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 (FEE REQUIRED)
For the fiscal year ended: August 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (a) 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 requirements for
the past 90 days. YES X NO
------ ------
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
-----
As of November 12, 1997, the aggregate market value of the voting
stock held by nonaffiliates of Temtex Industries, Inc. was
$7,245,630.
As of August 31, 1997 there were 3,477,141 shares of common stock,
par value $0.20 per share, of Temtex Industries, Inc. outstanding.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is a major producer of metal fireplace products
(woodburning and gas) and face brick products used in the
residential and commercial building markets. The Company
manufactures woodburning metal fireplaces as well as those
utilizing natural gas and liquified petroleum products. The
Company in 1992, introduced its Temco American Dream(Trademark)
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 also manufactures and
markets a line of face brick products in varying styles, textures,
sizes and colors. 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 its face brick business.
NARRATIVE DESCRIPTION OF BUSINESS
Fireplace Products
- - ------------------
Through its wholly owned subsidiary, Temco Fireplace Products, Inc.
("TFPI"), formerly Temtex Products, Inc., the Company manufactures
and distributes zero clearance metal fireplace units and gas
fireplace equipment. For the fiscal year ended August 31, 1997,
the Company had aggregate sales of fireplace products of
approximately $30.2 million.
Zero Clearance Metal 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(TRADEMARK) ventfree gas log
and a related ventfree fireplace unit. The American
Dream(TRADEMARK) 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(TRADEMARK) 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(REGISTERED)
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
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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 nominal cost.
The Company markets ventfree gas log products, which consists of
several different sizes of ventfree gas log sets and ventfree gas
heaters and fireplace units. The current fireplace products are
marketed under either the American Dream(TRADEMARK) ventfree name
or the Firetech 2000(REGISTERED) ventfree name, depending upon the
customer. 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.
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
home builders 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.
Although the Company ships its fireplace products nationwide, its
sales tend to be somewhat concentrated in the states where housing
construction is 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 ended August 31, 1997, 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 units 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.
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 terms of this license, the
Company has the 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 the
non-exclusive right to produce and sell ventfree gas logs
independently of fireplace units. Although the patented design of
the Company's ventfree gas log product cannot be utilized by other
manufacturers marketing fireplace units employing gas burning logs,
there can be no assurance that a competitive product employing a
different method to achieve the same or similar results could not
be developed in the future. The Company knows of one other entity
which is licensed by the patent holder to produce separate ventfree
gas logs. Other companies have introduced products which compete
with the Company's ventfree log sets, but the Company does not
believe that they are using the patented concept which provides
glowing logs and embers. 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 sold separately.
-3-
Face Brick Products
- - -------------------
The Company manufactures a broad line of face brick in a variety of
styles, textures, sizes and colors. The Company's face brick
products are manufactured in Malakoff, Texas (approximately 75
miles southeast of Dallas, Texas), through its Texas Clay Division.
For the fiscal year ended August 31, 1997, the Company had sales of
face brick products of approximately $9.0 million.
Manufacturing. Approximately 90% of the clay deposits presently
utilized in the manufacturing of face brick products by the Company
are located within twelve miles of its Malakoff operating
facilities. The Company owns approximately 669 acres of land, most
of which the Company believes have clay deposits, and leases an
aggregate of approximately 460 additional acres which it also
believes to contain clay deposits. Generally, the leases will
continue so long as clay is mined in paying quantities or minimum
royalties are paid. Royalties under the leases range from $0.25 to
$0.35 per cubic yard of merchantable clay removed. The Company
normally maintains at least a 120 day supply of raw clay at its
operating facilities. Historically, Texas Clay has obtained
approximately 25% of its raw clay requirements from its own land
and the remaining 75% from leased land. The Company believes that
its clay reserves necessary for making face bricks are adequate for
the foreseeable future, although the Company does not have
sufficient engineering data to permit it to predict the extent of
such reserves with accuracy. Additionally, the Company believes
that there is an abundance of clay deposits located near its
Malakoff operating facility which would be available to the Company
on acceptable terms if additional clay deposits are needed.
The Malakoff operating facility includes two plants that are
capable of producing approximately 55 million bricks annually
operating one shift per day, five days a week. For energy
efficiency reasons, three of the Company's kilns are operated 24
hours a day, notwithstanding staffing of other production
facilities. In the manufacture of face brick, the raw clay is
mined on the surface of the ground by open pit. The principal type
of clay mined by the Company is a highly refractory type of
material. A variety of clay pits are worked by the Company at any
given time since the type and grade of clay determine the
characteristics and color of finished brick. After the raw clay is
mined, it is crushed, screened and blended, warmed and tempered
into an amorphous mass which is extruded through a die and cut to
size automatically. The brick is then dried to reduce the moisture
content, burned at heat ranging up to 2200 degrees Fahrenheit, and
gathered and packaged for shipment in bundles of the same shade or
color or of mixed shades or colors. The Company utilizes a
grinding system which permits it to automatically mix ingredients,
thereby producing more consistency in color.
Marketing and Distribution. The face brick products manufactured
by the Company are distributed primarily in Texas and adjacent
states to commercial and residential contractors, architects and
interior and commercial decorators. The Company markets its face
brick products primarily through independent distributors. In
addition, the Company currently employs one full-time salesperson.
Sales made to the residential market generally produce higher
profit margins than sales made to the commercial markets. During
the fiscal year ended August 31, 1997, no single face brick
customer accounted for more than 10% of the Company's consolidated
net sales during such period.
Fuel Requirements. In order to manufacture the Company's face
brick products, significant quantities of natural gas must be
obtained from the local public utility or from private parties.
The Company historically has obtained most of its natural gas
requirements from the local public utility, but has obtained, and
currently continues to obtain, a significant portion of its gas
supply from one or more private parties.
The Company's manufacturing operations have, from time to time,
experienced minor disruptions resulting primarily from the
imposition by the local public utility of allocations during peak
usage periods, but such disruptions have not had and are not
expected in the foreseeable future to have, a material adverse
effect on the Company's operations. However, since the cost of
natural gas historically has constituted the largest single
component of the Company's face brick manufacturing operating costs
(other than labor and maintenance parts) and is expected in the
foreseeable future to continue to be
-4-
material, any significant increase in the cost of natural gas
without an accompanying price increase in the products sold by the
Company could adversely affect its operating results. The Company
purchases all of its natural gas at prevailing rates and does not
have any long-term supply agreements.
Inventories and Payment Terms
- - -----------------------------
As a general rule, the Company's customers are not permitted to
return fireplace units or face brick products, 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.
Patents and Trademarks
- - ----------------------
The Company does not own any material patents, but does own a
variety of trademarks and trade names. The consumer products
manufactured by the Company are sold primarily under the trademark
or trade names of Temco(REGISTERED), Amberlight(REGISTERED), Temco
American Dream(TRADEMARK), Firetech 2000(REGISTERED) and
Masterworks 280(REGISTERED) direct vent fireplace. The Company
believes that its trademarks and trade names as a whole have
significant value. However, the Company does not consider any one
or group of its 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 original Patent License provided for an initial term of four
years, commencing April 1, 1992 and expiring on March 31, 1996,
subject to termination in the event of default by the Company. The
Company exercised its option to extend the initial term of the
Patent License for an additional four year term, expiring on
March 31, 2000. During fiscal 1995, the Patent License was
extended again for an additional two year term, expiring on March
31, 2002.
-5-
Backlog
- - -------
The table set forth below gives certain information with respect to
the approximate backlog of the Company by business segment.
Face Fireplace
Brick Products Products Total
-------------- ------------- ----------
(In Thousands)
Balance at
8/31/96 $ 1,626 $ 2,256 $ 3,882
Balance at
8/31/97 $ 1,672 $ 1,267 $ 2,939
As of August 31, 1997, the amount of backlog of orders shown above
is believed to be firm and the orders are expected to be filled
during 1998. 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 which have been enacted or adopted 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
affect the competitive position of the Company and its subsidiaries
in any of the Company's segments of business.
Employees
- - ---------
As of August 31, 1997, the Company employed approximately 540
persons (including employees of wholly-owned subsidiaries) of whom
approximately 170 were salaried and 370 were hourly employees.
