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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED: JUNE 30, 1997
OR
[ ] SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 0-10937
SUN COAST INDUSTRIES, INC.
(Exact name as registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-1952968
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2700 SOUTH WESTMORELAND AVENUE 75233
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (214) 373-7864
Securities registered pursuant to Section 12 (b) of the Act:
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<S> <C>
Title of each class Name of exchange on which registered
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AT SEPTEMBER 22, 1997 WAS APPROXIMATELY $19,301,000.
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE ONE CENT
($.01) PER SHARE, OUTSTANDING AT SEPTEMBER 22, 1997 WAS 4,117,629.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT PREPARED FOR USE IN
CONNECTION WITH THE REGISTRANT'S 1997 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
NOVEMBER 21, 1997, HAVE BEEN INCORPORATED BY REFERENCE INTO PART III OF THIS
FORM 10-K. SUCH PROXY STATEMENT WILL BE FILED ON OR ABOUT OCTOBER 28, 1997.
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PART 1.
ITEM 1. BUSINESS
GENERAL
Sun Coast Industries, Inc. ("Sun Coast" or the "Company") manufactures and
sells plastic closures, lids and melamine and urea resins and compounds. The
Resins and Compounds Division manufactures melamine and urea resins and
compounds, which it supplies to other manufacturers and has used in producing
its own consumer products and foodservice products. 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. The Consumer Products and
Foodservice Tableware Divisions, which are being discontinued (see Note 2 of
Notes to the Consolidated Financial Statements), manufacture compression molded
melamine dinnerware and injection molded plastic drinkware and other household
products, which the Company sells to U.S., Canadian and Mexican retail and
commercial markets.
CONTINUING OPERATIONS:
RESINS AND COMPOUNDS DIVISION
Sun Coast manufactures melamine and urea resins and molding compounds at
its facilities in Dallas, Texas, and Murfreesboro, Tennessee. Sun Coast believes
that its proprietary formulations and technical expertise enable it to provide
consistently high quality chemical products. The Company sells these products
directly to its customers, which use them as raw materials in their own
manufacturing processes. Sun Coast is also a leading supplier of melamine resin
to manufacturers of decorative laminate, which is used for countertops and
tabletops and other furniture and fixture and flooring surfaces. Sun Coast is a
leading supplier of urea and melamine molding compounds to U.S. manufacturers of
electrical outlet and switch plates.
Melamine resists scratching, breaking and chipping; it also resists grease
and weak acid and it is odorless and easy to clean. Urea is similar in nature
but less expensive to produce and less durable than melamine. Melamine resin is
made principally from melamine crystals, formaldehyde and water which are
combined in a heated reactor. Urea resin is made using a similar process with
the same raw materials, with the substitution of urea crystals for melamine
crystals. Molding compounds are made from melamine or urea resin and purified
cellulose fillers, pigments, plasticizers and curing agents. These materials are
combined in a wet mixture, dried and ground to a fine powder.
There are three other major U.S. suppliers of melamine and urea molding
compounds similar to those supplied by the Company and many major suppliers of
melamine and urea resins. Some of these suppliers have greater resources than
the Company and are parts of large, diversified companies. In this highly
competitive market, the Company competes on the basis of product quality,
customer service and price.
CLOSURES DIVISION
Sun Coast manufactures linerless, foil or foam lined and tamper-evident
plastic closures and lids. The Company markets these products directly, and
through distributors and sales representatives, to manufacturers of packaged
food, beverages, pharmaceuticals and chemicals. These plastic closures seal
food, beverage, pharmaceutical and chemical containers generally made of
plastic.
Plastic closures are injection molded from polypropylene or polyethylene.
Key factors such as cycle time, the optimal number of mold cavities and the
quality of the mold are important in attaining production efficiency and cost
control. Sun Coast prototypes custom closures for the purpose of testing and
qualifying the closures for use with customers' products.
Plastic closures offer an advantage over metal ones, because metal closures
may chemically react with some foods. Plastic closures also allow the use of a
foil lined induction inner-seal for tamper evidence -- a feature metal closures
lack. Sun Coast's lined closures are used with a variety of food and beverage
products, including juices, sauces, dressings and peanut butter. The design of
the Company's Sun-Tab foil seal, widely used in peanut butter packaging,
incorporates a series of three small tabs that extend over the edge of the
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container. The consumer grasps any one of the tabs to remove the entire liner.
Sun Coast owns several patents encompassing closure and tamper-evident band
designs as well as a patent on a plastic closure for hermetic, pressure or
vacuum sealing of glass or plastic bottles and jars.
The Company's Sun-Twist closure is used as a tamper-evident, easy-opening
seal for "hot-fill" beverages, including fruit juices, teas and isotonic sport
drinks. The "hot-fill" market is one of the fastest growing for the Closures
Division. This market has developed in connection with beverage packers'
replacement of glass bottles with polyethylene terephthalate ("PET") bottles,
which are highly attractive to consumers because they are lightweight and have
the clarity of glass.
Sun Coast competes with several major corporations and numerous smaller
companies in the highly competitive closures market. The Company is a medium
size manufacturer in this industry and competes primarily on price, quality,
delivery and service.
DISCONTINUED OPERATIONS:
CONSUMER PRODUCTS AND FOODSERVICE DIVISIONS
On December 6, 1996, the Company's Board of Directors adopted a formal plan
to dispose of its Foodservice and Consumer Products Tableware Divisions,
including the Company's subsidiary in Mexico and to consider strategic
alternatives related to the on-going business. These divisions have been
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, which among other provisions, requires the plan
of disposal to be carried out within one year. Management believes this is a
reasonable time period for the disposal. In February 1997, the Company sold its
Foodservice Division and it has plans underway to exit the Consumer Products
Tableware Division, either through sale or termination of operations.
Based on management's assumptions used in determining the estimated loss
from the disposal of the Tableware business, the Company recorded a provision of
$4.9 million, net of income taxes, in the fiscal year ended June 30, 1997. This
loss consisted of the estimated net loss on the sale of the Foodservice Division
and estimated net loss on the exit of the Consumer Products Tableware Division
of approximately $4.0 million, net of income taxes, as well as estimated
operating losses during the period required to dispose of the divisions of
approximately $0.9 million, net of income taxes.
Sales for the divisions for the five months of fiscal 1997 prior to the
December 6th Board's decision to discontinue these operations were $7.7 million.
Sales for the twelve month periods ended June 30, 1995 and 1996 were $24.5 and
$21.9 million, respectively. Interest expense allocated to the operating losses
of the discontinued operations was calculated as the ratio of the discontinued
operations net assets to the sum of consolidated net assets and consolidated
debt, multiplied by interest expense for the period.
The net assets of discontinued operations at June 30, 1997 were $7.6
million including an estimated reserve for loss on disposal of $3.3 million. The
remaining reserve for loss on disposal is considered adequate at June 30, 1997
to cover estimated future costs of disposal of the Consumer Products Tableware
Division.
See Note 2 of Notes to the Consolidated Financial Statements.
HISTORICAL BACKLOG
The Company's backlog is comprised of written purchase orders and
contracts, substantially all of which are cancelable on short -- generally 30
days -- notice. There is no assurance that some portion of the backlog may not
be canceled or that the level of backlog at any particular time is an
appropriate indicator of the future operating performance of the Company.
Backlog for products of the Resins and Compounds Division decreased 2.1% to
$3.0 million at June 30, 1997 from $3.1 million at June 30, 1996. This decrease
reflects shorter term purchase commitments as customers attempt to manage
inventory levels.
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Backlog for products of the Closures Division increased 26.0% to $36.9
million at June 30, 1997 from $29.3 million at June 30, 1996. This increase
primarily reflects increased volume of orders from existing customers as well as
orders from new customers. Management attributes this increase to the
consistency of the Closures Division's product quality and its level of customer
service.
In the Resins and Compounds Division, orders are generally shipped within
30 to 60 days of receipt. In the Closures Division, orders are based primarily
on customers' annual estimated needs. Other orders are for specific quantities
and some are multi-year. Customer commitments require delivery of a quantity of
closures per month for a specific number of months, with seasonal variations.
These commitments are generally subject to cancellation at the discretion of the
customer on 30 days' notice to the Company; however, longer term contracts do
include cancellation penalties. Customer written purchase orders for specific
quantities are generally filled as received, either out of inventory or current
production.
MAJOR CUSTOMERS
The Company supplies chemical products for several large customers which
may result in one customer accounting for more than 10% of the Company's net
sales in a given fiscal year. In fiscal 1997, sales of chemical products to
Wilsonart International, Inc. and Eagle Plastics, Inc. accounted for
approximately $14.2 million or 21.3% and $10.6 million or 15.9%, of the
Company's net sales, respectively.
