SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: August 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-5940
TEMTEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1321869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 LBJ Freeway, Suite 1375, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: 972/726-7175
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.20 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
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As of November 14, 2000, the aggregate market value of the voting stock
held by non-affiliates of Temtex Industries, Inc. was $1,752,074.
As of November 14, 2000 there were 3,444,641 shares of common stock, par
value $0.20 per share, of Temtex Industries, Inc. outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is a major producer of metal fireplace products used in the
residential construction markets. The Company manufactures woodburning
metal fireplaces as well as those utilizing natural gas and liquified
petroleum fuels. In 1992, the Company introduced its Temco American
Dream TM ventfree gas log product line. The ventfree fireplace units
provide heat from glowing artificial logs without the use of a vent,
flue or similar device. The Company was organized in 1969 under the
name Monnfield Industries, Inc. and in 1971 changed its name to Temtex
Industries, Inc. In August 1971, the Company merged with Texas Clay
Industries, Inc., thereby acquiring several businesses, including a face
brick business. The Company completed the sale of Texas Clay
Industries, then an operating division of the Company, in January 1999.
NARRATIVE DESCRIPTION OF BUSINESS
Fireplace Products
Through its wholly owned subsidiary, Temco Fireplace Products, Inc. the
Company manufactures and distributes zero clearance metal woodburning
and gas fireplace equipment. For the fiscal year ended August 31, 2000,
the Company had aggregate sales of fireplace products of approximately
$20.7 million and reported a net loss from continuing operations of
approximately $6.1 million.
Zero Clearance Woodburning Fireplace Products. A zero clearance metal
fireplace is similar in function to a masonry fireplace, except that the
firebox and flue pipe chimney are fabricated from stainless and coated
steels and shipped as a unit to the purchaser or construction site. The
inside of the firebox of a zero clearance metal fireplace is completely
lined with an embossed brick pattern refractory, giving the appearance
of a masonry surface. The inner pipe of the flue is made from stainless
steel. Because zero clearance metal fireplaces are prefabricated,
contractors can install them more easily and at lower cost than is the
case with traditional masonry fireplaces. In addition, because zero
clearance metal fireplaces utilize a metal flue instead of a masonry
chimney, they offer enhanced placement flexibility. The Company
manufactures and distributes zero clearance fireplaces in a full range
of prices for each of the common fuel categories (i.e., wood logs,
natural gas and liquified petroleum products). In addition, the Company
either manufactures or purchases from others for use in conjunction with
its fireplace products certain essential components or optional
enhancements such as glass doors, blower kits, outside air kits, screens
and grates. These items are incorporated into the zero clearance metal
fireplace units during the assembly process or shipped in conjunction
with a fireplace unit for subsequent assembly, depending upon customer
specifications. The Company does not currently manufacture accessories
for fireplace units manufactured by third parties or for existing
masonry fireplaces.
Ventfree Gas Logs and Ventfree Fireplaces. During fiscal 1992, the
Company introduced its American Dream TM ventfree gas log and a related
ventfree fireplace unit. The American Dream TM ventfree gas log is a
simulated wood log and burner set assembly utilizing a patented design
licensed to the Company. This design permits the burning of natural gas
or liquefied petroleum products, such as propane, to provide heat
without the necessity of venting carbon monoxide from the combustion
area. The simulated wood logs utilized in the American Dream TM
ventfree gas log set are made of a soft ceramic material to resemble
wood logs and the embers produced by the burning of wood logs. As the
soft ceramic material is heated by the burner set, it radiates heat and
produces a red glow resembling that produced by wood logs in a masonry
fireplace. The Company also markets its ventfree gas logs as the
Firetech 2000(R) ventfree gas log, depending upon the customer. Unlike
vented fireplaces, which must be located where outside venting can be
effected, the Company's ventfree gas logs may be placed in any location
where a heat source is desired, including existing fireplaces. Existing
fireplaces can be modified to accommodate the use of the Company's
ventfree gas logs at a relatively low cost.
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The Company markets ventfree gas log products, which consist of several
different size ventfree gas log sets, ventfree gas heaters, and
fireplace units. Sales of the combined ventfree gas log and fireplace
unit have been primarily to new home contractors, while significant
quantities of the ventfree gas log sets not associated with a zero
clearance fireplace unit have been sold to independent distributors and
contractors serving the remodeling and retrofit markets.
Direct-Vent Gas Fireplaces. The Company purchased assets and technology
of Toronto based GSW, Inc. during fiscal 1998 for approximately
$700,000. GSW designed, manufactured and marketed direct-vent gas
fireplaces. Direct-vent gas fireplaces permit the burning of either
natural gas or liquefied petroleum products; however, unlike the
ventfree products sold by the Company, must be vented directly to the
outdoors.
The Company has converted the GSW products to the Temco brand name and
these products were introduced to the Company's distributors in August
1999. The acquisition of the GSW product line has expanded the
Company's market presence in Canada and broadened the line of products
in the fast growing direct-vent gas fireplace market.
Marketing and Distribution. The Company sells its fireplaces, ventfree
gas logs and related accessories nationwide through its own sales force
and through third party sales representatives primarily to contractors,
wholesale distributors and retailers. A majority of the Company's
fireplaces are ultimately purchased by homebuilders and others engaged
in the construction of new housing or remodeling of existing homes. The
Company has distributors in all regions of the country serving builders
and remodelers. The Company's fireplace products are used by many of
the country's best known builders. The Company has added new
distributors in the United States and Canada as the result of the new
direct-vent line of products.
Although the Company ships its fireplace products nationwide, its sales
tend to be somewhat concentrated in the states where new housing
construction is most active. Because the Company typically produces its
products to meet specific orders by contractors, large distributors or
retailers, it does not maintain material amounts of inventories in
excess of anticipated short-term demand. The raw materials for the
Company's fireplace products are readily available from a variety of
sources. During fiscal year ended August 31, 2000, no single customer
for fireplace products accounted for more than 10% of the Company's
consolidated sales during such period.
Manufacturing. The Company currently fabricates its zero clearance
fireplace units from stainless and coated steels acquired from vendors
and brick pattern refractory of its own manufacture. During the
fabrication process, the Company adds components and other hardware
purchased from vendors. Glass doors, fan kits and blowers designed for
the Company's zero clearance fireplace units are usually shipped
separately. The Company produces a variety of sizes and styles of zero
clearance fireplace units for both the single family and multi-family
markets. In the case of the ventfree gas log units, the Company
incorporates an oxygen depletion sensor and a pilot light and valve
acquired from vendors. The ventfree gas log components are then further
assembled and placed under an arrangement of soft ceramic simulated wood
logs. The Company, during fiscal year 1995, began manufacturing the
simulated wood logs at the Manchester facility.
Competition; Patents. There are a number of manufacturers producing
zero clearance metal fireplaces and related accessories similar to the
products of the Company and the market for these products is very
competitive. The Company believes that it is among the larger producers
of such products and that it markets a full range of zero clearance
fireplace units at competitive prices. Some of the Company's ventfree
gas log products utilize a patented design, which is currently being
licensed by the Company from the holder of the applicable patent. Under
the revised terms of this license, the Company has a non-exclusive right
to manufacture and distribute ventfree gas logs in the United States and
Mexico in conjunction with a prefabricated fireplace unit or other burn
chamber, and also the right to produce and sell ventfree gas logs
independently of fireplace units. Other companies have introduced
products which compete with the Company's ventfree log sets. There can
be no assurance that the holder of the patent will not license such non-
exclusive rights to additional parties, thereby increasing the
competition for the Company's ventfree gas logs.
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Inventories and Payment Terms
As a general rule, the Company's customers are not permitted to return
fireplaces nor are they granted extended payment terms on any of these
products. As a result, the Company's working capital needs are less
than would be the case if it carried significant amounts of inventory,
accepted returns of merchandise or granted extended payment terms.
Generally, receivables are due within 30 days.
Patents and Trademarks
The Company owns a variety of patents, trademarks and trade names. The
consumer products manufactured by the Company are sold primarily under
the trademark or trade names of Temco(R), Amberlight(R), Temco American
DreamTM and Firetech 2000(R). The Company believes that its trademarks
and trade names as a whole have significant value. Some of the patents
owned are relatively new and give the Company some unique product
features. However, the Company does not consider any one or group of
its patents, trademarks or trade names or any licenses granted to or by
it to be material to its business as a whole, except for the patent
license (the "Patent License") relating to its ventfree fireplace
products and direct vent fireplaces. The Patent License is scheduled to
expire on March 31, 2002 and may be terminated earlier in the event of
certain defaults by the Company. Unless the Company negotiates an
extension to this license agreement, it will lose the right to
manufacture ventfree gas logs of the covered design on that date.
Seasonality
A majority of the end-users of the Company's products are
contractors and others engaged in the construction and remodeling
markets, which tend to be most active in the summer and fall months.
Since users of the Company's products and others engaged in this
industry do not generally maintain significant inventories of building
materials or component parts of structures, such as zero clearance
fireplace units, the Company's sales are affected by this seasonality.
In addition, the Company operates in the durable goods sector of the
building products industry, which is cyclical in nature and can be
adversely affected by decreases in available consumer credit, increases
in interest rates, declines in consumer confidence or other adverse
developments in general economic conditions.
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Backlog
The table set forth below gives certain information with respect to the
approximate backlog of the Company.
August 31,
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1999 2000
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Backlog orders $1,357,000 $440,000
As of August 31, 2000, the amount of backlog of orders shown above is
believed to be firm and the orders are expected to be filled during
fiscal year 2001. The Company does not consider backlog amounts to be
significant due to the nature of the customer's order patterns.
