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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED: AUGUST 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-5940
TEMTEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1321869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 LBJ FREEWAY, SUITE 1375, DALLAS, TEXAS 75240
(Address of principal executive offices) Zip Code
Company's telephone number, including area code: 972/726-7175
Securities Registered Pursuant to Section 12(b) of the act:
NONE
Securities Registered Pursuant to Section 12(g) of the act:
COMMON STOCK, PAR VALUE $0.20 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
As of November 13, 1996, the aggregate market value of the voting stock held
by nonaffiliates of Temtex Industries, Inc. was $7,268,628.
As of August 31, 1996 there were 3,467,141 shares of common stock, par value
$0.20 per share, of Temtex Industries, Inc. outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is a major producer of metal fireplace products (woodburning and
gas) and face brick products used in the residential and commercial building
markets. The Company manufactures woodburning metal fireplaces as well as
those utilizing natural gas and liquified petroleum products. The Company in
1992, introduced its Temco American Dream-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
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location where a heat source is desired, including existing fireplaces.
Existing fireplaces can be modified to accommodate the use of the Company's
ventfree gas logs at a nominal cost.
The Company markets ventfree gas log products, which consists of several
different sizes of ventfree gas log sets and ventfree gas heaters and
fireplace units. The current fireplace products are marketed under either
the American Dream-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
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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
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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.
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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.
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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.
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ITEM 3. LEGAL PROCEEDINGS
There are legal actions in which the Company is a party, however, in the
opinion of management, the Company's ultimate loss, if any, will not be
significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
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.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
YEARS ENDED AUGUST 31,
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1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net Sales
Fireplace products ......................... $ 33,110 $ 34,504 $ 35,324 $ 26,371 $ 19,708
Face brick products ........................ 8,862 8,400 8,611 7,736 6,698
---------- ---------- ---------- ---------- ----------
Total net sales ......................... 41,972 42,904 43,935 34,107 26,406
Cost of goods sold .......................... 30,977 30,962 29,391 23,657 19,913
---------- ---------- ---------- ---------- ----------
Gross profit ................................ 10,995 11,942 14,544 10,450 6,493
Selling, general and administrative
expenses .................................. 9,548 10,782 10,291 7,735 5,875
Interest expense ............................ 583 424 526 903 985
Other income ................................ (2) (122) (71) (45) (256)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes ....................... 866 858 3,798 1,857 (111)
Income tax expense (benefit) ................ 324 369 (280) 713 28
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item ................. 542 489 4,078 1,144 (139)
Loss from discontinued operations,
less applicable federal taxes ............. -- -- -- (87) (226)
Extraordinary gain from utilization of
operating loss carryforward ............... -- -- -- 530 --
---------- ---------- ---------- ---------- ----------
Net income (loss) ........................... $ 542 $ 489 $ 4,078 $ 1,587 $ (365)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income (loss) per common share:
Income (loss) from continuing operations,
before extraordinary item ............... $ .16 $ .14 $ 1.25 $ .45 $ (.06)
Loss from discontinued operations ......... -- -- -- (.03) (.09)
Extraordinary item ........................ -- -- -- .21 --
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share ........ $ .16 $ .14 $ 1.25 $ .63 $ (.15)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding ............. 3,491,131 3,502,887 3,272,568 2,520,189 2,456,641
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
CASH DIVIDENDS DECLARED PER COMMON SHARE....... $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
AUGUST 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital ............................. $ 8,329 $ 9,014 $ 10,189 $ 1,582 $ 766
Total assets (1) ............................ 27,808 27,116 23,643 16,903 13,482
Short-term debt (2) ......................... 3,343 2,770 595 4,969 4,530
Long-term debt, excluding current
maturities (3) ............................ 2,218 3,099 1,346 2,166 2,687
Stockholders' equity ........................ 15,970 15,416 14,916 4,309 2,722
</TABLE>
- ------------------------
(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.
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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.
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OTHER INCOME
Other income for both fiscal 1996 and 1995 includes small amounts from
various sources.
INCOME TAXES
Income tax expense, both current and deferred, decreased from $369,000 in
fiscal 1995 to $324,000 in fiscal 1996. In fiscal 1996, income tax expense
consisted of $154,000 in federal, $146,000 in state and $24,000 in foreign
income taxes.
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.
11
<PAGE>
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.
12
<PAGE>
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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(A) DIRECTORS OF THE COMPANY
The names of the directors and nominees for the office of director and
information about them, as furnished by the directors and nominees
themselves, are set forth below:
First Positions and Offices with Company,
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.
14
<PAGE>
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.
15
<PAGE>
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
$100,000.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
--------------------------- ----------------------- ----------------
Other Securities All
Annual Restricted Underlying LTIP Other
Name and Compen- Stock Options/ Pay- Compen-
Principal Fiscal Salary Bonus sation Awards SARs outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E.R.Buford 1994 195,000 150,000 N/A -0- -0- -0- N/A
Chief 1995 205,300 -0- N/A -0- -0- -0- N/A
Executive 1996 213,500 -0- N/A -0- -0- -0- N/A
Officer and
President
- ----------------------------------------------------------------------------------------------------
J. E. Upfield 1994 145,000 25,000 N/A -0- -0- -0- N/A
Chairman of 1995 150,000 -0- N/A -0- -0- -0- N/A
the Board 1996 150,000 -0- N/A -0- -0- -0- N/A
- ----------------------------------------------------------------------------------------------------
R. N. Stivers 1994 102,500 30,000 N/A -0- -0- -0- N/A
Chief Financial 1995 107,800 -0- N/A -0- -0- -0- N/A
Officer/Vice 1996 112,000 -0- N/A -0- -0- -0- N/A
President-Finance
- ----------------------------------------------------------------------------------------------------
</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.
