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, 1998
[ ] 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 Section13 or 14 (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 13, 1998, the aggregate market value of the voting stock held by
nonaffiliates of Temtex Industries, Inc. was $7,169,441.
As of August 31, 1998 there were 3,477,141 shares of common stock, par value
$0.20 per share, of Temtex Industries, Inc. outstanding.
1
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. In 1992, the Company
introduced its Temco American Dream -TM- ventfree gas log product line. The
ventfree fireplace units provide heat from glowing artificial logs without the
use of a vent, flue or similar device. The Company 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, 1998, the Company had aggregate sales of fireplace products of
approximately $26.2 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 aire kits,
screens and grates. These items are incorporated into the zero clearance metal
fireplace units during the assembly process or shipped in conjunction with a
fireplace unit for subsequent assembly, depending upon customer specifications.
The Company does not currently manufacture accessories for fireplace units
manufactured by third parties or for existing masonry fireplaces.
VENTFREE GAS LOGS AND VENTFREE FIREPLACES. During fiscal 1992, the Company
introduced its American Dream -TM- ventfree gas log and a related ventfree
fireplace unit. The American Dream -TM- ventfree gas log is a simulated wood
log and burner set assembly utilizing a patented design licensed to the
Company. This design permits the burning of natural gas or liquefied
petroleum products, such as propane, to provide heat without the necessity of
venting carbon monoxide from the combustion area. The simulated wood logs
utilized in the American Dream -TM- ventfree gas log set are made of a soft
ceramic material to resemble wood logs and the embers produced by the burning
of wood logs. As the soft ceramic material is heated by the burner set, it
radiates heat and produces a red glow resembling that produced by wood logs
in a masonry fireplace. The Company also markets its ventfree gas logs as the
Firetech 2000-Registered Trademark- ventfree gas log, depending upon the
customer. Unlike vented fireplaces, which must be located where outside
venting can be effected, the Company's ventfree gas logs may be placed in any
location where a heat source is desired, including existing fireplaces.
Existing fireplaces can be modified to accommodate the use of the Company's
ventfree gas logs at a nominal cost.
2
The Company markets ventfree gas log products, which consist of several
different size ventfree gas log sets, ventfree gas heaters, and fireplace
units. The current fireplace products are marketed under either the American
Dream -TM- ventfree name or the Firetech 2000 -Registered Trademark- 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.
DIRECT-VENT GAS FIREPLACES. The Company purchased assets and technology of
Toronto based GSW, Inc. during the third quarter of fiscal 1998 for
approximately $700,000. The Company has converted the GSW products to the Temco
brand name and these products were introduced to the Company's distributors in
August 1998. The acquisition of the GSW product line made it possible for the
Company to expand its market presence in Canada and broaden the line of products
in the fast growing direct-vent gas fireplace market. The Company has added new
distributors in the United States and Canada as the result of the new
direct-vent line of products.
MARKETING AND DISTRIBUTION. The Company sells its fireplaces, ventfree gas logs
and related accessories nationwide through its own sales force and through third
party sales representatives primarily to contractors, wholesale distributors and
retailers. A majority of the Company's fireplaces are ultimately purchased by
homebuilders and others engaged in the construction of new housing or remodeling
of existing homes. The Company has distributors in all regions of the country
serving builders and remodelers. The Company's fireplace products are used by
many of the country's best know 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, 1998, 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 revised terms of this license, the Company has a non-exclusive
right to manufacture and distribute ventfree gas logs in the United States and
Mexico in conjunction with a prefabricated fireplace unit or other burn chamber,
and also the right to produce and sell ventfree gas logs independently of
fireplace units. 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.
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, 1998, the Company
had sales of face brick products of approximately $11.0 million.
Subsequent to August 31, 1998, the Company entered into an agreement to sell its
Texas Clay Division. Such sale is subject to shareholder approval amongst other
conditions, and is expected to close in December 1998.
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 728
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, 1998, two face brick customers 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.
4
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 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
Trademark-, Amberlight -Registered Trademark-, Temco American Dream -TM-,
Firetech 2000 -Registered Trademark- and Masterworks 280 -Registered
Trademark- 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 Patent License is
scheduled to expire 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
8/31/97 $ 1,672 $ 1,267 $ 2,939
Balance at
8/31/98 $ 2,956 $ 1,061 $ 4,017
As of August 31, 1998, the amount of backlog of orders shown above is believed
to be firm and the orders are expected to be filled during 1999. 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, 1998, the Company employed approximately 563 persons (including
employees of wholly-owned subsidiaries) of whom approximately 111 were salaried
and 452 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 base rental is $5,185.
FIREPLACE PRODUCTS
The Company manufactures and assembles its fireplace products in its facilities
at Manchester, Tennessee, Perris, California and Mexicali, Baja California,
Mexico. Management of the Company believes the availability of two plants
located in different geographic areas of the United States allows it to ship
products nationwide at a lower average freight cost than many of its competitors
operating out of a single plant.
The Company's Manchester 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 during April 1998 moved its Mexicali, Mexico operation to a larger
facility containing approximately 35,000 square feet. The lease for the facility
commenced April 20, 1998, provides for basic monthly rental of $11,732 (U.S.)
and expires in April 2005. 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.
