Item 1. BUSINESS
		 General Development of Business
The Company is the result of the merger in 1988 of the former Sunstates Corporation, a real estate and insurance conglomerate, with Acton Corporation, an owner and operator of cable television systems. The merger was accounted for as a reverse acquisition: the surviving legal entity having the name and corporate attributes of Acton Corporation but the financial accounting and tax attributes of Sunstates Corporation. Appropriate changes in the capital structure were made to accommodate the various classes of stock of both corporations. With the disposition of the last cable television system (see discussion below), none of the assets of the former cable television operation remain. At the Company's Annual Shareholders' Meeting on December 13, 1993, the shareholders approved the changing of the Company's name to Sunstates Corporation, effective January 1, 1994, in recognition of the fact that the name of Acton Corporation was associated with its cable television operations.
Sunstates Corporation (herein referred to as "Sunstates" or the "Company", which reference shall include subsidiaries) is a majority-owned subsidiary of Wisconsin Real Estate Investment Trust ("WREIT") and WREIT in turn is a direct and indirect majority-owned subsidiary of the following companies: Hickory Furniture Company ("Hickory"), Telco Capital Corporation ("Telco") and RDIS Corporation ("RDIS"), formerly Libco Corporation.
On January 17, 1989, Sunstates acquired from Hickory, for a cash payment of $2,000,000, a 99% ownership interest in Sew Simple Systems, Inc. ("Sew Simple"), a designer and manufacturer of automated textile machinery located in Fountain Inn, South Carolina. The results of operations of Sew Simple since January 1, 1989 are included in the Consolidated Statement of Operations. The Stock Purchase Agreement provided that if Hickory should find a buyer for Sew Simple prior to the expiration of the Agreement, then Hickory would be entitled to additional amounts based upon the excess, if any, of the sales price over an escalating amount specified in the contract, which, as of April 13, 1992, was approximately $3.4 million (the Rights). On April 13, 1992, Sunstates acquired from Hickory its remaining 1% ownership and its Rights under the Stock Purchase Agreement for approximately $13.6 million (see Note 1 of the Notes to Consolidated Financial Statements). The consideration given by Sunstates included the assignment of approximately $12 million previously due to Sunstates from Hickory and other affiliates plus a note payable for approximately $1.6 million.
On June 21, 1990, Hickory White Company ("Hickory White"), a wholly-owned subsidiary of Sunstates, completed the purchase of Hickory's furniture manufacturing assets for $44,500,000 plus the assumption of related operating liabilities and transaction costs. The consideration given by Hickory White was composed of cash of $25,315,740 (of which $20,623,807 was borrowed from a major bank pursuant to a Credit Agreement), the assignment of amounts previously due from Hickory totalling $11,257,935 and the assignment of $7,926,325 in Increasing Rate Notes, including accrued interest, due from Hickory Furniture Group, Inc., a wholly-owned subsidiary of Hickory. The operating results of Hickory White are included in the Consolidated Statement of Operations from the date of acquisition.
Alba-Waldensian, Inc. ("Alba"), a manufacturer of women's hosiery and pantyhose, women's casual hosiery products, women's intimate apparel, men's hosiery, medical specialty products and warp knit products located in Valdese, N. C., had been an investee of the Company accounted for utilizing the equity method of accounting since May, 1987. Effective June 30, 1993, Alba became a 50.1% owned subsidiary of the Company's insurance subsidiary, and accordingly, the financial statements of Alba have been consolidated in the accompanying financial statements since that date. Prior to June 30, 1993, the Company's share of Alba's earnings, which averaged 49.9% during the six months ended June 30, 1993, and the year ended December 31, 1992, was reported as equity in earnings of affiliates in the Consolidated Statement of Operations.
On December 30, 1993, the Company sold its sole remaining cable television system comprised of approximately 44,000 subscribers located in Anne Arundel County, Maryland resulting in after-tax net income of $46,565,847. With the sale of its sole remaining cable television system, the Company is no longer engaged in the cable television business. Accordingly, the Company has presented its cable television segment as a discontinued operation in the financial statements presented in Item #8 of this Report. Prior year's statements have been reclassified to remove the operations of the cable television segment from income from continuing operations and the net assets and liabilities have been presented on a single line in the prior years' balance sheets.
	 Financial Information About Industry Segments
Sunstates operates in four principal industries; insurance, manufacturing, real estate and, prior to December 30, 1993, cable television. See Note 14 of Notes to Consolidated Financial Statements contained in Item 8 of this report for information regarding Sunstates' operations in these industry segments.
		Narrative Description of Business
Sunstates has been engaged in the development, sale and management of real estate and in the property and casualty insurance business for each of the last five years. It has also been engaged in the cable television business from May 4, 1988 through December 30, 1993, in the manufacture of automated textile machinery since January 17, 1989, in the manufacture of furniture since June 21, 1990, in the manufacture of military footwear since September 30, 1990, and the manufacture of textile apparel since June 30, 1993. Sunstates conducts its business primarily through the following subsidiaries:
Normandy Insurance Agency, Inc., an Illinois corporation engaged in property and casualty insurance through its wholly-owned subsidiaries, principally, Coronet Insurance Company ("Coronet"). Hickory White Company, a North Carolina corporation engaged in the manufacture of high end home furnishing products encompassing a broad selection of traditional and transitional wood and upholstered lines with five production facilities located in Hickory and High Point, North Carolina.
Alba-Waldensian, Inc., a Delaware corporation engaged in the manufacture of women's hosiery and pantyhose, women's casual hosiery products, women's intimate apparel, men's hosiery, medical specialty products and warp knit products located in Valdese, N. C.
Wellco Enterprises, Inc., a North Carolina corporation engaged in the manufacturing of military footwear in Waynesville, N. C. with additional production facilities in Puerto Rico.
Sew Simple Systems, Inc., a South Carolina corporation engaged in the design and manufacture of automated textile machinery.
Sunstates Realty Group, Inc., Sunstates Equities, Inc., and Pensacola Holding Corp., Florida corporations engaged in the development of income-producing properties for sale to others. Their primary activities are in the states of North Carolina, Virginia and Florida.
National Development Company, Inc., a Texas corporation engaged in the development and sale of recreational and second home resort lots, primarily in the states of Missouri, Tennessee and Oklahoma.
The Springs, Inc., a Wisconsin corporation, engaged in the operation of a luxury hotel and golf resort and the development of residential lots and multi-family units in Spring Green, Wisconsin.
			Insurance Operations
Operations in the insurance segment include the providing of property and casualty insurance, primarily confined to the writing of full coverage non-standard automobile insurance. During 1994, Coronet's gross writings were 75% classified as auto liability, and 25% as auto physical damage. Illinois premiums account for 48% of the business; Arizona, 22%; Tennessee, 7%; Ohio 6%; Nevada, 8%; and all others, 9%.
Coronet generally writes minimum statutory limits of liability coverage under policies with terms up to one year. Coronet's customers are typically located in large urban areas and are drivers with a record of accidents or violations thereby making it difficult for them to obtain coverage from insurance companies not specializing in the non-standard automobile business. Types of coverage provided include both physical damage (collision and comprehensive), which has a relatively short payout pattern, as well as liability (bodily injury and property damage) which customarily has a longer payout pattern. Coverage written in excess of amounts which management deems reasonable to retain in relation to surplus are reinsured with other insurance companies.
Normandy and Coronet were both incorporated in Illinois in December, 1962 and commenced business on April 5, 1963 under the Illinois Insurance Code. Coronet is licensed to transact business in Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Minnesota, Mississippi, Missouri, Montana, Nevada, New Mexico, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.
Coronet Insurance Company operates three wholly-owned full line property and casualty insurance subsidiaries; National Assurance Indemnity Company ("NAIC"), Casualty Insurance Company of Florida ("CIC Florida") and Crown Casualty Company ("Crown"). NAIC was incorporated in Illinois on April 19, 1988, commenced business on June 21, 1988, and is licensed only in the State of Illinois. During 1992, NAIC began writing non-standard auto insurance at rates different than Coronet. CIC Florida was incorporated in Florida on April 3, 1990, commenced business on April 26, 1990 and is licensed only in the State of Florida. CIC Florida began writing business in February, 1994. Crown, a wholly-owned subsidiary of NAIC, was incorporated in the State of Illinois on March 23, 1990, commenced business on January 11, 1991, and is licensed only in the State of Illinois. On November 30, 1992, Coronet ceded 100% of the unearned premiums on its auto business lines as of that date to NAIC (75%) and Crown(25%). A reinsurance agreement provides that effective December 1, 1992, Coronet will cede 27% of its new auto business on the programs existing at that time to NAIC (20%) and Crown (7%). On December 31, 1994, Casualty Insurance Company of Georgia, formerly a wholly owned subsidiary of NAIC, was merged into Coronet Insurance Company.
Coronet operates in Illinois through numerous independent agencies who in turn deal with the retail customer. Liability and physical damage claims are adjusted by the home office staff. Written premiums in Illinois were $23,426,000 in 1994 compared to $19,515,000 in 1993, and $ 25,690,411, in 1992. The decrease in 1993 was primarily the result of program changes instituted by new management during 1993 that were not well received by certain major Illinois producers. During the latter part of 1993 and throughout 1994, Coronet has addressed the issues raised by the producers so as to regain the lost volume. In addition, Coronet has signed up additional producers, and developed new marketing programs in 1994.
Florida, Georgia, Tennessee, Arizona and Nevada business is obtained through managing general agency agreements. Subject to rules, regulations and rates promulgated by the Company, the agents are responsible for the production and issuance of policies. Claims have been handled by the same agents subject to separate agreements until late December 1993, at which time the Georgia claims were transferred to Coronet's Tampa claims office. Coronet personnel have conducted regular underwriting and claims audits in the offices of the agents.
As of October 1, 1991, laws materially affecting automobile insurance changed in Georgia. These changes have resulted in lower penetration of the marketplace and a decision was made to stop accepting new business in August 1993. As a result of these matters, premium volume declined to $61,769, $2,928,068 and $6,804,681, for the years of 1994, 1993 and 1992, respectively, as compared $13,717,709 in 1991.
Based on a review of the Arizona marketplace and rates, a rate increase of 21.7% was made in April 1993, which resulted in volume decreasing to $10,693,777 in 1994 as compared to $12,454,787 in 1993 and to $33,092,807 in 1992.
During 1993 and 1992, certain unprofitable programs were terminated. They include the termination in December 1993 of the Camelback reinsurance program which had written premiums of $4,800,000 in 1993 and $10,650,000 in 1992. Other programs which were terminated in late 1992 or early 1993 include the Kansas, Iowa, Kentucky and West Virginia programs, which had combined written premiums of $7,300,000 in 1992.
Through the end of 1993, substantially all of the premiums produced in the states of Missouri and Ohio were produced under Managing General Agency agreements similar to the agreements used to procure the Georgia, Tennessee and Arizona business. All underwriting for these programs were done by the Managing General Agents. Substantially all of the claims handling function for these programs were transferred from the agents to Coronet's Chicago or Tampa claims offices during 1993. Coronet personnel have conducted regular underwriting and claims audits, if appropriate, in the offices of the agent.
As the result of the factors and circumstances described above, Coronet has experienced a decline in written premiums from $131 million in 1991 to $119 million in 1992 to $57 million in 1993 and $48 million in 1994.
Prior to December 30, 1994, Normandy owned 72% of Greater Heritage Corporation ("Heritage") which in turn owned Florida No-Fault Insurance Agency, Inc. ("Agency"), an insurance agency business in the State of Florida. The Agency was sold in August, 1989 at a price of $2,250,000 with an initial payment of $250,000 and a note of $2,000,000. The note carries an interest rate of prime plus 1%, with principal payments being amortized over a twelve year period and a balloon payment due August 1, 1997. The sale resulted in a gain of $1,121,674, which is being recognized as the payments under the note are received. Heritage has no other ongoing operations. The note which was acquired by Coronet at December 31, 1992, has a remaining balance of $1,291,491. On December 30, 1994, GHC was merged into a wholly-owned subsidiary of Normandy.
Competition
The insurance industry is highly competitive and Coronet competes not only with other stock companies, many of which have substantially larger capital, but with mutual companies (which may have a competitive advantage because all profits accrue to policyholders), and with underwriters operating under insurance exchanges. Many other companies offer the lines of insurance which Coronet writes now or may write in the future. Many of these companies have been in business for long periods of time, have a much larger volume of business, offer more diversified lines of coverage and have far greater financial resources than Coronet.
Coronet obtains its underwriting business in three ways: (i) through insurance agencies who in turn deal with the retail customer, (ii) through managing general agents who in turn deal with smaller insurance agencies, and (iii) through reinsurance assumed agreements with other insurance companies. Assumed reinsurance business accounts for less than 10% of Coronet's business. Coronet does not directly market to retail customers. Primary competitive factors in particular markets are the premium rates for insurance coverage, commission rates offered to producers of underwriting business and the quality and responsiveness of services.
Investments
Coronet may invest in numerous different types of investments as allowed under applicable insurance regulations (see "Regulation" below): including U. S. Government securities; bonds and other corporate debt instruments; stocks and stock market options; income-producing real estate and real estate mortgages; and, through ownership of certain Sunstates subsidiaries, other non-insurance operations of Sunstates. Under Coronet's investment policy, investments may be made in high yield, unrated or less than investment grade corporate debt securities when it is perceived that such an investment could produce yields sufficiently greater than those generated by investment grade securities. Investments in high yield, unrated or less than investment grade corporate debt securities have different risks than other investments in corporate debt securities rated investment grade and held by Coronet. Risk of loss upon default by the borrower is significantly greater with respect to such corporate debt securities than with other corporate debt securities because these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. Coronet may from time to time utilize both market as well as issuer-specific call or put options for various investment reasons including reducing its portfolio's exposure to stock market volatility.
Regulation of Insurance Operations
1. General. Coronet, NAIC and Crown are subject to statutory regulation and supervision by the Illinois Department of Insurance ("IDI") pursuant to the Illinois Insurance Code ("Insurance Code"). The IDI possesses broad administrative powers relating to such matters as licensing of insurance companies and their agents, approving policy forms, prescribing the nature of and limitations on investments, requiring the establishment of reserves, regulating trade practices, establishing the form and content of financial statements and reports, and reviewing the rates for insurance, among other matters. Coronet, NAIC and Crown are required to file detailed annual statements with IDI and its business and accounts are subject to periodic examination by IDI.
CIC Florida is subject to statutory regulation and supervision by the Florida Department of Insurance which possess powers similar to those possessed by the Illinois Department of Insurance.
2. Holding Company System Regulation. The Insurance Code requires registration and periodic reporting by insurance companies that are licensed in Illinois and that are part of an insurance holding company system. An "insurance holding company system" means two or more affiliated persons, as defined by the Insurance Code, one or more of whom is an insurer. Since Coronet is an indirect subsidiary of Sunstates, Coronet is subject to these regulations. Generally, Coronet is required to register with the Director of the IDI as a member of an insurance holding company system and to file an annual statement and make its books and records available for examination. Material transactions between Coronet and any other affiliate of Coronet, which includes RDIS, Telco, Hickory, WREIT and Sunstates are subject to disclosure and such transactions must be on terms that are fair and reasonable.
3. Dividends. The Insurance Code permits the declaration and payment of dividends only out of earned, as distinguished from contributed, surplus, provided further that the remaining surplus is not less than the minimum original surplus required for it to transact business after payment of the dividend. The provisions of the Insurance Code pertaining to insurance company holding systems further restrict payment of any extraordinary dividend. Pursuant to this provision, Coronet will not be permitted to pay any extraordinary dividend or distribution unless the Director of IDI has received thirty days prior notice of the declaration and does not disapprove of such payment within that thirty day period. An extraordinary dividend or distribution is defined as one whose fair market value, together with other dividends within the preceding twelve months, exceeds the greater of (i) ten percent of surplus as regards policyholders as of the preceding December 31, or (ii) the net income from operations, as adjusted, for the twelve months ending on the preceding December 31.
4. Acquisition of Control. The Insurance Code restricts the ability of any person to acquire control of Coronet or of any company that directly or indirectly controls Coronet (which includes RDIS, Telco, Hickory, WREIT and Sunstates) without prior regulatory approval. Pursuant to the Insurance Code, ownership, control or holding shareholders' proxies representing ten percent or more of the voting securities of Coronet, RDIS, Telco, Hickory, WREIT or Sunstates, will be presumed to constitute control unless rebutted by a showing made in the manner as the Director of IDI may provide by rule.
5. Restrictions on Investments. The Insurance Code restricts investments of Coronet to those set forth in the Insurance Code. The Insurance Code requires any investment of Coronet to be authorized or ratified by the Board of Directors or by a committee thereof charged with the duty of supervising investments and loans. Among the type of investments permitted are obligations of the United States, states or political subdivisions of a state; revenue obligations of states or municipal public utilities; obligations of business corporations; obligations of not-for-profit corporations; non-demand obligations of financial institutions; common stock; preferred or guaranteed stock; equity or index put and call options (other than uncovered call options); savings and loan association deposits; income producing real estate; collateral loans; mortgages on real estate and mortgage pass-through securities as well as other permitted investments. The Insurance Code provides limitations for each category of investment as to the percentage of admitted assets or as to the percentage of surplus of Coronet which may be invested in each category. In addition, the Insurance Code provides limitations as to the percentage of admitted assets which may be invested in any one particular obligation or investment.
6. Restriction on Rates. The Insurance Code, and similar statutes which govern Coronet in each jurisdiction in which it does business, sets forth standards with regard to the making and use of rates. The statutes require generally that the rates not be excessive or inadequate, nor can they be discriminatory. A rate will not be held to be excessive unless it is unreasonably high for the insurance provided and a reasonable degree of competition does not exist in the area with respect to the classification to which the rate is applicable. A rate will not be held inadequate unless it is unreasonably low for the insurance provided and continued use of the rate would endanger the solvency of Coronet. The statutes generally permit consideration to be given to past and prospective loss experience, to a reasonable margin for underwriting profit and contingencies and to past and prospective expenses.
Every insurance company writing certain lines of insurance must file its rates and rating schedules with the appropriate governmental regulators. The filing must be made as often as the rates are changed or amended.
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of Coronet. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections, including independent actuarial reviews, and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. In estimating the ultimate net cost of unpaid claims and LAE the impact of inflation is implicitly considered. Coronet reduces its reserves for any estimated salvage or subrogation recoveries which may be realized in connection with settling unpaid claims. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, if any, are reflected in current operations.
The accompanying tables present an analysis of losses and LAE. The following table provides a reconciliation of beginning and ending liability balances for 1994, 1993 and 1992. The tabular Analysis of Loss Adjustment and Loss Expense Development shows the development of the estimated liability for the ten years prior to 1994.
The increase (decrease) in estimated losses and loss adjustment expenses for claims occurring in prior years, as shown in the preceding table, is due to settling case-basis reserves established in prior years at amounts other than originally expected.
The anticipated effect of inflation is implicitly considered when estimating present liabilities for losses and LAE. Anticipated cost increases due to inflation are considered in estimating the ultimate claim costs. Average claim costs (severities) are projected based on historical trends adjusted for changes in underwriting standards, policy provisions and general economic trends. These trends are monitored based on actual development and are modified if necessary.
The limits on risks retained by Coronet vary by type of policy. Risks in excess of the retention limits are reinsured.
The following table presents the development of balance sheet liabilities for 1984 through 1994. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amounts of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to Coronet. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about each individual claim.
The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1984 liability has developed a $662,000 deficiency over ten years. That amount has been reflected in income over the ten years and did not have a significant effect on income of any one year.
The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, in connection with the accident year of 1985, Coronet had paid as of December 31, 1994, $23,491,000 of the currently estimated $23,660,000 of losses and LAE that had been incurred; thus, an estimated $169,000, net of salvage and subrogation receivable, remains to be paid as of the current financial statement date.
In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of redundancy related to losses settled in 1989, but incurred in 1983, will be included in the cumulative redundancy (or deficiency) amount for years 1984 through 1989. This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
		 Furniture Manufacturing
Hickory White Company, through its four divisions, manufactures and retails wood furniture (also known as "casegoods") consisting of bedroom, dining room, and occasional pieces as well as upholstered furniture. Hickory White's furniture generally follows certain period styles from America, England, France, Italy and the Orient and is offered in numerous finishes. Recent introductions have also included contemporary and transitional designs. Designs are acquired from various independent designers on a retainer or royalty basis under agreements generally lasting five years.
