SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended February 28, 1999 Commission File No. 0-5940 TEMTEX INDUSTRIES, INC. ----------------------------------------------------- (Exact name of Registrant as specified in its Charter) Delaware 75-1321869 - ---------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No. 5400 LBJ Freeway, Suite 1375, Dallas, Texas 75240 - ------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) 972/726-7175 - --------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No ----- ----- The Registrant had 3,479,641 shares of common stock, par value $.20 per share, outstanding as of the close of the period covered by this report. PART I. FINANCIAL INFORMATION TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In Thousands Except Share Amounts) Three Months Ended Six Months Ended February 28, February 28, February 28, February 28, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales $ 6,310 $ 6,132 $ 13,985 $ 14,403 Cost of goods sold 5,638 4,755 11,720 10,653 ------------ ------------ ------------ ------------ 672 1,377 2,265 3,750 Cost and expenses: Selling, general and administrative 1,878 1,784 3,913 3,837 Interest 76 109 188 220 Other expense (income) 6 (3) 8 (2) ------------ ------------ ------------ ------------ 1,960 1,890 4,109 4,055 ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT AND DISCONTINUED OPERATIONS (1,288) (513) (1,844) (305) State and federal income tax benefit-Note B (448) (174) (599) (93) ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS (840) (339) (1,245) (212) GAIN FROM DISPOSAL AND OPERATING INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- Note H 4,828 378 5,434 636 ------------ ------------ ------------ ------------ NET INCOME $ 3,988 $ 39 $ 4,189 $ 424 ============ ============ ============ ============ Basic and diluted (loss) income per common share: Continuing operations $ (.24) $ (.10) $ (.36) $ (.06) ====== ====== ====== ====== Net Income: Basic $ 1.15 $ .01 $ 1.20 $ .12 ====== ====== ====== ====== Diluted $ 1.13 $ .01 $ 1.19 $ .12 ====== ====== ====== ====== Basic Weighted average common shares outstanding 3,477,458 3,477,141 3,477,298 3,477,141 ============ ============ ============ ============ Diluted weighted average common and common equivalent shares outstanding 3,523,628 3,527,877 3,525,963 3,528,536 ============ ============ ============ ============ See notes to condensed consolidated financial statements. -2- TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In Thousands) February 28, 1999 August 31, 1998 ----------------- --------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,720 $ 327 Accounts receivable, less allowance for doubtful accounts of $329,000 at February 28, 1999 and $264,000 at August 31, 1998 3,966 3,959 Inventories-Note D 9,064 7,749 Prepaid expenses and other assets 327 182 Income taxes recoverable -- 35 Deferred taxes 477 607 Net current assets of discontinued operations -- 1,929 --------- --------- TOTAL CURRENT ASSETS 21,554 14,788 DEFERRED TAXES 266 138 OTHER ASSETS 1,660 392 PROPERTY, PLANT AND EQUIPMENT Buildings and improvements 2,615 2,615 Machinery, equipment, furniture and fixtures 17,481 16,989 Leasehold improvements 1,090 1,059 --------- --------- 21,186 20,663 Less allowances for depreciation, depletion and amortization 16,060 15,471 --------- --------- 5,126 5,192 Property, plant and equipment of discontinued operations, net of accumulated depreciation of $7,232. -- 1,974 --------- --------- $ 28,606 $ 22,484 ========= ========= -3- February 28, 1999 August 31, 1998 ----------------- --------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable--Note E $ -- $ 700 Accounts payable 2,664 1,864 Accrued expenses 950 1,327 Income taxes payable 2,476 -- Current maturities of indebtedness to related parties 12 11 Current maturities of long-term obligations--Note E 27 48 --------- --------- TOTAL CURRENT LIABILITIES 6,129 3,950 INDEBTEDNESS TO RELATED PARTIES, less current maturities 1,588 1,593 LONG-TERM OBLIGATIONS, less current maturities--Note E 419 433 LONG-TERM OBILIGATIONS OF DISCONTINUED OPERATIONS less current maturities -- 220 COMMITMENTS AND CONTINGENCIES--Note F STOCKHOLDERS' EQUITY--Note G 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, 1998 and 5,286,125 at February 28, 1999 720 718 Additional capital 9,253 9,246 Retained earnings 10,840 6,651 --------- --------- 20,813 16,615 Less: Treasury stock: At cost - 118,696 and 113,696 shares for 1999 and 1998, respectively 343 327 At no cost - 1,687,788 shares -- -- --------- --------- 20,470 16,288 --------- --------- $ 28,606 $ 22,484 ========= ========= See notes to condensed consolidated financial statements. -4- TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended February 28, ------------------------- 1999 1998 ---------- ---------- OPERATING ACTIVITIES Net income $ 4,189 $ 424 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation, depletion and