7
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 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
FISCAL 1998
-----------
First Quarter $ 4.75 $ 2.88
Second Quarter 3.38 2.50
Third Quarter 4.63 3.13
Fourth Quarter 4.13 2.50
(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 13, 1998 was approximately 977. 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 1997 or 1998. 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.
8
ITEM 6. SELECTED FINANCIAL DATA
Years Ended August 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except share amounts)
Selected Statement of Operations Data:
Net Sales
Fireplace products ................................. $26,162 $30,198 $33,110 $34,504 $35,324
Face brick products ................................ 11,021 9,010 8,862 8,400 8,611
------- ------- ------- ------- -------
Total net sales .................................. 37,183 39,208 41,972 42,904 43,935
Cost of goods sold ................................... 27,045 29,317 30,977 30,962 29,391
------- ------- ------- ------- -------
Gross profit ......................................... 10,138 9,891 10,995 11,942 14,544
Selling, general and administrative expenses ......... 8,912 9,831 9,548 10,782 10,291
Interest expense ..................................... 464 519 583 424 526
Other income ......................................... (68) (114) (2) (122) (71)
------- ------- ------- ------- -------
Income (loss) before income taxes .................... 830 (345) 866 858 3,798
Income tax expense (benefit) ......................... 323 (144) 324 369 (280)
------- ------- ------- ------- -------
Net income (loss) .................................... 507 (201) 542 489 4,078
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic income (loss) per common share ................. $0.15 $(0.06) $0.16 $0.14 $1.28
Diluted income (loss) per common share ............... $0.14 $(0.06) $0.15 $0.14 $1.25
Basic weighted average common shares outstanding ..... 3,477,141 3,474,155 3,465,739 3,458,381 3,182,668
Diluted weighted average common and common
equivalent shares outstanding ...................... 3,531,414 3,474,155 3,531,631 3,543,915 3,272,880
August 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Balance Sheet Data:
Working capital ...................................... $10,838 $ 9,990 $ 8,329 $ 9,014 $10,189
Total assets ......................................... 23,647 23,233 27,808(4) 27,116(4) 23,643(4)
Short-term debt (1) ............................... 848 1,011 3,343 2,770 595
Long-term debt, excluding current maturities (2) .. 2,246 2,244 2,218 3,099 1,346
Stockholders' equity (3) .......................... 16,288 15,781 15,970 15,416 14,916
- - ---------------------------------
(1) Includes amounts borrowed under a revolving credit agreement and debt
payable within one year, including capitalized lease obligations to related
parties.
(2) Includes capitalized lease obligations to related parties.
(3) The Company has neither declared nor paid cash dividends during the
relevant periods.
(4) Excludes assets related to previously discontinued operations.
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 Industries 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 1998 COMPARED TO FISCAL YEAR 1997
NET SALES
FIREPLACE PRODUCTS. Net sales decreased $4.0 million or 13% in fiscal 1998
compared with fiscal 1997. The reduction in sales was the direct result of a
decrease in the quantity of gas burning fireplaces and log sets delivered in
fiscal 1998 due to the loss of a home center customer in fiscal 1997 and
unseasonably warm winter conditions in fiscal 1998. In addition, the Company has
been unable to increase selling prices for its products due to the competition
within the industry.
FACE BRICK PRODUCTS. Net sales increased approximately $2.0 million or 22% in
fiscal 1998 compared with fiscal 1997. The introduction of a new size of face
brick in the first quarter of fiscal 1998 in addition to a strong demand from
the construction industry in the region serviced by the brick manufacturing
facility was mainly responsible for the increase in sales. The increase in sales
was the result of an 18% increase in the quantity of brick sold as well as an
increase of approximately 3% in the price the Company received for the product.
GROSS PROFIT
FIREPLACE PRODUCTS. Gross profit decreased approximately 20% in fiscal 1998
compared with fiscal 1997. The decrease in sales volume was the major factor
contributing to the decrease in gross profit.
FACE BRICK PRODUCTS. Gross profit increased approximately 52% in fiscal 1998
compared with fiscal 1997. The increase resulted from the increases in sales
volume and selling prices, as well as favorable production efficiencies realized
in the manufacturing process.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses decreased 24% in fiscal 1998 compared with fiscal 1997. The
decrease was mainly due to decreases in payroll, selling commissions,
advertising and promotional display expenses.
General and administrative expenses increased approximately 7% in fiscal 1998
compared with fiscal 1997. The increase was mainly due to increases in
professional fees and the Company's contribution to the 401(k) employee benefit
plan.
10
INTEREST EXPENSE
Interest expense decreased $55,000 or 11% in fiscal 1998 compared with fiscal
1997. The decrease in interest expense was the direct result of the decrease in
the average indebtedness of the Company throughout fiscal 1998.
OTHER INCOME
Other income for both fiscal 1998 and 1997 includes small amounts of
miscellaneous income and expenses from various sources.
