three months ended September 30, 1996, increased $1,294,000
or 6.7%, when compared to the same period in 1995. Closure Division's
sales increased 12.1% due to increased demand. Consumer Products and
Foodservice Divisions' sales decreased 10.3% as a result of the downturn
in the retail economy. Chemical Division's sales increased 13.1% due to
increased customer demand.
Cost of sales as a percentage of net sales increased to 81.2% from 81.0%.
The decline in gross margin was primarily the result of volume declines in
the Foodservice and Consumer Products Divisions causing shortfalls in the
absorption of fixed costs.
Selling, general and administrative expense ("SG&A") decreased $121,000
to 14.4% of sales for the three months ended September 30, 1996 as
compared to 16.0% of sales for the three months ended September 30, 1995.
This decline is the result of a $115,000 gain on the sale of certain real
estate recorded in the quarter ended September 30, 1996.
Interest expense has increased $154,000 for the three months ended
September 30, 1996 compared to the three months ended September 30, 1995
due to an increase in interest rates.
Net income increased $102,000 from the comparable prior fiscal period
primarily due to increased sales volumes and the decrease in SG&A
explained above, which was partially offset by increased interest expense.
Liquidity and Capital Resources
Management reviews the Company's working capital, accounts receivable and
relationship of debt to equity on a continuing basis. The Company's growth
has been financed through long-term debt financing and cash generated from
operations. During the three months ended September 30, 1996, the Company
decreased net borrowings by $735,000. Cash flow from operations generated
$1.6 million.
Capital expenditures for the three months ended September 30, 1996 were
$196,000, Anticipated future capital additions should approximate less
than $3 million for the remainder of fiscal 1997 unless a new financing
facility is obtained at which time incremental expenditures will be
considered.
In December 1995, the Company refinanced its existing debt with a new
lender and increased its credit facility to provide a total of $35.7
million in borrowings secured by substantially all the assets of the
Company. The facility provides for borrowings under three separate
arrangements - (i) two separate one-time term advances in an aggregate
principal amount of $6.7 million payable in quarterly installments through
April 1, 2001, (ii) multiple term advances for capital expenditures in an
aggregate
12
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principle amount of $14 million payable in quarterly installments over 2
to 7 years, and (iii) a $15.0 million revolving loan, due December 31,
1998. As of September 30, 1996, outstanding borrowings under the credit
facility included $5.4 million under the two term loans, $7.9 million
under the capital expenditure term loan and $12.2 million under the
revolving credit line. At September 30, 1996, based on the Company's
borrowing formula incremental borrowing availability was approximately
$1.4 million under the revolving credit line. The credit facility provides
for the issuance of up to $2.0 million of letters of credit, subject to
the borrowing availability under the revolving credit line. The loan
agreement contains various covenants, including maintaining certain
financial ratios and tests, limitation on the issuance of debt and the
amount of capital expenditures, capital leases, investments and dividends.
The primary financial covenants include quarter end calculations of
leverage and fixed charge coverage.
The Company was not in compliance with two of its loan covenants at
September 30, 1996: (1) The Company's Tangible Net Worth (as defined in
the credit facility) was below the required minimum $14,650,000 and (2)
the Company's Fixed Charge Coverage Ratio (as defined in the Credit
Facility) was below the required minimum of 1.3 to 1.0. The Company has
not obtained a waiver of these covenants nor has it received a notice of
default as of September 30, 1996. The same or more restrictive covenants
must be met in future periods. As a result, the debt will be subject to
accelerated maturity at future dates in the absence of refinancing and,
therefore, has been classified as a current liability on the consolidated
balance sheet at September 30, 1996.
The Company is currently pursuing various strategic and financing
alternatives, including a refinancing of the existing senior lender
although there is no assurance that such alternatives will be in place by
December 31, 1996, the next measurement date for the loan covenant
compliance. In the event of non-compliance, management intends to seek the
necessary waivers such that the loan agreement will remain in force;
however, currently the Company's lender is unwilling to grant additional
waivers or amendments.
Disclosures Regarding Forward-Looking Statements
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this Form
10-Q, including, without limitation, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" regarding the Company's financing alternatives, financial
position, business strategy, plans and objectives of management of the
Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the
expectations reflected in any such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to
have been correct. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company's business, including but
not limited to, the intense competition in its markets, its recent
experience of increasing raw material prices, the absence of assurance of
strategic and financing alternatives, Mexican currency fluctuations and
its reliance on certain key customers; all of which may be beyond the
control of the Company. Any one or more of these factors could cause
actual results to differ materially from those expressed in any forward-
looking statement. All subsequent written and oral forward-looking
statements attributable to the Company or person acting on its behalf are
expressly qualified in their entirety by the cautionary statements
disclosed in this paragraph and otherwise in this report.
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SUN COAST INDUSTRIES, INC.
SEPTEMBER 30, 1996
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
Item 6 - Exhibits and Reports in Form 8K
(a) Exhibits:
14
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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.
Sun Coast Industries, Inc.
------------------------------------------------------
Registrant
11/13/96 By:
- -------- --------------------------------------------------
Date Eddie Lesok, Chief Executive Officer and President
11/13/96 By:
- -------- --------------------------------------------------
Date Cynthia R. Morris, CFO, Secretary and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,630
<SECURITIES> 0
<RECEIVABLES> 11,397
<ALLOWANCES> 313
<INVENTORY> 10,452
<CURRENT-ASSETS> 24,646
<PP&E> 52,852
<DEPRECIATION> 25,371
<TOTAL-ASSETS> 54,969
<CURRENT-LIABILITIES> 35,720
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 14,376
<TOTAL-LIABILITY-AND-EQUITY> 54,969
<SALES> 20,667
<TOTAL-REVENUES> 20,667
<CGS> 16,787
<TOTAL-COSTS> 16,787
<OTHER-EXPENSES> 3,577
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 590
<INCOME-PRETAX> 303
<INCOME-TAX> 113
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0
</TABLE>
