ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is a major producer of metal fireplace products (woodburning and gas) and face brick products used in the residential and commercial building markets. The Company manufactures woodburning metal fireplaces as well as those utilizing natural gas and liquified petroleum products. The Company in 1992, introduced its Temco American Dream-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, 1996, the Company had aggregate sales of fireplace products of approximately $33.1 million.
ZERO CLEARANCE METAL FIREPLACE PRODUCTS. A zero clearance metal fireplace is similar in function to a masonry fireplace, except that the firebox and flue pipe chimney are fabricated from stainless and coated steels and shipped as a unit to the purchaser or construction site. The inside of the firebox of a zero clearance metal fireplace is completely lined with an embossed brick pattern refractory, giving the appearance of a masonry surface. The inner pipe of the flue is made from stainless steel. Because zero clearance metal fireplaces are prefabricated, contractors can install them more easily and at lower cost than is the case with traditional masonry fireplaces. In addition, because zero clearance metal fireplaces utilize a metal flue instead of a masonry chimney, they offer enhanced placement flexibility. The Company manufactures and distributes zero clearance fireplaces in a full range of prices for each of the common fuel categories (i.e., wood logs, natural gas and liquified petroleum products). In addition, the Company either manufactures or purchases from others for use in conjunction with its fireplace products certain essential components or optional enhancements such as glass doors, blower kits, outside air kits, screens and grates. These items are incorporated into the zero clearance metal fireplace units during the assembly process or shipped in conjunction with a fireplace unit for subsequent assembly, depending upon customer specifications. The Company does not currently manufacture accessories for fireplace units manufactured by third parties or for existing masonry fireplaces.
VENTFREE GAS LOGS AND VENTFREE FIREPLACES. During fiscal 1992, the Company introduced its American Dream-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.
The Company markets ventfree gas log products, which consists of several different sizes of ventfree gas log sets and ventfree gas heaters and fireplace units. The current fireplace products are marketed under either the American Dream-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.
MARKETING AND DISTRIBUTION. The Company sells its fireplaces, ventfree gas logs and related accessories nationwide through its own sales force and through third party sales representatives primarily to contractors, wholesale distributors and retailers. A majority of the Company's fireplaces are ultimately purchased by home builders and others engaged in the construction of new housing or remodeling of existing homes. The Company has distributors in all regions of the country serving builders and remodelers. The Company's fireplace products are used by many of the country's best known builders.
Although the Company ships its fireplace products nationwide, its sales tend to be somewhat concentrated in the states where housing construction is active. Because the Company typically produces its products to meet specific orders by contractors, large distributors or retailers, it does not maintain material amounts of inventories in excess of anticipated short-term demand. The raw materials for the Company's fireplace products are readily available from a variety of sources. During fiscal ended August 31, 1996, no single customer for fireplace products accounted for more than 10% of the Company's consolidated sales during such period. A material portion of the Company's fireplace products are currently being sold to several of the nation's largest home center retailers.
MANUFACTURING. The Company currently fabricates its zero clearance fireplace units from stainless and coated steels acquired from vendors and brick pattern refractory of its own manufacture. During the fabrication process, the Company adds components and other hardware purchased from vendors. Glass doors, fan kits and blowers designed for the Company's zero clearance fireplace units are usually shipped separately. The Company produces a variety of sizes and styles of zero clearance fireplace units for both the single family and multi-family markets. In the case of the ventfree gas log units, the Company incorporates an oxygen depletion sensor and a pilot light and valve acquired from vendors. The ventfree gas log units are then further assembled and placed under an arrangement of soft ceramic simulated wood logs. The Company, during fiscal year 1995, began manufacturing the simulated wood logs at the Manchester facility.
COMPETITION; PATENTS. There are a number of manufacturers producing zero clearance metal fireplaces and related accessories similar to the products of the Company and the market for these products is very competitive. The Company believes that it is among the larger producers of such products and that it markets a full range of zero clearance fireplace units at competitive prices. The Company's ventfree gas log products utilize a patented design, which is currently being licensed by the Company from the holder of the applicable patent. Under the terms of this license, the Company has the exclusive right to manufacture and distribute ventfree gas logs in the United States and Mexico in conjunction with a prefabricated fireplace unit or other burn chamber, and the non-exclusive right to produce and sell ventfree gas logs independently of fireplace units. Although the patented design of the Company's ventfree gas log product cannot be utilized by other manufacturers marketing fireplace units employing gas burning logs, there can be no assurance that a competitive product employing a different method to achieve the same or similar results could not be developed in the future. The Company knows of one other entity which is licensed by the patent holder to produce separate ventfree gas logs. Other companies have introduced products which compete with the Company's ventfree log sets, but the Company does not believe that they are using the patented concept which provides glowing logs and embers. There can be no assurance that the holder of the patent will not license such non-exclusive rights to additional parties, thereby increasing the competition for the Company's
ventfree gas logs sold separately.
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, 1996, the Company had sales of face brick products of approximately $8.9 million.
MANUFACTURING. Approximately 90% of the clay deposits presently utilized in the manufacturing of face brick products by the Company are located within twelve miles of its Malakoff operating facilities. The Company owns approximately 552 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, 1996, no single face brick customer accounted for more than 10% of the Company's consolidated net sales during such period.
FUEL REQUIREMENTS. In order to manufacture the Company's face brick products, significant quantities of natural gas must be obtained from the local public utility or from private parties. The Company historically has obtained most of its natural gas requirements from the local public utility, but has obtained, and currently continues to obtain, a significant portion of its gas supply from one or more private parties.