Government Regulations
The Company does not anticipate that compliance with federal, state and
local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
will have any material effect upon capital expenditures or earnings and
will not materially affect the competitive position of the Company and
its subsidiary.
Many state and local building, fire and safety codes limit or prohibit
the installation of heating sources that burn natural gas or liquefied
petroleum products, unless such sources are accompanied by a vent, flue
or chimney. Unlike other combustion based heat sources, the Company's
ventfree gas logs do not emit carbon monoxide. Therefore, ventilation
away from the heat source is not necessary to assure the safety of
occupants of the dwelling in which ventfree gas logs are installed. The
Company has been relatively successful to date in obtaining a waiver of
the application of, or amendment to, the building, fire and safety codes
in a variety of jurisdictions to permit the installation of its ventfree
gas logs. To the extent that the Company is unsuccessful in obtaining
such waivers of, or amendments to, the relevant statutes or regulations
in any of the major housing markets in the United States, sales of
ventfree gas products may be adversely affected.
Employees
As of August 31, 2000, the Company employed 310 persons (including
employees of its wholly-owned subsidiary) of whom 73 were salaried and
237 were hourly employees.
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ITEM 2. PROPERTIES
Corporate Office
The executive offices of the Company are located at 5400 LBJ Freeway,
Suite 1375, Dallas, Texas 75240. Such offices consist of a small office
suite, which is leased under a five-year lease expiring on September 30,
2001. The current monthly base rental is $5,185.
Fireplace Products
The Company manufactures and assembles its fireplace products in its
facilities at Manchester, Tennessee; Perris, California; and Mexicali,
Baja California, Mexico. Management of the Company believes the
availability of two plants located in different geographic areas of the
United States allows it to ship products nationwide at a lower average
freight cost than many of its competitors operating out of a single
plant.
The Company's Manchester, Tennessee facility contains approximately
127,000 square feet and includes a main building of metal construction
and three adjacent smaller buildings, generally of metal construction.
The Manchester, Tennessee facility is leased by the Company from HUTCO,
a California partnership of which Mr. James E. Upfield (Chairman of the
Board of the Company) is a general partner. The original lease provided
for a twenty-five year term, expiring in 2014 with a monthly rental of
$13,020, subject to certain scheduled rental escalations based upon
increases in the consumer price index. During fiscal 1994, the Company
entered into a new lease agreement with HUTCO whereby HUTCO expanded the
Manchester, Tennessee facility by 30,000 square feet to a total of
approximately 157,000 square feet. The monthly rental beginning
January, 1995 increased to $21,500 and is subject to certain scheduled
rent escalations based upon increases in the consumer price index. The
new lease provides for a twenty-five year term, expiring in 2020. In
the opinion of the management of the Company, the leases from HUTCO were
consummated on terms and conditions as favorable to the Company as terms
and conditions obtainable from non-affiliated parties.
The Company's manufacturing facility in Perris, California is located on
ten acres of land and contains approximately 78,000 square feet. The
facility is leased by the Company under a long-term lease expiring
September 30, 2008. The monthly rental rate for this facility is
$6,368.
During 2000, the Company completed the expansion of the facility in
Mexicali, Mexico from 35,000 square feet to 49,000 square feet to
accommodate expanding operations in the Mexico plant. The lease for the
facility provides for basic monthly rental of $17,475 (U.S.) and expires
in April 2005. This facility manufactures fireplaces and component
parts for use by the Company's Manchester, Tennessee and Perris,
California plants.
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ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation that arises
through the normal course of business operations. As of the date of this
report, however, the Company is not a party to any litigation that we
believe could reasonably be expected to have a material adverse effect
on our business or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The following table summarizes the high and low sales prices of the
common stock provided to the Company by the Nasdaq Stock Market.
Price (1)
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High Low
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FISCAL 1999
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September-November $3.81 $2.75
December-February 3.50 2.56
March-May 3.19 2.38
June-August 2.63 2.25
FISCAL 2000
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September-November $2.34 $1.38
December-February 1.75 1.38
March-May 1.56 1.06
June-August 1.19 0.59
(1) The prices shown represent quotations between dealers and do not
include mark-ups, mark-downs or commissions, and may not represent
actual transactions.
The number of shareholders of record of the Company as of November 14,
2000 was approximately 640. The only stock of the Company outstanding
is common stock par value $0.20 per share.
No cash dividends were declared or paid during fiscal 1999 or 2000. The
Company currently intends to reinvest its earnings for use in its
business and to finance future growth. Accordingly, the Company does
not anticipate paying dividends in the foreseeable future.
Effective February 1, 2000, the Company moved the listing of its common
stock from the Nasdaq National Market to the Nasdaq SmallCap Market.
The Company maintained its ticker symbol TMTX.
There can be no assurance that the Company will be able to continue to
maintain its listing on the Nasdaq SmallCap market. The inability to
list the Company's common stock on the Nasdaq SmallCap Market could
adversely affect the ability or willingness of investors to purchase the
Company's common stock which, in turn, would likely severely affect the
market liquidity of the Company's securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five fiscal
years ended August 31, 2000 is derived from the audited consolidated
financial statements of the Company. The selected consolidated
financial data presented below should be read in conjunction with the
consolidated financial statements of the Company, together with the
Notes to consolidated financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in the Company's Form 10-K for the year ended August 31, 2000.
Year Ended August 31,
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2000 1999 1998 1997 1996
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(in thousands, except share amounts)
Selected Statement of Operations
Data:
Net sales $ 20,685 $ 24,829 $26,162 $30,198 $ 33,110
Net loss from continuing operations (6,064) (4,137) (1,635) (1,245) (367)
Net (loss) income (6,064) 1,269 507 (201) 542
Basic loss per common share from
continuing operations (1) (1.76) (1.19) (0.47) (0.36) (0.11)
Basic net income (loss) per common
share (1) (1.76) 0.37 0.15 (0.06) 0.16
Diluted net income (loss) per common
and common equivalent share (1) (1.76) 0.36 0.14 (0.06) 0.15
Basic weighted average common shares
outstanding (1) 3,444,641 3,466,975 3,477,141 3,474,155 3,465,739
Diluted weighted average common and
common equivalent shares
outstanding (1) 3,444,641 3,511,135 3,531,414 3,474,155 3,531,631
August 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ---------- --------- ----------
Selected Balance Sheet Data:
Total assets $16,541 $23,700(2) $22,547(2) $23,233(2) $28,010(2)
Long-term debt, excluding current 1,937 1,984 2,246 2,244 2,218
maturities (3)
Stockholders' equity (4) 11,390 17,454 16,288 15,781 15,970
___________________________
(1) All per share and weighted common and common equivalent shares
outstanding have been restated to reflect the adoption of SFAS No.
128.
(2) Includes assets related to discontinued operations.
(3) Includes capitalized lease obligations to related parties and
obligations of discontinued operations.
(4) The Company has not declared or paid cash dividends during the
relevant periods.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with
the audited consolidated financial statements and related notes of the
Company included elsewhere in this report. This Management's Discussion
and Analysis of Financial Condition and Results of Operations and other
parts of this Annual Report on Form 10-K contain forward-looking
statements that involve risks and uncertainties. Among the risks and
uncertainties to which the Company is subject are the risks inherent in
the cyclical and unpredictable nature of the housing and home products
business generally, fluctuations in interest rates, geographic
concentration of the Company's primary market, the fact that the Company
has experienced fluctuations in revenues and operating results, and the
highly competitive nature of the industry in which the Company competes,
together with each of those other factors set forth in the Company's
filings made with the Securities and Exchange Commission. As a result,
the actual results realized by the Company could differ materially from
the results discussed in the forward-looking statements made herein.
Words or phrases such as "will," "anticipate," "expect," "believe,"
"intend," "estimate," "project," "plan" or similar expressions are
intended to identify forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements made in
this Annual Report on Form 10-K.
The Company is a producer of metal fireplace products used in the
residential and commercial building and fireplace products remodeling
markets. The Company manufactures and distributes its fireplace
products through Temco Fireplace Products, Inc., a wholly owned
subsidiary of the Company. The Company's fireplace products are sold
nationwide to a network of contractors, distributors and retailers.
In January 1999 the Company completed the sale of Texas Clay Industries,
an operating division of the Company that produced face brick products.
The results of operations and gain on the sale have been classified as
discontinued operations.
Fiscal Year 2000 Compared to Fiscal Year 1999
Net Sales
Net sales decreased approximately $4.1 million or 17% in fiscal 2000
compared to fiscal 1999. The reduction in sales was mainly due to an
overall reduction in the number of woodburning and vent-free fireplace
units delivered which was partially offset by an increase in the number
of direct-vent gas fireplaces delivered of approximately 13% over
fiscal 1999. Small decreases in the average unit selling prices across
all lines of fireplaces added to the reduction in net sales.
Gross Profit
Gross profit decreased approximately $1.2 million or 42% in fiscal 2000
compared to fiscal 1999. The decrease in gross profit was caused in
part, by the decrease in sales volume. In an effort to reduce
manufacturing costs, the Company relocated the production line for its
36 inch woodburning fireplaces from its California facility to its plant
in Mexico in September 1999. Later in fiscal 2000, all fireplace
manufacturing was relocated to either the Mexico facility or the
facility in Tennessee. The only production lines remaining in operation
in California are those relating to the fabrication of the chimney pipe,
pipe returns and concrete logs. The Company anticipates significant
manufacturing cost savings should be realized as a result of the
relocation of all fireplace manufacturing from the California facility.