Casegoods are manufactured at the Company's residential manufacturing complex in Hickory, NC. Pricing generally falls in the upper-middle to upper price ranges, either as individual pieces or as a suite of furniture.
The upholstery division also targets pricing in the upper-middle to upper price ranges, with products manufactured at the Company's upholstery plant in High Point, NC. Wood frame parts are made in an adjacent frame plant. Some frames are imported from Spain and Italy, and are finished and upholstered at the Company's plant.
The Chaircraft Division, located in Bethlehem, NC, manufactures and markets occasional chairs and lounge seating which are sold to the contract, hospitality and health care markets. Their products are generally priced in the medium price ranges.
The Retail Division consists of two factory outlet stores in Statesville and Burlington, North Carolina. These stores sell factory seconds, returns, showroom samples, discontinued lines, etc. to the general public.
The following table shows the percentage of Hickory White's total sales (including periods prior to acquisition on June 21, 1990) from operations attributable to the sale of casegoods, upholstered furniture and occasional chairs\lounges during each of the periods set forth.
Manufacturing Process, Raw Materials and Supplies
Hickory White manufactures furniture by combining skilled craftsmanship with mechanized techniques. The blending of modern technology and skilled craftsmanship results in volume production without sacrificing quality. Prices of furniture pieces vary according to type and quality of wood used in the piece of furniture, detailed matching of veneers, quality of fabric (if upholstered), amount of hand work performed by the skilled craftsmen and time devoted to hand assembling and finishing the product.
Materials and supplies used in the manufacture of Hickory White's product consists primarily of lumber, veneers, fabrics, finishing material and various types of hardware. With a few exceptions, such as mahogany lumber, these items are provided by domestic sources and are offered by a number of competing suppliers. Hickory White devotes significant attention to its production scheduling, adequacy of inventories of materials, and the orderly procurement of a steady flow of materials and supplies. This stability has been achieved without the necessity of entering into long-term purchase commitments. Consequently, while the furniture industry has occasionally experienced temporary shortages and increased costs of some of its raw materials, such occurrences have not had any significant effect on the preponderance of Hickory White's diversified line of products and management does not expect any significant effect in the future.
Marketing, Sales and Distribution
Hickory White sells its products primarily to furniture retailers, showrooms and department stores. Furniture is also sold on a contract basis to customers other than furniture retailers such as hotels, motels, restaurants, offices, and retirement homes. Hickory White's products are principally sold in the United States, however, both the European Common Market and the Japanese Market have produced some sales to date. Although not currently significant, the volume in both of these markets is expected to increase in the future.
Residential products are sold through 21 exclusive commissioned sales agents. In addition, 25 commissioned sales agents sell Hickory White's products to the contract market and these representatives also sell the products of other companies.
Hickory White maintains approximately 2,200 active customer accounts. No single customer accounted for more than 3% of consolidated net sales during the 1994 fiscal year.
The percentages of consolidated net sales attributable to certain categories of purchasers during each of the last five years (including periods prior to acquisition) are as follows:
Backlog
Hickory White's unfilled customer orders (backlog) for furniture was approximately $7,339,000, $9,084,000 and $7,431,000 as of December 31, 1994, 1993 and 1992, respectively. Backlog is generally filled within three months.
Environmental and Other Regulation
Hickory White believes it has complied with all federal, state and local environmental and regulatory requirements and in cooperation with its insurance carriers, conducts safety programs and makes capital improvements to reduce risks of injury to employees, loss of property and the correction of environmental problems.
Hickory White is aware of the vast amount of activity pending on the federal, state and local levels which would require the expenditure of unknown amounts should the proposals be adopted. Proposals which have been advocated include but are not limited to: (a) further restrictions concerning the amount of wood dust particles in the work place, (b) increased control of permissible emissions such as smoke and finishing fumes into the environment, (c) further restrictions on flammability of upholstered furniture, (d) further restrictions on above ground and underground storage tanks and (e) bans on use of toxic substances.
The furniture industry is working with various regulatory bodies in an effort to see that adequate protection can be provided to employees, communities and consumers without prohibitive costs to manufacturers. In the past, the voluntary efforts of the industry, (including Hickory White) and the cooperative efforts of the industry and regulatory agencies, have produced reasonable regulation, the cost of which has not been prohibitive.
Competition and Housing Industry Factors
The furniture industry is highly competitive, with more than 2,000 manufacturers engaged in various phases of the industry. Although furniture manufactured by Hickory White is marketed primarily in the upper-middle to high price ranges, such furniture competes with other manufacturers' furniture in all price ranges. Many other competing furniture manufacturers have greater resources than Hickory White. Reputation, price, design and service constitute the principal methods of competition in the industry.
Imports have become an increasing factor in the furniture market, primarily in wood furniture. The primary sources of imports include Taiwan, Korea, Canada and Europe. Imports from Europe are generally in the upper price range (above Hickory White) and are less competitive at the lower price points. Hickory White has been affected in a small way by imports from the Pacific rim.
Competitive factors require that Hickory White and other industry members carry significant amounts of inventory in order to meet rapid delivery requirements of customers. Hickory White does not normally grant extended payment terms to customers, and it follows the normal practice in the industry of not permitting its customers to return merchandise unless the return is authorized.
The furniture industry has traditionally benefitted from new housing construction. Although interest rates have increased during the past year, they are still within reach of most new homeowners. However, such increases have resulted in a decline in new housing starts.
Manufacturing Consolidation
In early 1993 the Company closed its casegoods manufacturing operation in Mebane, NC which was the old White Furniture Company acquired in 1985. The shutdown was attributed to sagging demand for upper-end wood furniture, and to the Company's excess production capacity. Product lines previously manufactured in Mebane were transferred to the Hickory plant, and service to customers continued uninterrupted. (See "Management Discussion and Analysis" in Item 7. of Part II of this Annual Report for further information regarding this consolidation.)
			 Textile Apparel
Alba manufactures and markets a variety of knitted apparel and health care products through four divisions, the Consumer Products Division, the Health Products Division, the Alba Direct Division and the Byford Apparel Division. In addition, Alba has created the AWI retail division to market products directly to the consumer.
Consumer Products Division
Products manufactured and sold by this division include women's intimate apparel and women's hosiery products. Intimate apparel includes stretch bikinis, briefs and bodywear, as well as specially designed briefs for maternity wear. Women's hosiery products include sheer stockings, pantyhose, and trouser socks, primarily for large-size women and the maternity market.
Alba has developed a process which makes it possible to knit bras, tank tops and body suits in seamless knitting equipment. This design technology, which has a patent pending, has allowed the company to significantly broaden its product offerings.
Alba uses state of the art computer-controlled circular-knitting technology. In addition, a significant portion of Alba's consumer products, including its women's intimate apparel, are produced on fine gauge full-fashion knitting equipment. Such equipment produces apparel that management believes is better fitting, therefore more comfortable. Management believes that, due to the limited availability of such equipment, few companies have the ability to produce a significant volume of these full-fashioned products.
Health Products Division
Products manufactured and sold by this division are designed to assist in healthcare. They include anti-emobolism stockings and pulsitate anti-embolism systems, an intermittent pneumatic compression device, both designed to improve circulation and reduce the incidence of deep vein thrombosis; sterile wound dressings such as presaturated gauze, petrolatum and xeroform gauze, non-adhering dressings and gauze strips; XX-Span dressing retainers, an extensible net tubing designed to hold dressing in place without the use of adhesive tape. All dressing products are used in wound care therapy, particularly the treatment of burns.
Knitted stockinette is manufactured in a variety of sizes and used under fracture casts, and sterile packaged for use as a supplemental drape in surgical procedures. Heel and elbow pads are XX-Span(R) sleeves with an inner soft foam pad used to reduce pressure and the incidence of decubitus ulcers.
Slip-resistant patient treads are knitted, soft patient footwear with slip-resistant soles to help prevent patient falls while keeping feet warm even while in bed. Knitted arm sleeves provide protection to the skin of patients with poor circulation. Blood filter sleeves are a component used in blood filtering systems manufactured by others. Mesh panties are inexpensive stretch pants used to hold maternity pads or incontinent pads in place.
Byford Apparel Division
Byford imports and markets a broad range of better men's hosiery and sweaters. For the most part, Byford's socks are imported from the Byford mill in Leicester, England. The men's hosiery incorporates fully reciprocated and reinforced heels and toes. Sourcing for Byford sweaters is more broadly based , with products coming from Coats Viyella mills in the UK, mills in the Far East, and domestic sweater producers.
Alba Direct Division
Alba Direct distributes products from the Consumer Products Division, Byford Apparel Division, and Health Products Division to the independent specialty retail class of trade via telemarketing. It is also the primary group responsible for building Alba's export business.
AWI Retail Division
Alba Direct also has responsibility for an outlet store in Branson, Missouri, thereby providing entry into one of the fastest growing channels of distribution.
Methods of Distribution
The Consumer Products Division markets its products directly to chain store organizations, which sell them under their own labels, and to several companies that market nationally advertised brands. Alba's products are sold throughout the United States through salaried and commissioned salesmen. Byford products are marketed primarily through men's specialty stores, both chain and independents. Products of the Health Products Division for use in hospitals are marketed to major distributors supported by Alba's commissioned sales representatives. These products are sold both under private label and under Alba's own Life Span(R)label. Alba Direct distributes branded Consumer Products and Health Products to the independent retail trade through telemarketing. Sales offices are located in Valdese, N.C. and in New York. Total expense for marketing and selling of all products from Alba's continuing operations was 10.0% of sales in 1994, compared to 12.0% in 1993. The decrease from 1993 was mainly due to better cost control and the absence of incurred costs associated with a repackaging project and expenses related to the Leslie Fay(R) line.
Manufacturing
From the 1920's to the 1940's, women's silk stockings were knitted to the shape of the leg on fine gauge full-fashion machines and were seamed up the back (because silk is an inelastic yarn). The introduction of stretch nylon yarn in the early 1950's made it feasible to knit seamless stockings and, later, pantyhose on tubular knitting machines. When this occurred, the industry considered fine gauge full-fashion knitting equipment obsolete and production of this equipment here and in Europe ceased. Much existing equipment was destroyed and none has been manufactured since. In the mid-1950's Alba developed a technique for producing stretch, one-size panty products for women on this full-fashion knitting equipment. After some years of marketing development, the stretch panty product became quite successful, and, subsequently, Alba began using the same equipment to produce children's leotards and, later, men's underwear. During 1989 and 1990, men's underwear, the remainder of the children's leotards and tights were discontinued. In past years, Alba sought and acquired significant number of fine gauge full-fashion knitting machines and also developed a substantial stock of spare parts. As a result, management believes that Alba now owns more fine gauge full-fashion knitting machines than any other manufacturer. Company technicians have developed the capability of rebuilding and refurbishing the equipment to meet new equipment efficiency and quality standards. Alba, through its training programs, has developed a corps of professional mechanics and knitters to continue efficient operation of these machines. Alba's present complement of equipment is more than sufficient to produce the volume of its present sales, and it can produce or has produced any machine parts required for continuing operation of these machines. The balance of Alba's products is manufactured on equipment generally available to the industry (even though some equipment is modified by Alba). Alba anticipates that capital expenditures for 1995 will be approximately $2,100,000 for the renovation of existing plant and equipment and for the purchase of new, more efficient knitting equipment.
Financial Information About Classes of Similar Products
Alba is in a single line of business: manufacturing, processing and selling knitted products, consisting of several classes. The table below illustrates sales as a percentage of net dollar volume from continuing operations for each product class for each of Alba's last five years:
Discontinued products are eliminated for the purpose of this table. The remaining sales percentages of each class were restated after this elimination to represent sales of each class as a percentage of net dollar volume from continuing product lines.
New Products or Segments
Alba maintains an active research and development department that continually evaluates new products and processes. Management also evaluates new products, business opportunities, and acquisitions on an on-going basis and could encounter a profitable situation which would require substantial investment in the future. Such an investment occurred in 1994 with the purchase of the pulsitate anti-embolism system from Baxter Healthcare Systems.
On March 6, 1995, the Company's textile apparel manufacturing subsidiary (Alba) purchased the Balfour Health Care Division and manufacturing facility in Rockwood, Tennessee from Kayser-Roth Corporation for approximately $14.5 million, subject to post-closing adjustments. The acquisition of Balfour will add approximately $15 million in annual sales to Alba. Alba financed 100% of the acquisition price with a revolving loan agreement provided by a major bank.
Sources and Availability of Raw Materials
The principal raw materials used by Alba in its manufacturing processes include various types of yarn, chemicals for dyeing and finishing and for impregnating medical products and packaging materials for all products. Alba acquires these materials from a number of sources and is not dependent on any one source for a significant amount of its raw materials. Alba anticipates no material change in either the availability or the cost of its raw materials.
Patents and Licenses
The only material patents held by Alba are (1) for pantyhose with a terry crotch insert, which expired in 1992; (2) for a device used to warm wet dressings; and (3) for a process covering the manufacture of dressings. The latter two expire in 2002. Alba or its subsidiary, Pilot Research Corporation, holds numerous other patents that, because of obsolescence or other reasons, are not material to Alba's current operations. Alba licensed the No-Nonsense(R) trade mark in 1990 for an initial term of 3 years and seven months with renewal options after the expiration date. Management decided to terminate the license agreement at the end of 1993.
Working Capital
Differences resulting from seasonal fluctuations have not been sufficient to materially affect Alba's working capital requirements. Alba sells merchandise on consignment only on a limited basis. Returns are permitted when the quality of merchandise sold is below acceptable standards or when an error in completing an order occurs. The number and amounts of returns during Fiscal 1994 did not have a material effect on working capital of Alba. Due to the various approaches to manufacturing and distribution used by the industry, Alba is not aware of any industry-wide norms relating to sale and delivery requirements. During Fiscal 1994 working capital was adversely affected by the purchase of inventory related to the pulsitate anti-embloism system from Baxter Healthcare. This purchase was financed through short term borrowings on a line of credit which will be converted to a long term note in 1995 with an amortization schedule of 5 years.
Significant Customers
Major customers for Alba's products and their respective volume of sales for 1994, 1993 and 1992 are as follows:
			 1994 1993 1992
Baxter Health Products Corporation $12,902,722 $13,610,937 $11,074,280
While the loss of Baxter Health Products Corporation would have a material adverse effect on the business of Alba, management believes that because of the number of departments within this company to which it sells, the loss of a material amount of sales is unlikely.
Backlog
Alba's backlog of firm orders at December 31, 1994 was $2,173,893. A majority of Alba's orders are for delivery within 30 to 60 days. The backlog figures, therefore, are not normally indicative of orders for the remainder of the year.
Competition
In addition to meeting the demands of the normal hosiery and intimate apparel markets, Alba specializes in producing garments for the hard-to-fit woman. Consumer products are sold on a private label basis through the nation's retail chains and national brands. Health care products for use in hospitals are marketed under private label to major distributors, supported by commissioned sales representatives. In addition, health care products for use in the home have been introduced under private label and under Alba's own Life Span(R)label. Byford products are primarily marketed under the Byford name. Alba encounters severe competition in the sale of its products from numerous competitors, a few of which are known to have larger sales and capital resources than Alba. Management is unable to estimate the number of Alba's competitors or its relative position among them. Alba believes that the principal methods of competition in the markets in which it competes include price, delivery, performance, service and the ability to bring to the market innovative products. Management believes that Alba is competitive with respect to these factors but is unable to identify specific positive and negative aspects of Alba's business pertaining to such factors.
Research and Development
Alba reported that it spent $376,008, $340,663 and $187,000 for the years ended December 31, 1994, 1993 and 1992, respectively, in company-sponsored research and development projects through its wholly-owned subsidiary, Pilot Research Corporation and through Alba's Quality Control and Research and Development Department.
Environmental Regulations
In the opinion of management, Alba and its subsidiaries are in substantial compliance with present federal, state and local regulations regarding the discharge of materials into the environment. Capital expenditures required to be made in order to achieve such compliance have had no material effect upon the earnings or competitive position of Alba or its subsidiaries. Management believes that continued compliance will require no material expenditures.
Government Regulation
Alba is subject to various regulations relating to the maintenance of safe working conditions and manufacturing practices. In addition, certain of the products manufactured by the Health Products Division are subject to the requirements of the Food and Drug Administration with respect to environmentally controlled facilities. Alba believes that it is currently in compliance with all such regulations.
			Military Footwear
A majority of Wellco's operations relate to military footwear, which involve the following activities:
Combat Boot Manufacturing
Wellco's largest activity involves the manufacture and sale of military combat boots under firm fixed price contracts with the United States government. Boot products are the general issue all-leather boot, the hot weather boot and the desert boot, all manufactured using the government specified Direct Molded Sole ("DMS") process.
	 Military combat boot manufacturing activities in 1994 consisted of production and shipments against a three year contract awarded in 1993. When this contract was initially awarded, it was projected that shipments would be spread equally over three years, with the second and third years being from the award of contract options. However, actual consumption of combat boots during 1994 (first year) was less than projected, and resulted in the government's award in August, 1994 of the first option with a delivery time of sixteen months, one-third longer than the first year. This reduced the pairs of combat boots shipped in 1994, but the negative effect of this was somewhat offset by increased sales of equipment to non-military boot manufacturing customers and foreign military sales. The government has expressed their intent to also extend over sixteen months deliveries under the second option of this contract, at the end of which they are projecting the completion of their inventory reduction program.
Military Equipment and Technology
Through a subsidiary (Ro-Search, Inc.) Wellco supplies certain equipment and technology under long-term agreements to U.S. combat boot manufacturers. The boot makers receive equipment, technology and service, and Wellco earns fees based on pairs produced. Equipment is either sold or leased to these customers.
Foreign Military Sales
Ro-Search provides military footwear technology, technical assistance, training, equipment and materials to other countries. This may be through private companies who contract with their government, as is the practice in the U.S., or directly to the military who run their own factories. This activity can vary from year to year with the needs and financial resources of these customers. 1994 developments included the sale of additional equipment and materials to a long-term customer, the military of El Salvador.
Research and Development
A significant research and development effort is required in order to maintain Ro-Search's leading position in military footwear technology. Ro-Search's own resources committed to such research and development are supplemented by contracts with various agencies of the Department of Defense. In 1994, Ro-Search completed development work for the U. S. Army's Research and Development Laboratories on improvements to the hot weather boot, which will soon be incorporated into boot production contracts. Wellco estimates that the cost of research and development varies from $50,000 to $300,000 per year, depending on the number of research projects and the specific needs of its customers.
Non-Military Footwear Activity
Although much smaller than military activity, non-military footwear is also an important part of Wellco's business, which involve the following activities:
Ro-Search provides, primarily under long-term licensing agreements, technical assistance for manufacturing commercial footwear to customers in the United States and abroad. Under these agreements licensees receive technology, services and assistance, and Ro-Search earns fees based primarily on the licensees' sales volume. In 1994, Ro-Search provided one of its oldest customers with a significant amount of new equipment, and sold equipment and started the installation process for one new customer.
Ro-Search also has an ongoing business in the supply of European-made metal hardware for boots, such as hooks and speed lace loops and D-rings, and the related automated machinery for applying such hardware, to North American manufacturers of rugged footwear. The recent popularity of boots has significantly increased the sales of these items.
Government Military Boot Contracting Environment
Bidding on contracts is open to any qualified U.S. manufacturer. In addition to meeting very stringent manufacturing and quality specifications, contractors are required to comply with precise delivery schedules and a significant investment in specialized equipment is required.
Wellco usually competes on U. S. government contracts with three other companies, no one of which dominates the industry. Many factors affect the government's demand for combat boots and the quantity purchased can vary from year to year. Contractors cannot influence the government's combat boot needs. Price, quality and manufacturing efficiency are the areas emphasized by Wellco that strengthen its competitive position. Combat boots contract awards are presently based on negotiated-price directed awards.
Government contracts are subject to partial or complete termination under the following circumstances:
1. Convenience of the Government. The government's contracting officer has the authority to partially or completely terminate a contract for the convenience of the government only when it is in the government's interest to terminate. The contracting officer is responsible for negotiating a settlement with the contractor.
2. Default of the Contractor. The government's contracting officer has the authority to partially or completely terminate a contract because of the contractor's actual or anticipated failure to perform his contractual obligations.
Under certain circumstances occasioned by the egregious conduct of a contractor, contracts may be terminated and a contractor may be prohibited for a certain period of time from receiving government contracts. Wellco has never had a contract either partially or completely terminated.
