SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ X ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Temtex Industries, Inc.
- -----------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(1) and 0-11.
(1) Title of each class of securities to which
transaction applies:
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(2) Aggregate number of securities to which
transaction applies:
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(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-
11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
---------------------------------------------------
(4) Proposed maximum aggregate value of
transaction:
---------------------------------------------------
(5) Total fee paid:
$2,600
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[ X ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously.
Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its
filing.
(1) Amount Previously Paid:
------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------
(3) Filing Party:
------------------------------------------------------
(4) Date Filed:
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<PAGE>
TEMTEX INDUSTRIES, INC.
5400 LBJ Freeway, Suite 1375
Dallas, Texas 75240
(972) 726-7175
December 4, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the
Stockholders of Temtex Industries, Inc., a Delaware corporation
("Temtex"), to be held at 10:00, a.m. on January 5, 1999 at the
Lincoln City Club, 3rd Floor, Terrace Room, 5440 LBJ Freeway,
Dallas, Texas 75240 (including any adjournment or postponement
thereof, the "Special Meeting").
At the Special Meeting, you will be asked to consider and
vote upon a proposal to approve and adopt the Asset Purchase
Agreement dated as of October 22, 1998 (the "Agreement") between
Temtex and Acme Brick Company, a Delaware corporation (the
"Buyer"), pursuant to which Temtex proposes to sell (the
"Proposed Sale") for cash substantially all of the assets and
certain specified liabilities of Texas Clay Industries, the
division of Temtex that manufactures and markets clay face brick
products (the "Brick Business").
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE PROPOSED
SALE IS FAIR TO AND IN THE BEST INTERESTS OF TEMTEX AND ITS
STOCKHOLDERS, HAS APPROVED AND ADOPTED THE PROPOSED SALE (SUBJECT
TO STOCKHOLDER APPROVAL) AND RECOMMENDS THAT STOCKHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE PROPOSED SALE. In arriving at
its recommendation, the Board gave careful consideration to a
number of factors, as described in the enclosed Proxy Statement,
including the opinion of its financial adviser, Business
Valuation Services ("BVS"), to the effect that the consideration
to be received by Temtex is fair, from a financial point of view,
to Temtex and its stockholders. The written opinion of BVS is
attached as Appendix B to the enclosed Proxy Statement. You are
urged to read the opinion in its entirety for a description of
the assumptions made, the matters considered and the procedures
followed by BVS.
DETAILS OF THE PROPOSED SALE APPEAR IN THE ACCOMPANYING
PROXY STATEMENT. PLEASE GIVE THIS MATERIAL YOUR CAREFUL
ATTENTION.
Approval of the Proposed Sale requires the affirmative vote
of the holders of a majority of Temtex's issued and outstanding
shares of common stock, $0.20 par value per share (the "Common
Stock"). Each share of the Common Stock is entitled to one vote
on all matters to come before the Special Meeting. The Common
Stock constitutes the only outstanding class of capital stock of
Temtex.
It is important that your shares of Common Stock be
represented at the Special Meeting. Whether or not you plan to
attend the Special Meeting, please complete, sign and date the
enclosed proxy card and mail it promptly using the enclosed, pre-
addressed, postage-paid, return envelope. If you attend the
Special Meeting, you may revoke the proxy given and vote in
person if you wish, even if you have previously returned your
proxy card. Your prompt attention will be greatly appreciated.
Sincerely,
E. R. Buford
Chief Executive Officer and President
YOUR VOTE IS IMPORTANT.
PLEASE RETURN YOUR PROXY PROMPTLY.
<PAGE>
TEMTEX INDUSTRIES, INC.
5400 LBJ Freeway, Suite 1375
Dallas, Texas 75240
(972) 726-7175
____________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held January 5, 1999
To the Stockholders of Temtex Industries, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special
Meeting") of Stockholders of Temtex Industries, Inc. (the
"Company"), will be held at the Lincoln City Club, 3rd Floor,
Terrace Room, 5440 LBJ Freeway, Dallas, Texas 75240 at 10:00 a.m.
(Dallas, Texas time), on January 5, 1999 for the purpose of
considering and voting upon a proposal to approve and adopt the
Asset Purchase Agreement dated as of October 22, 1998 (the
"Agreement") between the Company and Acme Brick Company, a
Delaware corporation (the "Buyer") pursuant to which the Company
proposes to sell (the "Proposed Sale") for cash substantially all
of the assets and certain specified liabilities of Texas Clay
Industries, the division of the Company that manufactures and
markets clay face brick products (the "Brick Business"). The full
text of the Agreement is attached as Appendix A to the
accompanying Proxy Statement.
The Special Meeting is being called by the Board of
Directors of the Company in order for the stockholders to
consider a proposal for the sale of a substantial part of the
Company's current assets.
The Board of Directors has fixed the close of business on
November 6, 1998 as the record date (the "Record Date") for the
determination of the stockholders entitled to notice of, and to
vote at, the Special Meeting or any adjournment thereof. Only
stockholders of record at the close of business on the Record
Date are entitled to notice of, and to vote at, the Special
Meeting. The stock transfer books will not be closed. A list of
stockholders entitled to vote at the Special Meeting will be
available for examination at the offices of the Company for ten
days prior to the Special Meeting. Approval of the Proposed Sale
requires the affirmative vote of the holders of a majority of the
Company's common stock.
EACH STOCKHOLDER IS CORDIALLY INVITED TO ATTEND THE SPECIAL
MEETING IN PERSON. TO ASSURE REPRESENTATION AT THE SPECIAL
MEETING, HOWEVER, STOCKHOLDERS ARE URGED TO DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE POSTAGE-
PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER
ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF HE OR
SHE HAD PREVIOUSLY RETURNED A PROXY CARD.
By Order of the Board of Directors,
E. R. Buford
Chief Executive Officer and President
Dallas, Texas
December 4, 1998
<PAGE>
TABLE OF CONTENTS
Page
------
QUESTIONS AND ANSWERS ABOUT THE AGREEMENT WITH
ACME BRICK COMPANY 1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 2
THE SPECIAL MEETING 3
Time, Date and Place of Special Meeting 3
Purpose of the Special Meeting; Recommendation
of the Board of Directors 3
Record Date and Outstanding Shares 4
Intentions and Agreements to Vote 4
Quorum and Voting of Proxies; Revocation 4
Voting Rights 4
Vote Required 5
No Dissenters' Rights 5
Proxy Solicitation and Expenses 5
THE PROPOSED SALE 6
General 6
Temtex Industries, Inc 6
Acme Brick Company 7
Use of Proceeds; Plans for Future Operations
After the Proposed Sale 7
Background of the Proposed Sale 8
The Company's Reasons for the Proposed Sale;
Recommendation of the Board of Directors 9
Opinion of Business Valuation Services 11
Interest of Certain Persons in the Proposed Sale 14
Regulatory Approvals 14
Material Federal Income Tax Consequences 14
Accounting Treatment 15
Expenses and Other Fees 15
THE AGREEMENT 16
Purchase Price; Purchase Price Adjustment 16
The Closing 17
Purchased Assets and Assumed Liabilities 17
Representations and Warranties 19
Indemnification 19
Expenses and Transfer Taxes 20
Conditions of the Proposed Sale 20
Covenants Pending Closing 20
No Solicitation 21
Covenant Not to Compete 21
Treatment of Company Employees 21
Termination 21
Consequences of Termination 21
PRINCIPAL HOLDERS OF VOTING SECURITIES 22
OWNERSHIP OF COMMON STOCK BY MANAGEMENT 23
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY 24
FINANCIAL STATEMENTS OF TEXAS CLAY INDUSTRIES 25
PRO FORMA CONSOLIDATED SELECTED FINANCIAL DATA 35
STOCK PERFORMANCE DATA 36
Market Information 36
Recent Market Price 36
Number of Holders 36
COMPARATIVE PER SHARE DATA 37
PRO FORMA FINANCIAL DATA 37
DEADLINE FOR STOCKHOLDER PROPOSALS 45
MISCELLANEOUS 45
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE AGREEMENT WITH ACME BRICK COMPANY
Q. Who is soliciting my proxy?
A. The Board of Directors of Temtex Industries, Inc.
Q. Where and when is the Special Meeting?
A. 10:00 a.m., Tuesdsay, January 5, 1999, at the Lincoln City
Club, 3rd Floor, Terrace Room, 5440 LBJ Freeway, Dallas,
Texas 75240.
Q. What am I voting on?
A. Management of Temtex is seeking the authorization of the
stockholders to sell substantially all of the assets of the
Company's clay face brick products division to Acme Brick
Company. The Company is not selling, and will continue to own
and operate, its fireplace products business. If the
transaction with Acme Brick is consummated, the Company will
initially receive not less than $11,500,000 cash at closing;
however, depending on the value of certain assets and
liabilities of the Company existing as of the closing date,
the purchase price will be subsequently adjusted between the
parties. Management of the Company anticipates that the
ultimate sales price for the brick business will be in the
range of $12,000,000 to $12,500,000, although stockholders
should recognize that the sales price could theoretically be
more or less than this range pursuant to the terms of the
applicable agreement.
Q. Why should Temtex sell the brick business?
A. The Board of Directors of the Company has thoroughly
considered the advantages and disadvantages of selling the
brick business at this time. As described in greater detail
in this Proxy Statement, the Board believes that it is in the
best interests of the stockholders and this Company to
convert the assets of the brick business into cash and
redeploy that cash in connection with its future business
plan. The Company notes, however, that this strategy bears
some increased risk since management currently has no
definite plan for the use of the cash generated from the
sale.
Q. How do I know if Temtex is receiving fair value for the brick
business?
A. Based on a variety of factors including (i) the Company's
overall goals and future business plans, (ii) the current
financial condition and future prospects for the Texas Clay
Division, (iii) the changing and highly competitive nature of
the face brick products industry and management's
expectations regarding probable trends in the industry and
(iv) the limited survey of proposed alternatives to the
transaction, the Board believes that the consideration to be
received from Acme Brick in the sale of the brick business is
fair. In addition, the Board retained Business Valuation
Services, independent experts in valuation and appraisal
services, to analyze the pricing provisions of the agreement
with Acme Brick. BVS has concluded that the consideration to
be received by the Company in the transaction is fair from a
financial point of view.
Q. Will any of the money received from the transaction be
distributed to the Company's stockholders?
A. No. The Company intends to use approximately $1,000,000 of
the net proceeds generated from the sale to repay certain
outstanding indebtedness and will retain the remaining net
cash for working capital and general corporate purposes. In
addition, if the Company can locate a suitable acquisition
candidate, it will also consider using the cash for this
purpose. See "The Proposed Sale -- Use of Proceeds; Plans for
Future Operations After the Proposed Sale."
Q. Will stockholders have appraisal rights?
A. No. Stockholders of Temtex will not have appraisal rights as
a result of this transaction.
-1-
<PAGE>
Q. What should stockholders do now?
A. Stockholders should mail their signed and dated proxy card in
the enclosed envelope, as soon as possible, so that their
shares will be represented at the Temtex stockholders'
meeting.
Q. Can stockholders change their vote after they have mailed a
signed proxy card?
A. Yes. Stockholders can change their vote in one of three ways
at any time before their proxies are used. First,
stockholders can revoke their proxies by written notice.
Second, stockholders can complete new, later-dated proxy
cards. Third, stockholders can attend the special
stockholders' meeting and vote in person.
Q. How are shares held in a broker's name voted?
A. Brokers will vote shares nominally held in their name (or in
what is commonly called "street name") only if the beneficial
stockholder provides the broker with written instructions on
how to vote. Absent such instructions, these shares will not
be voted. Stockholders are urged to instruct their brokers in
writing to vote shares held in street name for the proposed
transaction.
Q. Whom should stockholders call with questions?
A. Temtex stockholders who have questions about the transaction
should call Roger N. Stivers, the Company's Vice President-
Finance, Chief Financial Officer and Secretary at (972)
726-7175.
Disclosure Regarding Forward-Looking Statements
This Proxy Statement contains forward-looking statements
including statements containing the words "believes,"
"anticipates," "expects," "intends" and words of similar import.
These statements involve known and unknown risks and
uncertainties that may cause the Company's actual results or
outcomes to be materially different from those anticipated and
discussed herein. Important factors that the Company believes
might cause such differences include: (1) concentration of the
Company's assets into one industry segment; (2) the seasonal
nature of the Fireplace Products Business (as defined herein);
(3) the termination or expiration of the Company's license
agreement for the design patent on its ventfree gas logs; (4) the
impact of changing economic conditions; (5) the actions of
competitors, including pricing and new product introductions; and
(6) those specific risks that are discussed in the cautionary
statements accompanying the forward-looking statements in this
Proxy Statement and in the Risk Factors detailed in the Company's
previous filings with the Securities and Exchange Commission (the
"Commission"). In assessing forward-looking statements contained
herein, stockholders are urged to read carefully all cautionary
statements contained in this Proxy Statement and in those other
filings with the Commission.
-2-
<PAGE>
TEMTEX INDUSTRIES, INC.
5400 LBJ Freeway, Suite 1375
Dallas, Texas 75240
(972) 726-7175
____________________________
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
The Special Meeting
Time, Date and Place of Special Meeting
- ---------------------------------------
This Proxy Statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of Temtex
Industries, Inc., a Delaware corporation (the "Company") for use
at the Special Meeting of Stockholders to be held at 10:00 a.m.
(Dallas, Texas time) on Tuesday, January 5, 1999 at the Lincoln
City Club, 3rd Floor, Terrace Room, 5440 LBJ Freeway, Dallas,
Texas 75240 and at any meeting held upon adjournment or
postponement thereof (the "Special Meeting").
Copies of this Proxy Statement, the attached Notice of
Special Meeting of Stockholders, and the enclosed form of proxy
are first being mailed to the Company's stockholders on or about
December 7, 1998.
Purpose of the Special Meeting; Recommendation of the Board of
Directors
- --------------------------------------------------------------
At the Special Meeting, holders of the Company's common
stock, $0.20 par value per share (the "Common Stock"), will
consider and vote upon a proposal to approve and adopt the Asset
Purchase Agreement dated as of October 22, 1998 (the "Agreement")
between the Company and Acme Brick Company, a Delaware
corporation (the "Buyer") pursuant to which the Company proposes
to sell (the "Proposed Sale") for cash substantially all of the
assets and certain specified liabilities of Texas Clay
Industries, the division of the Company that manufactures and
markets clay face brick products (the "Brick Business"). A copy
of the Agreement (without exhibits and schedules) has been
attached as Appendix A to this Proxy Statement. Subject to
certain indemnity obligations, retained liabilities and post-
closing adjustments, the Company is expected to receive between
$12,000,000 and $12,500,000 cash as consideration for the
Proposed Sale under the terms of the Agreement. In addition, the
Buyer has agreed to assume certain specified liabilities of the
Company. See "The Agreement."
Pursuant to the applicable provisions of the Delaware
General Corporation Law (the "DGCL"), the Company is required to
obtain the affirmative vote of a majority of the outstanding
shares of Common Stock prior to the sale of all or substantially
all of its property or assets. Although the Company will continue
to have significant operations after the consummation of the
Proposed Sale (see "--Use of Proceeds; Plans for Future
Operations After the Proposed Sale"), the Board of Directors has
nevertheless concluded that it is appropriate to submit the
Agreement and the transactions contemplated thereby to the
stockholders of the Company for consideration.
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED SALE (SUBJECT TO
STOCKHOLDER APPROVAL) AND RECOMMENDS A VOTE FOR APPROVAL OF THE
PROPOSED SALE.
-3-
<PAGE>
Record Date and Outstanding Shares
- ----------------------------------
The Board of Directors of the Company has fixed the close of
business on November 6, 1998 as the record date (the "Record
Date") for the determination of stockholders entitled to notice
of, and to vote at, the Special Meeting or any adjournment
thereof. Accordingly, only holders of record of the Company's
Common Stock at the close of business on the Record Date will be
entitled to vote at the Special Meeting, either by proxy or in
person. As of the Record Date, there were 197 holders of record
of the Common Stock of the Company and 3,477,141 shares of Common
Stock were issued and outstanding.
Intentions and Agreements to Vote
- ---------------------------------
The members of the Board of Directors of the Company, who
beneficially hold an aggregate of 33.4% of the outstanding shares
of Common Stock of the Company, have agreed to vote their shares
in favor of the Proposed Sale and the Agreement. As of the Record
Date, the total number of shares of Common Stock which the Board
has indicated a desire to vote equal 1,160,377 shares of Common
Stock. In addition, certain members of management of the Company,
holding an additional 22,543 shares of Common Stock (.6%), have
indicated their desire to vote their shares in favor of the
Proposed Sale and the Agreement. Accordingly, approval of the
Proposed Sale by the Company's stockholders is likely. See
"Ownership of Common Stock by Management."
Quorum and Voting of Proxies; Revocation
- ----------------------------------------
The presence at the Special Meeting, in person or by proxy,
of the holders of a majority of the Company's aggregate shares of
issued and outstanding Common Stock on the Record Date will
constitute a quorum at the Special Meeting. Shares of Common
Stock which are represented by properly executed proxy cards
received by the Company at or prior to the Special Meeting, and
not duly and timely revoked, will be voted according to the
instructions indicated on the proxy card. Unless contrary
instructions are given, the persons named on the proxy card
intend to vote the shares of Common Stock so represented FOR the
Proposed Sale.
Any holder of Common Stock has the power to revoke his or
her proxy at any time before it is voted at the Special Meeting
by delivering a written notice of revocation to the Secretary of
the Company, by a duly executed proxy bearing a later date, or by
voting by ballot at the Special Meeting.
Shares represented by proxies that reflect abstentions or
include "broker non-votes" will be treated as shares that are
present and entitled to vote for purposes of determining the
presence of a quorum. In the event that a quorum is not present
at the Special Meeting, it is expected that the meeting will be
adjourned or postponed to solicit additional proxies. The persons
named as proxies with respect to the Special Meeting may propose
and vote for one or more adjournments of the Special Meeting to
permit further solicitation of proxies in favor of the proposals;
provided, however, that no proxy which is voted against the
Proposed Sale will be voted in favor of any such adjournment or
postponement.
Voting Rights
- -------------
Each share of Common Stock is entitled to one vote on each
matter to be acted upon or which may properly come before the
Special Meeting. The Common Stock constitutes the only
outstanding capital stock of the Company.
-4-
<PAGE>
Vote Required
- -------------
The affirmative vote of the holders of a majority of the
issued and outstanding shares of Common Stock on the Record Date
is required to approve the Proposed Sale. Abstentions and "broker
non-votes" will have the effect of votes against approval of the
Proposed Sale. A broker non-vote occurs when a nominee holding
shares for a beneficial owner does not vote on a proposal because
the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner.
No Dissenters' Rights
- ---------------------
Stockholders of the Company who do not approve of the
Proposed Sale are not entitled to appraisal or any other rights
with respect to the Proposed Sale under Delaware law or the
Company's Restated Certificate of Incorporation.
Proxy Solicitation and Expenses
- -------------------------------
The accompanying proxy is being solicited on behalf of the
Board of Directors of the Company. All expenses of this
solicitation, including the cost of preparing, assembling, and
mailing this proxy soliciting material and Notice of Special
Meeting of Stockholders, will be paid by the Company. Additional
solicitation of holders of Common Stock by mail, telephone,
facsimile or by personal solicitation may be done by directors,
officers and regular employees of the Company, for which they
will receive no additional compensation. Brokerage houses and
other nominees, fiduciaries and custodians nominally holding
shares of Common Stock as of the Record Date will be requested to
forward proxy soliciting material to the beneficial owners of
such shares, and will be reimbursed by the Company for their
reasonable out-of-pocket expenses.