The reduction in labor cost at the Perris, California facility is
expected to exceed the additional labor costs incurred at the Tennessee
and Mexico facilities. Additionally, the Company expects that increased
production at the Tennessee facility will absorb fixed overhead and
result in more efficient utilization of that facility, contributing to
an increase in gross profits for fiscal 2001.
Selling, General and Administrative Expenses
Selling expenses decreased approximately 14% or approximately $546,000 in
fiscal 2000 compared to fiscal 1999. The decrease was mainly due to
decreases in printing and video expenses, advertising, sales volume
rebates and expenses related to customer satisfaction.
General and administrative expenses decreased approximately 12% or
approximately $595,000 in fiscal 2000 compared to fiscal 1999. A
reduction in personnel at the California facility and the Company's
corporate office decreased salaries and related benefits expenses during
the current year. Other significant decreases were recorded in legal and
professional expenses as well as group health insurance costs. During
the current year, the Company reduced the amount of its contribution to
the employee 401(k) Savings Plan in an effort to reduce expenses. In
addition, the Company terminated its Select Management Employee Security
Plan. Upon termination of the plan,
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each participant, excluding the Chairman of the Board of Directors,
received a one-time payment of approximately 120% of their annual salary
which was partially funded with the cash surrender values of policies
covering the participants. The Company recorded a net expense of
approximately $260,000 in fiscal 2000 in connection with the termination
of the Select Management Employee Security Plan.
Interest Expense
Net interest expense increased approximately $30,000 or 12% in fiscal
2000 compared to fiscal 1999. The net increase was caused by a reduction
in the amount of interest income earned through the company's investment
in cash funds as a result of utilizing invested cash funds in operations.
Income is netted with expense because the income amount is not
significant.
Other Income
Other income for both fiscal 2000 and 1999 includes immaterial amounts
of miscellaneous income and expenses from various sources.
Income Taxes
During fiscal 2000, the Company did not recognize a credit for income
taxes. The Company, before considering the valuation allowance, has net
deferred tax assets resulting primarily from net operating losses.
Therefore, the Company has chosen to establish a valuation allowance to
reserve the entire amount until such time that reassessment indicates
that it is more likely than not that the benefits will be realized
primarily through future taxable income.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net Sales
Net sales decreased approximately $1.3 million or 5% in fiscal 1999
compared to fiscal 1998. The reduction in sales was the direct result
of a decrease in the quantity of wood burning fireplaces delivered in
fiscal 1999 as well as a small decrease in the average unit selling
prices that the Company received for its products due to the intense
competition within the industry.
Gross Profit
Gross profit decreased approximately $2.7 million or 49% in fiscal 1999
compared to fiscal 1998. The decrease in gross profit was caused, in
part, by the decrease in sales volume. Another factor contributing to
the decrease in gross profit was the lack of capacity utilization
resulting in the under absorption of fixed manufacturing overhead
expenses. In addition, manufacturing difficulties early in the fiscal
year in the production of the direct-vent fireplaces which, although
resolved during the year resulted a reduction of gross profit.
Management of the Company projects that the improvements made will
result in increased demand for the Company's affected direct-vent
fireplace products and the Company anticipates that sales of the direct-
vent fireplace products will dramatically increase during fiscal year
2000. The increase in sales volume of the direct-vent fireplace
products should contribute to an increase in gross profit.
In September 1999, the Company relocated the production line for its 36
inch woodburning fireplaces from its California facility to the recently
expanded Mexico plant. Management of the Company anticipates that this
action will reduce labor and overhead expenses in future periods.
Selling, General and Administrative Expenses
Selling expenses increased approximately 8% in fiscal 1999 compared to
fiscal 1998. The increase was mainly due to increases in salaries and
related benefits costs, together with and increased sales volume rebates
to home center retailers.
General and administrative expenses increased approximately 16% in
fiscal 1999 compared to fiscal 1998. The increase resulted principally
from increases in professional expenses, salaries and benefits costs.
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Interest Expense
Net interest expense decreased $193,000 or approximately 43% in fiscal
1999 compared to fiscal 1998. The decrease in the net interest expense
was the result of the decrease in the average indebtedness of the
Company throughout fiscal 1999. In addition, the Company has invested a
portion of the proceeds from the sale of its brick manufacturing
facility in cash funds and is earning interest on a daily basis.
Other Income
Other income for both fiscal 1999 and 1998 includes immaterial amounts
of miscellaneous income and expenses from various sources.
Income Taxes
The benefit for income taxes, both current and deferred, increased from
a benefit of $836,000 in fiscal 1998 to a benefit of $1,840,000 in
fiscal 1999 due to diminished operating results. In fiscal 1999, the
net income tax benefit consists of $1,987,000 in federal tax benefit and
$147,000 in state tax expense.
Liquidity and Capital Resources
Net cash used in operating activities was $2,259,000 and $6,781,000 in
fiscal 2000 and 1999, respectively. Cash provided by operating
activities was $1,207,000 in fiscal 1998. Working capital decreased
$3,796,000 in fiscal 2000 due mainly to decreases in cash, accounts
receivable and inventories resulting principally from the decrease in
net sales. Working capital increased $1,592,000 in fiscal 1999 due to
the cash received from the sale of Texas Clay Industries.
Capital expenditures for fireplace products totaled $758,000, $1,036,000
and $924,000 in fiscal 2000, 1999 and 1998, respectively. The majority
of expenditures in each of the years was for tooling, replacement items
and major repairs to manufacturing equipment. In fiscal years 2000 and
1999, capital expenditures were primarily made using cash proceeds from
the sale of Texas Clay Industries.
In September 2000, the Company entered into a three-year credit
agreement with Frost Capital Group whereby the Company may borrow a
maximum of $4,000,000 under a revolving credit facility of which
less than 25% has been utilized since inception. The amount
available under the facility is subject to limitations based on
specified percentages of the Company's eligible outstanding receivables
and inventory. The outstanding principal bears interest at an annual
rate of 1.25% above the specified bank's prime commercial interest rate.
Interest is payable monthly and is added to the outstanding loan
balance. The new revolving credit facility does not require the
maintenance of any financial ratios. The new credit facility is secured
by the assets of the Company and its subsidiary, Temco Fireplace
Products, Inc.
The Company believes that cash flow from operations, together with funds
available from the revolving credit facility should provide the Company
with adequate funds to meet its working capital requirements as well as
requirements for capital expenditures for at least the next twelve
months. However, to the extent the Company experiences operating losses
in future periods that cause the Company to require capital in excess of
the borrowing capacity of its existing revolving credit facility, it may
be required to seek additional borrowing capacity under its existing
revolving credit facility or additional sources of capital. Sources of
additional capital may include public and private equity and debt
financings, sales of nonstrategic assets and other financing
arrangements. No assurances can be made that the Company will be able
to obtain sufficient capital in the future.
Earnings Per Share
The Company's Board of Director's approved the purchase of up to $1.0
million of the Company's common stock on the open market in fiscal 1999.
The stock purchase program was initiated to indicate management's
commitment to increasing shareholder value and their continued
confidence in the strength of the Company. The Company was successful
in purchasing 40,000 shares for $112,000 during the time allotted for
the purchase. The reduction in the number of shares outstanding had no
significant impact on the calculation of earnings per share in fiscal
2000 or fiscal 1999.
Discontinued Operations
In the second quarter of fiscal 1999, the Company sold Texas Clay
Industries, a division that produced face brick products. Proceeds from
the sale were approximately $12.5 million and the pre-tax gain recorded
as a result of the sale was approximately $7.4 million. The proceeds
were used to pay down indebtedness, purchase equipment and finance
operations.
-11-
Effects of Inflation
The Company believes that the effects of inflation on its operations
have not been material during the past three fiscal years. However,
inflation could adversely affect the Company if inflation results in
higher interest rates or a substantial weakening in economic conditions
that could adversely affect the new housing market.
Year 2000 Issue
The Company is not aware of any difficulties encountered relating to the
Year 2000 issue, either internal or external, that had any effect on the
Company's operations during fiscal 2000.
Management is of the opinion that all significant Year 2000 issues were
identified and resolved and does not anticipate any difficulties related
to the Year 2000 issue to be encountered in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in market risk sensitive instruments and
does not purchase hedging instruments or "other than trading"
instruments that are likely to expose the Company to market risk,
whether interest rate, foreign currency exchange, commodity price or
equity price risk. The Company has not purchased options or entered
into swaps or forward or futures contracts. The Company's primary
market risk exposure is that of interest rate risk on borrowings that
the Company may have under some future credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this
report
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING
AND FINANCIAL
DISCLOSURES
Not applicable.
-12-
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) DIRECTORS OF THE COMPANY
The names of the directors and information about them, as furnished by
the directors themselves, are set forth below:
Positions and Officers with Company,
First Became a Business Experience During Past
Name Age Director in Five Years and Other Directorships
- ---------------- ---- --------------- ------------------------------------
James E. Upfield 80 1969 Chairman of the Board of the Company
for more than the past five years;
also Chairman of the Board of Temco
Fireplace Products, Inc., a wholly-
owned subsidiary of the Company,
serves as a director of Magnum
Hunter Resources which is engaged in
the sale of oil, gas and oilfield
services.
E. R. Buford 65 1973 President of the Company for more
than five years and was elected
Chief Executive Officer of the
Company in February, 1986; President
and a director of Temco Fireplace
Products, Inc., a wholly-owned
subsidiary of the Company, for more
than the past five years.