Other Information
Because domestic commercial footwear manufacturers are adversely affected by imports from low labor cost countries, Wellco targets its marketing of technology and assistance to military footwear manufacturers. Wellco competes against several other footwear construction methods commonly used for heavy-duty footwear with leather uppers. These methods include the Goodyear Welt construction, as well as boots bottomed by injection molding. These methods are used in work shoes, safety shoes, and hiking boots manufactured both in the U.S. and abroad for the commercial market. The Goodyear Welt method is also used for certain types of military boots, although not for the models manufactured by Wellco which are made only in the government specified Direct Molded Sole construction. Quality, service and reasonable manufacturing costs are the most important features used to market Wellco's technology, assistance and services.
The backlog of all sales, not including license fees and rentals, as of December 31, 1994 was approximately $4,179,000 compared to $5,000,000 last year. This decrease is reflective of the U. S. government's awarding of the first option under the three year combat boot contract in two equal amounts, with the second half of that option not being awarded until the 1995 year. Substantially all of the current year backlog will be shipped by the end of 1995.
Compliance with various existing governmental provisions relating to protection of the environment has not had a material effect on Wellco's capital expenditures, earnings or competitive position.
Most of the raw materials used by Wellco can be obtained from at least two sources and are readily available. Because all materials in combat boots must meet rigid government specifications and because quality is the first priority, Wellco purchases most of its raw materials from vendors who provide the best materials at a reasonable cost. The loss of some vendors would cause some difficulty for the entire industry, but Wellco believes a suitable replacement could be found in a reasonably short period of time. Major raw materials include leathers, fabrics and chemicals, and by government regulation all are from manufacturers in the United States.
		 Textile Equipment Manufacturing
On January 17, 1989, Sunstates acquired from Hickory, for a cash payment of $2,000,000, a 99% ownership interest in Sew Simple Systems, Inc. ("Sew Simple"), a designer and manufacturer of automated textile machinery located in Fountain Inn, South Carolina. The results of operations of Sew Simple since January 1, 1989 are included in the Consolidated Statements of Operations. The Stock Purchase Agreement provided that if Hickory should find a buyer for Sew Simple prior to the expiration of the Agreement, then Hickory would be entitled to additional amounts based upon the excess, if any, of the sales price over an escalating amount specified in the contract, which, as of April 13, 1992, was approximately $3.4 million (the Rights). On April 13, 1992, Sunstates acquired from Hickory its remaining 1% ownership and its Rights under the Stock Purchase Agreement for approximately $13.6 million (see Note 1 of the Notes to Consolidated Financial Statements). The consideration given by Sunstates included the assignment of approximately $12 million previously due to Sunstates from Hickory and other affiliates plus a note payable for approximately $1.6 million.
Manufacturing operations began in 1968 with the development of a cloth cutting and hemming system known as an "Auto Casting System", which takes rolled material, measures, cuts, sews two ends with an overcast or purl stitch, trims, labels and stacks the finished product. Following later was the introduction of other machinery systems that automated folding hems on dishcloth materials, and for sewing cross hems and mitering corners of small towels.
The success of these products led to the incorporation in South Carolina in 1972 of Sew Simple Systems, Inc. to address the growing need for automation of various textile product fabricating processes with a broader and more comprehensive product line. Sew Simple has developed and introduced a broad range of fully automatic machine systems for fabricating various textile products such as sheets, pillowcases, towels, washcloths, blankets, drapes, tablecloths, napkins, etc.
Machines are built to meet a specific customer order and working capital is partially provided through the product's sales terms. Normally, 50% of the sales price is paid at the time of the order, 40% at the time the production of the machine is completed, with the final 10% paid upon installation in the customer's facility.
Sew Simple has a product line of over 20 different machines used in the production of various textile products. During 1994, various quantities of seven different machine products were manufactured and shipped. The product mix in any year, however, is directly related to the product line expansion activities of the customers in that particular year and is not necessarily indicative of future product mix. Order backlog approximated five months at current production levels as of December 31, 1994, and four months as of December 31, 1993.
Sew Simple's customers are primarily large domestic producers of finished textile products. Although 100.0% of machinery sales for 1994 were to eight customers, there is no dependence from year to year on any one customer. Due to the sales value of certain of Sew Simple's most popular machines ($475,000 to $675,000 each) a significant portion of annual sales volume may be to differing individual customers.
During the past three years, overseas sales have, on a cumulative basis, represented less than 1% of total revenues. Sew Simple has focused its efforts on developing the domestic market for its newer machines, and in expanding its customer base for both existing and new machine products.
Competition in the domestic marketplace exists in a limited number of Sew Simple's machine systems and even in those instances the competitors are principally foreign manufacturers who have difficulty effectively competing on price, quality, productivity and service.
Most raw materials are readily available from numerous sources at competitive prices. Although certain more technologically advanced parts used in the production process are obtained from one or two primary suppliers, the success of Sew Simple's operations are not dependent upon those suppliers. Sew Simple believes that alternative sources for obtaining such parts are available with only minor design modifications being necessary to accommodate such alternative parts.
Most of Sew Simple's machine systems incorporate the application and use of patented inventions. Current expiration dates of existing patents range from 1996 through 2009, with additional patents pending.
Research and development activities are continually underway in connection with current product line and the development of new products. Sew Simple is currently dependent upon one individual, who has been employed by Sew Simple since 1976 and whose employment agreement continues until 1999, for the invention and development of new machines. Although the long-term prospects for continued success are dependent upon the development of new products, operations would not be materially impacted for a period of three to five years by the loss of this individual and Sew Simple believes that it could seek and obtain comparable research and developmental skills within that time frame. Total research and development expenditures during the three years ended December 31, 1994, were $218,045, $232,540, and $248,559, respectively.
		 Real Estate Operations
Historically, the Company's real estate operations primarily reflected the development for resale of income producing properties located in the southeastern United States. Sunstates is also actively involved in the sale of recreational and second home resort lots and continues its efforts to sell other real estate assets no longer under active development.
Sunstates' primary real estate activity has been the development of income-producing properties with a view to selling these properties upon completion and lease-up. Projects are generally located in the southeastern United States with an emphasis on shopping centers and apartments.
Sunstates has substantially completed the construction phase of all of its major commercial and multi-family projects. Presently, Sunstates has five shopping centers which are presently either in various stages of lease-up or are currently being marketed. Based upon current market conditions, Sunstates presently does not anticipate that it will continue to actively seek locations for the development of new shopping centers or apartment projects.
On August 25, 1992, a subsidiary of Sunstates purchased 100% of the common stock of The SPRINGS, Inc. ("Springs") for $7,273,183 in cash (see Note 1 of Notes to Consolidated Financial Statements). The Springs is an 1,800 acre resort development project located in Spring Green, Wisconsin encompassing an 80 suite hotel, 27 hole golf course, ski slopes and trails, condominiums, single family home sites and other amenities. The hotel and golf course are substantially complete and real estate development and sales operations should begin in 1995. On February 23, 1993, the Company acquired from its Chairman approximately 1,137 additional acres of land near the Springs. This additional land, which presently contains 9 residential units and one vacation rental house, will provide for complementary development with the Springs project. (See Item #13 of this Report for additional information regarding this transaction.)
In the past, Sunstates has also engaged in the development of three interval ownership (timeshare) projects for sale in the Sarasota, Orlando and St. Augustine, Florida areas. In the first quarter of 1986, Sunstates elected to limit any future involvement in interval ownership (timeshare) development and during 1993 the Company disposed of substantially all of its remaining assets related to timeshare.
There are a number of risks inherent in Sunstates' real estate activities. The availability of short-term and long-term financing, the demand for space by tenants and the demand for real estate projects by purchasers are perhaps the major risks. Changes in federal and state tax laws can have a short-term impact upon the demand and market for income-producing properties. Additionally, the development of real estate projects involves substantial time between inception and completion. Success in real estate development is dependent upon accurate assessment of these risks. In certain instances, the risks may be minimized by obtaining financing, leasing or pre-sale commitments prior to construction. In other instances, management may deem it prudent not to make any commitments other than for construction financing prior to commencing construction of a project in order to take advantage of perceived favorable trends in given markets or the availability of long-term financing.
Although it has always been Sunstates' intention to obtain long-term financing or to sell its projects prior to the maturity of any construction loans, current conditions in the banking and other financial markets have made it difficult to obtain reasonable financing for either sales or refinancings. Banks and other financial institutions are restricting the availability of credit to the real estate and other industries. This inability to obtain financing has adversely affected Sunstates' current real estate operations and could restrict Sunstates' ability to sell its real estate projects.
In its present activities of developing, financing and marketing real estate, Sunstates is subject to competition from various types of entities including banks, real estate investment trusts, real estate developers, governmental agencies and other owners of income-producing properties.
A number of jurisdictions have adopted laws and regulations relating to environmental controls on the development of real estate. Such laws and regulations affect properties currently owned by Sunstates and will have an effect on the cost and type of development allowed on the properties. Although the application of such laws and regulations has not, to date, materially affected operations, the effect on future operations cannot be predicted.
In October 1993, the Company acquired Bell's Apple Orchard, a 32 acre apple orchard with 12 additional acres of production, retail and administrative facilities located in Lake Zurich, Illinois. The orchard is engaged in the growing, manufacture and retail marketing of apples and apple related products and employs 15 to 20 full time employees with approximately 45 to 50 seasonal employees during the harvest season. A portion of the retail facility is leased to tenants.
			Other Investments
Sunstates makes investments in the outstanding common stock of numerous corporations (sometimes in excess of 5% of the outstanding common stock of such corporations). When appropriate, Sunstates accounts for certain of the investments in common stock utilizing the equity method of accounting. Sunstates continually evaluates the corporations in which it has made investments and may, subject to such factors as price of shares, availability of shares and business prospects, increase or decrease its positions in those corporations. Factors considered in such analysis include, but are not limited to, economic prospects of the businesses, availability of investment opportunities and the potential for a satisfactory return on amounts invested.
Rocky Mountain Chocolate Factory, Inc. ("Rocky Mountain"), located in Durango, Colorado, manufactures, from its own recipes, a line of gourmet chocolates and other premium confectionery products for sale at company-owned and franchised stores. On December 31, 1989, Sunstates became the owner of 35.12% of the common stock of Rocky Mountain through the conversion of a note which was held in its investment portfolio. As of December 31, 1994, Sunstates' owned 55% of the common stock of Rocky Mountain and also holds additional notes which are secured by the common stock of Rocky Mountain. Although Sunstates' present ownership of Rocky Mountain is over 50%, the financial statements of Rocky Mountain have not been consolidated with Sunstates' due to immateriality. Sunstates is represented on the Board of Directors of Rocky Mountain.
Lerner Communications, Inc. ("Lerner"), a publisher of several neighborhood newspapers in the Chicago area, was acquired on October 13, 1992. Lerner solicits advertising and publishes the newspapers but subcontracts the printing of the papers with other newspaper printers. The purchase price of the net assets acquired totalled $1,078,626 consisting of $475,000 cash at closing and a short-term note payable of $602,431 paid in early 1993 plus other assumed liabilities of $1,195. The operations of Lerner are included in the Sunstates' consolidated financial statements since the date of acquisition.
The Company also invests in oriental artwork, antique jewelry and books and other collectibles which are purchased and sold through dealers and at public auctions.
			 Seasonality
Sunstates' insurance, manufacturing, and commercial property operations are generally not subject to significant seasonal fluctuations. However, sales of resort and recreational lots are subject to seasonal effects. The peak selling seasons for these products are during the spring and summer with declining sales activities during the fall and winter. Sales activities at Sunstates' recreational and resort lot projects are generally shut down during the months of November through February.
			Foreign Operations
Sunstates has no material continuing foreign operations. See "Furniture Manufacturing, Military Footwear, Textile Apparel and Textile Equipment Manufacturing" for information regarding foreign sales.
Item 2.

Item 2. PROPERTIES
The following table presents a description of the real estate owned by Sunstates at December 31, 1994. The net book value represents the historical cost of the property, net of accumulated depreciation, if any, and is not presented net of any related recourse or non-recourse financing on the property.
Property Name & Location Description Net Book Value
Real Estate Held for Development and Sale
Shopping Centers:
Moratok Shopping Center, 47,870 s.f. $ 1,389,660 Plymouth, NC 			 Mariner Crossing Shopping Ctr., 74,236 s.f. plus two 4,783,869 Spring Hill, FL outparcels
Patriot's Square Shopping Ctr., 47,231 s.f. plus three York County, VA outparcels 3,525,699
Ocean Village Square 60,631 s.f. Shopping Ctr., plus three New Smyrna Beach FL outparcels 4,990,619
The Market Place at West Melbourne 52,045 s.f. 1,532,751 Melbourne, FL
Office Buildings:
Anderson Plaza Raleigh, NC 29,727 s.f 1,104,059

Recreational and Second Home Lots:
Woodland Lakes, Sullivan, MO 1,388 lots 398,488
Hidden Valley Lake, Dixon, TN 314 lots 212,488
Piney Creek OK 271 lots 85,299 Pittsburgh County, OK
Twin Oaks Harbor 367 lots 308,916 Lowry City, MO
Inactive subdivisions 9 inactive subdivisions 25,351
Land:
The Springs 985 acres, primarily suitable Spring Green, WI for residential lots 2,145,633
Hacienda Hills 128 acres primarily suitable 108,034 New Port Richey, FL for residential lots
Creekside Office Plaza, 5.5 acres suitable for office Jacksonville, FL building 440,000
Somerset Port 22.5 acres suitable for 313,200 Orange, FL apartments
Mayport Road 13 acres suitable for Mayport, FL apartments 100,000
Southern Pines 50% undivided interest Southern Pines, NC in 20 acres 190,523
Westshore 50% undivided interest St.Petersburg, FL in 23 acres 100,000
Denver, CO 5.98 acres 1,000
Green Meadows Subdivision 91 developed residential lots 91 Omaha, NE
Berryhill Subdivision 8 developed residential lots and Carrboro, NC acreage suitable for 60 				 additional lots 1,561,405
Sparrows Walk 3 acres 50,000 Coral Springs, FL
Gastonia Commercial 50% undivided interest in Gastonia, NC approximately 3 acres 8,843
Chapel Hill Lots 4 developed residential lots 106,031 Chapel Hill, NC
Investment in Partnerships:
Maryland Trade Center 50% general partnership interest Greenbelt, MD in 208-room hotel (470,861)
Inlet Investors, Ltd., 28.31% Limited partnership Ponte Vedra Beach, FL interest in hotel and beach 				 club development 725,848
Amli-Will Ltd. Partnership, 5.5% Limited partnership Will County, IL interest in 2,505 acres held 				 for development 730,285
Other Real Estate:
The Springs 6 condominiums and 1 single- Spring Green, WI family home 719,399
The Springs Winter ski slope held Spring Green, WI for sale 918,139
Land Lease 84 year lease of land underlying Boca Raton, FL the recreational amenities of a 				 condominium project 63,355
Magic Tree Resort 3 timeshare weeks available Kissimmee, FL for sale 3
Epernay Property 1,137 acres held for Spring Green, WI development 999,057
Bell's Apple Orchard 32 acre apple orchard plus Lake Zurich, IL production, retail and 				 administrative facilities 1,373,441
Coach Horse Property leased to a Chicago, IL coach horse livery operation 				 In downtown Chicago 883,350
Property, Plant and Equipment
Operating Properties
The Springs 80 unit hotel and amenities 4,928,224 Spring Green, WI
The Springs 27 hole Robert Trent Jones/ Spring Green, WI Andy North golf course 2,110,400
Manufacturing Facilities
The following table sets forth information regarding production and showroom facilities of the Company's manufacturing subsidiaries.
		 Approximate Approximate Lease Primary Use Facility Name Floor Area Site Size Expiration or Products Location (Sq. Ft.) (Acres) (Annual Rent) Manufactured
Production Facilities: Hickory Manufacturing 479,000 29.6 (1) Owned Medium and higher Hickory, NC priced quality case goods
Hickory Manufacturing 124,000 6.5 11/15/95 Portion used for Hickory , NC ($34,400) rough mill, 						Two 5 year balance to be 						Options used for future 						Through expansion 						11/15/05
					 Chaircraft 230,000 25.65 Owned Lower-medium , Bethlehem NC priced quality 							 wood chairs and 							 upholstered 							 furniture
KayLyn 129,000 2.3 2/1/96 Medium and High Point, NC ($179,000) higher priced quality 							 upholstered 							 Furniture
Administrative Office 77,000 3.6 Owned Office and Oak Street Plant warehouse High Point, NC
Pendleton Frame 52,000 3.8 1/31/1996 Wood furniture Building High Point, NC ($69,800) frames
Chair Building 50,400 N/A 10/31/97 Vacant; sublet Mebane NC ($18,200) in March 1994
Outlet Store 25,000 N/A 1/31/2000 Retail space in Burlington, NC ($136,800) shopping center 				 			 Outlet Store 15,000 N/A 12/31/98 Retail space in Statesville, NC ($74,000) shopping center
Sew Simple 30,000 7 Owned Textile Fountain Inn, SC machinery
Wellco and Ro-Search 90,000 3 Owned Manufacturing, Hazelwood, NC warehousing 							 and office 							 facilities
Wellco 22,700 1 6/30/97 Military boot Aguadilla, Puerto Rico ($54,000) manufacturing
Alba 157,000 8.37 Owned Knitting, yarn Valdese, NC processing and 							 finishing
Knitting 18,000 1.22 Owned Knitting Valdese, NC (intimate 						 apparel)
John Louis 178,300 7.57 Owned Finishing Valdese, NC
Pineburr 81,000 19.8 Owned Knitting Valdese, NC (hosiery & 							 health care 							 products)
Offices 3,000 N/A 1998 Sales offices New York City, NY ($120,000)
Main Office 52,000 3.5 Owned Corporate Valdese, NC Headquarters
Main Street 69,000 1.4 Owned Knitting and Valdese, NC Finishing
Outlet Store 1,760 N/A 1999 Retail space in Branson, MO ($26,400) shopping center
Showroom and other Facilities:
Furniture Market 34,000 N/A 8/31/97 Furniture Showroom ($248,000) showroom High Point, NC
World Trade Center 12,906 N/A annually, Furniture showroom Dallas, TX renewable thru 						6/30/96 			 			($63,000)
(1) The Hickory Manufacturing North Carolina production site includes approximately 13.6 acres of unimproved land, suitable for plant expansion if and when necessary or desirable.
As a result of Hickory White closing its facility in Mebane, N. C. early in 1993 and transferring the production requirements to its plant in Hickory, N. C., Hickory White returned to 90% of capacity. Hickory White estimates that an increase in production of approximately 15% of normal capacity could be achieved with only modest capital expenditures for plant expansion. However, based upon present economic conditions, there is no anticipated need for such increased capacity and there are no significant capital expenditures planned in 1995.
In 1994, both Wellco's Hazelwood and Aguadilla facilities were used at less than normal capacity. Both facilities have the capability to significantly increase their production output within a short period of time.
Management believes all its plants, warehouses and offices are in good condition and are reasonably suited for the purposes for which they are presently used. Although there are no current plans for major expansion, current properties provide ample opportunity for future growth and there is an adequate and stable work force in all of Sunstates's manufacturing locations.
Newspaper Publishing:
Sunstates' newspaper publishing business operates out of approximately 10,000 square feet of leased office space in Chicago, Illinois. The lease calls for annual lease payments of $130,086 and expires on January 31, 1998. The printing of the newspapers is sub-contracted and Sunstates maintains no printing or other facilities with respect to its newspaper publishing operations.
Item 3.

Item 3. LEGAL PROCEEDINGS
In April of 1988, two essentially similar civil actions styled Jeremiah P. O'Connor, Sarah M. O'Connor, and Leonore Ballan v. Acton Corporation, et al., and VR Associates and PJE Associates v. Acton Corporation, et al., were filed in the Court of Chancery for the State of Delaware in and for New Castle County. Also named in these actions are Sunstates Corporation and the directors of Acton prior to the merger with Sunstates. These actions, along with another subsequently filed action styled Harry Lewis v. Clyde W. Engle, et al., have been consolidated into one action entitled In Re Acton Corporation Shareholders Litigation. All plaintiffs allege to be holders of common stock of Acton and seek to have the action designated a class action on behalf of all parties owning common stock of Acton. The action challenges the merger of Sunstates Corporation with and into Acton, alleges fraud and breach of fiduciary duty and seeks unspecified damages plus costs and expenses including attorney's fees. Acton intends to defend this action vigorously. The suit is still in the preliminary stages and management is unable to predict the outcome of the litigation; however, management is of the opinion that the outcome of the litigation is unlikely to have a material adverse effect on Sunstates' financial position.