-5-
<PAGE>
The Proposed Sale
General
- -------
The Agreement, which was executed and delivered by the
Company and the Buyer on October 22, 1998, provides for the sale
of substantially all of the assets of the Brick Business (the
"Purchased Assets") to the Buyer and the assumption by the Buyer
of certain liabilities of the Company (the "Assumed
Liabilities"). Subject to certain post-closing adjustments, the
Company is expected to receive between $12,000,000 and
$12,500,000 cash from the Buyer as consideration for the sale of
the Brick Business. The Company will receive not less than
$11,500,000 at Closing with the remainder of the purchase price
payable upon the final determination of certain assets and
liabilities attributable to the Brick Business as of the Closing
Date. Notwithstanding the Closing of the Proposed Sale, the
Company will remain liable for certain indemnity obligations and
retained liabilities relating to the Brick Business. See "The
Agreement."
Temtex Industries, Inc.
- -----------------------
As currently conducted, the Company operates two distinct
businesses in the home construction products industry.
Specifically, (1) the Company manufactures and distributes zero
clearance metal fireplace units and gas fireplace equipment (the
"Fireplace Products Business") through its wholly-owned
subsidiary Temco Fireplace Products, Inc. and (2) the Company
operates its Brick Business through its Texas Clay Division. If
the Proposed Sale is approved by the stockholders and the sale of
the Brick Business to Buyer is consummated, the Company will no
longer engage in the manufacturing and distribution of face brick
products.
The Company sells its fireplace products 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. Although the Company
ships its fireplace products nationwide, its sales tend to be
somewhat concentrated in the states where housing construction is
active.
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 for the
Brick Business.
The following table sets forth the amount, in dollars, and
the related percentage of the Company's net sales attributable to
the Fireplace Products Business and the Brick Business,
respectively, for each of the fiscal years ended August 31, 1996,
1997 and 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31,
(net sales in thousands)
----------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fireplace Products Business..... 33,110 78.9 30,198 77.0 26,162 70.4
Brick Business.................. 8,862 21.1 9,010 23.0 11,021 29.6
</TABLE>
For further information concerning the Company's financial
segments, see the notes to consolidated financial statements
included in the Company's Form 10-K for the year ended August 31,
1998, a copy of which accompanies this Proxy Statement. See also
"Selected Consolidated Financial Data of the Company," "Financial
Statements of Texas Clay Industries" and "Pro Forma Selected
Financial Data."
The Company's principal business and principal office is
located at 5400 LBJ Freeway, Suite 1375, Dallas, Texas 75240.
The Company's telephone number at this address is (972) 726-7175.
-6-
<PAGE>
Acme Brick Company
- ------------------
Acme Brick Company, a subsidiary of Justin Industries, Inc.,
is one of the largest manufacturers of face brick in the United
States. The Buyer's principal business and principal office is
located at 2821 West Seventh Street, Fort Worth, Texas 76107 and
its telephone number is (817) 332-4101.
Use of Proceeds; Plans for Future Operations After the Proposed
Sale
- ---------------------------------------------------------------
The net proceeds to the Company from the sale of the Brick
Business, after deducting estimated transaction expenses of
$1,000,000, are expected to be between $11,000,000 and
$11,500,000, subject to the payment of any indemnity obligations
and retained liabilities. The actual net proceeds derived from
the sale of the Brick Business may be more or less than this
amount based upon certain post-closing adjustments. See "The
Agreement -- Purchase Price; Purchase Price Adjustment."
Approximately $1,000,000 of the estimated net proceeds from the
Proposed Sale will be used by the Company to repay outstanding
debt. The remaining $10,000,000 to $10,500,000 of estimated net
proceeds will be used by the Company in its Fireplace Products
Business for working capital and general corporate purposes,
including capital expenditures. In addition, the Company may use
all or a portion of the remaining net proceeds from the Proposed
Sale for future acquisitions or strategic alliances.
Consequently, the Company notes that the sale of the Brick
Business bears some increased risk because management currently
has no definite plan for the use of the cash generated from the
sale. Stockholders of the Company will be dependent upon the
judgment of the Company's management to redeploy the net proceeds
generated from the sale of the Brick Business with limited
information concerning the specific purposes to which the funds
will ultimately be applied. No assurances can be given that the
Company's strategy of redeploying the cash generated from the
Proposed Sale will prove to be successful.
As noted, while the Company has no current agreements or
negotiations underway with respect to any acquisition, it intends
to actively evaluate acquisitive transactions and other strategic
alliances after consummation of the Proposed Sale. As of the
date of this Proxy Statement, the Company has not identified any
potential acquisition candidates nor has it determined with
specificity any particular set of characteristics, attributes or
parameters for defining a potential pool of suitable acquisition
candidates. However, at a minimum, the Company anticipates that
any potential acquisition candidate will be evaluated based on
market share and potential for growth, customer profiles,
potential to compliment the Fireplace Products Business,
operating efficiencies, distribution compatability, managerial
and personnel resources and ease of integration on a timely
basis. However, no assurances can be given that any suitable
acquisition candidates can be located or, that once located, such
acquisition candidates can be acquired on terms satisfactory to
the Company. Furthermore, acquisitions involve numerous other
risks and uncertainties, including, among others, loss of key
personnel of the acquired company, the difficulty associated with
assimilating the personnel and operations of the acquired
company, the potential disruption of the Company's ongoing
business, the maintenance of uniform standards, controls,
procedures and policies, and the possible impairment of the
Company's reputation and relationships with employees and
customers. In addition, any future acquisitions could result in
the issuance of dilutive equity securities, the incurrence of
debt or contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could have
a material adverse effect on the Company's business, operating
results or financial condition. With respect to strategic
alliances, the Company may elect as one of its strategies the
possibility of aligning with product and service providers in the
fireplace products industry generally for the purpose of
penetrating new markets, enhancing the Company's current product
offerings or to more efficiently utilize its distribution
network. However, the Company has not at this time identified any
specific strategic alliance partners.
Following the consummation of the Proposed Sale, the
stockholders of the Company will retain their equity interest in
the Company. The Proposed Sale will not result in any changes in
the rights of the Company's stockholders. As indicated above,
the Company will not distribute any of the proceeds derived from
the sale of the Brick Business to its stockholders. Instead, the
Company intends to invest such proceeds in future operations.
-7-
<PAGE>
Background of the Proposed Sale
- -------------------------------
Although the Company has not generally regarded the Brick
Business as being "for sale," the Company has received
miscellaneous unsolicited requests to engage in discussions
concerning the sale of the Brick Business, none of which the
Board considers to be material. In each case, these discussions
were discontinued prior to arriving at either a letter of intent
or definitive agreement because of the inability to agree on an
appropriate valuation for the Brick Business.
In November 1997, senior management of the Buyer expressed
interest in pursuing a transaction involving the acquisition of
the Brick Business and requested basic information concerning the
business from the Company. At approximately this same time, the
Company had been requested to provide, and did in fact provide,
similar information to other parties who expressed interest in
the Brick Business, however, no formal offers were received by
the Company.
The Board of Directors of the Company has continually
monitored the Brick Business and the face brick products industry
generally as part of evaluating and forecasting the role of the
Texas Clay Division in the Company's overall business strategy.
In late 1997, the Board concluded that the sale of the Brick
Business for cash could, depending on the terms of such a
transaction, be an appropriate redeployment of the Company's
assets. Accordingly, the Board authorized both Messrs. Buford and
Ward, the President of the Company and the President of the Texas
Clay Division, respectively, to proceed with discussions with the
Buyer and other potentially interested parties provided the
proposed transaction(s) resulted in cash consideration to the
Company equal to at least a specified minimum dollar amount.
In January 1998, Ed Stout, President of the Buyer, and John
Koch, Vice President of Production for Buyer, traveled to
Malakoff, Texas to inspect the Company's principal manufacturing
facilities. The parties did not engage in specific discussions
concerning the sale of the Brick Business during this visit;
however subsequently, numerous other representatives of Buyer
including Buyer's Manager of Personnel, and Buyer's Safety
Engineer, Electrical Engineer and Natural Gas Engineer and
various mining support, drill crew and environmental personnel,
performed significant additional due diligence on the Company and
the Brick Business generally.
On March 23, 1998, representatives of the Buyer and the
Company met at the corporate offices of Buyer in Fort Worth,
Texas at the request of the Buyer. In attendance for the Buyer
were Rick Savitz, Vice President-Finance (Justin Industries), Ed
Stout and Dennis Knautz, Vice President-Finance of Buyer. In
attendance for the Company were Ed Buford, President and Chief
Executive Officer, and Maury Ward, President of the Texas Clay
Division. At the conclusion of this meeting, the parties
determined that there was sufficient mutual interest to discuss
further the possibility of a transaction which involved a sale of
the Brick Business to Buyer.
On April 7, 1998, the Company received a written offer from
Buyer concerning the sale of the Brick Business. As originally
proposed, the Buyer offered $12,750,000 for the assets comprising
the Brick Business, subject to adjustment based on the value of
certain of such assets at closing; provided, however, the Buyer
was unwilling at this time to assume any liabilities associated
with the business. On April 21, 1998 the Company rejected this
offer and made a counter proposal to the Buyer which provided for
a $13,250,000 purchase price (again, subject to the same type of
post-closing adjustment mechanism) and the assumption of all
liabilities related to the Brick Business. Thereafter, in early
May 1998, the Buyer and the Company exchanged correspondence
attempting to further define the parameters of a possible
transaction.
On May 19, 1998, at the invitation of Buyer, representatives
of the Buyer and the Company met again at the corporate offices
of Buyer in Fort Worth, Texas. Attending this meeting were
Messrs. Stout and Knautz for the Buyer and Messrs. Buford and
Ward for the Company. At the conclusion of this meeting, the
parties had tentatively agreed on a purchase price of $13,200,000
and certain other basic terms of the transaction, although it was
agreed between the parties that certain other material items
needed to be resolved, including, specifically, the liabilities
to be assumed by Buyer.
-8-
<PAGE>
On June 12, 1998 counsel to the Buyer presented the first
draft of the Agreement to the Company's counsel. From that date
until October 7, 1998, the Company and their advisors on one hand
and the Buyer and their advisors on the other hand proceeded to
negotiate the terms of a final agreement. During this period, the
Buyer and the Company performed certain additional core drilling
operations in an attempt to evaluate the extent and quality of
remaining clay reserves underlying certain of the Company's
properties. In addition, the following were the subject of
significant negotiation between the parties during this period:
(i) the structure of the agreement, including the specific
liabilities to be assumed by the Buyer (including contract
liabilities for, among other things, reclamation); (ii) the
amount of the initial payment at Closing and the method used to
determine such amount; (iii) the restrictive covenants, including
the duration and scope of the particular noncompetition
provisions and exceptions to their applicability; (iv) the
limitations on Buyer's rights to terminate the Agreement prior to
Closing; and (v) the indemnity provisions.
On September 3, 1998, after it became apparent to management
of the Company that an agreement concerning the sale of the Brick
Business could be reached with the Buyer, the President of the
Company authorized Roger Stivers, the Company's Vice President-
Finance, Chief Financial Officer and Secretary, to engage
Business Valuation Services ("BVS") to assist with the potential
transaction. On September 4, 1998, the Company retained BVS to
consider the fairness of the purchase consideration involved in
the Proposed Sale, from a financial point of view, to the Company
and its stockholders. BVS is an independent valuation firm with
significant experience in providing asset valuation, fairness
opinion and related advisory services to business clients such as
the Company. As a result, management believes them to be well
qualified. BVS was selected by the Board on the basis of its
experience and reputation, the favorable personal presentation
made by BVS to the Company, the ability to perform the requisite
work on a schedule capable of accommodating the Company's
proposed timing and favorable fee estimate. Prior to the
engagement hereof, BVS and the Company did not maintain any
material relationship.
By September 1, 1998, the Company had agreed to reduce the
purchase price to $12,900,000 provided that Buyer assume each of
the liabilities ultimately provided for in the Agreement. From
this point until October 6, 1998 the parties proceeded to
document the final terms of the Agreement between the parties.
At a special meeting of the Board of Directors of the
Company held on October 7, 1998, the Board discussed the Buyer's
proposal concerning the purchase of the Brick Business as set
forth in the form of the Agreement attached as Appendix A hereto.
Representatives of BVS then discussed the steps taken and methods
used to arrive at a fairness opinion and concluded by verbally
advising the Board that it was of the opinion that the Purchase
Price to be received by the Company under the terms of the
Agreement is fair, from a financial point of view, to the Company
and its stockholders. The Board adjourned this meeting without
action until October 22,1998.
On October 22, 1998, the Board of Directors met again to
review the final terms of the Agreement. Copies of the Agreement
had been provided to each member of the Board prior to the
meeting. During this meeting, the Board was presented with the
written opinion of BVS that, as of such date and based on the
assumptions made, matters considered and limits of review as set
forth in such opinion, the Purchase Price to be received by the
Company is fair, from a financial point of view. After extended
consideration, the Board concluded that the Proposed Sale was
fair to, and in the best interests of, the Company and its
stockholders, approved the Agreement and authorized its
execution. The Directors also agreed to recommend that the
Company's stockholders approve the Proposed Sale. The Agreement
in the form attached as Appendix A hereto was executed on October
22, 1998. The Company issued a press release announcing the
transaction on October 22, 1998.
The Company's Reasons for the Proposed Sale; Recommendation of
the Board of Directors
- ---------------------------------------------------------------
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE
PROPOSED SALE IS IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED
THE PROPOSED SALE AND RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS
VOTE FOR THE APPROVAL OF THE PROPOSED SALE.
-9-
<PAGE>
As described above under "Background of the Proposed Sale,"
the decision of the Company's Board to approve the Proposed Sale
and the Agreement followed months of exploring and analyzing the
advantages and disadvantages of redeploying the Company's assets.
In making its recommendation to the stockholders of the Company,
the Board considered a number of factors, including those noted
immediately below which were determined by the Board to favor a
decision to consummate the Proposed Sale and those set forth in
the subsequent paragraph which disfavored a decision to
consummate the Proposed Sale:
(i) The Company's overall goals and future business
plans which include focusing on the Company's core
Fireplace Products Business, continuing to broaden
the Company's product line within this business
and improving the efficiency of the Company's
manufacturing facilities.
(ii) The current financial condition and future
prospects for the Texas Clay Division, especially
in light of the Board's conclusion that the
potential for growth in the Brick Business was
limited by the Company's existing plant capacity
which could not be increased without significant
additional capital expenditures.
(iii) The changing and highly competitive nature of the
face brick products industry and management's
expectations regarding probable trends in this
industry including the trend toward consolidation
and direct distribution.
(iv) The greater potential for operational and
financial improvements to the Fireplace Products
Business should the Company be able to
successfully redeploy the net proceeds derived
from the Proposed Sale, specifically, from
potential strategic acquisitions or alliances and
new products.
(v) The cyclicality of the Brick Business resulting
from its dependency upon interest rates and
construction activity within its service area.
(vi) The price and terms of the Proposed Sale, as
reflected in the Agreement.
(vii) The advantages of selling the Brick Business in a
negotiated, arms-length transaction to a leading
industry competitor after a limited survey of
proposed alternatives, which principal advantages
include the avoidance of instability among
employees and distributors, the generally shorter
time needed to effect a negotiated transaction and
the ability of the buyer to effect the Proposed
Sale without a financing contingency.
(viii) The opinion of BVS to the Board of Directors of
the Company that, subject to the matters set forth
therein, the consideration to be received by the
Company in connection with the Proposed Sale would
be fair, from a financial point of view, to the
Company and its stockholders.
(ix) The fact that no firm offers to acquire the Brick
Business involving cash consideration exceeding
that of the Buyer had been received by the
Company; although, various indications of interest
had been expressed.
(x) The benefits to the Company and its stockholders
from improvements to the Company's balance sheet
and liquidity position (specifically, after giving
effect to the Proposed Sale, the Company expects
to increase its net worth by approximately
$5,718,000 and increase its cash position by
approximately $12,428,000), thereby providing the
Company with significant liquidity to meet the
demands of its Fireplace Products Business and to
otherwise respond to changing economic conditions.
The Company's Board also considered the following
potentially negative factors in its deliberations concerning the
Proposed Sale: (i) the risks associated with concentrating the
Company's assets into a single industry segment; (ii) the
disadvantages of selling the Brick Business without a complete
survey of the proposed alternatives,
-10-
<PAGE>
which disadvantages include uncertainty regarding the existence
of other potentially interested third parties; (iii) the fact
that the Brick Business has, in recent history, contributed all
or a majority of the Company's profits and cash flow; (iv) the
risks associated with pursuing a transaction with a buyer that
maintains a different distribution model, namely that the Company
was at increased risk of instability among employees and
distributors should the transaction not be consummated and (v)
the significant costs involved in connection with consummating
the Proposed Sale (especially in light of the need to obtain a
shareholder vote), the substantial management time and effort
required to effectuate the sale and the potential disruption to
the Company's operations. The Company's Board did not believe
that the negative factors were sufficient, either individually or
collectively, to outweigh potential advantages of the Proposed
Sale.
The foregoing discussion of the information and factors
considered by the Board is not intended to be exhaustive, but
includes all material factors considered by the Board. The Board
did not attempt to quantify or otherwise assign relative weights
to the specific factors it considered or determine that any
factor was of particular importance. A determination of various
weightings would, in the view of the Board of Directors, be
impractical. Rather, the Board viewed its position and
recommendations as being based on the totality of the information
presented to, and considered by, the Board. In addition,
individual members of the Board may have given different weight
to different factors.
Opinion of Business Valuation Services
- --------------------------------------
At the October 7, 1998 meeting of the Board of Directors of
the Company, BVS delivered its oral opinion to the Board,
subsequently confirmed in a written opinion dated October 22,
1998 (the "Fairness Opinion"), to the effect that, based upon and
subject to various considerations set forth in such opinion, as
of such date, the Purchase Price to be received by the Company is
fair, from a financial point of view, to the Company and its
stockholders. No limitations were imposed by the Company's Board
of Directors upon BVS with respect to the investigations made and
procedures followed by BVS in rendering the Fairness Opinion.
THE FULL TEXT OF THE FAIRNESS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED,
LIMITATIONS ON AND THE SCOPE OF THE REVIEW BY BVS IN RENDERING
SUCH OPINION, IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX B
AND IS INCORPORATED BY REFERENCE HEREIN. THE FAIRNESS OPINION IS
ADDRESSED TO THE COMPANY'S BOARD OF DIRECTORS AND ADDRESSES THE
FAIRNESS OF THE PURCHASE PRICE TO THE COMPANY FROM A FINANCIAL
POINT OF VIEW AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE
AGREEMENT NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY HOLDER
OF THE COMPANY'S COMMON STOCK AS TO HOW TO VOTE AT THE SPECIAL
MEETING. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION. HOLDERS OF THE COMMON STOCK ARE
ENCOURAGED TO CAREFULLY READ THE FAIRNESS OPINION IN ITS
ENTIRETY.
In connection with the Fairness Opinion, BVS: (i) reviewed
certain internal financial statements and other financial and
operating data pertaining to the Brick Business prepared by
management including such information contained in publicly
available financial statements of the Company; (ii) discussed the
past and current operations, financial condition and prospects of
the Brick Business with management; (iii) reviewed the reported
prices and trading activity of the Common Stock of certain
publicly traded companies operating in business lines generally
comparable to that of the Company (including and excluding the
Brick Business); (iv) compared the financial performance of the
Brick Business with that of certain publicly traded companies
operating in business lines BVS believed to be generally
comparable to that of the Brick Business; (v) reviewed publicly
available information regarding the financial terms of certain
comparable acquisition transactions; (vi) reviewed the Agreement;
and (vii) performed such other analyses as BVS deemed
appropriate.
