SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended February 28, 2002 Commission File No. 0-5940
TEMTEX INDUSTRIES, INC.
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(Exact name of Registrant as specified in its Charter)
Delaware 75-1321869
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 LBJ Freeway, Suite 1375, Dallas, Texas 75240
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(Address of principal executive offices) (Zip Code)
972/726-7175
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(Registrant's telephone number including area code)
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 such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes X No
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The Registrant had 3,444,641 shares of common stock, par
value $.20 per share, outstanding as of the close of the
period covered by this report.
PART I. FINANCIAL INFORMATION
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)
Three Months Ended Six Months Ended
February 28, February 28,
2002 2001 2002 2001
----------- ----------- ----------- -----------
<s> <c> <c>
<c> <c>
Net sales $ 5,432 $ 4,324 $ 11,109 $ 9,567
Cost of goods sold 5,155 4,174 10,142 8,786
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277 150 967 781
Cost and expenses:
Selling, general and administrative 1,419 1,391 2,811 2,886
Interest 126 126 271 213
Other expense (income) 13 37 41 (15)
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1,558 1,554 3,123 3,084
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NET LOSS $ (1,281) $ (1,404) $ (2,156) $ (2,303)
=========== =========== =========== ===========
Basic and diluted loss per common share: $ (.37) $ (.41) $ (.63) $ (.67)
====== ====== ====== ======
Basic and diluted weighted average common
shares outstanding 3,444,641 3,444,641 3,444,641 3,444,641
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
-2-
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
February 28, August 31,
2002 2001
----------- -----------
(Unaudited)
<s> <c> <c>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 177 $ 169
Accounts receivable, less allowance for doubtful accounts
of $199 at February 28, 2002 and $274 at August 31, 2001 2,523 2,967
Inventories 4,508 6,881
Prepaid expenses and other assets 181 159
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TOTAL CURRENT ASSETS 7,389 10,176
OTHER ASSETS 52 54
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 2,615 2,615
Machinery, equipment, furniture and fixtures 18,754 18,701
Leasehold improvements 1,309 1,309
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22,678 22,625
Less allowances for depreciation and amortization 19,468 19,013
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3,210 3,612
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$ 10,651 $ 13,842
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February 28, August 31,
2002 2001
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(Unaudited)
<s> <c> <c>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,077 $ 2,955
Accounts payable 2,209 2,337
Accrued expenses 895 899
Income taxes payable 13 8
Current maturities of indebtedness to related parties 20 18
Current maturities of long-term obligations 46 44
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TOTAL CURRENT LIABILITIES 5,260 6,261
INDEBTEDNESS TO RELATED PARTIES,
less current maturities 1,537 1,547
LONG-TERM OBLIGATIONS,
less current maturities 324 348
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value; 1,000,000
shares authorized, none issued -- --
Common stock - $.20 par value; 10,000,000 shares
authorized, 5,286,125 shares issued 720 720
Additional capital 9,253 9,253
Accumulated deficit (6,004) (3,848)
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3,969 6,125
Less:
Treasury stock:
At cost - 153,696 shares 439 439
At no cost - 1,687,788 shares -- --
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3,530 5,686
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$ 10,651 $ 13,842
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-4-
See notes to condensed consolidated financial statements.
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended
February 28,
--------------------------
2002 2001
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<s> <c> <c>
OPERATING ACTIVITIES
Net loss $ (2,156) $ (2,303)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 463 564
Provision for doubtful accounts 22 64
Changes in operating assets and liabilities:
Accounts receivable 422 351
Inventories 2,373 (138)
Prepaid expenses and other assets (20) (30)
Accounts payable and accrued expenses (132) (776)
Income taxes payable 5 (295)
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 977 (2,563)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (61) (189)
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NET CASH USED IN INVESTING ACTIVITIES (61) (189)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term obligations -- 2,180
Principal payments on revolving line of credit,
long-term obligations and indebtedness
to related parties (908) (23)
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (908) 2,157
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8 (595)
Cash and cash equivalents at beginning of period 169 1,021
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 177 $ 426
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See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements include the accounts of Temtex Industries, Inc. (the
Company) and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The condensed financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three
and six month periods ended February 28, 2002 are not necessarily
indicative of the results that may be expected for the year
ending August 31, 2002. The financial statements should be read
in conjunction with the audited financial statements and notes
thereto included in the Company's annual report on Form 10-K for
the year ended August 31, 2001.
Certain prior year amounts have been reclassified to conform with
the current year's presentation. The most significant
reclassification involved the reclassification of shipping and
handling fees to cost of good sold to comply with EITF No. 00-10,
Accounting for Shipping and Handling Fees and Costs.To comply
with EITF No. 00-10, shipping and handling fees have been
reclassified to cost of goods sold.