The Company has sold chemical products to Wilsonart International, Inc. for
more than 20 years on the basis, the Company believes, of quality, service,
delivery and price. Wilsonart International, Inc. and Eagle Plastics, Inc. buy
through purchase orders issued periodically, which can be discontinued at any
time. Management believes that the Company has a good relationship with both
Wilsonart International, Inc. and Eagle Plastics, Inc.; however, the loss of
either of these customers or a significant portion of its business, would
adversely affect the business and financial condition of the Company. See Note
11 of Notes to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company has research and development laboratories at its principal
manufacturing facilities in Texas and Florida, where it continuously tests its
products, engages in product application research and endeavors to develop new
products to complement those presently offered. The Company employs nine people
in research and development, including one Ph.D. and two chemists. Research and
development expenditures for fiscal 1995, 1996, and 1997 were $1.1 million, $0.7
million, and $1.2 million, respectively.
RAW MATERIALS
The principal raw materials used by the Company in manufacturing plastic
products and compounds are melamine crystals, urea crystals, styrene
acrylonitrile, polypropylene and polyethylene resins, formaldehyde, cellulose
fillers, pigments, plasticizers, curing agents and lining material.
Historically, these materials have been available in sufficient quantities for
the Company's needs; however, during fiscal 1998, the world-wide supply of
melamine is not meeting demand causing price increases during the first and
second quarters.
Although the cost of raw materials used in the Company's operations have
historically been relatively stable, their prices increased significantly during
fiscal 1995 and the first half of fiscal 1996. The most dramatic change was in
the prices of formaldehyde, melamine and pulp. These repeated cost increases had
a significant impact on gross margin and earnings during fiscal 1995 and fiscal
1996. Costs did decline in the second half of fiscal 1996 improving
profitability in fiscal 1997. See additional discussion in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
EMPLOYEES
At June 30, 1997 Sun Coast had 454 employees, of whom 99 were office or
clerical and 355 hourly manufacturing. Local No. 745 of the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America is the
exclusive collective bargaining agent for the approximately 213 hourly
manufacturing employees at the Company's Dallas, Texas facility pursuant to a
three-year union contract which expires on March 31, 1998. None of the Company's
139 hourly employees at its Sarasota, Florida
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facility, or the 3 hourly employees at its Murfreesboro, Tennessee facility is
represented by a labor union. Management believes that it has a good
relationship with its employees.
ITEM 2. PROPERTIES
The Company owns a 72,000 square foot office, manufacturing and warehouse
building and a 74,000 square foot manufacturing and warehouse building in
Sarasota, Florida. In Dallas, Texas, it also owns a 348,000 square foot office
and manufacturing building and a 75,000 square foot warehouse which is currently
underutilized and is listed for sale. At the Florida facilities, the Company
manufactures closures. At its Texas facility, the Company manufactures melamine
and plastic injection molded consumer products and foodservice products and
chemical products. Both Texas facilities and one Florida facility secure the
Company's existing bank indebtedness. In Mexico City, Mexico, the Company leases
a 32,000 square foot office, manufacturing and warehouse facility under a lease
expiring in April 1999 and has entered into a one year renewable lease for
23,000 square feet of additional warehouse space effective July 1, 1995. In
Murfreesboro, Tennessee, the Company leases approximately 5,000 square feet of
space to manufacture chemical products. The Company believes that, after its
sale of the Texas 75,000 square foot warehouse, its properties are adequate for
current uses.
On September 12, 1996 the Company sold a 60,000 square foot manufacturing
building in Dallas, Texas for $525,000 in cash and a note in the principal
amount of $200,000. The proceeds were used to repay bank debt.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain legal proceedings that management
regards as normal to its business. The Company believes that the disposition of
these matters will not have a material impact on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 3, 1993, the Common Stock of the Company has been listed on
the New York Stock Exchange under the symbol SN. Prior to that date, the Common
Stock was listed on the NASDAQ National Market System. The following table sets
forth, for the periods indicated, the high and low sales prices per share of the
Common Stock.
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<CAPTION>
HIGH LOW
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<S> <C> <C>
FISCAL 1996
First Quarter............................................. $10.38 $6.88
Second Quarter............................................ 9.00 6.63
Third Quarter............................................. 7.63 4.88
Fourth Quarter............................................ 6.50 4.00
FISCAL 1997
First Quarter............................................. $ 5.13 $3.50
Second Quarter............................................ 4.00 2.75
Third Quarter............................................. 3.75 2.25
Fourth Quarter............................................ 4.63 1.88
</TABLE>
At September 22, 1997, there were approximately 2,245 record holders of the
Common Stock.
The Company has never declared or paid cash dividends on the Common Stock.
Management intends to retain any future earnings for the operation and expansion
of the Company's business and does not anticipate paying any cash dividends in
the foreseeable future. The Company's existing credit facility restricts the
Company's ability to pay dividends. See Note 6 of Notes to the Consolidated
Financial Statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the periods from July 1, 1992
until June 30, 1997 are derived from the consolidated financial statements of
the Company which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The data should be read in conjunction with the
Consolidated Financial Statements, the related notes and the independent
auditors' report, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the other financial information included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------
1993(3) 1994(3) 1995(3) 1996(3) 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................ $46,085 $53,228 $61,455 $58,879 $66,716
Costs and expenses:
Costs of sales......................... 36,348 41,826 50,606 48,602 53,666
Selling, general and administrative.... 6,630 6,818 9,075 8,314 7,207
Interest, net.......................... 898 858 1,231 1,506 1,932
Restructuring charge (1)............... -- 642 -- -- --
------- ------- ------- ------- -------
43,876 50,144 60,912 58,422 62,805
------- ------- ------- ------- -------
Income from continuing operations
before income taxes................. 2,209 3,084 543 457 3,911
Provision for income taxes............. 842 889 282 261 1,571
------- ------- ------- ------- -------
Income from continuing operations........ 1,367 2,195 261 196 2,340
Discontinued operations:(2)
Income (loss) from discontinued
operations, net of income taxes..... 2,322 1,069 784 (2,011) (819)
Loss on disposal of discontinued
operations, net of income taxes..... -- -- -- -- (4,855)
------- ------- ------- ------- -------
Net income (loss).............. $ 3,689 $ 3,264 $ 1,045 $(1,815) $(3,334)
======= ======= ======= ======= =======
Net income (loss) per common share:
Continuing operations.................. .34 .54 .06 $ .05 $ .58
Discontinued operations................ .59 .27 .20 (.50) (1.40)
------- ------- ------- ------- -------
Net income (loss) per common share....... $ .93 $ .81(1) $ .26 $ (.45) $ (.82)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------
1993(3) 1994(3) 1995(3) 1996(3) 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................ $ 7,119 $12,760 $19,022 $(6,141) $ 2,084
Total assets............................. 36,165 48,213 54,670 53,494 45,296
Long-term debt........................... 12,885 19,685 26,464 2,522 13,455
Stockholders' equity..................... 12,107 15,482 16,773 14,844 11,793
</TABLE>
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(1) During the second quarter of fiscal 1994, the Company recorded a
restructuring charge related to a reduction in its work force and the
consolidation of certain corporate functions.
(2) During the second quarter of fiscal 1997, the Company adopted a plan to
dispose of its Foodservice and Consumer Products Divisions including the
Company's foreign subsidiary in Mexico. A loss of $4,855,000, net of income
taxes, was recorded. See Note 2 of the Notes to the Consolidated Financial
Statements.
(3) Data for the years ended June 30, 1993, 1994, 1995 and 1996 have been
restated to present separately the results of continuing and discontinued
operations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items from the
consolidated statements of operations as a percentage of sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1995 1996 1997
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<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales............................................ 82.3 82.5 80.4
Selling, general and administrative....................... 14.8 14.1 10.8
Interest, net............................................. 2.0 2.6 2.9
----- ----- -----
99.1 99.2 94.1
----- ----- -----
Income from continuing operations before income taxes..... 0.9 0.8 5.9
Provision for income taxes................................ 0.5 0.5 2.4
----- ----- -----
Income from continuing operations................. 0.4 0.3 3.5
Income (loss) from discontinued operations, net of income
taxes.................................................. 1.3 (3.4) (1.2)
Loss on disposal of discontinued operations, net of income
taxes.................................................. -- -- (7.3)
----- ----- -----
Net income (loss)................................. 1.7% (3.1)% (5.0)%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS FOR FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 13.3% to $66.7 million during 1997 from $58.9 million
in 1996. Closure Division's sales increased 5.0% to $28.9 million in 1997 from
$27.6 million in 1996 and Resins and Compounds Division's sales increased 20.6%
to $37.8 million in 1997 from $31.3 million in 1996 both due to increased
customer orders, certain of which are non-recurring in the Resins and Compounds
Division.