Joseph V. 80 1979 Retired as Chairman and Chief
Mariner, Jr. Executive Officer of Hydro-Metals,
Inc., when it was acquired by
Wallace Murray Corporation, a
manufacturer of plumbing ware and
cutting tools; serves as a director
for Peerless Mfg. Co., a
manufacturer of separators and
filters used for removing liquids
and solids from gases and air; the
Dyson-Kissner-Moran Corporation, a
New York based privately owned
investment company; and Renters
Choice, Inc., the largest operator
in the U.S. rent-to-own industry,
currently operating over 2,000
company owned stores.
Larry J. Parsons 71 1989 Retired in 1988 as partner of Ernst
& Whinney (now known as Ernst &
Young LLP), an international public
accounting firm. Mr. Parsons was a
partner for more than five years
before his retirement and holds no
other directorships.
Scott K. Upfield 41 1992 President, Treasurer and a director
of Insurance Technologies
Corporation, a company principally
engaged in developing and marketing
software to the insurance industry
for more than the past five years.
Richard W. Griner 62 1995 Director, President and Chief
Operating Officer of The Hart Group,
a privately owned company which
supplies managerial services to
privately owned Rmax, Inc., a
manufacturer of rigid foam roofing
and sheathing insulation for more
than the past five years; director
and President of HC Industries, Inc.
and of HC Industries NV., Inc.,
subsidiaries of Rmax; and a former
director of Axon, Inc., a plumbing
and heating service company. Mr.
Griner is also a director and
President of Rmax.
Each of the above named nominees is a member of the present Board of
Directors and was elected to such office at the Annual Meeting of
Stockholders held March 9, 2000. There are no family relationships
among any of the directors or among any of the directors and any officer
of the Company except Messrs. James E. Upfield and Scott K. Upfield who
are father and son.
-13-
(b) EXECUTIVE OFFICERS OF THE COMPANY
Name Age Offices with Company
- ---- --- -------------------------------------
James E. Upfield 80 Chairman of the Board and a director
E. R. Buford 65 President, Chief Executive Officer and
a director
R. L. DeLozier 60 Secretary and Treasurer
James E. Upfield and E. R. Buford have served in their respective
capacity for more than the past five years. R. L. DeLozier was
appointed on May 15, 2000 to serve the unexpired term of R. N. Stivers
who retired on April 30, 2000. For more than the past five years, R. L.
DeLozier was Manager of Corporate Accounting. There are no family
relationships between any of the executive officers, nor any arrangement
of understanding between any officer and any other person pursuant to
which the officer was selected. Officers are appointed annually by the
Board of Directors immediately following the annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain disclosure of all compensation
awarded to, earned by or paid to the chief executive officer of the
Company and to each of the Company's four most highly compensated
executive officers (other than the chief executive officer) whose total
salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
--------------------------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Fiscal Salary Bonus sation Awards SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- --------------------------------------------------------------------------------------------------
E. R. Buford 1998 225,000 -0- N/A -0- -0- -0- N/A
Chief 1999 225,000 -0- N/A -0- -0- -0- N/A
Executive 2000 201,500(1) -0- N/A -0- -0- -0- 220,000(3)
Officer and
President
(1) Salary reduced by 25% on 4/1/00 in conjunction with Company's cost reduction effort.
- --------------------------------------------------------------------------------------------------
J. E. Upfield 1998 150,000 -0- N/A -0- -0- -0- N/A
Chairman of 1999 150,000 -0- N/A -0- -0- -0- N/A
the Board 2000 112,500(2) -0- N/A -0- -0- -0- N/A
(2) Salary reduced by 33% on 4/1/00 and 100% on 6/30/00.
- --------------------------------------------------------------------------------------------------
R.L. DeLozier 2000 107,500 -0- N/A -0- -0- -0- 129,000(3)
Secretary/
Treasurer
- --------------------------------------------------------------------------------------------------
(3) Amount received upon termination of the Company's Select Management
Employee Security Plan. See "Certain Relationships and Related
Transactions."
Other annual compensation did not exceed the lesser of either $50,000 or 10% of
total salary as disclosed in the summary compensation table.
Mr. R. N. Stivers, who previously served as our Chief Financial Officer and Vice
President-Finance, retired on April 30, 2000. Mr. Stivers received total
compensation in fiscal year 1999 of $118,100.
-14-
Employment Contract Agreements
At the March 3, 2000 meeting, the Board of Directors elected not to
extend the employment contracts of Mr. E. R. Buford and Mr. R. N.
Stivers. Mr. Stivers' contract would have terminated upon his
retirement in April 2000 without any action from the Board. Under
terms of the agreements Mr. E. R. Buford received an annual salary
of at least $201,300, Mr. R. N. Stivers received a base salary of
$105,000 and each was eligible to participate in the regular
employee benefit programs established by the Company. The Board of
Directors determined to reduce Mr. E. R. Buford's salary by 25% to
$201,500 in conjunction with the Company's cost reduction efforts.
Select Management Employee Security Plan
At a special meeting held on February 1, 2000, the Company's Board
of Directors voted to terminate the Temtex Select Management
Employee's Security Plan (the "Plan"). At the date of termination
of the plan there were eight employees participating under the
Plan. Benefits under the plan included an annual payment of
approximately 50% of the participant's annual salary at the time of
retirement for a period of ten years. Benefit payments are
provided by individual life insurance policies that are funded by
the Company. With the exception of Mr. James E. Upfield, Chairman
of the Board, all participants were offered the right to receive
either (i) a cash payment equal to 120% of their annual salary, or
(ii) the underlying life insurance policy purchased by the Company
under the Plan to fund the participant's benefit, together with
cash, if any, equal to the difference between the cash value of
such policy and 120% of their annual salary. The Company recorded
a net expense of approximately $260,000 in connection with the
termination. In addition, each participant was granted an option
to purchase an aggregate of 10,000 shares of the Company's common
stock at the fair market value of the common stock on the date of
the grant.
1990 Stock Option Plan for Key Employees
The 1990 Stock Plan for Key Employees of Temtex Industries, Inc.
(the "1990 Plan") expired, as provided in the 1990 Plan, on
December 31, 1999. At August 31, 2000 there was options to
acquire 125,000 shares of common stock that remain outstanding
under the terms of the 1990 Plan.
1999 Omnibus Securities Plan
In October 1999 and March 2000, respectively, the Board of
Directors and shareholders of the Company approved the adoption of
the 1999 Omnibus Securities Plan (the "1999 Plan"). The 1999 Plan
permits the discretionary granting of stock options, restricted and
unrestricted stock grants, performance stock awards, dividend
equivalent rights and stock appreciation rights to plan
participants. The 1999 Plan permits the Company to grant awards
exercisable for up to 175,000 shares of common stock to directors
(including outside directors), officers, employees and certain
consultants. Awards for 91,000 shares of stock have been granted
under the 1999 Plan.
-15-
Option Grants During 2000 Fiscal Year
The following table specifies the grants of stock options made
during the last completed fiscal year to each of the Company's
executive officers named in the Summary Compensation Table:
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
--------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options/ Annual Rates of Stock
Securities SARS Price Appreciation
Underlying Granted to Exercise For Option Term (1)
Options/ Employees or Base -----------------------
SARS in Fiscal Price Expiration 5% 10%
Name Granted Year ($/Sh) Date ($) ($)
- ------------------------------------------------------------------------------------------------
E. R. Buford 10,000 14 1.57 2/1/10 25,574 40,721
J. E. Upfield -0- -0- -0- -0- -0- -0-
R. L. DeLozier 10,000 14 1.57 2/1/10 25,574 40,721
(1) Amounts represent hypothetical gains that could be achieved for
the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date. The
gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with
the exercise of the option or the sale of the underlying shares.
The actual gains, if any, on the exercise of the stock options
will depend on the future performance of the Company's common
stock, and the date on which the options are exercised.
The following table includes the number of shares received upon
exercise, or if no shares were received, the number of securities
with respect to which the options were exercised, the aggregate
dollar value realized upon exercise and the total value of
unexercised options held at the end of the last completed fiscal
year for each of the Company's executive officers named in the
Summary Compensation Table:
Aggregated Option/SAR Exercises in Last Fiscal Year
---------------------------------------------------
and FY-End Option/SAR Values
----------------------------
Value of
Number of Unexercised
Securities Underlying In-the-Money
Unexercised Options/ Options/SARs
SARs at FY-End (#) at FY-End ($)
Shares
Acquired on Value
Name Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
------------------------------------------------------------------------------
E. R. Buford -0- -0- Exercisable 50,000 -0-(1)
Exercisable 20,000 -0-(1)
Unexercisable 10,000 -0-(1)
J. E. Upfield -0- -0- -0- -0-
R. L. DeLozier -0- -0- Unexercisable 10,000 -0-(1)
(1) The Company's stock price at August 31, 2000 was below the
option price.
-16-
Stock Option Plan for Outside Directors
In 1990, the Company adopted the Outside Director Stock Option
Plan (the "Outsider Director Plan"). The Outside Director Plan
expired on December 31, 1999 as provided by its terms. At the
date of termination, December 31, 1999, there were outstanding
options under The Outside Director Plan for the purchase of an
aggregate of 21,000 shares of the Company's common stock that
terminated. In fiscal year 2000, stock options were granted to
outside directors under the 1999 plan, as permitted by the 1999
Plan.
The following table shows stock options granted and presently
exercisable to outside directors as of August 31, 2000:
Options
Granted and Value of Unexercised
Presently Option In-The-Money Options
Name of Director Exercisable Price At Fiscal Year End ($)
---------------------- ----------- ------- ------------------------
Joseph V. Mariner, Jr. 6,500 $1.82 -0-(1)
Larry J. Parsons 6,500 $1.82 -0-(1)
Scott K. Upfield 4,000 $1.82 -0-(1)
Richard W. Griner 4,000 $1.82 -0-(1)
(1) The Company's stock price at August 31, 2000 was below
the option price.