-11-
<PAGE>
The Fairness Opinion was necessarily based on economic,
market and other conditions as in effect on, and the information
made available to BVS as of October 22, 1998. Although subsequent
developments may affect the Fairness Opinion, BVS does not have
any obligation to update, revise or reaffirm its opinion.
The following summarizes the material portions of the
financial analyses performed by BVS in connection with the
delivery of its Fairness Opinion:
DISCOUNTED CASH FLOW ANALYSIS. The discounted cash flow
("DCF") methodology of valuation is based on the premise that the
value of the business enterprise is the present value of the
future economic income to be derived by the owners of the
business. Theoretically, the income approach is the most
appropriate approach because it reflects the value of the
expected future cash flows of the business. A DCF analysis,
unlike other valuation analyses, can capture several important
technical aspects of the business such as levels of future
investment in fixed assets and working capital, changing margins,
or the terms of finite-life contracts. The DCF approach requires
the following: revenue analysis, expense analysis, depreciation
and capital spending analysis, working capital analysis, cost of
capital analysis and residual value analysis.
BVS forecast revenue by multiplying the forecast nominal
price per thousand bricks and the projected number of thousand
brick lots sold. The forecast nominal price per thousand brick
was a function of two factors in BVS' analysis: overall
inflationary growth and real price growth of bricks. Having
analyzed historical price per thousand for the Brick Business,
BVS determined that real brick prices for the Brick Business were
most accurately predicted using a factor of the previous period
output growth. Using this relationship, BVS forecast growth in
real brick prices as a function of its output assumptions given
various macroeconomic assumptions and the Brick Business specific
variables.
BVS' forecast for the cost of goods sold was based primarily
on statistical analysis. Applying simple linear regression to the
cost of goods sold and revenue figures, BVS was able to determine
a statistically significant relationship of fixed and variable
costs. BVS applied these statistical results to its cost of goods
sold forecast. A similar methodology was used to examine
historical selling, general and administrative expenses; however,
unlike the results of its cost of goods sold analysis, BVS was
not able to identify fixed and variable components of these
expenses with any statistical certainty. As a result, selling,
general and administrative expenses were forecast as variable,
consistent with historical results.
BVS forecast capital expenditures by projecting the level of
fixed assets required for the Brick Business to maintain its
production. Additions to fixed assets included both maintenance
expenditures and expenditures relating to certain environmental
regulation compliance measures. Depreciation was calculated on a
straight-line basis over the forecast period.
Working capital was projected primarily using historical
data as it related to accounts receivable, inventory, accounts
payable and other current liabilities. Resulting working capital
projections were very consistent with historical results.
Cost of capital analysis involved calculating an appropriate
weighted-average cost of capital ("WACC") to discount cash flow
to present value. The WACC was related to appropriate estimates
of cost of equity, after-tax cost of debt and capital structure.
The cost of equity used in BVS' calculations was arrived at under
the auspices of the Capital Asset Pricing Model ("CAPM"), a well-
accepted and tested predictor of required rates of return.
Residual analysis involved estimating the component of value
of the Brick Business attributable to its operation as a going
concern. Forecasting and discounting cash flows only over a
discrete period assumes termination of operations at the end of
the forecast period. BVS elected to use the Gordon Growth Model,
or annuity in perpetuity, to analyze the value of the Purchased
Assets subsequent to the discrete forecast period.
The results of BVS' analysis under the income approach
indicate that the value of the Purchased Assets was not more than
the Purchase Price.
-12-
<PAGE>
MARKET ANALYSIS. Market approach methodology was restricted
primarily to capital market pricing analysis. While BVS examined
transaction data involving brick fabrication companies, this data
was very poor in its disclosure of financial information. BVS
reviewed data from Mergerstat Review (1998) involving
transactions tracked in the stone, clay and glass industry
segments between 1993 and 1998. While the number of transactions
and the total amount of transaction consideration were available
on a yearly basis, neither a breakdown of individual transactions
nor summary pricing statistics were available. BVS also undertook
a search of the Securities Data Corp ("SDC") mergers and
acquisitions database in efforts to identify individual
transactions; however, like the results of its Mergerstat Review
search, no material pricing data was available for the four
transactions identified between January 1, 1996 and October 1,
1998. Examination of its own proprietary databases yielded only
one transaction for which BVS was able to obtain full financial
disclosure; however, this transaction was deemed too dated to
have any pricing relevance in its analysis of the Purchased
Assets.
BVS also compared the financial performance of the Brick
Business with that of certain publicly traded companies operating
in similar business lines. There were no identifiable companies
that were publicly traded and had exact lines of operation as the
Brick Business. As a result, BVS elected to select those
companies whose operations are affected by similar economic
factors as the Brick Business. Specifically, BVS identified and
used the following comparable companies for this purpose: (i)
Boral Limited; (ii) Centex Construction Group, a division of
Centex Corporation; (iii) Florida Rock; (iv) Justin Industries,
Inc.; (v) Lafarge Corporation; (vi) Lone Star Industries, Inc.;
(vii) Monarch Cement Company, Inc.; (viii) Southdown, Inc. and
(ix) USG Corporation.
BVS examined several pricing indicators resulting from this
analysis, including, but not necessarily limited to,
price/earnings ("P/E") indicators, price/book value of equity
indicators ("P/B"), price/sales ("P/S") indicators and market
value of invested capital/earnings before interest, taxes and
depreciation and amortization ("MVC/EBITDA") indicators. BVS
found that the MVC/EBITDA indicator exhibited a higher degree of
relative stability than the other indicators. BVS elected to
further examine the MVC/EBITDA indicator of value more closely.
Given that the Brick Business is engaged in the
manufacturing of a commodity-like product, BVS predicted that
there would likely be an inverse relationship to an indicator of
value such ad MVC/EBITDA and a corresponding measure of
profitability such as EBITDA margin. Through simple linear
regression, BVS determined that there was indeed an inverse
relationship. Excluding those data sets that were extremely
aberrant, BVS developed a sample set of observations that were
statistically robust in quantifying this particular inverse
relationship.
The results of the BVS analysis were that the implied market
pricing was note more than the Purchase Price.
The preparation of a fairness opinion is a complex process
involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore,
such an opinion is not necessarily susceptible to a partial
analysis or summary description. In arriving at its opinion, BVS
did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. BVS
believes that its analysis must be considered as a whole and that
selecting portions of its analysis, without considering all
analyses, would create an incomplete view of the process
underlying the Fairness Opinion. In addition, BVS may have given
certain analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other
assumptions, so that the range of valuations resulting from any
particular analysis described above should not be taken to be
BVS' view of the actual value of the Brick Business.
The analyses performed by BVS are not necessarily indicative
of actual values or actual future results, which may be
significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of BVS'
analysis of the fairness of the Purchase Price to the Company and
its stockholders from a financial point of view and were provided
to the Company's Board of Directors in connection with the
delivery of the Fairness Opinion. The analyses do not purport to
be appraisals or to reflect prices at which businesses might
-13-
<PAGE>
actually be sold, which are inherently subject to uncertainty. In
addition, as described above, the Fairness Opinion and the
information provided by BVS to the Company's Board of Directors
was one of many factors taken into consideration by the Company's
Board in making its determination to approve the Proposed Sale.
Consequently, BVS' analyses described above should not be viewed
as determinative of the opinion of the Company's Board of
Directors or the view of management with respect to the value of
the Brick Business.
BVS is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions,
restructurings and valuations for corporate or other purposes.
Pursuant to the terms of a letter agreement dated
September 4, 1998 (the "Engagement Letter"), BVS was retained by
the Company to render an opinion to the Company's Board of
Directors with respect to the Purchase Price and pricing
mechanism set forth in the Agreement. Under the terms of the
Engagement Letter, BVS will be paid a fee of $58,500. The Company
has also agreed to reimburse BVS for its reasonable out-of-pocket
expenses.
Interest of Certain Persons in the Proposed Sale
- ------------------------------------------------
The Proposed Sale is not conditioned upon any employment
arrangements between the Buyer and the current executive officers
of the Company. However, Maury Ward, the divisional President of
the Brick Business, is expected to receive a severance payment
from the Company in the range of $500,000 to $800,000 upon the
closing of the Proposed Sale. In addition, the Buyer has also
requested that Mr. Ward remain with the Texas Clay Division for
an unspecified period of time after the Closing, on substantially
the same terms of his current employment, in order to ensure a
smooth transition of the Brick Business to Buyer. The Board of
Directors of the Company was aware of these interests and
considered them along with the other matters described above
under "Background of the Proposed Sale."
Regulatory Approvals
- --------------------
Consummation of the Agreement does not require any
regulatory approvals other than the federal filings required
under applicable U.S. securities laws in connection with this
Proxy Statement.
Material Federal Income Tax Consequences
- ----------------------------------------
THIS SECTION IS A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES TO THE COMPANY AND THE STOCKHOLDERS OF THE COMPANY
FROM THE PROPOSED SALE. EXCEPT WHERE SPECIFICALLY NOTED, THIS
SUMMARY DOES NOT APPLY TO STATE OR LOCAL TAXES. THE SUMMARY IS
BASED UPON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED,
JUDICIAL DECISIONS, UNITED STATES TREASURY DEPARTMENT REGULATIONS
PROMULGATED THEREUNDER, ADMINISTRATIVE RULINGS OF THE UNITED
STATES TREASURY DEPARTMENT, AND OTHER INTERPRETATIONS THEREOF,
ANY OF WHICH COULD BE CHANGED AT ANY TIME. NO RULING HAS BEEN OR
WILL BE REQUESTED FROM THE INTERNAL REVENUE SERVICE WITH RESPECT
TO ANY CONSEQUENCES RESULTING FROM THE PROPOSED SALE.
The Proposed Sale will not have any federal income tax
consequences to the Company's stockholders because no
distributions of sale proceeds will be made to the stockholders.
Upon consummation of the Proposed Sale, the Company will
recognize taxable income in an amount equal to the excess of (i)
the sum of the cash sale proceeds and the Assumed Liabilities,
over (ii) the sum of the Company's tax bases in the Purchased
Assets and the Company's expenses of the Proposed Sale. The
taxable income may be increased or decreased depending on certain
post-closing adjustments. The Company estimates that its federal
and state tax liabilities in fiscal year 1999 relating to the
Proposed Sale will be approximately $3,243,000.
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<PAGE>
Accounting Treatment
- --------------------
For financial reporting purposes, the Proposed Sale will be
recorded as a sale of a segment of the Company's business and
reported as a discontinued operation.
Expenses and Other Fees
- -----------------------
Each party will bear its own expenses in respect of the
Proposed Sale, whether or not consummated.
-15-
<PAGE>
The Agreement
The following is a brief summary of certain provisions of
the Agreement. THIS DESCRIPTION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE COMPLETE TEXT OF THE AGREEMENT, A COPY OF WHICH
IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX A AND IS
INCORPORATED HEREIN BY REFERENCE. THE TERMS NOT OTHERWISE DEFINED
IN THIS SUMMARY OR ELSEWHERE IN THIS PROXY STATEMENT HAVE THE
MEANINGS SET FORTH IN THE AGREEMENT. ALL STOCKHOLDERS ARE URGED
TO CAREFULLY READ THE AGREEMENT IN ITS ENTIRETY.
Purchase Price; Purchase Price Adjustment
- -----------------------------------------
Pursuant to the terms of the Agreement, in consideration of
the transfer to the Buyer of all of the Purchased Assets (which
include substantially all of the assets relating to the Brick
Business, other than Excluded Assets), the Buyer has agreed to
pay to the Company an amount in cash equal to $12,970,000,
subject to adjustment (the "Purchase Price"), and to assume the
Assumed Liabilities. At the Closing the Buyer will deliver to the
Company an Initial Payment of at least $11,500,000. The
remaining portion of the Purchase Price will be retained by the
Buyer pending the final determination of the adjustments to the
Purchase Price.
Within 120 days after the Closing Date, Buyer will deliver
an Adjustments Report to the Company indicating Buyer's
determination of the amount of (i) Trade Accounts Receivables,
(ii) the Value of Inventory, (iii) the Prepaid Clay Lease
Expenses, and (iv) certain specified Assumed Liabilities (the
"Specified Liabilities"), in each case, as such amounts existed
as of the Closing Date. Thereafter, if the Company accepts the
amounts set forth on the Buyer's Adjustments Report, the Purchase
Price will be adjusted by the net amount obtained (i) by
increasing or decreasing, as the case may be, the Purchase Price
by the difference between the net amount owing on all Trade
Accounts Receivable and $877,000; provided, the Purchase Price
shall not be increased as a result of this calculation by more
than $1,373,000, (ii) by increasing or decreasing, as the case
may be, the Purchase Price by the difference between the Value of
Inventory and $1,657,000; provided, the Purchase Price shall not
be increased as a result of this calculation by more than
$783,000, (iii) by increasing or decreasing, as the case may be,
the Purchase Price by the difference between the aggregate amount
of Prepaid Clay Lease Expenses and $20,000; provided, the
Purchase Price shall not be increased as a result of this
calculation by more than $5,000 and (iv) by decreasing the
Purchase Price by the Specified Liabilities, which amount shall
not exceed $941,000. If, after such adjustments, the Purchase
Price is greater than the Initial Payment, Buyer shall pay the
Company the amount of such difference within five business days.
If, on the other hand, the Purchase Price is less than the
Initial Payment, the Company shall pay the Buyer the amount of
such difference within five business days.
Although management of the Company believes that the
ultimate amount received by the Company for the sale of the Brick
Business will be in the range of $12,000,000 to $12,500,000 after
the adjustments described herein, the actual Purchase Price may
be more or less than this amount. No assurances can be given
that the actual cash proceeds received by the Company for the
sale of the Brick Business will fall into this range. The
Agreement does not provide for any cap on the amount of the
downward adjustment to the Purchase Price.
If the Company objects to any adjustments set forth in the
Adjustments Report, it shall have 30 days after receipt thereof
to notify Buyer of the nature and extent of such disagreement.
Thereafter, any disputed amounts which cannot be agreed to by the
parties within 30 days from the Buyer's receipt of the Company's
objection notice shall be determined by Ernst & Young LLP (or
another nationally recognized accounting firm selected by Ernst &
Young LLP) (the "Accounting Firm") within 60 days. The
determination made by the Accounting Firm regarding adjustments
to the Purchase Price shall be binding on and nonappealable by
the Company and Buyer.
Within five business days after the Accounting Firm's final
determination of all disputed amounts in the Adjustments Report,
Buyer or the Company, as appropriate, shall pay the difference in
the Purchase Price as finally determined and the Initial Payment.
The parties have agreed that whichever party shall be responsible
for the
-16-
<PAGE>
payment to finally adjust the Purchase Price shall pay interest
on such amount at the rate of the lesser of (i) 15% per annum or
(ii) the maximum rate permitted by applicable law, if such
payment is not made when due.
The Closing
- -----------
The closing (the "Closing") of the Proposed Sale will take
place on or about January 5, 1999, if the Proposed Sale is
approved by the stockholders of the Company at the Special
Meeting.
Purchased Assets and Assumed Liabilities
- ----------------------------------------
The Purchased Assets to be purchased by the Buyer generally
include the operating assets of the Brick Business, including,
but not limited to: (i) eight parcels of real property
(collectively, the "Owned Real Property") all improvements
thereon, and all minerals, clays and sands on any such real
property; (ii) all of the Company's interest under three lease
arrangements relating to an aggregate of approximately 450 acres
of land (the "Leased Real Property"); (iii) all plant and
equipment relating to the Brick Business; (iv) all accounts,
notes and other receivables and all related deposits, security or
collateral therefor arising out of the operation of the Brick
Business; (v) all inventories, inventories of parts, raw
materials, work in progress and finished goods, currently used or
held for use in connection with the Brick Business; (vi) all
drawings, blueprints, specifications, designs and data pertaining
to the Purchased Assets; (vii) all technology and other
proprietary information and all patents and applications therefor
and licenses thereto, together with the goodwill associated
therewith used or held for use in connection with the Brick
Business; (viii) all trademarks and tradenames, including without
limitation to "Texas Clay", "Texas Clay Products," "Texas Clay
Industries," "Building Better Places, Brick by Brick"; (ix) a
3-inch 6 mile natural gas pipeline running between the Tri-Cities
gas field and the Company's manufacturing plant in Malakoff,
Texas, together with all of the Company's rights-of-way and
easement interests held in connection therewith; (x) all
catalogues and other selling material pertaining to the Purchased
Assets; (xi) all books, records and files pertaining to the
Purchased Assets; (xii) all rights, title and interest of the
Company under all of the Contracts that Buyer has requested to be
assigned to it; (xiii) all customer lists of the Brick Business;
(xiv) all goodwill relating to the Purchased Assets; (xv) all
governmental permits and approvals relating to the Purchased
Assets; and (xvi) all claims against third parties related to the
Purchased Assets.
The Purchased Assets include a 76-acre tract of land in
Malakoff, Texas used by the Brick Business for its office and
manufacturing facilities. The Company's improvements to this
land, consisting of multiple buildings and aggregating
approximately 268,000 square feet, house two manufacturing
plants, three active kilns and necessary storage and loading
areas. The Malakoff operating facility is capable of producing
approximately 55 million bricks annually operating one shift per
day, five days a week. The Purchased Assets also include an
additional 1,100 acres of land and leases for an aggregate of
approximately 1,176 acres, most of which are believed to contain
clay deposits suitable for use in the manufacture of brick
products. Historically, the Brick Business has obtained
approximately 25% of its raw clay requirements from its own land
and the remaining 75% from leased land. The Company believes
that, if the Proposed Sale is not consummated, 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 Purchased Assets specifically exclude, and the Company
will retain, the following Excluded Assets: (i) all assets and
properties held by the Company for use in the Fireplace Products
Business, (ii) all cash held by the Company as of the Closing
Date other than petty cash, (iii) claims or rights against third
parties relating to Contracts not assumed by Buyer, (iv) rights
under specified insurance policies, including rights to any
cancellation value, (v) claims for refunds of taxes and
governmental charges related to the Brick Business for periods
ending on or prior to the Closing Date and (vi) all accounts,
notes and other receivables for advances made to employees of the
Brick Business for expenses which are payable to or for the
benefit of the Brick Business as of the Closing Date.
