SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 1, 1997 Commission File No. 1-6914
SUN CITY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-0950777
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5545 N.W. 35 Ave. Fort Lauderdale, FL 33309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 730-3333
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_____
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FINANCIAL INFORMATION
The consolidated financial statements included herein have been
prepared by the Company, without audit, according to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. The financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to represent fairly the financial position
and results of operations as of and for the periods indicated. The
statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended February 1, 1997.
The results of operations for the nine month period ended
November 1, 1997, are not necessarily indicative of results to be
expected for the entire year ending January 31, 1998.
SUN CITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
November 1, February 1,
ASSETS 1997 1997
CURRENT ASSETS:
Accounts and trade notes receivable,
less allowance for doubtful accounts
of approximately $195,000 and $186,000
in 1997 and 1996, respectively 5,031,210 5,521,144
Inventories 1,628,269 2,344,987
Notes receivable - current portion 17,333 18,927
Prepaid expenses 101,694 218,838
TOTAL CURRENT ASSETS 6,778,506 8,093,896
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 108,133 108,133
Buildings and improvements 358,508 499,917
Machinery and equipment 1,746,815 2,243,175
2,213,456 2,851,225
Less accumulated depreciation (1,251,013) (1,319,437)
962,443 1,531,788
Properties held for sale 512,148 504,849
Long-term notes receivable 75,930 88,308
Excess of purchase price over fair value
of net assets acquired 1,148,680 1,780,836
OTHER ASSETS 492,455 447,340
TOTAL $9,970,162 $12,447,017
November 1, February 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
CURRENT LIABILITIES:
Cash Overdraft 593,630 214,744
Accounts payable $4,718,697 $5,003,332
Accrued expenses 2,164,661 734,354
Current portion of long-term debt 2,180,500 1,720,129
TOTAL CURRENT LIABILITIES 9,657,488 7,672,559
DEFERRED COMPENSATION PAYABLE 123,106
LONG-TERM DEBT 3,439,464 5,409,828
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value 3,000,000
shares authorized; 2,276,116 shared
issued in 1997 and 1996 227,612 227,612
Capital in excess of par value 1,041,721 1,041,721
Retained earnings (1,570,562) 2,004,838
(301,229) 2,107,084
Less: Treasury stock at cost, 828,214
and 837,164 shares in 1997 and 1996,
respectively (2,653,560) (2,653,560)
Less: Receivable for common stock sold
to ESOP (172,000) (212,000)
TOTAL STOCKHOLDERS' EQUITY (3,126,789) (758,476)
TOTAL $9,970,163 $12,447,017
See notes to consolidated financial statements
SUN CITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
Sales 47,511,727 50,595,997 13,185,625 16,063,150
Costs and Expenses
Cost of goods sold 40,701,706 43,261,570 11,050,908 13,918,194
Operating expenses 3,441,654 3,805,518 1,045,269 1,308,957
Selling, general and
administrative expenses 3,756,845 3,118,414 1,425,627 968,334
Provision for loss on
disposal of a subsidiary 1,333,461 52,494
Interest expense 666,943 655,626 199,581 237,585
Other expense, net 19,431 67,690 3,095 59,666
Total Cost and Expenses 49,920,040 50,908,818 13,776,974 16,492,736
(Loss) From Operations
Before Income Taxes (2,408,313) (312,821) (591,349) (429,586)
Provision For Income Taxes - - - -
Net (Loss) $(2,408,313) $(312,821) $(591,349) $(429,586)
(Loss)Per Common Share $(1.66) $(.21) $(.41) $(.28)
See notes to consolidated financial statements
SUN CITY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
November 1, November 2,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
Net earnings (loss) $(2,408,313) $(312,821)
Adjustments To Reconcile Net Earnings
To Net Cash Provided By
Operating Activities:
Depreciation 248,578 272,937
Amortization of excess of purchase price
over fair market value of net assets
acquired 58,673 64,474
Provision for losses on accounts receivable 317,867 132,570
Change in assets and liabilities:
Decrease in trade accounts receivable 172,067 1,214,492
Decrease in inventories 706,718 304,145
Decrease (Increase) in prepaid expenses 117,144 (87,685)
Decrease (Increase) in other assets 528,368 (141,020)