On June 4, 1990, VR Associates and Sonem Partners, L.P. filed a shareholder derivative action in the Court of Chancery for the State of Delaware in New Castle County against the directors of Acton and Hickory. The action alleges that certain transactions entered into and investments made by Acton constituted waste or a breach of fiduciary duty by the Board of Directors of Acton. In particular, the action alleges that Acton's purchase of the furniture operations of Hickory was not in the best interests of Acton and seeks various relief, including rescission of the purchase, unspecified damages and costs. The action also sought to obtain a temporary restraining order to prevent consummation of the purchase transaction. The request for a restraining order was denied by the Court on June 8, 1990. An essentially similar action was filed in the State of Delaware on June 12, 1990 by PJE Associates. These suits are still in the preliminary stages and management is unable to predict the outcome of the litigation; however, Sunstates intends to defend these actions vigorously and does not believe that the outcome of the litigation is likely to have a material adverse effect on Sunstates' financial position.
On June 14, 1991, a jury in a District Court of Dallas County, Texas awarded $3.5 million in actual damages and $5 million in punitive damages to the plaintiffs of a lawsuit filed against Acton Corporation. This dispute relates to the amount of additional purchase consideration due plaintiffs under an agreement made in 1983 whereby the Company purchased National Development Company, a real estate company based in Dallas. The Company has appealed the verdict based, in part, on the exclusion by the court of evidence crucial to the Company's defense. On November 7, 1991, the Company filed a Supersedeas Bond in the amount of the judgment, plus costs and interest for one year, with the Clerk of the District Court, signed by the Company as principal and by National Development Company, Inc., an affiliate of the Company, as surety. The effect of the filing of the supersedeas bond is to stay any execution of the judgment against assets of the Company, pending the results on appeal or any further orders of the District Court regarding the supersedeas. The plaintiffs have filed a cross-appeal, alleging that the trial court should have awarded an additional $5 million in exemplary damages, based upon the jury verdict. The Company believes that the damages awarded are contrary to the law and facts in this matter and is vigorously pursuing its rights on appeal. However, at this time management is not able to predict the Company's ultimate liability, if any, in this matter and accordingly, no provision for any such liability has been made in the Company's financial statements. Should the Company be required to pay all or a significant portion of this judgment, it could have a material adverse effect on the financial position and results of operations of the Company.
On December 6, 1991, California Federal Bank filed a suit against Acton in the Circuit Court, Duval County, Florida alleging breach of a Contract of Guaranty of a $5,100,000 note executed by Jacksonville Apartment Associates, Ltd. and secured by a mortgage on an apartment project in Jacksonville, Florida. During 1994 the suit was settled with the Company making a payment of $230,000.
On December 8, 1993, Richard N. Frank filed a purported derivative and class action in the Court of Chancery for the State of Delaware in New Castle County against the directors of Acton, Hickory and Telco. The action alleges that certain transactions entered into and investments made by Acton constituted waste or a breach of fiduciary duty by the Board of Directors of Acton. The complaint also alleges that the Company and its insurance subsidiary repurchased shares of the Company's common stock and $3.75 Cumulative Preferred Stock in violation of the Company's certificate of incorporation. Finally, the complaint alleges that the proxy statement disseminated in connection with the Company's December 13, 1993, annual meeting was materially misleading. This suit is in the preliminary stages and management is unable to predict the outcome of the litigation; however, Sunstates intends to defend these actions vigorously and does not believe that the outcome of the litigation is likely to have a material adverse effect on Sunstates' financial position.
On January 10, 1994, Robert A. Lee, et al. filed a punitive derivative action in the Court of Chancery for the State of Delaware in New Castle County against the directors of Acton, Hickory, Telco, WREIT, RDIS Corporation and nominally against the Company itself. The complaint alleges that certain transactions entered into and investments made by Acton constituted waste or a breach of fiduciary duty. This suit is in the preliminary stages and management is unable to predict the outcome of the litigation; however, Sunstates intends to defend these actions vigorously and does not believe that the outcome of the litigation is likely to have a material adverse effect on Sunstates' financial position.
At December 31, 1994, Sunstates and its subsidiaries also were, and currently are, defendants in other legal proceedings incidental to their business. Sunstates intends to defend such proceedings vigorously and, in the opinion of the management, Sunstates' ultimate liability, if any, in these proceedings will not have a material adverse effect on the consolidated financial position of Sunstates.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders during the quarter ended December 31, 1994.
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Prior to May 3, 1994, both Sunstates' Common Stock, and $3.75 Cumulative Preferred Stock ("$3.75 Preferred Stock") were traded on the American Stock Exchange (AMEX) under the symbols "ATN" and "ATNP", respectively. On May 3, 1994, both Sunstates' Common Stock, and $3.75 Cumulative Preferred Stock ("$3.75 Preferred Stock") began trading on the Nasdaq Stock Market (NASDAQ/NMS) under the symbols "SUST" and "SUSTP", respectively.
The Sunstates' Class B Accumulating Convertible Stock ("Class B Stock") is traded through brokers who have registered with the National Association of Securities Dealers, Inc. to make a market in these shares. Currently, Mesirow Financial is the only broker who has registered to buy and sell Sunstates' Class B Stock. There is no significant trading market for Sunstates' Class E Preferred Stock, Series I and II.
The following table sets forth for the periods indicated the high and low closing prices for the Sunstates' Common Stock and $3.75 Preferred Stock, respectively, as reported by the AMEX and NASDAQ/NMS, as appropriate.
The following table sets forth for the periods indicated the range of high and low bid prices for Sunstates' Class B Stock as reported by the primary market maker, Mesirow Financial. These quotations do not reflect retail mark-ups, mark-downs or commissions and do not represent actual transactions.
The approximate numbers of holders of record for the respective classes of Sunstates' equity securities at March 6, 1995, were as follows:
Common Stock 2,718 Class B Stock 104 $3.75 Preferred Stock 1,434 Class E Preferred Stock, Series I & II 58
Dividends
No dividends were paid to holders of Sunstates' Common Stock and Class B Stock during 1994, 1993 or 1992 nor does the Company currently anticipate the payment of such dividends in the foreseeable future. Under the terms of Sunstates' $3.75 Preferred Stock, dividends may not be paid on common shares while preferred stock dividends remain in arrears. At March 14, 1995, nine semi-annual dividend payments aggregating $4,795,588 ($16.875 per share) were in arrears on Sunstates' $3.75 Preferred Stock.
The above financial information has been retroactively restated to reflect the effect of the Company's change in its method of valuing its furniture manufacturing inventories from the last-in, first-out method to the first-in, first-out method (see Note 2 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form). The effect of this retroactive restatement upon previously reported balances is as follows:
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Litigation
See Note 9 of Notes to Consolidated Financial Statements contained in Item 8

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to Item 8 is submitted as a separate section of this report.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 	 AND FINANCIAL DISCLOSURE
There have been no changes in and disagreements with accountants on accounting and financial disclosure.
			 PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
		 Year Shares and 		 First Class of Positions with Sunstates; Became Equity Principal occupations Director Securities Name		 During Past Five Years; other of Beneficially (Age)		 Directorships Sunstates owned (1)(2)
William D. Principal (since January, 1989) Schubert of Advanced Management Concepts, 1991 -O- (71)		 a management consulting firm to 		 the textile and apparel 		 industries; Director (from 1973 		 to May, 1991), Chairman of the 		 Board of Directors (from 		 December, 1985 to December, 		 1988) and President and Chief 		 Executive Officer (from April, 		 1974 to July, 1988) of Alba- 		 Waldensian, Inc., a manufacturer 		 of textile apparel and medical 		 specialty products; Director 		 (since November, 199O) of Wellco 		 Enterprises, Inc.
Robert J. Spiller Director (from 1981 to May, (64) 1988) of Sunstates Corporation; 1988 148 shares 		 retired Chairman and Chief of Class B 		 Executive Officer (197O - 199O) Stock; 3,607 		 of The Boston Five Bancorp. shares of 								 Common Stock 							 	 issuable upon 								 conversion of 							 	 Class B Stock
Clyde Wm. Chairman of the Board (since 1985 See "Security Engle(3) December, 1985) and Chief ownership of (52) Executive Officer (since Certain 		 December, 199O); President and Beneficial 		 Chief Executive Officer (from Owners,". 		 December, 1985 to May, 1988) of 		 Acton; Director (from 1981 to 		 May, 1988) of Sunstates 		 Corporation. Other than as 		 noted below, during the past 5 		 years Mr. Engle has served as: 		 Chairman of the Board and Chief 		 Executive Officer of Telco 		 Capital Corporation (a 		 diversified financial services 		 and manufacturing company and an 		 indirect parent of Sunstates); 		 General Partner of Sierra 		 Associates, itself the general 		 partner of Sierra-Capital Group 		 (an investment partnership); 		 Chairman of the Board and Chief 		 Executive Officer of GSC 		 Enterprises, Inc. (a one-bank 		 holding company), and Chairman 		 of the Board of its subsidiary, 		 Bank of Lincolnwood; Chairman of 		 the Board and President of RDIS 		 Corporation (a diversified 		 financial services and 		 manufacturing company), Director 		 and since 199O, Chairman of the 		 Board, President and Chief 		 Executive Officer of Hickory 		 Furniture Company; Director and 		 Chairman of the Board of NRG, 		 Inc.; Trustee and Chairman of 		 the Board of Wisconsin Real 		 Estate Investment Trust; 		 Director of Wellco Enterprises, 		 Inc.; Director and Chairman 		 (since May, 1991) of Alba- 		 Waldensian, Inc.; Director of 		 Indiana Financial Investors, 		 Inc.; Director (since November, 		 1987) of Rocky Mountain 		 Chocolate Factory, Inc.
Howard Friedman Partner (since 1971) in the law 1986 50O shares of (55) firm of Altheimer & Gray, Common Stock 		 Chicago, Illinois; Director 		 (since 1984) of Bank of 		 Lincolnwood.
Lee N. Mortenson President (since May, 1988), 1988 5OO shares of (59) Chief Operating Officer (since Common Stock, 		 December, 199O) and Chief 8OO shares of 		 Executive Officer (May, 1988 to $3.75 December, 199O) of Sunstates; Preferred President and Chief Executive Stock 		 Officer (from July, 1984 to May, 		 1988) and Director (from 		 February, 1985 to May, 1988) of 		 Sunstates Corporation; 		 President, Chief Operating 		 Officer and Director of Telco 		 Capital Corporation (since 		 January, 1984); Director (since 		 April, 1984) of Alba-Waldensian, 		 Inc.; Director (since March, 		 1987) of NRG, Inc.; Director 		 (January, 1988 to October, 1992) 		 of Sun Electric Corporation; 		 Director (since November, 1987) 		 of Rocky Mountain Chocolate 		 Factory, Inc.; Director of 		 Wellco Enterprises, Inc. (since 		 December 1993).
Harold Sampson Director (from 1982 to May, 1988 -O- (76) 1988) of Sunstates Corporation; 		Chairman of the Board (since 		1981) of Sampson Investments (a 		real estate holding company); 		Trustee (since 198O) of 		Wisconsin Real Estate Investment 		Trust; Director (since 1986) of 		Indiana Financial Investors, 		Inc; Chairman of the Board of 		Diginet Communications, Inc. 		(since 1985); Director of Mt. 		Sinai Hospital (since 196O).
(1) All stock information is as of March 3, 1995. Unless otherwise noted, all shares are owned directly, with sole voting and dispositive power.
(2) Unless otherwise noted, the shares of equity securities owned by each director represents less than 1% of the class so owned.
(3) The following information is provided voluntarily by Mr. Engle although it is not deemed material information as that term is used in Item 401 of Regulation S-K. Mr. Engle is the subject of a Cease and Desist Order dated October 7, 1993, issued by the Securities and Exchange Commission (the Commission) requiring Mr. Engle and certain of his affiliated companies to permanently cease and desist from committing any further violations of Section 16(a) of the Securities Exchange Act of 1934 as amended and the rules promulgated thereunder, which requires monthly and other periodic reports of transactions in certain securities. The Commission found some of the reports of such transactions to have been filed delinquently although many of these transactions were between affiliated entities or had been publicly reported in other reports filed with the Commission or had been otherwise publicly announced.
Executive Officers
Name Age Positions and Offices Business Experience During 			 with Company Last Five Years
Clyde Wm. Engle 52 Chairman of the See "DIRECTORS" above 			 Board and Chief 			 Executive Officer
Lee N. Mortenson 59 Director, See "DIRECTORS" above 			 President and 			 Chief Operating 			 Officer
Glenn J. Kennedy 43 Vice President, Vice President (since July 			 Treasurer and 1988) and Treasurer and Chief 			 Chief Financial Financial Officer (since May 			 Officer 		 1988) of the company, 						 Treasurer and Chief Financial 						 Officer of Sunstates 						 Corporation (from September 						 1986 to May 1988); Chief 						 Financial Officer of Simms 						 Investment Company (May 1984 						 to August 1986); Senior Audit 						 Manager, Price Waterhouse 						 (1978 to May 1984)
Richard A. Leonard 48 Vice President and Vice President (since July 1988) 			 Secretary and Secretary (since May 1988) 						of the Company; Vice President 						(from April 1986 to May 1988) 						and Secretary (from September 						1986 to May 1988) of Sunstates 						Corporation; Administrative 						Vice President and Counsel 						(from June 1984 to April 1986) 						of Sunstates Properties, Inc., 						a wholly-owned subsidiary of 						Sunstates Corporation; President 						and Counsel of AMIC Title 						Insurance Company (January 1982 						to June 1984)
For information on security ownership of the Company's executive officers, see above sections captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS". Mr. Kennedy and Mr. Leonard do not own any securities of Sunstates.
COMPLIANCE WITH SECTION 16(a) OF SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the fiscal year ended December 31, 1994, and Forms 5 and amendments thereto furnished to the Company with respect to the fiscal year ended December 31, 1994, and any written representations from a reporting person that no Form 5 is required, to the best of the Company's knowledge, no person who was a director, officer or beneficial owner of more than ten percent of any class of equity securities of the Company (a reporting person) failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the most recent fiscal year. However, Mr. Engle has not furnished the Company with copies of any Form 5 or written representation with respect to reporting during the fiscal year ended December 31, 1994.
Item 11.

Item 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors
The following summarizes the director compensation paid by the Company during the year ended December 31, 1994.
Each director other than Messrs. Engle and Mortenson is paid $5,000 per quarter for serving in such capacity. In addition, directors other than Messrs. Engle and Mortenson, receive $1,500 for each Board meeting attended ($1,000 prior to June 1994) and $600 for each standing committee meeting attended which is not held on the day of a regularly scheduled Board of Directors meeting. Directors are also compensated from time to time for special assignments, including serving on special committees, at the rate of $200 per hour ($1,600 per day maximum) plus expenses. Each director is reimbursed for his actual expenses in attending meetings of the Board or any of its committees.
Employment Agreements
Mr. Engle has entered into an employment agreement effective January 1, 1991, and initially extending through 1995, whereby Mr. Engle received a base salary of $500,000. Such amount will increase in each subsequent year by at least the increase in the Chicago Consumer Price Index. In addition, under the terms of the employment agreement, Mr. Engle received a bonus in the amount of $2,470,000 (3.25% of the gross sales price) in connection with the sale of the cable television system. There are no other employment agreements between the Company and any of its other executive officers.
The following table sets forth a summary of the compensation earned by the Company's executive officers during 1994, 1993 and 1992:
(c) Salary: Total base salary paid by the Company during the calendar year. Mr. Engle became an employee of the Company on September 16, 1991 under an employment agreement extending initially through 1995 and providing for an initial annual salary of $500,000 retroactive to January 1, 1991. Prior to 1991, Mr. Engle served the Company as its Chairman and Chief Executive Officer without compensation. Mr. Engle and Mr. Mortenson are also employees of the Company's parent, Hickory, and receive compensation from Hickory for services rendered to the Company. The Company pays Hickory an annual management fee and the compensation received by Mr. Engle and Mr. Mortenson from Hickory attributable to services rendered to the Company is included in Other Annual Compensation (column "e").
(d) Bonus: With respect to Mr. Kennedy and Mr. Leonard, represents annual incentive compensation awarded on a discretionary basis for results achieved during the calendar year under a plan approved by the Board of Directors. Up to one-half of the bonus amount is paid when awarded and the remainder is paid over the succeeding five years on a prorata basis. Should the officer voluntarily leave the Company during that five-year period, he will forfeit all rights to any unpaid balance. The award for 1994 has not yet been determined. With respect to Mr. Mortenson, the 1994 bonus was a special cash bonus awarded by the Compensation Committee of the Board of Directors for services rendered during 1993 and 1994. With respect to Mr. Engle, the bonus in 1993 represents amounts payable to Mr. Engle under the terms of his employment agreement as the result of the sale of the cable television system.
(e) Other Annual Compensation: All additional forms of cash and non-cash compensation paid, awarded or earned. The amounts shown for Mr. Engle and Mr. Mortenson represent salary paid by the Company's parent, Telco, attributable to services rendered to the Company (see "a" above). The value of all other personal benefits and perquisites received by the Company's executive officers in 1992 and 1993 was less than the required reporting threshold.
(i) All Other Compensation: All other compensation that does not fall under any of the aforementioned categories. The amounts shown in this column for 1994 comprise the following payments made by the Company: (i) Mr. Mortenson: $2,914 - matching contribution to 401(k) plan and $916 - premium for term life insurance policy; (ii) Mr. Kennedy: $2,254 - matching contribution to 401(k) plan and $1,197 - premium for term life insurance policy; and (iii) Mr. Leonard: $2,464 - matching contribution to 401(k) plan and $1,199 - premium for term life insurance policy.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the name, address and beneficial ownership, as of March 14, 1995, of each person known to the Company to be the beneficial owner of more than 5% of any class of its outstanding securities entitled to vote. Information presented in this table and related notes has been obtained from the Company's shareholder lists, the beneficial owner or from reports filed by the beneficial owner with the Securities and Exchange Commission pursuant to Section 13 of the Securities Exchange Act of 1934 as amended, (the "Exchange Act").
								 Percent Name and Address of Amount and Class of Equity Percent of of Voting Beneficial owner Securities Beneficially Class (1) Power(3) owned (8)
COMMON AND CLASS B COMBINED (3):
A group consisting of: Wisconsin Real Estate 63,O43 Shares of Class B 9O.4% 79.9% Investment Trust Stock (2) ("WREIT") 55 East Monroe P. O. Box 17 Chicago, Illinois 6O6O3 (7)
and and
Hickory Furniture 91,3O1 Shares of Common 11.67% 1.36% Company ("Hickory") Stock (2) 55 East Monroe P. O. Box 17 Chicago, Illinois 6O6O3 (8)
and or
Indiana Financial 1,627,974 Shares of Common 7O.2% 56.3% Investors, Inc. Stock issuable upon ("Indiana") conversion of Class B Stock 55 East Monroe (4) P. O. Box 17 Chicago, Illinois 6O6O3
and
Telco Capital Corporation ("Telco") 55 East Monroe P. O. Box 17 Chicago, Illinois 6O6O3
and
RDIS Corporation ("RDIS") 55 East Monroe P. O. Box 17 Chicago, Illinois 6O6O3 (6)
and
GSC Enterprises 55 East Monroe P. O. Box 17 Chicago, Illinois 6O6O3 (5)
and
Clyde Wm. Engle 55 East Monroe P. O. Box 17 Chicago, Illinois 6O6O3 (5)
Dimensional Fund 52,5O4 Shares of Common 6.71% O.78% Advisors, Inc. Stock 1299 Ocean Avenue Santa Monica, California 9O4O1 (9)
$3.75 PREFERRED STOCK (3):
John D. Weil 84,668 Shares of $3.75 29.8% 29.8% 5O9 Olive St Preferred Stock Suite 7O5 St. Louis, Mo 631O1
The Employees' 17,8OO Shares of $3.75 6.26% 6.26% Retirement Plan of Preferred Stock Consolidated Electrical Disributors, Inc. 1516 Pontius Avenue Los Angeles, California 9OO25
(1) At March 14, 1995, there were 782,422 shares of Common Stock outstanding, net of 1,046,966 shares held by subsidiaries and therefore deemed to be treasury shares, 69,471 shares of Class B Stock outstanding, net of 12,453 shares held by subsidiaries and therefore deemed to be treasury shares, and 284,183 shares of $3.75 Preferred Stock outstanding, net of 178,795 shares held by subsidiaries and therefore deemed to be treasury shares.
