<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1997
----------------------------------------
Commission File Number 1-12476
------------------------------
SUN COAST INDUSTRIES, INC.
--------------------------
(Exact name of Registrant)
Delaware #59-1952968
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
2700 South Westmoreland Ave., Dallas, TX 75233
----------------------------------------------
(Address of principal executive offices)
(214) 373-7864
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of February 10, 1998, the latest practicable date.
Class Outstanding at February 10, 1998
----- --------------------------------
Common stock $0.01 par value 4,117,929
1
<PAGE> 2
SUN COAST INDUSTRIES, INC.
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item I - Financial Statements
Condensed Consolidated Balance Sheets --December 31, 1997
and June 30, 1997 3
Condensed Consolidated Statements of Operations - Six Months
ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Operations - Three Months
Ended December 31, 1997 and 1996 6
Condensed Consolidated Statements of Cash Flows -- Six
Months ended December 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 8
Item II - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Items 1 through 6 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1997 June 30,
(unaudited) 1997
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 248 $ 324
Accounts receivable, net of allowance for
doubtful accounts of $120 and $170 7,279 8,273
Inventories (Note 3) 5,054 4,358
Other current assets 130 145
Net assets of discontinued
operations (Note 2) 4,940 7,580
-------- --------
Total current assets 17,651 20,680
Property, plant and equipment, net of accumulated
depreciation of $26,214 and $24,367 21,242 22,466
Intangible assets 239 253
Deferred income taxes 339 96
Other assets 1,945 1,834
-------- --------
Total assets $ 41,416 $ 45,329
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
<TABLE>
<CAPTION>
December 31,
1997 June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) 1997
---------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,669 $ 5,485
Accrued expenses 5,246 7,214
Current portion
of long-term debt (Note 4) 6,987 5,864
-------- --------
Total current liabilities 15,902 18,563
Long-term debt (Note 4) 11,248 13,455
Deferred income taxes 1,463 1,485
-------- --------
Total liabilities 28,613 33,503
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 40,000,000
shares authorized; 4,117,629
and 4,117,629 respectively, issued and
4,117,629 and 4,104,229, respectively,
outstanding 41 41
Additional paid-in capital 11,554 11,654
Treasury stock, 13,400 shares at cost -- (153)
Retained earnings 1,208 284
-------- --------
Total stockholders' equity 12,803 11,826
-------- --------
Total liabilities and stockholders' equity $ 41,416 $ 45,329
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------
1997 1996
-------- -------
<S> <C> <C>
Sales $ 32,969 $31,581
Costs and expenses:
Cost of sales 27,414 25,248
Selling, general and administrative 3,243 4,220
Interest, net 819 985
-------- -------
31,476 30,453
-------- -------
Income before provision for income taxes 1,493 1,128
Provision for income taxes (569) (356)
-------- -------
Income from continuing
operations 924 772
Discontinued operations: (Note 2)
Loss from discontinued
operations, net of income
taxes of $145 for 1996 -- (819)
Loss on disposal of discontinued
operations, net of income taxes
of $2,817 for 1996 -- (5,025)
-------- -------
Net income (loss) $ 924 $(5,072)
======== =======
Net income (loss) per common share:
Basic and Diluted EPS:
Continuing operations $ 0.22 $ 0.19
Discontinued operations -- (1.46)
-------- -------
Net income (loss) per common share $ 0.22 $ (1.27)
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------
1997 1996
------- --------
<S> <C> <C>
Sales $16,332 $ 15,585
Costs and expenses:
Cost of sales 13,049 12,533
Selling, general and administrative 1,763 2,228
Interest, net 416 488
------- --------
15,288 15,249
------- --------
Income before provision for income taxes 1,104 336
Provision for income taxes (428) (99)
------- --------
Income from continuing
operations 676 237
Discontinued operations: (Note 2)
Loss from discontinued
operations, net of income taxes
of $260 for 1996 -- (474)
Loss on disposal of discontinued
operations, net of income taxes
of $2,817 for 1996 -- (5,025)
------- --------
Net income (loss) $ 676 $ (5,262)
======= ========
Net income (loss) per common share:
Basic and Diluted EPS:
Continuing operations $ 0.16 $ 0.06
Discontinued operations -- (1.37)
------- -------
Net income (loss) per common share $ 0.16 $ (1.31)
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
SUN COAST INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION> Six Months Ended
December 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 924 $ (5,072)
Adjustments to reconcile net income (loss):
Loss from discontinued operations -- 819
Loss from disposal of discontinued operations -- 5,025
Depreciation and amortization 2,313 2,653
Loss (gain) on sale of property, plant and equipment 1 (44)