(Decrease) in accounts payable (284,635) (297,900)
Increase (Decrease) in accrued expenses 1,430,307 (188,276)
Decrease (Increase) in deferred
compensation payable (123,106) 18,000
Total Adjustments 3,171,981 1,297,737
Net Cash Provided By
Operating Activities $763,668 $978,916
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets,net 313,467 (30,236)
Cash Provided By
Investing Activities 313,467 (30,236)
Cash Flows From Financing Activities:
Principal payments on notes payable (1,817,345) (1,585,952)
Proceeds from notes payable 307,352 60,000
Proceeds from receivable from ESOP 40,000 53,000
Proceeds from exercise of options - 75
Repayments on notes receivable 13,972 10,977
Net Cash (Used In)
Financing Activities (1,456,021) (1,585,952)
Net (Decrease) Increase In Cash
and Equivalents (378,886) (513,220)
(CASH OVERDRAFT) CASH AND EQUIVALENTS
Beginning of Year (214,744) 760,885
(CASH OVERDRAFT) CASH AND EQUIVALENTS
End of Year $ 593,630) $ 247,665
See notes to consolidated financial statements
SUN CITY INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
(Unaudited)
A. Basis of Presentation:
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements
of Sun City Industries, Inc. and subsidiaries have been prepared by the
Company without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information related to the Company's
organization, significant accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and the results
of the operations for the periods presented and the disclosures herein are
adequate to make the information presented not misleading. Operating results
for the interim periods presented are not indicative of the results that can
be expected for a full year.
Going Concern
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying financial statements, during the nine months ended November 1,
1997, the Company incurred a net loss of $2,408,314, and as of November 1,
1997 the Company had a stockholders' deficit of . These factors among others
may indicate that the Company will be unable to continue as a going concern
for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company is not in compliance with several
provisions of its line of credit agreement and the lender has placed
significant operating and financing restrictions on the Company pursuant to a
forbearance agreement. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms and covenants of its
financing agreements, to obtain additional financing or refinancing as may be
required, and ultimately to attain successful operations.
B. New Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128, "Earnings per Share"
("SFAS 128") which changes the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. Basic earnings per
share is computed by dividing the net income available to common shareholders
by the weighted average shares of outstanding common stock. The calculation
of diluted earnings per share is similar to basic earnings per share except
that the denominator includes dilutive common stock equivalents such as stock
options and warrants. The statement is effective for financial statements for
periods ending December 31, 1997. The Company will adopt SFAS 128 in the
fourth quarter of fiscal 1998, as early adoption is not permitted. The
adoption of SFAS 128 is not expected to have an impact on the Company's
earnings per share.
C. Reverse Acquisition:
On June 17, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with SeaSpecialties, Inc. ("SeaSpecialties"), a
private company. Under the terms of the Agreement, upon completion of the
merger, the shareholders of SeaSpecialties will own approximately 83% of the
common stock of the combined entities. The transaction will be accounted for
as a reverse acquisition and upon consummation SeaSpecialties will be the
surviving entity. Also, SeaSpecialties entered into a Management Agreement to
manage the Company until the merger is completed.
D. Provision for Loss on Planned Disposal of Subsidiary:
On August 31, 1997, the Company closed its subsidiary, Gulf Coast
Foodservice, Inc. Management anticipates that, as a consequence of terminating
the operations of this subsidiary and disposing of its assets, the Company
will have a loss of approximately $1,300,000. Such loss has been provided for
and the related impaired assets have been written down to estimated fair value
in the accompanying condensed consolidated financial statements.