16
<PAGE>
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.
17
<PAGE>
STOCK OPTION PLAN FOR KEY EMPLOYEES
In 1990, the Company adopted the 1990 Stock Plan for Key Employees of Temtex
Industries, Inc. and its Subsidiaries (the "1990 Plan"). The 1990 Plan
provides for the grant of stock options, including "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986 and
"non-qualified stock options" which do not constitute incentive stock
options, the grant of stock appreciation rights in connection therewith, and
the allotment of shares of restricted stock, to key employees of the Company.
The 1990 Plan is intended to attract, retain and provide incentives for
eligible key employees. The 1990 Plan is administered by a committee of the
Board of Directors not eligible to receive awards under the 1990 Plan.
Presently the Compensation Committee administers the Plan. Such committee
has authority, in its discretion, to determine the individuals to whom, and
the time or times at which restricted stock will be allotted or options or
stock appreciation rights will be granted, the number of shares to be subject
to each allotment of restricted stock, stock options and appreciation rights,
the option price for the duration of each option and other matters in
connection with the administration of the 1990 Plan and the grant of awards
thereunder. The exercise price of any option granted under the 1990 Plan may
not be less than the fair market value of the Common Stock at the date of
grant. Options and stock appreciation rights may be granted and restricted
stock allotted under the 1990 Plan from time to time until December 31, 1999,
on which date such 1990 Plan will terminate, unless it is sooner terminated
as provided therein.
The stockholders at the annual meeting held March 7, 1995, approved a
proposal increasing the shares eligible for issuance pursuant to the 1990
Plan from 95,000 shares to 195,000 shares of Common Stock and the aggregate
number of options (including stock appreciation rights) or shares of
restricted stock which may be issued to any one employee in any fiscal year
shall not exceed 25,000.
18
<PAGE>
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.
- --------------------------------------------------------------------------------
19
<PAGE>
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.
20
<PAGE>
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
21
<PAGE>
PERFORMANCE GRAPH
The following table compares the performance of the Company's Common Stock with
certain comparable indices:
[GRAPH]
<TABLE>
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
TEMTEX INDUSTRIES, INC. ............. $ 100.00 $ 125.00 $ 888.00 $1,075.00 $ 469.00 $ 363.00
Dow Jones Industrial ................ $3,517.79 $3,877.63 $4,475.10 $4,928.00 $5,965.04 $7,434.82
Dow Jones Furnishings & Appliances... $ 280.08 $ 301.58 $ 490.28 $ 449.74 $ 457.28 $ 528.50
</TABLE>
22
<PAGE>
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:
<TABLE>
Amount and Nature
Title of Name and Address of Beneficial Percent
Class of Beneficial Owner Ownership (1) of Class
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock James E. Upfield 1,062,850 (2) 30.7%
5400 LBJ Freeway
Suite 1375
Dallas, Texas 75240
Common Stock Dimensional Fund Advisors, Inc. 186,000 5.4%
1299 Ocean Avenue
11th Floor
Santa Monica, California 90401
</TABLE>
- ------------------
(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.
23
<PAGE>
(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.
24
<PAGE>
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
25
<PAGE>
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."
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 14 is submitted
as a separate section of this report.
(3) Listing of Exhibits: The response to this portion
is presented in Item (c).
(b) During the fourth quarter of the period covered by this report,
there were no reports filed on Form 8-K.
(c) Exhibits:
(3) Articles of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of
Incorporation.*
3.2 Amended and Restated Bylaws.*
(10) Material Contracts
10.10 1990 Stock Option Plan for Key
Employees of Temtex Industries,
Inc. and its subsidiaries.*
10.11 Outside Directors Stock Option Plan
of Temtex Industries, Inc.*
10.12 Share Purchase Agreement between
the Registrant and Mr. James E.
Upfield effective December 21, 1976.*
10.13 Lease Agreement between the Registrant
and Mr. John D. Howard, a former
Director of the Registrant, dated
October 1, 1973 (the "Howard Lease
Agreement").*
10.14 Second Amendment to the Howard Lease
Agreement dated August 22, 1983.*
10.15 Lease Agreement between HUTCO and the
Registrant, dated September 7, 1989.*
10.16 Lease Agreement between HUTCO and the
the Registrant, dated April 25, 1994.**
10.17 Loan Agreement between NationsBank of
Texas, N.A. and the Registrant dated
May 3, 1994.**
10.18 Employment contract between E. R.
Buford and the Registrant dated
June 7, 1994.**
27
<PAGE>
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.
28
<PAGE>
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
29
<PAGE>
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.
F-1
<PAGE>
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
F-2
<PAGE>
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
------- -------
------- -------
F-3
<PAGE>
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.