Deferred income taxes (265) 149
Credit for doubtful accounts (50) (1)
Changes in assets and liabilities:
Accounts receivable 1,044 1,438
Inventories, net (696) (215)
Other current assets 15 905
Intangible and other assets (301) (781)
Accounts payable and accrued expenses (3,731) (74)
------- --------
Net cash provided (used) by continuing operations (746) 4,802
Net cash provided by discontinued operations 1,999 595
------- --------
Net cash provided by operating activities 1,253 5,397
Cash flows from investing activities:
Capital expenditures (886) (1,183)
Dispositions -- 56
Proceeds from disposal of discontinued operations 641 --
------- --------
Net cash used in investing activities (245) (1,127)
Cash flows from financing activity -
Repayment of long-term debt (1,084) (2,374)
------- --------
Change in cash and cash equivalents (76) 1,896
Cash and cash equivalents at beginning of period 324 1,778
------- --------
Cash and cash equivalents at end of period $ 248 $ 3,674
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's (defined below) interim financial statements are unaudited
and should be read in conjunction with the consolidated financial
statements and notes thereto in its Form 10-K and Annual Report to
Stockholders for the year ended June 30, 1997.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair statement of the results of
operations for the interim periods presented.
Description of Business
Sun Coast Industries, Inc. (the "Company") manufactures and sells plastic
closures and melamine and urea resins and compounds. The Specialty Resins
and Compounds Division manufactures melamine and urea resins and
compounds, which it supplies to other manufacturers. (See Note 5 on sale).
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
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. 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. Certain amounts in
previously issued financial statements have been reclassified to conform
with the current year financial statement presentation.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined utilizing the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the related
assets. Lives assigned to asset categories are 5 to 15 years for machinery
and equipment, 30 to 35 years for buildings and 5 years for molds.
Machinery and equipment under capital leases are stated at the present
value of minimum lease payments 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.
8
<PAGE> 9
SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont'd)
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 cost of funds. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
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.
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.
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.
Environmental Costs
A liability for environmental assessments and/or cleanup is accrued when
it is probable a loss has been incurred and is estimable. No significant
liabilities were in existence at December 31, 1997 and June 30, 1997.
9
<PAGE> 10
SUN COAST INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont'd)
Net Income Per Common Share
On December 31, 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". This statement replaces the primary
and fully diluted earnings per share computations with basic and diluted
earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing net income
by weighted average number of common shares and dilutive securities
outstanding during the period and must be presented in all cases with basic
earnings per share. Dilutive securities consist of common stock options.
The reconciliation of common shares outstanding to dilutive common shares
outstanding is as follows:
<TABLE>
<CAPTION>
Six months Six months Three months Three months
ended Dec. 31, ended Dec. 31, ended Dec. 31, ended Dec. 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average
common shares
Dilutive securities- 4,117,629 4,004,229 4,117,629 4,004,229
common stock options 48,925 903 140,997 969
Weighted average --------- --------- --------- ---------
common shares plus 4,166,554 4,005,132 4,258,626 4,005,198
dilutive securities ========= ========= ========= =========
</TABLE>
Revenue Recognition
Sales are recognized when the product is shipped. Sales are shown net of
returns and allowances.
Research and Development
Research and development costs associated with new product development,
application and testing are expensed as incurred.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents. Cash equivalents at December 31, 1997 and June 30,
1997 were not significant.
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. Management believes this
disposal will be carried out by June 30, 1998. 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 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 six month periods ended December 31, 1997
and 1996 were $2,935,000 and $9,171,000, respectively.
The remaining reserve for loss on disposal is considered adequate at
December 31, 1997 to cover estimated future costs of disposal of the
Consumer Products Tableware Division.