E. Legal Proceedings:
On June 16, 1997, a suit was filed in Broward County, Florida, Circuit
Court against Sun City's subsidiary, Sheppard Foodservice, Inc., and Sun City
alleging a default by Sheppard Foodservice, Inc. in its obligations to make
purchase price payments under the January 31, 1995 Asset Purchase Agreement
under which Sheppard Foodservice, Inc. acquired its business from Sheppard
Distibutors, Inc., a Florida corporation now known as Page & McKean, Inc. Sun
City is the guarantor of the obligations of Sheppard Foodservice under the
Asset Purchase Agreement. The plaintiffs also sought a declaratory judgement
that the alleged default released the plaintiffs from certain noncompete
agreements given in connection with the Asset Purchase Agreement.
As of November 25, 1997, the parties entered into a Settlement
Agreement under which Sheppard Foodservice, Inc. and Sun City agreed to pay
the plaintiffs on or before February 28, 1998, the amount of $253,278 which
amount is the regular obligation payable in accordance with the Asset Purchase
Agreement and interest thereon at the rate of 10.5% per annum from June 1,
1997 as well as plaintiffs' legal fees in the amount of $18,263. Sheppard
Foodservice also agreed to pay an affiliate of the plaintiff the amount of
$9,009 with interest at 10.5% from August 13, 1997, representing a commercial
account debt. In exchange for this agreement, the plaintiffs agreed to
suspend proceedings in the lawsuit until March 1, 1998. If the foregoing
payments are not timely made, the Settlement Agreement allows the plaintiffs
to file stipulated final judgment against Sheppard Foodservice, Inc. and Sun
City for all relief sought in the lawsuit.
The complaint filed in the above litigation sought only money damages
relating to the payment due on May 27, 1997, which the plaintiffs estimated at
that time to be in excess of $150,000. Since the deferred portion of the
purchase price under the Asset Purchase Agreement is not a fixed amount, but
is computed with reference only to ongoing average annual net profits of
Sheppard Foodservice, Inc., there is no fixed amount owed that could be
accelerated because of the default, and the complaint did not seek any such
remedy.
If the proposed merger with SeaSpecialties does not occur on or before
March 1, 1998, it is likely that the defendants would be unable to pay the
required settlement amounts and that Sheppard Foodservice, Inc. would suffer
the total loss of its business through enforcement of the Settlement Agreement
and the stipulated final judgment and anticipated reaction by Sun City's
primary lender, which holds a first security interest in the inventory and
receivables of Sheppard Foodservice, Inc. In fiscal 1996-1997 Sheppard
Foodservice had sales and operating revenue of $15,160,239 with a net profit
of $300,700.
Part 1
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL:
Sun City Industries, Inc. (the "Company"), which began in 1949 as an egg
processing and marketing company, has now moved its focus to the foodservice
marketing and distribution business throughout parts of the eastern seaboard
of the United States with a heavy concentration in the State of Florida. In
1990, the Company began its expansion as a foodservice distributor that now
includes five centers in Florida covering the West Coast of Florida, Central
Florida and Southeast Florida. In addition, the Company has operations that
distribute to markets in Atlanta, Georgia, Baltimore, Maryland, Philadelphia,
Pennsylvania and throughout New Jersey. The Company's clientele includes
hotels, restaurants, airline caterers, country clubs and cruiseship lines.
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
financial statements and notes appearing herein.
RESULTS OF OPERATIONS:
Sales For The Nine Months Ended November 1, 1997 and November 2, 1996 were as
follows:
Nine Total Foodservice % of Egg % of
Months Sales Division Total Division Total
1997 $47,511,727 $44,899,004 94.5% $2,612,723 5.5%
1996 $50,595,997 $46,167,220 91.2% $4,428,777 8.8%
Net change $(3,084,270) $(1,268,216) $(1,816,054)
Comparison of Nine Months Ended November 1, 1997 and November 2, 1996.
Foodservice:
Decreased sales of $3.7 million at the Gulf Coast division and $2.5
million at other foodservice divisions, offset increases of $5.0 million
at the Produce division.