Cost of sales as a percentage of sales decreased to 80.4% in 1997 from
82.5% in 1996. This improvement in gross margin was due primarily to the
increased sales volume and decreased raw material prices. Additional overhead
may be charged to the Resins and Compounds Division in the future due to the
shutdown of the Consumer Products and Foodservice Tableware Divisions; however,
it is too early to predict the impact on future cost of sales.
Selling, general and administrative expense ("SG&A") decreased 13.3% to
$7.2 million in 1997 from $8.3 million in 1996. The reduction in SG&A in 1997 is
primarily due to a non-recurring severance payment made to the former President
of the Company in February 1996, and other related expenses.
Despite lower average borrowings during the year, interest expense
increased 28.3% from 1996 to 1997 primarily due to an increase in interest rates
with new bank financing completed in January 1997. The average outstanding
borrowings during 1997 were $25.5 million compared to an average of $29.5
million in 1996.
Income from continuing operations was $2.3 million ($0.58 per share) in
fiscal 1997 versus income from continuing operations of $0.2 million ($0.05 per
share) in fiscal 1996. This increase is primarily due to increased sales volumes
in fiscal 1997 and the severance payments in fiscal 1996, discussed above.
RESULTS OF OPERATIONS FOR FISCAL 1996 COMPARED TO FISCAL 1995
Total sales decreased 4.2% to $58.9 million during 1996 from $61.5 million
in 1995. Substantially all of this decrease occurred in the first half of the
year and related principally to volume declines in response to the Company's
effort to pass through raw material cost increases on the Company's product
lines. Sales in the Resins and Compounds Division decreased 10.3% to $31.3
million in 1996 from $34.9 million in 1995. The
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decrease in Resins and Compounds Division sales was due to volume decreases as
customers declined to accept price increases and instead used the opportunity to
reduce their own inventory levels as their markets weakened. Sales in the
Closures Division increased 3.8% to $27.6 million in 1996 from $26.5 million in
1995, resulting from price increases and the addition of new products and
customers.
Cost of sales as a percentage of sales increased to 82.5% in 1996 from
82.3% in 1995. The decline in gross margin was the result of raw material price
increases and related volume declines as customers resisted price pass-throughs
from the increased costs of raw materials.
Selling, general and administrative expense ("SG&A") decreased 8.4% to $8.3
million in 1996 from $9.1 million in 1995. The decrease is attributed to the
overall decline in sales volumes.
Interest expense increased 22.3% from 1995 to 1996 due to increased
borrowings and higher interest rates near the end of fiscal 1996. The average
outstanding borrowings during 1996 were $29.5 million compared to an average of
$25.9 million in 1995.
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 fiscal 1997, the Company repaid net borrowings by $9.9
million. Cash flow from continuing operations generated $13.0 million.
Capital expenditures for fiscal 1997 were $4.0 million including
approximately $2 million for the purchase, in January 1997, of a second facility
to expand capacity in the Closures Division in Florida. Anticipated future
capital additions should approximate $3 million during fiscal 1998.
At June 30, 1997, the Company's cash and cash equivalents were $0.3 million
and working capital was $2.1 million. In addition, the Company had total
long-term debt outstanding of $19.3 million (including current portion), with a
weighted average interest rate at June 30, 1997 of 9.5%.
In January 1997, the Company refinanced its existing debt with a new lender
to provide a total credit facility of $30 million in borrowings secured by
substantially all the assets of the Company. The facility provides for
borrowings under three separate arrangements -- (i) a term loan in an aggregate
principal amount of $10 million payable in monthly installments through January
31, 2000, (ii) a second term loan in an aggregate principle amount of $5 million
payable in monthly installments beginning January 1, 1998 through January 31,
2000, and (iii) a $15.0 million revolving loan, due January 31, 2000. As of June
30, 1997, outstanding borrowings under the credit facility included $13.7
million under the two term loans and $3.6 million under the revolving credit
line. At June 30, 1997 based on the Company's borrowing formula, incremental
borrowing availability was approximately $7.6 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, limitations 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
net worth, working capital and fixed charge coverage and a limitation on annual
capital expenditures.
The Company's plan to discontinue its Tableware business should not have an
overall material impact on liquidity. Certain cash proceeds were received from
the sale of its Foodservice Division and there were offsetting cash needs
related to severance, relocation and other costs of discontinuing the Consumer
Products Division. The majority of costs related to the discontinuation of the
tableware business are non-cash.
Management believes internally generated funds and proceeds from sale of
assets should be adequate to meet future debt repayments and capital expenditure
needs.
The Company's Mexican subsidiary, included in discontinued operations, is
subject to currency risk to the extent its net assets, denominated in pesos, are
devalued against the U.S. dollar.
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INFLATION
The effect of inflation on operating costs has been minimal in prior years.
However, the cost of raw materials used in the Company's operations increased
significantly during 1995 and early 1996. These increased raw material costs had
a material impact upon the Company's gross margin and earnings during fiscal
1995 and 1996. While some raw materials experienced declines in price in fiscal
1997 helping overall profitability, the overall future impact is not predictable
at this time. Currently, the world-wide supply of melamine is not meeting demand
causing price increases in the first two quarters of 1998.
AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards No. 128 "Earnings per Share," No. 129 "Disclosure of
Information about Capital Structure," No. 130 "Reporting Comprehensive Income"
and No. 131 "Disclosures about Segments of an Enterprise and Related
Information." Statements 128 and 129 are required to be adopted in fiscal 1998
and Statements 130 and 131 are required to be adopted in fiscal 1999. Statement
128 requires the disclosure of basic and diluted earnings per share, which
measures are not expected to differ significantly from the primary and fully
diluted earnings per share presently disclosed. Statement 130 will require the
Company to report comprehensive income and its components with the same
prominence as other financial statements. Statements 129 and 131 are not
expected to significantly change the Company's current disclosures.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K 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-K, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedule of the Company as of
June 30, 1996 and 1997, and for each of the years in the three-year period ended
June 30, 1997, are included as part of this report beginning on Page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
9
<PAGE> 11
PART III.
Portions of the registrant's definitive proxy statement prepared for use in
connection with the 1997 Annual Meeting of shareholders to be held November 21,
1997, dated on or about October 28, 1997, have been incorporated by reference as
listed below. The proxy is expected to be filed with the Securities and Exchange
Commission on or about October 28, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and executive officers is included in the
Election of Directors Section of the Company's definitive proxy statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in the Executive
Compensation Section of the Company's definitive proxy statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners
and management in included in the Stock Ownership Section of the Company's
definitive proxy statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
included in the Certain Transactions Section of the Company's definitive proxy
statement and is incorporated herein by reference.
10
<PAGE> 12
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
1. Consolidated Financial Statements
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets, June 30, 1996 and 1997......... F-3
Consolidated Statements of Operations, Years Ended June 30,
1995, 1996, and 1997........................................ F-4
Consolidated Statements of Cash Flows, Years Ended June 30,
1995, 1996 and 1997......................................... F-5
Consolidated Statements of Stockholders' Equity, Years Ended
June 30, 1995, 1996
and 1997.................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
2. Consolidated Financial Statement Schedule II
-- Valuation and Qualifying Accounts and Reserves........... F-18
</TABLE>
Schedules other than as listed above are omitted because they are not
required or are not applicable or the information is immaterial in relation to
the registrant's consolidated financial statements.
3. Exhibits
The information required by this Item 14(a)(3) is set forth in the index to
Exhibits accompanying this Annual Report on Form 10-K.
B. REPORTS ON FORM 8-K
Not applicable.