F-4
<PAGE>
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.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
Common Stock
Outstanding Retained Cost of
------------------- Additional Earnings Treasury
Shares Amount Capital (Deficit) Stock
--------- ------ ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1993 2,456,641 $514 $2,886 $1,236 $327
Stock offering 1,000,000 200 6,329
Net income 4,078
--------- ---- ------ ------ ----
BALANCE AT AUGUST 31, 1994 3,456,641 714 9,215 5,314 327
Exercise of stock options 7,500 1 10
Net income 489
--------- ---- ------ ------ ----
BALANCE AT AUGUST 31, 1995 3,464,141 715 9,225 5,803 327
Stock award 3,000 1 11
Net income 542
--------- ---- ------ ------ ----
BALANCE AT AUGUST 31, 1996 3,467,141 $716 $9,236 $6,345 $327
--------- ---- ------ ------ ----
--------- ---- ------ ------ ----
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
Year Ended August 31,
-------------------------------
1996 1995 1994
------- ------- --------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 542 $ 489 $ 4,078
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,964 1,509 1,074
Deferred taxes (18) 84 (940)
Gain on disposition of buildings and equipment (9) (94) (24)
Provision for doubtful accounts 198 186 402
Provision for losses on assets related
to discontinued operations -- -- 16
Changes in operating assets and liabilities:
Accounts receivable (158) 532 (2,754)
Inventories (1,451) 11 (2,497)
Prepaid expenses and other assets 101 45 180
Accounts payable and accrued expenses 492 (958) 1,046
Income taxes payable 500 (446) (240)
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,161 1,358 341
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,065) (4,254) (1,978)
Expenditures on assets related to discontinued
operations (129) -- (333)
Proceeds from disposition of property, plant
and equipment 12 99 34
Proceeds from disposition of assets and other
receipts related to discontinued operations 26 6 839
------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,156) (4,149) (1,438)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 1,099 3,893 485
Principal payments on revolving line of
credit, long-term obligations and indebtedness
to related parties (1,407) (1,004) (5,700)
Proceeds from issuance of common stock 12 11 6,529
------- ------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (296) 2,900 1,314
------- ------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (291) 109 217
Cash and cash equivalents at beginning of year 736 627 410
------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 445 $ 736 $ 627
------- ------- --------
------- ------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Capital lease obligations $ -- $ 1,040 $ 20
Charges to allowance for doubtful accounts $ 304 $ 173 $ 290
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
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.
F-8
<PAGE>
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
------ ------ -------
------ ------ -------
F-9
<PAGE>
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.
F-10
<PAGE>
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.
F-11
<PAGE>
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.
F-12
<PAGE>
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)
---- ---- -------
---- ---- -------
F-13
<PAGE>
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.
F-14
<PAGE>
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
------ --------
------ --------
F-15
<PAGE>
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
------ -------
------ -------
F-16
<PAGE>
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.
F-17
<PAGE>
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.
F-18
<PAGE>
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):
<TABLE>
THREE MONTHS ENDED
-----------------------------------------------
NOVEMBER 30 FEBRUARY 29 MAY 31 AUGUST 31 TOTAL
----------- ----------- ------ --------- -----
<S> <C> <C> <C> <C> <C>
Fiscal year 1996:
Net sales $12,993 $ 9,060 $ 9,660 $10,259 $41,972
Gross profit 4,076 2,337 2,122 2,460 10,995
Income (loss) from
continuing operations 581 (34) (27) 22 542
Net income (loss) 581 (34) (27) 22 542
Per share:
Continuing operations $ .16 $ (.01) $ (.01) $ .01 $ .16
Net income (loss) .16 (.01) (.01) .01 .16
Fiscal year 1995:
Net sales $14,167 $10,213 $ 8,581 $ 9,943 $42,904
Gross profit 4,851 2,665 1,809 2,617 11,942
Income (loss) from
continuing operations 1,029 146 (619) (67) 489
Net income (loss) 1,029 146 (619) (67) 489
Per share:
Continuing operations $ .29 $ .04 $ (.18) $ (.02) $ .14
Net income (loss) .29 .04 (.18) (.02) .14
</TABLE>
F-19
<PAGE>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended August 31, 1994, 1995 and 1996
(in thousands)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts- Deductions- at End
Description of Period Expenses Describe Describe of Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1994
Reserve, deducted from related asset:
Allowance for doubtful accounts $409 $402 $ 1 (1) $290 (2) $522
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Year ended August 31, 1995
Reserve, deducted from related asset:
Allowance for doubtful accounts $522 $186 $ 6 (1) $173 (2) $541
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Year ended August 31, 1996
Reserve, deducted from related asset:
Allowance for doubtful accounts $541 $198 $ -- $304 (2) $435
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
(1) Other additions represent collections on receivables previously written
off.
(2) Amount charged against reserve.
F-20
<PAGE>
EXHIBIT 10.22
[LOGO] BUSINESS LOAN AGREEMENT
- ------------------------------------------------------------------------------
This Agreement dated as of May 1, 1996 is between Bank of America Texas, N.A.
(the "Bank") and TEMTEX INDUSTRIES, INC. (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Four Million and No/100 Dollars ($4,000,000.00).
(b) This is a revolving line of credit with a within line facility for letters
of credit. During the availability period, the Borrower may repay principal
amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of the
line of credit plus the outstanding amounts of any letters of credit,
including amounts drawn on letters of credit and not yet reimbursed, to
exceed the Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and May 1, 1998 (the "Expiration Date") unless the Borrower is
in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an Optional interest rate as described below,
the interest rate is the lesser of (a) the maximum lawful rate of interest
permitted under applicable usury laws, now or hereafter enacted (the
"Maximum Rate"), or (b) the rate (the "Basic Rated that is equal to the
Bank's Reference Rate.