Eggs:
The decrease in sales of $1.8 million results from a decrease of 2
million units sold and $.08 per dozen lower selling prices on 3.4 million
dozens sold.
COST OF GOODS SOLD:
Cost of goods sold include product and freight-in costs.
During the nine months, cost of goods sold were generally in line with the
Company's sales, 85.7% this year versus 85.5% for the prior year. The rate of
change is influenced by the Company's overall customer and product mix, as
well as the changes in market prices which fluctuate from year to year.
OPERATING EXPENSES:
Operating expenses include warehousing and distribution costs.
During the nine months operating expenses decreased $363,864 reflecting changes
in the Company's business as compared to the same period of the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
During the nine months, selling, general and administrative expenses were up
$638,431. The change reflects changes in most operating divisions plus
costs associated with the Congress default as well as increased legal,
audit and litigation expenses.
INTEREST EXPENSE:
Interest expense increased by $11,316 during the nine months. This increase
reflects an overall 2% greater cost for borrowing, offset by reduced borrowing
levels incurred primarily with the Company's primary lender.
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS 109, under which
deferred tax liabilities are recognized for future taxable amounts and deferred
tax assets are recognized for future deductions and operating loss
carryforwards.
A valuation allowance is recognized to reduce net deferred tax assets to the
amounts that are more likely than not to be realized.
The Company, estimates that after filing its fiscal 1997 tax return, it will
have tax loss carryforwards of approximately $5,500,000 expiring in the
years 2009 through 2012.
NET (LOSS) EARNINGS:
For the nine months the net loss amounted to $2,408,314 as compared to net loss
of $312,821 for the same nine months a year ago. The loss per share is $1.66
versus a loss of $.21 per share reported for the same period a year ago.
Comparisons To The Prior Year:
Amount Explanations
Foodservice $ (440,790) Decreases in earnings results from the
Company's lack of capital that put added
pressure on its ability to buy
competitively coupled with its inability to
discount invoices.
Disposal of
Subsidiary (1,276,221) The increased loss results from declining
operations and the disposal of the Gulf
Coast Subsidiary.
Egg Marketing (104,460) This decrease results from a decline of
units sold.
Interest Expense (11,316) Represents a 2% increased cost of
borrowing offset by reduced borrowing
levels.
All Other (262,706) Increased expenses associated with
litigation fees, legal fees, audit costs
and costs due to the Company's default
with its major lender.
Net Difference $2,095,493
(LOSS) PER COMMON SHARE:
November 1, November 2,
Nine Months Ended 1997 1996
(Loss) earnings per common share $(1.66) $(.21)
Average shares used in computation 1,447,902 1,512,902
LIQUIDITY AND CAPITAL RESOURCES:
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the
accompanying financial statements, during the year ended February 1, 1997
and nine months ended November 1, 1997, the Company incurred net losses of
$1,167,087 and $2,408,313, respectively, and as of November 1, 1997 the
Company had a stockholders' deficit of $3,126,789. These factors among
others may indicate that the Company will be unable to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. As described in Note A of Sun
City's unaudited financial statements included in this report. Sun City
is not in compliance wth several provisions of its line of credit agreement
and the lender has placed significant operating and financing restrictions
on the Company pursuant to a forebearance agreement. Sun City's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply
with the terms and covenants of its financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to
attain successful operations. Management anticipates that Sun City's
consolidated financial position and results of operations will be
significantly improved as a result of and following, the proposed Merger
described in Note C to the financial statements included in this report,
pursuant to which SeaSpecialties, Inc. will become a subsidiary of Sun City
by merging with a newly formed subsidiary of Sun City. However, whether or
not the Merger is consummated, there can be no assurance that management's
efforts to improve Sun City's financial condition will ultimately be
successful or that Sun City will be able to continue as a going concern.
The Merger is further described below.
During fiscal 1997, The Company:
Was placed in default by its major lender as a result of over-
advances the lender made to the Company which were not secured by assets
of the Company. As a result of the default, the Company's stated interest
rate on this debt increased from 2.25% over the prime rate in fiscal 1996
to 4.25% over the prime rate in fiscal 1997.