INCOME TAXES
The provision for income taxes, both current and deferred, increased from a
benefit of $144,000 in fiscal 1997 to an expense of $323,000 in fiscal 1998 due
to the significant improvement in operating results. In fiscal 1998, the income
tax provision consists of $176,000, $111,000 and $36,000 in federal, state and
foreign tax expenses, respectively.
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 million 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 15% 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 21% 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.
11
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,214,000, $3,088,000 and
$2,161,000 in fiscal 1998, 1997 and 1996, respectively. Working capital
increased $848,000 in fiscal 1998 due mainly to increases in accounts receivable
and inventories. In fiscal 1997, working capital increased $1,661,000 due to
decreases in notes payable and accounts payable.
Capital expenditures and capitalized lease obligations for fireplace and brick
products totaled $1,235,000 ($922,000 for fireplace products and $313,000 for
face brick products), $1,158,000 ($682,000 for fireplace products and $476,000
for face brick products) and $2,057,000 ($1,722,000 for fireplace products and
$335,000 for face brick products) in fiscal 1998, 1997 and 1996, respectively.
The majority of expenditures in each of the years was for tooling, replacement
items and major repairs to manufacturing equipment. Approximately 58 acres of
land were purchased in fiscal 1998 and approximately 117 acres were purchased in
fiscal 1997. The land is believed to contain clay/shale deposits that can be
mined for utilization in the production of face brick.
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. 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 an outstanding balance of
$700,000 at August 31, 1998. The credit facility requires the Company to
maintain certain minimum financial ratios, measured on a quarterly basis, in
addition to positive net income for each annual accounting period. At August 31,
1998, the Company is in compliance with these covenants.
In fiscal 1998, purchases of tooling and manufacturing equipment were made using
cash generated from operations. Proceeds from long-term notes were used to
purchase land.
Subsequent to August 31, 1998, the Company entered into an agreement for the
sale of its face brick products division. The agreement is subject to approval
by the Company's stockholders. The cash proceeds, estimated to be $12 million,
will be available to pay down certain indebtedness and enhance the Company's
remaining business operations through strategic acquisitions or other
appropriate uses.
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.
12
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations have not
been material during the past three fiscal years. However, inflation could
adversely affect the Company if inflation results in higher interest rates or a
substantial weakening in economic conditions that could adversely affect the new
housing market.
YEAR 2000 ISSUE
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 may 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 early 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 time, the Company is not aware of any customer, vendor or supplier with
a year 2000 issue that would materially affect the operations of the Company.
However, the Company will continue to monitor the situation and will devote
necessary resources to resolve any significant year 2000 issues in a timely
manner.
Management is of the opinion that all significant year 2000 issues have been
identified and addressed. Accordingly, the Company has no developed year 2000
contingency plans for continuing operations.
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 Became Positions and Offices with Company, Business Experience During Past Five
Name Age Director in Years and Other Directorships
- - ----------------- --- ------------ ------------------------------------------------------------------------------
James E. Upfield 78 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. which is engaged in the sale of oil, gas and oilfield
services.
E. R. Buford 63 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. 78 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 for Peerless Mfg. Co., a
manufacturer of separators and filters used for removing liquids and solids
from gases and air; the Dyson-Kissner-Moran Corporation, a New York based
privately owned investment company; Kearney National, Inc., a manufacturer
of electrical power distribution products; and Renters Choice, Inc., the
largest operator in the U.S. rent-to-own industry, currently operating over
2,000 company owned stores.
Larry J. Parsons 69 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 39 1992 President, Treasurer and a director of Insurance Technologies Corporation,
a company principally engaged in developing and marketing software to the
insurance industry for more than the past five years.
Richard W. Griner 60 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 5, 1998. There are no family relationships among any of the directors or
among any of the directors and any officer of the Company except Messrs.
James E. Upfield and Scott K. Upfield who are father and son.
14
(b) EXECUTIVE OFFICERS OF THE COMPANY
Name Age Offices with Company
- - -------------------- --- ----------------------------------------------
James E. Upfield 78 Chairman of the Board and a director
E. R. Buford 63 President, Chief Executive Officer and a director
R. N. Stivers 62 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain disclosure of all compensation awarded to,
earned by or paid to the chief executive officer of the Company and to each of
the Company's four most highly compensated executive officers (other than the
chief executive officer) whose total salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Fiscal Salary Bonus sation Awards SARs Payouts sation
Position Year ($) ($) $) ($) (#) ($) ($)
- - -------------------------------------------------------------------------------------------------------------------------
E. R. Buford 1996 213,500 -0- N/A -0- -0- -0- N/A
Chief 1997 222,100 -0- N/A -0- -0- -0- N/A
Executive 1998 225,000 -0- N/A -0- -0- -0- N/A
Officer and
President
- - -------------------------------------------------------------------------------------------------------------------------
J. E. Upfield 1996 150,000 -0- N/A -0- -0- -0- N/A
Chairman of 1997 150,000 -0- N/A -0- -0- -0- N/.A
the Board 1998 150,000 -0- N/A -0- -0- -0- N.A
- - -------------------------------------------------------------------------------------------------------------------------
R. N. Stivers 1996 112,000 -0- N/A -0- -0- -0- N/A
Chief Financial 1997 116,600 -0- N/A -0- -0- -0- N/A
Officer/Vice 1998 118,100 -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.