-17-
<PAGE>
At the Closing, the Buyer will assume the following Assumed
Liabilities: (i) all accounts payable of the Brick Business (not
to exceed $800,000 in the aggregate); (ii) accrued liabilities of
the Company relating to a specific parcel of the Owned Real
Property (not to exceed $141,000 in the aggregate); (iii) certain
long term debt and current maturities liabilities of the Brick
Business (not to exceed $123,000 in the case of long term debt
and $90,000 in the case of current maturities liabilities), less
the amount of such liabilities which are paid by the Company
prior to the Closing Date; (iv) those liabilities of the Company
with respect to clay pit reclamation on the Owned Real Property
or under the leases relating to the Leased Real Property, whether
or not occurring before or after the Closing Date; (v) the
liabilities accruing after the Closing Date under the Leases or
the Contracts, (vi) the obligations to ship finished products
relating to the Brick Business for outstanding orders not shipped
as of the Closing Date, (vii) all warranties, liabilities or
obligations to customers or distributors with respect to the
repair or replacement of any finished products related to the
Brick Business which are shipped before the Closing Date (to the
extent each individual warranty claim is $3,000 or less and the
aggregate liability for such repair or replacement does not
exceed $40,000), or after the Closing Date (no limitation on
amount), (viii) all wages, benefits and civil penalties
(including fines and attorneys' fees) which may be imposed for
failure to give advance notice under the Worker Adjustment and
Retraining Notification Act; (ix) liabilities associated with
Environmental Conditions (other than a Serious Environmental
Condition) relevant to the Owned Real Property and the Leased
Real Property (including liabilities or obligations occurring as
a result of the violation of an Environmental Law applicable to
such sites, except for any Serious Environmental Condition
arising therefrom), (x) the removal, closure and remediation
costs and obligations associated with any underground storage
tanks located at the Owned Real Property (other than any Serious
Environmental Condition arising therefrom); (xi) fines, penalties
and remedial costs and obligations required by any governmental
agency after the Closing Date to bring facilities of the Brick
Business as currently operated into compliance with applicable
orders, decrees, rules and regulations and (xii) any other
liabilities or obligations of the Company assumed by Buyer. The
Agreement provides that an "Environmental Condition" means any
condition with respect to soil, water or air which could or does
result in any damage, loss or cost to or against Seller or Buyer
(whether or not yet discovered). The Agreement further provides
that a "Serious Environmental Condition" shall mean any condition
relating to contaminated groundwater which existed at the Closing
Date, is discovered within two years thereafter and requires
either the Company or the Buyer to conduct monitoring,
investigatory or corrective action to address the contaminated
groundwater.
At the Closing, the Company will assign, and the Buyer will
assume, certain Contracts relating to the operation of the Brick
Business. The Buyer will perform all post-Closing obligations and
realize all post-Closing benefits, under the Contracts. In the
event that the Buyer fails to perform under any Contract, the
Company may be secondarily liable in the event that a contracting
party consents to the assignment of the Contract but fails to
release the Company from future liabilities. To date, several
contracting parties have consented to the assignment of the
Contracts and have agreed to release the Company from any
liabilities under the Contracts as of the Closing Date. Pursuant
to the Agreement, the Buyer has agreed to perform under the
Contracts and the Company would seek recourse against the Buyer
for damages if the Company were found secondarily liable under
those Contracts for which the Company is not released.
Except as otherwise provided in the Agreement, the Buyer
will not assume any other of the Company's liabilities of any
nature, currently existing or incurred in the future, including,
without limitation, the following Excluded Liabilities: (i) all
liabilities arising out of employment matters (other than that
Assumed Liability concerning the Worker Adjustment and Retraining
Notification Act); (ii) all of the Company's liabilities and
obligations in respect of taxes attributable to taxable years or
periods ending prior to the Closing Date; (iii) all of the
Company's liabilities arising out of any litigation relating to
the Brick Business based upon events prior to the Closing Date;
(iv) liabilities arising out of obligations to customers or
distributors for products shipped prior to the Closing Date (to
the extent an individual liability is in excess of $3,000 or
aggregate liability exceeds $40,000); (v) liabilities of the
Company arising under any of the Contracts based upon events
prior to the Closing Date; (vi) all liabilities arising out of
any claim by third parties in respect of the death or personal
injury of any person attributable to acts relating to the Brick
Business prior to the Closing Date; and (vii) all liabilities of
the Company under the Agreement.
-18-
<PAGE>
Representations and Warranties
- ------------------------------
The Agreement contains various representations and
warranties of the Company including, among others,
representations and warranties related to corporate organization
and similar corporate matters; authorization and enforceability;
non-contravention of transactions contemplated by the Proposed
Sale, the Company's certificate of incorporation or by-laws, and
non-violation of laws and binding agreements; consents and
approvals; compliance with laws, licenses and permits pertaining
to the Brick Business; the accuracy of certain financial
statements provided to the Buyer; accounts receivables and
inventories; absence of certain changes since July 31, 1998;
absence of legal proceedings; ownership, condition and title to
assets and properties; taxes and tax returns; contracts; patents,
trademarks and tradenames; licenses and permits; environmental
matters; labor matters; employee plans; insurance; customers and
suppliers; absence of brokers; and the accuracy of information
relating to the Company contained in information delivered to the
Buyer.
The Agreement contains various representations and
warranties of the Buyer including, among others, representations
and warranties related to corporate organization and similar
corporate matters; authorization and enforceability; non-
contravention of transactions contemplated by the Proposed Sale,
the Buyer's certificate of incorporation or by-laws, and
nonviolation of laws and binding agreements; and consents and
approvals.
Indemnification
- ---------------
The Company has agreed to indemnify, defend and hold
harmless Buyer and Buyer's affiliates from and against any and
all losses, liabilities, obligations, payments, damages, costs
and expenses (collectively, "Losses") arising out of or due to,
directly or indirectly (i) any Excluded Liability or (ii) any
inaccuracy in or breach of any of the representations,
warranties, covenants, agreements or undertakings of the Company
contained in the Agreement or in any agreement, document or
instrument executed and delivered pursuant thereto or in
connection therewith.
Notwithstanding the foregoing, the parties have agreed that
the Company shall not indemnify the Buyer for any Losses (other
than Losses occurring as a result of any Excluded Liability or a
breach of warranty relating to (i) the corporate status of the
Company, (ii) the authorization of the Agreement and/or the
consummation of the Proposed Sale, (iii) the enforceability of
the Agreement and related documents, (iv) taxes, (v) material
patents, trademarks and tradenames, (vi) Owned Real Property,
(vii) the Leases, (viii) title to the Purchased Assets or (ix)
specified environmental matters (collectively, the "Referenced
Matters")) unless and until the Buyer and its affiliates shall
have suffered Losses aggregating in excess of $25,000, whereupon
the Buyer and its affiliates shall be entitled to indemnification
for the full amount of such Losses up to and including the first
$25,000. With respect to any Losses incurred by Buyer or any of
its affiliates relating to any of the Referenced Matters, the
Company shall be obligated to indemnify for such Losses without
limitation as to amount.
The Company's obligation to indemnity for Losses resulting
from Serious Environmental Conditions and breaches of certain
representations or warranties (including the Referenced Matters)
terminates on the second anniversary of the Closing Date. The
Company's obligation to indemnify for Losses resulting from
breaches of certain other representations or warranties survive
for the applicable statute of limitations period.
The Buyer has agreed to indemnify, defend and hold harmless
the Company from and against any and all Losses arising out of or
due to, directly or indirectly (i) any Assumed Liability, or
(ii) any inaccuracy in or breach of any of the representations,
warranties, covenants, agreements or undertakings of the Buyer
contained in the Agreement or in any agreement, document or
instrument executed and delivered pursuant thereto or in
connection therewith.
The Buyer's obligation to indemnify for Losses resulting
from breaches of representations and warranties terminates on the
second anniversary of the Closing Date.
-19-
<PAGE>
If any claim for indemnification remains unresolved on any
date on which a payment is otherwise due by the Buyer, the Buyer
may withhold from such payment an amount up to the estimated
Losses.
Expenses and Transfer Taxes
- ---------------------------
Each party has agreed to bear its own fees and expenses in
respect of the Proposed Sale, except that the Buyer and the
Company have each agreed to pay one-half of all sales, use,
transfer or similar taxes payable in connection with the Proposed
Sale. The Company has agreed at its expense to furnish the Buyer
with certain title insurance and surveys relating to the Owned
Real Property.
Conditions of the Proposed Sale
- -------------------------------
The obligations of the Company to effect the Proposed Sale
are subject to the following conditions: (i) the stockholders of
the Company shall have approved the Proposed Sale at the Special
Meeting; (ii) the representations and warranties of the Buyer
contained in the Agreement shall be true and correct on and as of
the Closing Date and Buyer shall have performed all agreements to
be performed by the Closing Date; (iii) the Company shall have
received the Initial Payment; (iv) the Buyer shall have executed
and delivered each of the instruments and documents contemplated
by the Agreement in order to consummate the Proposed Sale; (v)
the requisite consents shall have been obtained; (vi) no suit,
action or other proceeding by any government authority shall have
been instituted which questions the validity or legality of the
Proposed Sale; (vii) no court shall have directed that the
Proposed Sale not be consummated or otherwise impose any
additional conditions on the consummation thereof and (viii) the
Company shall have received the opinion of counsel to the Buyer
with respect to matters typical in such transactions.
The obligations of the Buyer to effect the Proposed Sale are
subject to the following conditions: (i) the stockholders of the
Company shall have approved the Proposed Sale at the Special
Meeting; (ii) the representations and warranties of the Company
contained in the Agreement shall be true and correct on and as of
the Closing Date and the Company shall have performed all
agreements to be performed by the Closing Date; (iii) as of the
Closing, there shall have been no material adverse change since
July 31, 1998 in the financial condition, business or affairs of
the Brick Business and/or the Purchased Assets (except for any
such change resulting from voluntary terminations of distributor
agreements by current distributors of the Brick Business'
products) and the Brick Business and/or the Purchased Assets
shall not have suffered any material loss which substantially
affects the value of the Brick Business and/or the Purchased
Assets; (iv) the Company shall have executed and delivered each
of the instruments and documents contemplated by the Agreement in
order to consummate the Proposed Sale; (v) the requisite consents
shall have been obtained; (vi) specified encumbrances on the
Purchased Assets shall have been cured, removed, discharged,
released or terminated; (vii) no suit, action or other proceeding
by any governmental authority shall have been instituted which
questions the validity or legality of the Proposed Sale; (viii)
no court shall have directed that the Proposed Sale not be
consummated or otherwise impose any additional conditions on the
consummation thereof and (ix) the Buyer shall have received from
Arter & Hadden LLP, counsel to the Company, an opinion with
respect to matters typical in such transactions.
Covenants Pending Closing
- -------------------------
Pursuant to the Agreement, prior to the Closing, the Company
has agreed (i) to conduct the Brick Business in the ordinary
course, consistent with past practice, and to use its best
efforts to maintain satisfactory relationships with suppliers,
distributors, customers and employees; (ii) not to make any
material change in the conduct of the Brick Business or enter
into any transaction not in the ordinary course, to sell or
encumber any of the Purchased Assets or to take any action that
would cause any of the representations and warranties made by it
in the Agreement not to remain true and correct, in each case,
without the Buyer's consent; (iii) to permit representatives of
the Buyer to have full access at all reasonable times to all
properties, personnel, books, records, Contracts, and documents
of or pertaining to the Brick Business (including all
environmental reports and studies); (iv) to file with the
Securities and Exchange Commission (the "Commission") this Proxy
Statement in preliminary form to approve the Proposed
-20-
<PAGE>
Sale and to call the Special Meeting as promptly as practicable
after the date of the Agreement, for the purpose of obtaining
approval of the Proposed Sale; and (v) to obtain all necessary
authorizations, consents and approvals from all persons with
respect to the Proposed Sale and Agreement.
In addition, the Company and the Buyer have agreed (i) to
take all action and to do all things necessary in order to
consummate and make effective the Proposed Sale, (ii) that from
the date of the Agreement through the Closing Date, no public
release or announcement concerning the Proposed Sale will be
issued by either party without the prior consent of the other
party, except as such release or announcement may be required by
applicable law or any governmental authority, (iii) to cooperate
and provide information necessary to the preparation of tax
returns and the handling of tax matters; (iv) to prorate ad
valorem real property and personal property taxes as of the
Closing Date and (v) to act in accordance with the allocation of
the Purchase Price determined between the parties in any tax
returns or similar filings.
No Solicitation
- ---------------
Pursuant to the Agreement, the Company has agreed not to (i)
solicit, initiate, or encourage the submission of any proposal or
offer from any third party relating to the acquisition of the
Purchased Assets or any portion thereof or (ii) participate in
any negotiations regarding or furnish to any third party any
information with respect to any such acquisition or assist or
facilitate any attempt by any third party to solicit any such
proposal or offer.
Covenant Not to Compete
- -----------------------
The Company has agreed that, for a period of five years from
and after the Closing Date it will not (i) permit its name to be
used in connection with or engage, directly or indirectly, in the
business of manufacturing, storing, delivering, distributing,
selling or supplying clay brick products, (ii) provide or offer
to provide any customer with clay brick products or to induce
such customer to stop doing business with Buyer or (iii) recruit
or solicit employees or vendors of the Brick Business to
terminate their relationship.
Treatment of Company Employees
- ------------------------------
The Buyer has the option to offer employment to each of the
current employees of the Brick Business in accordance with hiring
practices determined by Buyer in its sole discretion. Buyer has
agreed to provide health insurance to all Transferred Employees
in accordance with Buyer's current health insurance policies,
and, in connection therewith, (i) with respect to any length of
service requirements applicable to such policies, Buyer shall
credit each Transferred Employee with the number of days such
Transferred Employee was employed by the Company and (ii) Buyer
shall waive any pre-existing condition exclusions applicable to
any Transferred Employee who was covered under the Company's
health policy.
Termination
- -----------
The Agreement may be terminated and the transactions
contemplated thereby abandoned at any time prior to the Closing
Date (i) by written consent of the Company and the Buyer, (ii) by
the Buyer or the Company, if the conditions to Closing are not
fulfilled or waived by January 15, 1999; (iii) by Buyer if there
has been a material adverse change in the Brick Business and/or
the Purchased Assets, or (iv) by either party if there has been a
material breach of a representation or warranty by the other
party or there has been any failure by such other party to
perform in all material respects the obligations to be performed
by it. Although the Agreement attached hereto indicates that the
closing must occur by December 31, 1998, the parties have
subsequently agreed to extend the termination date until
January 15, 1999.
Consequences of Termination
- ---------------------------
In the event of any termination of the Agreement, the
Proposed Sale shall be abandoned and there shall be no liability
on the part of either party except for the material breach of any
representation, warranty or covenant that is within the control
of the party in breach.
-21-
<PAGE>
Principal Holders of Voting Securities
- ---------------------------------
THE COMPANY KNOWS OF NO PERSON OWNING BENEFICIALLY MORE THAN
5% OF THE COMPANY'S COMMON STOCK, EXCEPT FOR THE FOLLOWING
PERSONS WHO BENEFICIALLY OWNED, AS OF NOVEMBER 13, 1998, THE
NUMBER OF SHARES OF COMMON STOCK OF THE COMPANY SET FORTH
OPPOSITE EACH SUCH PERSON'S NAME IN THE TABLE BELOW:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership (1) of Class
- ------------------ ----------------------------- ----------------- -----------
<S> <C> <C> <C>
Common Stock James E. Upfield 1,083,590(2) 31.2%
5400 LBJ Freeway, Suite 1375
Dallas, Texas 75240
Common Stock Franklin Resources, Inc. 265,500 7.6%
777 Mariners Island Blvd.
San Mateo, California 94404
Common Stock Dimensional Fund Advisors, Inc. 196,000 5.6%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
_______________
(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. Upfield has shared voting and investment power owned by
HUTCO, a California partnership of which Mr. Upfield is a
general partner.
</TABLE>
-22-
<PAGE>
OWNERSHIP OF COMMON STOCK BY MANAGEMENT
The following table sets forth the beneficial ownership (as
defined by the rules of the Commission) of Common Stock of the
Company by (1) each director of the Company, (2) the Company's
Chief Executive Officer and each of the Company's other executive
officers (other than the Chief Executive Officer) whose total
salary and bonus exceed $100,000 and (3) all directors and
officers as a group, together with the percentage of the
outstanding shares which such ownership represents. Information
is stated as of November 13, 1998.
<TABLE>
<CAPTION>
Amount and Nature
Name or Identity of Beneficial Percent
of Group Title of Class Ownership (1) of Class
- --------------------------- --------------- ----------------- -----------
<S> <C> <C> <C>
James E. Upfield Common Stock 1,083,590(2) 31.2%
E. R. Buford Common Stock 114,062(3) 3.3%
Joseph V. Mariner, Jr. Common Stock 6,725(4) *
Larry J. Parsons Common Stock 7,000(4) *
Scott K. Upfield Common Stock 30,500(5) 1.0%
Richard W. Griner Common Stock 4,500(5) *
R. N. Stivers Common Stock 30,043(6) 1.0%
All present executive
officers and directors
as a group (7 persons) Common Stock 1,276,420(7) 36.7%
_________________
* Denotes less than 1%
(1) The nature of the beneficial ownership of the shares by the
respective persons or group is sole voting and investment
power unless otherwise indicated.
(2) Includes 24,750 shares of Common Stock over which
Mr. Upfield has shared voting and investment power owned by
HUTCO, a partnership of which Mr. Upfield is a general
partner.
(3) Includes 65,000 shares of Common Stock issuable upon the
exercise of options granted under the 1990 Stock Plan for
Key Employees of Temtex Industries, Inc. and its
Subsidiaries (the "1990 Plan"). Includes 5,000 shares of
Common Stock over which Mr. Buford has shared voting and
investment power owned by Virginia H. Buford, Mr. Buford's
spouse.
(4) Includes 6,500 shares of Common Stock issuable upon the
exercise of options granted under the Outside Director Stock
Option Plan (the "Outside Director Plan").
(5) Includes 4,000 shares of Common Stock issuable upon the
exercise of options granted under the Outside Director Plan.
(6) Includes 7,500 shares of Common Stock issuable upon the
exercise of options granted under the 1990 Plan.
(7) Includes 93,500 shares of Common Stock issuable upon the
exercise of options granted under the 1990 Plan and the
Outside Director Plan.
-23-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(Amounts in Thousands, Except Share and Per Share Data)
THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA FOR THE
FIVE FISCAL YEARS ENDED AUGUST 31, 1998, IS DERIVED FROM THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY. THE
SELECTED CONSOLIDATED FINANCIAL DATA PRESENTED BELOW SHOULD BE
READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE COMPANY, TOGETHER WITH THE NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" INCLUDED ELSEWHERE IN THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED AUGUST 31, 1998.
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Selected Statement of Operations Data:
Net sales $ 43,935 $ 42,904 $ 41,972 $ 39,208 $ 37,183
Net income (loss) 4,078 489 542 (201) 507
Basic income (loss) per common share (1) 1.28 0.14 0.16 (0.06) 0.15
Diluted income (loss) per
common and common
equivalent share (1) 1.25 0.14 0.15 (0.06) 0.14
Basic weighted average common
shares outstanding (1) 3,182,668 3,458,381 3,465,739 3,474,155 3,477,141
Diluted weighted average common
and common equivalent
shares outstanding (1) 3,272,880 3,543,915 3,531,631 3,474,155 3,531,414
As of August 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
Selected Balance Sheet Data:
Total assets $ 23,643(2) $ 27,116(2) $ 27,808(2) $ 23,233 $ 23,647
Long-term debt, excluding
current maturities (3) 1,346 3,099 2,218 2,244 2,246
Stockholders' equity (4) 14,916 15,416 15,970 15,781 16,288
________________
(1) All per share and weighted average common and common
equivalent shares outstanding have been restated to reflect
the adoption of SFAS No. 128.
(2) Excludes assets related to previously discontinued
operations.
(3) Includes capitalized lease obligations to related parties.
(4) The Company has not declared or paid cash dividends during
the relevant periods.
-24-
<PAGE>
Financial Statements of Texas Clay Industries
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
The following unaudited financial statements for Texas Clay
Industries at August 31, 1997 and 1998 and for each of the years
in the three-year period ended August 31, 1998 have been prepared
by management of the Company. In the opinion of management, all
adjustments consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and
results of operations, have been included in such unaudited
financial statements. These financial statements should be read
in conjunction with the consolidated financial statements of the
Company, together with the Notes to consolidated financial
statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in the
Company's Form 10-K for the year ended August 31, 1998.