F-1
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sun Coast Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Sun Coast
Industries, Inc. and subsidiaries as of June 30, 1996 and 1997, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the years in the three-year period ended June 30, 1997. In connection
with our audits of the consolidated financial statements, we have also audited
the accompanying financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sun Coast
Industries, Inc. and subsidiaries as of June 30, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Dallas, Texas
August 22, 1997
F-2
<PAGE> 14
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,778 $ 324
Accounts receivable, net of allowance for doubtful
accounts of $76 in 1996 and $170 in 1997............... 8,451 8,273
Inventories (Note 3)...................................... 5,397 4,358
Other current assets...................................... 417 112
Net assets of discontinued operations (Note 2)............ 12,704 7,580
------- -------
Total current assets.............................. 28,747 20,647
Property, plant and equipment, net (Note 4)................. 23,113 22,466
Intangible assets, net...................................... 251 253
Deferred income taxes (Note 7).............................. 13 96
Other assets................................................ 1,370 1,834
------- -------
$53,494 $45,296
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,266 $ 5,485
Accrued expenses (Note 5)................................. 2,863 7,214
Current portion of long-term debt (Note 6)................ 26,759 5,864
------- -------
Total current liabilities......................... 34,888 18,563
Long-term debt, exclusive of current portion (Note 6)....... 2,522 13,455
Deferred income taxes (Note 7).............................. 1,240 1,485
COMMITMENTS AND CONTINGENCIES (Note 12)
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 shares
authorized: 4,017,629 issued and 4,004,229 outstanding
in 1996; and 4,117,629 issued and 4,104,229 outstanding
in 1997................................................ 40 41
Additional paid-in capital................................ 11,339 11,621
Treasury stock, 13,400 shares at cost..................... (153) (153)
Retained earnings......................................... 3,618 284
------- -------
Total stockholders' equity........................ 14,844 11,793
------- -------
$53,494 $45,296
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 15
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Continuing operations:
Net sales................................................. $61,455 $58,879 $66,716
------- ------- -------
Costs and Expenses:
Costs of sales......................................... 50,606 48,602 53,666
Selling, general and administrative.................... 9,075 8,314 7,207
Interest, net.......................................... 1,231 1,506 1,932
------- ------- -------
60,912 58,422 62,805
------- ------- -------
Income from continuing operations before provision for
income taxes.............................................. 543 457 3,911
Provision for income taxes.................................. 282 261 1,571
------- ------- -------
Income from continuing operations......................... 261 196 2,340
Discontinued operations: (Note 2)
Income (loss) from discontinued operations, net of income
taxes of $461, $(1,078) and $(405), respectively....... 784 (2,011) (819)
Loss on disposal of discontinued operations, net of income
taxes of $2,987........................................ -- -- (4,855)
------- ------- -------
Net income (loss)................................. $ 1,045 $(1,815) $(3,334)
======= ======= =======
Net income (loss) per common share:
Continuing operations..................................... $ 0.06 $ 0.05 $ 0.58
Discontinued operations................................... 0.20 (0.50) (1.40)
------- ------- -------
Net income (loss) per common share.......................... $ 0.26 $ (0.45) $ (0.82)
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 16
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 1,045 $(1,815) $ (3,334)
Adjustments to reconcile net income (loss):
(Income) loss from discontinued operations............. (784) 2,011 819
Loss on disposal of discontinued operations............ -- -- 4,855
Depreciation and amortization.......................... 3,640 4,247 4,579
Deferred income taxes.................................. 673 (900) 162
Gain on sale of property, plant and equipment.......... -- -- (119)
Provision (credit) for doubtful accounts............... 14 (36) 94
Changes in assets and liabilities:
Accounts receivable.................................. 244 (2,905) 84
Inventories, net..................................... (1,616) 2,088 1,039
Other current assets................................. 775 (30) 305
Intangible and other assets.......................... (378) 15 (48)
Accounts payable and accrued expenses................ (3,521) 1,511 4,570
------- ------- --------
Net cash provided by continuing operations........ 92 4,186 13,006
Net cash used by discontinued operations.......... (3,064) (840) (2,654)
------- ------- --------
Net cash provided (used) by operating
activities...................................... (2,972) 3,346 10,352
------- ------- --------
Cash flows from investing activities:
Capital expenditures...................................... (6,062) (2,819) (3,958)
Proceeds from dispositions of property, plant and
equipment.............................................. -- -- 660
Proceeds from disposal of discontinued operations......... -- -- 2,104
------- ------- --------
Net cash used in investing activities................ (6,062) (2,819) (1,194)
------- ------- --------
Cash flows from financing activities:
Net proceeds (repayments) of revolving credit line........ 2,685 1,640 (9,432)
Proceeds from long-term debt.............................. 8,384 2,386 15,800
Repayment of long-term debt............................... (3,085) (3,867) (16,312)
Debt issue costs.......................................... -- -- (668)
Issuance of common stock.................................. 246 72 --
------- ------- --------
Net cash provided (used) by financing activities..... 8,230 231 (10,612)
------- ------- --------
Change in cash and cash equivalents......................... (804) 758 (1,454)
Cash and cash equivalents at beginning of year.............. 1,824 1,020 1,778
------- ------- --------
Cash and cash equivalents at end of year.................... $ 1,020 $ 1,778 $ 324
======= ======= ========
</TABLE>
See Notes 1, 6, and 7 for supplementary disclosures.
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 17
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK EARNINGS EQUITY
--------- ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
At June 30, 1994..................... 3,974,314 $40 $11,054 -- $ 4,388 $15,482
Exercise of options.................. 31,315 -- 246 -- -- 246
Net income........................... -- -- -- -- 1,045 1,045
--------- --- ------- ----- ------- -------
At June 30, 1995..................... 4,005,629 40 11,300 -- 5,433 16,773
Exercise of options.................. 12,000 -- 72 -- -- 72
Employee loan for options............ -- -- (33) -- -- (33)
Treasury stock transaction........... (13,400) -- -- (153) -- (153)
Net loss............................. -- -- -- -- (1,815) (1,815)
--------- --- ------- ----- ------- -------
At June 30, 1996..................... 4,004,229 40 11,339 (153) 3,618 14,844
Issuance of common stock for debt
refinancing (Note 6)............... 100,000 1 282 -- -- 283
Net loss............................. -- -- -- -- (3,334) (3,334)
--------- --- ------- ----- ------- -------
At June 30, 1997..................... 4,104,229 $41 $11,621 $(153) $ 284 $11,793
========= === ======= ===== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 18
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
NOTE 1 -- THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Sun Coast Industries, Inc. (the "Company") manufactures and sells plastic
closures, lids and melamine and urea resins and compounds. The Resins and
Compounds 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 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. The Consumer Products and Foodservice Divisions, which
are being discontinued (see Note 2), manufacture compression molded melamine
dinnerware and injection molded plastic drinkware and other houseware products,
which the Company sells to U.S., Canadian and Mexican retail and commercial
markets.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
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 year consolidated 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. See Note 3.
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 and amortized over 1 to 3 years. 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.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net identifiable assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, ranging from 5-20 years. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
F-7
<PAGE> 19
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
July 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of the Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
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. Advertising
expense for fiscal years 1995, 1996 and 1997 was $212,000, $97,000 and $14,000,
respectively.
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 (loss). The principal temporary differences are
described in Note 7.
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123. See Note 8.
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 liability
exists at June 30, 1997.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
year after giving effect to stock options and warrants considered to be dilutive
common stock equivalents. The weighted average number of common shares
F-8
<PAGE> 20
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding was 4,076,792 in 1995, 4,005,394 in 1996 and 4,045,713 in 1997.
Primary and fully diluted net income (loss) per common share amounts are the
same.
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. Research and development costs
amounted to $1,086,000, $733,000 and $1,222,000 in fiscal years 1995, 1996 and
1997 respectively.
STATEMENTS 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. Cash equivalents at June 30, 1996 and 1997 were not
significant. Noncash capital lease financing transactions totaled $121,000 in
fiscal 1995 and $265,000 in fiscal 1997 and a noncash treasury stock transaction
totaled $153,000 in fiscal 1996. Common stock issued in conjunction with debt
refinancing was valued at $283,000 in fiscal 1997 (See Note 6). See Note 12 for
additional noncash transactions.
NOTE 2 -- DISCONTINUED OPERATIONS
On December 6, 1996, the Company's Board of Directors adopted a formal plan
to dispose of its Foodservice and Consumer Products Tableware Divisions
including the Company's foreign subsidiary in Mexico and to consider strategic
alternatives related to the on-going business. These divisions have been
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, which among other provisions, requires the plan
of disposal to be carried out within one year. Management believes this is a
reasonable time period for the disposal. In February 1997, the Company sold its
Foodservice Division for cash proceeds of $2,104,000 and it has plans underway
to exit the Consumer Products Tableware Division, either through sale or
termination of operations.
Based on management's assumptions used in determining the estimated gain or
loss from the disposal of the tableware business, the Company recorded a
provision of $4,855,000, net of income taxes, for the loss on disposal of the
discontinued business in the fiscal year ended June 30, 1997. This loss on
disposal of discontinued operations resulted from the estimated net loss on the
sale of the Foodservice Division and estimated net loss on the exit of the
Consumer Products Tableware Division of approximately $3,997,000, net of income
taxes, as well as estimated operating losses during the period required to
dispose of the divisions of approximately $858,000, net of income taxes.
Sales of the divisions for the five months of fiscal 1997 prior to the
December 6th Board's decision to discontinue these operations were $7,678,000.
Sales for the twelve month periods ended June 30, 1995 and 1996 were $24,532,000
and $21,911,000, respectively. Interest expense allocated to the operating
losses of the discontinued operations was calculated as the ratio of the
discontinued operations net assets to the sum of consolidated net assets and
consolidated debt, multiplied by interest expense for the period.