The Company's manufacturing operations have, from time to time, experienced minor disruptions resulting primarily from the imposition by the local public utility of allocations during peak usage periods, but such disruptions have not had and are not expected in the foreseeable future to have, a material adverse effect on the Company's operations. However, since the cost of natural gas historically
has constituted the largest single component of the Company's face brick manufacturing operating costs (other than labor and maintenance parts) and is expected in the foreseeable future to continue to be 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 original Patent License provided for an initial term of four years, commencing April 1, 1992 and expiring on March 31, 1996, subject to termination in the event of default by the Company. The Company exercised its option to extend the initial term of the Patent License for an additional four year term, expiring on March 31, 2000. During fiscal 1995, the Patent License was extended again for an additional two year term, expiring on March 31, 2002.
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 8/31/95 $1,453 $2,034 $3,487
Balance at 8/31/96 $1,626 $2,256 $3,882
As of August 31, 1996, the amount of backlog of orders shown above is believed to be firm and the orders are expected to be filled during 1997. 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, 1996, the Company employed approximately 628 persons (including employees of wholly-owned subsidiaries) of whom approximately 130 were salaried and 498 were hourly employees.
ITEM 2.
ITEM 2. PROPERTIES
CORPORATE OFFICE
The executive offices of the Company are located at 5400 LBJ Freeway, Suite 1375, Dallas, Texas 75240. Such offices consist of a small office suite which is leased under a five year lease expiring on September 30, 2001. The current monthly rental is $5,185.
FIREPLACE PRODUCTS
The Company manufactures and assembles its fireplace products in its facilities at Manchester, Tennessee, Perris, California and Mexicali, Baja California, Mexico. Management of the Company believes the availability of two plants located in different geographic areas of the United States allows it to ship products nationwide at a lower average freight cost than many of its competitors operating out of a single plant.
The Company's Manchester facility contains approximately 127,000 square feet and includes a main building of metal construction and three adjacent smaller buildings, generally of metal construction. The Manchester facility is leased by the Company from HUTCO, a California partnership of which Mr. James E. Upfield (Chairman of the Board of the Company) and a former director of the Company are the general partners. 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 from a former director of 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. In the opinion of the management of the Company, the Perris lease was consummated on terms and conditions as favorable to the Company as terms and conditions obtainable from non-affiliated parties.
The Company's Mexicali, Mexico facility contains approximately 13,000 square feet. The lease for this facility commenced on August 1, 1993, provides for monthly rental of $3,410 (U.S.) and expires in July 1998. During the 1994 fiscal year, the Company entered into a second lease for an additional 7,250 square feet with a monthly rental of $2,100 (U.S.) and this lease also expires in July 1998. This facility manufactures fireplace component parts for use by the Company's Manchester and Perris plants.
FACE BRICK PRODUCTS
The Company's face brick products are manufactured in Malakoff, Texas through its Texas Clay division. The Company owns and operates office and manufacturing facilities on a seventy-six acre tract of land at this location, consisting of multiple buildings constructed on steel frames with sheet metal siding and roofs which contain approximately 268,000 square feet of floor space. The Company's facilities house manufacturing equipment, three active kilns, storage areas for raw materials and finished products and loading areas for trucks.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCK-HOLDER 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 1995 First Quarter $12.13 $9.50 Second Quarter 10.38 7.75 Third Quarter 8.50 6.00 Fourth Quarter 6.41 4.13
FISCAL 1996 First Quarter $ 4.75 $3.63 Second Quarter 5.25 3.38 Third Quarter 5.00 3.50 Fourth Quarter 4.50 2.94
(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, 1996 was approximately 1,570. 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 1995 or 1996. 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------ (1) Excludes assets related to discontinued operations. (2) Includes amounts borrowed under a revolving credit agreement and debt payable within one year, including capitalized lease obligations to related parties. (3) Includes capitalized lease obligations to related parties.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a producer of metal fireplace products and face brick products used in the residential and commercial building and remodeling markets. The Company manufactures and distributes its fireplace products through Temco Fireplace Products, Inc., a wholly owned subsidiary of the Company, and its face brick products through its Texas Clay division. The Company's fireplace products are sold nationwide to a network of contractors, distributors and retailers, and its face brick products are sold to contractors and distributors principally in Texas and surrounding states.
The Company provides products to contractors and others engaged in the construction and remodeling markets which usually are more active in the summer and fall months. The Company's sales are affected by this seasonality since contractors and other users do not maintain inventories of products for construction purposes. In addition, the Company provides goods to the building products industry which is cyclical in nature and can be affected by changes in consumer credit, interest rates and general economic conditions.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
NET SALES
FIREPLACE PRODUCTS. Net sales decreased $1.4 million or 4% in fiscal 1996 compared with fiscal 1995. Although the Company shipped a greater quantity of fireplaces and ventfree gas log sets in 1996 compared with 1995, the average price received for each unit was less in 1996 than in 1995. Competition within the industry, especially for ventfree gas products, had a negative impact on net sales in 1996.
FACE BRICK PRODUCTS. Net sales increased $0.5 millon or 6% in fiscal 1996 compared with fiscal 1995. An increase in the quantity of face brick shipped in 1996 along with a small increase in the selling price which the Company received for its product, were responsible for the overall increase in net sales.
GROSS PROFIT
FIREPLACE PRODUCTS. Gross profit decreased approximately 11% in fiscal 1996 compared with fiscal 1995. A portion of the decrease is attributable to the decrease in sales. The reduction in the average unit sales price received for the product also contributed to the lower gross profit recorded in 1996.
FACE BRICK PRODUCTS. Gross profit increased approximately 3% in fiscal 1996 compared with fiscal 1995. The increase was a direct result of the increase in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses decreased 15% in fiscal 1996 compared with fiscal 1995. As a percentage of sales, the decrease was 2% between the two years. The decrease was mainly due to a decrease in advertising expenses. Advertising expenses in fiscal 1995 were greater than usual due to the introduction of several new gas fireplace and gas log products.
General and administrative expenses decreased approximately 6% in fiscal 1996 compared with fiscal 1995. As a percentage of sales, the decrease was less than 1%.