On December 16, 1996, signed a Forbearance Agreement with its
primary lender which extends the existing line of credit until March 30,
1998, agrees to a repayment schedule that permits the Company to operate
and fund its business under certain limitations and conditions and provides
the lender additional collateral in the form of its North Carolina and
Virginia real estate.
Failed to make its regular semi-annual interest payments on its $1.4
million principal amount of Senior Subordinated Convertiblbe Debentures.
As of August 2, 1997, the total interest arrearage was $178,500. Although
Sun City is in monetary default, its Debenture holders have not indicated
they will place the Sun City in default. On the contrary, the Debenture
holders have cooperated with Sun City in Sun City's attempts to raise
additional capital through a direct investment or through a qualified
merger partner, and have signed agreements to convert the Debentures into
shares of Sun City Common Stock in connection with the closing of the
Merger.
Did not fully satisfy the American Stock Exchange's guidelines for
continued listing. Accordingly, there can be no assurance that the listing
will be continued.
On May 20, 1997, Oak Crest Enterprises, Inc. ("Oak Crest"), a
subsidiary of Sun City, borrowed $251,500 from a SeaSpecialties affiliate
and received a mortgage for the Hawthorne, Florida property. Sun city also
signed an option agreement to sell its New Jersey operations to such
lender. Subsequent to fiscal 1997, Oak Crest borrowed an additional
$155,852 against the same mortgage. Oak Crest subsequently repaid
$100,000.
On May 29, 1997, Sun City announced that it had entered into
preliminary merger discussions with SeaSpecialties and on June 17, 1997
signed a definitive merger agreement for the proposed Merger with
SeaSpecialties. Upon consummation of the Merger, Mr. Harvey Oxenberg,
Chairman and C.E.O. of SeaSpecialties, in a stock for stock transaction,
will own a majority of the oustanding stock of Sun City, and SeaSpecialties
will become a wholly owned subsidiary of Sun City. See "Item2. Changes in
Securities and Use of Proceeds." Sun City also entered into a Management
Agreement providing for SeaSpecialties to assist in managing Sun City prior
to the Merger. SeaSpecialties also purchased certain receivables of Sun
City to assist with Sun City's cash requirements.
In June, 1997, Sun City and its subsidiary Gulf Coast Foodservice,
Inc. ("Gulf Coast") received a notice of default and intent to sue from WL
& HM Inc. under a promissory note evidencing the balance of the purchase
price for the foodservice business purchased by Gulf Coast in 1993. The
note was secured by fixed assets, trademarks, tredanames, business names
and utility deposits, pursuant to a security agreement. Sun City was the
guarantor of such note and of lease obligations of Gulf Coast, to an
affiliate of WL & HM, Inc., which lease obligations were cross-defaulted
with the promissory note.
On August 31, 1997, Sun City closed its Gulf Coast operations, and
sold its inventory to an affiliate of WL & HM, Inc. On September 25, 1997,
Gulf Coast and Sun City entered into and closed an agreement with WL & HM,
Inc. and others, under which Gulf Coast transferred its remaining tangible
personal property, telephone numbers, and utility and security deposits to
an affiliate of WL & HM, Inc. in exchange for a covenant by WL & HM, Inc,
not to sue under the promissory note and an assumption or payoff by WL &
HM, Inc. of certain debt of Gulf Coast encumbering some of the purchased
assets. Gulf Coast and Sun City were released from all obligations under
the lease except for certain environmental indemnifications. Gulf Coast
retained and is attempting to collect its receivables, and intends to use
the net proceeds to retire debt secured by receivables, with any balance
to be applied first to debt claims under the Perishable Agricultural
Commodities Act, and then to unsecured debt. It is anticipated that the
receivables will not generate sufficient funds to pay unsecured debt. The
holders of Sun City's Senior Convertible Subordinated Debentures have
agreed to contribute up to $200,000 towards payment of certain liabilities
of Gulf Coast if the merger is consummated, in exchange for Sun City's
agreement to grant to such holders options to purchase one share of Sun
City Common Stock for each dollar contributed by such holders for payment
of Gulf Coast's debts. Such options will be granted as and when such funds
are distributed and will have an exercise price equal to the market price
of Sun City Common Stock on the date of grant.