10
<PAGE> 11
The net assets of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
(unaudited)
------------ --------
($ in thousands)
<S> <C> <C>
Current assets $ 2,769 $ 6,401
Plant, property and equipment 3,809 4,117
Intangible & other assets 489 503
Current liabilities (460) (280)
Accrued expenses (208) (870)
Long term debt -- (1,000)
Deferred taxes 584 1,309
Foreign Currency Translation 737 737
Provision for estimated loss
on disposal (2,780) (3,337)
------- -------
Net assets of discontinued
operations $ 4,940 $ 7,580
======= =======
</TABLE>
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
December 31,
1997 June 30,
(unaudited) 1997
------------ --------
(in thousands)
<S> <C> <C>
Raw Materials $ 2,182 $ 2,169
Work-in-process 333 384
Finished goods 2,930 2,439
---------- --------
5,445 4,992
Obsolescence reserve (391) (634)
---------- --------
$ 5,054 $ 4,358
========== ========
</TABLE>
11
<PAGE> 12
NOTE 4 - LONG TERM DEBT
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
(unaudited)
------------ -------
(in thousands)
<S> <C> <C>
Term Loan $12,520 $13,742
Revolving credit line 3,882 3,643
Industrial development revenue bonds 1,950 2,025
Capitalized lease obligations 100 178
------- -------
Subtotal 18,452 19,588
Less: Debt issuance costs (217) (269)
------- -------
18,235 19,319
Less: Current maturities on original
maturity schedule (6,987) (5,864)
------- -------
$11,248 $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 million
revolving loan, due January 31, 2000. As of December 31, 1997, outstanding
borrowings under the credit facility included $12.5 million under the two
term loans, and $3.9 million under the revolving credit line. At December
31, 1997, based on the Company's borrowing formula incremental borrowing
availability was approximately $5.1 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 material 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 net worth, working capital 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 maturity obligations.
NOTE 5 - SUBSEQUENT EVENTS
On February 6, 1998, the Company sold certain operating assets related to
the Specialty Resins and Compounds Division of Plastics Manufacturing
Company, a wholly owned subsidiary of Sun Coast Industries, Inc., for $13.8
million, subject to certain adjustments. The purchaser assumed certain
operating liabilities. No gain or loss is expected on the sale.
On January 28, 1998, the Company announced that a definitive merger
agreement with Kerr Group, Inc. had been signed, pursuant to which Kerr
will pay $10.75 in cash for each outstanding share of Sun Coast common
stock. The cash tender offer commenced of February 3, 1998 and is expected
to close March 1998.
12
<PAGE> 13
Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended December 31, 1997, Compared to the Three Months
Ended December 31, 1996 for Continuing Operations
Sales for the three months ended December 31, 1997, increased $747,000 or
4.8%, when compared to the same period in 1996 due primarily to increased
customer demand.
Cost of sales as a percentage of net sales decreased to 79.9% from 80.4%.
The improvement in gross margin was primarily the result of increased
volume.
Selling, general and administrative expense ("SG&A") decreased $465,000
to 10.8% of sales for the three months ended December 31, 1997 as
compared to 14.3% of sales for the three months ended December 31, 1996.
This decrease is the result of certain expenses related to the refinancing
of bank debt and costs related to review of various strategic alternatives
in the prior fiscal year.
Interest expense has decreased $72,000 for the three months ended
December 31, 1997 compared to the three months ended December 31, 1996
due to the Company's effort to pay down the long-term debt facility offset
by an increase in interest rates as a result of new bank financing
completed in January 1997.
Net income from continuing operations increased $439,000 from the
comparable prior fiscal period primarily due to the increased sales
volumes.
13
<PAGE> 14
Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months Ended December 31, 1997, Compared to the Six Months
Ended December 31, 1996 for Continuing Operations
Sales for the six months ended December 31, 1997, increased $1,388,000
or 4.4%, when compared to the same period in 1996 due primarily to
increased customer demand.
Cost of sales as a percentage of net sales increased to 83.2% from 79.9%.
The decrease in gross margin was primarily the result of volume decreases
affecting absorption as well as certain price reductions in the Closure's
division during the first quarter of fiscal 1998. In the Chemical
division, a worldwide shortage of one of it's primary raw materials
resulted in cost increases that were not passed through until the second
quarter of fiscal 1998.
Selling, general and administrative expense ("SG&A") decreased $977,000 to
9.8% of sales for the six months ended December 31, 1997 as compared to
13.4% of sales for the six months ended December 31, 1996. This decrease
is primarily the result of nonrecurring legal expenses incurred in the
comparable prior fiscal period.