INTEREST EXPENSE
Interest expense increased $159,000 or 38% in fiscal 1996 compared with fiscal 1995. The increase in interest expense was the direct result of the increase in the average indebtedness of the Company in 1996.
OTHER INCOME
Other income for both fiscal 1996 and 1995 includes small amounts from various sources.
INCOME TAXES
Income tax expense, both current and deferred, decreased from $369,000 in fiscal 1995 to $324,000 in fiscal 1996. In fiscal 1996, income tax expense consisted of $154,000 in federal, $146,000 in state and $24,000 in foreign income taxes.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
NET SALES
FIREPLACE PRODUCTS. Net sales decreased $0.8 million or 2% in fiscal 1995 compared with fiscal 1994. The Company shipped approximately the same quantity of fireplaces and ventfree gas log sets in 1995 compared with 1994. A change in the mix of products shipped was primarily responsible for the reduction in sales.
FACE BRICK PRODUCTS. Net sales decreased $0.2 million or 2% in fiscal 1995 compared with fiscal 1994. The reduction in the quantity of face brick shipped in 1995 was partially offset by an increase in sales price which the Company received for its product.
GROSS PROFIT
FIREPLACE PRODUCTS. Gross profit decreased approximately 22% in fiscal 1995 compared with fiscal 1994. A portion of the decrease is attributable to the decrease in sales. Also adding to the increase in cost of goods sold was the increase in depreciation expense resulting from the greater than normal expenditures for capital items in fiscal 1995. In addition, costs related to changes for product improvement as well as packaging changes to prevent product damage in shipment also added to the cost without a corresponding increase in sales price to the customers.
FACE BRICK PRODUCTS. Gross profit decreased approximately 2% in fiscal 1995 compared with fiscal 1994. The decrease was a direct result of the reduction in sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses increased 15% in fiscal 1995 compared with fiscal 1994. As a percentage of sales, the increase was 2.4% between the two years. The increase was due primarily to an increase in advertising expenses related to the Company's gas fireplace and gas log products.
General and administrative expenses decreased approximately 9% in fiscal 1995 compared with fiscal 1994. As a percentage of sales, expenses decreased by 0.7%. The major portion of the decrease was attributed to the decrease in management bonuses accrued at fiscal 1995 year end.
INTEREST EXPENSE
Interest expense decreased approximately $102,000 or 19% in fiscal 1995 compared with fiscal 1994. Although indebtedness increased significantly in the third and fourth quarters of fiscal 1995, the average indebtedness of the Company throughout the entire year was slightly less than the average for fiscal 1994. The reduction in interest expense is the direct result of the decrease in the average indebtedness.
OTHER INCOME
Other income for both fiscal 1995 and 1994 includes small amounts from various sources.
INCOME TAXES
Income tax expense, both current and deferred, decreased from $1,394,000 in fiscal 1994 (before change in valuation allowance), to $369,000 in fiscal 1995, due to diminished operating results. In fiscal 1995, income tax expense consisted of $296,000 in federal income taxes and $73,000 in state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,161,000, $1,358,000 and $341,000 in fiscal 1996, 1995 and 1994, respectively. Although there was an increase in cash provided by operations in fiscal 1996, working capital decreased by $685,000 mainly due to an increase in notes payable. In fiscal 1995, working capital decreased by $1,175,000 mainly due to a decrease in accounts receivable and an increase in notes payable and current maturities of long term obligations.
Capital expenditures and capitalized lease obligations for fireplace and face brick products totalled $2,057,000 ($1,722,000 for fireplace products and $335,000 for face brick products), $5,294,000 ($4,030,000 for fireplace products and $1,264,000 for face brick products) and $1,997,000 ($1,561,000 for fireplace products and $436,000 for face brick products) in fiscal 1996, 1995 and 1994, respectively. The majority of expenditures in each of the years was for tooling, replacement items and major repairs to manufacturing equipment. In fiscal 1995, equipment was purchased for the Tennessee location which was expanded to increase its fireplace manufacturing capacity. The Company entered into a new lease agreement for the Tennessee facility at that time in consideration of the expansion which was financed by the partnership which owns the facility. In fiscal 1995, the Company also exercised its option to extend its lease of the fireplace manufacturing facility in California. Also, in fiscal 1995, expenditures for face brick products included an amount for approximately 80 acres of land believed to contain an estimated 400,000 cubic feet of clay. Construction of a replacement office building at the face brick products manufacturing facility was completed early in fiscal 1995.
In May 1996, the Company entered into a two year credit agreement with a bank whereby the Company may borrow a maximum of $4,000,000 under a revolving credit facility. The outstanding principal balance may bear interest at a variable or fixed rate, at the Company's option, at the time funds are requested. Interest is payable on a monthly basis and also at the end of the borrowing period if borrowing at a fixed rate. The revolving credit facility had an outstanding balance of $3,099,000 at August 31, 1996. The credit facility requires the Company to maintain certain minimum financial ratios. The Company was in compliance with all debt covenants at August 31, 1996.
Advances from the new revolving credit facility were used to repay the principal balance outstanding and accrued interest on a two year revolving credit note that expired, as scheduled, in May 1996. In addition, a promissory term note that had been added to the expiring revolving credit note, was repaid at the same time. The term note was scheduled for repayment in March 1998.
In fiscal 1996, borrowings under the revolving credit agreement combined with cash on hand, were used to purchase various items of tooling and manufacturing equipment.
The Company anticipates that cash flow from operations together with funds available from the revolving credit facility should provide the Company with adequate funds to meet its working capital requirements as well as requirements for capital expenditures for at least the next twelve months.
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations have not been material during the past three fiscal years. However, inflation could adversely affect the Company if inflation results in higher interest rates or a substantial weakness in economic conditions that could adversely affect the new housing market.