Notwithstanding the foregoing, if at any time the Basic Rate shall exceed
the Maximum Rate and thereafter the Basic Rate shall become less than the
Maximum Rate, the Rate of interest payable shall be the Maximum Rate until
the Bank shall have received the amount of interest it otherwise would have
received if the interest payable had not been limited by the Maximum Rate
during the period of time the Basic Rate exceeded the Maximum Rate.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in Irving. Texas, as its Reference Rate. The Reference
Rate is set by the Bank based on various factors, including its costs and
desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans. The Bank may price loans to
its customers at, above, or below the Reference Rate. Any change in the
Reference Rate will take effect at the opening of business on the day
specified in the public announcement of a change in the Bank's Reference
Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on June 1, 1996 and on the 1st day of each
month thereafter until payment in full of any principal outstanding under
this line of credit,
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date.
(c) The Borrower may prepay the loan in full or in part at any time.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of the line of
credit during the availability period bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrower;
provided, however, that the Borrower shall not have the option or right to elect
to have all or any portion of the line of credit] bear interest at the rates
described below when such rates exceeds the Maximum Rate. Each interest rate is
a rate per year. Interest will be paid on the last day of each interest period,
and on the 1st day of each month during the interest
SLA.TX (1/95) 1
<PAGE>
period. At the end of any interest period, the interest rate will revert to
the rate based on the Reference Rate, unless the Borrower has designated
another optional interest rate for the portion.
1.6 LETTERS OF CREDIT.
(a) This line of credit may be used for financing standby letters of credit
with a maximum maturity of 365 days but not to extend beyond the Expiration
Date.
(b) The amount of the letters of credit outstanding at any one time (including
amounts drawn on the letter of credit and not yet reimbursed) may not
exceed Five Hundred Thousand and No/100 Dollars ($500.000.00).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank, be
added to the principal amount outstanding under this Agreement. The amount
will bear interest and be due as described elsewhere in this Agreement.
(b) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary acceptable
to the Bank.
(c) to sign the Bank's form Application and Agreement for Standby Letter of
Credit.
(d) to pay the following issuance and other fees for issuing and processing
letters of credit in the amount of 1% percent per annum of face amount of
each letter of credit.
(e) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
1.7 LIBOR RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the LIBOR Rate plus
1.25 percentage points (the "Eurodollar Rate")
Designation of a Eurodollar Rate portion is subject to the following
requirements:
(a) The interest period during which the Eurodollar Rate will be in effect will
be 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, or 12 months. The last day of the
interest period will be determined by the Bank using the practices of the
London inter-bank market.
(b) Each Eurodollar Rate portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).
(c) The Borrower shall irrevocably request a Eurodollar Rate portion no later
than 11:00 a.m. Dallas time two (2) banking days before the commencement of
the interest period using the attached Borrowing Certificate Form included
as Exhibit "A".
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
London Rate
LIBOR Rate = ---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward to the nearest
1/16th of one percent) at which the Bank's London Branch, London,
Great Britain, would offer U.S. dollar deposits for the applicable
interest period to other major banks in the London inter-branch market
at approximately 11:00 a.m. London time two (2) Banking Days prior to
the commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in the Federal Reserve Board Regulation D, rounded upward to
the nearest
SLA.TX (1/95) 2
<PAGE>
1/100 of one percent. The percentage will be expressed as a decimal,
and will include, but not be limited to, marginal, emergency,
supplemental, special and other reserve percentages.
(e) The Borrower may not elect a Eurodollar Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(f) Any portion of the principal balance of the line of credit already bearing
interest at the Eurodollar Rate will not be converted to a different rate
during its interest period.
(g) Each prepayment of a Eurodollar Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid; and a prepayment fee equal to the amount
(if any) by which:
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period. exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the London inter-bank market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
(h) The Bank will have no obligation to accept an election for a Eurodollar
Rate portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a Eurodollar Rate portion are not available in the
London inter-bank market; or
(ii) the Eurodollar Rate does not accurately reflect the cost of a
Eurodollar Rate portion.
(i) If at any time during any applicable interest period the Eurodollar Rate
shall exceed the Maximum Rate and thereafter the Eurodollar Rate shall
become less than the Maximum Rate, the rate of interest payable shall be
the Maximum Rate until the Bank shall have received the amount of interest
it otherwise would have received if the interest payable had not been
limited by the Maximum Rate during the period of time the Eurodollar Rate
exceeded the Maximum Rate.
2. FEES, EXPENSES
2.1 UNUSED COMMITMENT FEE. Subject to the provisions of Section 2 hereof, the
Borrower agrees to pay a fee on any difference between the Commitment and
the amount of credit it actually uses, determined by the weighted average
loan balance maintained during the specified period. The fee will be
calculated at 1/8% per year.
This fee is due on August 1, 1996 and on each quarterly date thereafter until
the expiration of the availability period.
2.2 WAIVER FEE. Subject to the provisions of Section 2 hereof, if the Bank, at
its discretion, agrees to waive or amend any terms of this Agreement, then the
Borrower will pay the Bank a One Thousand and No/100 Dollar ($1,000.00) fee for
each waiver or amendment, Nothing in this paragraph shall imply that the Bank is
obligated to agree to any waiver or amendment requested by the Borrower. The
Bank may impose additional requirements as a condition to any waiver or
amendment.
2.3 EXPENSES.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
closing of this transaction or the preparation of this Agreement and any
agreement or instrument required by this Agreement, up to a maximum of Four
Thousand and No/100 Dollars ($4,000.00). Expenses include, but are not
limited to, reasonable attorneys' fees, filing and recording fees and
taxes, search fees and other out-of-pocket expenses incurred by Bank.