Commitments:
As of November 1, 1997, Sun City had no commitments for capital
expenditures.
During fiscal 1996, Sun City:
Disposed of property, plant and equipment and related joint venture
investments relating to its Spring Grove, Pennsylvania, Burgaw, North
Carolina, and Jarratt, Virginia, egg production and processing operations.
This resulted in a reduction in fixed assets and capital lease obligations
of $1,543,663 and $503,031, respectively.
Acquired Sheppard Distributors, Inc. of Auburndale, Florida for
$1,350,000. This resulted in goodwill of $450,000.
Surrendered certain key man life insurance policies, the net proceeds
of which were used to purchase new split dollar and paid up deferred
compensation policies.
Completed its second private placement offering by raising an
additional $700,000 in five year Senior Subordinated Convertible Debentures
carrying a fixed 9% interest rate, convertible at $5.125 per share.
Expanded its credit facility with its major lender from $7.0 million
to $7.5 million. The credit facility is solely for Sun City's working
capital needs.
As of February 3, 1996, Sun City did not meet the minimum net worth
requirement required by its lending arrangement. The lender increased the
interest rate on the line of credit by an additional quarter of one
percent.
Deteriorating Financial Condition of Sun City
As discussed to some extent above, the financial condition of Sun
City has continued to decline. While Sun City typically experiences a
seasonal decline in sales and operating profits beginning after the
Easter/Passover season and continuing through Thanksgiving, the current
year's results are substantially worse than normal and Sun City's net worth
has declined to ($3,126,789) as of November 1, 1997. The major factors in
this decline have been the continuing liquidity problems that arose during
fiscal 1996, with the disposal of Sun City's egg processing operations and
joint ventures, and during fiscal 1997 with the default on the Congress
Financial credit facility. The new credit criteria established by Congress
Financial following the default in August, 1996, has severly restricted Sun
City's ability to pay its vendors on regular terms.
While higher levels during the months of November 1996 to March,
1997, created funding sufficient to pay down the Congress Financial
overadvance from $1.1 million to $450,000, as well as reducing the debt
level owed to Congress Financial, the requirements imposed by such lender
resulted in a reduction of the outstanding balance on the Congress
Financial credit facility to $3.0 million as of November 30, 1997, but
reducing cash available for operations. Further, available funding under
the Congress Financial facility fell from approximately $1.6 million per
week in March, 1997 to approximately $800,000 per week during October,
1997. These factors, along with the annual seasonable sales decline, made
it more difficult for Sun City to purchase inventory from vendors, leaving
Sun City with insufficient inventory available for sale to customers even
at reduced seasonal levels, resulting in even lower sales volume.
These adverse circumstances were compounded with the passing of Mr.
Gustave Minkin, as a result of which Sun City lost all of its egg marketing
operations. The adverse effect of this loss was partially offset by the
proceeds of key man insurance on Mr. Minkin.
The most serious consequences of these adverse developments has been
the closing of the Gulf Coast Foodservice operation and default on the
deferred purchase price obligations owed with reference to the Sheppard
Foodservice operation. See "Item 1. Legal Proceedings" below.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Sun City presently is party to one legal proceeding which could
have had a material adverse effect on Sun City, and Sun City recently
settled another potential legal proceeding. In addition, Sun City and
its subsidiary Gulf Coast Foodservice, Inc. have been sued by several
trade creditors of Gulf Coast Foodservice for amounts due and owing such
creditors, as described further below.
Sheppard Foodservice, Inc.