EARNINGS PER SHARE
In December 1993, the Company completed a secondary stock offering in which an additional 1,000,000 shares of common stock were issued.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(A) DIRECTORS OF THE COMPANY
The names of the directors and nominees for the office of director and information about them, as furnished by the directors and nominees themselves, are set forth below:
First Positions and Offices with Company, Became a Business Experience During Past Name Age Director in Five Years and Other Directorships - ---------------- --- ----------- ----------------------------------- James E. Upfield 76 1969 Chairman of the Board of the Company for more than the past five years; also Chairman of the Board of Temco Fireplace Products, Inc., a wholly-owned subsidiary of the Company; serves as a director of Magnum Petroleum, Inc. (formerly Hunter Resources, Inc.) which is engaged in the sale of oil, gas and oilfield services.
E. R. Buford 61 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. 76 1979 Retired as Chairman and Chief Executive Officer of Hydro-Metals, Inc., when it was acquired by Wallace Murray Corporation, a manufacturer of plumbing ware and cutting tools; serves as a director of Peerless Mfg. Co., a manufacturer of separators and filters used for removing liquids and solids from gases and air; the Dyson-Kissner-Moran Corporation, a New York based privately owned investment company; Kearney National, Inc., a manufacturer of electrical power distribution products; El Chico Restaurants, Inc., a Mexican restaurant chain; Renters Choice, Inc., operates Rent-To-Own Stores; and Industrial Flexible Materials, Inc., a manufacturer of crumbs rubber from recycled tires.
Larry J. Parsons 67 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 37 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 58 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 and distributor of insulation wall board for more than the past five years; director and President of HC Industries, Inc. and of HC Industries NV., Inc., subsidiaries of Rmax; and director of Axon, Inc., a multifaceted contracting and service company. Mr. Griner is also a director and President of Rmax.
Each of the above named nominees is a member of the present Board of Directors and was elected to such office at the Annual Meeting of Stockholders held March 6, 1996. There are no family relationships among any of the directors or among any of the directors and any officers of the Company except Messrs. James E. Upfield and Scott K. Upfield who are father and son.
(B) EXECUTIVE OFFICERS OF THE COMPANY
Name Age Offices with Company - ---------------- --- ------------------------------------------------- James E. Upfield 76 Chairman of the Board and a director
E. R. Buford 61 President, Chief Executive Officer and a director
R. N. Stivers 60 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.
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 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 benefit program now or hereafter established by the Company.
On each anniversary of these agreements, the term shall be extended for an additional period of one year unless the Board of Directors elects, at the directors' meeting following the annual stockholders' meeting, not to extend the agreements.
The agreements may be terminated by the Company without cause upon thirty days prior written notice. In the event of termination without cause, the Company shall for a period of two and one-half years continue to pay Mr. Buford and for a period of one year continue to pay Mr. Stivers their base salaries effective at the time of termination.
If the Executives are involuntarily terminated, other than for cause, in contemplation of, or within three years following, a change of control, the Company shall pay the Executives (i) a lump sum severance payment equal to two and one-half times the Executives base salary in effect at the time of involuntary termination, payable as a lump sum, and (ii) continuation of all employee benefits, executive benefits and perquisites or benefits reasonably equivalent thereto, for a period of two and one-half years.
SELECT MANAGEMENT EMPLOYEE SECURITY PLAN
Except for the Company's Select Management Employee Security Plan, the Company does not have any plans that could be deemed long-term incentive plans or defined benefit or actuarial plans under which benefits are determined primarily by reference to final compensation. The Select Management Employee Security Plan (the "Security Plan") provides certain death and retirement benefits to key employees of the Company. During the fiscal year ended August 31, 1996, 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 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 1996 FISCAL YEAR
There were no stock options granted to the Company's executive officers named in the summary compensation table during fiscal year 1996.
- --------------------------------------------------------------------------------
The following table includes the number of shares received upon exercise, or if no shares were received, the number of securities with respect to which the options were exercised, the aggregate dollar value realized upon exercise and the total value of unexercised options held at the end of the last completed fiscal year for each of the Company's executive officers named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR --------------------------------------------------- AND FY-END OPTION/SAR VALUES ----------------------------
Value of Number of Securities Unexercised In- Underlying the-Money Unexercised Options/SARs at Options/SARs at FY- FY-End ($) End (#) Shares Acquired on Value Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable Unexercisable - -------------------------------------------------------------------------------- E. R. Buford -0- -0- Exercisable 50,000 $122,000 Exercisable 5,000 -0- (1) Unexercisable 15,000 -0- (1)
J. E. Upfield -0- -0- -0- -0-
R. N. Stivers -0- -0- Exercisable 10,000 $ 24,400 Exercisable 2,500 -0- (1) Unexercisable 7,500 -0- (1)
(1) The Company's stock price at August 31, 1996 was below the option price. - --------------------------------------------------------------------------------
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, 1996:
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 $4,075 2,500 $1.44 5,475 ----- ------ 5,000 $9,550 ----- ------ ----- ------ Larry J. Parsons 2,500 $2.00 $4,075 2,500 $1.44 5,475 ----- ------ 5,000 $9,550 ----- ------ ----- ------ Scott K. Upfield 2,500 $1.44 $5,475 ----- ------ ----- ------ Richard W. Griner 2,500 $4.81 $ -0- (1) ----- -----
(1) The Company's stock price at August 31, 1996 was below the option price.
DIRECTORS' REMUNERATION
Those directors who are salaried employees of the Company receive no additional compensation for their services as directors or as members of committees of the Board. Cash compensation currently payable to the other directors for services in that capacity consists of a retainer of $2,500 per year and a fee of $750 (in addition to travel expenses) for each day of each meeting of the Board of Directors attended. No additional retainers are paid for serving on a committee; however, if one or more committee meetings are held on a day other than one on which a Board meeting is held, committee members are paid a fee of $750 (in addition to travel expenses) for each day of such meeting or meetings.