SLA.TX (1/95) 3
<PAGE>
2.4 NO EXCESS FEES. Notwithstanding anything to the contrary in this Section
2, in no event shall any sum payable under this Section 2 (to the extent, if
any, constituting interest under any applicable laws), together with all amounts
constituting interest under applicable laws and payable in connection with the
credit evidenced hereby, exceed the Maximum Rate or the maximum amount of
interest permitted to be charged, taken, reserved, received or contracted for
under applicable usury laws.
3. COLLATERAL
3.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower.
(a) Inventory, excluding inventory domiciled in Mexico.
(b) Receivables.
In addition, all personal property collateral securing this Agreement shall also
secure all other present and future obligations of the Borrower to the Bank
(excluding any consumer credit covered by the federal Truth in Lending law,
unless the Borrower has otherwise agreed in writing). All personal property
collateral securing any other present or future obligations of the Borrower to
the Bank shall also secure this Agreement.
3.2 OTHER COLLATERAL. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property now owned or owned in the future
by Temco Fireplace Product, Inc. as listed below, The collateral is further
defined in security agreement(s) executed by Temco Fireplace Product, Inc.
(a) Inventory, excluding inventory domiciled in Mexico.
(b) Receivables.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing by submitting to the Bank a Borrowing Certificate in the attached
Exhibit "A" hereto, or by another means acceptable to the Bank.
4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Banks branch (or other location) selected by the Bank from time
to time;
(b) made in immediately available funds, or such other type of funds selected
by the Bank;
(c) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes,
4.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments or for
the designation Of Optional interest rates given by any one of the
individual signer(s) of this Agreement or a person or persons authorized by
any one of the signer(s) of this Agreement.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 2605400143, or such other accounts with the Bank
as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone instructions it reasonably believes
are made by any individual authorized by the Borrower to give such
instructions.
4.4 DIRECT DEBIT.
(a) The Borrower agrees that interest and any fees will be deducted
automatically on the due date from checking account number 2605400143,
(b) The Bank will debit the account on the dates the payments become due, If a
due date does not fall on a banking day, the Bank will debit the account on
the first banking day following the due date.
SLA.TX (1/95) 4
<PAGE>
(c) The Borrower will maintain sufficient funds in the account on the dates the
Bank enters debits authorized by this Agreement. If there are insufficient
funds in the account on the date the Bank enters any debit authorized by
this Agreement, the debit will be reversed.
4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in Texas. For amounts bearing interest at a LIBOR Rate, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in Texas and Bank of America National Trust and Savings Association
("BofA California") in San Francisco, California and dealing in dollars in the
London inter-bank market. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
4.6 TAXES. The Borrower will not deduct any taxes from any payments it makes to
the Bank. If any government authority imposes any taxes on any payments made by
the Borrower, the Borrower will pay the taxes or charges. Upon request by the
Bank, the Borrower will confirm that it has paid the taxes by giving the Bank
official tax receipts (or notarized copies) within 30 days after the due date.
However, the Borrower will not pay the Bank's net income taxes.
4.7 ADDITIONAL COSTS. With respect to any portion of the principal balance
bearing interest at the Eurodollar Rate and subject to the provisions of Section
4 hereof, the Borrower will pay the Bank, on demand, for the Bank's costs or
losses arising from any statute or regulation, or any request or requirement of
a regulatory agency which is applicable to all national banks or a class of all
national banks. The costs and losses will be allocated to the loan in a manner
determined by the Bank, using any reasonable method. The costs include the
following:
(a) any increased reserve or deposit requirements; and
(b) any increased capital requirements relating to the Bank's assets and
commitments for credit.
Notwithstanding the foregoing, in no event shall any sum payable under this
Section 4 (to the extent, if any, constituting interest under applicable laws),
together with all amounts constituting interest under applicable laws and
payable in connection with the credit evidenced hereby, exceed the Maximum Rate
or the maximum amount of interest permitted to be charged, taken, reserved,
received or contracted for under any applicable usury laws.
4.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360 day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Notwithstanding the foregoing, interest at the
Maximum Rate will always be computed on the basis of a 365-day year and the
actual number of days elapsed.
4.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the lesser of (a) the Maximum Rate or (b) the
Bank's Reference Rate plus 1.00 percentage point.
4.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at the lesser of (a) the Maximum Rate and (b) a rate
per annum which is 1.00 percentage point higher than the rate of interest
otherwise provided under this Agreement. This will not constitute a waiver of
any default.
SLA.TX (1/95) 5
<PAGE>
5. CONDITIONS. The Bank must receive the following items, in form and content
acceptable to the Bank, before it is required to extend any credit to the
Borrower under this Agreement:
5.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower and each guarantor or subordinating creditor of this Agreement and
any instrument or agreement required under this Agreement have been duly
authorized.
5.2 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which
the Bank requires a possessory security interest), which the Bank requires.
5.3 EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
5.4 INSURANCE. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
5.5 BUSINESS INTERRUPTION INSURANCE. Evidence of a business interruption
insurance policy for at least Four Million and No/100 Dollars ($4,000,000.00)
with an insurer acceptable to the Bank.
5.6 ENVIRONMENTAL QUESTIONNAIRE. A completed Bank form Environmental
Questionnaire and Disclosure Statement.
5.7 GUARANTIES. Guaranties signed by Temco Fireplace Products, Inc., Temtex
Trucking, Inc., and Malakoff Brick, Inc. on the Bank's standard form in an
amount as may be acceptable, from time to time, to the Bank.