-6-
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 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 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 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 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 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
originally expiring in 1999. During fiscal 1995, the Company
exercised a ten year option extending the lease through September
30, 2008. The monthly rental rate remains the same at $6,368.
The Company's Mexicali, Mexico facility contains approximately
13,000 square feet. The lease for this facility commenced on
August 1, 1993, provides for monthly rental of $3,410 (U.S.) and
expires in July 1998. During the 1994 fiscal year, the Company
entered into a second lease for an additional 7,250 square feet
with a monthly rental of $2,100 (U.S.) and this lease also expires
in July 1998. This facility manufactures fireplace component parts
for use by the Company's Manchester and Perris plants.
Face Brick Products
- - -------------------
The Company's face brick products are manufactured in Malakoff,
Texas through its Texas Clay division. The Company owns and
operates office and manufacturing facilities on a seventy-six acre
tract of land at this location, consisting of multiple buildings
constructed on steel frames with sheet metal siding and roofs which
contain approximately 268,000 square feet of floor space. The
Company's facilities house manufacturing equipment, three active
kilns, storage areas for raw materials and finished products and
loading areas for trucks.
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ITEM 3. LEGAL PROCEEDINGS
There are legal actions in which the Company is a party, however,
in the opinion of management, the Company's ultimate loss, if any,
will not be significant.
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 National Association of
Securities Dealers Automated Quotation System ("NASDAQ"). The
Company's Common Stock trades on the NASDAQ market under the symbol
TMTX.
Price (1)
----------------
High Low
------ ------
FISCAL 1996
-----------
First Quarter $4.75 $3.63
Second Quarter 5.25 3.38
Third Quarter 5.00 3.50
Fourth Quarter 4.50 2.94
FISCAL 1997
-----------
First Quarter $4.13 $2.75
Second Quarter 4.50 2.38
Third Quarter 3.63 2.38
Fourth Quarter 3.88 2.32
(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 and beneficial shareholders of
the Company as of November 12, 1997 was approximately 1,200. 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 1996 or 1997.
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.
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ITEM 6. SELECTED FINANCIAL DATA
Years Ended August 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
(in thousands, except share amounts)
Selected Statement of Operations Data:
Net Sales
Fireplace products......................... $30,198 $33,110 $34,504 $35,324 $26,371
Face brick products........................ 9,010 8,862 8,400 8,611 7,736
------- ------- ------- ------- -------
Total net sales.......................... 39,208 41,972 42,904 43,935 34,107
Cost of goods sold............................ 29,693 30,977 30,962 29,391 23,657
------- ------- ------- ------- -------
Gross profit.................................. 9,515 10,995 11,942 14,544 10,450
Selling, general and administrative
expenses................................... 9,455 9,548 10,782 10,291 7,735
Interest expense.............................. 519 583 424 526 903
Other income.................................. (114) (2) (122) (71) (45)
------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes........................ (345) 866 858 3,798 1,857
Income tax expense (benefit).................. (144) 324 369 (280) 713
------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary item.................. (201) 542 489 4,078 1,144
Loss from discontinued operations,
less applicable federal taxes.............. -- -- -- -- (87)
Extraordinary gain from utilization of
operating loss carryforward................ -- -- -- -- 530
------- ------- ------- ------- -------
Net income (loss)............................. $ (201) $ 542 $ 489 $ 4,078 $ 1,587
======= ======= ======= ======= =======
Income (loss) per common share:
Income (loss) from continuing operations,
before extraordinary item................ $ (.06) $ .16 $ .14 $ 1.25 $ .45
Loss from discontinued operations.......... -- -- -- -- (.03)
Extraordinary item......................... -- -- -- -- .21
------- ------- ------- ------- -------
Net income (loss) per common share......... $ (.06) $ .16 $ .14 $ 1.25 $ .63
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding.............. 3,474,155 3,491,131 3,502,887 3,272,568 2,520,189
========= ========= ========= ========= =========
Cash Dividends Declared Per Common Share........... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
August 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Selected Balance Sheet Data:
Working capital............................... $ 9,990 $ 8,329 $ 9,014 $10,189 $ 1,582
Total assets (1).............................. 23,233 27,808 27,116 23,643 16,903
Short-term debt (2)........................... 1,011 3,343 2,770 595 4,969
Long-term debt, excluding current
maturities (3)............................. 2,244 2,218 3,099 1,346 2,166
Stockholders' equity.......................... 15,781 15,970 15,416 14,916 4,309
________________________
(1) Excludes assets related to discontinued operations.
(2) Includes amounts borrowed under a revolving credit agreement
and debt payable within one year, including capitalized lease
obligations to related parties.
(3) Includes capitalized lease obligations to related parties.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- - --------
The Company is a producer of metal fireplace products and face
brick products used in the residential and commercial building and
remodeling markets. The Company manufactures and distributes its
fireplace products through Temco Fireplace Products, Inc., a wholly
owned subsidiary of the Company, and its face brick products
through its Texas Clay division. The Company's fireplace products
are sold nationwide to a network of contractors, distributors and
retailers, and its face brick products are sold to contractors and
distributors principally in Texas and surrounding states.
The Company provides products to contractors and others engaged in
the construction and remodeling markets which usually are more
active in the summer and fall months. The Company's sales are
affected by this seasonality since contractors and other users do
not maintain inventories of products for construction purposes. In
addition, the Company provides goods to the building products
industry which is cyclical in nature and can be affected by changes
in consumer credit, interest rates and general economic conditions.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net Sales
- - ---------
Fireplace Products. Net sales decreased $2.9 million or 9% in
fiscal 1997 compared with fiscal 1996. The reduction in sales was
the direct result of a decrease in the quantity of woodburning
fireplaces delivered in 1997. Intense competition within the
industry has prohibited the Company from increasing selling prices
on its fireplace products.
Face Brick Products. Net sales increased approximately $0.1 millon
or 2% in fiscal 1997 compared with fiscal 1996. A small increase
in selling price was responsible for the increase in net sales.
Gross Profit
- - ------------
Fireplace Products. Gross profit decreased approximately 20% in
fiscal 1997 compared with fiscal 1996. The decrease in sales
volume was the major factor contributing to the decrease in gross
profit.
Face Brick Products. Gross profit increased approximately 5% in
fiscal 1997 compared with fiscal 1996. The increase was a direct
result of the increase in the selling price for brick products.
Selling, General and Administrative Expenses
- - --------------------------------------------
Selling expenses decreased 9% in fiscal 1997 compared with fiscal
1996. The decrease was mainly due to decreases in selling
commissions, payroll and advertising expenses.
General and administrative expenses increased approximately 11% in
fiscal 1997 compared with fiscal 1996. Payroll related fringe
benefits, specifically group health insurance and worker's
compensation insurance expenses were less than usual in fiscal 1996
due to refunds received in 1996 that related to prior years and
adjustment of accrued balances to more accurately reflect estimated
liabilities in fiscal 1996. Expenses for fiscal 1997 do not
include any significant adjustments for prior year activity.
Interest Expense
- - ----------------
Interest expense decreased $64,000 or 11% in fiscal 1997 compared
with fiscal 1996. The decrease in interest expense was the direct
result of the decrease in the average indebtedness of the Company
throughout fiscal 1997.
-10-
Other Income
- - ------------
Other income for both fiscal 1997 and 1996 includes small amounts
of miscellaneous income and expenses from various sources.
Income Taxes
- - ------------
The provision for income taxes, both current and deferred,
decreased from an expense of $324,000 in fiscal 1996 to a benefit
of $144,000 in fiscal 1997 due to diminished operating results. In
fiscal 1997, the income tax provision consists of a benefit of
$202,000 in federal and an expense of $58,000 in state taxes.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales
- - ---------
Fireplace Products. Net sales decreased $1.4 million or 4% in
fiscal 1996 compared with fiscal 1995. Although the Company
shipped a greater quantity of fireplaces and ventfree gas log sets
in 1996 compared with 1995, the average price received for each
unit was less in 1996 than in 1995. Competition within the
industry, especially for ventfree gas products, had a negative
impact on net sales in 1996.