Directors who are not regular salaried officers or employees who render services to the Company in a capacity or capacities other than that of a director (for example, as consultants or attorneys) may be compensated for such other services, and such compensation for other services shall not, except insofar as may be specified by the Company in particular cases, affect the cash compensation payable to such directors in their capacities as directors and members of committees of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James E. Upfield was, during the fiscal year, an officer of the Company and a member of the Compensation Committee of the Board of Directors. Mr. Upfield has engaged in certain transactions with the company described under the heading "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors consists of Mr. Mariner (Chairman), Mr. Parsons, Mr. James E. Upfield, Mr. Scott K. Upfield and Mr. Richard W. Griner. The Compensation Committee's primary function is to review the compensation awarded to the executive officers of the Company.
In determining executive compensation, the Compensation Committee reviews the performance of the specific executive, the operating performance of the Company, the compensation of executives of companies which are comparable to the Company and the performance of the Company's Common Stock. Particular emphasis is given to the operating results of the Company. The Company's Compensation Committee has access to, and review reports of, independent financial consultants who assimilate and evaluate the compensation of executive officers employed by companies which are generally comparable to the Company. The cumulative weight of all such factors is then generally considered to determine whether or not a particular executive should receive an increase in compensation, an incentive bonus under the Company's Executive Bonus Plan, a stock option or stock grant under the Company's Stock Option Plan for Key Employees, or any other compensation benefits. Mr. E. R. Buford (the Chief Executive Officer of the Company) and Mr. Roger Stivers entered into employment agreements with the Company which fixed their annual salaries at certain minimum levels $201,300 per annum for Mr. Buford and $105,000 per annum for Mr. Stivers).
The Compensation Committee believes that in order for the Company to succeed, it must attract and retain qualified executives who can not only perform satisfactorily on an individual basis but who can also retain and manage a quality staff or other executive officers and key employees. Thus, in addition to applying the criteria generally applicable to all executive officers, in determining the compensation of the chief executive officer the Compensation Committee may also be influenced to a significant extent by the overall performance of the company's other executives and key employees. After a review of all such factors and a report of independent financial consultants dated February 5, 1996, which opined that a base salary of $220,000 and total cash compensation of $295,000 for the Chief Executive Officer would be "competitive", the Compensation Committee recommended that the Chief Executive Officer's base salary be increased to $216,320 per annum but did not recommend that any bonus be paid for fiscal 1996.
Mr. Joseph V. Mariner, Jr. Mr. James E. Upfield Mr. Scott K. Upfield Mr. Larry J. Parsons Mr. Richard W. Griner
PERFORMANCE GRAPH
The following table compares the performance of the Company's Common Stock with certain comparable indices:
[GRAPH]
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The Company knows of no person owning beneficially more than 5% of the Company's Common Stock, except for the following person who owned, as of November 13, 1996, the number of shares of Common Stock of the Company set forth opposite his name in the table below:
- ------------------ (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 comprised of Mr. Upfield and a former director of the Company. Mr. James E. Upfield has shared voting and investment power with respect to such shares of Common Stock.
(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, 1996.
Amount and Title of Name or Identity Nature of Bene- Percent of Class of Group ficial Ownership (1) Class - ------------ ----------------- -------------------- ----------
Common Stock James E. Upfield 1,062,850 (2) 30.7%
Common Stock E. R. Buford 94,062 (3) 2.7%
Common Stock Joseph V. Mariner, Jr. 6,725 (4) *
Common Stock Larry J. Parsons 7,000 (4) *
Common Stock Scott K. Upfield 29,500 (5) 1.0%
Common Stock Richard W. Griner 4,500 (5) *
Common Stock R. N. Stivers 25,043 (6) 1.0% --------- ---- 1,229,680 35.5% - ---------------- * Denotes less than 1%.
(1) The nature of the beneficial ownership of the shares by the respective persons or group is sole voting and investment power unless otherwise indicated.
(2) Includes 24,750 shares of Common Stock over which Mr. James E. Upfield has shared voting and investment power owned by HUTCO, a partnership comprised of Mr. James E. Upfield and a former director of the Company.
(3) Includes 55,000 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 12,500 shares of Common Stock exercisable under the 1990 Plan.
ITEM 13.
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, 1996.
The Estate will not be obligated to sell any shares of Common Stock under the Agreement unless prior to the closing of such sale the Estate has obtained a ruling from the Internal Revenue Service, or an opinion of counsel satisfactory in form and content to the Estate, to the effect that the purchase by the Company will be treated as a distribution in full payment and exchange therefor under Section 302(b) of the Code. The Company will not be required to purchase any shares of Common Stock under the Agreement if and to the extent that such a purchase would result in an impairment of its capital or would otherwise be in violation of applicable state law relative to the Company's purchase of its shares of Common Stock.
The Company, pursuant to the Agreement, has transferred to the Trustee, as beneficiary, an existing life insurance policy on the life of Mr. Upfield in the amount of $500,000. The Company is the owner of such insurance policy; however, under certain conditions described below, Mr. Upfield will have the right to purchase all, or any part, of such policy. The premium payable by the Company for such insurance policy is $21,049 per year. The premiums paid by the Company are not deductible by it for federal income tax purposes, and the proceeds of the policy when paid to the Trustee and used to purchase the shares of Common Stock under the Agreement or transferred to the Company will not constitute income to the Company for federal income tax purposes.
The Trustee is to hold in its custody until the death of Mr. Upfield or termination of the Agreement (in which event it is to return to the Company) the insurance policy on the life of Mr. Upfield. Upon and after the death of Mr. Upfield, the Trustee is to make claim for, collect, hold, deposit or invest, and pay over the proceeds of the insurance policy on the life of Mr. Upfield and any deposits or investments thereof and interest earned thereon
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 and a former director are the general partners. 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."
PART IV
ITEM 14.