The remaining reserve for loss on disposal is considered adequate at June
30, 1997, to cover estimated future costs of disposal of the Consumer Products
Tableware Division.
F-9
<PAGE> 21
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net assets of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 8,701 $ 6,401
Plant, property and equipment............................... 5,598 4,117
Intangible and other assets................................. 690 503
Current liabilities......................................... (393) (280)
Accrued expenses............................................ (72) (870)
Long term debt.............................................. (1,000) (1,000)
Deferred taxes.............................................. (1,488) 1,309
Foreign currency translation................................ 668 737
Provision for estimated loss on disposal.................... -- (3,337)
------- -------
Net assets of discontinued operations....................... $12,704 $ 7,580
======= =======
</TABLE>
NOTE 3 -- INVENTORIES
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 2,831 $ 2,438
Work-in-process............................................. 326 111
Finished goods.............................................. 2,799 2,443
------- -------
5,956 4,992
Obsolescence reserve........................................ (559) (634)
------- -------
$ 5,397 $ 4,358
======= =======
</TABLE>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 634 $ 824
Buildings................................................... 6,862 7,962
Machinery and equipment..................................... 20,932 22,203
Machinery and equipment under capital leases................ 378 378
Molds....................................................... 8,491 9,061
Furniture and fixtures, leasehold improvements and other.... 6,111 6,405
-------- --------
43,408 46,833
Less accumulated depreciation and amortization.............. (20,295) (24,367)
-------- --------
$ 23,113 $ 22,466
======== ========
</TABLE>
Accumulated amortization of machinery and equipment under capital leases
was $267,000 and $343,000 at June 30, 1996 and 1997, respectively.
F-10
<PAGE> 22
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries and other benefits................................. $ 1,139 $ 1,207
Property taxes payable...................................... 452 462
Income taxes payable........................................ -- 4,317
Other....................................................... 1,272 1,228
------- -------
$ 2,863 $ 7,214
======= =======
</TABLE>
NOTE 6 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Term loan................................................... $ 5,818 $ 13,742
Revolving credit line....................................... 12,659 3,643
Capital expenditures term loan.............................. 8,437 --
Industrial development revenue bonds........................ 2,175 2,025
Capitalized lease obligations............................... 192 178
-------- ---------
29,281 19,588
Less debt issue costs....................................... -- (269)
Less current portion........................................ (26,759) (5,864)
-------- ---------
$ 2,522 $ 13,455
======== =========
</TABLE>
On January 31, 1997, the Company refinanced its existing debt with a new
lender to provide a total credit facility of $30 million in borrowings secured
by substantially all the assets of the Company. The facility provides for
borrowings under three separate arrangements -- (i) a term loan in an aggregate
principal amount of $10 million payable in monthly installments through January
31, 2000, (ii) a second term loan in an aggregate principal amount of $5 million
payable in monthly installments beginning January 1, 1998 through January 31,
2000, and (iii) a $15.0 million revolving loan, due January 31, 2000. As of June
30, 1997, outstanding borrowings under the credit facility included $13.7
million under the two term loans, and $3.6 million under the revolving credit
line. At June 30, 1997, based on the Company's borrowing formula incremental
borrowing availability was approximately $7.6 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 and a limitation on annual capital
expenditures. In conjunction with the refinancing, the Company issued 100,000
shares of its common stock to the new lender.
As the Company is currently in compliance with the loan covenants on its
new debt, the Company has classified its outstanding debt as current or long
term based upon its scheduled maturity obligations.
The industrial development revenue bonds were used to finance the cost of a
production and office facility (completed during 1988) and certain machinery in
Florida. The bonds bear interest at 78% of prime, are payable in monthly
installments of $12,500 through 2011, and are secured by the underlying facility
and equipment. The weighted average interest rate on all outstanding debt at
June 30, 1997 was 9.5%.
The estimated fair value of the Company's debt approximates the carrying
value at June 30, 1996 and 1997. Interest paid (net of $206,000 and $53,000
capitalized in 1996 and 1997, respectively) amounted to $1,692,000 in 1995, and
$1,801,000 in 1996 and $1,735,000 in 1997.
F-11
<PAGE> 23
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled debt maturities (excluding capital lease obligations) subsequent
to June 30, 1997 are as follows: $5,833,000 in 1998, $3,030,000 in 1999,
$8,972,000 in 2000, $150,000 in 2001, $150,000 in 2002 and $1,275,000
thereafter.
NOTE 7 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $(348) $ 1,101 $ 942
State................................................. (43) 60 467
----- ------- -------
(391) 1,161 1,409
Deferred federal and state.............................. 673 (900) 162
----- ------- -------
$ 282 $ 261 $ 1,571
===== ======= =======
Income taxes paid (refunded)............................ $ 967 $ (496) $ (683)
===== ======= =======
</TABLE>
A reconciliation of the federal statutory tax rate with the effective tax
rate follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit..... 11.1 2.8 5.0
Goodwill write-off and amortization....................... 11.9 1.2 0.7
Meals and entertainment................................... 2.5 9.6 0.5
Other..................................................... (7.6) 9.4 --
---- ----- ----
Effective tax rate.......................................... 51.9% 57.0% 40.2%
==== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 29 $ 65
Accrued expenses.......................................... 312 277
Inventories............................................... 177 328
AMT credit carryforward................................... 311 --
------- -------
Total gross deferred tax assets................... 829 670
------- -------
Deferred tax liabilities:
Property, plant and equipment............................. (1,218) (1,485)
Inventories............................................... (732) (531)
Other..................................................... (106) (43)
------- -------
Total gross deferred tax liabilities.............. (2,056) (2,059)
------- -------
Net deferred tax liability........................ $(1,227) $(1,389)
======= =======
</TABLE>
No valuation allowance related to deferred tax assets was necessary for any
of the periods presented as management believes it is more likely than not that
such deferred tax assets will be realized.
F-12
<PAGE> 24
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- STOCKHOLDERS' EQUITY
STOCK WARRANTS
The Company has outstanding warrants at June 30, 1997 to purchase 115,884
shares of common stock at $12.94 per share which were issued in connection with
obtaining financing for the purchase of a subsidiary. The warrants are
exercisable through 2002 and contain antidilution provisions which cause both
the number of warrants and the exercise price to change as certain events occur.
STOCK OPTIONS
The 1994 Long Term Incentive Plan provides that officers and key employees
may be granted stock appreciation rights, restricted stock, performance share
awards, nonqualified stock options or incentive stock options for the purchase
of the Company's common stock. Up to 250,000 shares of the Company's common
stock may be issued on exercise of options and rights granted under this plan.
The type, terms and timing of options granted will be determined at the
discretion of the Board of Directors.
The Directors Formula Stock Option Plan provides for each non-employee
director and Chairman to be granted 1,000 options initially and 500 options each
fiscal year for purchase of the Company's common stock at the fair market value
at the date of grant.
No future grants will be made under the Company's previous incentive stock
option plans. At June 30, 1997, previously granted options for 134,700 shares
remain outstanding under these plans. The per share weighted average fair value
of stock options granted during 1996 and 1997 was $3.36 and $2.68 on the date of
grant using the Black Scholes option-pricing model with the following weighted
average assumptions: 1996 -- expected volatility 59.8%, expected dividend yield
of 0.0%, risk-free interest rate of 6.6% and an expected life of 7 years;
1997 -- expected volatility 61.0%, expected dividend yield of 0.0%, risk-free
interest rate of 6.5% and an expected life of 7 years.
Transactions in stock options under these plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
-------- ----------------
<S> <C> <C>
Options outstanding at June 30, 1994...................... 408,800 $10.75
Options granted......................................... 46,000 10.55
Options exercised....................................... (31,315) 8.22
Options terminated...................................... (80) 9.40
--------
Options outstanding at June 30, 1995...................... 423,405 10.92
Options granted......................................... 122,000 5.05
Options exercised....................................... (12,000) 5.98
Options terminated...................................... (154,700) 11.20
--------
Options outstanding at June 30, 1996...................... 378,705 8.96
Options granted......................................... 54,750 3.97
Options terminated...................................... (49,200) 14.66
--------
Options outstanding at June 30, 1997...................... 384,255 $ 7.52
========
</TABLE>
At June 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.37-$15.00 and 1.24
years, respectively.
At June 30, 1997 and 1996, the number of options exercisable was 189,205
and 194,205, respectively, and the weighted-average exercise price of those
options was $8.79 and $10.05, respectively.
F-13
<PAGE> 25
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss and loss per common share would have been adjusted to the pro
forma amounts indicated below (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C> <C>
Net loss............................................ As reported $(1,815) $(3,334)
Pro forma (1,825) (3,416)
Net loss per common share........................... As reported $ (0.45) $ (0.82)
Pro forma (0.45) (0.84)
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss and loss per
common share amounts presented above because compensation cost is reflected over
the options' vesting period of 5 years and compensation cost for options granted
prior to July 1, 1995 is not considered.