Face Brick Products. Net sales increased $0.5 million or 6% in
fiscal 1996 compared with fiscal 1995. An increase in the quantity
of face brick shipped in 1996 along with a small increase in the
selling price which the Company received for its product, were
responsible for the overall increase in net sales.
Gross Profit
- - ------------
Fireplace Products. Gross profit decreased approximately 11% in
fiscal 1996 compared with fiscal 1995. A portion of the decrease
is attributable to the decrease in sales. The reduction in the
average unit sales price received for the product also contributed
to the lower gross profit recorded in 1996.
Face Brick Products. Gross profit increased approximately 3% in
fiscal 1996 compared with fiscal 1995. The increase was a direct
result of the increase in net sales.
Selling, General and Administrative Expenses
- - --------------------------------------------
Selling expenses decreased 15% in fiscal 1996 compared with fiscal
1995. As a percentage of sales, the decrease was 2% between the
two years. The decrease was mainly due to a decrease in
advertising expenses. Advertising expenses in fiscal 1995 were
greater than usual due to the introduction of several new gas
fireplace and gas log products.
General and administrative expenses decreased approximately 6% in
fiscal 1996 compared with fiscal 1995. As a percentage of sales,
the decrease was less than 1%.
Interest Expense
- - ----------------
Interest expense increased $159,000 or 38% in fiscal 1996 compared
with fiscal 1995. The increase in interest expense was the direct
result of the increase in the average indebtedness of the Company
in 1996.
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Other Income
- - ------------
Other income for both fiscal 1996 and 1995 includes small amounts
from various sources.
Income Taxes
- - ------------
Income tax expense, both current and deferred, decreased from
$369,000 in fiscal 1995 to $324,000 in fiscal 1996. In fiscal
1996, income tax expense consisted of $154,000 in federal, $146,000
in state and $24,000 in foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,088,000,
$2,161,000 and $1,358,000 in fiscal 1997, 1996 and 1995,
respectively. Working capital also increased $1,661,000 in fiscal
1997 mainly due to decreases in notes payable and accounts payable.
In fiscal 1996, working capital decreased $685,000 due to an
increase in notes payable.
Capital expenditures and capitalized lease obligations for
fireplace and face brick products totalled $1,158,000 ($682,000 for
fireplace products and $476,000 for face brick products),
$2,057,000 ($1,722,000 for fireplace products and $335,000 for face
brick products) and $5,294,000 ($4,030,000 for fireplace products
and $1,264,000 for face brick products) in fiscal 1997, 1996 and
1995, respectively. The majority of expenditures in each of the
years was for tooling, replacement items and major repairs to
manufacturing equipment. Approximately 117 acres of land were
purchased in fiscal 1997 believed to contain an estimated five
million cubic yards of shale/clay to be utilized in the production
of face brick. In fiscal 1995, equipment was purchased for the
Tennessee location which was expanded to increase its fireplace
manufacturing capacity. The Company entered into a new lease
agreement for the Tennessee facility at that time in consideration
of the expansion which was financed by the partnership which owns
the facility. In fiscal 1995, the Company also exercised its
option to extend its lease of the fireplace manufacturing facility
in California. Also, in fiscal 1995, expenditures for face brick
products included an amount for approximately 80 acres of land
believed to contain an estimated 400,000 cubic yards of clay.
Construction of a replacement office building at the face brick
products manufacturing facility was completed early in fiscal 1995.
In May 1996, the Company entered into a two year credit agreement
with a bank whereby the Company may borrow a maximum of $4,000,000
under a revolving credit facility. The outstanding principal
balance may bear interest at a variable or fixed rate, at the
Company's option, at the time funds are requested. Interest is
payable on a monthly basis and also at the end of the borrowing
period if borrowing at a fixed rate. The revolving credit facility
had an outstanding balance of $800,000 at August 31, 1997. The
credit facility requires the Company to maintain certain minimum
financial ratios, on a quarterly basis, in addition to positive net
income for each annual accounting period. The Company is in
compliance with the covenants requiring the maintenance of the
financial ratios but due to the net loss experienced in fiscal
1997, was not in compliance with the covenant requiring positive
net income. The lending bank has waived the net income requirement
for the year ended August 31, 1997.
Advances from the revolving credit facility were used to repay the
principal balance outstanding and accrued interest on a two year
revolving credit note that expired, as scheduled, in May 1996. In
addition, a promissory term note that had been added to the
expiring revolving credit note, was repaid at the same time. The
term note was scheduled for repayment in March 1998.
In fiscal 1997, the majority of purchases of tooling and
manufacturing equipment was made using cash generated from
operations. Proceeds from long-term notes were used to purchase
land and a few pieces of equipment.
-12-
The Company anticipates 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.
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.
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.
-13-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) DIRECTORS OF THE COMPANY
The names of the directors and nominees for the office of director
and information about them, as furnished by the directors and
nominees themselves, are set forth below:
First Positions and Offices with Company, Business
Became a Experience During Past Five Years and Other
Name Age Director in Directorships
- - ------------------- ----- ----------- ----------------------------------------------
James E. Upfield 77 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 Petroleum, Inc.
(formerly Hunter Resources, Inc.) which is
engaged in the sale of oil, gas and oilfield
services.
E. R. Buford 62 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. Mariner, Jr. 77 1979 Retired as Chairman and Chief 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 of 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;
Kearney National, Inc., a manufacturer of
electrical power distribution products; El
Chico Restaurants, Inc., a Mexican restaurant
chain; and Renters Choice, Inc., operates
Rent-To-Own Stores.
Larry J. Parsons 68 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 38 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.
-14-
Richard W. Griner 59 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 director of
Axon, Inc., a multifaceted contracting and
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 6, 1997. There are no family
relationships among any of the directors or among any of the
directors and any officers of the Company except Messrs. James E.
Upfield and Scott K. Upfield who are father and son.
(b) EXECUTIVE OFFICERS OF THE COMPANY
Name Age Offices with Company
- - ------------------- ----- ----------------------------------------------
James E. Upfield 77 Chairman of the Board and a director
E. R. Buford 62 President, Chief Executive Officer and a
director
R. N. Stivers 61 Vice President-Finance, Secretary, Treasurer,
Chief Financial Officer and Chief Accounting
Officer
Each of the officers has served in their respective capacity for
more than the past five years. 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.
-15-
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 $100,000.
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
-----------------------------------------------
Annual Compensation Awards Payouts
--------------------------- ------------------------- -----------------
Other Securities All
Annual Restricted Underlying LTIP Other
Name and Compen- Stock Options/ Pay- Compen-
Principal Fiscal Salary Bonus sation Awards SARs outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- - -----------------------------------------------------------------------------------------------------------
E.R.Buford 1995 205,300 -0- N/A -0- -0- -0- N/A
Chief 1996 213,500 -0- N/A -0- -0- -0- N/A
Executive 1997 222,100 -0- N/A -0- -0- -0- N/A
Officer and
President
- - -----------------------------------------------------------------------------------------------------------
J. E. Upfield 1995 150,000 -0- N/A -0- -0- -0- N/A
Chairman of 1996 150,000 -0- N/A -0- -0- -0- N/A
the Board 1997 150,000 -0- N/A -0- -0- -0- N/A
- - -----------------------------------------------------------------------------------------------------------
R. N. Stivers 1995 107,800 -0- N/A -0- -0- -0- N/A
Chief Financial 1996 112,000 -0- N/A -0- -0- -0- N/A
Officer/Vice 1997 116,600 -0- N/A -0- -0- -0- N/A
President-Finance
- - -----------------------------------------------------------------------------------------------------------
Other annual compensation did not exceed the lesser of either
$50,000 or 10% of total salary as disclosed in the summary
compensation table.
-16-
Employment Contract Agreements
- - ------------------------------
The Company entered into three-year employment contracts with Mr.
E. R. Buford and Mr. R. N. Stivers (the "Executives") as of June
7, 1994. Under the terms of the agreements, Mr. Buford receives
an annual base salary of at least $201,300 and Mr. Stivers
receives a base salary of at least $105,000. During the term of
the agreements, the Company may increase the base salary of the
Executives. The Executives will also be eligible to participate
in the regular employee benefit program now or hereafter
established by the Company.