Directors' Remuneration
Those directors who are salaried employees of the Company receive
no additional compensation for their services as directors or as
members of committees of the Board. Cash compensation currently
payable to the other directors for services in that capacity
consists of a retainer of $2,500 per year and a fee of $750 (in
addition to travel expenses) for each day of each meeting of the
Board of Directors attended. No additional retainers are paid
for serving on a committee; however, if one or more committee
meetings are held on a day other than one on which a Board
meeting is held, committee members are paid a fee of $750 (in
addition to travel expenses) for each day of such meeting or
meetings.
Directors who are not regular salaried officers or employees who
render services to the Company in a capacity or capacities other
than that of a director (for example, as consultants or
attorneys) may be compensated for such other services, and such
compensation for other services shall not, except insofar as may
be specified by the Company in particular cases, affect the cash
compensation payable to such directors in their capacities as
directors and members of committees of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
James E. Upfield was, during the fiscal year, an officer of the
Company and a member of the Compensation Committee of the Board of
Directors. Mr. Upfield has engaged in certain transactions with
the Company described under the heading "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors consists of
Mr. Richard W. Griner (Chairman), Mr. Larry J Parsons, Mr. James E.
Upfield, Mr. Scott K. Upfield and Mr. Joseph V. Mariner, Jr. The
Compensation Committee's primary function is to review the
compensation awarded to the Company's Chief Executive and Chief
Financial Officers and to approve the determinations of
compensation to be paid to certain other senior executives of the
-17-
Company. Salaries are reviewed at regular intervals,
approximately annually, depending on job classification and
competitive market levels.
In determining executive compensation, the Compensation Committee
reviews the performance of the specific executive, the operating
performance of the Company, the compensation for executives of
companies, which are comparable to the Company and the performance
of the Company's Common Stock. Although the Compensation Committee
does not utilize any formal mathematical formulae or objective
thresholds, particular emphasis is given to the operating results
of the Company. The Compensation Committee believes that specific
formulae restrict flexibility and are too rigid at this stage of
the Company's development.
The Compensation Committee also believes that in order for the
Company to succeed, it must attract and retain qualified executives
who can not only perform satisfactorily on an individual basis but
who can also retain and manage a quality staff of other executive
officers and key employees. Thus, in addition to applying the
criteria generally applicable to all executive officers, in
determining the compensation of the Chief Executive Officer, the
Compensation Committee may also be influenced to a significant
extent by the overall performance of the Company's other executives
and key employees.
In addition to the Compensation Committee's subjective
determination of the factors noted above, the committee has access
to, and from time to time has reviewed reports of, independent
financial consultants who assimilate and evaluate the compensation
of executive officers employed by companies which are generally
comparable to the Company. During this year's review, the
Compensation Committee elected not to consider such a report. The
Compensation Committee seeks to establish base salaries that
generally approximate the median range for comparable companies.
After a review of the factors discussed above, the Compensation
Committee determines whether a particular executive should receive
an increase in compensation, an incentive bonus under the Company's
Executive Bonus Plan, a stock option or stock grant under the
Company's 1999 Omnibus Securities Plan, or any other compensation
benefits. At their March 9, 2000 meeting, the Compensation
Committee recommended salary reductions in view of the Company's
financial condition. Mr. Upfield offered to take no salary after
June 30, 2000. Mr. Buford agreed to a salary reduction of
approximately 25% as of May 1, 2000.
The Compensation Committee has reviewed the applicability of
Section 162(m) of the Code, which disallows a tax deduction for
compensation to an executive officer in excess of $1.0 million per
year. The Compensation Committee does not anticipate that
compensation subject to this threshold will be paid to any
executive officer of the Company in the foreseeable future. The
committee intends to periodically review the potential consequences
of Section 162(m) and may in the future structure the performance-
based portion of its executive officer compensation to comply with
certain exemptions provided in Section 162(m).
Mr. Richard W. Griner
Mr. James E. Upfield
Mr. Scott K. Upfield
Mr. Larry J. Parsons
Mr. Joseph V. Mariner, Jr.
-18-
Performance Graph
The following table compares the performance of the Company's
Common Stock with certain comparable indices:
1995 1996 1997 1998 1999 2000
------- ---------- -------- -------- --------- ---------
TEMTEX INDUSTRIES, INC. $100.00 $ 77.40 $ 72.28 $ 66.74 $ 47.97 $ 21.32
Dow Jones Total Market $100.00 $117.81 $162.81 $169.16 $235.45 $283.17
Dow Jones Furnishings &
Appliances $100.00 $115.36 $153.32 $145.55 $156.00 $137.23
-19-
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) The Company knows of no person owning beneficially more
than 5% of the Company's Common Stock, except for the following
persons who owned, as of November 14, 2000, the number of shares
of Common Stock of the Company set forth opposite his name in the
table below:
Amount and
Nature of
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownership (1) of Class
-------------- ---------------------- ------------- ---------
Common Stock James E. Upfield
5400 LBJ Freeway 1,341,940(2) 39.0%
Suite 1375
Dallas, TX 75240
Common Stock Dennis Chase 334,850 9.7%
Box 248
North Lake, WI 53064
Common Stock Dimensional Fund 192,200 5.6%
Advisors, Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
___________________
(1) The nature of the beneficial ownership of the shares is
sole voting and investment power unless indicated
otherwise.
(2) Includes 24,750 shares of Common Stock held of record by
HUTCO, a partnership of which Mr. Upfield is general
partner. Mr. James E. Upfield has shared voting and
investment power with respect to such shares of Common
Stock.
-20-
(b) The following table sets forth the beneficial ownership
(as defined by the rules of the Securities and Exchange
Commission) of Common Stock of the Company by the incumbent
directors, nominees for director and all directors and officers
as a group, together with the percentage of the outstanding
shares which such ownership represents. Information is stated as
of November 14, 2000.
Amount and Percent
Title of Name or Indentity Nature of Bene- of
Class of Group ficial Ownership (1) Class
---------- ---------------------- -------------------- -------
Common Stock James E. Upfield 1,341,940 (2) 39.0%
Common Stock E. R. Buford 119,062 (3) 3.5%
Common Stock Joseph V. Mariner, Jr. 6,725 (4) *
Common Stock Larry J. Parsons 7,000 (4) *
Common Stock Scott K. Upfield 31,500 (5) 1.0%
Common Stock Richard W. Griner 4,500 (5) *
--------- -----
1,510,727 (6) 43.9%
_____________
* Denotes less than 1%.
(1) The nature of the beneficial ownership of the shares by the
respective persons or group is sole voting and investment power
unless otherwise indicated.
(2) Includes 24,750 shares of common stock over which Mr. James E.
Upfield has shared voting and investment power owned by HUTCO, a
partnership of which Mr. James E. Upfield is a general partner.
(3) Includes 70,000 share of common stock exercisable under the
1990 Plan.
(4) Includes 6,500 shares of common stock exerciseable under the
1999 Omnibus Plan.
(5) Includes 4,000 shares of common stock exercisable under the
1999 Omnibus Plan.
(6) Includes 70,000 shares and 21,000 shares of common stock
issuable upon exercise of options granted under the 1990 Plan and
the 1999 Omnibus Plan, respectively.
-21-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
On December 21, 1976, the stockholders of the Company
approved a Share Repurchase Agreement (the "Agreement")
among the Company, Mr. James E. Upfield, the Chairman of
the Board of Directors (the "Chairman") and a trustee
under which the Company could be required to purchase a
specified number of shares of the Company's common stock
from the Chairman's estate (the "Estate") upon his death.
The purpose of the agreement was to provide an orderly
means for the Estate to raise funds to pay all estate
taxes, inheritance taxes, funeral expenses and
administrative expenses without necessitating the sale of
a large number of shares of the Company's common stock in
the over-the counter market, an event which, in the
opinion of the company, would have, primarily because of
the limited volume of trading in such shares, a
potentially serious adverse effect on the price of the
Company's common stock. The Company purchased a life
insurance policy on the life of the Chairman in the amount
of $500,000 to fund the Company's obligations under the
Agreement. Pursuant to the Agreement, upon termination of
the Agreement during the Chairman's lifetime, the Chairman
had the right to purchase any part or all of the life
insurance policy on his life at a purchase price equal to
cash surrender value, net of policy indebtedness, plus any
unearned premium thereon at the date of purchase.
On December 14, 1999, the Company and the Chairman
mutually agreed to terminate the agreement and the Chairman
declined to purchase the life insurance policy on his life.
At a special meeting held on February 1, 2000, the
Company's Board of Directors voted to terminate the
Company's Select Management Employee Security Plan. The
termination of the Select Management Employee Security
Plan is described under the caption "Executive
Compensation - Select Management Employee Security Plan."
Messrs. Buford and DeLozier received payments of $220,000
and $129,000, respectively, in conjunction with the
termination of the Select Management Employee Security
Plan.
The manufacturing plant and related real property in
Manchester, Tennessee is leased by TFPI from HUTCO, a
California partnership of which Mr. James E. Upfield is a
general partner. The Manchester facility, which was originally
subject to a five-year lease with an option to purchase between
TFPI and the former owner, was acquired by HUTCO upon the
assignment to it of TFPI's option to purchase following TFPI's
inability to secure financing upon acceptable terms. The lease
between TFPI and HUTCO was for a twenty-five year term
commencing November 15, 1989 and provided for monthly rental
payments of $13,020 (subject to certain scheduled rent
escalations based upon increases in the consumer price index).