STOCKHOLDER RIGHTS PLAN
On June 6, 1995, the Company adopted a Stockholder Rights Plan as amended
on December 5, 1995 and, in connection with such plan, declared a dividend
distribution of one right for each outstanding share of the Company's $0.01 par
value common stock, payable on July 6, 1995 to stockholders of record on that
date. Each right entitles the stockholders to buy from the Company one share of
common stock at a price of $50.00 per share. The rights will not be exercisable
or separable from the common stock until ten business days after a party
acquires beneficial ownership of 15% or more of the Company's common stock or
announces a tender offer for at least 15% of its outstanding common stock. The
Plan excludes James M. Hoak from causing the rights to become exercisable until
such time as Mr. Hoak, together with certain affiliated and associated persons,
collectively own 20% or more of the Company's common stock.
In the event the Company is acquired in a merger or other business
combination transaction, at any time after a person or group has acquired
beneficial ownership of 15% or more (or, in the case of Mr. Hoak, 20% or more)
of the Company's common stock, each right will entitle its holder to purchase,
at the right's then current exercise price, that number of acquiring company's
common shares having a market value of two times the exercise price of the
right. If any person or group acquires beneficial ownership of 15% or more (or,
in the case of Mr. Hoak, 20% or more) of the Company's common stock, each right
will entitle its holder (other than such person or any member of such group) to
buy a number of additional shares of the Company's common stock having a market
value of twice the exercise price of each right. Alternatively, if a person or
group has acquired 15% or more (or, in the case of Mr. Hoak, 20% or more) of the
Company's common stock, but less than 50% of the common stock, the Company may
at its option exchange each right of a holder (other than such person or any
member of such group) for one share of common stock. The rights, which are
subject to adjustment, may be redeemed by the Company at a price of $0.01 per
right at any time prior to expiration on July 6, 2005 or the point at which they
become exercisable.
The Stockholder Rights Plan is designed to assure that the Company's
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company and to guard against partial tender offers and other
abusive takeover tactics to gain control of the Company without paying all
stockholders a fair price.
NOTE 9 -- BUSINESS SEGMENT INFORMATION
A description of each of the Company's two segments and their products and
markets served is included in Note 1.
F-14
<PAGE> 26
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating profit by segment and geographic area is total operating revenue
less expenses which are related to the unit's operating revenue. Identifiable
assets by segment and geographic area are those assets that are used in the
operation of that unit. Corporate assets consist principally of discontinued
operations net assets, deferred income taxes and other intangible assets.
A summary of information about the Company's operations by segment follows:
<TABLE>
<CAPTION>
OPERATING ASSETS AT DEPRECIATION CAPITAL
NET SALES INCOME (LOSS) JUNE 30 AND AMORTIZATION EXPENDITURES
--------- ------------- --------- ---------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1995
Chemical...................... $34,912 $ (166) $22,596 $1,133 $3,198
Closures...................... 26,543 3,636 17,448 2,170 2,864
------- ------- ------- ------- ------
Total operating segments...... 61,455 3,470 40,044 3,303 6,062
Corporate..................... -- (1,696) 14,626 337 --
Interest, net................. -- (1,231) -- -- --
------- ------- ------- ------- ------
Total company................. $61,455 $ 543 $54,670 $3,640 $6,062
======= ======= ======= ======= ======
1996
Chemical...................... $31,326 $ 337 $23,829 $1,388 $1,956
Closures...................... 27,553 3,827 16,889 2,460 863
------- ------- ------- ------- ------
Total operating segments...... 58,879 4,164 40,718 3,848 2,819
Corporate..................... -- (2,201) 12,776 399 --
Interest net.................. -- (1,506) -- -- --
------- ------- ------- ------- ------
Total company................. $58,879 $ 457 $53,494 $4,247 $2,819
======= ======= ======= ======= ======
1997
Chemical...................... $37,787 $ 3,421 $19,489 $2,012 $ 325
Closures...................... 28,929 4,265 17,831 2,383 3,898
------- ------- ------- ------- ------
Total operating segments...... 66,716 7,686 37,320 4,395 4,223
Corporate..................... -- (1,843) 7,976 184 --
Interest, net................. -- (1,932) -- -- --
------- ------- ------- ------- ------
Total company................. $66,716 $ 3,911 $45,296 $4,579 $4,223
======= ======= ======= ======= ======
</TABLE>
Operating income is total revenue less operating expenses. No general
administrative expenses were specifically identified with the discontinued
operations and, therefore, have been included in the table above as continuing
operations.
NOTE 10 -- PENSION, RETIREMENT, PROFIT SHARING AND SAVINGS PLANS
The Company has separate pension plans covering bargaining unit employees
and substantially all other employees. Benefits under the bargaining unit plan
are set by contract with the union at a fixed amount per year of service, which
also requires contributions at certain intervals, as stipulated in the union
contract. Benefits under the other plan were frozen effective February 1, 1994.
F-15
<PAGE> 27
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension cost and significant assumptions follow:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the
period.......................................... $ 59 $ 62 $ 54
Interest cost on projected benefit obligation..... 316 331 338
Actual return on assets........................... (463) (388) (737)
Net amortization and deferral of gains and
losses.......................................... 108 18 354
----- ----- -----
Net periodic pension cost............... $ 20 $ 23 $ 9
===== ===== =====
Weighted average discount rate.................... 7.5% 7.5% 7.0% and 7.5%
Rate of increase in compensation level............ N/A N/A N/A
Long-term rate of return on plan assets........... 7.0 7.0 7.0 and 7.5
</TABLE>
A summary of the plans' funded status and amounts recognized in the
Company's consolidated balance sheets follow:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, fully vested.............. $ 4,829 $ 5,112
======= =======
Projected benefit obligation.............................. $(4,829) $(5,112)
Plan assets at fair value................................. 5,501 6,033
------- -------
Plan assets in excess of projected benefit obligation..... 672 921
Unrecognized net gain and transition asset.................. (30) (190)
------- -------
Prepaid pension asset included in other assets.............. $ 642 $ 731
======= =======
</TABLE>
The Company and its subsidiaries have a defined contribution profit sharing
and savings plan for the benefit of employees. Company contributions to the
profit sharing and savings plans were $111,000, $141,000 and $139,000 for fiscal
years 1995, 1996, and 1997, respectively.
NOTE 11 -- BUSINESS AND CREDIT CONCENTRATION
The Company frequently bids for large contracts for its products which may
result in individual customers accounting for more than 10% of its net sales in
a given fiscal year. Sales to a single customer were approximately $12,275,000,
$13,882,000 and $14,242,000 for fiscal years 1995, 1996 and 1997, respectively.
Sales to a second customer were approximately $9,374,000, $8,114,000 and
$10,594,000 in fiscal years 1995, 1996 and 1997, respectively. No other
customers represented more than 10% of the Company's net sales in 1995, 1996 or
1997. The Company had accounts receivable balances from these major customers of
approximately $3,655,000 and $4,094,000 as of June 30, 1996, and 1997,
respectively. Customers from many geographic locations are granted credit on an
unsecured basis. Management believes that sufficient allowances for doubtful
accounts have been provided as of June 30, 1996 and 1997.
F-16
<PAGE> 28
SUN COAST INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment used in the manufacturing of products.
Rental expense under operating leases was $797,000, $1,154,000 and $788,000 in
fiscal years 1995, 1996 and 1997, respectively. Future minimum lease payments
under capital and operating leases with initial or remaining terms of one year
or more at the end of fiscal year 1997 follow (included in the capital lease
payments is imputed interest of $50,000):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, CAPITAL OPERATING
-------------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $159 $555
1999................................................... 69 473
2000................................................... -- 369
2001................................................... -- 243
2002................................................... -- 180
Thereafter............................................. -- 193
</TABLE>
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company is responsible for certain expected losses related
primarily to workers' compensation. Provisions for losses expected under this
program are actuarially determined based upon estimates of the aggregate
liability for claims incurred. Such estimates utilize certain actuarial
assumptions followed in the insurance industry.
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a material impact on the financial
condition or results of operations of the Company.