(2) Hickory owns directly 31,913 shares of Common Stock, Indiana owns directly 1,340 shares of Class B Stock and 43,988 shares of Common Stock, WREIT owns directly 61,703 shares of Class B Stock, and GSC owns directly 15,400 shares of Common Stock.
(3) Holders of Common Stock are entitled to one vote per share and holders of Class B Stock are entitled to 85.3125 votes per share, voting together as a single class. Percentages indicated are based upon the combined total number of votes available to holders of Common Stock and Class B Stock, a total of 6,732,201 on March 14, 1995. Common Stock and $3.75 Preferred Stock are each entitled to one vote per share when voting as a separate class.
(4) Each share of Class B Stock is convertible immediately into 24.375 shares of Common Stock. Were only Hickory, Indiana and WREIT to immediately convert their shares of Class B Stock into Common Stock, the group would then hold 56.3% of the voting power of the outstanding securities regularly entitled to vote.
(5) Mr. Engle may be deemed the beneficial owner of the shares of Class B Stock beneficially owned by Hickory, Indiana and WREIT by virtue of his ownership of RDIS. According to information filed with the Commission, Mr. Engle, Chairman of the Board of Directors of RDIS, possesses beneficial ownership in excess of 50% of the outstanding shares of common stock of RDIS. RDIS owns 100% of the outstanding common stock of Telco; Telco owns approximately 92.9% of the outstanding common stock of Hickory; and Hickory owns approximately 76.6% of the outstanding shares of beneficial interest of WREIT and approximately 70.6% of the outstanding common stock of Indiana. Mr. Engle may be deemed the beneficial owner of the shares of Common Stock owned by GSC Enterprises, a one bank holding company, of which Mr. Engle is the majority owner.
(6) Although RDIS is not in the business of making loans, at the request of Mr. Engle, RDIS has made a loan to Mr. Engle on a non-preferential basis secured by a lien on the shares of RDIS owned by Mr. Engle. In addition, all of the shares of common stock of Hickory owned by Telco have been pledged to an unaffiliated bank in Chicago to secure a loan to Telco by that bank.
(7) WREIT has pledged its 61,703 shares of Sunstates' Class B Stock to secure a loan from Hickory.
(8) The amounts included do not include 14,300 shares of Sunstates Common Stock held directly by or in trust for members of Mr. Engle's immediate family. Mr. Engle specifically disavows beneficial ownership of such shares.
(9) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, is deemed to have beneficial ownership of 52,504 shares of Sunstates Corporation common stock as of December 31, 1994, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, the DFA Investment Trust Company and the DFA Participating Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of such shares.
As of March 14, 1995, all officers and directors of the Company as a group, a total of 8 persons, owned beneficially 92,301 shares of Common Stock, or 11.8% of the total shares of Common Stock outstanding, 63,191 shares of Class B Stock, or 90.61% of the total shares of Class B Stock outstanding, 800 shares of $3.75 Preferred Stock or 0.28% of the total shares of $3.75 Preferred Stock outstanding and 49,000 shares of Class E Preferred Stock or 8.55% of the total shares of Class E Preferred Stock outstanding. If the group were to presently convert its Class B Stock into Common Stock, they would receive an additional 1,540,281 shares of Common Stock for a total ownership of 1,632,582 shares of Common Stock, or 70.29% of the total shares of Common Stock outstanding. Each share of Class B Stock is entitled to 85.3125 votes and votes together with the Common Stock as a single class, with respect to all matters to be voted upon by shareholders except with respect to the election of one director to be elected solely by the holders of Common Stock, voting as a separate class, and as otherwise provided by law. Officers and directors as a group are currently the beneficial owners of 81.45% of the voting power of all Common Stock and Class B Stock presently outstanding when these shares vote as a single class. (See Item 10 of this Report for information as to securities ownership of individual directors and officers.)
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Engle and Sampson serve as trustees and Mr. Engle is also Chairman of the Board of Trustees of WREIT. Messrs. Engle and Sampson serve as directors of Indiana Financial Investors, Inc. Messrs. Engle and Mortenson serve as directors, and Mr. Engle is Chairman of the Board of Directors, President and Chief Executive Officer, of Hickory Furniture Company. Mr. Engle is Chairman of the Board and Chief Executive Officer and Mr. Mortenson is a director, President and Chief Operating Officer of Telco Capital Corporation. Please see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" for additional information regarding the relationship of the Company and management to these entities.
The law firm of Altheimer & Gray, of which Mr. Friedman is a member, has rendered legal services to the Company during 1994 (approximately $308,000) and the current fiscal year (approximately $78,000).
See Note 12 to Consolidated Financial Statements contained in Part IV, Item 14

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
1. Financial Statements
The response to this portion of Item 14 is submitted as a separate section of this report.
2. Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report.
3. Exhibits
The response to this portion of Item 14 is submitted as a separate section of this report.
(b) Reports on Form 8-K
There we no filings on Form 8-K during the quarter ended December 31, 1994.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report.
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, thereunto duly authorized.
March 31, 1995 Sunstates Corporation
by /s/ Clyde Wm. Engle Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Clyde Wm. Engle Director March 31, 1995 Clyde Wm. Engle (Chairman of the Board and Chief Executive Officer)
/s/ Lee N. Mortenson President and Director March 31, 1995 Lee N. Mortenson (Chief Operating Officer)
/s/ Glenn J. Kennedy Vice President and Treasurer March 31, 1995 Glenn J. Kennedy (Chief Financial Officer)
/s/ Dean F. Shaver Controller March 31, 1995 Dean F. Shaver
/s/ Howard Friedman Director March 31, 1995 Howard Friedman
/s/ Harold Sampson Director March 31, 1995 Harold Sampson
/s/ William D. Schubert Director March 31, 1995 William D. Schubert
/s/ Robert J. Spiller Director March 31, 1995 Robert J. Spiller
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1994
SUNSTATES CORPORATION AND SUBSIDIARIES
RALEIGH, NORTH CAROLINA
Form 10-K - Item 8, Item 14(a)(1) and (2) and Item 14(d) Sunstates Corporation and Subsidiaries LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Sunstates Corporation and Subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1994 and 1993
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the Years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Independent Auditors' Reports
The following consolidated financial statement schedules of Sunstates Corporation and Subsidiaries are included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant - December 31, 1994 and 1993 and for the Years Ended December 31, 1994, 1993, and 1992
Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1994, 1993 and 1992
Schedule III - Real Estate Held for Development and Sale and Accumulated Depreciation - December 31, 1994
Schedule V - Supplemental Information Concerning Property/Casualty Insurance Operations - For the Years Ended December 31, 1994, 1993 and 1992
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
On December 13, 1993, the shareholders voted to change the name of the Company from Acton Corporation to Sunstates Corporation, effective January 1, 1994.
Parent Company
Sunstates Corporation ("Sunstates" and/or the "Company") is a majority-owned subsidiary of Wisconsin Real Estate Investment Trust ("WREIT") and WREIT in turn is a direct and indirect majority-owned subsidiary of the following companies: Hickory Furniture Company ("Hickory"), Telco Capital Corporation ("Telco") and RDIS Corporation ("RDIS").
Sale of Cable Television System
On December 30, 1993, Sunstates Corporation completed the sale of its sole remaining cable television system comprised of approximately 44,000 subscribers located in Anne Arundel County, Maryland to InterMedia Partners of San Francisco, California. The $76 million sale price produced after-tax net income of $46.5 million or $18.45 per share on a primary basis and $15.22 per share on a fully diluted basis.
The $76 million consideration consisted of $26.5 million in cash, the assumption of approximately $32.1 million of debt (without recourse to the Company) which was outstanding against the system and a $17.4 million secured note initially bearing interest at LIBOR plus 3% and paid in June 1994.
With the sale of its sole remaining cable television system, the Company is no longer engaged in the cable television business and accordingly the Company has presented its cable television segment as a discontinued operation in the accompanying financial statements. Prior years' statements have been reclassified to remove the operations of the cable television segment from income from continuing operations and to present the segment's net assets and liabilities on a single line in the balance sheet. Revenues from the operations of the cable television system totalled $17,189,152 and $16,385,939 for the years ended December 31, 1993 and 1992, respectively.
Alba-Waldensian Consolidation
Alba-Waldensian, Inc. ("Alba"), a manufacturer of women's hosiery and pantyhose, women's casual hosiery products, women's intimate apparel, men's hosiery, medical specialty products and warp knit products located in Valdese, N. C., has been an investee of the Company accounted for utilizing the equity method of accounting since May, 1987. Effective June 30, 1993, Alba became a 50.1% owned subsidiary of the Company's insurance subsidiary, and accordingly, the accounts of Alba have been consolidated in the accompanying financial statements as of that date.
The following table presents the Company's investment as allocated utilizing the purchase method of accounting to the individual assets and liabilities of Alba as of June 30, 1993 (amounts in thousands):
Property, plant and equipment $9,682 Restricted cash 77 Accounts receivable 7,703 Inventories 11,354 Prepaid expenses 1,463 Notes payable (1,291) Mortgage notes payable (150) Accounts payable (1,554) Accrued expenses (1,553) Other liabilities (1,845) Minority interest in net assets (13,112) ------
Consolidated net assets $ 10,774 ======
Prior to June 30, 1993, the Company's investment in Alba was presented in the Balance Sheet as an investment in affiliates and the Company's share of Alba's earnings, which averaged 49.9% during the six months ended June 30, 1993, and the years ended December 31, 1992 and 1991, was reported as equity in earnings of affiliates in the Statement of Operations. Accordingly, there would be no material change to reported net income or earnings per share had the acquisition been consummated at the beginning of either 1993 or 1992. Commencing July 1, 1993, the operating revenues and expenses of Alba are included in the Company's Consolidated Statements of Operations and contributed $26,798,277 of revenues and $1,004,407 of pre-tax income before minority interests of $287,878 during the year.
Sew Simple Systems, Inc.
On January 17, 1989, Sunstates acquired from Hickory, for a cash payment of $2,000,000, a 99% ownership interest in Sew Simple Systems, Inc. ("Sew Simple"), a designer and manufacturer of automated textile machinery located in Fountain Inn, South Carolina. Accordingly, Sew Simple has been included in Sunstates' consolidated financial statements since that date. The Stock Purchase Agreement provided that if Hickory should find a buyer for Sew Simple prior to the expiration of the Agreement, then Hickory would be entitled to additional amounts based upon the excess, if any, of the sales price over an escalating amount specified in the contract, which, as of April 13, 1992, was approximately $3.4 million (the Rights).
On April 13, 1992, Sunstates acquired from Hickory its remaining 1% ownership and its Rights under the Stock Purchase Agreement for approximately $13.6 million. The consideration given by Sunstates included the assignment of approximately $12 million previously due to Sunstates from Hickory and other affiliates plus a note payable for the remaining $1.6 million.
At April 13, 1992, Hickory beneficially owned approximately 52% of the common equity interests of Sunstates (61% on a fully diluted basis) and controlled approximately 79% of its voting interests. Generally accepted accounting principles applicable to purchases of businesses in transactions between entities under common voting control require that the assets acquired be recorded at their historical cost basis as previously reflected on the books of the seller. Accordingly, approximately $11 million, representing the excess of the fair market value paid for Hickory's remaining interest in Sew Simple over Hickory's historical cost basis, was reflected as a reduction to Sunstates' capital in excess of par value as of the date of the transaction. Future reported results of operations will be favorably impacted as the result of the elimination of Hickory's Rights under the Stock Purchase Agreement.
Subsequent Event - Balfour Acquisition
On March 6, 1995, the Company's textile apparel manufacturing subsidiary (Alba) purchased the Balfour Health Care Division and manufacturing facility in Rockwood, Tennessee from Kayser-Roth Corporation for approximately $14.5 million, subject to post-closing adjustments. The acquisition of Balfour will add approximately $15 million in annual sales to Alba. Alba financed 100% of the acquisition price with a revolving loan agreement provided by a major bank.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Sunstates and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Hickory White is included based on its 52/53 week fiscal year which ended on January 2, 1993, January 1, 1994 and December 31, 1994. Wellco is included based upon its four fiscal quarters ended January 2, 1993, January 1, 1994 and December 31, 1994. The accounts of Hickory White and Wellco have been included in the accompanying consolidated financial statements as of those dates. There were no material transactions during the periods from those dates to December 31st of each year.
The accounts of Sunstates' insurance subsidiaries are included based upon generally accepted accounting principles which differ from statutory accounting practices required by regulatory authorities.
Property, Plant and Equipment
Property, plant and equipment consists of investment in productive facilities and equipment, including (prior to December 30, 1993) the cost of acquired cable television franchises. Such assets are stated at cost and are depreciated and amortized over their estimated useful lives (ranging from 3 to 40 years, 15 years for cable television) primarily on a straight-line basis.
Certain shoe-making machinery is leased to licensees under cancelable operating leases. Such activity is accounted for by the operating method whereby leased assets are capitalized and depreciated over their estimated useful lives (5 to 20 years) and rentals, based primarily on the volume of shoes produced or shipped by the lessees, are recorded during the period earned.
Real Estate Held for Development and Sale
Real estate held for development and sale is recorded at the lower of cost or net realizable value. Depreciation, where appropriate, is provided using the straight-line method over the estimated useful lives of the assets (not exceeding forty years).
During the construction and development phase of real estate development certain costs are capitalized, including the cost of land, land improvements, construction, amenities, and certain indirect costs such as interest and real estate taxes. Construction and development costs are allocated to cost of sales using specific identification or other methods, as appropriate. During the sell-out or rent-up period, which is limited to a period no longer than one year after construction completion, the net results of incidental operations are reflected as an adjustment to the construction cost of the project.
Investments
On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 ("Accounting for Certain Investments in Debt and Equity Securities"). Under this Statement the Company began reporting its investment in debt securities, which are all classified as available for sale, at fair value, with unrealized gains or losses (other than permanent declines in value) excluded from earnings and reported in a separate component of stockholders' equity. Prior to December 31, 1993, the Company accounted for investments in debt securities at original cost, adjusted for amortization of premium or discount and permanent declines in value. Furthermore, under Statement No. 115, the Company began reporting marketable equity securities available for sale which are owned by other than its insurance subsidiary at their fair value, with unrealized gains or losses (other than permanent declines in value) reported in a separate component of stockholders' equity. Prior to December 31, 1993, marketable equity securities not owned by Sunstates' insurance subsidiaries were carried at the lower of aggregate cost or market value, whereas marketable equity securities owned by its insurance subsidiary have always been reported at fair value in a manner similar to that now required under Statement No. 115.
A summary of the Company's accounting policies for investments are as follows:
Short-term investments are carried at cost, which approximates market, and represent the temporary investment of excess cash balances within the insurance investment portfolio. These investments are composed of interest-bearing deposits and other investments in short-term financial instruments.
Fixed maturities investments representing debt securities are available for sale and are reported at their fair value. In addition to debt securities as described above, fixed maturity investments include certain collateralized notes receivable which are accounted for at original cost, as adjusted for amortization of premium or discount and permanent declines in value.
Equity securities are available for sale and are carried at current market value.
Investments in affiliates represent investments which are accounted for utilizing the equity method of accounting and the common stocks of certain of Sunstates' direct and indirect parent companies which are carried at cost.
Realized gains and losses on the sale of investments are recognized in net income on the specific identification basis. Changes in market values of debt and equity securities available for sale are reflected as unrealized gains (losses) directly in stockholders' equity and accordingly have no effect on net income. Unrealized losses which are deemed to be other than temporary are charged to operations. The Company may also invest in equity or index put or call options which are carried at their current market values with any change in such values being immediately recognized in the income statement.
Cash
Sunstates may invest cash in excess of operating requirements in income producing investments including certificates of deposit and money market accounts which have original maturities of three months or less. Such short-term investments, other than those which are a part of the insurance investment portfolio, are included in the cash balances reported in the accompanying financial statements. The carrying amount approximates fair value because of the short maturity of those instruments.
Restricted Cash
Restricted cash primarily represents cash of the insurance subsidiaries, whose ability to transfer cash to Sunstates is restricted by regulatory authorities. Restricted cash also represents cash of other subsidiaries which is restricted by law or by contract to specific purposes and is generally not available for other discretionary use. The carrying amount approximates fair value because of the short maturity of those instruments.
Receivables
Accounts receivable result primarily from the Company's furniture, textile apparel and military footwear manufacturing businesses and represent amounts receivable under normal trade terms. No single customer accounted for more than 3% of sales in 1994 except for the Company's textile apparel manufacturing division's sales to Baxter Health Care Corporation which totalled $12,902,722, $13,610,937 and $11,074,280 for the years ended December 31, 1994, 1993 and 1992, respectively. Military footwear sales are primarily to the U. S. government. Accounts receivable are net of a reserve for possible uncollectible amounts of $804,047 and $737,036 at December 31, 1994 and 1993, respectively.
The Company conducts its insurance business in certain states through managing general agents who issue the Company's policies to and collect premiums from other agents and retail customers. These managing general agents are given normal trade credit terms of between 45 to 60 days and at December 31, 1994, the Company had $2,027,270 of premium receivables from 5 different managing general agents, the largest of which totalled $1,640,955. Premiums receivable are net of a reserve for possible uncollectible amounts of $500,000 at both December 31, 1994 and 1993.
Inventories
Textile apparel manufacturing inventories are stated at the lower of cost as determined by the first-in, first-out (FIFO) method or market.
Raw materials and supplies of the military footwear manufacturing subsidiary are valued at the lower of first-in, first-out cost or market. Finished goods and work in progress of this subsidiary are valued at the lower of actual cost, determined on a specific basis, or market. Such inventories have been reduced by progress payments received on United States government contracts since title to all inventories related to these contracts vests in the U. S. government.
During 1994, the Company changed its method of inventory valuation for its furniture manufacturing inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method because the FIFO method of reporting inventories and cost of sales represents a preferable method. The change is reported in the accompanying financial statements by restating all prior years to reflect the new method of accounting. The change is preferable, in part, because under the current economic environment of low inflation, the Company believes that the FIFO method will result in a better measurement of operating results. Also, as a result of the recent operating losses and demands upon its liquidity, the Company believes its financial position is the primary concern of the readers of its financial statements and that the accounting change will reflect inventories in the balance sheet at a value that more closely represents current costs.
Restatement of operating results due to the change decreased cost of manufacturing sales and the net loss by $731,197 ($.29 per primary and fully diluted share) in 1994, increased cost of manufacturing sales and decreased net income by $284,361 ($.11 per primary share and $.09 per fully diluted share) in 1993 and decreased cost of manufacturing sales and the net loss by $44,280 ($.02 per primary and fully diluted share) in 1992. The cumulative effect of the change of $7,589,886 represents the reversal of the LIFO reserve as of January 1, 1992. Of this amount, $6,245,669 represented the LIFO reserve originally recorded in connection with the acquisition of the furniture assets from the Company's controlling shareholder in June of 1990. The original accounting for this acquisition resulted in a charge to paid in capital to reflect the excess of the purchase price paid over the seller's historical cost basis of the assets acquired. Accordingly, $6,245,669 has been reflected in the accompanying financial statements as a retroactive adjustment to paid in capital. The remaining balance of $1,344,217 has been reported as an adjustment to the accumulated deficit as of January 1, 1992. The aggregate effect of the change was to increase stockholders' equity by $8,081,002 as of December 31, 1994.
Other inventories, consisting mainly of raw materials and work in process related to the textile equipment manufacturing business are stated at the lower of cost (determined on a first-in, first-out method) or market.
Policy Acquisition Costs
Commissions and other variable costs related to the production of profitable new insurance underwriting business are deferred at the time of policy issuance. The Company may reduce such deferred costs when necessary to ensure that when combined with estimated costs of future claims and claims adjustment expenses, such costs do not exceed the amount of unearned premiums relating to the new business. Policy acquisition costs are amortized against income over the term of the related insurance policy and amortization totalled $1,670,889, $4,314,649, and $6,060,029 for the years ended December 31, 1994, 1993, and 1992, respectively.
Other Assets
The Company also invests in oriental artwork, antique jewelry and books and other collectibles which are purchased and sold through dealers and at public auctions. Such collectible investments are carried at cost (which does not exceed market) and are saleable. At December 31, 1994, other assets included $2,256,909 of such collectible investments.