On each anniversary of these agreements, the term shall be
extended for an additional period of one year unless the Board of
Directors elects, at the directors' meeting following the annual
stockholders' meeting, not to extend the agreements.
The agreements may be terminated by the Company without cause
upon thirty days prior written notice. In the event of
termination without cause, the Company shall for a period of two
and one-half years continue to pay Mr. Buford and for a period of
one year continue to pay Mr. Stivers their base salaries
effective at the time of termination.
If the Executives are involuntarily terminated, other than for
cause, in contemplation of, or within three years following, a
change of control, the Company shall pay the Executives (i) a
lump sum severance payment equal to two and one-half times the
Executives base salary in effect at the time of involuntary
termination, payable as a lump sum, and (ii) continuation of all
employee benefits, executive benefits and perquisites or benefits
reasonably equivalent thereto, for a period of two and one-half
years.
Select Management Employee Security Plan
- - ----------------------------------------
Except for the Company's Select Management Employee Security
Plan, the Company does not have any plans that could be deemed
long-term incentive plans or defined benefit or actuarial plans
under which benefits are determined primarily by reference to
final compensation. The Select Management Employee Security Plan
(the "Security Plan") provides certain death and retirement
benefits to key employees of the Company. During the fiscal year
ended August 31, 1997, ten (10) employees were participating in
the Security Plan (including the three named executive officers
in the Summary Compensation Table above). The Company's
Compensation Committee has discretion to select additional
employees (not more frequently than annually) to participate in
the Security Plan.
The Security Plan provides for benefits to be paid to each
participant for a period of ten (10) years after retirement (or
to the beneficiary or estate of a participant for a period of ten
(10) years following the date of death of a participant) in an
amount during each such year equal to approximately 50% of the
participant's salary at the date of retirement or death. All
required benefit payments are provided by individual life
insurance, retirement insurance or annuity type policies which
the Company's Compensation Committee has deemed appropriate.
Pursuant to the Security Plan, the Company makes all
contributions to fund the aggregate amount of insurance premiums
required to purchase and maintain all applicable insurance or
annuity type policies.
Any participant in the Security Plan who ceases to be an employee
of the Company prior to attaining the age of fifty (50) and ten
(10) years of employment and before normal retirement date may
elect to purchase his insurance policy for one-third of its cash
value on the date of termination. Any participant who ceases to
be employed after attaining age fifty (50) and ten (10) years of
service but before normal retirement will be assigned his
insurance policy without any payment being required.
-17-
Stock Option Plan for Key Employees
- - -----------------------------------
In 1990, the Company adopted the 1990 Stock Plan for Key
Employees of Temtex Industries, Inc. and its Subsidiaries (the
"1990 Plan"). The 1990 Plan provides for the grant of stock
options, including "incentive stock options" within the meaning
of Section 422A of the Internal Revenue Code of 1986 and "non-
qualified stock options" which do not constitute incentive stock
options, the grant of stock appreciation rights in connection
therewith, and the allotment of shares of restricted stock, to
key employees of the Company.
The 1990 Plan is intended to attract, retain and provide
incentives for eligible key employees. The 1990 Plan is
administered by a committee of the Board of Directors not
eligible to receive awards under the 1990 Plan. Presently the
Compensation Committee administers the Plan. Such committee has
authority, in its discretion, to determine the individuals to
whom, and the time or times at which restricted stock will be
allotted or options or stock appreciation rights will be granted,
the number of shares to be subject to each allotment of
restricted stock, stock options and appreciation rights, the
option price for the duration of each option and other matters in
connection with the administration of the 1990 Plan and the grant
of awards thereunder. The exercise price of any option granted
under the 1990 Plan may not be less than the fair market value of
the Common Stock at the date of grant. Options and stock
appreciation rights may be granted and restricted stock allotted
under the 1990 Plan from time to time until December 31, 1999, on
which date such 1990 Plan will terminate, unless it is sooner
terminated as provided therein.
The stockholders at the annual meeting held March 7, 1995,
approved a proposal increasing the shares eligible for issuance
pursuant to the 1990 Plan from 95,000 shares to 195,000 shares of
Common Stock and the aggregate number of options (including stock
appreciation rights) or shares of restricted stock which may be
issued to any one employee in any fiscal year shall not exceed
25,000.
-18-
Option Grants During 1997 Fiscal Year
- - -------------------------------------
There were no stock options granted to the Company's executive
officers named in the summary compensation table during fiscal
year 1997.
- - ----------------------------------------------------------------
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 Securities Unexercised In-
Underlying the-Money
Unexercised Options/SARs at
Options/SARs at FY- FY-End ($)
End (#)
Shares
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- - -------------------------------------------------------------------------------------------
E. R. Buford -0- -0- Exercisable 50,000 $109,500
Exercisable 10,000 -0- (1)
Unexercisable 10,000 -0- (1)
J. E. Upfield -0- -0- -0- -0-
R. N. Stivers -0- -0- Exercisable 5,000 -0- (1)
Unexercisable 5,000 -0- (1)
(1) The Company's stock price at August 31, 1997 was below the option price.
- - -------------------------------------------------------------------------------------------
-19-
Stock Option Plan for Outside Directors
- - ---------------------------------------
In 1990, the Company also adopted the Outside Director Stock
Option Plan (the "Outside Director Plan"). The Outside Director
Plan is intended to encourage more extensive ownership of the
Common Stock, to provide incentives and to attract and retain
eligible outside directors of the Company. Under the Outside
Director Plan, 30,000 shares of Common Stock were reserved. The
Outside Director Plan is presently administered by the Board of
Directors. The Board of Directors has authority, in its
discretion, to determine the outside directors to whom, and the
time or times in which, options will be granted, the number of
shares to be subject to each option, and the purchase price of
the shares covered by each option. The exercise price of any
option granted under the Outside Director Plan may not be less
than the fair market value of the Common Stock at the date of the
grant. Options granted under the Outside Director Plan are non-
qualified options for federal income tax purposes.
The following table shows stock options granted and presently
exercisable to outside directors from May 23, 1990 to August 31,
1997:
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. 2,500 $2.00 $ 3,450
2,500 $1.44 4,850
1,500 $3.31 -0- (1)
------ -------
6,500 $ 8,300
====== =======
Larry J. Parsons 2,500 $2.00 $ 3,450
2,500 $1.44 4,850
1,500 $3.31 -0- (1)
------ -------
6,500 $ 8,300
====== =======
Scott K. Upfield 2,500 $1.44 4,850
1,500 $3.31 $ -0- (1)
------ -------
4,000 $ 4,850
====== =======
Richard W. Griner 2,500 $4.81 $ -0- (1)
1,500 $3.31 -0- (1)
------ -------
4,000 $ -0-
====== =======
(1) The Company's stock price at August 31, 1997 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.
-20-
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 executive officers of the Company.
In determining executive compensation, the Compensation Committee
reviews the performance of the specific executive, the operating
performance of the Company, the compensation of executives of
companies which are comparable to the Company and the performance
of the Company's Common Stock. Particular emphasis is given to
the operating results of the Company. The Company's Compensation
Committee has access to, and review reports of, independent
financial consultants who assimilate and evaluate the
compensation of executive officers employed by companies which
are generally comparable to the Company. The cumulative weight
of all such factors is then generally considered to determine
whether or not 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
Stock Option Plan for Key Employees, or any other compensation
benefits. The Compensation Committee noted that while fiscal
1996 performance did not meet target levels in all categories,
cost of living increases of approximately 4% were generally
appropriate. Mr. E. R. Buford (the Chief Executive Officer of
the Company) and Mr. Roger Stivers, have employment agreements
with the Company which fix their annual salaries at certain
minimum levels ($201,300 per annum for Mr. Buford and $105,000
per annum for Mr. Stivers).
The Compensation Committee 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. After a review of all such factors
and a report of independent financial consultants dated January
23, 1997, which concluded that a salary increase in the range of
4% for the Chief Executive Officer was appropriate, the
Compensation Committee recommended that Mr. Buford's base salary
be increased to $225,000 per annum. Neither the report of the
independent financial consultants nor the Compensation Committee
recommended that a bonus be paid for fiscal 1997.