Interest expense has decreased $166,000 for the six months ended
December 31, 1997 compared to the six months ended December 31, 1996
primarily due to the Company's effort to pay down the long-term debt
facility offset by an increase in interest rates as a result of the new
bank financing completed in January 1997.
Net income from continuing operations increased $152,000 from the
comparable prior fiscal period primarily due to increased sales volumes.
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. Management believes this
disposal will be carried out by June 30, 1998. 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 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 six month periods ended December 31, 1997
and 1996 were $2,935,000 and $9,171,000, respectively.
The remaining reserve for loss on disposal is considered adequate at
December 31, 1997 to cover estimated future costs of disposal of the
Consumer Products Tableware Division.
Liquidity and Capital Resources
Management reviews the Company's working capital, accounts receivable and
relationship of debt to equity on a continuing basis. The Company's growth
has been financed through long-term debt financing and cash generated from
operations. During the six months ended December 31, 1997, the Company
repaid net borrowings by $1,084,000. Cash flow used in continuing
operations was $746,000.
Capital expenditures for the six months ended December 31, 1997 were
$886,000. Anticipated future capital additions should approximate less
than $3 million for the remainder of fiscal 1998.
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
14
<PAGE> 15
principle amount of $5 million payable in monthly installments beginning
January 1, 1998 through January 31, 2000, and (iii) a $15 million revolving
loan, due January 31, 2000. As of December 31, 1997, outstanding borrowings
under the credit facility included $12.5 million under the two term loans
and $3.9 million under the revolving credit line. At December 31, 1997,
based on the Company's borrowing formula incremental borrowing availability
was approximately $5.1 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 net worth, working capital and fixed charge coverage and a limitation on
annual capital expenditures.
On February 6, 1998 the Company sold certain operating assets related to
the Specialty Resins and Compounds Division. The cash proceeds of $13.8
million were applied to the Company's outstanding borrowings. As of
February 6, 1998 outstanding borrowings under the credit facility included
$2.1 million under the two term loans.
The Company's Mexican subsidiary, included in discontinued operations, is
subject to currency risk to the extent its net assets, denominated in
pesos, devalues against the U.S. dollar.
Disclosures Regarding Forward-Looking Statements
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this Form
10-Q, including, without limitation, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" regarding the Company's financing alternatives, financial
position, business strategy, plans and objectives of management of the
Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the
expectations reflected in any such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to
have been correct. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company's business, including but
not limited to, the intense competition in its markets, its recent
experience of increasing raw material prices, the absence of assurance of
strategic and financing alternatives, Mexican currency fluctuations and
its reliance on certain key customers; all of which may be beyond the
control of the Company. Any one or more of these factors could cause
actual results to differ materially from those expressed in any forward-
looking statement. All subsequent written and oral forward-looking
statements attributable to the Company or person acting on its behalf are
expressly qualified in their entirety by the cautionary statements
disclosed in this paragraph and otherwise in this report.
15
<PAGE> 16
SUN COAST INDUSTRIES, INC.
December 31, 1997
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
On February 6, 1998, the Company sold to Borden Chemical, Inc.
substantially all the assets of the Speciality Resins and Compounds
Division for $13.8 million, subject to certain adjustments. The purchaser
assumed certain operating liabilities.
On January 28, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Kerr Group, Inc. ("Kerr") and Saffron
Acquisition Corp., a wholly-owned subsidiary of Kerr (the "Purchaser"),
pursuant to which the Purchaser has commenced a tender offer (the "Offer")
to purchase all of the outstanding shares of the Company's common stock,
par value $0.01 per share (the "Shares"), for a cash price of $10.75 per
Share. The Offer is conditioned upon, among other things, the tender of at
least a majority of the Shares outstanding on a fully diluted basis. The
Merger Agreement provides that following consummation of the Offer, the
Purchaser will be merged (the "Merger") with and into the Company and
those Shares that are not acquired in the Offer will be converted into the
right to receive $10.75 per Share in cash.
The Board of Directors of the Company has unanimously approved the
Merger Agreement, the Offer and the Merger and determined that the shares
of the offer and the Merger are fair to, and in the best interest of,
the Company and the holders of the Shares. The Company has filed with the
Securities and Exchange Commission a Schedule 14D-9, describing the
factors considered by the Board in arriving at its recommendation.