5.8 GOOD STANDING. Certificates of good standing for the Borrower from its
state of incorporation and from any other state in which the Borrower is
required to qualify to conduct its business.
5.9 OTHER ITEMS. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and
until the Bank is repaid in full, the Borrower makes the following
representations and warranties. Each request for an extension of credit
constitutes a renewed representation.
6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's or Guarantor's powers, have been duly
authorized, and do not conflict with any of its organizational papers.
6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
6.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.
SLA.TX (1/95) 6
<PAGE>
6.6 FINANCIAL INFORMATION. All financial and other information that has been
or will be supplied to the Bank, including the Borrower's financial statement
dated as of February 29, 1996 is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
and any guarantor's financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the assets or the financial condition of the Borrower
or any guarantor.
6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
6.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
6.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
6.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
6.11 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
6.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of
time or both would be, a default under this Agreement.
6.13 ERISA PLANS.
(a) The Borrower has fulfilled its obligations, if any, under the minimum
funding standards of ERISA and the Code with respect to each Plan and is in
compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA for which
the PBGC requires 30 day notice.
(c) No action by the Borrower to terminate or withdraw from any Plan has been
taken and no notice of intent to terminate a Plan has been filed under
Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under Section 4042
of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(ii) "ERISA" means the Employee Retirement Income Act of 1974, as amended
from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained or
contributed to by the Borrower and insured by the Pension Benefit
Guaranty Corporation under Title IV of ERISA.
6.14 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
SLA.TX (1/95) 7
<PAGE>
6.15 LOCATION OF INVENTORY. The Borrower's Inventory is located at the
following locations:
<TABLE>
<S> <C> <C>
Texas Clay Industries Temco Fireplace Products, Inc. Temco Fireplace Products Inc.
West End of Bartlett Street 1324 McArthur Drive 1190 W. Oleander
Malakoff, Texas 75148 Manchester, TN 37355 Perris, CA 92572
</TABLE>
7. COVENANTS. The Borrower agrees, so long as credit is available under this
Agreement and until the Bank is repaid in full:
7.1 USE OF PROCEEDS. To use the proceeds of the credit only to support ongoing
investment in accounts receivable and inventory along with general working
capital funding requirements.
7.2 FINANCIAL INFORMATION. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements and Borrower's Form 10-K Annual Report. These
financial statements must be audited (with an unqualified opinion) by a
Certified Public Accountant ("CPA") acceptable to the Bank. The statements
shall be prepared on a consolidated and consolidating basis. The
consolidating statements will not be audited.
(b) Within 45 days of the period's end, the Borrower's quarterly financial
statements and Form 10-Q Quarterly Report. These financial statements may
be Borrower prepared. The statements shall be prepared on a consolidated
basis.
(c) Within 45 days of each quarter end, the Borrower will provide the Bank with
a Compliance Certificate in the form described as Exhibit "B" hereto.
(d) Borrower to provide to Bank annual operating forecasts by the end of the
first quarter following the start of each fiscal year.
7.3 QUICK RATIO. To maintain on a consolidated basis a ratio of quick assets
to current liabilities of at least 0.60:1.0, measured quarterly, beginning
August 31, 1996.
"Quick assets" means cash, short-term cash investments, net trade receivables
and marketable securities not classified as long-term investments.
7.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on a
consolidated basis a ratio of Total Liabilities to Tangible Net Worth not
exceeding 1.20:1.0, measured quarterly, beginning August 31,1996.
"Total Liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
7.5 PROFITABILITY. To maintain on a consolidated basis a positive net income
after taxes and extraordinary items for each year end accounting period.
7.6 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
SLA.TX (1/95) 8
<PAGE>
(d) Debts and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank in the Borrower's financial statement
dated February 29, 1996.
(e) Additional debts and lease obligations for the acquisition of fixed or
capital assets, to the extent permitted elsewhere in this Agreement.
(f) Additional debts and lease obligations for business purposes which do not
exceed a total principal amount of One Million and No/100 Dollars
($1,000,000.00) outstanding at any one time.
7.7 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.
(d) Additional purchase money security interests in personal property acquired
after the date of this Agreement, if the total principal amount of debts
secured by such liens does not exceed One Million and No/100 Dollars
($1,000,000.00) at any one time.
7.8 CAPITAL EXPENDITURES. Not to spend or incur obligations (including the
total amount of any capital leases) for more than Three Million and No/100
Dollars ($3,000,000.00) in any single fiscal year to acquire fixed or capital
assets.
7.9 DIVIDENDS. Not to declare or pay any dividends on any of its shares except
dividends payable in capital stock of the Borrower, and not to purchase, redeem
or otherwise acquire for value any of its shares, or create any sinking fund in
relation thereto.
7.10 LOANS TO OFFICERS OR AFFILIATES. Not to make any loans, advances or other
extensions of credit to any of the Borrower's executives, officers, affiliates,
directors, shareholders or Temtex International, Inc. (or any relatives of any
of the foregoing), in excess of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00). This specifically excludes inter-company advances to
subsidiaries. Intercompany advances among Borrower and guaranteeing subsidiaries
are permitted.
7.11 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00) against the Borrower or any guarantor.
(b) any substantial dispute between the Borrower or any guarantor and any
government authority.
(c) any failure to comply with this Agreement,
(d) any material adverse change in the Borrower's or any guarantor's financial
condition or operations.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
7.12 BOOKS AND RECORDS. To maintain adequate books and records.
7.13 AUDITS. To allow the Bank and its agents to inspect upon reasonable notice
the Borrower's properties and examine, audit, and make copies of books and
records at any reasonable time. If any of the Borrower's properties, books or
records are in the possession of a third party, the Borrower authorizes that
third party to permit the Bank or its agents to have access to perform
inspections or audits and to respond to the Bank's requests for information
concerning such properties, books and records.