Mr. Richard W. Griner
Mr. James E. Upfield
Mr. Scott K. Upfield
Mr. Larry J. Parsons
Mr. Joseph V. Mariner, Jr.
-21-
Performance Graph
- - -----------------
The following table compares the performance of the Company's
Common Stock with certain comparable indices:
[PERFORMANCE TABLE]
[GRAPHIC MATERIAL OMITTED]
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
TEMTEX INDUSTRIES, INC..... $100.00 $710.40 $860.00 $375.20 $290.40 $270.40
Dow Jones Industrial....... $100.00 $115.41 $127.09 $153.83 $191.74 $265.10
Dow Jones Furnishings &
Appliances............. $100.00 $162.57 $149.13 $151.63 $175.24 $216.97
-22-
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
person who owned, as of November 12, 1997, the number of shares
of Common Stock of the Company set forth opposite his name in the
table below:
Amount and Nature
Title of Name and Address of Beneficial Percent
Class of Beneficial Owner Ownership (1) of Class
- - -----------------------------------------------------------------------------------
Common Stock James E. Upfield 1,085,890 (2) 31.2%
5400 LBJ Freeway
Suite 1375
Dallas, Texas 75240
Common Stock Franklin Resources, Inc. 265,500 7.6%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock Dimensional Fund Advisors, Inc. 188,000 5.4%
1299 Ocean Avenue
11th Floor
Santa Monica, California 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.
-23-
(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 12, 1997.
Amount and
Title of Name or Identity Nature of Bene- Percent of
Class of Group ficial Ownership (1) Class
- - ---------------------------------------------------------------------------
Common Stock James E. Upfield 1,085,890 (2) 31.2%
Common Stock E. R. Buford 109,062 (3) 3.1%
Common Stock Joseph V. Mariner, Jr. 6,725 (4) *
Common Stock Larry J. Parsons 7,000 (4) *
Common Stock Scott K. Upfield 29,500 (5) 1.0%
Common Stock Richard W. Griner 4,500 (5) *
Common Stock R. N. Stivers 27,543 (6) 1.0%
--------- ----
1,270,220 36.5%
__________
* 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 60,000 shares of Common Stock exercisable
under the 1990 Plan.
(4) Includes 6,500 shares of Common Stock exercisable under
the Outside Director Plan.
(5) Includes 4,000 shares of Common Stock exercisable under
the Outside Director Plan.
(6) Includes 5,000 shares of Common Stock exercisable under
the 1990 Plan.
-24-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the Annual Meeting of Stockholders of the Company held
December 21, 1976, the Company's stockholders approved a Share
Purchase Agreement ("Agreement") among the Company, Mr. James E.
Upfield and RepublicBank Dallas, (succeeded by NationsBank of
Texas, N.A.) as trustee (the "Trustee"), pursuant to which the
Company may purchase, or may be required, following the death of
Mr. Upfield, to purchase from the estate of Mr. Upfield (the
"Estate") up to that maximum number of shares of Common Stock
whose aggregate purchase price does not exceed the lesser of (a)
the sum of (i) the estate, inheritance, legacy and succession
taxes (including any interest collected as a part of such taxes)
imposed because of Mr. Upfield's death and (ii) the amount of
funeral and administrative expenses allowable as deductions in
computing the taxable estate of Mr. Upfield under Section 2053 of
the Code, or (b) the amount paid to the Trustee pursuant to the
Agreement upon and by reason of the death of Mr. Upfield pursuant
to a life insurance policy in the amount of $500,000 carried by
the Company on the life of Mr. Upfield.
The purpose of the Agreement is to provide an orderly means for
the Estate to raise funds to pay all estate and inheritance taxes
and funeral and administrative expenses without necessitating the
sale of a large number of shares of 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 Common Stock.
The purchase price of a share of Common Stock under the Agreement
is an amount equal to 90% of the mean between the highest and
lowest quoted selling price for a share of Common Stock in any
public securities exchange or market, if available, or otherwise
the mean between the bona fide closing bid and asked prices
therefore in said exchange or market, on the date of death of Mr.
Upfield, or if no such sales or bid and asked prices are
available on such date, then the weighted average of the mean
between the highest and lowest selling prices, or bona fide bid
and asked prices, as the case may be, for a share of Common Stock
on the nearest trading date before and the nearest trading date
after the date of death of Mr. Upfield (such average to be
weighted inversely by the respective number of trading dates
between the selling dates or the price quotation dates and such
date of death in the same manner used in determining the
valuation of stock for federal estate tax purposes as set forth
in Treasury Regulation Section 20.2031-2(d) promulgated by the
Commissioner of Internal Revenue under Section 2031 of the Code).
Such purchase price would have been $3.16, if computed as of
November 12, 1997.
The Estate will not be obligated to sell any shares of Common
Stock under the Agreement unless prior to the closing of such
sale the Estate has obtained a ruling from the Internal Revenue
Service, or an opinion of counsel satisfactory in form and
content to the Estate, to the effect that the purchase by the
Company will be treated as a distribution in full payment and
exchange therefor under Section 302(b) of the Code. The Company
will not be required to purchase any shares of Common Stock under
the Agreement if and to the extent that such a purchase would
result in an impairment of its capital or would otherwise be in
violation of applicable state law relative to the Company's
purchase of its shares of Common Stock.
The Company, pursuant to the Agreement, has transferred to the
Trustee, as beneficiary, an existing life insurance policy on the
life of Mr. Upfield in the amount of $500,000. The Company is
the owner of such insurance policy; however, under certain
conditions described below, Mr. Upfield will have the right to
purchase all, or any part, of such policy. The premium payable
by the Company for such insurance policy is $21,049 per year.
The premiums paid by the Company are not deductible by it for
federal income tax purposes, and the proceeds of the policy when
paid to the Trustee and used to purchase the shares of Common
Stock under the Agreement or transferred to the Company will not
constitute income to the Company for federal income tax purposes.
The Trustee is to hold in its custody until the death of Mr.
Upfield or termination of the Agreement (in which event it is to
return to the Company) the insurance policy on the life of Mr.
Upfield. Upon and after the death of Mr. Upfield, the Trustee is
to make claim for, collect, hold, deposit or invest, and pay over
the proceeds of the insurance policy on the life of Mr. Upfield
and any deposits or investments thereof and interest earned
thereon
-25-
for the account of the Company. In the event the proceeds from
such insurance policy are greater than the amount required to
purchase the shares of Common Stock from the Estate, such excess
will be paid to the Company. The Company will reimburse the
Trustee for its expenses in carrying out the provisions of the
Agreement and will pay reasonable and customary compensation.
The Agreement may be terminated (a) upon the determination of
bankruptcy or the dissolution of the Company, (b) upon the
cessation of regular business of the Company, (c) at the option
of the Company, in the event the purchase price thereunder
exceeds 200% of the book value of a share of Common Stock,
determined as of the end of the fiscal quarter immediately
preceding the date of Mr. Upfield's death, (d) at the option of
the Estate, in the event the purchase price thereunder is less
than 75% of the book value of a share of Common Stock, determined
as of the end of the fiscal quarter immediately preceding the
date of Mr. Upfield's death or (e) by the mutual written consent
of Mr. Upfield or the Estate and the Company. In addition, if
Mr. Upfield disposes, during his lifetime, of all of the Common
Stock he now owns, the Agreement will be terminated.
The Agreement provides that if it is terminated during Mr.
Upfield's life, he will have the right to purchase from the
Company any part or all of the insurance policy on his life
subject to the Agreement. The purchase price of such insurance
policy will be equal to its cash surrender value, net of any
policy indebtedness, plus any unearned premium thereon at the
date of purchase.
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 is for a
twenty-five year term commencing November 15, 1989 and provides
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.
In 1994, the Company entered into employment agreements with
Messrs. E. R. Buford and R. N. Stivers. The employment
agreements are described under the caption "Executive
Compensation-Employment Contract Agreements."