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 benefits
program now or hereafter established by the Company.
15
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, 1998, 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.
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
16
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.
OPTION GRANTS DURING 1998 FISCAL YEAR
There were no stock options granted to the Company's executive officers named in
the summary compensation table during fiscal year 1998.
- - --------------------------------------------------------------------------------
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
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at FY-
Options/SARs at FY- End ($)
End (#)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------
E. R. Buford -0- -0- Exercisable 50,000 $97,000
Exercisable 15,000 -0- (1)
Unexercisable 5,000 -0- (1)
J. E. Upfield -0- -0- -0- -0-
R. N. Stivers -0- -0- Exercisable 7,500 -0- (1)
Unexercisable 2,500 -0- (1)
(1) The Company's stock price at August 31, 1998 was below the option price.
- - --------------------------------------------------------------------------------
17
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, 1998:
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 $2,825
2,500 $1.44 4,225
1,500 $3.31 -0- (1)
------ ------
6,500 $7,050
------ ------
------ ------
Larry J. Parsons 2,500 $2.00 $2,825
2,500 $1.44 4,225
1,500 $3.31 -0- (1)
------ ------
6,500 $7,050
------ ------
------ ------
Scott K. Upfield 2,500 $1.44 4,225
1,500 $3.31 $ -0- (1)
------ ------
4,000 $4,225
------ ------
------ ------
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, 1998 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
18
Company in particular cases, affect the cash compensation payable to such
directors in their capacities as directors and members of committees of the
Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James E. Upfield was, during the fiscal year, an officer of the Company and a
member of the Compensation Committee of the Board of Directors. Mr. Upfield has
engaged in certain transactions with the company described under the heading
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors consists of Mr. Richard W.
Griner (Chairman), Mr. Larry J Parsons, Mr. James E. Upfield, Mr. Scott K.
Upfield and Mr. Joseph V. Mariner, Jr. The Compensation Committee's primary
function is to review the compensation awarded to the Company's Chief Executive
and Chief Financial Officers and to approve the determinations of compensation
to be paid to certain other senior executives of the Company. Salaries are
reviewed at regular intervals, approximately annually, depending on job
classification and competitive market levels. Mr. E. R. Buford (the Chief
Executive Officer of the Company) and Mr. Roger N. Stivers (the Chief financial
Officer of the Company), 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). See "--Executive Officers
Employment Agreements."
In determining executive compensation, the Compensation Committee reviews the
performance of the specific executive, the operating performance of the Company,
the compensation for executives of companies, which are comparable to the
Company and the performance of the Company's Common Stock. Although the
Compensation Committee does not utilize any formal mathematical formulae or
objective thresholds, particular emphasis is given to the operating results of
the Company. The Compensation Committee believes that specific formulae restrict
flexibility and are too rigid at this state of the Company's development.
The Compensation Committee also believes that in order for the Company to
succeed, it must attract and retain qualified executives who can not only
perform satisfactorily on an individual basis but who can also retain and manage
a quality staff of other executive officers and key employees. Thus, in addition
to applying the criteria generally applicable to all executive officers, in
determining the compensation of the Chief Executive Officer, the Compensation
Committee may also be influenced to a significant extent by the overall
performance of the company's other executives and key employees.
In addition to the Compensation Committee's subjective determination of the
factors noted above, the committee has access to, and reviews reports of,
independent financial consultants who assimilate and evaluate the compensation
of executive officers employed by companies which are generally comparable to
the Company. During this year's review, the Compensation Committee considered
the report, dated February 16, 1998, of a recognized independent consulting firm
used by the committee each of the previous two years. The Compensation Committee
seeks to establish base salaries that generally approximate the median range for
comparable companies as set forth in the consultant's report. The independent
consulting firm considers a wide spectrum of durable goods manufacturing
companies to be "comparable" for this purpose; however, adjustments are made to
reflect the relative size of such companies. The "DOW JONES FURNISHINGS &
APPLIANCES" peer group used in the performance chart on page 20 of the Annual
Report reflects a smaller group of the Company's competitors. The Compensation
Committee believes that the use of a broader group of manufacturing companies
for purposes of determining competitive levels of executive pay is justified
because the Company competes with this larger group for the services of talented
executives.
After a review of the factors discussed above, the Compensation Committee
determines whether a particular executive should receive an increase in
compensation, an incentive bonus under the Company's Executive Bonus Plan, a
stock option or stock grant under the Company's Stock Option Plan for Key
Employees, or any other compenation benefits. For fiscal 1998, the Compensation
Committee noted that, although comparable companies were generally providing for
modest increases to the base salaries of their executive officers, the Company's
performance during this period did not meet expectations. As a result, the
Compensation Committee determined to
19
maintain Mr. Buford's base salary at $225,000 per annum. Neither the report of
the independent financial consultants nor the Compensation Committee recommended
that a bonus or other incentive payment be paid.
The Compensation Committee has reviewed the applicability of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), which disallows a
tax deduction for compensation to an executive officer in excess of $1.0 million
per year. The Compensation Committee does not anticipate that compensation
subject to this threshold will be paid to any executive officer of the Company
in the foreseeable future. The committee intends to periodically review the
potential consequences of Section 162(m) and may in the future structure the
performance-based portion of its executive officer compensation to comply with
certain exemptions provided in Section 162(m).