-25-
<PAGE>
BALANCE SHEETS
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
August 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 80 $ 73
Accounts receivable, less allowance for doubtful
accounts: 1998--$29,000 and 1997--$160,000--Note C 1,638 724
Inventories--Notes B and C 1,328 1,359
Prepaid expenses and other assets 45 36
Deferred Taxes -- Note E -- 92
------------ ------------
TOTAL CURRENT ASSETS 3,091 2,284
PROPERTY, PLANT AND EQUIPMENT--Note C
Land and clay deposits 566 405
Buildings and improvements 876 876
Machinery, equipment, furniture and fixtures 7,765 7,672
------------ ------------
9,207 8,953
Less allowances for depreciation and depletion 7,232 6,872
1,975 2,081
------------ ------------
$ 5,066 $ 4,365
============ ============
LIABILITIES AND DIVISIONAL INTERCOMPANY
CURRENT LIABILITIES
Accounts payable $ 810 $ 1,004
Accrued expenses--Note D 264 235
Current maturities of long-term obligations--Note C 89 107
Deferred Taxes--Note E 294 --
------------ ------------
TOTAL CURRENT LIABILITIES 1,457 1,346
LONG-TERM OBLIGATIONS, less current maturities--Note C 220 170
DEFERRED TAXES--Note E 114 279
COMMITMENTS AND CONTINGENCIES--Note H
DIVISIONAL INTERCOMPANY 3,275 2,570
------------ ------------
$ 5,066 $ 4,365
============ ============
See notes to financial statements.
</TABLE>
-26-
<PAGE>
STATEMENTS OF OPERATIONS
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Net sales $ 11,021 $ 9,010 $ 8,862
Cost of goods sold 6,393 5,971 5,970
----------- ----------- -----------
4,628 3,039 2,892
Costs and expenses:
Selling, general and administrative 1,302 1,431 1,491
Interest 42 48 45
Corporate overhead charges 315 275 157
Other income (12) (25) (15)
----------- ----------- -----------
1,647 1,729 1,678
----------- ----------- -----------
INCOME FROM OPERATIONS BEFORE
INCOME TAXES 2,981 1,310 1,214
State and federal income taxes-Note E
Provision 1,053 453 409
----------- ----------- -----------
NET INCOME $ 1,928 $ 857 $ 805
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES OF DIVISIONAL INTERCOMPANY
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
Divisional Intercompany
-----------------------
(in thousands)
<S> <C>
Balance at August 31, 1995 $ 2,795
Net income 805
Income taxes, current (399)
Cash transfers to corporate, net (246)
--------
Balance at August 31, 1996 2,955
Net income 857
Income taxes, current (541)
Cash transfers to corporate, net (701)
--------
Balance at August 31, 1997 2,570
Net income 1,928
Income taxes, current (832)
Cash transfers to corporate, net (391)
--------
Balance at August 31, 1998 $ 3,275
========
See notes to financial statements.
</TABLE>
-27-
<PAGE>
STATEMENTS OF CASH FLOWS
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------
1998 1997 1996
------------ ----------- ------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,928 $ 857 $ 805
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and depletion 414 391 385
Deferred income taxes 221 88 (10)
Gain on disposition of equipment (10) (21) (11)
Provision for doubtful accounts (125) 13 24
Changes in operating assets and liabilities:
Accounts receivable (789) 177 (241)
Inventories 31 (143) 43
Prepaid expenses and other assets (9) 1 (7)
Accounts payable and accrued expenses (165) 148 74
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,496 1,511 1,062
INVESTING ACTIVITIES
Purchases of property, plant and equipment (313) (476) (335)
Proceeds from disposition of property, plant and equipment
15 41 11
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (298) (435) (324)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 141 265 --
Principal payments on long-term obligations (109) (99) (85)
Divisional intercompany (1,223) (1,242) (645)
----------- ---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (1,191) (1,076) (730)
----------- -----------
INCREASE IN CASH AND CASH
EQUIVALENTS 7 -- 8
Cash and cash equivalents at beginning of year 73 73 65
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR
$ 80 $ 73 $ 73
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Charges to allowance for doubtful accounts $ 6 $ 3 $ 12
See notes to financial statements.
</TABLE>
-28-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
August 31, 1998
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Organization: Texas Clay Industries (TCI), a division of Temtex
Industries, Inc. and Subsidiaries is a major producer of face
brick products which are manufactured in Malakoff, Texas.
All products are sold through the TCI's own sales force and third
party sales representatives to contractors and distributors
principally in Texas and surrounding states engaged in providing
building products used in both new residential and commercial
construction as well as remodeling projects.
Basis of Presentation: The financial statements include the
accounts of TCI, a division of Temtex Industries, Inc. and
Subsidiaries prepared in accordance with generally accepted
accounting principles, and in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
Corporate overhead charges other than interest expense are
allocated to TCI based upon total cost of sales. Interest
expense is allocated based on total current assets. Allocated
interest expense of $24,000, $27,000 and $32,000 for 1998, 1997
and 1996, respectively has been included in TCI's interest
expense. In the opinion of management, the method of allocation
of corporate overhead charges and interest expense is reasonable.
Management believes that the accompanying financial statements
include all the necessary costs of conducting business. However,
such costs are not necessarily indicative of, and it is not
practicable for management to estimate, the nature and level of
costs which might have been incurred had TCI operated as a stand-
alone company.
Revenue Recognition: TCI recognizes revenue upon shipment of
product.
Cash and Cash Equivalents: The Company considers all highly
liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Use of Estimates: The preparation of 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 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. Depreciation on buildings and equipment is
provided using principally accelerated methods. Depletion of
clay deposits is 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
Expenditures for maintenance and repairs are charged to
operations; betterments are capitalized.
-29-
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - Continued
Concentration of Credit Risk: TCI manufactures and sells brick
products to companies in the construction industry. TCI 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.
Income Taxes: TCI is a division of Temtex Industries, Inc. and
Subsidiaries, which files a consolidated U.S. Federal Income Tax
Return. Income tax expense has been reflected herein based upon
the division's operating results computed on a separate return
basis.
Income taxes have been provided using the liability method.
NOTE B-INVENTORIES
Inventories based on average cost are summarized below:
August 31,
----------------------
1998 1997
----------- ---------
(in thousands)
Finished goods $ 424 $ 669
Work in progress 94 101
Raw materials and supplies 810 589
---------- ---------
$ 1,328 $ 1,359
========== =========
NOTE C-LONG-TERM DEBT
Long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
August 31,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
(in thousands)
Long-term obligations:
Land notes with interest at 8.5% to 9.0%, due in monthly and
annual installments ending in 2007 $ 206 $ 69
Equipment notes with interest at 6.4% to 8.25%, due in
monthly installments ending in 2001 103 208
---------- -----------
309 277
Less current maturities 89 107
---------- -----------
$ 220 $ 170
========== ===========
</TABLE>
Annual maturities of long-term obligations for each of the five
succeeding fiscal years and thereafter are $89,000, $53,000,
$25,000, $23,000, $23,000, and $96,000.
-30-
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
NOTE C - LONG-TERM DEBT - Continued
The Company made interest payments in 1998, 1997 and 1996 of
$18,000, $21,000 and $13,000, respectively.
Accounts receivable and inventories of TCI are pledged as
collateral on Temtex Industries, Inc. and Subsidiaries revolving
credit facility.
NOTE D-ACCRUED EXPENSES
Accrued expenses include the following:
August 31,
----------------------
1998 1997
----------- ---------
(in thousands)
Employee compensation $ 163 $ 98
Taxes, other than taxes on income 66 46
Other 35 91
-------- -------
$ 264 $ 235
======== ========
NOTE E-INCOME TAXES
Significant components of the provision for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 998 $ (32) $ 341
State 162 75 78
-------- -------- --------
Total current 1,160 43 419
Deferred:
Federal (90) 396 (8)
State (17) 14 (2)
-------- -------- --------
Total deferred (107) 410 (10)
-------- -------- --------
Total income tax provision $ 1,053 $ 453 $ 409
======== ======== ========
</TABLE>
-31-
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
NOTE E-INCOME TAXES - Continued
The difference between the provision for income taxes and income
taxes computed using statutory income tax rates is as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Income tax provision at statutory rate $ 1,013 $ 446 $ 413
Additional statutory percentage depletion (57) (52) (55)
State income taxes, net of federal tax benefit 96 58 50
Other 1 1 1
--------- --------- ---------
Total income tax provision $ 1,053 $ 453 $ 409
========= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
August 31,
----------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 11 $ 61
Inventory allowance 12 30
Accrued property taxes 17 5
---------- ----------
Total deferred tax assets 40 96
Deferred tax liabilities:
Property, plant and equipment (114) (279)
Utilized corporate net operating loss carryforwards (327) --
Other (7) (4)
---------- ----------
Total deferred tax liabilities (448) (283)
---------- ----------
Net deferred tax liabilities $ (408) $ (187)
========== ==========
</TABLE>
-32-
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
NOTE F-LEASE COMMITMENTS
Equipment and land containing clay reserves are leased under
operating lease agreements which expire at various dates through
fiscal 2001.
Future minimum payments, by year and in the aggregate, under
noncancelable operating leases, consisted of the following at
August 31, 1998 in thousands:
Fiscal Year:
1999 $ 97
2000 97
2001 36
---------------
Total minimum lease payments $ 230
===============
Rental expense for operating leases was $156,000, $150,000 and
$152,000 in 1998, 1997 and 1996, respectively.
NOTE G-RECONCILIATION TO FORM 10-K INCOME AND PRO FORMA
ADJUSTMENTS
Net income for TCI differs from operating profit as presented in
Note I of the Notes to Consolidated Financial Statements in the
Company's annual report as filed on Form 10-K for the fiscal year
ended August 31, 1998.
The difference between the net income and operating profit is as
follows:
Year Ended August 31,
----------------------------------
1998 1997 1996
---------- ---------- -----------
(in thousands)
Net income $ 1,928 $ 857 $ 805
State and federal income taxes 1,053 453 409
Interest 42 48 45
Corporate overhead charges 315 275 157
Other income (12) (25) (15)
---------- ---------- -----------
Operating profit $ 3,326 $ 1,608 $ 1,401
========== ========== ===========
NOTES TO FINANCIAL STATEMENTS - Continued
UNAUDITED
TEXAS CLAY INDUSTRIES
(A DIVISION OF TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES)
NOTE G-RECONCILIATION TO FORM 10-K INCOME AND PRO FORMA
ADJUSTMENTS - Continued
Net income for TCI differs from the net amount of the pro forma
adjustments in the pro forma financial information.
The differences are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
TCI net income $ 1,928 $ 857 $ 805
Corporate overhead charges not included in
Proforma adjustments 315 275 157
Income taxes relating to corporate overhead
charges (101) (88) (53)
--------- --------- ----------
Net pro forma adjustments $ 2,142 $ 1,044 $ 909
========= ========= ==========
</TABLE>
NOTE H-CONTINGENCIES
Due to the complexity of the TCI's operations, disagreements
occasionally occur.
In the opinion of management, the TCI's ultimate loss from such
disagreements and potential resulting legal action, if any, will
not be significant.
NOTE I-SUBSEQUENT EVENT
On October 22, 1998, Temtex Industries, Inc. and Subsidiaries
entered into an Agreement for the sale of TCI for approximately
$12.9 million subject to final adjustment. The Agreement is
subject to final approval by Temtex Industries, Inc. and
Subsidiaries stockholders.
-34-
<PAGE>
Pro Forma Consolidated Selected Financial Data
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
The following unaudited pro forma consolidated selected
financial data for the three fiscal years ended August 31, 1998
were derived from the unaudited pro forma consolidated statements
of operations and the unaudited pro forma consolidated balance
sheet included elsewhere in this Proxy Statement. This pro forma
consolidated selected financial data should be read in
conjunction with the description of the Proposed Sale contained
in this Proxy Statement and the pro forma financial data
appearing elsewhere herein and the Company's consolidated
financial statements included in the Company's annual report on
Form 10-K for the year ended August 31, 1998 included as
Appendix C attached hereto.
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Pro Forma Statement of
Operations Data:
Net sales $ 33,110 $ 30,198 $ 26,162
Net loss (367) (1,245) (1,635)
Basic and diluted loss
per common share (0.11) (0.36) (0.47)
Weighted average common
and common equivalent
shares outstanding 3,465,739 3,474,155 3,477,141
As of August 31, 1998
----------------------
Pro Forma Balance Sheet Data:
Total assets $31,499
Long-term debt, excluding
current maturities (1) 2,026
Stockholders' equity 22,006
Book value per share: (2)
Historical $4.68
Pro forma $6.33
________________
(1) Includes capitalized lease obligations to related parties.
(2) Book value per share is computed based on 3,477,141 common
shares outstanding at August 31, 1998.
</TABLE>
-35-
<PAGE>
STOCK PERFORMANCE DATA
Market Information
- ------------------
The following table sets forth the high and low sales prices
per share of the Company's Common Stock on the Nasdaq Stock
Market's National Market for the quarterly periods presented. The
Company has not paid cash dividends on shares of its Common
Stock.
High Low
------ ------
Fiscal Year Ended August 31, 1997
First Quarter 4-1/8 2-3/4
Second Quarter 4-1/2 2-3/8
Third Quarter 3-5/8 2-3/8
Fourth Quarter 3-7/8 2-5/16
Fiscal Year Ended August 31, 1998
First Quarter 4-3/4 2-7/8
Second Quarter 3-3/8 2-1/2
Third Quarter 4-5/8 3-1/8
Fourth Quarter 4-1/8 2-1/2
Fiscal Year Ending August 31, 1999
First Quarter 3-13/16 2-3/4
Second Quarter (through December 3, 1998 3-3/32 2-7/8
Recent Market Price
- -------------------
The following table sets forth the closing price and the
high and low sales prices per share of the Company's Common Stock
on the Nasdaq Stock Market's National Market on October 21, the
last trading day preceding the public announcement of the
Proposed Sale and on December 3, 1998 the latest practicable date
trading before the printing of this Proxy Statement. Stockholders
are urged to obtain current market quotations.
Closing High Low
-------- --------- ---------
October 21, 1998 3 3 3
December 3, 1998 2-29/32 3 2-7/8
Number of Holders
- -----------------
As of the Record Date, 3,477,141 shares of Common Stock were
issued and outstanding and were held of record by approximately
197 persons, including several holders who are nominees for an
undetermined number of beneficial owners. The Company believes
that as of the Record Date there were approximately 977
beneficial owners of Common Stock.
-36-
<PAGE>
Comparative Per Share Data
(Unaudited)
The following table reflects the historical net income
(loss) per share from continuing operations in comparison with
the pro forma net income (loss) per share from continuing
operations after giving effect to the Proposed Sale. The
information presented in this table should be read in conjunction
with the description of the Proposed Sale contained in this Proxy
Statement and the pro forma financial data appearing elsewhere
herein and the Company's consolidated financial statements
included in the Company's annual report on Form 10-K for the year
ended August 31, 1998 included as Appendix C attached hereto.
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) per share:
Pro Forma - basic and diluted $ (0.11) $ (0.36) $ (0.47)
Historical - basic 0.16 (0.06) 0.15
Historical - diluted 0.15 (0.06) 0.14
</TABLE>
Pro Forma Financial Data
The following unaudited pro forma consolidated statements of
operations for the three fiscal years ended August 31, 1998
reflect the historical accounts of the Company for those periods,
adjusted to give pro forma effect to the Proposed Sale as if the
transaction had occurred at the beginning of each period
presented.
The following unaudited pro forma consolidated balance sheet
as of August 31, 1998 reflects the historical accounts of the
Company as of that date adjusted to give pro forma effect to the
Proposed Sale as if the transaction had occurred as of August 31,
1998.
The pro forma financial data and accompanying notes should
be read in conjunction with the description of the Proposed Sale
contained in this Proxy Statement and the Consolidated Financial
Statements and related notes included in the Company's 1998
Annual Report on Form 10-K previously filed with the Commission,
a copy of which accompanies this Proxy Statement as Appendix C
attached hereto. The Company believes that the assumptions used
in the following statements provide a reasonable basis on which
to present the pro forma financial data. The pro forma financial
data is provided for informational purposes only and should not
be construed to be indicative of the Company's financial
condition or results of operations had the Proposed Sale been
consummated on the dates assumed and are not intended to project
the Company's financial condition on any future date or results
of operations for any future period.
-37-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
As of August 31, 1998
--------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------- -------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 407 $ 12,428[2] $ 12,835
Accounts receivable - net 5,598 (1,636)[1] 3,962
Inventories 9,077 (1,328)[1] 7,749
Prepaid expenses 227 (45)[1] 182
Income taxes recoverable 35 -- 35
Deferred taxes 607 294[3] 901
------------- -------------- -------------
TOTAL CURRENT ASSETS 15,951 9,713 25,664
DEFERRED TAXES 138 114[3] 252
OTHER ASSETS 392 392
PROPERTY, PLANT AND EQUIPMENT
Land and clay deposits 566 (566)[1] --
Buildings and improvements 3,491 (876)[1] 2,615
Machinery, equipment, furniture and fixtures 24,753 (7,765)[1] 16,988
Leasehold improvements 1,059 -- 1,059
------------- -------------- -------------
29,869 (9,207) 20,662
Less allowance for depreciation,
depletion and amortization 22,703 (7,232)[1] 15,471
------------- -------------- -------------
7,166 (1,975) 5,191
------------- -------------- -------------
$ 23,647 $ 7,852 $ 31,499
============= ============== =============
</TABLE>
-38-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
As of August 31, 1998
---------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------- -------------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes payable $ 700 $ -- $ 700
Accounts payable 2,674 (800)[1] 1,874
Accrued expenses 1,591 -- 1,591
Income taxes payable -- 3,243[3] 3,243
Current maturities of indebtedness to related parties 11 -- 11
Current maturities of long-term obligations 137 (89)[1] 48
------------- --------------- --------------
TOTAL CURRENT LIABILITIES 5,113 2,354 7,467
INDEBTEDNESS TO RELATED PARTIES,
less current maturities 1,593 -- 1,593
LONG-TERM OBLIGATIONS, less current
maturities 653 (220)[1] 433
STOCKHOLDERS' EQUITY
Common stock 718 -- 718
Additional capital 9,246 -- 9,246
Retained earnings 6,651 5,718[3] 12,369
------------- --------------- --------------
16,615 5,718 22,333
Less: Cost of treasury stock 327 -- 327
------------ --------------- --------------
16,288 5,718 22,006
------------- --------------- --------------
$ 23,647 $ 7,852 $ 31,499
============= =============== ==============
</TABLE>
-39-
<PAGE>
Footnotes to Unaudited Pro Forma Consolidated Balance Sheet
(In thousands of dollars)
(1) To reflect the elimination of assets and liabilities
relating to and resulting from the operations of the
Brick Business to be sold in connection with the
Proposed Sale.