During the 1994 fiscal year, the Company entered into a new
twenty-five year lease agreement with HUTCO. The new lease
agreement provides for a 30,000 square foot expansion to the
facility with monthly rental payments of $21,500 commencing
January 1, 1995. The new lease is subject to certain scheduled
rent escalations based upon increases in the consumer price
index.
In the opinion of management of the Company, the leases of the
TFPI manufacturing facility from HUTCO have been consummated on
terms and conditions as favorable to the Company as terms and
conditions obtainable from non-affiliated parties.
-22-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) and (2) The response to this
portion of Item 14 is submitted as a
separate section of this report.
(3) Listing of Exhibits: The response to this
portion is presented in Item (c).
(b) During the fourth quarter of the period covered by this
report, there were no reports filed on Form 8-K.
(c) Exhibits:
(3) Articles of Incorporation and
Bylaws.
3.1 Amended and Restated Certificate of
Incorporation. (3.1)*
3.2 Amended and Restated Bylaws. (3.2)*
(10) Material Contracts
10.10 1990 Stock Option Plan for Key
Employees of Temtex Industries,Inc.
and its susidiaries. (10.10)*
10.13 Lease Agreement between the
Registrant and Mr. John D.
Howard, a former Director of the
Registrant, dated October 1,
1973 (the "Howard Lease
Agreement"). (10.13) *
10.14 Second Amendment to the Howard
Lease Agreement dated August
22, 1983. (10.14) *
10.15 Lease Agreement between HUTCO
and the Registrant dated
September 7, 1989. (10.15) *
10.16 Lease Agreement between HUTCO
and the Registrant dated April
25, 1994. (10.16) *
10.26 Temtex Industries, Inc. 1999 Omnibus
Securities Plan. (10.26)*
10.27 Loan Agreement between the
Registrant, Temco Fireplace
Products, Inc. and The Frost National
Bank dated September 6,
2000 and related Revolving Credit
Note, Security Agreement of Registrant,
Security Agreement of Temco Fireplace
Products, Inc., subsidiary of Registrant,
Patent Collateral Security Agreement of
Temco Fireplace Products, Inc., subsidiary
of Registrant, Pledge and Security
Agreement of Temco Fireplace Products,
Inc., subsidiary of the Registrant, Pledge
and Security Agreement of Registrant and
Trademark Collateral Assignment and
Security Agreement of Temco Fireplace
Products, Inc., susidiary of Registrant. **
(21) Subsidiaries of the Registrant.
21.1 Subsidiaries of the Registrant.*
(23) Consents of Experts and Counsel
23.1 Consent of Independent Auditors.**
-23-
(27) Financial Data Schedule
27.1 Financial data schedule**
(d) Financial Statement Schedules-The response to
this portion of Item 14 is submitted as a separate
section of this report.
* Filed as the exhibit shown in parentheses to the Registrant's
Annual Report on Form 10-K for the fiscal year ended August
31, 1999 and incorporated by reference herein.
** Filed herewith.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TEMTEX INDUSTRIES, INC.
Date: 11/27/00 /s/ James E. Upfield
----------------------- --------------------------
James E. Upfield
Chairman of the Board of
Directors
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 Company and in the capacities and on the dates
indicated.
Signatures Titles Date
---------- ------ ----
/s/James E. Upfield Director, Chairman of the Board 11/27/00
- -------------------- --------
James E. Upfield
/s/E. R. Buford Director, President and Chief 11/27/00
- ------------------ Executive Officer --------
E. R. Buford
/s/R. L. DeLozier Secretary and Treasurer 11/27/00
- -------------------- --------
R. L. DeLozier
/s/Scott K. Upfield Director 11/27/00
- -------------------- --------
Scott K. Upfield
-25-
FORM 10-K-ITEM 8 AND ITEM 14(a) (1) and (2)
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Ernst & Young Independent Auditors
Consolidated balance sheets-August 31, 2000 and 1999
Consolidated statements of operations-Years ended August 31,
2000, 1999 and 1998
Consolidated statements of stockholders' equity-Years ended
August 31, 2000, 1999 and 1998
Consolidated statements of cash flows-Years ended August 2000,
1999 and 1998
Notes to consolidated financial statements-August 31, 2000
Financial statement schedules:
II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable,
and, therefore have been omitted.
Individual financial statements of the registrant have been omitted
as the registrant is primarily an operating company, and the
subsidiary included in the consolidated financial statement, filed,
in the aggregate, does not have minority equity interest and/or
indebtedness to any person other than the registrant in amounts
which together (excepting indebtedness incurred in the ordinary
course of business which is not overdue and matures within one year
from the date of its creation whether or not evidenced by
securities) exceed five percent of the total assets as shown by the
most recent year-end consolidated balance sheet.
Report of Independent Auditors
Board of Directors
Temtex Industries, Inc.
We have audited the accompanying consolidated balance sheets of
Temtex Industries, Inc. and subsidiaries as of August 31, 2000
and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended August 31, 2000. Our audits also included
the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Temtex Industries, Inc. and subsidiaries as
of August 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of three years in the
period ended August 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information
set therein.
/s/ Ernst & Young LLP
October 20, 2000
CONSOLIDATED BALANCE SHEETS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31,
--------------------------
2000 1999
---------- ----------
(in thousands except share
and per share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,021 $ 4,077
Accounts receivable, less
allowance for doubtful accounts:
2000--$319 and 1999--$267 2,847 3,648
Inventories 7,452 8,680
Prepaid expenses and other assets 180 254
Income taxes recoverable 484 --
Deferred taxes -- 169
--------- --------
TOTAL CURRENT ASSETS 11,984 16,828
DEFERRED TAXES -- 144
OTHER ASSETS 162 1,793
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 2,615 2,615
Machinery, equipment, furniture
and fixtures 18,432 17,859
Leasehold improvements 1,302 1,213
22,349 21,687
-------- --------
Less allowances for depreciation
and amortization 17,954 16,752
--------- --------
4,395 4,935
--------- --------
$ 16,541 $ 23,700
========= ========
-1-
August 31,
-------------------
2000 1999
--------- --------
(in thousands, except share
and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,565 $ 1,725
Accrued expenses 1,396 1,749
Income taxes payable 206 746
Current maturities of indebtedness
to related parties 15 13
Current maturities of long-term
obligations 32 29
--------- -------
TOTAL CURRENT LIABILITIES 3,214 4,262
INDEBTEDNESS TO RELATED PARTIES,
less current maturities 1,565 1,580
LONG-TERM OBLIGATIONS,
less current maturities 372 404
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock--$1 par value; 1,000,000
shares authorized, none issued -- --
Common stock--$.20 par value; 10,000,000
shares authorized, 5,286,125 shares issued 720 720
Additional capital 9,253 9,253
Retained earnings 1,856 7,920
-------- -------
11,829 17,893
Less:
Treasury stock:
At cost-153,696 shares 439 439
At no cost-1,687,788 shares -- --
-------- -------
11,390 17,454
-------- -------
$ 16,541 $23,700
======== =======
See notes to consolidated financial statements.
-2-
CONSOLIDATED STATEMENTS OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31,
--------------------------------
2000 1999 1998
------------ -------- ---------
(in thousands, except share
and per share data)
Net sales $20,685 $24,829 $26,162
Cost of goods sold 19,057 22,004 20,652
---------- ------- ---------
1,628 2,825 5,510
Costs and expenses:
Selling, general and administrative 7,401 8,542 7,610
Interest 283 253 422
Other expense (income) (58) 7 (56)
---------- -------- --------
7,626 8,802 7,976
LOSS FROM CONTINUING OPERATIONS ---------- -------- --------
BEFORE INCOME TAX (BENEFIT) AND
DISCONTINUED OPERATIONS (5,998) (5,977) (2,466)
State, federal and foreign income tax
(benefit): 66 (1,840) (831)
---------- -------- --------
LOSS FROM CONTINUING OPERATIONS (6,064) (4,137) (1,635)
GAIN FROM DISPOSAL AND OPERATING
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME
TAXES -- 5,406 2,142
---------- -------- --------
NET (LOSS) INCOME $ (6,064) $ 1,269 $ 507
========== ======== ========
Basic and diluted (loss) income per common
share:
Continuing operations--Basic and
diluted $ (1.76) $ (1.19) $ (0.47)
========== ======== ========
Net (loss) income
Basic $ (1.76) $ 0.37 $ 0.15
========== ======== ========
Diluted $ (1.76) $ 0.36 $ 0.14
========== ======== ========
Basic weighted average common shares
Outstanding 3,444,641 3,466,975 3,477,141
Diluted weighted average common and common
equivalent shares outstanding 3,444,641 3,511,135 3,531,414
See notes to consolidated financial statements.
-3-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Common Stock
Outstanding Cost of
------------------- Additional Retained Treasury
Shares Amount Capital Earnings Stock
--------- ------- ---------- --------- ----------
(Dollars in thousands)
BALANCE AT AUGUST 31, 1997 3,477,141 $ 718 $ 9,246 $ 6,144 $ 327
Net income 507
--------- ------- --------- --------- --------
BALANCE AT AUGUST 31, 1998 3,477,141 718 9,246 6,651 327
Exercise of stock options 7,500 2 7
Purchase of stock (40,000) 112
Net income 1,269
--------- ------- ---------- --------- --------
BALANCE AT AUGUST 31, 1999 3,444,641 720 9,253 7,920 439
Net loss (6,064)
--------- ------- ---------- --------- --------
BALANCE AT AUGUST 31, 2000 3,444,641 $ 720 $ 9,253 $ 1,856 $ 439
========= ======= ========== ========= ========
See notes to consolidated financial statements.