The accompanying unaudited consolidated financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the consolidated
financial statements for the year ended August 31, 2001 as filed
in the Company's Annual Report on Form 10-K, the Company incurred
significant losses from continuing operations during the previous
two years ended August 31, 2001. In addition, considering
borrowing limitations under the Company's existing credit
agreement, the Company continues to borrow the maximum available
amount under its credit agreement. These factors, among others,
indicate that the Company may be unable to continue as a going
concern.
Management recognizes that the Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash
flow to allow the Company to satisfy its obligations on a timely
basis. The generation of sufficient cash flow is dependent not
only on the successful expansion of the Company's share of market
for its product, but also on its ability to reduce inventories.
The continuing primary focus is on increasing revenue levels to
utilize excess capacity and to increase inventory turnover. The
Company continues to review each sales territory to determine
what actions may be taken to increase the Company's market share
in that region. As reported at August 31, 2001, the Company has
implemented an aggressive inventory reduction program. During
the first six months of fiscal 2002, inventories were reduced by
approximately $2,373,000. The Company continues to evaluate
other methods of controlling inventory levels, including the
expected purchase of computer software to more effectively
control the purchasing and production processes. Management
believes that the successful achievement of these initiatives
combined with borrowings under its existing credit agreement
should provide the Company with sufficient resources to meet its
near term cash requirements. In addition, the Company is also
considering a number of other strategic financing alternatives,
however, no assurance can be made with respect to the viability
of the Company.
-6-
NOTE B--INCOME TAXES
For the periods ended February 28, 2002 and 2001, no state and
federal income tax benefit has been recorded as the Company has
recorded a valuation allowance to fully reserve the net operating
loss carryforwards since the realization of these assets is
uncertain.
The Company has state net operating loss carryforwards of
approximately $15,900,000 expiring in the years 2002 through
2015. In addition, the Company also has a federal net operating
loss carryforward of approximately $9,200,000 which begins to
expire in the year 2021.
NOTE C--INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is based upon the weighted
average number of shares of common stock outstanding during each
period. Diluted income (loss) per share is based upon the
weighted average number of shares of common stock and common
stock equivalents outstanding during each period unless the
effect is antidilutive. Common stock equivalents include options
granted to key employees and outside directors. 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 common stock during each quarter with the proceeds from
the exercise of the options.
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NOTE D--INVENTORIES
Inventories are summarized below:
February 28, 2002 August 31, 2001
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(in thousands)
Finished goods $ 1,584 $ 2,662
Work in process 501 622
Raw materials and supplies 2,423 3,597
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$ 4,508 $ 6,881
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NOTE E--NOTES PAYABLE AND LONG-TERM DEBT
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 accounts receivable and inventory. The outstanding
principal is due on demand and 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 revolving credit facility does not
require the maintenance of any financial ratios but does contain
both affirmative and negative covenants. As reported in the
Annual Report filed on Form 10-K for the year ended August 31,
2001, the Company had exceeded the limit on annual capital
expenditures and had requested a waiver from the lender.
Although the Company had reached a verbal understanding with the
lender, a written waiver was not received until The waiver was
received in March 2002. As of the date of this filing, Tthe
Company is currently in compliance with all of the loan
covenants. The credit facility is secured by all assets of the
Company and its subsidiary, Temco Fireplace Products. At
February 28, 2002 there was approximately $2,077,000 outstanding
under the credit facility, which was the maximum credit available
on that day.
NOTE F--COMMITMENTS AND 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 G--FOREIGN OPERATIONS
At February 28, 2002 assets of approximately $877,000 were
located at the Company's manufacturing facility in Mexico.
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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 unaudited condensed 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 Quarterly Report on Form 10-Q 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 industries 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
Quarterly Report on Form 10-Q.
NET SALES
Net sales of fireplace products increased approximately 26% or
$1,108,000 in the second quarter of fiscal 2002 compared to the
second quarter of fiscal 2001. The increase in sales resulted
from an overall increase in the quantity of fireplaces delivered
in the second quarter of 2002. Deliveries of gas fireplaces
increased by approximately 42% between the comparative quarters
while deliveries of woodburning fireplaces increased
approximately 37%. Within the group of gas fireplaces, the most
significant increase was recorded in the direct-vent segment
which was approximately 59% of the increase. Between the
comparative six-month periods, net sales increased approximately
16% or $1,542,000 in fiscal 2002, again due to the increase in
quantities delivered. Deliveries of gas fireplaces increased
approximately 16% between the comparative six months and delivers
of woodburning fireplaces increased approximately 28%. Unit sale
prices declined slightly between both periods as a result of
price decreases necessary for the successful implementation of
the Company's inventory reduction program.
were adversely affected by the implementation of the Company's
aggressive inventory reduction program.