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are summarized as follows (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL YEAR 1996 QUARTERS FISCAL YEAR 1997 QUARTERS
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales......................................... $14,146 $13,311 $16,081 $15,341 $15,996 $15,585 $18,140 $16,995
Gross margin.................................. 2,517 2,232 2,917 2,611 3,281 3,052 3,164 3,553
Income (loss) before income tax from
continuing operations....................... 180 105 (164) 336 792 336 856 1,927
Income (loss) from continuing operations...... 125 136 (176) 213 535 237 569 999
Loss from discontinued operations............. 65 (475) (968) (633) (345) (474) -- --
Loss from disposal of discontinued
operations.................................. -- -- -- -- -- (5,025) -- 170
Net income (loss) per common share:
Continuing operations......................... .01 .03 (.04) .05 .14 .06 .14 .24
Discontinued operations....................... .02 (.11) (.25) (.16) (.07) (1.37) -- .04
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per common share............ $ .03 $ (.08) $ (.29) $ (.11) $ .07 $ (1.31) $ .14 $ .28
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
F-17
<PAGE> 29
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THREE YEARS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) OF PERIOD
----------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for doubtful accounts......... $ 76 $ 94 -- $ -- $ 170
Allowance for obsolete inventory........ $559 $ 94 -- $ (19) $ 634
Provision for estimated loss on disposal
of discontinued operations........... $ 0 $5,025 -- $(1,688) $3,337
Year ended June 30, 1996:
Allowance for doubtful accounts......... $112 $ 106 -- $ (142) $ 76
Allowance for obsolete inventory........ $278 $ 457 -- $ (176) $ 559
Year ended June 30, 1995:
Allowance for doubtful accounts......... $ 98 $ 165 -- $ (151) $ 112
Allowance for obsolete inventory........ $213 $ 394 -- $ (329) $ 278
</TABLE>
- ---------------
(1) Write-offs against allowance
<PAGE> 30
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, thereto duly authorized.
SUN COAST INDUSTRIES, INC.
Date September 24, 1997 By: /s/ EDDIE M. LESOK
------------------------------------
Eddie M. Lesok
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JAMES D. IRELAND III Chairman of the Board and Director September 24, 1997
- -----------------------------------------------------
James D. Ireland III
/s/ EDDIE M. LESOK President, Chief Executive Officer September 24, 1997
- ----------------------------------------------------- and Directors
Eddie M. Lesok
/s/ CYNTHIA R. MORRIS Secretary, Treasurer (Principal September 24, 1997
- ----------------------------------------------------- Accounting and Financial
Cynthia R. Morris Officer)
/s/ STEVE BARTLETT Director September 24, 1997
- -----------------------------------------------------
Steve Bartlett
/s/ JAMES H. MILLER Director September 24, 1997
- -----------------------------------------------------
James H. Miller
/s/ JAMES R. PARISH Director September 24, 1997
- -----------------------------------------------------
James R. Parish
/s/ ARNO F. PIRKAU Director September 24, 1997
- -----------------------------------------------------
Arno F. Pirkau
/s/ WAYNE L. KERN Director September 24, 1997
- -----------------------------------------------------
Wayne L. Kern
</TABLE>
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- 1984 Incentive Stock Option Plan (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on March 15,
1993 and incorporated herein by reference).
10.2 -- 1987 Incentive Stock Option Plan (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on March 15,
1993 and incorporated herein by reference).
10.3 -- 1993 Incentive and Non-Statutory Stock Option Plan (filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange
Commission on March 15, 1993 and incorporated herein by
reference).
10.4 -- 1994 Long-Term Incentive Plan (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on December
16, 1994 and incorporated herein by reference).
10.5 -- 1994 Director Stock Option Plan (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on December
16, 1994 and incorporated herein by reference).
10.6 -- Form of Director and Officer Indemnification Agreements
entered into between the Company and each director and
executive officer as of July 3, 1995 (filed as Exhibit
10.19 to the Company's Form 10-K dated June 30, 1995 and
incorporated herein by reference).
10.7 -- Loan, Mortgage and Security Agreement between Manatee
County, Florida and Sun Coast Plastics, Inc. dated as of
December 1, 1985 relating to Manatee County, Florida
Industrial Development Revenue Bonds, 1985 Series (Sun
Coast Plastics, Inc. Project) (filed as Exhibit 10.20 to
the Company's Registration Statement on Form S-2 filed on
February 17, 1995 and incorporated herein by reference).
10.8 -- Trust Indenture between Manatee County, Florida and Sun
Bank, National Association, as Trustee, dated as of
December 1, 1985, relating to Manatee County, Florida
Industrial Development Revenue Bonds, 1985 Series (Sun
Coast Plastics, Inc. Project) (filed as Exhibit 10.21 to
the Company's Registration Statement on Form S-2 filed on
February 17, 1995 and incorporated herein by reference).
10.9 -- United States of America, State of Florida, Manatee
County Industrial Development Revenue Bond, 1985 Series
(Sun Coast Plastics, Inc. Project) (filed as Exhibit
10.22 to the Company's Registration Statement on Form S-2
filed on February 17, 1995 and incorporated herein by
reference).
10.10 -- Rights Agreement, dated as of June 6, 1995, between the
Company and American Stock Transfer & Trust Company
(filed as Exhibit 1 to the Company's Current Report on
Form 8-K dated June 6, 1995 and incorporated herein by
reference).
10.11 -- Amendment No. 1 to Rights Agreement, dated as of December
5, 1995, between the Company and American Stock Transfer
& Trust Company (filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated December 11, 1995 and
incorporated herein by reference).
10.12 -- Amended Severance Agreement, dated March 13, 1996,
between the Company and Cynthia R. Morris (filed as
Exhibit 10.2 to the Company's Form 10-Q dated March 31,
1996 and incorporated herein by reference).
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 -- Severance Agreement, dated as of April 22, 1996, between
the Company and Eddie Lesok (filed as Exhibit 10.1 to the
Company's Form 10-Q dated March 31, 1996 and incorporated
herein by reference).
10.14 -- Severance Agreement, dated as of October 11, 1995 between
the Company and Arno F. Pirkau.
10.15 -- Financing Agreement between the Company and the CIT
Group/Business Credit, Inc. dated January 31, 1997 (filed
as Exhibit 10.1 to the Company's Form 10-Q dated December
31, 1996 and incorporated herein by reference).
21 -- Subsidiaries of the Company
23.1 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.14
SUN COAST INDUSTRIES, INC.
Severance Agreement
This Severance Agreement ("Agreement") is made and effective as of the
11th day of October 1995, by and between Sun Coast Industries, Inc., a Delaware
corporation having its principal place of business in Dallas, Dallas County,
Texas (the "Company"), and Arno F. Pirkau, an individual currently residing in
Parrish, Florida ("Employee").
RECITALS
The Board of Directors of the Company (the "Board") has determined that
it is in the best interest of the Company to assure that the Company will have
the continued dedication of the Employee, notwithstanding the possibility,
threat or occurrence of a Change of Control (as defined below). The Board
believes it is imperative to diminish the inevitable distraction of the
Employee by virtue of the personal uncertainties and risks created by a pending
or threatened Change of Control, to encourage the Employee's full attention and
dedication to the Company currently and in the event of any threatened or
pending Change of Control, and to provide Employee with compensation and
benefit arrangements upon a Change of Control which insures that such
compensation and benefits are competitive with other corporations.
AGREEMENT
Now, therefore, in consideration of Employee's continued employment by
Sun Coast Closures, Inc. ("SCC"), a Florida corporation and wholly-owned
subsidiary of the Company, as well as the promises, covenants and obligations
contained herein, the Company and Employee agree as follows:
1. Payment of Severance Amount. Upon the occurrence of a
Termination Event (as defined in paragraph 2), the Company shall:
(a) pay Employee an amount equal to (i) Employee's Base Annual
Salary (as defined in paragraph 2) multiplied by the Employment Term
Factor (as defined in paragraph 2), (ii) less all principal of any loans
from the Company to Employee, as well as any interest then due thereon,
payable as a lump sum cash payment within 30 days after the date of the
termination constituting such Termination Event (the "Termination
Date"), provided, Employee may elect to have such amount paid in equal
monthly installments over a period not to exceed 13 months;
(b) provide Employee with life, disability and medical
insurance at the level provided at either the date of the Change of
Control (as defined in paragraph 2) or the Termination Date, as Employee
shall in his sole discretion elect by providing written notice thereof
to the Company, for a period of time equal to twelve (12) months
multiplied by the Employment Term Factor (as defined in paragraph 2)
following the Termination Date, or such shorter period until Employee
shall obtain substantially equivalent insurance coverage from a
subsequent employer , if any, in the
<PAGE> 2
same manner as if Employee's employment had not been terminated until
the end of such period. Employee shall immediately notify the Company
upon obtaining any insurance from a subsequent employer and shall
provide all information required by the Company regarding such insurance
to enable the Company to make a determination of whether such insurance
is substantially equivalent.
(c) for a period of twelve months from and after such
Termination Event, or until such earlier time as the Employee obtains
other employment, provide the Employee with outplacement services of a
firm of Employee's choice.
(d) pay all reasonable legal fees and expenses incurred by
Employee in seeking to obtain or enforce any right or benefit provided
by the Agreement.