7.14 COMPLIANCE WITH LAWS. To comply with the laws, (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
7.15 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
7.16 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
7.17 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
SLA.TX (1/95) 9
<PAGE>
7.18 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
7.19 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor of
the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance satisfactory to the Bank
as to amount, nature and carrier covering property damage (including loss
of use and occupancy) to any of the Borrower's properties, public liability
insurance including coverage for contractual liability, product liability
and workers' compensation, and any other insurance which is usual for the
Borrower's business.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
7.20 INVENTORY INVESTMENT IN MEXICO. Not to maintain at any time an inventory
investment in Mexico in excess of Seven Hundred Fifty Thousand and No/100
Dollars ($750,000.00).
7.21 INVESTMENTS. Not to make or maintain at any time investments in securities
other than in U.S. Government Obligations or other "investment grade"
investments.
7.22 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's business
or the Borrower's assets.
(e) acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any assets for less than fair market value or
enter into any sale and lease back agreement covering any of its fixed or
capital assets.
(g) voluntarily suspend its business.
7.23 ERISA PLANS. To give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(b) of ERISA for
which the PBGC requires 30 day notice,
(b) Any action by the Borrower to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041 of ERISA.
(c) Any notice of noncompliance made with respect to a Plan under Section
4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
8. HAZARDOUS WASTE. The Borrower will indemnify and hold harmless the Bank
from any loss or liability directly or indirectly arising out of the use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of a hazardous substance. This indemnity will
apply whether the hazardous substance is on, under or about the Borrower's
property or operations or property leased to the Borrower. The indemnity
includes but is not limited to attorneys' fees (including the reasonable
estimate of the allocated cost of in-house counsel and staff). The indemnity
extends to the Bank, its parent, subsidiaries and all of their directors,
officers, employees, agents, successors. attorneys and assigns. For these
purposes, the term "hazardous substances" means any substance which is or
becomes designated as "hazardous" or "toxic" under any federal, state or local
law. This indemnity will survive repayment of the Borrower's obligations to the
Bank.
SLA.TX (1/95) 10
<PAGE>
9. DEFAULT. If any of the following events occur, the Bank may do one or more
of the following: (i) declare the Borrower in default, (ii) stop making any
additional credit available to the Borrower, (iii) exercise any and all rights
and remedies as may be available to the Bank under the terms of any collateral
documents, security instruments, debt instruments or any other document or
instrument executed in connection herewith or in any way related hereto, (iv)
exercise any and all rights and remedies as may be available to the Bank at law
or in equity, and (v) declare the entire debt created and evidenced hereby to be
immediately due and payable in full, whereupon the entire unpaid principal
indebtedness evidenced hereby, and all accrued unpaid interest thereon, shall at
once mature and become due and payable without presentment, demand, protest,
grace or notice of any kind (including, without limitation, notice of intent to
accelerate, notice of acceleration or notice of protest), all of which are
hereby severally waived by the Borrower. If a bankruptcy petition is filed with
respect to the Borrower, the entire debt outstanding under this Agreement will
automatically become due immediately.
9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
9.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for the extensions of credit under
this Agreement.
9.3 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
9.4 BANKRUPTCY. The Borrower or any guarantor files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower or any guarantor, or the
Borrower or any guarantor makes a general assignment for the benefit of
creditors.
9.5 RECEIVERS. A receiver or similar official is appointed for the Borrower's
or any guarantor's business, or the business is terminated.
9.6 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) or more in excess of any insurance
coverage.
9.7 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower or any guarantor, or the Borrower or any guarantor enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00)
or more in excess of any insurance coverage.
9.8 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's or any guarantor's
financial condition or ability to repay.
9.9 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's or any guarantor's financial condition, properties or prospects, or
ability to repay the loan.
9.10 NON-COMPLIANCE. The Borrower or any guarantor fails to meet the conditions
of, or fails to perform any obligation under any other agreement the Borrower or
any guarantor has with the Bank or any affiliate of the Bank.
9.11 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower or any guarantor has obtained from anyone else or which
the Borrower or any guarantor has guaranteed.
9.12 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is revoked in whole or in part, violated or no longer in effect.
SLA.TX (1/95) 11
<PAGE>
9.13 ERISA PLANS. The occurrence of any one or more of the following events
with respect to the Borrower, provided such event or events could reasonably be
expected, in the judgment of the Bank, to subject the Borrower to any tax,
penalty or liability (or any combination of the foregoing) which, in the
aggregate, could have a material adverse effect on the financial condition of
the Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan which is, in the
reasonable judgment of the Bank, likely to result in the termination of
such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to terminate a Plan)
or the Borrower's full or partial withdrawal from a Plan.
9.14 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
9.15 CHANGE OF OWNERSHIP. Any person or group acting in concert other than the
existing executive management of Borrower shall own or exercise voting control
over 51% or more of the capital stock of Borrower.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
10.2 TEXAS LAW. This Agreement is governed by Texas law.
10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the
right of set-off against the Borrower.