GROSS PROFIT
Gross profit increased from $150,000 or 3.5% to $277,000 or 5.1%
from the second quarter of fiscal 2001 to the second quarter of
fiscal 2002. Between the comparative six-month periods, gross
profit increased from $781,000 or 8.2% in fiscal 2001 to $967,000
or 8.7% in fiscal 2002. The increase in gross profit in both of
the comparisons was the direct result of the increase in sales.
-9-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $28,000 or
approximately 2% in the second quarter of fiscal 2002 compared to
the second quarter of fiscal 2001. Between the comparative six-
month periods, selling, general and administrative expenses
decreased approximately $75,000 or 3%. Expenses as a percentage
of net sales were approximately 26% for the current quarter
compared to 32% for the second quarter of 2001 and 25% for the
first six months of fiscal 2002 compared to 30% for the first six
months of fiscal 2001. The improvements in the ratios were the
direct result of the increase in net sales in the current fiscal
year.
INTEREST EXPENSE
Interest expense remained the same at approximately $126,000
between the comparative second quarters. Interest expense
increased from approximately $213,000 in the first six months of
fiscal 2001 to approximately $271,000 for the first six months of
fiscal 2002. The increase in the expense was caused by the
increase in the average indebtedness, resulting from increased
borrowings under the line of credit. Between the comparative
quarters, an increase of approximately $950,000 in the average
loan outstanding under the Company's notes payable was offset by
a decrease of approximately 5% in the average interest rate
charged in the second quarter of fiscal 2002. Between the
comparative six month periods, the average loan outstanding
increased by approximately $1,600,000 while the interest rate
decreased by approximately 3%. The interest rate charged on the
Company's long-term debt remained constant during all periods
presented.
INCOME TAXES
The Company has not recorded a benefit for income taxes on its
operating losses in either of the comparison quarters. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $977,000 for the
first six months of 2002 compared to net cash used of $2,563,000
for the first six months of 2001. The increased cash flow from
operations in the first six months of fiscal 2002 was primarily
due to the change in working capital resulting from, principally
the decrease in inventories brought about by the successful
implementation of the Company's inventory reduction plan. The
Company considers its inventory reduction plan to be
substantially complete and does not expect significant reductions
in inventories in future periods.
Working capital was $2,129,000 at February 28, 2002 compared to
$3,915,000 at August 31, 2001. The decrease in working capital
is primarily due to the decrease in inventories.
Capital expenditures and capitalized lease obligations for the
first six months of 2002 were $61,000. Expenditures include
amounts for tooling, dies, replacement items and major repairs to
manufacturing equipment.
-10-
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
is due on demand and 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 revolving credit facility does not require the
maintenance of any financial ratios but does contain several
covenants. The credit facility is secured by all assets of the
Company and its subsidiary, Temco Fireplace Products, Inc. At
February 28, 2001 there was approximately $2,077,000 outstanding
under the credit facility, which was the maximum credit available
on that day.
The accompanying unaudited consolidated financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the consolidated
financial statements for the year ended August 31, 2001 as filed
in the Company's Annual Report on Form 10-K, the Company incurred
significant losses from continuing operations during the previous
two years ended August 31, 2001. In addition, considering
borrowing limitations under the Company's existing credit
agreement, the Company continues to borrow the maximum amount
under its credit agreement. These factors, among others,
indicate that the Company may be unable to continue as a going
concern.
Management recognizes that the Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash
flow to allow the Company to satisfy its obligations on a timely
basis. The generation of sufficient cash flow is dependent not
only on the successful expansion of the Company's share of market
for its product, but also on its ability to control inventories.
The continuing primary focus is on increasing revenue levels to
utilize excess capacity and to increase inventory turnover. The
Company continues to review each sales territory to determine
what actions may be taken to increase the Company's market share
in that region. During the first six months of fiscal 2002,
inventories were reduced by approximately $2,373,000 as a result
of the implementation of and substantial completion of an
aggressive inventory reduction plan. The Company continues to
evaluate other methods of controlling inventory levels, including
the purchase of computer software to more effectively control the
purchasing and production processes. Management believes that
the successful achievement of these initiatives combined with
borrowings under its existing credit agreement should provide the
Company with sufficient resources to meet its near term cash
requirements. In addition, the Company is also considering a
number of other strategic financing alternatives, however, no
assurance can be made with respect to the viability of the
Company. If the Company is not successful in achieving its
initiatives or obtaining additional financing, it will be unable
to continue operations which will have a material adverse effect
on the price of its stock.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-
K during the quarter for which this report is filed.
-12-
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TEMTEX INDUSTRIES, INC.
DATE: 4/15/02 BY: /s/ E.R.Buford
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E. R. Buford
President
DATE: 4/15/02 BY: /s/ R. L. DeLozier
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R. L. DeLozier
Secretary/Treasurer
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