-26-
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. *
3.2 Amended and Restated Bylaws. *
(10) Material Contracts
10.10 1990 Stock Option Plan for Key Employees
of Temtex Industries, Inc. and its
subsidiaries. *
10.11 Outside Directors Stock Option Plan of
Temtex Industries, Inc. *
10.12 Share Purchase Agreement between the
Registrant and Mr. James E. Upfield
effective December 21, 1976. *
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"). *
10.14 Second Amendment to the Howard Lease
Agreement dated August 22, 1983. *
10.15 Lease Agreement between HUTCO and the
Registrant, dated September 7, 1989. *
10.16 Lease Agreement between HUTCO and the
Registrant, dated April 25, 1994. **
10.17 Loan Agreement between NationsBank of
Texas, N.A. and the Registrant dated
May 3, 1994. **
10.18 Employment contract between E. R. Buford
and the Registrant dated June 7, 1994.**
-27-
10.19 Employment contract between R. N.
Stivers and the Registrant dated June 7,
1994. **
10.20 First amendment to the loan agreement
between NationsBank of Texas, N.A. and
the Registrant dated May 3, 1994.***
10.21 Second amendment to the loan agreement
between NationsBank of Texas, N.A. and
the Registrant dated May 3, 1994.***
10.22 Loan agreement between Bank of America
and the Registrant dated May 1,
1996.****
10.23 Waiver agreement to the loan between
Bank of America and the Registrant dated
May 1, 1996.*****
(21) Subsidiaries of the Registrant.
21.1 Subsidiaries of the Registrant. *
(23) Consents of Experts and Counsel
23.1 Consent of Independent Auditors.*****
(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 an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended August 31, 1993, and
incorporated by reference herein.
** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended August 31, 1994, and
incorporated by reference herein.
*** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended August 31, 1995 and
incorporated by reference herein.
**** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended August 31, 1996 and
incorporated by reference herein.
***** Filed herewith.
-28-
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.
/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 Title Date
---------- ----- ----
/s/ James E. Upfield Director, Chairman of the Board 11/24/97
- - --------------------- --------
James E. Upfield
/s/ E. R. Buford Director, President and Chief 11/24/97
- - -------------------- Executive Officer --------
E. R. Buford
/s/ R. N. Stivers Vice President-Finance, 11/24/97
- - -------------------- Chief Financial Officer and --------
R. N. Stivers Chief Accounting Officer
/s/Scott K. Upfield Director 11/24/97
- - -------------------- --------
Scott K. Upfield
-29-
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
YEAR ENDED AUGUST 31, 1997
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
DALLAS, TEXAS
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, 1997 and 1996
Consolidated statements of operations--Years ended August
31, 1997, 1996 and 1995
Consolidated statements of stockholders' equity--Years ended
August 31, 1997, 1996 and 1995
Consolidated statements of cash flows--Years ended August
1997, 1996, 1995
Notes to consolidated financial statements--August 31, 1997
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, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended August 31, 1997. 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Temtex Industries, Inc. and subsidiaries at
August 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of three years in the
period ended August 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Dallas, Texas
October 17, 1997
CONSOLIDATED BALANCE SHEETS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31,
-----------------
1997 1996
------ -------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 575 $ 445
Accounts receivable, less allowance for
doubtful accounts: 1997--$364,000
and 1996--$435,000--Note C 5,100 6,971
Inventories--Notes B and C 8,172 10,224
Prepaid expenses and other assets 258 285
Income taxes recoverable--Note G 653 --
Deferred taxes--Note G 440 226
------- -------
TOTAL CURRENT ASSETS 15,198 18,151
DEFERRED TAXES--Note G 163 672
OTHER ASSETS 183 381
ASSETS RELATED TO DISCONTINUED OPERATIONS--Note H -- 202
PROPERTY, PLANT AND EQUIPMENT--Notes C and F
Land and clay deposits 405 325
Buildings and improvements 3,491 3,491
Machinery, equipment, furniture and
fixtures 24,086 23,289
Leasehold improvements 869 866
------- -------
28,851 27,971
Less allowances for depreciation,
depletion and amortization 21,162 19,367
------- -------
7,689 8,604
------- -------
$23,233 $28,010
======= =======
-1-
August 31,
-----------------
1997 1996
------ -------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable--Note C $ 800 $ 3,099
Accounts payable 2,459 4,714
Accrued expenses--Note D 1,738 1,708
Income taxes payable--Note G -- 57
Current maturities of indebtedness
to related parties--Notes C and F 9 8
Current maturities of long-term obliga-
tions--Note C 202 236
------- -------
TOTAL CURRENT LIABILITIES 5,208 9,822
INDEBTEDNESS TO RELATED PARTIES,
less current maturities--Notes C and F 1,604 1,613
LONG-TERM OBLIGATIONS, less current
maturities--Note C 640 605
COMMITMENTS AND CONTINGENCIES--Notes F and L
STOCKHOLDERS' EQUITY--Notes E and K
Preferred stock--$1 par value; 1,000,000
shares authorized, none issued -- --
Common stock--$.20 par value; 10,000,000
shares authorized, 5,278,625 shares
issued at August 31, 1997 and 5,268,625 shares
issued at August 31, 1996 718 716
Additional capital 9,246 9,236
Retained earnings 6,144 6,345
------- -------
16,108 16,297
Less:
Treasury stock:
At cost--113,696 shares 327 327
At no cost--1,687,788 shares -- --
------- -------
15,781 15,970
------- -------
$23,233 $28,010
======= =======
See notes to consolidated financial statements.
-2-
CONSOLIDATED STATEMENTS OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31,
-------------------------------------
1997 1996 1995
------- ------- -------
(in thousands except share data)
Net sales $39,208 $41,972 $42,904
Cost of goods sold 29,693 30,977 30,962
------- ------- -------
9,515 10,995 11,942
Costs and expenses:
Selling, general and administrative 9,455 9,548 10,782
Interest 519 583 424
Other income (114) (2) (122)
------- ------- -------
9,860 10,129 11,084
------- ------- -------
(LOSS) INCOME FROM OPERATIONS
BEFORE INCOME TAXES (345) 866 858
State and federal income
taxes--Note G:
(Benefit) provision (144) 324 369
------- ------- -------
NET INCOME $ (201) $ 542 $ 489
======= ======= =======
(Loss) income per common share $ (.06) $ .16 $ .14
======= ======= =======
Weighted average common and common
equivalent shares outstanding 3,474,155 3,491,131 3,502,887
========= ========= =========
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, 1994 3,456,641 $ 714 $ 9,215 $ 5,314 $ 327
Exercise of stock options 7,500 1 10
Net income 489
--------- ------ ------- ------- ------
BALANCE AT AUGUST 31, 1995 3,464,141 715 9,225 5,803 327
Stock award 3,000 1 11
Net income 542
--------- ------ ------- -------- ------
BALANCE AT AUGUST 31, 1996 3,467,141 716 9,236 6,345 327
Exercise of stock options 10,000 2 10
Net loss (201)
--------- ------ -------- ------- ------
BALANCE AT AUGUST 31, 1997 3,477,141 $ 718 $ 9,246 $ 6,144 $ 327
========= ====== ======== ======== ======
See notes to consolidated financial statements.
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31,
---------------------------
1997 1996 1995
-------- -------- -------
(in thousands)
OPERATING ACTIVITIES
Net (loss) income $ (201) $ 542 $ 489
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation, depletion and amortization 2,062 1,964 1,509
Deferred taxes 295 (18) 84
Gain on disposition of buildings and equipment (96) (9) (94)
Provision for doubtful accounts 271 198 186
Changes in operating assets and liabilities:
Accounts receivable 1,600 (158) 532
Inventories 2,052 (1,451) 11
Prepaid expenses and other assets 40 101 45
Accounts payable and accrued expenses (2,225) 492 (958)
Income taxes payable (710) 500 (446)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,088 2,161 1,358
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,161) (2,065) (4,254)
Expenditures on assets related to discontinued
operations (44) (129) --
Proceeds from disposition of property, plant
and equipment 150 12 99
Proceeds from disposition of assets and other
receipts related to discontinued operations 398 26 6
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (657) (2,156) (4,149)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 265 1,099 3,893
Principal payments on revolving line of
credit, long-term obligations and indebtedness
to related parties (2,578) (1,407) (1,004)
Proceeds from issuance of common stock 12 12 11
------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (2,301) (296) 2,900
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 130 (291) 109
Cash and cash equivalents at beginning of year 445 736 627
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 575 $ 445 $ 736
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Capital lease obligations $ 7 $ -- $ 1,040
Charges to allowance for doubtful accounts $ 342 $ 304 $ 173
See notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31, 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The Company is a major producer of metal fireplace
products and face brick products. The Company manufactures its
fireplace products in facilities located in Manchester,
Tennessee, Perris, California and Mexicali, Mexico. Face brick
products are manufactured 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.