Mr. Richard W. Griner
Mr. James E. Upfield
Mr. Scott K. Upfield
Mr. Larry J. Parsons
Mr. Joseph V. Mariner, Jr.
20
PERFORMANCE GRAPH
The following table compares the performance of the Company's Common Stock with
certain comparable indices:
[GRAPH]
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -----
TEMTEX INDUSTRIES, INC.............. $100.00 $121.06 $ 52.82 $ 40.88 $ 38.06 $ 35.25
Dow Jones Industrial................ $100.00 $110.10 $133.27 $166.10 $229.66 $231.11
Dow Jones Furnishings &
Appliances........................ $100.00 $ 91.73 $ 93.27 $107.80 $133.46 $115.94
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The Company knows of no person owning beneficially more than 5% of the
Company's Common Stock, except for the following persons who owned, as of
November 13, 1998, the number of shares of Common Stock of the Company set forth
opposite his name in the table below:
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership (1) Percent of Class
------------------ ------------------------ ------------------------ ----------------
Common Stock James E. Upfield 1,083,590 (2) 31.2%
5400 LBJ Freeway
Suite 1375
Dallas, TX 75240
Common Stock Franklin Resources, Inc. 265,500 7.6%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock Dimensional Fund Advisors, 196,000 5.6%
Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
- - -------------------
(1) The nature of the beneficial ownership of the shares is sole voting and
investment power unless indicated otherwise.
(2) Includes 24,750 shares of Common Stock held of record by HUTCO, a
partnership of which Mr. Upfield is general partner. Mr. James E.
Upfield has shared voting and investment power with respect to such
shares of Common Stock.
22
(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 13, 1998.
Amount and
Title of Name or Identity Nature of Bene- Percent of
Class of Group ficial Ownership (1) Class
---------------- ----------------------- -------------------- ----------
Common Stock James E. Upfield 1,083,590 (2) 31.2%
Common Stock E. R. Buford 114,062 (3) 3.3%
Common Stock Joseph V. Mariner, Jr. 6,725 (4) *
Common Stock Larry J. Parsons 7,000 (4) *
Common Stock Scott K. Upfield 30,500 (5) 1.0%
Common Stock Richard W. Griner 4,500 (5) *
Common Stock R. N. Stivers 30,043 (6) 1.0%
----------- -------
1,276,420 (7) 36.7 %
- - ----------------
* 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 65,000 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 7,500 shares of Common Stock exercisable under the 1990
Plan.
(7) Includes 93,500 shares of Common Stock issuable upon exercise of
options granted under the 1990 Plan and the Outside Director Plan.
23
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 $3.13, if computed as of November 13, 1998.
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 therefore
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
24
insurance policy on the life of Mr. Upfield and any deposits or investments
thereof and interest earned thereon 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."
25
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. **
26
10.18 Employment contract between E. R.
Buford and the Registrant dated
June 7, 1994. **
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.*****
10.24 Second amendment to the loan agreement
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.
27
**** 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 as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1997 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 Titles Date
---------- ------ ----
/s/James E. Upfield Director, Chairman of the Board 11/24/98
----------------------------
James E. Upfield
/s/E. R. Buford Director, President and Chief
---------------------------- Executive Officer 11/24/98
E. R. Buford
/s/R. N. Stivers Vice President-Finance, 11/24/98
---------------------------- Chief Financial Officer and
R. N. Stivers Chief Accounting Officer
/s/Scott K. Upfield Director 11/24/98
----------------------------
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, 1998
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, 1998 and 1997
Consolidated statements of operations--Years ended August 31, 1998,
1997 and 1996
Consolidated statements of stockholders' equity--Years ended
August 31, 1998, 1997 and 1996
Consolidated statements of cash flows--Years ended August 1998, 1997,
1996
Notes to consolidated financial statements--August 31, 1998
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended August 31, 1998. 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 of 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of three
years in the period ended August 31, 1998, 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 23, 1998
CONSOLIDATED BALANCE SHEETS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31,
--------------------------
1998 1997
------ ------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 407 $ 575
Accounts receivable, less allowance for
doubtful accounts: 1998--$292,000
and 1997--$364,000--Note C 5,598 5,100
Inventories--Notes B and C 9,077 8,172
Prepaid expenses and other assets 227 258
Income taxes recoverable--Note G 35 653
Deferred taxes--Note G 607 440
------ ------
TOTAL CURRENT ASSETS 15,951 15,198
DEFERRED TAXES--Note G 138 163
OTHER ASSETS 392 183
PROPERTY, PLANT AND EQUIPMENT--Notes C and F
Land and clay deposits 566 405
Buildings and improvements 3,491 3,491
Machinery, equipment, furniture and
fixtures 24,753 24,086
Leasehold improvements 1,059 869
------ ------
29,869 28,851
Less allowances for depreciation,
depletion and amortization 22,703 21,162
------ ------
7,166 7,689
------ ------