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 the Registrant, dated April 25, 1994.**
10.17 Loan Agreement between NationsBank of Texas, N.A. and the Registrant dated May 3, 1994.**
10.18 Employment contract between E. R. Buford and the Registrant dated June 7, 1994.**
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.****
(21) Subsidiaries of the Registrant.
21.1 Subsidiaries of the Registrant.*
(23) Consents of Experts and Counsel
23.1 Consent of Independent Auditors.****
(27) Financial Data Schedule
27.1 Financial data schedule.****
(d) Financial Statement Schedules -- The response to this portion of Item 14 is submitted as a separate section of this report.
* Filed as an exhibit of the same number to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993, and incorporated by reference herein.
** Filed as an exhibit of the same number to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1994, and incorporated by reference herein.
*** Filed as an exhibit of the same number to the registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1995 and incorporated by reference herein.
**** Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TEMTEX INDUSTRIES, INC.
/s/ James E. Upfield --------------------------------------- James E. Upfield Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ----
/s/ James E. Upfield Director, Chairman of the Board 11/25/96 - ------------------------ James E. Upfield
/s/ E. R. Buford Director, President and Chief - ------------------------ Executive Officer 11/25/96 E. R. Buford
/s/ R. N. Stivers Vice President-Finance, - ------------------------ Chief Financial Officer and R. N. Stivers Chief Accounting Officer 11/25/96
/s/ Scott K. Upfield Director 11/25/96 - ------------------------ Scott K. Upfield
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, 1996 and 1995
Consolidated statements of operations--Years ended August 31, 1996, 1995 and 1994
Consolidated statements of stockholders' equity--Years ended August 31, 1996, 1995 and 1994
Consolidated statements of cash flows--Years ended August 1996, 1995, 1994
Notes to consolidated financial statements--August 31, 1996
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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we p!an 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of three years in the period ended August 31, 1996, 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.
/s/ ERNST & YOUNG LLP ---------------------------------------- ERNST & YOUNG LLP
Dallas, Texas October 25, 1996
CONSOLIDATED BALANCE SHEETS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31, --------------------- 1996 1995 ------- ------- (in thousands) ASSETS
CURRENT ASSETS Cash and cash equivalents $ 445 $ 736 Accounts receivable, less allowance for doubtful accounts: 1996--$435,000 and 1995--$541,000--Note D 6,971 7,011 Inventories--Notes C and D 10,224 8,773 Prepaid expenses and other assets 285 401 Income taxes recoverable--Note H -- 443 Deferred taxes--Note H 226 350 ------- ------- TOTAL CURRENT ASSETS 18,151 17,714
DEFERRED TAXES--Note H 672 530
OTHER ASSETS 381 366
ASSETS RELATED TO DISCONTINUED OPERATIONS--Note I 202 99
PROPERTY, PLANT AND EQUIPMENT--Notes D and G Land and clay deposits 325 325 Buildings and improvements 3,491 3,496 Machinery, equipment, furniture and fixtures 23,289 21,448 Leasehold improvements 866 742 ------- ------- 27,971 26,011 Less allowances for depreciation, depletion and amortization 19,367 17,505 ------- ------- 8,604 8,506
------- ------- $28,010 $27,215 ------- ------- ------- -------
August 31, --------------------- 1996 1995 ------- ------- (in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Notes payable--Note D $ 3,099 $ 2,000 Accounts payable 4,714 4,144 Accrued expenses--Note E 1,708 1,786 Income taxes payable--Note H 57 -- Current maturities of indebtedness to related parties--Notes D and G 8 7 Current maturities of long-term obliga- tions--Note D 236 763 ------- ------- TOTAL CURRENT LIABILITIES 9,822 8,700
INDEBTEDNESS TO RELATED PARTIES, less current maturities--Notes D and G 1,613 1,621
LONG-TERM OBLIGATIONS, less current maturities--Note D 605 1,478
COMMITMENTS AND CONTINGENCIES--Notes G and M
STOCKHOLDERS' EQUITY--Notes B, F and L Preferred stock--$1 par value; 1,000,000 shares authorized, none issued -- -- Common stock--$.20 par value; 10,000,000 shares authorized, 5,268,625 shares issued at August 31, 1996 and 5,265,625 shares issued at August 31, 1995 716 715 Additional capital 9,236 9,225 Retained earnings 6,345 5,803 ------- ------- 16,297 15,743 Less: Treasury stock: At cost--113,696 shares 327 327 At no cost--1,687,788 shares -- -- ------- ------- 15,970 15,416 ------- ------- $28,010 $27,215 ------- ------- ------- -------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended August 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- (in thousands except share data)
Net sales $ 41,972 $ 42,904 $ 43,935 Cost of goods sold 30,977 30,962 29,391 --------- --------- --------- 10,995 11,942 14,544 Costs and expenses: Selling, general and administrative 9,548 10,782 10,291 Interest 583 424 526 Other income (2) (122) (71) --------- --------- --------- 10,129 11,084 10,746 --------- --------- --------- INCOME FROM OPERATIONS BEFORE INCOME TAXES 866 858 3,798
State and federal income taxes--Note H: Provision (benefit) 324 369 (280) --------- --------- --------- NET INCOME $ 542 $ 489 $ 4,078 --------- --------- --------- --------- --------- ---------
Income per common share $ .16 $ .14 $ 1.25 --------- --------- --------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding 3,491,131 3,502,887 3,272,568 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
AUGUST 31, 1996
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 G. 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 in accordance with the Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INCOME PER COMMON SHARE: Income per common share is based upon the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents include options granted to key employees and outside directors (see Note F). The number of common stock equivalents was based on the number of shares issuable on the exercise of options reduced by the number of common shares that are assumed to have been purchased at the average price of the common stock during the year with the proceeds from the exercise of the options. Fully diluted income per common share is not presented because dilution is not significant.