PRINCIPLES OF CONSOLIDATION: The 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.
USE OF ESTIMATES: The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles 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 or replacement value. Work in process and finished goods
are stated at the lower of cost or net realizable value, which is
less than replacement value.
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. Depletion of clay
deposits and amortization of leasehold improvements and
capitalized leases are computed using the straight-line method.
The estimated useful lives used in computing depreciation,
depletion, and amortization are:
Years
-------------
Clay deposits 10-20
Buildings and improvement s 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 in accordance with the Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--Continued
INCOME PER COMMON SHARE: Income per common share is based upon
the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. 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 common 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. Fully diluted income per common share is not presented
because dilution is not significant.
The Company will adopt Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share", in its
quarter ending February 28, 1998, at which time it will restate
all periods presented. The Company does not believe the adoption
of SFAS 128 will be material.
CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK: The Company manufactures and sells
fireplace and brick 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.
NOTE B--INVENTORIES
Inventories by costing method are summarized below:
First-in Average
First-out Cost Total
--------- -------- -------
(in thousands)
August 31, 1997:
Finished goods $ 2,727 $ 669 $ 3,396
Work in process 1,029 101 1,130
Raw materials and supplies 3,057 589 3,646
------- ------- -------
$ 6,813 $ 1,359 $ 8,172
======= ======= =======
August 31, 1996:
Finished goods $ 3,591 $ 593 $ 4,184
Work in process 1,064 107 1,171
Raw materials and supplies 4,353 516 4,869
------- ------- -------
$ 9,008 $ 1,216 $10,224
======= ======= =======
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE C--NOTES PAYABLE AND LONG-TERM DEBT
In May 1996, the Company entered into a two year credit agreement
with a bank whereby the Company may borrow a maximum of
$4,000,000 under a revolving credit facility. At the option of
the Company, borrowings under the demand note may bear interest
at the lending bank's prime commercial interest rate or at the
London Interbank Offered Rate ("LIBOR") plus 1.25 percentage
points. Interest is payable on a monthly basis. The Company's
obligation to the bank is secured by accounts receivable and
inventory. The loan agreement contains covenants that require
the maintenance of a specified ratio of quick assets to current
liabilities, as defined, and a specified ratio of total
liabilities to tangible net worth, as defined, both ratios to be
measured on a quarterly basis beginning August 31, 1996. At
August 31, 1997, the Company is in compliance with these two
covenants. Another covenant requires the Company to maintain a
positive net income for each annual accounting period. As a
result of the inability of the Company to comply with this
covenant, the lending bank has waived this requirement for the
year ended August 31, 1997. Advances under the new credit
agreement were used to repay both the balance outstanding and
accrued interest on a two year revolving credit facility that
expired in May 1996, as scheduled. Also, a promissory term note
that had been added to the expiring revolving credit note was
repaid at the same time, even though final payment was not
scheduled to be made until March 1998. At August 31, 1997,
$800,000 was outstanding under the revolving credit note.
The weighted average interest rates on borrowings under the
revolving credit notes as of August 31, 1997 and August 31, 1996
were 8.0% and 6.8%, respectively.
Long-term obligations are summarized as follows:
August 31,
----------------
1997 1996
------ ------
(in thousands)
Long-term obligations:
Capitalized lease obligations, with interest
at 9.0% to 15.5%--Note F $2,113 $2,150
Equipment and land notes with interest at 6.4%
to 9.0%, due in monthly installments
ending in 2007 342 312
------ ------
2,455 2,462
Less current maturities 211 244
------ ------
$2,244 $2,218
====== ======
Annual maturities of long-term obligations for each of the five
succeeding fiscal years and thereafter are $211,000, $124,000,
$78,000, $57,000, $60,000, and $1,925,000.
The Company made interest payments in 1997, 1996 and 1995 of
$519,000, $621,000 and $363,000, respectively.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE D--ACCRUED EXPENSES
Accrued expenses include the following:
August 31,
----------------
1997 1996
------ ------
(in thousands)
Employee compensation $ 429 $ 491
Taxes, other than taxes on income 129 126
Interest 120 119
Other 1,060 972
------ ------
$1,738 $1,708
====== ======
NOTE E--STOCK OPTIONS
In 1990, the Company adopted a stock option plan for key
employees to replace a prior plan that expired on August 31,
1989. Options may include "incentive stock options" within the
meaning of Section 422A of the Internal Revenue Code of 1986 or
"non-qualified stock options." Options and SARs may be granted
to key employees at prices not less than the market value at the
date of grant for terms not to exceed ten years in the case of
incentive stock options and ten years and one month in the case
of non-qualified stock options. Under the original plan, 95,000
shares of common stock were reserved for future issuance. The
plan was amended in 1995 in which the number of shares eligible
for issuance was increased to 195,000. The aggregate number of
options which may be awarded to any one employee in any fiscal
year will not exceed 25,000.
In 1990, the Company adopted a stock option plan for directors of
the Company who are not employees of the Company. Options may be
granted at prices not less than the market value of the stock at
the time of the grant for terms not to exceed ten years from the
date of the grant. The maximum number of shares for which
options may be granted to any outside director during a calendar
year is 2,500. Under this plan, 30,000 shares of common stock
were reserved for future issuance.
The following table indicates the number of options granted and
exercised for each plan:
Key Outside
Employee Director
Plan Plan
-------- --------
Options outstanding at August 31, 1995 152,500 15,000
Granted -- --
Exercised -- --
------- -------
Options outstanding at August 31, 1996 152,500 15,000
Granted -- 6,000
Exercised 10,000 --
------- -------
Options outstanding at August 31, 1997 142,500 21,000
======= =======
Options exercisable at August 31, 1997 107,500 21,000
======= =======
Option prices range from $1.19 to $4.94 per share and expire
between 1999 and 2005.
The Company has elected to continue to follow the expense
recognition criteria in Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees".
Therefore, SFAS 123, "Accounting for Stock-Based Compensation",
has no effect on the Company's financial statements. The pro
forma disclosures mandated by SFAS 123 are not provided as the
effect of adopting the expense recognition criteria of
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE E--STOCK OPTIONS--Continued
SFAS 123 for stock options granted subsequent to August 31, 1995
would not be material to the Company.
NOTE F--LEASE COMMITMENTS
Two leased plant facilities are accounted for as a capitalized
lease. 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 $358,000 and $391,000 at August
31, 1997 and 1996, 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 $1,296,000 and
$1,362,000 at August 31, 1997 and 1996, 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
2001. The capitalized leases expire in fiscal 2009 and fiscal
2019.
Future minimum payments, by year and in the aggregate, under
capital leases and noncancelable operating leases, consisted of
the following at August 31, 1997:
Capital Operating
Leases Leases
------- ---------
(in thousands)
Fiscal Year:
1998 $ 348 $ 325
1999 337 238
2000 334 219
2001 334 128
2002 334 11
Thereafter 4,873 --
------ ------
Total minimum lease payments 6,560 $ 921
======
Amount representing interest 4,447
------
Present value of net minimum
lease payments $2,113
======
Rental expense for operating leases was $394,000, $351,000 and
$265,000 in 1997, 1996 and 1995, respectively.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE G--INCOME TAXES
Significant components of the (benefit) provision for income
taxes attributable to continuing operations are as follows:
Year Ended August 31,
--------------------------
1997 1996 1995
------ ------ ------
(in thousands)
Current:
Federal $ (157) $ 207 $ 173
State 119 111 112
Foreign 0 24 --
------ ------ ------
Total current (38) 342 285
Deferred:
Federal (45) (53) 123
State (61) 35 (39)
------ ------ ------
Total deferred (106) (18) 84
Total income tax (benefit)
expense $ (144) $ 324 $ 369
====== ====== ======
The Company utilized investment tax credit carryforwards of
$50,000 and $40,000, respectively, in 1995 and 1996.