Costs in Excess of Assets Acquired
Costs in excess of net assets acquired represents the excess of the purchase price over the fair value of net assets acquired in connection with the acquisition of the insurance, manufacturing and newspaper publishing businesses. The Company evaluates the continued recoverability of its tangible assets, including cost in excess of assets acquired, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors which would trigger such an evaluation would include, but not limited to a significant decrease in the market value of an asset or operation, a significant change in the extent or manner in which an asset is being used, a significant change in legal factors or business climate and an expectation of continuing future losses. The Company evaluates the realizability of goodwill based upon expectations of nondiscounted cash flows and operating income for each subsidiary having a material amount of goodwill recorded.
These costs are being amortized on a straight-line basis over a 20 and 10-year period, respectively, except with respect to $3,706,258 related to furniture acquisitions prior to 1970 which is not being amortized since, in the opinion of management, there has not been any diminution in its value. Cumulative amortization totalled $1,883,409 and $1,649,004 at December 31, 1994 and 1993, respectively.
Insurance Reserves
Reserve for losses represents the estimated liability on all claims outstanding plus a reserve for losses incurred but not yet reported. An amount for both future overhead and external expenses expected to be incurred in processing and settling such claims is also estimated and added to the reserves for claims. Case-basis evaluations and other statistical and judgmental methods, including independent actuarial reviews, are used to establish and continually evaluate the adequacy of the reserves. The ultimate amount of losses and loss adjustment expenses paid may differ from previously recorded reserves and any adjustments which may thereby be determined to be necessary are reflected in current operations at the time such differences are identified.
Unearned Premiums
Premium revenue is recognized in income on a pro-rata basis over the terms of the related insurance policies.
Reinsurance
Sunstates is involved in both the cession and assumption of reinsurance with other insurance companies. Reinsurance is assumed primarily on a quota share, or dollar for dollar sharing basis, on business which is essentially the same type of business which is written directly. Reinsurance premiums, commissions, claim processing expense reimbursements, and reserves related to reinsurance business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Earned premiums related to assumed reinsurance totalled $481,841, $5,655,727, and $19,402,040 for the years ended December 31, 1994, 1993 and 1992, respectively.
To the extent that a portion of the Company's liabilities under its insurance policies have been ceded to other insurance companies, these policy risks are treated as though they are risks for which the Company is not liable. A contingent liability exists with respect to such reinsurance in the event the reinsurer is unable to meet its obligations. At December 31, 1994, reinsured unpaid losses and unearned premiums totalled $1,261,774.
Manufacturing Revenue
Sales of furniture, textile apparel and automated textile machinery are recorded at the time the inventory is shipped. Military footwear is sold primarily under contracts with the United States government and revenue is recognized at the time the goods are inspected and accepted by the United States government.
Real Estate Revenue
Profits on sales of real estate are recorded under the full accrual method or other generally accepted methods, as appropriate.
Interest, rent and other operating income is recorded when earned, except that interest is not accrued on loans which are in excess of sixty days past due and other income is not recognized if collectability is doubtful.
Pensions
Certain of Sunstates' manufacturing operations maintain defined benefit pension plans covering substantially all of their employees. The benefits under these plans are based upon years of service and employee compensation. Sunstates' policy is to fund the minimum amount required by the Employee Retirement Income Security Act.
Income Taxes
Sunstates and its eligible United States subsidiaries file consolidated federal income tax returns. Income earned by its Puerto Rican subsidiary is not subject to United States federal income tax and is 90% exempt from Puerto Rican income taxes through the year 2000.
Income taxes for both federal and state tax purposes are provided based on both income reported for financial statement purposes and the applicable tax laws and rates in effect for the years presented. Significant net operating loss carryforwards for federal income tax purposes are available which may be utilized to eliminate, except for alternative minimum tax, substantially all federal income taxes.
The Company adopted prospectively Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 1, 1993. This Statement affects methods of accounting for deferred tax assets and liabilities, recognizing benefits of existing net operating loss carryforwards, and the accounting for income tax effects of business combinations accounted for under the purchase method. The utilization of net operating loss carryforwards is no longer reported as an extraordinary item in the statement of operations but instead the current provision for income tax expense is presented net of any benefit recognized from the utilization of existing net operating loss carryforwards. The Statement also requires the use of the asset and liability method of accounting for income taxes wherein deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In establishing such an allowance, the Company considers all available information, including but not limited to, its historical taxable income record, the likelihood of future taxable income, the availability of tax planning strategies and the existence of taxable temporary differences which will reverse during periods in which the Company's net operating loss carryforwards will be available to offset such taxable items.
Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Mortgage Loans - estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit risks and for the same remaining maturities.
Land Contracts Receivable - by discounting future cash flows using the current rates at which the Company is now making such loans (12%).
Short-term Investments - the carrying amount approximates fair value because of the short-term maturity of those instruments.
Fixed Maturity Investments - marketable debt securities are valued at their quoted market prices or dealer quotes. Other debt securities are valued by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit risks and for the same remaining maturities.
Equity Security Investments - valued at their quoted market prices or dealer quotes.
Investments in Affiliates - valued at their quoted market prices or dealer quotes.
Receivables from Affiliates - due to their related party nature and terms of the receivables from affiliates, the Company cannot estimate the fair market value of such financial instruments.
Notes Payable - these notes substantially bear interest at a floating rate of interest based upon the lending institution's prime lending rate. Accordingly, the fair value approximates their reported carrying amount at December 31, 1994.
Mortgage Notes - estimated based upon current market borrowing rates for loans with similar terms and maturities.
Reclassifications
Certain amounts in the financial statements for prior years have been reclassified to conform to current year presentation. Such reclassifications had no effect on previously reported net income or stockholders' equity.
3. Real Estate
Property, Plant and Equipment
Property, plant and equipment is shown net of accumulated depreciation and amortization of $41,084,496 and $37,616,828 at December 31, 1994 and 1993, respectively. Included therein is $1,374,609 and $1,303,521 of accumulated depreciation related to machinery leased to licensees at December 31, 1994 and 1993, respectively. Rental revenue on such leased machinery, substantially all of which vary with lessee's production or shipments, totalled $132,355, $139,083 and $127,845 for the years ended December 31, 1994, 1993 and 1992, respectively.
Property, plant and equipment totalling $27,413,700 is pledged as collateral under various notes and mortgages outstanding at December 31, 1994 (see Note 6).
Real Estate Held For Development and Sale
Certain of the assets shown above are stated at their fair values as established in connection with a 1985 merger. The adjustment to historical cost represents the difference between such fair values and the cost which was allocated to those assets in connection with the merger.
Approximately $17,721,000 of the real estate was pledged to secure various mortgage notes payable at December 31, 1994 (see Note 6).
Interest capitalized on the above assets during the years ended December 31, 1994, 1993 and 1992 totalled $6,096, $9,907, and $316,506, respectively.
Real estate presented above is net of accumulated depreciation of $2,516,956 and $2,621,464 at December 31, 1994 and 1993, respectively.
Mortgage Loans
Certain mortgage loans are stated at their fair values as established in connection with a 1985 merger. An adjustment to historical cost was established representing the difference between such fair values and the cost allocated to those mortgage loans in connection with the merger. At December 31, 1994 and 1993 the remaining balance of this adjustment to historical cost was $21,292 and $43,308 respectively.
Mortgage loans at December 31, 1994 and 1993 are net of unamortized discount of $272,824 and $332,747 and allowances for possible losses of $165,036 and $153,092, respectively. The effective interest rates used to discount these loans range from 8.25% to 20%. The weighted average interest rates on the mortgage loan portfolio were 11.13% and 9.8% for the years ended December 31, 1994 and 1993, respectively.
Estimated collections of principal on mortgage loans at December 31, 1994 are as follows:
Years Ending Principal December 31, Collections 1995 $ 937,117 1996 318,486 1997 1,406,850 1998 1,625,811 1999 110,273 2000 and thereafter 1,369,554 							 --------- Total gross receivables 5,768,091 Less: Unamortized interest discounts (272,824) Allowance for possible losses (165,036) 							 --------- 5,330,231 Adjustment to historical cost (21,292) 							 --------- $ 5,308,939 							 =========
Land Contracts Receivable
NDC typically finances its sales of recreational and second home resort lots, after a 10% down payment, over a period of three to seven years with an interest rate of 12%. Estimated collections of principal on land contracts receivable at December 31, 1994 are as follows:
Years Ending Principal December 31, Collections
1995 $3,088,140 1996 1,280,822 1997 1,083,409 1998 825,140 1999 527,223 2000 and thereafter 138,415 							--------- Total gross receivables 6,943,149 Less: Unamortized interest discounts (246,004) Allowance for cancellation and uncollectible accounts (1,580,425) 							--------- $ 5,116,720 						=========
Land contracts receivable are discounted to reflect market rates of interest prevailing at the date of sale, primarily 12-15%. The discounts are amortized to operations using the interest method over the term of the respective notes.
4. Investments
Fixed Maturities
In addition to marketable debt securities available for sale, fixed maturity investments include certain collateralized notes receivable which are accounted for at original cost, as adjusted for amortization of premium or discount and permanent declines in value ("carrying amount"). In 1993, the Company adopted Statement of Financial Accounting Standards No. 114 ("Accounting by Creditors for Impairment of a Loan"). Under this Statement an impaired loan is valued at the lower of its carrying amount or its net realizable value, including interest to be collected. Any changes in its estimated net realizable value, up to but not exceeding the loan's carrying amount, are reported as an adjustment to bad debt expense for the period. At December 31, 1994 and 1993, the Company had one collateralized note receivable which had previously been impaired. During 1993, the estimated net realizable value of the loan increased as the result of bankruptcy court's approval for the sale of the debtor's business, which was completed in February 1994. The following presents the activity in the allowance for credit losses during 1993 and 1994:
Balance, January 1, 1993 $575,803 Reduction to bad debt expense 575,803 							 ------- Balance, December 31, 1993 and 1994 $ -- 							 =======
Included in fixed maturity investments at December 31, 1994, are certain one and two-year U. S. Treasury securities yielding 7.22% to 7.67% with an original cost of $25,522,655 (approximates market) which were acquired under agreements to resell on various dates through April 3,1995. Due to the short-term nature of the agreements, the Company did not take possession of the securities which were instead held in custody by the Company's brokerage firms. Additionally, the Company borrowed $25,343,045 from these brokerage firms against such securities with interest rates ranging from 5.25% to 6.375% and maturing on various dates through April 3, 1995 (see Note 6).
The amortized cost and estimated market value of debt securities at December 31, 1994, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Market Cost Value Due in one year or less $ 23,358,463 23,425,184 Due after one year through five years 13,852,877 13,675,012 Due after five years through ten years 1,619,823 1,763,570 Due after ten years 71,837 71,837 					 ---------- ---------- 38,903,000 38,935,603 Collateralized notes receivable (due in 1995) 378,532 378,532 					 ---------- ---------- $ 39,281,532 39,314,135 ========== ==========
At December 31, 1994, investments in high yield, unrated or non-investment grade securities and notes totalled $1,946,506 with an aggregate market value of $1,946,506. Included in this category at December 31, 1994, is a receivable of $378,532 remaining from a bankruptcy filed during 1993. During 1993 the bankruptcy court approved the sale of the debtor's assets (which closed in 1994) wherein the Company received distributions totalling $5,923,320, which were sufficient to realize all but $378,532 of the carrying value of the note at December 31, 1993. The Company anticipates receiving additional distributions from the bankruptcy which will exceed the carrying value of the receivable at December 31, 1994.
As required by law, bonds and certificates of deposit carried at $6,433,045 and $4,244,606 at December 31, 1994 and 1993, respectively, were on deposit with the various states in which the insurance subsidiaries are doing business.
Equity Securities
The cost of marketable equity securities available for sale totalled $16,382,784 and $14,266,424 at December 31, 1994, and 1993, respectively.
At December 31, 1994, the net pre-tax unrealized gains on marketable equity securities of $4,407,933 included in stockholders' equity was comprised of $5,313,461 of unrealized gains and $905,528 of unrealized losses.
Net realized gains related to sales of equity securities which are included in investment income in the accompanying financial statements totalled $12,528,332, $15,434,405, and $2,338,276 for the three years ended December 31, 1994. In addition, writedowns to reflect what the Company believed to be other than temporary declines in the market value of equity securities totalled $913,590 and $1,394,322 during the years ended December 31, 1994 and 1992, respectively.
Investments in Affiliates
During the period from 1987 through 1991, Normandy acquired from Hickory and on the open market a 49.94% interest in Alba-Waldensian, Inc. ("Alba"), a manufacturer of knitted apparel and health care products. Accordingly, Alba has been an investee of the Company accounted for utilizing the equity method of accounting since May, 1987. Effective June 30, 1993, Alba became a 50.1% owned subsidiary of the Company's insurance subsidiary, and accordingly, the accounts of Alba have been consolidated in the accompanying financial statements since that date (see Note 1).
Rocky Mountain Chocolate Factory, Inc. ("Rocky Mountain"), located in Durango, Colorado, manufactures, from its own recipes, a line of gourmet chocolates and other premium confectionery products for sale at company-owned and franchised stores. On December 31, 1989, Sunstates became the owner of 35.12% of the common stock of Rocky Mountain through the conversion of a note which was held in its investment portfolio and thereby commenced equity accounting for its investment at that date. In addition to the $2,678,715 carrying value of Sunstates' investment in 55% of the common stock of Rocky Mountain indicated below (which represents an equity in the underlying net assets of Rocky Mountain totalling $3,041,000), Sunstates also holds additional notes with a carrying value of $1,124,996, which are secured by the common stock of Rocky Mountain. Although Sunstates' present ownership of Rocky Mountain is over 50%, the financial statements of Rocky Mountain have not been consolidated with Sunstates' due to immateriality. At December 31, 1994, the Company's investment in Rocky Mountain stock, which has a carrying value of $2,678,715 and a market value of $19,537,970, was pledged to secure a note payable to a bank (see Note 6).
The following is a summary of the equity in earnings of equity investees recognized by the Company during the three years ended December 31, 1994:
Rocky Year Alba Mountain
1992 $ 1,274 101 1993 435 382 1994 -- 891
The difference between the cost of the investments and the underlying net assets of investees is allocated to the property, plant and equipment of the investee and amortized over the depreciable life of the assets. At December 31, 1994, consolidated stockholders' equity included $1,566,221 of cumulative undistributed earnings of equity investees.
Also included in investment in affiliates on the accompanying Consolidated Balance Sheet at December 31, 1994, is the common stock of certain of Sunstates' direct and indirect parent companies which was purchased on the open market at an aggregate cost of $954,995. (See Note 12 regarding the writeoff at December 31, 1994, of the Company's investment in WREIT.)
5. Inventories
The principal classifications of inventories are:
December 31, 1994 1993 Furniture manufacturing - Materials and supplies $ 2,807,511 2,718,289 Work in process 6,535,222 6,452,802 Finished goods 12,041,195 8,838,599 				 ---------- ---------- 21,383,928 18,009,690 				 ---------- ---------- Textile apparel manufacturing - Materials and supplies 3,296,755 2,548,836 Work in progress 5,803,012 5,870,073 Finished goods 8,164,413 5,729,717 				 ---------- ---------- 17,264,180 14,148,626 				 ---------- ---------- Bootwear manufacturing - Materials and supplies 882,022 1,314,587 Work in progress 1,501,282 1,608,896 Finished goods 542,876 146,647 				 --------- --------- 2,926,180 3,070,130 				 --------- ---------
Textile equipment manufacturing 883,086 1,254,300 Resort development 164,036 124,834 Other 287,521 118,519 				 ---------- ---------- $42,908,931 36,726,099 				 ========== ==========
(See Note 2 for information regarding a change in method of valuing the furniture subsidiary's inventories.)
6. Debt
Notes Payable
The following table summarizes notes payable: December 31, 1994 1993
Notes payable to bank $10,000,000 6,000,000
Investment financing 25,343,045 --
Revolving credit line 11,860,195 10,706,789
Equipment loan 1,500,000 2,000,000
Capitalized lease obligations 715,186 802,597
Short-term borrowings 3,248,062 20,000
Other 10,026 -- 					 ---------- ---------- $ 52,676,514 19,529,386 					 ========== ==========
The Company's note payable to a bank matures December 29, 1995, bears interest at Prime + 1% and is secured by the Company's investment in its textile apparel, military footwear manufacturing subsidiaries and its investment in Rocky Mountain (see Note 4). Additionally, the Company has pledged substantially all of the assets of its hotel and golf resort and its automated textile equipment manufacturing operations as collateral under this note.
On October 27, 1993, the Company's insurance subsidiary entered into a $10,000,000 loan agreement with a bank bearing interest at Prime plus 0.5% and due on January 26, 1994. The outstanding balance of $6,000,000 at December 31, 1993, was secured by the Company's investment in its textile apparel and military footwear manufacturing subsidiaries and its investment in Rocky Mountain (see Note 4) and was repaid on January 3, 1994, with a portion of the proceeds from the sale of the cable television system.
During December 1994, the insurance subsidiary borrowed $25,343,045 from various brokerage firms at rates varying from 5.25% to 6.375%, with maturities through April 3, 1995. These borrowings were secured by certain one and two-year U. S. Treasury securities with an original cost of $25,522,655 (approximates market) yielding 7.22% to 7.67% which were acquired under agreements to resell on various dates through April 3,1995.
The furniture subsidiary's revolving credit agreement with a major bank provides for borrowings of up to $12.5 million based upon the levels of eligible (as defined) accounts receivable and inventories. The credit agreement carries interest at the lender's "alternative base rate", as defined, plus 2% (10.5% at December 31, 1994). At December 31, 1994, borrowings under the revolving credit agreement were $11,860,195 and there was approximately $640,000 available under the agreement. Borrowings pursuant to the credit agreement are secured by substantially all of the assets of Hickory White and the loan is guaranteed by Hickory Furniture Company, Sunstates' parent. However, Sunstates is not obligated under the credit agreement. At December 31, 1994, the net worth of Hickory Furniture Company, Sunstates' parent, did not meet the minimum requirement under the loan covenants. The furniture subsidiary requested and obtained from the bank a waiver of the violation.
The credit agreement has previously matured and has been extended through January 3, 1996, to allow the Company additional time to obtain refinancing. However, the Company cannot state with certainty that it will be able to find alternative financing at terms acceptable to the Company prior to the extended maturity date of the loan. The credit agreement contains various covenants by Hickory White, the more restrictive of which include: (i) maintenance of; (a) minimum earnings, (b) tangible net worth levels and, (c) minimum ratios of earnings to fixed charges, all as defined, (ii) limitation of cash dividends on the common stock of Hickory White, (iii) prohibition on investments in and advances to other companies and affiliates and (iv) limitations on indebtedness of Hickory White.
The Company's textile apparel manufacturing subsidiary has a $2,000,000 term loan agreement with a bank that provides for equipment purchases of $250,000 up to $2,000,000, collateralized by the equipment purchased. Interest on the loan is 6.3% and as of December 31, 1994, there was $1,500,000 outstanding under this loan agreement.
The Company has leased certain computer, golf course and telephone equipment at its various operations under capital leases at inherent interest rates varying from 8% to 13.75% under varying terms extending through April 1999.
Short-term borrowings primarily represent balances owed under various seasonal and annually renewable bank lines of credit. The textile apparel manufacturing subsidiary has a $3,000,000 seasonal line of credit under which $1,821,938 was available at December 31, 1994. This line of credit bears interest at prime and is secured by liens on equipment and accounts receivable and contains covenants which relate to the maintenance of working capital and net worth, the purchase of fixed assets and the payment of dividends. At December 31, 1994, the military footwear manufacturing subsidiary had borrowed $2,050,000 at the bank's prime rate of interest which was secured by marketable securities and repaid in January 1995. The military footwear manufacturing subsidiary also has a $1,500,000 unsecured bank line of credit which bears interest at the bank's prime rate and expires December 30, 1995, but can be renewed annually at the bank's discretion. At December 31, 1994, $1,480,000 was available under this line.
At December 31, 1994, the prime rate of interest was 8.5%. Effective weighted average interest rates for notes payable was 8.44%, 9.01%, and 8.43% for the years ended December 31, 1994, 1993 and 1992, respectively.
Mortgage Notes
The above mortgage notes are collateralized by approximately $17,721,000 of real estate (see Note 3).