$23,647 $23,233
------- -------
------- -------
1
August 31,
--------------------------
1998 1997
------ ------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable--Note C $ 700 $ 800
Accounts payable 2,674 2,459
Accrued expenses--Note D 1,591 1,738
Current maturities of indebtedness
to related parties--Notes C and F 11 9
Current maturities of long-term obligations--Note C 137 202
------ ------
TOTAL CURRENT LIABILITIES 5,113 5,208
INDEBTEDNESS TO RELATED PARTIES,
less current maturities--Notes C and F 1,593 1,604
LONG-TERM OBLIGATIONS, less current maturities--Note C 653 640
COMMITMENTS AND CONTINGENCIES--Notes F and K
STOCKHOLDERS' EQUITY--Notes E and J
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 at August 31, 1997 718 718
Additional capital 9,246 9,246
Retained earnings 6,651 6,144
------ ------
16,615 16,108
Less:
Treasury stock:
At cost--113,696 shares 327 327
At no cost--1,687,788 shares -- --
------ ------
16,288 15,781
------ ------
$23,647 $23,233
------- -------
------- -------
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31,
-----------------------------------------------
1998 1997 1996
------ ------ ------
(in thousands except share data)
Net sales $37,183 $39,208 $41,972
Cost of goods sold 27,045 29,317 30,977
------- ------- -------
10,138 9,891 10,995
Costs and expenses:
Selling, general and administrative 8,912 9,831 9,548
Interest 464 519 583
Other income (68) (114) (2)
------- ------- -------
9,308 10,236 10,129
------- ------- -------
------- ------- -------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 830 (345) 866
State and federal income taxes--Note G:
Provision (benefit) 323 (144) 324
------- ------- -------
NET INCOME (LOSS) $ 507 $ (201) $ 542
------- ------- -------
------- ------- -------
Basic income (loss) per common share $0.15 $(0.06) $0.16
Diluted income (loss) per common share $0.14 $(0.06) $0.15
Basic weighted average common shares outstanding 3,477,141 3,474,155 3,465,739
Diluted weighted average common and common
equivalent shares outstanding 3,531,414 3,474,155 3,531,631
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, 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
Net income 507
--------- ------ ------- ------- -----
BALANCE AT AUGUST 31, 1998 3,477,141 $ 718 $ 9,246 $ 6,651 $ 327
--------- ------ ------- ------- -----
--------- ------ ------- ------- -----
See notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31,
---------------------------
1998 1997 1996
---- ---- ----
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 507 $ (201) $ 542
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,755 2,062 1,964
Deferred taxes (142) 295 (18)
Gain on disposition of buildings and equipment (11) (96) (9)
Provision for doubtful accounts 107 271 198
Changes in operating assets and liabilities:
Accounts receivable (605) 1,600 (158)
Inventories (905) 2,052 (1,451)
Prepaid expenses and other assets (178) 40 101
Accounts payable and accrued expenses 68 (2,225) 492
Income taxes recoverable/payable 618 (710) 500
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,214 3,088 2,161
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,237) (1,161) (2,065)
Expenditures on assets related to discontinued operations -- (44) (129)
Proceeds from disposition of property, plant and equipment 16 150 12
Proceeds from disposition of assets and other
receipts related to discontinued operations -- 398 26
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (1,221) (657) (2,156)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 141 265 1,099
Principal payments on revolving line of credit, long-term
obligations and indebtedness to related parties (302) (2,578) (1,407)
Proceeds from issuance of common stock -- 12 12
------ ------ ------
NET CASH USED IN FINANCING ACTIVITIES (161) (2,301) (296)
------ ------ ------
(DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS (168) 130 (291)
Cash and cash equivalents at beginning of year 575 445 736
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 407 $ 575 $ 445
------ ------ ------
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Capital lease obligations $ -- $ 7 $ --
Charges to allowance for doubtful accounts $ 179 $ 342 $ 304
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31, 1998
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 improvements 5-30
Machinery, equipment, furniture and fixtures 3-15
Leasehold improvements Life of lease
Expenditures for maintenance and repairs are charged to operations; betterments
are capitalized.
INCOME TAXES: Income taxes have been provided using the liability method for
providing deferred taxes.
6
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INCOME PER COMMON SHARE: Basic income per common share is based upon the
weighted average number of shares of common stock outstanding during the year.
Diluted income per share is based upon the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. Common
stock equivalents include options granted to key employees and outside directors
(see Note E). The number of common stock equivalents was based on the number of
shares issuable on the exercise of options reduced by the number of shares that
are assumed to have been purchased at the average price of the common stock
during the year with the proceeds from the exercise of the options.
All periods presented have been restated to reflect the adoption of Statement of
Financial Accounting Standard No. 128 (SFAS 128), "Earnings Per Share".
CASH EQUIVALENTS: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
RECLASSIFICATION: Certain prior year amounts have been reclassified to conform
to the current year presentation.