On December 17, 1993, the Company completed the sale of 1,000,000 shares of its common stock in a public offering. If the common stock offering had occurred on September 1, 1993, the effect on earnings per share in fiscal 1994 would not be significant.
CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK: The Company manufactures and sells fireplace and brick products to companies in the construction industry. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 30 days. Credit losses consistently have been within management's expectations.
NOTE B--PUBLIC OFFERING AND NONRECURRING ITEMS
In December 1993, the Company completed a secondary stock offering in which 1,000,000 shares of common stock were issued.
NOTE C--INVENTORIES
Inventories by costing method are summarized below:
First-in Average First-out Cost Total --------- ------- ------- (in thousands)
August 31, 1996: Finished goods $3,591 $ 593 $ 4,184 Work in process 1,064 107 1,171 Raw materials and supplies 4,353 516 4,869 ------ ------ ------- $9,008 $1,216 $10,224 ------ ------ ------- ------ ------ -------
August 31, 1995: Finished goods $2,527 $ 643 $ 3,170 Work in process 706 93 799 Raw materials and supplies 4,281 523 4,804 ------ ------ ------- $7,514 $1,259 $ 8,773 ------ ------ ------- ------ ------ -------
NOTES TO CONSOLIDATED FINANCIAL--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE D--NOTES PAYABLE AND LONG-TERM DEBT
In May 1996, the Company entered into a two year credit agreement with a bank whereby the Company may borrow a maximum of $4,000,000 under a revolving credit facility. At the option of the Company, borrowings under the demand note may bear interest at the lending bank's prime commercial interest rate or at the London Interbank Offered Rate ("LIBOR") plus 1.25 percentage points. Interest is payable on a monthly basis. The Company's obligation to the bank is secured by accounts receivable and inventory. The loan agreement contains covenants that require the maintenance of a specified ratio of quick assets to current liabilities, as defined, and a specified ratio of total liabilities to tangible net worth, as defined, both ratios to be measured on a quarterly basis beginning August 31, 1996. Advances under the new credit agreement were used to repay both the balance outstanding and accrued interest on a two year revolving credit facility that expired in May 1996, as scheduled. Also, a promissory term note that had been added to the expiring revolving credit note was repaid at the same time, even though final payment was not scheduled to be made until March 1998. At August 31, 1996, $3,099,000 was outstanding under the new revolving credit note.
The weighted average interest rates on borrowings under the revolving credit notes as of August 31, 1996 and August 31, 1995 were 6.8% and 7.9%, respectively.
Long-term obligations are summarized as follows: August 31, ----------------- 1996 1995 ------ ------ (in thousands) Long-term obligations: Term loan, due in quarterly installments of $98,545 through March 1998; repaid in May 1996 $ -- $1,084
Capitalized lease obligations, with interest at 8.8% to 16.7%--Note G 2,150 2,209
Equipment notes with interest at 8.0% to 9.8%, due in monthly installments ending in 1999 312 576 ------ ------ 2,462 3,869 Less current maturities 244 770 ------ ------ $2,218 $3,099 ------ ------ ------ ------
Annual maturities of long-term obligations for each of the five succeeding fiscal years and thereafter are $244,000, $134,000, $58,000, $42,000, $47,000, and $1,937,000.
The Company made interest payments in 1996, 1995 and 1994, respectively, of $621,000, $363,000 and $580,000.
NOTES TO CONSOLIDATED FINANCIAL--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE E--ACCRUED EXPENSES
Accrued expenses include the following: August 31, ---------------- 1996 1995 ------ ------ (in thousands)
Employee compensation $ 491 $ 483 Taxes, other than taxes on income 126 130 Interest 119 157 Other 972 1,016 ------ ------ $1,708 $1,786 ------ ------ ------ ------ NOTE F--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, 1994 90,000 12,500 Granted 70,000 2,500 Exercised 7,500 -- ------- ------ Options outstanding at August 31, 1995 152,500 15,000 Granted -- -- Exercised -- -- Options outstanding at August 31, 1996 152,500 15,000 ------- ------ ------- ------ Options exercisable at August 31, 1996 100,000 15,000 ------- ------ ------- ------
Option prices range from $1.19 to $4.94 per share and expire between 1999 and 2005.
NOTES TO CONSOLIDATED FINANCIAL--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE G--LEASE COMMITMENTS
Two plant facilities leased from a former director 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 $391,000 and $423,000 at August 31, 1996 and 1995, respectively.
A third manufacturing facility, accounted for as a capitalized lease, is leased from a partnership consisting of the Company's Chairman and a former director. 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 $1,362,000 and $1,428,000 at August 31, 1996 and 1995, 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 1999. 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, 1996:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) Fiscal Year: 1997 $ 352 $294 1998 345 259 1999 334 175 2000 334 158 2001 334 109 Thereafter 5,181 -- ------ ---- Total minimum lease payments 6,880 $995 ---- ---- Amount representing interest 4,730 ------ Present value of net minimum lease payments $2,150 ------ ------
Rental expense for operating leases was $351,000, $265,000 and $255,000 in 1996, 1995 and 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE H--INCOME TAXES
Significant components of the provision (benefit) for income taxes attributable to continuing operations are as follows:
Year Ended August 31, ------------------------------ 1996 1995 1994 ---- ---- ---- (in thousands) Current: Federal $207 $173 $ 570 State 111 112 90 Foreign 24 -- -- ---- ---- ------- Total current 342 285 660 Deferred: Federal (53) 123 677 State 35 (39) 57 ---- ---- ------- Total deferred (18) 84 734 Change in valuation allowance -- -- (1,674) ---- ---- ------- Total income tax $324 $369 $ (280) ---- ---- ------- ---- ---- -------
The Company utilized net operating loss and investment tax credit carryforwards of $997,000 and $459,000, respectively, in 1994.