(2) To reflect the net proceeds resulting from and related
to the Proposed Sale of the Brick Business calculated
as follows:
Gross proceeds from sale of net assets $12,970
Purchase price adjustments based on assumed
net assets, as defined 458
Payment of estimated fees and transaction
costs (270)
Payment of estimated severance costs (730)
----------
Net proceeds $12,428
----------
(3) To reflect the estimated gain for financial statement
purposes resulting from the Proposed Sale of the Brick
Business calculated as follows:
Gross proceeds from sale of net assets $12,970
Purchase price adjustments 458
Net book value of assets and liabilities
related to and resulting from the operations
of the Brick Business (3,875)
Taxes, estimated fees and transaction costs,
and estimated severance costs
(3,835)
----------
Estimated gain $ 5,718
==========
-40-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Year ended August 31, 1998
---------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------- --------------- -------------
<S> <C> <C> <C>
Net sales $ 37,183 $ (11,021)[1] $ 26,162
Cost of goods sold 27,045 (6,393)[1] 20,652
------------- --------------- -------------
10,138 (4,628) 5,510
Costs and expenses:
Selling, general and administrative 8,912 (1,302)[1] 7,610
Interest 464 (42)[2] 422
Other expense / (income) (68) 12[1] (56)
------------- --------------- -------------
9,308 (1,332) 7,976
INCOME (LOSS) BEFORE ------------- --------------- -------------
INCOME TAXES 830 (3,296) (2,466)
Income taxes 323 (1,154)[1] (831)
------------- --------------- -------------
NET INCOME (LOSS) $ 507 $ (2,142) $ (1,635)
============= =============== =============
Basic income (loss) per common share $0.15 ($0.47)
Diluted income (loss) per common share $0.14 ($0.47)
Basic weighted average common shares outstanding 3,477,141 3,477,141
Diluted weighted average common and common equivalent
shares outstanding 3,531,414 3,477,141
</TABLE>
-41-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Year Ended August 31, 1997
---------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------- --------------- -------------
<S> <C> <C> <C>
Net sales $ 39,208 $ (9,010)[1] $ 30,198
Cost of goods sold 29,317 (5,971)[1] 23,346
------------- --------------- -------------
9,891 (3,039) 6,852
Costs and expenses:
Selling, general and administrative 9,831 (1,431)[1] 8,400
Interest 519 (48)[2] 471
Other expense / (income) (114) 25[1] (89)
------------- --------------- -------------
10,236 (1,454) 8,782
LOSS BEFORE INCOME TAXES ------------- --------------- -------------
(345) (1,585) (1,930)
Income taxes (144) (541)[1] (685)
------------- --------------- -------------
NET LOSS $ (201) $ (1,044) $ (1,245)
============= =============== =============
Basic and diluted loss per common share $(0.06) $(0.36)
Weighted average common shares outstanding 3,474,155 3,474,155
</TABLE>
-42-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Year Ended August 31, 1996
--------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------- --------------- -------------
<S> <C> <C> <C>
Net sales $ 41,972 $ (8,862)[1] $ 33,110
Cost of goods sold 30,977 (5,970)[1] 25,007
------------- --------------- -------------
10,995 (2,892) 8,103
Costs and expenses:
Selling, general and administrative 9,548 (1,491)[1] 8,057
Interest 583 (45)[2] 538
Other expense / (income) (2) 15[1] 13
------------- --------------- -------------
10,129 (1,521) 8,608
INCOME (LOSS) BEFORE ------------- --------------- -------------
INCOME TAXES 866 (1,371) (505)
Income taxes 324 (462)[1] (138)
------------- --------------- -------------
NET INCOME (LOSS) $ 542 $ (909) $ (367)
============= =============== =============
Basic income (loss) per common share $0.16 $(0.11)
Diluted income (loss) per common share 0.15 (0.11)
Basic weighted average common shares outstanding 3,465,739 3,465,739
Diluted weighted average common and common
equivalent shares outstanding 3,531,631 3,465,739
</TABLE>
-43-
<PAGE>
Footnotes to Unaudited Pro Forma Consolidated Statements of
Operations
(In thousands of dollars)
(1) To reflect the elimination of net sales, costs of
goods sold, costs and expenses, and income taxes of
the Brick Business.
(2) To reflect the elimination of interest expense which
includes $18, $21 and $13 for long-term obligations
directly related to the Brick Business and $24, $27
and $32 of interest expense associated with the
Company's line of credit allocated to the Brick
Business based upon total current assets for the years
ended August 31, 1998, 1997, and 1996, respectively.
-44-
<PAGE>
DEADLINE FOR STOCKHOLDER PROPOSALS
The Company presently anticipates that its next Annual
Meeting of Stockholders will be held in March of 1999. Any
proposal by a Stockholder of the Company intended to be presented
at the 1999 Annual Meeting of Stockholders was required to have
been received by the Company at its principal executive office
not later than October 9, 1998 for inclusion in the Company's
Proxy Statement and form of proxy relating to that meeting.
Miscellaneous
The Board of Directors has appointed Ernst & Young LLP
("Ernst & Young") as the independent auditors of the Company for
the fiscal year ending August 31, 1999. Ernst & Young acted as
the Company's independent auditors for the fiscal year ended
August 31, 1998. A representative of Ernst & Young will attend
the Special Meeting to be held January 5, 1999, will have an
opportunity to make a statement, and will respond to appropriate
questions from stockholders.
By Order of the Board of Directors,
E. R. Buford
Chief Executive Officer and President
December 4, 1998
Appendices
- ----------
Appendix A - Asset Purchase Agreement dated October 22,
1998 by and between Temtex Industries, Inc.
and Acme Brick Company
Appendix B - Fairness Opinion of Business Valuation
Services
Appendix C - Annual Report on Form 10-K for the fiscal
year ended August 31, 1998
-45-
<PAGE>
TEMTEX INDUSTRIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 5, 1999
The undersigned, having received the Notice of Special Meeting and
Proxy Statement dated December 4, 1998, appoints James E. Upfield, E. R.
Buford and Roger N. Stivers and each of them as Proxies with full power of
substitution to represent the undersigned and to vote all shares of Common
Stock of Temtex Industries, Inc., which the undersigned is entitled to vote
at the Special Meeting of Stockholders, to be held on January 5, 1999 at
10:00 am, Dallas, Texas time, at the Lincoln City Club at 5440 LBJ Freeway,
3rd Floor, Dallas, Texas 75240, Terrace Room, and at any adjournment or
adjournments thereof.
Your vote is important! Please sign and date on the reverse and
return promptly to American Stock Transfer and Trust Company, 40 Wall
Street, New York, N.Y. 10005 in the enclosed envelope, so that your shares
can be represented at the meeting.
(Continued and to be signed on the reverse)
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL
BE VOTED "FOR" THE PROPOSAL SET FORTH BELOW. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
A proposal to approve and adopt the Asset Purchase Agreement, dated as
of October 22, 1998 between Temtex Industries, Inc. (the "Company")
and Acme Brick Company ("Acme") pursuant to which the Company will
sell to Acme for cash substantially all of the assets and certain
specified liabilities of Texas Clay Industries, a division of the
Company which manufactures and markets clay face brick products.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated: _____________________________, 199__
____________________________________________
Signature
____________________________________________
Signature
Please sign exactly as name appears hereon.
Joint owners should each sign. When signing
as a fiduciary or for an estate, trust,
corporation or partnership, your title or
capacity should be stated.
<PAGE>
APPENDIX A
ASSET PURCHASE AGREEMENT
<PAGE>
- ----------------------------------------------------------------
ASSET PURCHASE AGREEMENT
BETWEEN
ACME BRICK COMPANY
BUYER
and
TEMTEX INDUSTRIES, INC.
SELLER
October 22, 1998
- -----------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. Purchased and Sale 1
1.1 Purchased Assets 1
1.2 Assumption of Specified Liabilities 4
1.3 Non-Assumption of Certain Liabilities 8
1.4 No Expansion of Third-Party Rights 10
1.5 Corporate Action by Seller 10
2. Purchase Price and Closing 11
2.1 Purchase Price 11
2.2 Purchase Price Adjustments. 11
2.3 The Closing 14
3. Representations and Warranties of Seller 15
3.1 Existence; Good Standing; Corporate Authority;
Compliance With Law 15
3.2 Authorization, Validity and Effect of Agreements 15
3.3 Financial Statements 16
3.4 Absence of Certain Changes or Events 16
3.5 Taxes 17
3.6 Personal Property 17
3.7 Accounts Receivable 17
3.8 Inventory 17
3.9 Business Property Rights 17
3.10 Owned Real Property 18
3.11 Leased Real Property 20
3.12 Title to Property; Encumbrances; Sufficiency of
Purchased Assets 20
3.13 Licenses and Permits 20
3.14 Compliance with Law 21
3.15 Litigation 21
3.16 Contracts 21
3.17 Labor Matters 22
3.18 Employee Plans 22
3.19 Insurance 23
3.20 Environmental Matters 23
3.21 Customers and Suppliers 23
3.22 No Brokers 23
3.23 No Other Agreements to Sell the Purchased Assets 23
3.24 Accuracy of Information 23
4. Representations and Warranties of Buyer 24
4.1 Existence; Good Standing; Corporate Authority;
Compliance With Law 24
4.2 Authorization, Validity and Effect of Agreements 24
-i-
<PAGE>
TABLE OF CONTENTS (continued)
5. Survival of Provisions/Indemnification 25
5.1 Survival of Provisions 25
5.2 Indemnification by Seller 25
5.3 Indemnification by Buyer 26
5.4 Limitations on Indemnification 26
5.5 Conditions of Indemnification 28
5.6 Buyer's Right of Withholding and Offset 29
6. Other Covenants and Agreements 30
6.1 Restrictive Covenants 30
6.2 Conduct of the Business 32
6.3 Consents and Approvals 32
6.4 Access to Properties and Records 33
6.5 Acquisition Proposals 33
6.6 Public Announcements 34
6.7 Notification of Certain Matters 34
6.8 Execution of Additional Documents 34
6.9 Costs and Expenses 34
6.10 Transfer Taxes 34
6.11 Cooperation on Tax Matters; Business Records 34
6.12 Allocation of Total Purchase Price 35
6.13 Proration of Property Taxes 35
6.14 Offers of Employment 36
6.15 Title Commitments, Title Policies and Surveys
Covering Owned Real Property 36
6.16 Environmental Information 37
7. Conditions of Closing 37
7.1 Buyer's Conditions of Closing 37
7.2 Seller's Conditions of Closing 39
8. Termination and Abandonment 40
8.1 Reasons for Termination 40
8.2 Procedure Upon and Effect of Termination 41
9. Miscellaneous 41
9.1 Notices 41
9.2 Binding Effect; Benefits 43
9.3 Entire Agreement 43
9.4 Governing Law 43
9.5 Counterparts 44
9.6 Headings 44
9.7 Waivers 44
9.8 Merger of Documents 45
9.9 Incorporation of Exhibits and Schedules 45
9.10 Severability 45
9.11 Assignability 45
-ii-
<PAGE>
TABLE OF CONTENTS (continued)
9.12 Drafting 45
9.13 References 46
9.14 Calendar Days, Weeks and Months 46
9.15 Gender; Plural and Singular 46
9.16 Cumulative Rights 46
9.17 No Implied Covenants 46
9.18 Attorneys' Fees 46
9.19 Indirect Action 46
-iii-
<PAGE>
Exhibit
A Form of Bill of Sale, Assignment and Assumption Agreement
B Form of Legal Opinion of Seller's Counsel
C Form of Legal Opinion of Buyer's Counsel
Schedule
1.1.1A Owned Real Property
1.1.1B Leases and Leased Real Property
1.1.1C Certain Purchased Assets
1.1.1D Business Property Rights
1.1.1E Description of the Owned Gas Pipeline
1.1.2 Excluded Assets
1.2A Certain Long Term Debt and Current Maturities
Assumed Liabilities
1.2B Assumed Contracts
3.1 Violations of Law; Failures to Obtain Permits
3.2 Seller's Third Party Consents Required;
Defaults; Violations
3.3 Interim Financial Statements
3.10 Owned Real Property Matters
3.11 Defaults Under Leases
3.12 Certain Encumbrances
3.13 Licenses and Permits
3.14 Violations of Law
3.15 Pending or Threatened Litigation or Claims
3.16 Material Contracts
3.17 Employment and Labor Agreements
3.18 Employee Plans
3.19 Insurance
3.20 Environmental Matters
4.2 Buyer's Third Party Consents Required;
Defaults; Violations
6.15 Encumbrances on Owned Real Property to be
Removed Prior to Closing
-iv-
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as
of October 22, 1998, by and between ACME BRICK COMPANY, a
Delaware corporation ("Buyer"), and TEMTEX INDUSTRIES, INC., a
Delaware corporation ("Seller").
WHEREAS, Seller is engaged, among other things, in the
business of manufacturing, storing, selling, delivering,
supplying and/or distributing clay face brick products through
its Texas Clay Industries division (the "Business"); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires
to acquire from Seller, the Purchased Assets (as such term is
hereinafter defined) in accordance with the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, and other good
and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. PURCHASED AND SALE.
1.1 PURCHASED ASSETS.
1.1.1 On the terms and subject to the conditions
contained in this Agreement, on the Closing Date (as
such term is hereinafter defined), Seller shall sell,
assign, grant, convey, bargain, set over, transfer and
deliver to Buyer, and Buyer shall purchase and acquire
from Seller, the following assets and properties of
Seller (hereinafter referred to collectively as the
"Purchased Assets"), except any of the following which
are Excluded Assets:
(i) the real property described on Schedule
1.1.1A hereof, together with all interests in such
real property (including, without limitation,
leases and contract rights), all buildings,
improvements and other structures located on such
real property, all uses, easements and rights-of-
way which benefit such real property, and all
minerals (surface and subsurface), clays and sands
located on, at or below such real property (such
assets and properties being collectively referred
to herein as the "Owned Real Property");
(ii) all rights, title and interest of Seller
under the leases or subleases of real property or
interests in real property (including mineral,
sand or clay rights) described on Schedule 1.1.1B
hereof (such leases and subleases being
collectively referred to herein as the "Leases"
and the real property or interests in real
property leased or subleased
<PAGE>
under the Leases being collectively referred to
herein as the "Leased Real Property");
(iii) all of the assets and properties of
Seller of every kind, nature and description which
are located at or on any of the Owned Real
Property or Leased Real Property, except any such
assets or properties which may be disposed of
after the date hereof in the ordinary course of
business consistent with past practice;
(iv) all of the assets and properties
(wherever located) set forth in a detailed list of
plant and equipment as of the date of the Balance
Sheet (as such term is hereinafter defined)
prepared from the accounting records of Seller and
attached hereto as Schedule 1.1.1C, and all such
assets and properties of the Business as may have
been acquired by Seller after the date of the
Balance Sheet which would be included on a list
prepared in like manner from such accounting
records as of the Closing Date, except any such
assets or properties which have been or may be
disposed of since the date of the Balance Sheet in
the ordinary course of business consistent with
past practice;
(v) all accounts, notes and other
receivables (including, without limitation,
amounts due from distributors or customers of the
Business) and related deposits, security or
collateral therefor arising out of the operations
of the Business, as the same shall exist as of the
Closing Date;
(vi) all inventories, inventories of parts,
raw materials, work in process and finished goods
which are held in connection with, or used or held
for use in the business and operations of, the
Business, except any such assets or properties
which may be disposed of after the date hereof in
the ordinary course of business consistent with
past practice;
(vii) all drawings, blueprints,
specifications, designs and data pertaining to the
Purchased Assets;
(viii) all technology, know-how, designs,
devices, processes, methods, inventions, drawings,
schematics, specifications, standards, trade
secrets and other proprietary information which
are held in connection with, or used or held for
use in, the manufacture of clay face brick
products;
(ix) all patents and applications therefor
and the licenses thereto, and all trademarks and
tradenames (including, without limitation, "Texas
Clay", "Texas Clay Products", "Texas Clay
Industries", "Building Better Places, Brick by
Brick" and any variations thereof), trademark and
tradename registrations, service marks and
-2-
<PAGE>
service mark registrations, copyrights and
copyright registrations, the applications therefor
and the licenses thereto, which are listed or
described on Schedule 1.1.1D hereof (such assets
and properties being hereinafter collectively
referred to as the "Business Property Rights"),
together with the goodwill and the business
appurtenant thereto;
(x) that certain 3 inch, 6-1/2 mile natural gas
pipeline more fully described in Schedule 1.1.1E
hereof, together with all rights-of-way and
easement interests, if any, owned or held by
Seller in connection therewith (such assets and
properties being collectively referred to herein
as the "Owned Gas Pipeline");
(xi) all catalogues, brochures, sales
literature, promotional material, samples and
other selling material pertaining to the Purchased
Assets;
(xii) all books and records and all
files, documents, papers, agreements, books of
account and other records pertaining to the
Purchased Assets, provided, however, that Seller
may retain copies thereof;
(xiii) all rights, title and interest of
Seller under all of its contracts, agreements,
licenses, leases, sales orders, permits, purchase
orders and other commitments (whether oral or
written), other than the Leases (individually a
"Contract" and collectively the "Contracts"),
which Buyer will assume pursuant to Section 1.2
hereof;
(xiv) all lists of past, present and
qualified prospective customers of the Business
and distributors of products of the Business;
(xv) all goodwill relating to the Purchased
Assets;
(xvi) all governmental establishment and
product licenses and permits, approvals, license
and permit applications and license and permit
amendment applications pertaining to the Purchased
Assets; and
(xvii) all claims against third parties,
whether or not asserted and whether now existing
or hereafter arising, related to the Purchased
Assets (including, without limitation, all claims
based on any indemnities or warranties in favor of
Seller relating to any of the Purchased Assets).
1.1.2 Anything herein contained to the
contrary notwithstanding, (i) the assets and properties
of Seller which are not held in connection with, or not
used or held for use in the business or operations of,
the Business are specifically excluded from the
Purchased Assets and shall be retained by Seller; and
(ii) the assets and properties of Seller which are held
in connection with, or used or held for use in the
business or operations of, the Business and which are
-3-
<PAGE>
described in Schedule 1.1.2 hereof, as the same shall
exist as of the Closing Date (collectively the
"Excluded Assets"), are specifically excluded from the
Purchased Assets and shall be retained by Seller.
1.1.3 Subject to Section 1.1.4 hereof, at the
Closing, Seller shall execute and deliver to Buyer (i)
a Bill of Sale, Assignment and Assumption Agreement, in
the form attached hereto as Exhibit "A" (the "Bill of
Sale, Assignment and Assumption Agreement"), under the
terms of which Seller shall sell, grant, convey,
assign, transfer and deliver the Purchased Assets to
Buyer, (ii) a special warranty deed in form and content
reasonably satisfactory to Buyer relating to each of
the tracts of Owned Real Property, and (iii) such other
bills of sale, deeds, instruments of assignment and
other appropriate documents as may be reasonably
requested by Buyer in order to carry out the intentions
and purposes hereof.
1.1.4 Notwithstanding the foregoing, this
Agreement shall not constitute an agreement to assign
or transfer any Lease or Contract if an assignment or
transfer or an attempt to make such an assignment or
transfer without the consent of a third party would
constitute a breach or violation thereof or affect
adversely the rights of Buyer or Seller thereunder; and
any transfer or assignment to Buyer by Seller of any
interest under any such Lease or Contract hereunder
that requires the consent or approval of a third party
shall be made subject to such consent or approval being
obtained. In the event any such consent or approval is
not obtained on or prior to the Closing Date and Buyer
waives as of the Closing Date the condition that such
consent or approval be obtained, Seller shall continue
to use all reasonable efforts to obtain any such
consent or approval after the Closing Date until such
time as such consent or approval be obtained, and
Seller shall cooperate with Buyer in any lawful and
economically feasible arrangement to provide that Buyer
shall receive the interest of Seller in all benefits
under any such Lease or Contract, including without
limitation performance by Seller as agent if
economically feasible; provided, however, that Buyer
shall undertake to pay or satisfy the corresponding
liabilities for the enjoyment of such benefit to the
extent Buyer would have been responsible therefor
hereunder if such consent or approval had been obtained
as of the Closing Date. Seller shall pay and
discharge, and shall indemnify and hold Buyer harmless
from and against, any and all out-of-pocket costs of
seeking to obtain or obtaining any such contractual
consent or approval before or after the Closing Date.