At December 31, 1994, the prime rate of interest was 8.5%. Effective weighted average interest rates for mortgage notes payable approximated 8.75%, 7.9%, 7.93% for the years ended December 31, 1994, 1993 and 1992, respectively.
Five Year Maturity Schedule
The following table reflects the required principal payments on debt, including notes payable and mortgage notes which would be made if the debt outstanding at December 31, 1994, was held to maturity:
Years Ending Principal December 31, Payments
1995 $57,542,677 1996 7,606,592 1997 773,100 1998 2,747,710 1999 99,693 2000 and thereafter 182,644 								---------- 68,952,416 Unamortized discounts (164,465) 								 --------- Net carrying value $ 68,787,951 								 ==========
With respect to the notes maturing in 1995, Sunstates is continuing to search for satisfactory alternative financing for these properties. However, the availability of real estate financing has been severely curtailed as the result of problems in both the banking and real estate industries. Accordingly, Sunstates cannot state with certainty that it will be successful in obtaining such refinancing.
Interest paid for the years ended December 31, 1994, 1993 and 1992 totalled $3,954,096, $7,755,005 and, $6,309,934, respectively.
7. Minority Interest in Subsidiaries
Included in the minority interest in subsidiaries is the minority stockholders' proportionate share of Alba's net assets (49.6% and 49.9% at December 31, 1994 and 1993, respectively), and Wellco's net assets (41.4% and 43% at December 31, 1994 and 1993, respectively).
8. Stockholders' Equity
Preferred Stocks
Sunstates has the following issues of preferred stock:
December 31, 1994 1993
$3.75 Cumulative Preferred Stock $ 7,198,975 9,008,675
Class E Preferred Stock 57,300 57,300 					 --------- -------- Total Preferred Stock $ 7,256,275 9,065,975 					 ========= =========
Class B Preferred Stock - $1.00 par value; preference in liquidation $100; authorized and issued one share at December 31, 1994 and 1993. The one share issued is held by a 100% owned subsidiary of Sunstates and is thereby deemed to be treasury stock and not outstanding. If the Class B Preferred were outstanding, it would have a voting equivalency of 400,000 shares and vote with the common stock as a single class.
$3.75 Cumulative Preferred Stock - $25 par value per share, 471,100 shares authorized; 287,959 and 360,347 issued and outstanding at December 31, 1994 and 1993, respectively. The $3.75 Cumulative Preferred Stock has no conversion, exchange, mandatory redemption, preemptive or other subscription rights or sinking fund provisions and is currently callable at $25 per share, in whole or in part, at the option of Sunstates. Dividends are cumulative and payable semi-annually, when and as declared. The $3.75 Cumulative Preferred Stock has no voting rights, except if two semi-annual dividend payments are unpaid and in arrears at the date of the Company's annual meeting the holders of the $3.75 Cumulative Preferred Stock have the right to elect fifty percent of the members of the Company's Board of Directors. At December 31, 1994, Sunstates was eight semi-annual dividends in arrears on its $3.75 Cumulative Preferred Stock.
During the three years ended December 31, 1994, Sunstates' insurance subsidiary purchased 15,000, 20,600 and 72,319 shares, respectively, of $3.75 Cumulative Preferred Stock at a cost of $329,618, $455,432 and $2,020,629, respectively. These shares are deemed to be treasury shares on a consolidated basis and deducted from outstanding shares in the accompanying financial statements.
Class E Preferred Stock, Series I and II - $.10 par value per share; 589,000 shares authorized; 573,000 issued and outstanding at December 31, 1994 and 1993, with a $1.00 per share liquidation preference. Class E Preferred Stock has no conversion, exchange, mandatory redemption, preemptive or general voting rights and may be redeemed in whole or in part by action of Sunstates' Board of Directors. Non-cumulative dividends are payable on the Class E Preferred Stock at the annual rate of $.08 per share, when and as declared. There were no dividends declared during the three years ended December 31, 1994.
Common Stock - $.33 1/3 par value per share; 5,000,000 shares authorized; 1,829,388 shares issued as of December 31, 1994 (1,826,347 shares at December 31, 1993) of which 1,032,372 and 792,775 shares were held in treasury at December 31, 1994 and 1993, respectively. During the three years ended December 31, 1994, Sunstates' insurance subsidiaries purchased 160,775, 69,100 and 239,597 shares, respectively, of its Common Stock at a cost of $943,485, $333,184 and $1,791,015, respectively. These shares are deemed to be treasury shares on a consolidated basis and deducted from outstanding shares in the accompanying financial statements.
Class B Accumulating Convertible Stock ("Class B Stock") $.10 par value, 84,800 shares authorized. Class B Stock has the same rights as Common Stock other than with respect to voting rights and conversion privileges. Each share of Class B Stock has 85.3125 votes per share on each matter submitted to a vote of Sunstates' stockholders. Holders of Class B Stock also have the right, at their option, to convert Class B Stock into Common Stock at a rate of 21.125 shares of Common Stock per share of Class B Stock at December 31, 1994. The conversion rate increases annually to a maximum conversion rate in 1995 of 24.375 shares of Common Stock per share of Class B Stock. During 1994 and 1993, 140 and 222 shares of Class B Stock were converted into 3,041 and 3,968 shares of Common Stock, respectively. During the year ended December 31, 1994, Sunstates' insurance subsidiaries purchased 8,613 shares of its Class B Stock at a cost of $1,559,392.
Dividends
Under the terms of Sunstates' $3.75 Preferred Stock, dividends may not be paid on common shares while preferred stock dividends remain in arrears. At December 31, 1994, Sunstates was in arrears eight semi-annual dividends on its $3.75 Cumulative Preferred Stock aggregating $4,319,385 ($15 per share).
Options and Warrants
In May 1982 shareholders approved the adoption of an Incentive Stock Option Plan pursuant to which options to purchase the common stock of Sunstates may be granted to key employees at a price not less than fair market value at date of grant, up to a maximum of 32,994 additional shares of Sunstates' common stock. Options under this Plan were issued in 1982 through 1984 and became exercisable at the rate of 25% per year beginning one year from the date of grant and expired in ten years. No charges were made to income with respect to these options. During the three years ended December 31, 1994, there were no exercises of outstanding options and all previously outstanding options have now expired. The Company has no plans to issue any new options under the Incentive Stock Option Plan.
All previously issued warrants under Sunstates' 1979 compensatory warrant plan have expired unexercised.
9. Commitments and Contingencies
Litigation
In April of 1988, two essentially similar civil actions styled Jeremiah P. O'Connor, Sarah M. O'Connor, and Leonore Ballan v. Acton Corporation, et al., and VR Associates and PJE Associates v. Acton Corporation, et al., were filed in the Court of Chancery for the State of Delaware in and for New Castle County. Also named in these actions are Sunstates Corporation and the directors of Acton prior to the merger with Sunstates. These actions, along with another subsequently filed action styled Harry Lewis v. Clyde W. Engle, et al., have been consolidated into one action entitled In Re Acton Corporation Shareholders Litigation. All plaintiffs allege to be holders of common stock of Acton and seek to have the action designated a class action on behalf of all parties owning common stock of Acton. The action challenges the merger of Sunstates Corporation with and into Acton, alleges fraud and breach of fiduciary duty and seeks unspecified damages plus costs and expenses including attorney's fees. Acton intends to defend this action vigorously. The suit is still in the preliminary stages and management is unable to predict the outcome of the litigation; however, management is of the opinion that the outcome of the litigation is unlikely to have a material adverse effect on Sunstates' financial position.
On June 4, 1990, VR Associates and Sonem Partners, L.P. filed a shareholder derivative action in the Court of Chancery for the State of Delaware in New Castle County against the directors of Acton and Hickory. The action alleges that certain transactions entered into and investments made by Acton constituted waste or a breach of fiduciary duty by the Board of Directors of Acton. In particular, the action alleges that Acton's purchase of the furniture operations of Hickory was not in the best interests of Acton and seeks various relief, including rescission of the purchase, unspecified damages and costs. The action also sought to obtain a temporary restraining order to prevent consummation of the purchase transaction. The request for a restraining order was denied by the Court on June 8, 1990. An essentially similar action was filed in the State of Delaware on June 12, 1990 by PJE Associates. These suits are still in the preliminary stages and management is unable to predict the outcome of the litigation; however, Sunstates intends to defend these actions vigorously and does not believe that the outcome of the litigation is likely to have a material adverse effect on Sunstates' financial position.
On June 14, 1991, a jury in a District Court of Dallas County, Texas awarded $3.5 million in actual damages and $5 million in punitive damages to the plaintiffs of a lawsuit filed against Acton Corporation. This dispute relates to the amount of additional purchase consideration due plaintiffs under an agreement made in 1983 whereby the Company purchased National Development Company, a real estate company based in Dallas. The Company has appealed the verdict based, in part, on the exclusion by the court of evidence crucial to the Company's defense. On November 7, 1991, the Company filed a Supersedeas Bond in the amount of the judgment, plus costs and interest for one year, with the Clerk of the District Court, signed by the Company as principal and by National Development Company, Inc., an affiliate of the Company, as surety. The effect of the filing of the supersedeas bond is to stay any execution of the judgment against assets of the Company, pending the results on appeal or any further orders of the District Court regarding the supersedeas. The plaintiffs have filed a cross-appeal, alleging that the trial court should have awarded an additional $5 million in exemplary damages, based upon the jury verdict. The Company believes that the damages awarded are contrary to the law and facts in this matter and is vigorously pursuing its rights on appeal. However, at this time management is not able to predict the Company's ultimate liability, if any, in this matter and accordingly, no provision for any such liability has been made in the Company's financial statements. Should the Company be required to pay all or a significant portion of this judgment, it could have a material adverse effect on the financial position and results of operations of the Company.
On December 6, 1991, California Federal Bank filed a suit against Acton in the Circuit Court, Duval County, Florida alleging breach of a Contract of Guaranty of a $5,100,000 note executed by Jacksonville Apartment Associates, Ltd. and secured by a mortgage on an apartment project in Jacksonville, Florida. During 1994 the suit was settled with the Company making a payment of $230,000.
On December 8, 1993, Richard N. Frank filed a purported derivative and class action in the Court of Chancery for the State of Delaware in New Castle County against the directors of Acton, Hickory and Telco. The action alleges that certain transactions entered into and investments made by Acton constituted waste or a breach of fiduciary duty by the Board of Directors of Acton. The complaint also alleges that the Company and its insurance subsidiary repurchased shares of the Company's common stock and $3.75 Cumulative Preferred Stock in violation of the Company's certificate of incorporation. Finally, the complaint alleges that the proxy statement disseminated in connection with the Company's December 13, 1993, annual meeting was materially misleading. This suit is in the preliminary stages and management is unable to predict the outcome of the litigation; however, Sunstates intends to defend these actions vigorously and does not believe that the outcome of the litigation is likely to have a material adverse effect on Sunstates' financial position.
On January 10, 1994, Robert A. Lee, et al. filed a punitive derivative action in the Court of Chancery for the State of Delaware in New Castle County against the directors of Acton, Hickory, Telco, WREIT, RDIS Corporation and nominally against the Company itself. The complaint alleges that certain transactions entered into and investments made by Acton constituted waste or a breach of fiduciary duty. This suit is in the preliminary stages and management is unable to predict the outcome of the litigation; however, Sunstates intends to defend these actions vigorously and does not believe that the outcome of the litigation is likely to have a material adverse effect on Sunstates' financial position.
At December 31, 1994, Sunstates and its subsidiaries also were, and currently are, defendants in other legal proceedings incidental to their business. Sunstates intends to defend such proceedings vigorously and, in the opinion of the management, Sunstates' ultimate liability, if any, in these proceedings will not have a material adverse effect on the consolidated financial position of Sunstates.
Insurance Matters
During the past three years, the Company's insurance subsidiary experienced significant declines in premium volume as the result of the discontinuation of certain general liability reinsurance programs and several unprofitable direct automotive insurance programs combined with the effect of price increases having been implemented in other markets which were producing unsatisfactory results. The combination of the above has resulted in the written premium volume declining to approximately $47,944,000 in 1994 as compared to $57,063,000 in 1993 and $118,830,000 in 1992. The decline in writings accelerated in the latter half of 1993 with writings in the fourth quarter totalling approximately $10,493,000 as compared to $20,711,000 for the same period in 1992. The decline in premium volume stabilized during the early part of 1994 and showed modest increases during the last half of the year as new programs already established and other planned actions to increase volume started to become effective resulting in fourth quarter 1994 writings totalling $12,910,000.
The short-term impact of the drop in written volume was that the company experienced a period of negative cash flow from underwriting activities resulting from relatively immediate declines in collected premiums while claim payouts, relating primarily to previously written policies, continue at disproportionately higher levels. The Company's negative cash flow from underwriting has begun to decline as premium volume has stabilized. Negative cash flow from investment income and underwriting activities of the insurance segment for 1994 was $29,162,720 (declining to only $5,551,737 in the fourth quarter) compared to $54,819,238 for 1993 and $12,859,008 for 1992. Accordingly, the Company believes that any required liquidations of the investment portfolio in order to meet operating cash flow requirements during 1995 will be greatly reduced.
The level of liquid assets, as defined by the National Association of Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was $90,109,196 at December 31, 1994, as compared to $77,678,160 at December 31, 1993. Included in NAIC-defined liquid assets are U. S. Treasury securities with approximately $25,500,000 which were acquired under agreements to resell (see Note 4) as well as certain securities with a reported value of $6,932,590 at December 31, 1994, which are not publically traded as well as approximately $8,333,000 of securities and certificates of deposit which were on deposit pursuant to state laws and various reinsurance agreements. In addition, $33,954,320 ($36,446,728 at December 31, 1993) of investments in publicly traded equity securities of other companies, valued at their quoted market prices on December 31, 1994, do not meet the NAIC definition of liquid assets solely because of the level of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of Insurance to decrease Coronet's ratio of liabilities to liquid assets, as defined by the NAIC, to 105% over a five year period. At December 31, 1994, Coronet's ratio was 134.6%, as compared to the agreed upon ratio of 155%. The ratio required to be met by December 31, 1995, is 130%. The Company expects to achieve this objective without any material adverse consequences; however, such compliance is dependent upon a combination of future premium volumes, underwriting and investment results, various restructurings and asset transfers, potential regulatory examination adjustments, if any, and other factors beyond the Company's control.
In September 1993, the Arizona Department of Insurance notified the Company that it would be performing a limited examination of the Company's reported statutory surplus, however, to date no such examination has commenced. The Illinois Department is currently conducting a financial examination of Coronet as of December 31, 1993, although the examination has not been completed, at this time no matters have been brought to the Company's attention which would have a material adverse impact on the Company.
The National Association of Insurance Commissioners ("NAIC") recently adopted risk-based capital guidelines for property/casualty insurance companies whereby defined risk-based capital would be based, in part, upon a formulated risk assessment of the type of assets held in an insurance company's investment portfolio, asset concentrations and underwriting risks. Such proposed regulations are anticipated to become effective in 1995, however, a computation of the Company's risk-based capital was required to be prepared for informational purposes only as of December 31, 1994. Based upon this computation, as filed under the NAIC's reporting requirements, the Company's risk-based capital far exceeds proposed minimum requirements.
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of Coronet. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections, including independent actuarial reviews, and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. In estimating the ultimate net cost of unpaid claims and LAE the impact of inflation is implicitly considered. Coronet reduces its reserves for any estimated salvage or subrogation recoveries which may be realized in connection with settling unpaid claims. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, if any, are reflected in current operations.
The increase (decrease) in estimated losses and loss adjustment expenses for claims occurring in prior years, as shown in the preceding table, is due to settling case-basis reserves established in prior years at amounts other than originally expected and no additional premiums have been accrued as a result of these prior-year effects.
Liquidity
As the result of negative cash flow from insurance underwriting (see discussion above), operating losses in certain other segments of the Company's operations (see Note 14), and maturing debt obligations (see Note 6), the Company will be facing various demands upon its liquidity in 1995. Although, the Company believes that it can meet such demands through selective liquidations of securities in its investment portfolio, sales or refinancings of various real estate and other assets and the refinancing of its furniture business, it cannot predict with certainty the outcomes of such actions.
10. Income Taxes
The provision for income taxes includes the following (amounts in thousands):
1994 1993 1992
Current - Federal $150 (322) 268 - State 123 212 614 					 --- --- --- 273 (110) 882
Provision by majority-owned subsidiaries 1,766 838 777 					 ----- --- ---
Total provision $ 2,039 728 1,659 					 ===== === =====
In 1993 the provision for federal taxes reflects a benefit attributable to current operating losses which were utilized to reduce the amount of alternative minimum tax which would have otherwise been payable on the taxable income generated in connection with the sale of the cable television system (see Note 1). Income from discontinued operations is presented net of income taxes totalling $35,173 and $256,990 which have been allocated to the operations of the cable television system for the years ended December 31, 1993 and 1992, respectively. The amount of income taxes allocated to income from discontinued operations in 1993 is net of a benefit of $282,495 from the utilization of the Company's net operating loss carryforwards. Income from the sale of the cable television system in 1993 is presented net of $1,015,446 of income taxes which reflects a benefit of $12,196,279 from the utilization of the Company's net operating loss carryforwards.
A valuation allowance has been provided to reduce the deferred tax assets to a level which management estimates will more likely than not be realized, primarily through the reversal of taxable temporary differences within the net operating loss carryforward periods. Certain subsidiaries do not file consolidated tax returns with the Company and thereby the Company's net operating loss carryforwards are not available to offset future deferred tax liabilities of these subsidiaries. As of December 31, 1994 and 1993, these subsidiaries had net deferred tax liabilities of $852,000 and $298,000, respectively, which are included in the Company's consolidated balance sheet.
Net operating loss carryforwards of approximately $57,000,000 are available to offset future taxable income which, if not used, will expire in 1995 through 2009. The tax returns for the years during which these operating losses were generated have not been examined by the Internal Revenue Service and such returns could be examined at the time the loss carryforwards are utilized. Additionally, approximately $26,700,000 of these tax loss carryforwards were generated by subsidiaries prior to their acquisition and are thereby restricted to offsetting only future taxable income of the subsidiaries which generated the losses. Any future utilization of these pre-acquisition loss carryforwards may be treated for financial reporting purposes as a retroactive adjustment to the original purchase cost assigned to certain assets of such subsidiaries.
State and federal income taxes paid for the years ended December 31, 1994, 1993 and 1992 totalled $924,035, $1,403,205 and $1,542,830, respectively.
11. Per Share Amounts
Per share amounts are computed based upon the weighted average number of common and common equivalent shares outstanding. Common equivalent shares consist of the assumed conversion of the Class B stock (21.125 to 1 in 1994; 17.875 to 1 in 1993 and 15.4375 to 1 in 1992) and any dilutive effect of stock options and warrants.
Primary per share amounts for 1994, 1993 and 1992 have been computed based on weighted average common and common equivalent shares of 2,564,584, 2,523,962, and 2,488,466, respectively. Fully diluted earnings per share for 1994, 1993 and 1992 have been computed based on the weighted average number of common and common equivalent shares of 2,564,584, 3,060,359, and 2,488,466, respectively.
The effect of stock options and warrants were not included in the computation of fully diluted per share amounts in 1993 or 1992 because their inclusion would have been anti-dilutive. At December 31, 1994, all such stock options and warrants had expired and were no longer outstanding. The maximum conversion of Class B Stock was not included in the computation of fully diluted per share amounts in 1994 and 1992 because its inclusion would have been anti-dilutive.
Net income applicable to common stock reflects the dividend requirements applicable to preferred stocks totalling $1,125,686, $1,397,141, and $1,476,176 for the years ended December 31, 1994, 1993 and 1992, respectively.
12. Related Party Transactions
Following is a summary of the amounts receivable from (payable to) affiliates:
December 31, 1994 1993
Telco $ 2,304,404 1,917,995 Hickory 777,584 710,779 WREIT -- 2,086,014 Chairman 152,764 2,456,086 	 ---------	 	 --------- $ 3,234,752 7,170,874 			 ========= 		 =========
During 1993, the Company advanced $40,720 to Telco on an unsecured basis which, along with all amounts previously advanced, is due on demand and bears interest at prime plus two percent.
On April 13, 1992, Sunstates acquired Hickory's remaining interest in Sew Simple in a transaction whereby approximately $12 million of balances due from Hickory and Telco were satisfied (see Note 1), including all amounts due under the Intercompany Credit Agreement which expired simultaneously with the transaction. The transaction also created an unsecured note payable at prime +2% to Hickory in the amount of $1,637,323. Subsequent to the transaction, Sunstates made payments to Hickory such that the entire balance due under the note was paid off in 1992.