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, 1998:
Finished goods $ 2,682 $ 424 $ 3,106
Work in process 899 94 993
Raw materials and supplies 4,168 810 4,978
------ ------ ------
$ 7,749 $1,328 $ 9,077
------- ------- -------
------- ------- -------
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
------- ------- -------
------- ------- -------
7
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. 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. Another covenant
requires the Company to maintain a positive net income for each annual
accounting period . At August 31, 1998, the Company is in compliance with these
covenants. At August 31, 1998 and 1997, $700,000 and $800,000, respectively, was
outstanding under the revolving credit note.
The weighted average interest rate on borrowings under the revolving credit note
as of August 31, 1998 and August 31, 1997 was 8.0% for each period.
Long-term obligations are summarized as follows:
August 31,
----------------------
1998 1997
------ ------
(in thousands)
Long-term obligations:
Capitalized lease obligations, with interest
at 9.0% to 15.5%--Note F $2,065 $2,113
Equipment and land notes with interest at 6.4%
to 9.0%, due in monthly and annual installments
ending in 2007 329 342
----- -----
2,394 2,455
Less current maturities 148 211
----- -----
$2,246 $2,244
------ ------
------ ------
Annual maturities of long-term obligations for each of the five succeeding
fiscal years and thereafter are $148,000, $ 94,000, $73,000, $76,000, $84,000,
and $1,919,000.
The Company made interest payments in 1998, 1997, and 1996 of $451,000, $519,000
and $621,000, respectively.
8
NOTE D--ACCRUED EXPENSES
Accrued expenses include the following:
August 31,
--------------------
1998 1997
------ ------
(in thousands)
Employee compensation $ 462 $ 429
Taxes, other than taxes on income 204 129
Interest 132 120
Other 793 1,060
------ ------
$1,591 $1,738
------ ------
------ ------
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 and 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
Granted -- --
Exercised -- --
------- ------
Options outstanding at August 31, 1998 142,500 21,000
------- ------
------- ------
Options exercisable at August 31, 1998 125,000 21,000
------- ------
------- ------
Option prices range from $1.19 to $4.94 per share and expire between 1999 and
2005.
The weighted average exercise price at August 31, 1998 is $2.96.
The weighted average remaining life of the options at August 31, 1998 is four
years.
9
NOTE E--STOCK OPTIONS--CONTINUED
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 there is no effect of
adopting the expense recognition criteria of SFAS 123 for stock options granted
subsequent to August 31, 1995 on reported income per share of 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 $326,000 and $358,000 at August 31, 1998 and
1997, 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 $1,230,000 and $1,296,000 at August 31, 1998 and 1997,
respectively. This lease obligation is classified as "Indebtedness to Related
Parties".
Other plant and office facilities are leased under operating lease agreements
which expire at various dates through fiscal 2005. The capitalized leases expire
in fiscal 2009 and fiscal 2019.
Future minimum payments, by year and in the aggregate, under capital leases and
noncancelable operating leases, consisted of the following at August 31, 1998:
Capital Operating
Leases Leases
-------- ---------
(in thousands)
Fiscal Year:
1999 $ 337 $ 368
2000 334 358
2001 334 282
2002 334 157
2003 334 157
Thereafter 4,463 263
----- ------
Total minimum lease payments 6,136 $1,585
Amount representing interest 4,071 ------
----- ------
Present value of net minimum
lease payments $2,065
------
------
Rental expense for operating leases was $411,000, $394,000 and $351,000 in 1998,
1997 and 1996, respectively.
10
NOTE G--INCOME TAXES
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
Year Ended August 31,
---------------------------------------------
1998 1997 1996
-------- ---------- --------
Current: (in thousands)
Federal $ 87 $ (157) $ 207
State 111 119 111
Foreign 35 -- 24
-------- ---------- --------
Total current 233 (38) 342
Deferred:
Federal 89 (45) (53)
State 1 (61) 35
-------- ---------- --------
Total deferred 90 (106) (18)
-------- ---------- --------
Total income tax provision (benefit) $ 323 $ (144) $ 324
-------- ---------- --------
-------- ---------- --------
In 1997, the Company utilized a federal net operating loss carryover of
approximately $1,200,000 through a carryback to 1993. This carryback resulted in
a refund of approximately $122,000 which was included in income taxes
recoverable. The carryback also generated an alternative minimum tax credit
carryforward of approximately of $106,000 and an investment tax credit
carryforward of approximately $126,000 from 1993.
The Company has state net operating loss carryforwards of approximately
$4,900,000 expiring in the years 2004 through 2009. In addition, the Company has
investment tax credit carryforwards of approximately $192,000 expiring in years
2001 through 2003, and approximately $271,000 of alternative minimum tax credit
carryforwards, which have no expiration date.
A valuation allowance of approximately $62,000 has been recorded to offset a
portion of the state net operating loss carryforwards because the realization of
those amounts is uncertain.