Nothing in this Section 1.1.4 shall be deemed a waiver
by Buyer of its right to have received on or before the
Closing Date an effective assignment of all of the
Leases, and of all of the Contracts it has requested be
assigned to it hereunder, nor shall this Section 1.1.4
be deemed to constitute an agreement to exclude any
Leases or Contracts from the terms of this Agreement.
1.2 ASSUMPTION OF SPECIFIED LIABILITIES. Upon the
terms and subject to the conditions set forth herein,
subject however to Section 1.1.4 and 1.3 hereof, and as
-4-
<PAGE>
additional consideration for Buyer's purchase of the
Purchased Assets, Buyer shall, on the Closing Date, assume,
and covenant and agree to pay, perform and discharge when
due, only the following liabilities and obligations of
Seller (the "Assumed Liabilities"):
(i) accounts payable of the Business as at the
Closing Date incurred in the ordinary course of
business and consistent with past practice (not to
exceed $800,000.00 in the aggregate);
(ii) accrued liabilities of Seller relating to the
Richardson Property (as such term is hereinafter
defined) as at the Closing Date (not to exceed
$141,000.00 in the aggregate);
(iii) the long term debt and current
maturities liabilities of the Business listed on
Schedule 1.2A hereof (not to exceed $123,000.00 in the
case of long term debt liabilities and $90,000.00 in
the case of current maturities liabilities), less any
such liabilities which are paid, performed or
discharged by Seller between the date hereof and the
Closing Date;
(iv) those liabilities or obligations of Seller
with respect to clay pit reclamation on the Owned Real
Property or under the Leases, whether or not occurring
before or after the Closing Date;
(v) those liabilities or obligations of Seller
accruing after the Closing Date under the Leases (other
than liabilities or obligations with respect to clay
pit reclamation) or under the terms of a Contract (x)
which is listed on Schedule 1.2B hereof, or (y) which
otherwise relates to the Business and which was entered
into by Seller after the date hereof and on or prior to
the Closing Date in the ordinary course of business and
consistent with past practice and which Buyer, in the
exercise of its sole discretion, desires to assume and
agree to pay, perform and discharge, in each case less
any such liabilities or obligations which are paid,
performed or discharged by Seller between the date
hereof and the Closing Date;
(vi) the obligations of Seller to ship finished
products relating to the Business with respect to all
outstanding orders from customers or distributors for
such products which are not fully shipped as of the
Closing Date and which arose on or prior to the Closing
Date in the ordinary course of business and consistent
with past practice;
(vii) all warranties, liabilities or
obligations to customers or distributors with respect
to the repair or replacement of any finished products
related to the Business which have been manufactured by
Seller on or prior to the Closing Date (and which are
included as part of the inventories portion of the
Purchased Assets) and which are shipped by Buyer after
the Closing Date;
-5-
<PAGE>
(viii) all wages and benefits for employees of
the Business who did not receive any required notice
under the Worker Adjustment and Retraining Notification
Act or for civil penalties by local governments which
may be imposed for failure to give advanced notice
under the Worker Adjustment and Retraining Notification
Act, including without limitation fines and attorneys'
fees;
(ix) liabilities or obligations with respect to
any Environmental Condition (as such term is
hereinafter defined) relevant to any Site (as such term
is hereinafter defined) or any facilities or operations
thereon, except for any Serious Environmental Condition
(as such term is hereinafter defined);
(x) any liabilities or obligations with respect
to any violation of an Environmental Law (as such term
is hereinafter defined) with respect to any Site or any
facilities or operations thereon, except for any
Serious Environmental Condition arising therefrom;
(xi) liabilities or obligations with respect to
the removal, closure and any remediation activities
associated with any underground storage tanks located
at the Owned Real Property, except for any Serious
Environmental Condition arising therefrom;
(xii) liabilities or obligations for all
fines, penalties and remedial work required by the
Texas Natural Resources Conservation Commission (the
"TNRCC") or other governmental agency after the Closing
Date to bring facilities of the Business as currently
operated into compliance with all orders, decrees,
rules and regulations of the TNRCC or such governmental
agency;
(xiii) any individual warranty claim of
$3,000.00 or less with respect to the repair or
replacement of any finished products related to the
Business which have been manufactured by Seller on or
prior to the Closing Date and which have been shipped
by Seller on or prior to the Closing Date (provided,
however, that Buyer's aggregate Assumed Liability under
this Section 1.2(xiii) for all such claims shall not
exceed $40,000.00); and
(xiv) any other liabilities or obligations of
Seller expressly assumed by Buyer under any other
provision of this Agreement.
Subject to Sections 1.1.4 and 1.3 hereof, at the
Closing, Buyer shall execute and deliver to Seller the Bill
of Sale, Assignment and Assumption Agreement, under the
terms of which Buyer shall assume the Assumed Liabilities.
As used herein, the term "CERCLA" means the
Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. '9601 et seq., as amended to the
date hereof.
-6-
<PAGE>
As used herein, the term "Environment" shall mean soil,
surface waters, groundwaters, land, stream sediments,
surface or subsurface strata, ambient air, and any
environmental medium.
As used herein, the term "Environmental Condition"
shall mean any condition with respect to the Environment on
or off any Site, whether or not yet discovered, which could
or does result in any damage, loss, cost, expense, claim,
demand, order, or liability to or against Seller or Buyer by
any third party (including, without limitation, any
government entity), including without limitation any
condition resulting from the operation of the Business
and/or the operation of the business of any other property
owner or operator in the vicinity of any Site and/or any
activity or operation formerly conducted by any person or
entity on or off any Site.
As used herein, the term "Serious Environmental
Condition" shall mean any condition with respect to
contaminated groundwater on or off any Site, which (a)
existed at the Closing Date and is discovered within two
years after the Closing Date, and (b) under any
Environmental Law requires Seller or Buyer to conduct
monitoring, investigatory or corrective action to address
the contaminated groundwater. Corrective action means any
engineering control designed to prevent the migration of the
contaminated groundwater, any long-term monitoring necessary
to assess natural attenuation of contaminants, or any
treatment process designed to remove groundwater
contaminants necessary to achieve risk-based cleanup levels
for the contaminated groundwater.
As used herein, the term "Site" shall mean any Owned
Real Property or Leased Real Property.
As used herein, the term "Environmental Laws" shall
mean all applicable laws and regulations (federal, state,
and local), whether existing as of the date hereof,
previously enforced or subsequently enacted, relating to
pollution, the protection of environmentally sensitive areas
or species, or to the protection of public safety, public
health, public welfare, industrial hygiene, or the
Environment, including without limitation (i) those laws and
regulations relating to the Release or threatened Release of
Hazardous Materials and to the manufacture, generation,
management, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous
Materials, (ii) duties or requirements arising out of common
law, and (iii) judicial and administrative interpretations
thereof.
As used herein, the term "Hazardous Material" shall
mean (i) any chemicals, materials, wastes or substances that
are defined, regulated, determined or identified as toxic or
hazardous in any Environmental Law (including, without
limitation, substances defined as "hazardous substances",
"hazardous materials", or "hazardous waste" "pollutant or
contaminant", "petroleum" or "natural gas liquids" in
CERCLA, the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act, or comparable state
and local statutes or in the regulations adopted and
publications promulgated pursuant to said statutes), and
(ii) any asbestos or presumed asbestos
-7-
<PAGE>
containing materials, polychlorinated biphenyls, urea
formaldehyde, lead based paint, petroleum, petroleum
products, oil, solid waste, pollutants, and other
contaminants (whether or not regulated under any
Environmental Law).
As used herein, the term "Release" or "Released" shall
mean emitting, depositing, leaking, spilling, pumping,
pouring, emptying, discharging, injecting, escaping,
leaching, dumping or disposing.
1.3 NON ASSUMPTION OF CERTAIN LIABILITIES.
Notwithstanding any other provision of this Agreement, Buyer
shall not assume, and shall not be deemed to have assumed or
be in any way liable for or subject to or have any
obligation for or with respect to, any liabilities or
obligations of Seller of any kind, nature or description
whatsoever, except as expressly provided in Section 1.2
hereof (the "Excluded Liabilities"). Anything in Section
1.2 hereof or elsewhere herein to the contrary
notwithstanding and without limiting the generality of the
foregoing, Buyer shall not assume, and shall not be deemed
to have assumed or be in any way liable for or subject to or
have any obligation for or with respect to, any of the
following Excluded Liabilities:
(i) except for the liabilities assumed by Buyer
pursuant to section 1.2(viii) hereof, any and all
claims, liabilities or obligations that arise, result
from, or relate in any way to any or all employment
practices, decisions, actions, or proceedings
undertaken by Seller prior to or on the Closing Date in
connection with persons employed or seeking to be
employed in connection with the operation of the
Business, including without limitation any and all
claims, liabilities or obligations that arise out of,
result from, or relate to (a) Employment and Labor
Agreements, Employee Policies and Procedures or Plans
(as such terms are hereinafter defined), (b) any
National Labor Relations Board ("NLRB") proceedings,
(c) any other matters arising out of the employment of
people in connection with the operation of the
Business, such as workers' compensation, wage and hour,
safety and health, employment discrimination, unfunded
pension liability for vested and non-vested employees,
vacation accruals, and the like, and (d) any liability,
including without limitation federal and state income
tax liability, by reason of Seller's failure, through
any act or omission prior to or on the Closing Date, to
comply with the requirements of COBRA (as such term is
hereinafter defined) with respect to any "qualified
beneficiary" (as defined in COBRA); or
(ii) any and all liabilities or obligations of
Seller in respect of (x) any Taxes (as such term is
hereinafter defined) attributable to the Business and
attributable to periods or events prior to or ending or
occurring on the Closing Date or (y) except as
otherwise specifically provided in Section 6.10 hereof,
any Taxes, legal, accounting, brokerage, finder's fees,
or other expenses of whatsoever kind or nature incurred
by Seller or any partner, affiliate, director, employee
or officer of Seller as a result of the execution of
this Agreement or the consummation of the transactions
contemplated hereby; or
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(iii) any and all liabilities or obligations
of Seller relating to the Business arising out of any
litigation, action, suit or proceeding based upon an
event occurring, a condition existing or a claim
arising relating to the Business (x) on or prior to the
Closing Date (including, without limitation, the
litigation, actions, suits, proceedings and claims
listed on Schedule 3.15 hereof), or (y) after the
Closing Date in the case of claims, litigation,
actions, suits or proceedings in respect of products of
the Business sold by Seller on or prior to the Closing
Date and attributable to acts relating to the Business
performed or omitted by Seller on or prior to the
Closing Date (other than any of the foregoing which
constitute Assumed Liabilities); or
(iv) any individual warranty claim in excess of
$3,000.00 (or any warranty claim of $3,000.00 or less
in excess of Buyer's maximum Assumed Liability for such
claims under Section 1.2(xiii) hereof) with respect to
the repair or replacement of any finished products
related to the Business which have been manufactured by
Seller on or prior to the Closing Date and which have
been shipped by Seller on or prior to the Closing Date;
or
(v) any and all liabilities or obligations of
Seller under any of the Leases or Contracts assigned to
Buyer hereunder based upon an event occurring, a
condition existing or a claim arising (x) on or prior
to the Closing Date, or (ii) after the Closing Date in
the case of liabilities or obligations thereunder
attributable to acts performed or omitted by Seller on
or prior to the Closing Date (other than any of the
foregoing which constitute Assumed Liabilities); or
(vi) any and all liabilities or obligations
arising out of any claim, litigation, action, suit or
proceeding by third parties (including, without
limitation, current or former employees of the
Business) in respect of the death or personal injury of
any person attributable to acts relating to the
Business performed or omitted, or the operation of the
Business, on or prior to the Closing Date (including,
without limitation, any Releases of any Hazardous
Material on, at or from any Site existing or occurring
on or prior to the Closing Date); or
(vii) any and all liabilities or obligations
of Seller arising out of or related to this Agreement.
As used herein, the term "COBRA" means the provisions
of the Code, ERISA and the Public Health Service Act enacted
by Sections 10001 through 10003 of the Consolidated Omnibus
Budget Reconciliation Act of 1985 (P.L. 99-272), including
any subsequent amendments to such provisions.
As used herein, the term "Code" means the Internal
Revenue Code of 1986, as amended.
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As used herein, the term "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended.
As used herein, the terms "Tax" or "Taxes" means all
federal, foreign, state, county, local or other net or gross
income, gross receipts, sales, use, transfer, transfer
gains, ad valorem, value-added, franchise, production,
severance, windfall profit, withholding, payroll,
employment, excise or similar taxes, assessments, duties,
fees, levies or other governmental charges (together with
any interest thereon, any penalties, additions to tax or
additional amounts with respect thereto and any interest in
respect of such penalties, additions or additional amounts).
1.4 NO EXPANSION OF THIRD-PARTY RIGHTS. The assumption
by Buyer of any Assumed Liabilities hereunder shall in no
way expand the rights or remedies of any third party against
Buyer as compared to the rights and remedies that such third
party would have had against Seller had Buyer not assumed
such Assumed Liabilities. Without limiting the generality of
the preceding sentence, the assumption by Buyer of such
Assumed Liabilities shall not create any third-party
beneficiary rights.
1.5 CORPORATE ACTION BY SELLER.
1.5.1 Seller hereby represents and warrants to
Buyer that Seller's Board of Directors (the "Board")
has, without dissent of any member thereof, (i)
determined that this Agreement, the sale of the
Purchased Assets hereunder and all other transactions
contemplated hereby are fair to and in the best
interests of its stockholders; and (ii) approved and
adopted this Agreement, the sale of the Purchased
Assets hereunder and all other transactions
contemplated hereby, and resolved to recommend, and to
continue to recommend between the date hereof and the
earlier of the Closing Date or the Termination Date (as
such term is hereinafter defined), that Seller's
stockholders vote in favor of the approval and adoption
of this Agreement, the sale of the Purchased Assets
hereunder and all other transactions contemplated
hereby and to use the Board's best efforts to obtain
such stockholder approval.
1.5.2 As soon as practicable after the
execution of this Agreement, Seller shall duly call and
cause to be held an annual or special meeting of its
stockholders and shall direct that this Agreement, the
sale of the Purchased Assets hereunder and all other
transactions contemplated hereby be submitted to
Seller's stockholders for the purpose of approving and
adopting the same. Seller agrees to use its best
efforts to obtain approval of this Agreement, the sale
of the Purchased Assets hereunder and all other
transactions contemplated hereby by its stockholders.
As promptly as possible after the execution
of this Agreement, Seller shall prepare and mail a
proxy statement and other proxy materials for such
meeting and shall comply with all legal requirements
applicable hereto. Seller shall provide Buyer and its
representatives with a reasonable opportunity
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to review and comment on such proxy statement and other
materials before they are distributed to Seller's
stockholders. Seller shall comply with all provisions
of federal and state securities laws applicable to
solicitation of proxies and consummation of the sale of
the Purchased Assets hereunder.
1.5.3 Seller further represents and warrants to
Buyer that each member of the Board has agreed for the
benefit of Buyer to vote or cause others to vote all of
the shares of capital stock of Seller beneficially
owned by such Board member or his affiliates (to the
extent such shares have voting rights) in favor of the
approval and adoption of this Agreement, the sale of
the Purchased Assets hereunder and all other
transactions contemplated hereby. Evidence of such
agreement has been provided to Buyer prior to the
execution of this Agreement.
2. PURCHASE PRICE AND CLOSING.
2.1 PURCHASE PRICE.
2.1.1 BEGINNING PURCHASE PRICE. Subject to
adjustment as provided in Section 2.2 below, the
purchase price for the Purchased Assets shall be
$12,970,000.00 (such price, as adjusted as provided in
Section 2.2 below, being herein referred to as the
"Purchase Price").
2.1.2 INITIAL PAYMENT. At the Closing, Buyer
shall deliver to Seller an initial payment determined
by Buyer pursuant to this Section 2.1.2 (the "Initial
Payment"). At least five business days prior to the
Closing Date, Seller shall deliver to Buyer copies of
the most recently available month end unaudited balance
sheet of the Business, and the unaudited statement of
income of the Business for the period ended on such
month end, together with the notes and schedules
thereto, if any, and such other information as
requested by Buyer as may be reasonably necessary to
make the calculation of the Initial Payment pursuant to
this Section 2.1.2. Such financial statements shall
present fairly the financial position, results of
operations and cash flows of the Business as at the
month end date thereof and for the period then ended,
in accordance with generally accepted accounting
principles consistently applied, subject to year end
adjustments. Buyer shall then determine in good faith
(solely for purposes of determining the Initial Payment
pursuant to this Section 2.1.2) the Purchase Price and
the adjustments thereto set forth in Sections 2.2.1,
2.2.2 and 2.2.3 below based on such financial
statements (and such other information provided by
Seller) and assuming, for such purpose, that such
adjustments were made as at the month end date of such
balance sheet rather than as at the Closing Date as
provided in Sections 2.2.1, 2.2.2 and 2.2.3 below.
Prior to the Closing, Buyer shall provide to Seller a
schedule setting forth in reasonable detail such
determination by Buyer. At the Closing, Buyer shall
deliver to Seller as the Initial Payment, by means of
federal funds wire or interbank transfer in immediately
available funds to such bank account(s) as Seller shall
designate, the greater of (i) $11,500,000.00, or (ii)
an amount equal to the Purchase Price
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(as theretofore calculated and adjusted by Buyer for
purposes of determining the Initial Payment pursuant to
this Section 2.1.2) less $300,000.00.
2.2 PURCHASE PRICE ADJUSTMENTS.
2.2.1 TRADE ACCOUNTS RECEIVABLE ADJUSTMENT. As
used herein, "Trade Accounts Receivable" shall mean all
accounts, notes and other receivables (including,
without limitation, amounts due from customers whether
recorded as accounts, notes or other receivables or
reductions in accounts payable) and related deposits,
security or collateral therefor (including, without
limitation, recoverable customer deposits of Seller),
which (i) are payable to or for the benefit of the
Business as at the Closing Date, (ii) arise out of the
ordinary course of business of the Business, and (iii)
represent bona fide, undisputed indebtedness (subject
to no counterclaim, right of offset or warranty claim
and after taking into account all offsets and credits
thereto) incurred by the applicable account debtor for
goods held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract
of sale.
If the aggregate net amount owing on all Trade
Accounts Receivable is less than $877,000.00, then the
Purchase Price shall be decreased by the amount that
the aggregate net amount owing on all Trade Accounts
Receivable is less than $877,000.00. If the aggregate
net amount owing on all Trade Accounts Receivable is
more than $877,000.00, then the Purchase Price shall be
increased by the amount that the aggregate net amount
owing on all Trade Accounts Receivable is more than
$877,000.00; provided, however, that there shall be no
such adjustment to the Purchase Price for aggregate net
amounts owing on all Trade Accounts Receivable in
excess of $2,250,000.00.
2.2.2 INVENTORY/PREPAID CLAY LEASE EXPENSES
ADJUSTMENT. As used herein, "Value" shall mean the
lower of cost or replacement value, in the case of raw
materials and supplies inventory, or the lower of cost
or net realizable value (which is less than replacement
value), in the case of work in progress and finished
goods inventory, in each case as at the Closing Date;
provided, however, that the Value of any unique runs of
finished goods brick inventory classified as "seconds"
(consistent with Seller's past practice as reasonably
approved by Buyer) shall be equal to the lesser of (i)
70% of such cost or (ii) net realizable value.