During the years ended December 31, 1993 and 1992, the Company loaned Hickory $108,161 and $895,000, respectively, which amounts were due on demand and provide for interest at a rate of Prime + 2%. No additional amounts were loaned during the year ending December 31, 1994. All of the amounts advanced prior to 1993 were either assigned to Hickory in conjunction with the acquisition on June 21, 1990, of Hickory's furniture manufacturing business or were satisfied in the Sew Simple acquisition transaction referred to above (see Note 1).
During 1992, the Company purchased $108,700 (par value) of 12% Debentures of Hickory Furniture Company at a cost of $103,736. At December 31, 1994, the Company held a total of $474,900 par value (with a carrying value of $651,350, including interest) of these debentures which were due in January 1992 and remain in default.
Subsequent to December 31, 1994, the Company determined that due to a decline in the value of the Company's Class B Stock owned by WREIT and the fact that substantially all of WREIT's assets were pledged to secure other obligations, the repayment of amounts owed to the Company by WREIT is doubtful. Accordingly, as of December 31, 1994, the Company has written off its receivable from and its investment in the shares of beneficial interest of WREIT in the amounts of $2,287,750 and $669,395, respectively.
The advances to Sunstates' Chairman as of December 31, 1994, are unsecured, non-interest bearing and due on demand. During 1993, $1,150,000 was advanced to the Chairman under similar terms. These advances to the Chairman were in connection with a transaction as to which negotiations were completed on February 26, 1993, whereby Sunstates' Board of Directors approved the purchase from the Chairman of Epernay Properties, Inc., which owns approximately 1,137 acres of improved and unimproved land located near the Company's resort development in Spring Green, Wisconsin, at a price of $1,700,000. Generally accepted accounting principles applicable to purchases of businesses in transactions between entities under common voting control require that the assets acquired be recorded at their historical cost basis as previously reflected on the books of the seller. Accordingly, $676,000, representing the excess of the fair market value paid over the Chairman's historical cost basis of Epernay Properties, Inc. was reflected as a reduction to Sunstates' capital in excess of par value as of the date of the transaction.
Additionally, during 1993 amounts totalling $2,456,086 were advanced to the Company's Chairman against commissions due upon the sale of the cable television system totalling $2,470,000 (see Note 1). During 1994 such commissions were paid and the receivable from the Chairman was reduced by $2,470,000.
During early 1994 amounts totalling $309,008 were paid to the Company's Chairman in full satisfaction of salary due for the year of 1994. Subsequent to December 31, 1994, $432,210 was paid to the Chairman in full satisfaction of salary due for the year of 1995. Both amounts reflect a discount of 10%.
On March 4, 1994, the Company purchased from its parent, RDIS, an automobile for $109,404. Although the purchase price did not exceed the fair market value of the automobile, the depreciated carrying value of the car on the books of RDIS was zero on the date of the transaction. Generally accepted accounting principles applicable to transactions between entities under common voting control require that the assets acquired be recorded at their historical cost basis as previously reflected on the books of the seller. Accordingly the $109,404, representing the excess of the amount paid for the automobile over RDIS's historical cost basis, was reflected as a reduction to Sunstates' capital in excess of par value as of the date of the transaction.
Since January 1, 1990, the Company has purchased on the open market, 84,842 shares of beneficial interest of WREIT, representing 5.5% on the outstanding shares of beneficial interest of WREIT, for a total cost of $669,395 (see discussion above where this amount has been written off as of December 31, 1994). Also, since January 1, 1990, the Company purchased on the open market 9,330 shares of common stock of Hickory, representing 1.2% of the outstanding shares of Hickory, at a total cost of $166,113. Since January 1, 1990, the Company has purchased on the open market 134,445 shares of common stock of Indiana Financial Investors, Inc. ("IFII"), representing 16.2% of the issued shares of IFII, at a total cost of $788,882. Subsequent to December 31, 1994, the Company purchased 2,255 shares of common stock of IFII at a cost of $7,329.
During 1994, subsidiaries of the insurance company purchased, from brokers and other non-affiliated owners, 8,613 shares of Class B Stock of Sunstates (at a total cost of $1,559,392) which had been owned by the Company's parent prior to their acquisition by the Company. Subsequent to December 31, 1994, subsidiaries of the insurance company purchased, from non-affiliated owners, an additional 3,840 shares of Class B Stock of Sunstates (at a total cost of $503,140) which had been owned by the Company's parent prior to their acquisition by the Company.
During the years ended December 31, 1994, 1993 and 1992 Sunstates earned interest income from affiliates of $359,453, $295,787, and $495,926, respectively.
During 1994, 1993 and 1992, Telco invoiced Sunstates $1,856,000, $1,945,000, and $2,069,000, respectively for various professional services primarily related to the insurance operations and to various corporate activities. As of December 31, 1994, the Company had advanced Telco $1,255,250 on an unsecured, non-interest bearing basis as a prepayment of fees for such professional services to be rendered in 1995. On February 4, 1994, the Company's insurance subsidiary entered into a ten year lease agreement for office space to be occupied largely by employees of Hickory. The lease calls for initial monthly payments of $4,096, which will be offset against amounts billed to the Company for professional services discussed above.
The above financial information has been retroactively restated to reflect the effect of the Company's change in its method of valuing its furniture manufacturing inventories from the last-in, first-out method to the first-in, first-out method (see Note 2). The effect of this change was to increase net income by $94,000 ($.04 per primary and fully diluted share), $294,000 ($.11 per primary and fully diluted share), $206,000 ($.08 per primary and fully diluted share) and $137,000 ($.06 per primary and fully diluted share) in the first through fourth quarters of 1994, respectively. For 1993, the effect of this change was to increase net income by $94,000 ($.04 per primary and fully diluted share), $10,000 ($.01 per primary and fully diluted share), and $17,000 ($.01 per primary and fully diluted share) in the first three quarters, respectively, while decreasing net income by $405,000 ($.16 per primary and $.13 per fully diluted share) during the fourth quarter.
(a) See Note 1 for information regarding the sale of the cable television business.
(b) See Note 2 for information regarding the adoption of Statement No. 109 "Accounting for Income Taxes".
(c) Includes net gains of approximately $6,182,000 realized from the insurance subsidiary's equity security investment portfolio. Also includes $3,930,000 of underwriting loss emanating from programs which had been previously discontinued due to their unsatisfactory results.
(d) Includes net gains of approximately $3,926,000 realized from the insurance subsidiary's equity security investment portfolio. Also includes $2,442,000 of underwriting loss related to prior accident years, primarily on the Company's continuing programs.
(e) Includes $2,166,000 of underwriting loss related to prior accident years, primarily on the Company's continuing programs. Also includes $3,296,000 of gains realized from the insurance subsidiary's equity security investment portfolio.
(f) Includes bad debt writeoff of $556,205 relating to textile apparel manufacturing customer which filed for bankruptcy as well as $428,652 of costs incurred in connection with investigation of a potential acquisition.
(g) Includes $2,728,693 of profit from the sale of an apartment project.
(h) Writedowns totalling $571,800 were recorded to reflect what Sunstates believes to be other than temporary declines in the value of securities in its investment portfolio. Also, see Note 12 regarding the writeoff at December 31, 1994, of the Company's receivables from and investments in WREIT.
14. Industry Segments
Sunstates operates in four industry segments: insurance, manufacturing, real estate development and, prior to December 30, 1993, cable television (see Note 1).
Operations of the insurance segment include the providing of property and casualty insurance, primarily confined to the writing of full coverage non-standard automobile insurance in Arizona, Illinois, Nevada, Ohio and Tennessee and several other states, and the financing of premiums on policies issued by the Company.
Manufacturing represents operations in the furniture, textile apparel, military footwear and textile equipment manufacturing businesses. The furniture operations encompass the manufacture of high end home furnishing products covering a broad selection of traditional and transitional wood and upholstered lines which are marketed to furniture retailers throughout the country. The Company's textile apparel manufacturing subsidiary produces and sells an extensive line of men's and women's hosiery and knitted intimate apparel products as well as a variety of surgical products for the health care industry. Military footwear operations include the manufacture and sale of military combat boots under fixed price contracts, primarily to the United States government. Automated textile machinery is designed and produced in South Carolina and is marketed to large textile producers located primarily in the United States.
Real estate operations primarily reflect the development for resale of income producing properties located in the southeastern United States. The Company is also actively involved in the development of a resort in Spring Green, Wisconsin and in the development and sale of recreational and second home resort lots and continues its efforts to sell other real estate assets no longer under active development.
Cable represents the Company's involvement in the development, management and operation of a cable television system in Maryland (which was sold on December 30, 1993).
Equity investees represent less than 50% investments in Alba (until June 30, 1993) and Rocky Mountain.
Included in corporate and other is the Company's newspaper production operation which was acquired in October 1992. The assets and results of operations of the newspaper operation are not significant.
During 1994, 1993 and 1992, insurance premium production from one broker approximated 29%, 44% and 46% respectively, of direct written premiums and 29%, 43% and 39%, respectively, of total written premiums.
The reported statutory net worth of Coronet at December 31, 1994 and 1993 was $59,483,697 and $58,605,217, respectively. Statutory net income (loss) for the three years ended December 31, 1994, totalled $2,843,245, $(5,975,327) and $7,256,796, respectively. The maximum amount of dividends which can be paid by the insurance subsidiary without prior approval of the Insurance Commissioner of the State of Illinois is subject to restrictions. The maximum dividend payment which may be made without prior approval is subject to the availability of earned surplus from which it can be paid and further limited to the greater of statutory net income, as adjusted, for the twelve months last ended or 10% of the subsidiary's statutory surplus. At December 31, 1994, there was no earned surplus from which dividends can be paid.
The financial statements of Normandy Insurance Agency, Inc. and its subsidiaries are included in the consolidated financial statements pursuant to FASB Statement No. 94 "Consolidation of All Majority-Owned Subsidiaries"; prior to 1988, such financial statements were not consolidated. Subsequent to 1987, Normandy has invested in manufacturing and other segments of Sunstates' operations. As a result, the current Normandy financial statements are no longer comparable to those formerly not consolidated. Management believes that the disaggregated information provided in this segment note and elsewhere in the consolidated financial statements presents the most meaningful information.
Information about operations in different industry segments for the three years ending December 31 is as follows (amounts in thousands):
1994 1993 1992
Revenues Insurance $ 49,054 88,678 138,314 Manufacturing 130,495 96,454 67,740 Real Estate 24,301 17,362 8,546 Equity Investees 1,496 1,256 1,565 Corporate and Other 3,808 3,444 227 					 ------- ------- ------- $209,154 207,194 216,392 					 ======= ======= =======
Operating Income (Loss) Insurance $ (6,792) (3,555) (14,302) Manufacturing 7,929 4,292 1,994 Real Estate 1,377 1,534 (435) Equity Investees 1,496 1,256 1,565 Corporate and Other (4,826) (4,404) (3,416) Interest (3,129) (3,700) (2,708) 					 ----- ----- ------ $ (3,945) (4,577) (17,302) 					 ===== ===== ======
Identifiable Assets Insurance $100,396 102,773 120,142 Manufacturing 100,694 95,481 65,942 Real Estate 47,430 59,700 63,722 Equity Investees 3,804 2,902 12,869 Corporate and Other 3,108 6,701 1,873 Eliminations ( 8,857) (18,277) (13,897) 					 ------- ------- ------- $246,575 249,280 250,651 					 ======= ======= =======
Depreciation and Amortization Insurance $ 842 685 491 Manufacturing 3,119 2,592 1,900 Real Estate 1,320 1,071 817 Corporate and Other 51 59 43 					 ----- ----- ----- $ 5,332 4,407 3,251 					 ===== ===== =====
Capital Expenditures Insurance $ 523 1,328 312 Manufacturing 3,135 2,580 637 Real Estate 1,986 1,406 178 Corporate and Other 89 41 56 					 ----- ----- ----- $ 5,733 5,355 1,183 					 ===== ===== =====
Report of Independent Certified Public Accountants
Stockholders and Board of Directors Sunstates Corporation
We have audited the consolidated balance sheets of Sunstates Corporation and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of Wellco Enterprises, Inc., a 58.6% owned subsidiary, which statements reflect total assets of $24,788,000 and $20,058,000 as of December 31, 1994 and 1993 and total revenues of $20,790,000, $20,644,000 and $18,434,000 for each of the three years in the period ended December 31, 1994. We also did not audit the 1993 and 1992 financial statements of Alba-Waldensian, Inc. a 50.4% owned subsidiary in which Sunstates' statements reflect total assets of $33,141,000 as of December 31, 1993 and total revenues of $26,798,000 for the year then ended. In 1992, Sunstates' statements reflected an investment in Alba-Waldensian, Inc. of $10,279,000 at December 31, 1992 and equity in $1,274,000 for the year then ended. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for Wellco Enterprises, Inc. and Alba-Waldensian, Inc. is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Sunstates Corporation and subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with general accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of inventory valuation for its furniture manufacturing inventories.
As discussed in Note 9 to the consolidated financial statements, the Company is involved in various lawsuits, including a lawsuit which is being appealed where a jury has awarded $8,500,000 in actual and punitive damages against the Company, and the Company's insurance subsidiary is involved in certain regulatory matters, including a requirement to further reduce its ratio of liabilities to liquid assets over the next two years. While the Company cannot predict the outcome of the lawsuit which is being appealed, it believes that the other lawsuits and the regulatory matters will not have a material adverse impact on the consolidated financial statements or on its ability to continue to write new insurance at anticipated 1995 levels. Accordingly, no provision for any liability or other adjustments which may result, if any, have been recorded in the accompanying consolidated financial statements.
BDO SEIDMAN
Greensboro, North Carolina March 30, 1995
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Wellco Enterprises, Inc. Waynesville, North Carolina
We have audited the accompanying consolidated balance sheets of Wellco Enterprises, Inc. and subsidiaries as of July 2, 1994 and July 3, 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 2, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, such consolidated financial statements present fairly, in all material respects, the financial position of Wellco Enterprises, Inc. and subsidiaries as of July 2, 1994 and July 3, 1993, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, the Company changed its method of accounting for income taxes during fiscal year 1993 to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina August 31, 1994
INDEPENDENT AUDITORS' REPORT
Board of Directors Alba-Waldensian, Inc. Valdese, North Carolina
We have audited the accompanying consolidated balance sheet of Alba-Waldensian, Inc. and subsidiaries as of December 31, 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, such consolidated financial statements present fairly, in all material respects, the financial position of Alba-Waldensian, Inc. and subsidiaries as of December 31, 1993, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes effective January 1, 1992 to conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Hickory, North Carolina February 11, 1994
The statements presented on Schedule I include the accounts of the Company and its unrestricted subsidiaries. This statement does not include the individual accounts of Normandy Insurance Agency, Inc., (including Sew Simple Systems, Inc., Wellco Enterprises, Inc. and Alba Waldensian, Inc.), Hickory White Company, nor, prior to December 30, 1993, Acton Cable Partnership inasmuch as the ability of those entities to transfer assets to Sunstates is restricted by governmental regulation with respect to Normandy and by contract otherwise. The Company's investment in these entities is reflected utilizing the equity method of accounting and presented as an investment in affiliates.
3. Depreciation of operating properties is computed on the straight-line method over the remaining useful lives of the properties, which are generally thirty-one and one-half to forty years for buildings and five to twelve years for furniture and equipment.
4. Aggregate cost as of December 31, 1994 for federal income tax purposes has not yet been determined.
EXHIBIT INDEX
Sunstates Corporation Form 10-K Annual Report For the Year Ended December 31, 1994
All Exhibits except Exhibits 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 	4.3, 4.4, 4.5,10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 	10.9, 10.10, and 10.11 are filed herewith and included in Item 	14. Exhibit 10.1 is incorporated by reference to Acton's 	Quarterly Report on Form 10-Q for the quarter ended September 30, 	1990. Exhibits 4.1 and 10.4 are incorporated by reference to 	Acton's Current Report on Form 8-K dated July 5, 1990. Exhibits 	3.1 and 10.2 are incorporated by reference to Acton's Form 10-K 	for the year ended December 31, 1989. Exhibits 3.2, and 10.3 	are incorporated by reference to Acton's Form 10-K for the year 	ended December 31, 1990. Exhibit 4.2 is incorporated by reference to 	Acton's Form 10-Q for the quarter ended March 31, 1991. Exhibits 	4.3, 4.4, 10.5, 10.6, 10.7 and 10.8 are incorporated by 	reference to Acton's Form 10-K for the year ended December 31, 	1991. Exhibits 4.4 and 10.8 are incorporated by reference to 	Acton's Form 10-K for the year ended December 31, 1992. Exhibits 3.3, 	3.4, 4.5, 10.9 and 10.10 are incorporated by reference to 	Sunstates Corporation's Form 10-K for the year ended December 	31, 1993. Exhibit 10.11 is incorporated by reference to 	Sunstates Corporation's Form 8-K dated March 6, 1995.
(3) Amended and Restated Certificate of Incorporation and By-Laws
(3.1) Restated Certificate of Incorporation
(3.2) Certificate of Amendment of Restated Certificate of 	 Incorporation
(3.3) Certificate of Amendment to Restated Certificate of 		Incorporation dated December 28, 1993
(3.4) Amended and Restated By-Laws of Sunstates Corporation
(4) Instruments Defining the Rights of Security Holders, Including 	Debentures
(4.1) Credit Agreement dated June 15, 1990 by and between Hickory White Company and Citicorp North America, Inc.
(4.2) First Amendment to Credit Agreement dated April 1, 1991, by and between Hickory White Company and Citicorp North America, Inc.
(4.3) Second Amendment to Credit Agreement dated January 30, 1992, by and between Hickory White Company and Citicorp North America, Inc.
(4.4) Third Amendment to Credit agreement dated January 31, 1993, by and between Hickory White Company and Citicorp North America, Inc.
(4.5) Fourth Amendment to Credit Agreement dated November 	 30, 1993, by and between Hickory White Company and 	 Citicorp North America, Inc.
(4.6) Fifth Amendment to Credit Agreement dated December 21, 1994, by 	 and between Hickory White Company and Citicorp North 	 America, Inc.
(10) Material Contracts
(10.1) Form of Indemnification Agreement between Acton Corporation and each officer and director, respectively.
(10.2) Stock Purchase Agreement dated January 17, 1989, both by and between Normandy Insurance Agency, Inc. and Hickory Furniture Company.
(10.3) Asset Purchase Agreement dated June 15, 1990, by and between Hickory White Company and Hickory Furniture Company et. al.
(10.4) Extension Agreement dated February 28, 1992, both by and between Normandy Insurance Agency, Inc. and Hickory Furniture Company.
(10.5) Executive Employment Agreement dated September 16, 1991, by and between Acton Corporation and Clyde Wm. Engle.
(10.6) Corporate Officers Discretionary Bonus Plan.
(10.7) Purchase of Stock and Assignment of Contract Rights dated April 13, 1992, by and between Normandy Insurance Agency, Inc. and Hickory Furniture Company.
(10.8) Stock Purchase Agreement dated July, 28, 1992, by and between Coronet Insurance Company and Euroactividade Corporation, et. al., covering the acquisition of all of the outstanding capital stock of Euroactividade Spring Green, Inc.
(10.9) Amended and Restated Purchase and Sale Agreement 	 dated as of December 30, 1993, by and between Acton 	 Corporation and Acton Cable Investors, N.V. as sellers and 	 InterMedia Partners of Maryland, L.P. and InterMedia 	 Partners, III, L.P. as buyers
(10.10) Note payable to Acton Corporation and Acton Cable Investors, 	 N.V. in the amount of $17,366,614 dated December 30, 1993, 	 by InterMedia Partners of Maryland, L.P. and InterMedia 	 Partners III, L.P.
(10.11) Asset Purchase Agreement dated as of March 6, 1995, by and 	 between Alba-Waldensian, Inc. and Kayser-Roth Corporation 	 for the purchase of the Balfour Healthcare Division.
(11) Statement re Computation of Per Share Earnings
(11.1) Primary
(11.2) Fully diluted
(18) Letter re Change in Accounting Principle
(21) Subsidiaries of the Company
(27) Financial Data Schedules
(28P) Information from Reports Furnished to State Regulatory Authorities. Schedules P of the 1994 Annual Statement of Coronet Insurance Company of Chicago to the Insurance Department of the State of Illinois.