On June 16, 1997, a suit was filed in Broward County, Florida,
Circuit Court against Sun City's subsidiary, Sheppard Foodservice, Inc.,
and Sun City alleging a default by Sheppard Foodservice, Inc. in its
obligations to make purchase price payments under the January 31, 1995
Asset Purchase Agreement under which Sheppard Foodservice, Inc. acquired
its business from Sheppard Distributors, Inc., a Florida corporation
known as Page & McKean, Inc. Sun City is the guarantor of the
obligations of Sheppard Foodservice under the Asset Purchase Agreement.
The plaintiffs also sought a declaratory judgment that the alleged
default released the plaintiffs from certain noncompete agreements given
in connection with the Asset Purchase Agreement.
As of November 25, 1997, the parties entered into a Settlement
Agreement under which Sheppard Foodservice, Inc. and Sun City agreed to
pay the plaintiffs on or before February 28, 1998, the amount of
$253,278 which amount is the regular obligation payable in accordance
with Asset Purchase Agreement and interest thereon at the rate of 10.5%
per annum from June 1, 1997, as well as plaintiffs' legal fees in the
amount of $18,263. Sheppard Foodservice also agreed to pay an affiliate
of the plaintiff the amount of $9,009 with interest at 10.5% from August
13, 1997, representing a commercial account debt. In exchange for this
agreement, the plaintiffs agreed to suspend proceedings in the lawsuit
until March 1, 1998. If the foregoing payments are not timely made, the
Settlement Agreement allows the plaintiffs to file stipulated final
judgment against Sheppard Foodservice, Inc. and Sun City for all relief
sought in the lawsuit.
The deferred purchase price obligation under the above Asset
Purchase Agreement is evidenced only by that Agreement and not by a
promissory note. The Asset Purchase Agreement provides that within 90
days of each anniversary of closing, starting in 1996 and ending in
1998, a computation is to be made of the average annual net profit (as
defined in the Asset Purchase Agreement) of Sheppard Foodservice, Inc.
since the February, 1995 closing under the Asset Purchase Agreement.
The computed figure is multiplied by a factor of 4.5 (on average annual
net profit up to $400,000) or 5.5 (on average annual net profit
exceeding $400,000), and a percentage of that product, adjusted for
amounts paid at closing and amounts paid at any prior anniversary, is
due by the 90th day after the then current anniversary of closing.
Twenty-Five percent of the updated computed balance is due in the years
1996 and 1997, with fifty percent of the final computed balance due in
1998 and the remainder one year thereafter. Sheppard Foodservice, Inc.
paid $252,500 on this obligation in 1996, and estimates that the
remaining payments will approximate $600,000.
The Asset Purchase Agreement provides for the deferred purchase
price obligation to be secured by a first lien on the tangible personal
property acquired by Sheppard Foodservice, Inc. at the closing under
the Asset Purchase Agreement, including furniture, furnishing.
machinery, apparatus, equipment, fittings and fixtures. The collateral
also includes any trademarks, tradenames or business names used by, and
any utility security deposits of Sheppard Foodservice, Inc. The
collateral does not include inventory or accounts receivable, which are
pledged to Sun City's primnary lender.
The complaint filed in the above litigation sought only money
damages relating to the payment due on May 27, 1997, which the
plaintiffs estimated at that time to be in excess of $150,000. Since
the deferred portion of the purchase price under the Asset Purchase
Agreement is not a fixed amount, but is computed with reference only to
ongoing average annual net profits of Sheppard Foodservice, Inc., there
is no fixed amount owed that could be accelerated because of the
default, and the complaint did not seek any such remedy. The defendents
answered by amitting the allegations as to the monetary defaults, but
denying that such defaults release the individual plaintiffs from their
noncompete agreements.
If the proposed merger with SeaSpecialties does not occur on or
before March 1, 1998, it is likely that the defendents would be unable
to pay the required settlement amounts and that Sheppard Foodservice,
Inc. would suffer the total loss of its business through enforcement of
the Settlement Agreement and the stipulated final judgment and
anticipated reaction by Sun City's primary lender, which holds a first
security interest in the inventory and receivables of Sheppard
Foodservice, Inc. In fiscal 1996-1997, Sheppard Foodservice had sales
and operating revenue of $15,160,239, with a net profit of $300,700.