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31,
-------------------------------------
2000 1999 1998
--------- ---------- ----------
(in thousands)
OPERATING ACTIVITIES
Net (loss) income $ (6,064) $ 1,269 $ 507
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities
Depreciation, depletion and amortization 1,272 1,394 1,755
Discontinued operations:
Gain on sale, net of tax -- (4,670) --
Income from operations, net of tax -- (736) (2,142)
Deferred taxes 313 (63) 353
Loss (gain) on disposition of property, plant and
equipment 23 -- (11)
Provision for doubtful accounts 225 249 107
Changes in operating assets and liabilities:
Accounts receivable 576 62 310
Inventories 1,228 (931) (936)
Prepaid expenses and other assets 1,705 (1,473) (169)
Accounts payable and accrued expenses (513) 283 233
Income taxes payable/recoverable (1,024) 781 618
Net change of operating assets and liabilities
of discontinued operation -- (2,946) 582
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (2,259) (6,781) 1,207
INVESTING ACTIVITIES
Purchases of property, plant and equipment (758) (1,036) (924)
Purchases of property, plant and equipment,
discontinued operations -- (24) (313)
Proceeds from sale of discontinued operations -- 12,484 --
Proceeds from disposition of property, plant and
equipment 3 -- 1
Proceeds from disposition of property, plant and
equipment, discontinued operations -- -- 15
-------- -------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (755) 11,424 (1,221)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-
term obligations -- -- 141
Principal payments on revolving line of credit,
long-term obligations and
indebtedness to related parties (42) (759) (192)
Principal payments on long-term obligations,
discontinued operations -- (31) (110)
Proceeds from issuance of common stock -- 9 --
--
Purchase of treasury stock -- (112) --
--------- -------- ---------
NET CASH USED IN FINANCING ACTIVITIES (42) (893) (161)
--------- -------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,056) 3,750 (175)
Cash and cash equivalents at beginning of year 4,077 327 502
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,021 $ 4,077 $ 327
========= ======== =========
See notes to consolidated financial statements.
-5-
August 31, 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Organization: Temtex Industries, Inc. (the Company) is a major
producer of metal fireplace products. The Company manufactures its
fireplace products in facilities located in Manchester, Tennessee;
Perris, California; and Mexicali, Mexico. In January 1999, the
Company sold its face brick products manufacturing facility located
in Malakoff, Texas.
All products are sold through the Company's own sales force and third
party sales representatives to contractors, distributors and
retailers engaged in providing building products used in both new
residential and commercial construction as well as remodeling
projects.
At August 31, 2000, net assets of approximately $1,238,000 were located
at the Company's manufacturing facility in Mexico.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Use of Estimates: The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make certain
estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets, liabilities, revenues, and expenses
and the disclosure of gain and loss contingencies at the date of the
consolidated financial statements. Actual results could differ from
those estimates.
Inventories: Raw materials and supplies are stated at the lower of
cost, determined on the first-in, first-out method, or market. Work
in process and finished goods are stated at the lower of cost,
determined on the first-in, first-out method or market.
Property, Plant and Equipment: Property, plant and equipment are
carried at cost. Capitalized leases are carried at the present value
of the net fixed minimum lease commitments, as explained in Note F.
Depreciation on buildings and equipment is provided using principally
accelerated methods. Amortization of leasehold improvements and
assets under capitalized leases are computed using the straight-line
method. The estimated useful lives used in computing depreciation
and amortization are:
Years
--------------
Buildings and improvements 5-30
Machinery, equipment, furniture
and fixtures 3-15
Leasehold improvements Life of lease
Expenditures for maintenance and repairs are charged to operations;
betterments are capitalized.
Income Taxes: Income taxes have been provided using the liability
method.
-6-
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--Continued
Income Per Common Share: Basic income per common share is based upon
the weighted average number of shares of common stock outstanding
during the year. Diluted income per share is based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year unless the effect of the common stock
equivalents would be antidilutive. Common stock equivalents include
options granted to key employees and outside directors (see Note E).
The number of common stock equivalents was based on the number of
shares issuable on the exercise of options reduced by the number of
shares that are assumed to have been purchased at the average price
of the common stock during the year with the proceeds from the
exercise of the options.
Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk: The Company manufactures and sells
fireplace products to companies in the construction industry. The
Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral.
Receivables generally are due within 30 days. Credit losses
consistently have been within management's expectations.
Advertising Costs: The Company expenses advertising costs as they
are incurred. Advertising costs in 2000, 1999, and 1998 were
$242,000, $220,000, and $208,000, respectively.
Revenue Recognition: Revenue is recognized upon the shipment
of the Company's products to its customers.
NOTE B--INVENTORIES
Inventories are summarized below:
August 31
-----------------------------
2000 1999
--------- ---------
(in thousands)
Finished goods $ 2,992 $ 3,121
Work in process 619 856
Raw materials and supplies 3,841 4,703
-------- --------
$ 7,452 $ 8,680
======== ========
-7-
NOTE C--NOTES PAYABLE AND LONG--TERM OBLIGATIONS
In September 2000, the Company entered into a three-year credit
agreement with Frost Capital Group whereby the Company may borrow a
maximum of $4,000,000 under a revolving credit facility. The amount
available under the facility is subject to limitations based on
specified percentages of the Company's eligible outstanding
receivables and inventory. The outstanding principal bears interest
at an annual rate of 1.25% above the specified bank's prime
commercial interest rate. Interest is payable monthly and is added
to the outstanding loan balance. The new revolving credit facility
does not require the maintenance of any financial ratios.
Long-term obligations are summarized as follows:
August 31,
-----------------------
2000 1999
--------- --------
(in thousands)
Long-term obligations:
Capitalized lease obligations,
with interest at 9.0% to
15.5%--Note F $1,984 $2,026
Less current maturities 47 42
------ ------
$1,937 $1,984
====== ======
Annual maturities of long-term obligations for each of the five
succeeding fiscal years and thereafter are $47,000, $54,000, $61,000,
$69,000, $78,000, and $1,675,000.
The Company made interest payments in 2000, 1999 and 1998 of
$383,000, $534,000 and $433,000, respectively.
-8-
NOTE D--ACCRUED EXPENSES
Accrued expenses include the following:
August 31,
------------------------
2000 1999
------- ---------
(in thousands)
Employee compensation $ 333 $ 473
Taxes, other than taxes on income 139 114
Interest 7 --
Group health insurance 163 218
Legal and professional fees 266 332
Other 488 612
------- -------
$ 1,396 $ 1,749
======= =======
NOTE E--STOCK OPTIONS
In October 1999 and March 2000, respectively, the Board of Directors
and shareholders of the Company adopted the 1999 Omnibus Securities
Plan (the "1999 Omnibus Plan") to replace the 1990 Stock Plan for Key
Employees and the 1990 Stock Plan for outside directors of the
Company. The 1990 Plans expired on December 31, 1999. At August
31, 2000, options exercisable for 125,000 shares of common stock
remain outstanding under the 1990 Stock Plan for Key Employees. All
unexercised options outstanding under the 1990 Stock Plan for outside
directors expired on December 31, 1999.
The 1999 Omnibus Plan permits the discretionary granting of stock
options restricted and unrestricted stock grants; performance stock
awards, dividend equivalent rights and stock appreciation rights to
plan participants. The 1999 Plan permits the Company to grant awards
exercisable for up to 175,000 shares of common stock to directors,
officers, employees and certain consultants. At the time options are
granted, vesting dates are determined by the stock option committee
and specified on each individual award.
As of August 31, 2000, awards for 91,000 shares of stock have been
granted under the 1999 Omnibus plan.
The Company has elected to continue to follow the expense recognition
criteria in Accounting Principles Board Opinion No. 25 (APB25)
"Accounting for Stock Issued to Employees" however, pro forma
information regarding net income and earnings per share is required
by SFAS No. 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated at the
date of grant using the Black-Scholes method with the
following weighted average assumptions: risk-free interest rate of
6.36%, expected volatility of 37%, dividend yield of 0%, and a weighted
average expected life of the options of five years. The weighted
average fair value at the grant date was $0.65 per option.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized over the options vesting period. Proforma net
loss and basic and diluted loss per share for the year ended August
31, 2000, would be $6,101,000 and $1.77, respectively, if the Company
had accounted for its stock options under the fair value method set
forth in SFAS No. 123. No pro forma disclosures have been provided for
fiscal 1999 and 1998 as the Company did not grant any stock options
during either of those periods.
-9-
NOTE E-STOCK OPTIONS-Continued
The following table indicates the activity for each option plan:
Key Employee Plan Outside Director Plan 1999 Omnibus Plan
------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- -------- ---------- ---------- --------- --------
Options outstanding at
August 31, 1997 142,500 $3.03 21,000 $2.51 N/A
Options exercisable at
August 31, 1997 107,500 $2.41 21,000 $2.51
Granted -- -- --
Exercised -- -- -- --
--------- -------- -------- -------- --------
Options outstanding at
August 31, 1998 142,500 $3.03 21,000 $2.51 N/A
Options exercisable at
August 31, 1998 125,000 $2.77 21,000 $2.51
Granted -- -- --
Exercised 7,500 $1.19 -- --
--------- -------- -------- --------
Options outstanding at
August 31, 1999 135,000 $3.13 21,000 $2.51 N/A
Options exercisable at
August 31, 1999 135,000 $3.13 21,000 $2.51
Granted -- -- 91,000 $1.63
Exercised -- -- --
Expired 10,000 $4.94 21,000 $2.51 --
--------- -------- -------- -------- -------- --------
Options outstanding at
August 31, 2000 125,000 $2.99 -- 91,000 1.63
Options exercisable at
August 31, 2000 125,000 $2.99 N/A 21,000 1.82
Option prices range from $1.19 to $4.94 per share and expire between
2001 and 2010.