The Company generated a federal net operating loss of
approximately $1,200,000 in 1997 which the Company anticipates
carrying back to the tax year ended August 31, 1994 and is
included in income taxes recoverable. Any unused net operating
loss will expire in the year 2013.
The Company has state net operating loss carryforwards of
approximately $3,700,000 expiring in the years 2004 through 2008.
In addition, the Company has investment tax credit carryforwards
of approximately $80,000 expiring in years 2001 and 2002, and
approximately $175,000 of alternative minimum tax credits which
have no expiration date.
The differences between the (benefit) provision for income taxes
and income taxes computed using statutory income tax rates are as
follows:
Year Ended August 31,
-------------------------
1997 1996 1995
----- ----- -----
(in thousands)
Income tax (benefit) expense at
statutory rate $(117) $ 294 $ 292
Additional statutory percentage
depletion (52) (55) (55)
State income taxes, net of federal
tax benefit 39 73 49
Other (14) 12 83
----- ----- -----
Total income tax (benefit)
expense $(144) $ 324 $ 369
===== ===== =====
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
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,
----------------
1997 1996
------ ------
(in thousands)
Deferred tax assets:
Accounts receivable allowance $ 124 $ 174
Capital lease obligation 54 72
Book over tax depreciation -- 302
Other 536 416
------ ------
Total deferred tax assets 714 964
Deferred tax liabilities (111) (66)
------ ------
Net deferred tax assets $ 603 $ 898
====== ======
The Company made federal and state income tax payments in 1997,
1996 and 1995, respectively, of $272,000, $263,000, and $803,000.
NOTE H--DISCONTINUED OPERATIONS
In 1993, management of the Company decided to discontinue the
Company's contract products segment.
In fiscal 1996, the Company leased the building and the majority
of the land. The initial lease term was for a period of five
years with an option to extend the lease for an additional five
year period. The lease also contained an option to purchase the
property during the first two years of the initial lease period.
In fiscal 1997, the leased building and land were sold to the
lessee. The remaining parcel of land, which has a net book value
of $0, is on the market to be sold.
NOTE I-- EMPLOYEE BENEFIT PLAN
During 1992, the Company adopted a defined contribution pension
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 total expense for Company contributions was $92,000, $40,000
and $35,000 in 1997, 1996 and 1995, respectively.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE J--BUSINESS SEGMENTS
The following financial information is presented for the
Company's business segments:
Face Brick Fireplace
Products Products Total
---------- --------- -------
(in thousands)
1997:
Net sales $9,010 $30,198 $39,208
====== ======= =======
Operating profit $1,608 $ (238) $ 1,370
====== =======
Unallocated corporate
expense, net (1,310)
Interest expense (519)
Other income 114
-------
Loss from continuing
operations before income taxes $ (345)
=======
Identifiable assets $4,200 $17,042 $21,242
====== =======
Corporate assets 1,991
-------
Total assets $23,233
=======
Depreciation, depletion
and amortization $ 391 $ 1,667
====== =======
Capital expenditures $ 476 $ 682
====== =======
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE J--BUSINESS SEGMENTS--Continued
Face Brick Fireplace
Products Products Total
---------- --------- -------
(in thousands)
1996:
Net sales $8,862 $33,110 $41,972
====== ======= =======
Operating profit $1,401 $ 892 $ 2,293
====== =======
Unallocated corporate
expense, net (846)
Interest expense (583)
Other income 2
-------
Income from continuing
operations before income taxes $ 866
=======
Identifiable assets $4,183 $21,927 $26,110
====== =======
Corporate assets 1,698
Assets related to
discontinued operations 202
-------
Total assets $28,010
=======
Depreciation, depletion
and amortization $ 385 $ 1,579
====== =======
Capital expenditures $ 335 $ 1,722
====== =======
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE J--BUSINESS SEGMENTS--Continued
Face Brick Fireplace
Products Products Total
---------- --------- -------
(in thousands)
1995:
Net sales $8,400 $34,504 $42,904
====== ======= =======
Operating profit $1,241 $ 1,089 $ 2,330
====== =======
Unallocated corporate
expense, net (1,170)
Interest expense (424)
Other income 122
-------
Income from continuing operations
before income taxes $ 858
=======
Identifiable assets $4,053 $20,611 $24,664
====== =======
Corporate assets 2,452
Assets related to
discontinued operations 99
-------
Total assets $27,215
=======
Depreciation, depletion
and amortization $ 345 $ 1,163
====== =======
Capital expenditures $1,264 $ 4,030
====== =======
Operating profit is net sales less operating expenses. In computing
segment operating profit, the following items are excluded: general
corporate revenues and expenses, interest expense, other income, and
income taxes. There are no sales between segments.
Identifiable assets are those assets used in either segment. Corporate
assets are principally cash and deferred taxes.
Sales to any one customer were not ten percent or greater of the total
sales in any of the three years reported.
The Company will be required to adopt SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information", in its fiscal year
beginning September 1, 1998. The Company does not believe that the
adoption of SFAS 131 will materially change its disclosures regarding
industry segment information.
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE K--Share Repurchase Agreement
On December 21, 1976, the stockholders approved a Share Repurchase
Agreement (the "Agreement") among the Company, the Chairman of the
Board of Directors (the "Chairman"), and a trustee under which the
Company may be required to purchase a number of shares of common stock
from the Chairman's estate upon his death. The purchase price of a
share of common stock under this Agreement is to be 90% of the quoted
market value at the date of the Chairman's death. The aggregate
purchase price may not exceed the lesser of certain taxes and expenses
associated with his death or the benefits under a certain life
insurance policy on the life of the Chairman. This policy, purchased
by the Company at an annual premium of $21,000, has been transferred to
the Trustee under this Agreement.
The Company is not required to purchase any shares of common stock
under the Agreement if such purchase would result in an impairment of
its capital or would violate state laws in effect at that date.
NOTE L--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.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE M--QUARTERLY RESULTS (UNAUDITED)
Summary data relating to the results of operations for each quarter of
the years ended August 31, 1997 and 1996 follows (in thousands except
per share amounts):
Three Months Ended
--------------------------------------------------------------
November 30 February 28 May 31 August 31 Total
----------- ----------- -------- --------- -------
Fiscal year 1997:
Net sales $13,086 $ 8,985 $ 8,479 $ 8,658 $39,208
Gross profit 4,011 2,298 1,664 1,542 9,515
Income (loss) from
continuing operations 753 (88) (376) (490) (201)
Net income (loss) 753 (88) (376) (490) (201)
Per share:
Continuing operations $.22 $(.03) $(.11) $(.14) $(.06)
Net income (loss) .22 (.03) (.11) (.14) (.06)
Fiscal year 1996:
Net sales $12,993 $ 9,060 $ 9,660 $10,259 $41,972
Gross profit 4,076 2,337 2,122 2,460 10,995
Income (loss) from
continuing operations 581 (34) (27) 22 542
Net income (loss) 581 (34) (27) 22 542
Per share:
Continuing operations $.16 $(.01) $(.01) $.01 $.16
Net income (loss) .16 (.01) (.01) .01 .16
-17-
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended August 31, 1995, 1996 and 1997
(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, 1995
Reserve, deducted from related asset:
Allowance for doubtful accounts $522 $186 $ 6 (1) $173 (2) $541
==== ==== ==== ==== ====
Year ended August 31, 1996
Reserve, deducted from related asset:
Allowance for doubtful accounts $541 $198 $ -- $304 (2) $435
==== ==== ==== ==== ====
Year ended August 31, 1997
Reserve, deducted from related asset:
Allowance for doubtful accounts $435 $271 $ -- $342 (2) $364
==== ==== ==== ==== ====
(1) Other additions represent collections on receivables
previously written off.
(2) Amount charged against reserve.
II