Item 6 - Exhibits and Reports in Form 8K
(a) Exhibits:
Exhibit 2.1 Agreement and Plan of Merger, dated as of January 28, 1998,
among Sun Coast Industries, Inc., Kerr Group, Inc. and
Saffron Acquisition Corp. (filed as Exhibit 1 to the
Company's Schedule 14D-9 filed on February 3, 1998 and
incorporated herein by reference).
Exhibit 2.2 Company Option Agreement, dated as of January 28, 1998 among
Sun Coast Industries, Inc. and Kerr Group, Inc. (filed as
Exhibit 2 to the Company's Schedule 14D-9 filed on February
3, 1998 and incorporated herein by reference).
Exhibit 2.3 Guarantee, dated as of January 28, 1998, between Sun Coast
Industries, Inc. and Fremont Partners, L.P. (filed as
Exhibit 3 to the Company's Schedule 14D-9 filed on February
3, 1998 and incorporated herein by reference).
Exhibit 2.4 Stockholder Agreement, dated as of January 28, 1998, between
Kerr Group, Inc. and James M. Hoak, Jr. (filed as Exhibit 4
to the Company's Schedule 14D-9 filed on February 3, 1998
and incorporated herein by reference).
Exhibit 10.1 Rights Agreement, dated as of June 6, 1995, between Sun
Coast Industries, Inc. and American Stock Transfer & Trust
Company (filed as Exhibit 5 to the Company's Schedule 14D-9
filed on February 3, 1998 and incorporated herein by
reference).
Exhibit 10.2 Amendment No. 2 to the Rights Agreement, dated as of January
28, 1998, between Sun Coast Industries, Inc. and American
Stock Transfer & Trust Company (filed as Exhibit 6 to the
Company's Schedule 14D-9 filed on February 3, 1998 and
incorporated herein by reference).
Exhibit 10.3 Purchase and Sale Agreement dated as of December 22, 1997
between Sun Coast Industries, Inc., Sun Coast Holdings, Inc.
and Plastics Manufacturing Company, and Borden Chemical,
Inc. (filed as Exhibit 10 to the Company's Schedule 14D-9
filed on February 3, 1998 and incorporated herein by
reference).
Exhibit 10.4 Confidentiality Agreement dated November 14, 1997, between
the Company and Fremont Partners, L.P. (filed as Exhibit 11
to the Company's Schedule 14D-9 filed on February 3, 1998
and incorporated herein by reference).
Exhibit 10.5 Confidentiality Agreement dated January 8, 1998, among the
Company, Fremont Partners, L.P. and Kerr Group, Inc. (filed
as Exhibit 12 to the Company's Schedule 14D-9 filed on
February 3, 1998 and incorporated herein by reference).
b. On February 6, 1998, the Company filed a Form 8-K to report the
disposition of assets of its Speciality Resins and Compound Division,
as further described in Item 5 hereof.
27 Financial Data Schedule
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sun Coast Industries, Inc.
------------------------------------------------------
Registrant
2/13/98 By: /s/ EDDIE M. LESOK
- -------- --------------------------------------------------
Date Eddie M. Lesok, Chief Executive Officer
and President
2/13/98 By: /s/ CYNTHIA R. MORRIS
- -------- --------------------------------------------------
Date Cynthia R. Morris, CFO, Secretary and Treasurer
17
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 248
<SECURITIES> 0
<RECEIVABLES> 7,399
<ALLOWANCES> 120
<INVENTORY> 5,054
<CURRENT-ASSETS> 17,651
<PP&E> 47,456
<DEPRECIATION> 26,214
<TOTAL-ASSETS> 41,416
<CURRENT-LIABILITIES> 15,902
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 12,762
<TOTAL-LIABILITY-AND-EQUITY> 41,416
<SALES> 32,969
<TOTAL-REVENUES> 32,969
<CGS> 27,414
<TOTAL-COSTS> 27,414
<OTHER-EXPENSES> 4,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 819
<INCOME-PRETAX> 1,493
<INCOME-TAX> (569)
<INCOME-CONTINUING> 924
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 924
<EPS-PRIMARY> .22
<EPS-DILUTED> .00
<FN>
<F1>Net Assets of Discontinued Operations-4,940
</FN>
</TABLE>