The differences between the provision (benefit) for income taxes and income
taxes computed using statutory income tax rates are as follows:
Year Ended August 31,
1998 1997 1996
-------- --------- --------
(in thousands)
Income tax provision (benefit) at statutory rate $ 282 $ (117) $ 294
Additional statutory percentage depletion (57) (52) (55)
State income taxes, net of federal tax benefit 63 39 73
Change in valuation allowance 62 -- --
Other (27) (14) 12
-------- --------- --------
Total income tax provision (benefit) $ 323 $ (144) $ 324
-------- --------- --------
-------- --------- --------
11
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,
---------------------------
1998 1997
-------- ----------
(in thousands)
Deferred tax assets:
Accounts receivable allowance $ 99 $ 124
Capital lease obligation 261 54
Tax credits and net operating
loss carryforwards 660 479
Other 185 57
-------- ----------
Total deferred tax assets 1,205 1,205 714
Valuation allowance (62) --
-------- ----------
Net deferred tax assets 1,143 714
Deferred tax liabilities:
Property, plant and equipment (259) (111)
Other (139) --
-------- ----------
Total deferred tax liabilities (398) (111)
-------- ----------
Net deferred tax assets $ 745 $ 603
-------- ----------
-------- ----------
The Company received federal and state income tax refunds of $265,000 in 1998
and made federal and state income tax payments in 1998, 1997 and 1996 of
$76,000, $272,000 and $263,000, respectively.
NOTE H-- EMPLOYEE BENEFIT PLAN
During 1992, the Company adopted a defined contribution benefit plan covering
substantially all of its employees. The Company contribution was $.25 for each
$1.00 contributed by an employee (up to 4% of eligible wages).
The plan was amended during 1997, which increases the Company contribution to
$.50 for each $1.00 contributed by an employee (up to 6% of eligible wages).
The total expense for Company contributions was $158,000, $92,000 and $40,000 in
1998, 1997 and 1996, respectively.
12
NOTE I--BUSINESS SEGMENTS
The following financial information is presented for the Company's business
segments:
Face Brick Fireplace
Products Products Total
---------- --------- -----
(in thousands)
1998:
Net sales $11,021 $26,162 $37,183
------- ------- -------
------- ------- -------
Operating profit (loss) $ 3,326 $ (605) $ 2,721
------- -------
------- -------
Unallocated corporate
expense, net (1,495)
Interest expense (464)
Other income 68
------
Income from continuing
operations before income taxes $ 830
------
------
Identifiable assets $ 4,986 $17,245 $22,231
------- -------
------- -------
Corporate assets 1,416
-----
Total assets $23,647
-------
-------
Depreciation, depletion
and amortization $ 414 $ 1,336
------- -------
------- -------
Capital expenditures $ 313 $ 922
------- -------
------- -------
13
NOTE I--BUSINESS SEGMENTS--CONTINUED
Face Brick Fireplace
Products Products Total
---------- --------- -----
(in thousands)
1997:
Net sales $ 9,010 $30,198 $39,208
------- ------- -------
------- ------- -------
Operating profit (loss) $ 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
------- -------
------- -------
14
NOTE I--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 $ 886
-------
-------
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
------- -------
------- -------
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
NOTE J--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.
As of August 31, 1998, the amount payable under this Agreement by the Company to
repurchase shares of common stock from the Chairman's estate could not exceed
$500,000, all of which is payable from the proceeds of the life insurance policy
maintained by the Company for this purpose.
NOTE K--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
NOTE L--QUARTERLY RESULTS (UNAUDITED)
Summary data relating to the results of operations for each quarter of the years
ended August 31, 1998 and 1997 follows (in thousands except per share amounts):
Three Months Ended
----------------------------------------------------------
November 30 February 28 May 31 August 31 Total
----------- ----------- ------ --------- -----
Fiscal year 1998:
Net sales $10,426 $ 8,449 $ 8,566 $ 9,742 $37,183
Gross profit 3,160 2,279 2,191 2,508 10,138
Income from
continuing operations 385 39 18 65 507
Net income 385 39 18 65 507
Basic income from continuing
operations per common share $.11 $.01 $.01 $.02 $.15
Diluted income from continuing
operations per common share .11 .01 .01 .02 .14
Fiscal year 1997:
Net sales $13,086 $ 8,985 $ 8,479 $8,658 $39,208
Gross profit 4,110 2,384 1,748 1,649 9,891
Income (loss) from
continuing operations 753 (88) (376) (490) (201)
Net income (loss) 753 (88) (376) (490) (201)
Basic income (loss) from continuing
operations per common share $.22 $(.03) $(.11) $(.14) $(.06)
Diluted income (loss) from continuing
operations per common share .21 (.03) (.11) (.14) (.06)
NOTE M--SUBSEQUENT EVENT
On October 22, 1998, the Company entered into an Agreement for the sale of its
Texas Clay division for approximately $12.9 million subject to final adjustment.
The Agreement is subject to final approval by the Company's stockholders.
Accordingly, the consolidated financial statements have not been reclassified to
reflect Texas Clay as a discontinued segment.
17
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended August 31, 1996, 1997 and 1998
(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, 1996
Reserve, deducted from related asset:
Allowance for doubtful accounts $541 $198 $ -- $304 (1) $435
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Year ended August 31, 1997
Reserve, deducted from related asset:
Allowance for doubtful accounts $435 $271 $ -- $342 (1) $364
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Year ended August 31, 1998
Reserve, deducted from related asset:
Allowance for doubtful accounts $364 $107 $ -- $179 (1) $292
---- ---- ---- ---- ----
---- ---- ---- ---- ----
(1) Amount charged against reserve.
II