10.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that arise
from:
(i) This Agreement (including any renewals, extensions or modifications
of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
the Borrower and the bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of the Borrower or the bank, an such controversies or claims
will be settled by arbitration in accordance with the United States
Arbitration Act. THE UNITED STATES ARBITRATION ACT WILL APPLY EVEN THOUGH
THIS AGREEMENT PROVIDES THAT IT IS GOVERNED BY TEXAS LAW.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration. The
arbitration will be conducted within the following Texas county: Dallas.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statutes of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitratable, the
arbitrators will have the authority to resolve any such dispute.
SLA.TX (1/95) 12
<PAGE>
(f) The decision that results from an arbitration proceeding may be submitted
to an authorized court of law to be confirmed and enforced.
(g) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral;
or
(iii) act in a court of law before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(h) The pursuit of a successful action for interim, additional or supplementary
remedies, or the filing of a court action, does not constitute a waiver of
the right of the Borrower or the Bank, including the suing party, to submit
the controversy or claim to arbitration of the other party contests the
lawsuit.
10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
10.6 COSTS. If the Bank incurs any expenses in connection with administering or
enforcing this Agreement, or if the Bank takes collection action under this
Agreement, it is entitled to costs and reasonable attorneys' fees, including any
allocated costs of in-house counsel.
10.7 ATTORNEYS' FEES. In the event of a lawsuit or arbitration proceeding, the
prevailing party is entitled to recover costs and reasonable attorneys' fees
(including any allocated costs of in-house counsel) incurred in connection with
the lawsuit or arbitration proceeding, as determined by the court or arbitrator.
10.8 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
10.9 HEADINGS. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
10.10 USURY LAWS. It is the intention of the parties to comply with applicable
usury laws; accordingly, it is agreed that notwithstanding any provisions to the
contrary in this Agreement or in any of the documents evidencing or securing
payment hereof or otherwise relating hereto, in no event shall this Agreement or
such instruments or documents require or permit the payment, contracting for,
charging, taking, reserving or receiving any sums constituting interest, as
defined under applicable usury laws, in excess of the maximum amount permitted
by such laws. If any such excess of interest is contracted for, paid, charged,
taken, reserved or received under this Agreement or under any of the documents
evidencing or securing payment hereof or otherwise relating hereto, on the
amount of principal actually outstanding from time to time shall exceed the
maximum amount of interest permitted by applicable usury laws, then in any such
event,
(i) the provisions of this Section shall govern and control;
(ii) any such excess shall be canceled automatically to the extent of such
excess, and shall not be collected or collectible;
(iii) any such excess which is or has been received shall be credited
against the unpaid principal balance hereof or refunded to the
Borrower, at the Bank's option; and
(iv) the effective rate of interest shall be automatically reduced to the
maximum lawful rate allowed under applicable laws as construed by
courts having jurisdiction hereof or thereof.
It is further agreed that without limitation of the foregoing, all calculations
of the rate of interest calculated for, paid, charged, taken, reserved or
received under this Agreement or under such other documents or instruments that
are made for the purpose of determining whether such rate exceeds the maximum
lawful rate of interest, shall be made, to the extent permitted by applicable
usury laws, by amortizing, prorating, allocating and spreading in equal parts
during the period of the full stated term of the indebtedness, all interest at
any time contractor for, paid, charged, taken, reserved or received from the
Borrower or otherwise by the holder or holders thereof. The terms
SLA.TX (1/95) 13
<PAGE>
of this section shall be deemed to be incorporated in every loan document,
security instrument, debt instrument, and communication relating to this
Agreement and the law evidenced hereby. The term "applicable usury laws"
shall mean such law of the State of Texas or the laws of the United States;
whichever laws allow the higher rate of interest, as such laws now exist;
provided, however, that if such laws shall hereafter allow higher rates of
interest, then the applicable usury laws shall be the laws allowing the
higher rate to be effective as of the effective date of such laws. To the
extent that TEX. REV. STAT. ANN. art 5069-1.04, as amended (the "Act"), is
relevant to the Bank for the purposes of determining the Maximum Rate, the
parties elect to determine the Maximum Rate under the Act pursuant to the
"indicate rate ceiling" from time to time in effect, as referred to and
defined in article 1.04(a)(1) of the Act; subject, however, to any right the
Bank may have subsequently under applicable law, to change the method of
determining the Maximum Rate.
10.11 NO ORAL AGREEMENTS. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
THIS WRITTEN AGREEMENT AND THE INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION
HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA TEXAS, N.A. TEMTEX INDUSTRIES, INC.
/s/ DONALD P. HELLMAN /s/ ROGER N. STIVERS
- -------------------------------------- -------------------------------------
By: Donald P. Hellman, Vice President By: Roger N. Stivers, Vice President
Address where notices to the Address where notices to the
Bank are to be sent: Borrower are to be sent:
Bank of America Texas, N.A. 3010 LBJ Freeway, Suite 650
Attn: Commercial Loan Services Dallas, Texas 75234
333 Clay Street, Ste. 3600
Houston, Texas 77002
SLA.TX (1/95) 14
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1990 Stock Plan for Key Employees of Temtex
Industries, Inc. and its Subsidiaries and the Outside Directors Stock Option
Plan of Temtex Industries, Inc. of our report dated October 25, 1996, with
respect to the consolidated financial statements and schedule of Temtex
Industries, Inc. included in the Annual Report (Form 10-K) for the year ended
August 31, 1996.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Dallas, Texas
November 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the Temtex
Industries, Inc. and Subsidiaries financial statements for the twelve
months ended August 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 445
<SECURITIES> 0
<RECEIVABLES> 7,406
<ALLOWANCES> 435
<INVENTORY> 10,224
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0
0
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</TABLE>