The Company has state net operating loss carryforwards of approximately $1,500,000 expiring in the years 2004 through 2007. In addition, the Company has federal tax credit carryforwards of approximately $190,000 expiring in years 2001 and 2002.
The differences between the provision for income taxes and income taxes computed using statutory income tax rates are as follows:
Year Ended August 31, ------------------------------ 1996 1995 1994 ---- ---- ---- (in thousands)
Income tax expense at statutory rate $294 $292 $ 1,291 Additional statutory percentage depletion (55) (55) (52) State income taxes, net of federal tax benefit 73 49 129 Other 12 83 26 Change in valuation allowance -- -- (1,674) ---- ---- ------- Total income taxes $324 $369 $ (280) ---- ---- ------- ---- ---- -------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE H--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, ----------------- 1996 1995 ---- ---- (in thousands) Deferred tax assets: Accounts receivable allowance $174 $233 Capital lease obligation 72 85 Book over tax depreciation 302 232 Other 416 393 ---- ---- Total deferred tax assets 964 943 Deferred tax liabilities (66) (63) ---- ---- Net deferred tax assets $898 $880 ---- ---- ---- ----
The Company made federal and state income tax payments in 1996, 1995 and 1994, respectively, of $263,000, $803,000 and $857,000.
NOTE I--DISCONTINUED OPERATIONS
In 1993, management of the Company decided to discontinue the Company's contract products segment.
In fiscal 1996, the Company leased the building and the majority of the land. The initial lease term is for a period of five years with an option to extend the lease for an additional five year period. The lease also contains an option to purchase the property during the first two years of the initial lease period. Rental income received is recorded as a reduction in the carrying value of the property.
The remaining parcel of land and equipment are on the market to be sold.
NOTE J--EMPLOYEE BENEFIT PLAN
During 1992, the Company adopted a defined contribution pension plan covering substantially all of its employees. The Company contribution is $.25 for each $1.00 contributed by an employee (up to 4% of eligible wages).
The total expense for Company contributions was $40,000, $35,000 and $45,000 in 1996, 1995 and 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE K--BUSINESS SEGMENTS
The following financial information is presented for the Company's business segments:
Face Brick Fireplace Products Products Total ---------- --------- ------- (in thousands) 1996: Net sales $8,862 $33,110 $41,972 ------ -------- ------- ------ -------- ------- Operating profit $1,401 $ 892 $ 2,293 ------ -------- ------ -------- Unallocated corporate expense, net (846) Interest expense (583) Other income 2 ------ Income from continuing operations before income taxes $ 866 ------ ------ Identifiable assets $4,183 $21,927 $26,110 ------ -------- ------ -------- Corporate assets 1,698 Assets related to discontinued operations 202 ------ Total assets $28,010 ------ ------ Depreciation, depletion and amortization $ 385 $ 1,579 ------ -------- ------ -------- Capital expenditures $ 335 $ 1,722 ------ -------- ------ --------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE K--BUSINESS SEGMENTS--CONTINUED
Face Brick Fireplace Products Products Total ---------- --------- ------- (in thousands) 1995: Net sales $8,400 $34,504 $42,904 ------ ------- ------- ------ ------- ------- Operating profit $1,241 $ 1,089 $ 2,330 ------ ------- ------- ------ ------- ------- Unallocated corporate expense, net (1,170) Interest expense (424) Other income 122 ------- Income from continuing operations before income taxes $ 858 ------- ------- Identifiable assets $4,053 $20,611 $24,664 ------ ------- ------ ------- Corporate assets 2,452 Assets related to discontinued operations 99 ------- Total assets $27,215 ------- ------- Depreciation, depletion and amortization $ 345 $ 1,163 ------ ------- ------ ------- Capital expenditures $1,264 $ 4,030 ------ ------- ------ -------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE K--BUSINESS SEGMENTS--CONTINUED
Face Brick Fireplace Products Products Total ---------- --------- ------- (in thousands) 1994: Net sales $8,611 $35,324 $43,935 ------ -------- ------- ------ -------- ------- Operating profit $1,544 $ 4,315 $ 5,859 ------ ------- ------ ------- Unallocated corporate expense, net (1,606) Interest expense (526) Other income 71 ------- Income from continuing operations before income taxes $ 3,798 ------- ------- Identifiable assets $3,321 $18,387 $21,708 ------ ------- ------ ------- Corporate assets 1,935 Assets related to discontinued operations 105 ------- Total assets $23,748 ------- ------- Depreciation, depletion and amortization $ 301 $ 781 ------ ------- ------ ------- Capital expenditures $ 436 $ 1,561 ------ ------- ------ -------
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 one customer in the Fireplace Products Segment were $3,243,000, $3,978,000, and $4,550,000 in 1996, 1995 and 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE L--SHARE REPURCHASE AGREEMENT
On December 21, 1976, the stockholders approved a Share Repurchase Agreement (the "Agreement") among the Company, the Chairman of the Board of Directors (the "Chairman"), and a trustee under which the Company may be required to purchase a number of shares of common stock from the Chairman's estate upon his death. The purchase price of a share of common stock under this Agreement is to be 90% of the quoted market value at the date of the Chairman's death. The aggregate purchase price may not exceed the lesser of certain taxes and expenses associated with his death or the benefits under a certain life insurance policy on the life of the Chairman. This policy, purchased by the Company at an annual premium of $21,000, has been transferred to the Trustee under this Agreement.
The Company is not required to purchase any shares of common stock under the Agreement if such purchase would result in an impairment of its capital or would violate state laws in effect at that date.
NOTE M--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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
NOTE N--QUARTERLY RESULTS (UNAUDITED)
Summary data relating to the results of operations for each quarter of the years ended August 31, 1996 and 1995 follows (in thousands except per share amounts):
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended August 31, 1994, 1995 and 1996 (in thousands)
(1) Other additions represent collections on receivables previously written off.
(2) Amount charged against reserve.