amortization 700 824 Discontinued operations: Gain on sale, net of tax (4,675) -- Income from operations, net of tax (759) (636) Gain on disposition of property, plant and equipment -- (14) Provision for doubtful accounts 73 79 Changes in operating assets and liabilities: Accounts receivable (80) 425 Inventories (1,315) (57) Prepaid expenses and other assets (1,039) 16 Accounts payable and accrued expenses (1,429) (284) Income taxes payable/recoverable 2,513 246 Cash (used in) provided by discontinued operations (1,986) 351 ---------- ---------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,808) 1,374 INVESTING ACTIVITIES Purchases of property, plant and equipment (523) (296) Purchases of property, plant and equipment, discontinued operations (24) (86) Proceeds from sale of discontinued operations 12,525 -- Proceeds from disposition of property, plant and equipment -- 1 Proceeds from disposition of property, plant and equipment, discontinued operations -- 15 ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 11,978 (366) FINANCING ACTIVITIES Proceeds from revolving line of credit and long-term borrowings -- -- Principal payments on revolving line of credit, long-term obligations and indebtedness to related parties (739) (537) Principal payments on long-term obligations, discontinued operations (31) (54) Proceeds from issuance of common stock 9 -- Purchase of treasury stock (16) -- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (777) (591) ---------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 7,393 417 Cash and cash equivalents at beginning of year 327 502 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,720 $ 919 ========== ========== See notes to condensed consolidated financial statements. -5- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Temtex Industries, Inc. (the Company) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six- month period ended February 28, 1999 are not necessarily indicative of the results that may be expected for the year ending August 31, 1999. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended August 31, 1998. NOTE B--INCOME TAXES Income taxes have been provided using the liability method for providing deferred taxes. Income from continuing operations for the first six months of fiscal 1999 reflects an estimated annualized tax rate of approximately 32.5%. NOTE C--INCOME PER COMMON SHARE Basic income per common share is based upon the weighted average number of shares of common stock outstanding during each period. Diluted income per share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Common stock equivalents include options granted to key employees and outside directors. The number of common stock equivalents was based on the number of shares issuable on the exercise of options reduced by the number of shares that are assumed to have been purchased at the average price of common stock during each quarter with the proceeds from the exercise of the options. NOTE D--INVENTORIES Inventories are summarized below: February 28, 1999 August 31, 1998 ----------------- --------------- (in thousands) Finished goods $ 2,929 $ 2,682 Work in process 899 899 Raw materials and supplies 5,236 4,168 --------- --------- $ 9,064 $ 7,749 ========= ========= -6- NOTE E--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. In April 1998, the credit agreement was amended whereby the maximum amount available under the revolving credit facility was reduced to $3,000,000 and the expiration date was extended for an additional two year period. 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. At February 28, 1999, the Company is in compliance with these covenants. At February 28, 1999, there was no balance outstanding under the revolving credit note. NOTE F-COMMITMENTS AND CONTINGENCIES Due to the complexity of the Company's operations, disagreements occasionally occur. In the opinion of management, the Company's ultimate loss from such disagreements and potential resulting legal action, if any, will not be significant. NOTE G--CAPITAL STOCK At February 28, 1999 and August 31, 1998, there were 1,000,000 shares of preferred stock, with a par value of $1 authorized. None have been issued. The Company's Board of Directors approved the repurchase of up to $1.0 million of the Company's Common Stock after a Special Shareholder's meeting held on January 5, 1999. As of February 28, 1999, 5,000 shares have been purchased on the open market and are included as treasury stock. At February 28, 1999 and August 31, 1998, there were 10,000,000 shares of par value $.20 common stock authorized of which 5,286,125 and 5,278,625 shares were issued at February 28, 1999 and August 31, 1998, respectively. Of the shares issued, 3,479,641 were outstanding at February 28, 1999 and 3,477,141 were outstanding at August 31, 1998. The remainder of the issued stock is comprised of 1,806,484 and 1,801,484 shares of treasury stock at February 28, 1999 