Gulf Coast Foodservice,Inc.
In July, 1997, Sun City and its subsidiary Gulf Coast
Foodsercvice,Inc ("Gulf Coast") received from WL & HM, Inc., a Florida
corporation which sold its food service business to Gulf Coast in 1993,
notice of default and intent to sue under a promissory note evidencing
the balance of the purchase price for such business. Sun City was the
guarantor of such note. Such matter has been settled as described in.
"Sun City Management's Discussion & Anlysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," which
settlement involved the transfer of certain of the Gulf Coast operations
back to the seller.
Also, several trade creditors of Gulf Coast have filed lawsuits
in various courts against Gulf Coast and Sun City for amounts owed them
by Gulf Coast. One of these lawsuits, filed in federal court. involves
a claim in excess of $22,000 under the Perishable Agricultural
Commodities Act, for which Sun City would be liable as the owner of Gulf
Coast. The total amounts in controversy in these lawsuits is
approximately $110,000. See "Sun City Management's Discussion &
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources" and "Notes to Consolidated Financial Statements."
Item 2. Changes in Securities and Use of Proceeds
If the proposed Merger with SeaSpecialties is approved by Sun
City's shareholders at the annual meeting on December 17, 1997 and
subsequently consummated, then, pursuant to the Merger Agreement for
the Merger, (i) a subsidiary of Sun City ("Acquisition") will merge with
and into SeaSpecialties (the "Merger"), with SeaSpecialties being the
surviving corporation of the Merger (the "Surviving Corporation"),
(ii)the oustanding shares of common stock of SeaSpecialties will be
converted into shares of common stock of Sun City, and as result of such
conversion Sun City will issue approximately 38,335,320 shares of its
common stock to the shareholders of SeaSpecialties, and the shares of
Sun City common stock currently outstanding will constitute
approximately 3.1% of the total shares of Sun City common stock
outstanding upon consummation of the Merger, (iii) Sun City's
outstanding Senior Convertible Subordinated Debentures (and all accrued
interest thereon) will be converted into shares of Sun City's common
stock that will constitute approximately 14.4% of the total shares of
Sun City common stock outstanding upon consummation of the Merger, and
(iv) each outstanding share of common stock of Acquisition will be
converted into one share of common stock of the Surviving Corporation,
resulting in SeaSpecialties becoming a wholly-owned subsidiary of Sun
City.
In addition. there will be amendments to Sun City's Certificate
of Incorporation in connection with the Merger to (i)increase the
authorized number of shares of Sun City's common stock from 3,000,000 to
75,000,000 shares, (ii) decrease the par value per share of Sun City's
common stock from $.10 to $.01, and (iii) change Sun City's name to
"SeaSpecialties, Inc."
<PAGE>
Item 3. Defaults Upon Senior Securities
See "Notes to Consolidated Financial Statements" and "Sun
City's Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources" and "Item 1. Legal Proceedings" for a description
of certain defaults of Sun City.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Limitations
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger, dated June 17, 1997 for
the Registrant's proposed merger with SeaSpecialties, Inc.
was filed as Exhibit A to the Registrant's Proxy Statement,
dated November 7, 1997 and is incorporated herein by
reference.
SALES OF UNREGISTERED SECURITIES (DEBT OR EQUITY): None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registratnt has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SUN CITY INDUSTRIES, INC.
REGISTRANT
Date: December 16, 1997 Malvin Avchen
Malvin Avchen, C.E.O.
Date: December 16, 1997 Syed Jafri
Syed Jafri, Treasurer
The financial statements for the nine months ended November 1, 1997 and
November 2, 1996, respectively, are unaudited but are prepared in
conformity with accounting principles used at our last fiscal year end
and include alladjustments which the Company considers necessary for a
fair presentation.