2. Definitions.
(a) A "Termination Event" shall be deemed to have occurred if:
(i) SCC or any successor thereto shall terminate
Employee's employment for any reason other than for Cause; or
(ii) The Employee shall voluntarily terminate his
employment with SCC within one (1) year of a Change of Control
for "Good Reason." For purposes of this Agreement, "Good Reason"
shall mean any of the following (without Employee's express
written consent):
(A) A significant and material change in the
nature or scope of the Employee's duties from those
engaged in immediately prior to the date on which a Change
of Control occurs to duties that are, taken as a whole,
inconsistent with Employee's range and duration of
experience; provided, however, that Employee's title,
scope of responsibility and authority may be altered (by
reason of the creation of or filling of offices with the
Company senior to Employee's office or otherwise) without
constituting "Good Reason" so long as Employee's new
duties are not inconsistent with his prior experience;
(B) A reduction in Employee's base salary from
that provided to him immediately prior to the date the
Change of Control occurs;
(C) A diminution in Employee's eligibility to
participate in bonus, stock option or other incentive
compensation plans or employee benefit plans (including
medical, dental, life insurance and long-term disability
plans) provided for executives with comparable duties; and
(D) Any required relocation of Employee of more
than thirty miles from Employee's the current location
(including any required business travel in excess of
the greater of 90 days per year or the level
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<PAGE> 3
of business travel of Employee prior to the most recent
Change of Control).
(b) A "Change of Control" shall be deemed to have occurred if.
(i) individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to
constitute at least fifty-one percent (51%) of the Board,
provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's stockholders was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
shall be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board;
(ii) the stockholders of the Company shall approve a
reorganization, merger or consolidation, in each case, with
respect to which persons who were the stockholders of the Company
immediately prior to such reorganization, merger or consolidation
do not, immediately thereafter, own more than fifty percent (50%)
of the combined voting power entitled to vote generally in the
election of directors of the reorganized, merged or consolidated
company's then outstanding voting securities, or of a liquidation
or dissolution of the Company or of the sale of all or
substantially all of the assets of the Company;
(iii) the stockholders of the Company shall approve a
sale of all or substantially all of the assets of the Company;
(iv) a stock sale, reorganization, merger or
consolidation of SCC takes place and the Company and/or its
subsidiaries do not, immediately thereafter, own more than 50% of
the combined voting power entitled to vote generally in the
election of directors of the sold, reorganized, merged or
consolidated company's then outstanding voting securities; or
(v) all or substantially all of the assets of SCC are
sold.
(c) "Employment Term Factor" is equal to (i) the sum of (a)
twelve plus (b) the number of years' service Employee has with the
Company (ii) divided by twelve. In no event will the Employment Term
Factor exceed three (3.0).
(d) "Base Annual Salary" shall, as determined on the
Termination Date, be equal to the greater of (i) Employee's annual
salary on the date of the earliest Change of Control to occur during the
eighteen month period prior to the Termination Date plus any bonuses or
special incentive payments received in the twelve months prior to such
Change of Control or (ii) Employee's annual salary on the Termination
Date plus any bonuses or special incentive payments received in the
prior twelve months.
-3-
<PAGE> 4
(e) "Cause" as used herein with respect to termination of
Employee's employment shall mean termination upon (A) the willful and
continued failure by Employee to substantially perform Employee's duties
with the Company (other than any such failure resulting from Employee's
incapacity due to physical or mental illness), after a demand for
substantial performance is delivered to you by the Chief Executive
Officer of the Company or the Board of Directors, which specifically
identifies the manner in which such officer or the Board of Directors
believes that Employee has not substantially performed Employee's
duties, or (B) the willful engaging by Employee in misconduct which is
materially injurious to the Company, monetarily or otherwise. For
purposes of this paragraph, no act, or failure to act, on Employee's
part shall be considered "willful" unless done, or omitted to be done,
by Employee not in good faith and without reasonable belief that
Employee's action or omission was in the best interest of the Company.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a notice of termination from the Chief Executive
Officer of the Company or the Board of Directors, after reasonable
notice to Employee and an opportunity for Employee, together with
Employee's counsel, to be heard before the Board of Directors, finding
that, in the good faith opinion of the Board, Employee was guilty of
conduct set forth above in clauses (A) or (B) of the first sentence of
this subparagraph and specifying the particulars thereof in detail.
3. Parachute Payment Limitations. Any other provision of this
Agreement to the contrary notwithstanding, if the total amount of payments and
benefits to be paid or provided to Employee under this Agreement which are
considered to be "parachute payments" within the meaning of Section 28OG of the
Internal Revenue Code of 1986, as amended (the "Code"), when added to any other
such "parachute payments" received by Employee from the Company or from a
member of the Company's affiliated group (as provided in Code Section
28OG(d)(5)), whether or not under this Agreement, are in excess of the amount
Employee can receive without causing the Company to lose its deduction with
respect to all or any portion of such total amount on account of Code Section
280G, the amount of payments and benefits to be paid or provided to Employee
under this Agreement which are parachute payments shall be reduced to the
highest amount which will not cause the Company to lose its deduction with
respect to any such payments and benefits on account of Code Section 280G.
4. Notices. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company to: Sun Coast Industries, Inc.
2700 South Westmoreland
Dallas, Texas 75233
Attention: Chairman of the Board
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<PAGE> 5
If to Employee to: Arno F. Pirkau
2945 Wilderness Boulevard East
Parrish, Florida 34219
or to such other address as either party may furnish to the other in writing in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
5. Applicable Law. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of Texas.
6. Severability. If a court of competent jurisdiction determines
that any provision of this Agreement is invalid or unenforceable, then the
invalidity or unenforceability of that provision shall not affect the validity
or enforceability of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
7. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
8. Withholding of Taxes. Company may withhold from any benefits
payable under this Agreement all federal, state, city or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
9. No Employment Agreement. Nothing in this Agreement shall give
employee any rights (or impose any obligations) to continued employment by the
Company or any subsidiary thereof or successor thereto, nor shall it give the
Company any rights (or impose any obligations) with respect to continued
performance of duties by Employee for the Company or any subsidiary thereof or
successor thereto.
10. Assignment.
(a) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder, except
as provided in the remainder of this paragraph 10. Without limiting the
foregoing, Employee's right to receive payments hereunder shall not be
assignable or transferable, whether by pledge, creation of a security
interest or otherwise, other than a transfer by his will or by the laws
of descent or distribution, and in the event of any attempted assignment
or transfer contrary to this paragraph 10 the Company shall have no
liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(b) The Company may: (x) as long as it remains obligated with
respect to this Agreement, cause its obligations hereunder to be
performed by a subsidiary or subsidiaries for which Employee performs
services, in whole or in part; (y) assigns this
-5-
<PAGE> 6
Agreement and its rights hereunder in whole, but not in part, to any
corporation with or into which it may hereafter merge or consolidate or
to which it may transfer all or substantially all of its assets, if said
corporation shall by operation of law or expressly in writing assume all
liabilities of the Company hereunder as fully as if it has been
originally named the Company herein; but may not otherwise assign this
Agreement or its rights hereunder. Subject to the foregoing, this
Agreement shall inure to the benefit of and be enforceable by the
Company's successors and assigns.
11. Modifications. This Agreement shall not be varied, altered,
modified, canceled, changed or in any way amended except by mutual agreement of
the parties in a written instrument executed by the parties hereto or their
legal representatives.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first above written.
SUN COAST INDUSTRIES, INC.
By: /s/ STEPHEN P. SMILEY
------------------------------------------
Stephen P. Smiley, Chairman of the Board
EMPLOYEE
/s/ ARNO F. PIRKAU
---------------------------------------------
Arno F. Pirkau
-6-
<PAGE> 1
EXHIBIT 21
SUN COAST INDUSTRIES, INC.
SUBSIDIARIES
Sun Coast Holdings, Inc., a Nevada corporation
Sun Coast Closures, Inc., a Florida corporation
Plastics Manufacturing Company, a Nevada corporation
Custom Laminates, Inc., a Nevada corporation
Sun Coast Acquisition, Inc., a Nevada corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sun Coast Industries, Inc.:
We consent to the incorporation by reference in the registration statements
(No. 33-59652, 33-80238, 33-87538 and 33-87544) on Form S-8 of Sun Coast
Industries, Inc. and subsidiaries of our report dated August 22, 1997, relating
to the consolidated balance sheets of Sun Coast Industries, Inc. and
subsidiaries as of June 30, 1996 and 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
years in the three year period ended June 30, 1997, and the related schedule,
which appears in the June 30, 1997 annual report on Form 10-K of Sun Coast
Industries, Inc.
KPMG PEAT MARWICK LLP
Dallas, Texas
September 25, 1997
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