and August 31, 1998, respectively. NOTE H-DISCONTINUED OPERATIONS On January 5, 1999, the Company sold its Texas Clay brick manufacturing division for approximately $12.9 million subject to final adjustments. Management believes that any final adjustments will not be significant. The financial statements have been restated to reflect Texas Clay as a discontinued operation. -7- NOTE H-- DISCONTINUED OPERATIONS - (continued) The components of the Company's results from the discontinued operation of Texas Clay, net of income taxes, are as follows: Three Months Ended Six Months Ended February 28, February 28, February 28, February 28, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Income from operations of Texas Clay before income taxes $ 280 $ 578 $ 1,171 $ 1,012 Income taxes 127 200 412 376 -------- -------- -------- -------- 153 378 759 636 Gain on disposal of Texas Clay before income taxes 7,420 7,420 Income taxes 2,745 2,745 -------- -------- -------- -------- 4,675 -- 4,675 -- -------- -------- -------- -------- Gain from disposal and income from discontinued operations, net of income taxes $ 4,828 $ 378 $ 5,434 $ 636 ======== ======== ======== ======== Income per share: Basic income per common share: Operations $ .04 $ .11 $ .22 $ .18 Gain on sale 1.35 -- 1.34 -- ----- ----- ----- ----- $1.39 $ .11 $1.56 $ .18 ===== ===== ===== ===== Diluted income per common and common equivalent share: Operations $ .04 $ .11 $ .22 $ .18 Gain on sale 1.33 -- 1.33 -- ----- ----- ----- ----- $1.37 $ .11 $1.55 $ .18 ===== ===== ===== ===== -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Among the risks and uncertainties to which the Company is subject are the risks inherent in the cyclical and unpredictable nature of the housing and home products business generally, fluctuations in interest rates, geographic concentration of the Company's primary market, the fact that the Company has experienced fluctuations in revenues and operating results, and the highly competitive nature of the industries in which the Company competes, together with each of those other factors set forth in the Company's filings made with the Securities & Exchange Commission. As a result, the actual results realized by the Company could differ materially from the results discussed in the forward-looking statements made herein. Words or phrases such as "will," "anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on the forward- looking statements made in this Quarterly Report on Form 10-Q. On January 5, 1999 the company sold its facility that produced face brick products. The results of operations and gain on the sale have been classified as discontinued operations. The following discussion focuses on the remaining segment of business, "Fireplace Products". Net Sales - --------- Net sales of fireplace products increased approximately 3% or $178,000 in the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998. The major portion of the sales increase results from an increase in the quantity of gas log sets delivered in the second quarter of 1999. Sales of zero-clearance fireplaces remained at approximately the same level as in 1998. Between the comparative six-month periods, net sales decreased approximately 3% in fiscal 1999. Net sales decreased for both fireplaces and gas log sets. Although the combined quantity for all models of fireplaces sold in the most recent six months period was greater than last year, the unit average selling price was less than last year's price. Competition within the industry continues to be a major factor in determining selling prices. Gross Profit - ------------ Gross profit decreased approximately 51% in the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998. Production at less than optimum levels results in under absorption of fixed costs and reduced gross profits. Gross profit decreased approximately 40% between the comparative six- month periods due to the lack of capacity utilization as in the comparative quarters. -9- Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses increased by $94,000 or approximately 5% in the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998. A portion of the increase was caused by the creation of a department within the sales organization for the exclusive purpose of managing the Canadian sales effort. Expenses related to home center sales also showed a slight increase. Between the comparative six-month periods, expenses increased $76,000 or approximately 2% for essentially the same reasons as the increase between the quarters. Interest Expense - ---------------- Interest expense decreased $33,000 or approximately 30% and $32,000 or 14% between the comparative quarters and six-month periods, respectively. The decrease in expense in both the second quarter and the first six months of fiscal 1999 was caused by the decrease in the average debt outstanding during both periods compared to those in fiscal 1998. Income Taxes - ------------ Income tax benefit of $599,000 for continuing operations for the first six months of fiscal 1999 is based on an estimated annualized effective tax rate of 32.5%. The effective tax rates applied to discontinued operations and the gain on the disposition of the discontinued operations were 35.2% and 37%, respectively. Liquidity and Capital Resources - ------------------------------- Net cash used by operating activities was $3,808,000 for the first six months of 1999 compared to net cash provided of $1,374,000 for the first six months of 1998. The decreased cash flow from operations in the first six months of fiscal 1999 was primarily due to the loss incurred by continuing operations as well as changes in working capital, principally increases in inventories, prepaids and other assets. The brick manufacturing division was sold for approximately $12,900,000, subject to final adjustments, of which $12,068,000 was received at closing on January 5, 1999. Price adjustments may include amounts for accounts receivable, inventories and prepaid items that differed in amounts on the closing date from amounts recorded at the time of the original agreement in 1998. Any price adjustments are not expected to be significant. The cash proceeds, estimated to be approximately $12,500,000 after final adjustments, have been used to pay down certain indebtedness with the remainder being available to enhance the Company's business operations through strategic acquisitions or other appropriate uses. Working capital increased from $10,838,000 at August 31, 1998 to $15,425,000 at February 28, 1999. Capital expenditures and capitalized lease obligations for the first six months of 1999 were $523,000. Expenditures include amounts for tooling, dies, replacement items and major repairs to manufacturing equipment. In May 1996, the Company entered into a two-year credit agreement with a bank whereby the Company may borrow up to $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 -10- is payable on a monthly basis and also at the end of the borrowing period if borrowing at a fixed rate. In April 1998, the credit agreement was amended whereby the maximum amount available under the revolving credit facility was reduced to $3,000,000 and the expiration date was extended for an additional two-year period. The revolving credit facility had no outstanding balance at February 28, 1999. The Company anticipates that cash flow from operations together with proceeds from the sale of the brick division and 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. Year 2000 Issue - --------------- Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. As a result, as year 2000 approaches, computer systems and applications used by many companies may need to be upgraded to comply with "Year 2000" requirements. The Company relies on its systems in operating and monitoring many significant aspects of its business, including financial systems (such as general ledger, accounts payable, accounts receivable, inventory and order management), customer services, infrastructure and network and telecommunications equipment. The Company also relies directly and indirectly on the systems of external business enterprises such as customers, suppliers, creditors and financial organizations. Based on various assessments during the past year, the Company determined that only minor modifications of its information and production software systems would be necessary in order to properly utilize dates beyond the year 1999. Most of the changes have already been made. Although the Company anticipates all remaining modifications to be completed in 1999, if such modifications were not made, management believes the year 2000 issue will not have a material impact on the operations of the Company. The cost for system modifications was approximately $11,000 and any further modification expenses are expected to be insignificant. At this date, the Company is not aware of any customer, vendor, or supplier (external agents) with a year 2000 issue that would materially affect the Company's results of operations, liquidity or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. Management is of the opinion that all significant year 2000 issues have been identified and addressed. Accordingly, the Company has not developed any year 2000 contingency plans for operations. -11- PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibits -------- Exhibit No. Description ---------- ----------- 27.1 Financial Data Schedule (filed herewith) (b). Report on Form 8-K ------------------ The Registrant filed one report on Form 8-K during the quarter for which this report is filed -12- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEMTEX INDUSTRIES, INC. DATE: 4/13/99 BY: /s/ E. R. BUFORD ------- ------------------------- E. R. Buford President DATE: 4/13/99 BY: /s/ R. N. STIVERS ------- ------------------------- R. N. Stivers Vice President-Finance -13-