The weighted average remaining life of the options at August 31, 2000
is six years.
NOTE F--LEASE COMMITMENTS
Two leased plant facilities are accounted for as capitalized leases.
The leased properties were capitalized at the initial value of
$635,000. In 1995, the Company exercised its option to renew the lease
which increased the term of the lease by ten years and added to the
value of the lease. The leased properties have a combined net book
value of $261,000 and $294,000 at August 31, 2000 and 1999,
respectively.
A third manufacturing facility, accounted for as a capitalized lease,
is leased from a partnership which includes the Company's Chairman.
This facility was capitalized at the initial value of $976,000. During
1995, the facility was expanded, at the expense of the partnership, and
the original lease canceled. The new twenty-five year lease negotiated
by the Company has basically the same provisions as the original, with
an increase in the lease payments in consideration of the expense
incurred in the expansion. The facility has a net book value of
$1,097,000 and $1,163,000 at August 31, 2000 and 1999, respectively.
This lease obligation is classified as "Indebtedness to Related
Parties".
Other plant and office facilities are leased under operating lease
agreements, which expire at various dates through fiscal 2005. The
capitalized leases expire in fiscal 2009 and fiscal 2019.
-10-
NOTE F--LEASE COMMITMENTS--Continued
Future minimum payments, by year and in the aggregate, under capital
leases and noncancelable operating leases, consisted of the following
at August 31, 2000:
Capital Operating
Leases Leases
-------- ----------
(in thousands)
Fiscal Year:
2001 $ 364 $ 353
2002 364 250
2003 364 229
2004 364 220
2005 364 145
Thereafter 4,285 --
-------- -------
Total minimum lease payments 6,105 $ 1,197
=======
Amount representing interest 4,121
--------
Present value of net minimum
lease payments $ 1,984
========
Rental expense for operating leases included in continuing operations
was $391,000, $330,000 and $255,000 in 2000, 1999 and 1998,
respectively.
Interest expense paid to related parties was $270,000, $247,000 and
$249,000 in 2000, 1999 and 1998, respectively.
-11-
NOTE G--INCOME TAXES
Significant components of the state, federal and foreign provision
(benefit) for income taxes attributable to continuing operations are as
follows:
Year Ended August 31,
----------------------------------------
2000 1999 1998
--------- ---------- ----------
Current: (in thousands)
Federal $ (315) $ (1,850) $ (912)
State 2 74 21
Foreign 66 -- 35
------ --------- --------
Total current (247) (1,776) (856)
Deferred:
Federal 576 (137) 80
State (263) 73 (55)
------ --------- --------
Total deferred 313 (64) 25
------ --------- --------
Total income tax
expense/(benefit) $ 66 $ (1,840) $ (831)
====== ========= ========
The Company has state net operating loss carryforwards of approximately
$11,500,000 expiring in the years 2002 through 2015. The Company also
has a federal net operating loss carryforward of approximately
$3,100,000 which begins to expire in the year 2021.
A valuation allowance of approximately $2,500,000 has been recorded to
offset the federal and state net operating loss carryforwards since the
realization of these assets is uncertain.
The differences between the benefit for federal income taxes and the
expected income taxes computed using statutory income tax rates are as
follows:
Year Ended August 31,
---------------------------------------
2000 1999 1998
---------- --------- --------
(in thousands)
Federal income tax benefit
at statutory rate $ (2,039) $ (2,032) $ (839)
State income taxes, net of
federal tax benefit (174) (95) (35)
Change in valuation allowance 2,139 291 62
Other 140 (4) (19)
---------- -------- -------
Total income tax expense/
(benefit) $ 66 $ (1,840) $ (831)
========== ======== =======
-12-
NOTE G--INCOME TAXES--continued
Deferred income taxes are recognized using the liability method and
reflect the tax impact of temporary differences between the amount of
assets and liabilities for financial purposes and such amounts as
measured by tax laws and regulations. Significant components of the
Company's deferred tax assets and liabilities are as follows:
August 31,
-----------------------
2000 1999
---------- --------
(in thousands)
Deferred tax assets:
Accounts receivable allowance $ 110 $ 91
Capital lease obligation 264 263
Federl and state loss
carryforwards 1,582 353
Other 728 164
------- --------
Total deferred tax assets 2,684 871
Valuation allowance (2,492) (353)
------- --------
Net deferred tax assets 192 518
Deferred tax liabilities:
Property, plant and equipment (118) (119)
Other (74) (86)
------- --------
Total deferred tax
liabilities (192) (205)
------- --------
Net deferred tax assets $ -- $ 313
======= ========
The Company received federal or state income tax refunds in 2000 of
$5,000 and made federal and state income tax payments in 2000, 1999 and
1998 of $761,000, $92,000 and $76,000 respectively.
NOTE H--EMPLOYEE BENEFIT PLAN
During 1992, the Company adopted a defined contribution benefit plan
covering substantially all of its employees. The Company contribution
was $.25 for each $1.00 contributed by an employee (up to 4% of
eligible wages).
The plan was amended during 1997, which increases the Company
contribution to $.50 for each $1.00 contributed by an employee (up to
6% of eligible wages).
The plan was amended again during 2000 which reduces the Company
contribution to $0.25 for each $1.00 contributed by an employee (up to
6% of eligible wages).
The total expense for Company contributions was $82,000, $116,000 and
$158,000 in 2000, 1999 and 1998, respectively.
-13-
NOTE I--DISCONTINUED OPERATIONS
On January 5, 1999, the Company sold its Texas Clay Industries brick
manufacturing division for cash of approximately $12.5 million
resulting in a net after tax gain of approximately $4.7 million. The
financial statements classify Texas Clay Industries as a discontinued
operation and prior years have been restated to reflect same.
For business segment reporting purposes, Texas Clay Industries was
previously classified as face brick products.
The components of the Company's results from the discontinued operation
of Texas Clay Industries are as follows:
Year Ended August 31,
--------------------------------
1999 1998
---------- ---------
(in thousands except share data)
Net sales $ 3,660 $ 11,021
Income from operations before
income taxes 1,139 3,296
Income taxes 403 1,154
------- -------
736 2,142
Gain on disposal before income taxes 7,413 --
Income taxes 2,743 --
------- -------
4,670 --
------- -------
Gain from disposal and income from
discontinued operations, net of
income taxes $ 5,406 $ 2,142
======= =======
Income per share:
Basic income per common share:
Operations $ .21 $ .62
Gain on sale 1.35 --
------- -------
$ 1.56 $ .62
======= =======
Diluted income per common and
common equivalent share:
Operations $ .21 $ .61
Gain on sale 1.33 --
------- -------
$ 1.54 $ .61
======= =======
-14-
NOTE J--CONTINGENCIES
Due to the complexity of the Company's operations, disagreements
occasionally occur.
In the opinion of management, the Company's ultimate loss from such
disagreements and potential resulting legal action, if any, will not be
significant.
NOTE K--QUARTERLY RESULTS (UNAUDITED)
Summary data relating to the results of operations for each quarter of
the years ended August 31, 2000 and 1999 follows (in thousands except
per share amounts):
Three Months Ended
--------------------------------------------------
November 30 February 29 May 31 August 31
----------- -------------- -------- ---------
Fiscal year 2000:
Net sales $ 6,124 $ 5,210 $ 4,770 $ 4,581
Gross profit 976 381 150 121
Loss from
continuing operations (420) (1,019) (2,839) (1,786)
Net loss (420) (1,019) (2,839) (1,786)
Basic and diluted loss from
continuing operations per
common share $ (0.12) $ (0.30) $ (0.82) $ (.52)
Net loss
Basic $ (0.12) $ (0.30) $ (0.82) $ (0.52)
Diluted $ (0.12) $ (0.30) $ (0.82) $ (0.52)
Fiscal year 1999:
Net sales $ 7,675 $ 6,310 $ 5,442 $ 5,402
Gross profit 1,593 672 311 249
Loss from
continuing operations (405) (840) (1,168) (1,724)
Net income (loss) 201 3,988 (1,168) (1,752)
Basic and diluted loss from
continuing operations per
common share $ (.12) $ (.24) $ (0.34) $ (0.50)
Net income
Basic $ 0.06 $ 1.15 $ (0.34) $ (0.50)
Diluted 0.06 1.13 (0.33) (0.50)
-15-
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
For the Years Ended August 31, 1998, 1999 and 2000
(in thousands)
- ------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------
Description Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts- Deductions- at End
of Period Expenses Describe Describe of Period
- -------------------------------------------------------------------------------------------------
Year ended August 31, 1998
Reserve, deducted from
related asset:
Allowance for doubtful
accounts $204 $233 $ -- $173 (1) $264
==== ==== ==== ==== ====
Year ended August 31, 1999
Reserve, deducted from
related asset:
Allowance for doubtful
accounts $264 $272 $ -- $269 (1) $267
==== ==== ==== ==== ====
Year ended August 31, 2000
Reserve, deducted from
related asset:
Allowance for doubtful
accounts $267 $222 $ -- $170 (1) $319
==== ==== ==== ==== ====
(1) Amount charged against reserve