As used herein, "Inventory" shall mean all
inventories of raw materials and supplies, work in
process and finished goods as the same may exist on the
Closing Date, wherever located, used or relating to the
Business. The term Inventory excludes any of the
foregoing which is not usable or saleable in the
ordinary course of business of the Business as
heretofore conducted.
If the aggregate Value of Inventory is less than
$1,657,000.00, then the Purchase Price shall be
decreased by the amount that the aggregate Value of
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Inventory is less than $1,657,000.00. If the aggregate
Value of Inventory is more than $1,657,000.00, then the
Purchase Price shall be increased by the amount that
the aggregate Value of Inventory is more than
$1,657,000.00; provided, however, that there shall be
no such adjustment to the Purchase Price for aggregate
Value of Inventory in excess of $2,440,000.00.
As used herein, "Prepaid Clay Lease Expenses"
shall mean all prepaid expenses paid and incurred by
Seller as at the Closing Date relating to Seller's clay
leases entered into in the ordinary course of business
of the Business consistent with past practice.
If the aggregate amount of Prepaid Clay Lease
Expenses is less than $20,000.00, then the Purchase
Price shall be decreased by the amount that the
aggregate amount of Prepaid Clay Lease Expenses is less
than $20,000.00. If the aggregate amount of Prepaid
Clay Lease Expenses is more than $20,000.00, then the
Purchase Price shall be increased by the amount that
the aggregate amount of Prepaid Clay Lease Expenses is
more than $20,000.00; provided, however, that there
shall be no such adjustment to the Purchase Price for
aggregate amounts of Prepaid Clay Lease Expenses in
excess of $25,000.00.
2.2.3 LIABILITIES ADJUSTMENT. To the extent
assumed by Buyer pursuant to Section 1.2 hereof, the
accounts payable of the Business and accrued
liabilities of Seller relating to the Richardson
Property (as such term is hereinafter defined), in each
case as at the Closing Date and incurred in the
ordinary course of its business consistent with past
practice (not to exceed the applicable maximum amounts
therefor referred to in Sections 1.2(i) and 1.2(ii)
hereof), shall decrease the Purchase Price on a dollar
for dollar basis.
2.2.4 ADJUSTMENTS REPORT.
(a) Within 120 days after the Closing Date,
Buyer shall deliver to Seller a report (the
"Adjustments Report"), prepared by Buyer in good faith
and on a reasonable basis, setting forth in reasonable
detail Buyer's determination of the adjustments set
forth in Sections 2.2.1, 2.2.2 and 2.2.3 hereof.
(b) Within 30 days after receipt of the
Adjustments Report, Seller shall review the Adjustments
Report and notify Buyer in writing whether or not
Seller accepts all or any of the adjustments set forth
on the Adjustments Report. If Seller accepts the
Adjustments Report with respect to all adjustments
contained therein, Buyer or Seller, as appropriate,
shall, within five business days of such acceptance,
make the following adjustments: (i) if the Purchase
Price calculated based on the Adjustments Report is
greater than the Initial Payment, Buyer shall pay to
Seller in cash (by means of federal funds wire or
interbank transfer in immediately available funds) the
amount of such difference, or (ii) if the Purchase
Price calculated based on the Adjustments
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Report is less than the Initial Payment, Seller shall
pay to Buyer in cash (by means of federal funds wire or
interbank transfer in immediately available funds) the
amount of such difference.
(c) If Seller in good faith objects to any
adjustments set forth on the Adjustments Report, Seller
shall give notice thereof to Buyer in writing within 30
days after receipt of the Adjustments Report,
specifying in reasonable detail the nature and extent
of such disagreement and Buyer and Seller shall have a
period of 30 days from Buyer's receipt of such notice
in which to resolve such disagreement. If such notice
of objection is not received by Buyer within 30 days
after receipt of the Adjustments Report, it shall be
deemed that Seller has accepted the Adjustments Report
with respect to all items set forth therein and within
five business days after the expiration of such 30 day
period Buyer or Seller, as appropriate, shall make the
payments described in Section 2.2.4(b) hereof. Any
disputed amounts which cannot be agreed to by the
parties within 30 days from Buyer's receipt of Seller's
notice of objection to any of the adjustments set forth
in the Adjustments Report shall be determined by the
Houston, Texas office of the accounting firm of Ernst &
Young LLP ("EY"). The engagement of and the
determination by EY (or any other accounting firm
designated by EY as set forth below) shall be completed
within 60 days after such assignment is given to EY and
shall be binding on and shall be nonappealable by
Seller and Buyer. If for any reason EY is unable to
act in such capacity, such determination will be made
by any other nationally recognized accounting firm
selected by the Houston, Texas office of EY. The fees
and expenses payable to EY (or any other accounting
firm designated by EY) in connection with such
determination will be borne 50% by Seller and 50% by
Buyer, unless (i) the determination of EY (or any other
accounting firm designated by EY) with respect to the
disputed amounts results in a payment by Seller in an
amount which exceeds by more than $25,000 the amount
Seller shall have claimed it owes hereunder, in which
case all the fees and expenses payable to EY (or any
other accounting firm designated by EY) shall be paid
by Seller, or (ii) the determination of EY (or any
other accounting firm designated by EY) with respect to
the disputed amounts results in a payment by Buyer in
an amount which exceeds by more than $25,000 the amount
Buyer shall have claimed it owed hereunder, in which
case all the fees and expenses payable to EY (or any
other accounting firm designated by EY) shall be paid
by Buyer. Within five business days after final
determination of all disputed amounts in the
Adjustments Report as provided in this Section
2.2.4(c), Buyer or Seller, as appropriate, shall make
the following adjustments: (i) if the Purchase Price as
finally determined is greater than the Initial Payment,
Buyer shall pay to Seller in cash (by means of federal
funds wire or interbank transfer in immediately
available funds) the amount of such difference; or (ii)
if the Purchase Price as finally determined is less
than the Initial Payment, Seller shall pay to Buyer in
cash (by means of federal funds wire or interbank
transfer in immediately available funds) the amount of
such difference. Each party shall, upon the request of
the other party, promptly reimburse such other party
for any fees or
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expenses of EY (or any other accounting firm designated
by EY) for which it is responsible under this Section
2.2.4(c) but which have been paid by such other party.
(d) In the event any payment required by
this Section 2.2.4 is not made by the appropriate party
when due pursuant to the terms of this Section 2.2.4,
such payment shall accrue interest from the date such
payment was due at the lesser of 15% per annum or the
maximum rate permitted by applicable law. Such
interest shall be paid by the appropriate party upon
demand by the other party.
2.3 THE CLOSING. The closing of the purchase and sale
of the Purchased Assets provided herein (the "Closing")
shall occur (i) at the offices of Kelly, Hart & Hallman, a
professional corporation, 201 Main Street, Suite 2500, Fort
Worth, Texas 76102, at 10:00 a.m., local time, on the first
business day immediately following the day on or by which
the last to be fulfilled or waived of the conditions set
forth in Section 7 hereof shall be fulfilled or waived in
accordance herewith or (ii) at such other time and place or
on such other date as Seller and Buyer may mutually agree
(such date and time of Closing being herein referred to
collectively as the "Closing Date"). The Closing shall be
deemed to have occurred as of 11:59 p.m. on the Closing
Date.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller
represents and warrants to Buyer as follows:
3.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY;
COMPLIANCE WITH LAW. Seller (i) is a corporation duly
incorporated, validly existing and in good standing under
the laws of the State of Delaware; (ii) is duly licensed or
qualified to do business as a foreign corporation under the
laws of the State of Texas; (iii) is duly licensed or
qualified to do business as a foreign corporation under the
laws of any other jurisdiction in which the character of the
properties owned or leased by it therein or in which the
transaction of its business makes such qualification
necessary, except where the failure to be so qualified would
not have a material adverse effect on the results of
operations or financial condition of the Business and/or the
Purchased Assets (a "Material Adverse Effect"); (iv) has all
requisite corporate power and authority to own its
properties and carry on its business as now conducted; (v)
is not in default with respect to any order of any court,
governmental authority or arbitration board or tribunal to
which Seller is a party or is subject; (vi) except as set
forth in Schedule 3.1 hereof, is not in violation of any
laws, ordinances, governmental rules or regulations to which
it is subject, except for violations that would not have a
Material Adverse Effect; and (vii) except as set forth in
Schedule 3.1 hereof, has obtained all licenses, permits and
other authorizations and has taken all actions required by
applicable laws or governmental regulations in connection
with its business as now conducted, except where the failure
to obtain such licenses, permits or authorizations, or the
failure to take such actions, would not have a Material
Adverse Effect.
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3.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
3.2.1 The execution and delivery of this
Agreement and all agreements and documents contemplated
hereby by Seller, and the consummation by it of the
transactions contemplated hereby, have been duly
authorized by the Board and, except for the approval of
Seller's stockholders, no other corporate proceedings
on the part of Seller are necessary to authorize this
Agreement and the transactions contemplated hereby.
3.2.2 This Agreement constitutes, and all
agreements and documents contemplated hereby when
executed and delivered pursuant hereto for value
received will constitute, the valid and legally binding
obligations of Seller enforceable in accordance with
their terms, except that enforceability may be limited
by applicable bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium, bulk sales,
preference, equitable subordination, marshalling or
other similar laws of general application now or
hereafter in effect relating to the enforcement of
creditors' rights generally and except that the
remedies of specific performance, injunction and other
forms of equitable relief are subject to certain tests
of equity jurisdiction, equitable defenses and the
discretion of the court before which any proceeding
therefor may be brought.
3.2.3 The execution and delivery of this
Agreement by Seller does not, and the consummation of
the transactions contemplated hereby by Seller will
not, except as set forth on Schedule 3.2 hereof, (i)
require the consent, approval or authorization of, or
declaration, filing or registration with, any
governmental or regulatory authority or any third
party; (ii) result in the breach of any term or
provision of, or constitute a default under, or result
in the acceleration of or entitle any party to
accelerate (whether after the giving of notice or the
lapse of time or both) any obligation under, or result
in the creation or imposition of any Encumbrance (as
such term is hereinafter defined) upon any part of the
property of Seller pursuant to any provision of, any
order, judgment, arbitration award, injunction, decree,
indenture, mortgage, lease, license, lien, or other
agreement or instrument to which Seller is a party or
by which it is bound; or (iii) violate or conflict with
any provision of the by-laws or certificate of
incorporation of Seller as amended to the date hereof.
As used herein, the term "Encumbrance" means any
security interest, pledge, mortgage, lien (including,
without limitation, environmental and tax liens),
charge, adverse claim, preferential arrangement, or
restriction of any kind, including, without limitation,
any restriction on the use, transfer, or other exercise
of any attributes of ownership.
3.3 FINANCIAL STATEMENTS. Attached as Schedule 3.3
are true and complete copies of the unaudited balance sheet
of the Business as at July 31, 1998 (the "Balance Sheet"),
and the unaudited statement of income of the Business for
the eleven-month period ended on such date, together with
the notes and schedules thereto, if any. The financial
statements described in this Section 3.3 are referred to
herein collectively as
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the "Interim Financial Statements". Except as set forth in
Schedule 3.3 hereof, the Interim Financial Statements
present fairly the financial position, results of operations
and cash flows of the Business as at the date thereof and
for the period then ended, in accordance with generally
accepted accounting principles consistently applied, subject
to year end adjustments.
3.4 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since July
31, 1998, there has not been: (i) any material adverse
change in the business, operations, properties, condition
(financial or other) or prospects of the Business, and no
factor or condition exists and no event has occurred that
would be likely to result in any such change, (ii) any
material loss, damage, or other casualty to the Purchased
Assets (other than any for which insurance awards have been
received or guaranteed), or (iii) any loss of the
employment, services or benefits of any key employee of the
Business. Since July 31, 1998, Seller has operated the
Business in the ordinary course of business consistent with
past practice and has not: (i) incurred or failed to pay or
satisfy any material obligation or liability (whether
accrued, contingent or otherwise) relating to the operations
of the Business except in the ordinary course of business
consistent with past practice, (ii) incurred or failed to
discharge or satisfy any Encumbrance other than Encumbrances
arising in the ordinary course of business that do not,
individually or in the aggregate, interfere with the use,
operation, enjoyment or marketability of any of the
Purchased Assets, all of which shall be released as of the
Closing Date, (iii) sold or transferred any of the assets of
the Business or canceled any debts or claims or waived any
rights material to the Business relating to the operations
of the Business, (iv) defaulted on any material obligation
relating to the operations of the Business, (v) entered into
any transaction material to the Business, or materially
amended or terminated any arrangement material to the
Business or relating to the Business, except in the ordinary
course of business consistent with past practice, or (vi)
entered into any agreement or made any commitment to do any
of the foregoing.
3.5 TAXES. Seller (i) has duly and timely filed or
caused to be filed all federal, state, local and foreign tax
returns required to be filed by it prior to the date hereof
which relate to the Business or with respect to which the
Business or the Purchased Assets are liable or otherwise in
any way subject; (ii) has paid or fully accrued for all
Taxes shown to be due and payable on such returns (which
Taxes are all the Taxes due and payable under the laws and
regulations pursuant to which such returns were filed); and
(iii) has properly accrued for all such Taxes accrued in
respect of it, the Business or the Purchased Assets for
periods subsequent to the periods covered by such returns.
No deficiency in payment of any such Taxes for any period
has been asserted by any taxing body and remains unsettled
at the date hereof.
3.6 PERSONAL PROPERTY. The machinery, equipment,
furniture, fixtures and other tangible personal property
owned, leased or used by Seller in the Business and included
in the Purchased Assets are reasonably sufficient and
adequate to carry on the Business as presently conducted.
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3.7 ACCOUNTS RECEIVABLE. All trade accounts, notes
and other receivables arising out of the operations of the
Business have arisen in the ordinary course of business and
represent bona fide, undisputed indebtedness (subject to no
counterclaim, right of setoff or warranty claim) incurred by
the applicable account debtor for goods held subject to
delivery instructions or heretofore shipped or delivered
pursuant to a contract of sale or for services heretofore
performed by Seller.
3.8 INVENTORY. The inventories of Seller which are
held in connection with, or used or held for use in the
business and operations of, the Business do not include any
inventory which is not usable or saleable in the ordinary
course of business of the Business as heretofore conducted.
3.9 BUSINESS PROPERTY RIGHTS.
3.9.1 The Business Property Rights comprise
all patents and applications therefor and the licenses
thereto, and all trademarks and tradenames, trademark
and tradename registrations, service marks and service
mark registrations, copyrights and copyright
registrations, the applications therefor and the
licenses thereto, owned or held by Seller and which are
used or held for use in connection with the Business
and which are material to the Business.
3.9.2 Seller owns or has valid rights to use
all Business Property Rights without conflict with the
rights of others. Except as set forth in Schedule 3.15
hereof, no person or entity has made or, to the best of
Seller's knowledge, threatened to make any claims that
the operation of the Business is in violation of or
infringes any other proprietary or trade rights of any
third party. To the best of Seller's knowledge, no
third party is in violation of or is infringing upon
any Business Property Rights.
3.10 OWNED REAL PROPERTY. The Owned Real Property
comprises all of the real property owned, either in whole or
in part, by Seller which is currently used or held for use
in connection with the Business as now being conducted.
Except as set forth in Schedule 3.10 hereof, Seller, as
lessor, does not lease any Owned Real Property to any third
party. Except as set forth in Schedule 3.10 hereof,
(i) Seller has not received any notice from
any insurance company or from any board of fire
underwriters (or other body exercising similar
functions) claiming any defects or deficiencies in
the Owned Real Property or suggesting, requiring
or requesting the performance of any repairs,
alterations or other work to the Owned Real
Property that have been performed.
(ii) All permanent certificates of occupancy
and all other licenses, permits, authorizations,
consents, certificates and approvals required by
all governmental authorities having jurisdiction
and the
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requisite certificates of the local board of fire
insurance underwriters (or other body exercising
similar functions), in each case for the operation
of the Owned Real Property as currently operated,
which are material to the Business and which have
been issued for the Owned Real Property, have been
paid for, and are in full force and effect; all of
the same will be assignable by Seller on the
Closing Date, and none of them will be
invalidated, violated, or otherwise adversely
affected by the assignment thereof or by the
transfer of the Owned Real Property to Buyer.
(iii) The improvements on the Owned Real
Property are being maintained and operated in
substantial compliance with all applicable laws,
regulations, insurance requirements, contracts,
leases, permits, licenses, ordinances,
restrictions, and easements, and Seller has
received no notice, written or verbal, claiming
any violation of any of the same.
(iv) Utility systems and lines necessary to
operate the Owned Real Property as currently
operated serve the Owned Real Property and are
connected to the lines and/or other facilities of
the respective public authorities or utility
companies providing such services or accepting
such discharge, either adjacent to the Owned Real
Property or through easements or rights of way
benefitting, appurtenant to and forming a part of
the Owned Real Property; and any such easements or
rights-of-way have been fully granted; and all
charges therefor have been fully paid by Seller
and all charges for the aforesaid utility systems
and the connection of the Owned Real Property
thereto, including without limitation connection
fees, "tie-in" charges and other charges now or
hereafter to become due and payable, have been
fully paid by Seller; provided, however, that
Seller makes no representation or warranty with
respect to the adequacy or validity of any
easements associated with the Owned Gas Pipeline.
(v) All contractors, subcontractors, and
other persons or entities furnishing work, labor,
materials or supplies to Seller or Seller's
predecessors in interest for the development and
construction of the Owned Real Property have been
paid in full for all work performed to date except
for retainage in customary amounts in accordance
with the construction contracts for the Owned Real
Property, and there are no claims against Seller
or the Owned Real Property in connection
therewith.
(vi) No zoning variances, special exceptions
or other special relief from applicable
governmental requirements have been issued for the
construction of the Owned Real Property or for its
present or intended use.
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(vii) Seller has not received any notice
of any governmental regulation, order or
requirement restricting the operation of the Owned
Real Property in the manner in which the Owned
Real Property is being operated on the date
hereof.
(viii) Seller has not received any written
notice of, nor to the best of Seller's knowledge,
is there any proceeding pending for the increase
or decrease of the assessed valuation of all or
any portion of the Owned Real Property.
(ix) Seller has not received any notice of
any condemnation proceeding or other proceedings
in the nature of eminent domain in connection with
the Owned Real Property.
(x) No portion of the Owned Real Property is
located within an area designated as a flood
hazard area or an area which will require the
purchase of flood insurance for the obtaining of
any federally insured or federally related loan;
and no portion of the Owned Real Property is
located in any conservation or historic district.
(xi) No assessments for public improvements
have been made against the Owned Real Property
which remain unpaid and all such assessments which
have been or could be levied for public
improvements ordered, commenced or completed prior
to the Closing Date have been paid for in full by
Seller. All ad valorem real property taxes and
personal property taxes related to the Owned Real
Property and the personal property therein have
been paid through and including 1997.
(xii) There are no special assessments
respecting the Owned Real Property which will
result from work, activities or improvements done
to the Owned Real Property by Seller in the course
of construction, alteration or repair of the Owned
Real Property.
3.11 LEASED REAL PROPERTY. The Leases comprise all of
the leases or subleases by Seller of real property or
interests in real property (including mineral, sand or clay
rights) used or held for use in connection with the Business
as now being conducted. Seller has not received any written
notification that it is in default with respect to any of
the Leases nor are there any disputes between any landlord
and Seller with respect to the Leases that would affect the
right of Seller to remain in possession or otherwise affect
the current use of the property leased or the rental amount
then due. Except as set forth in Schedule 3.11 hereof,
Seller has performed all obligations required to be
performed by it to date under, and is not in default in
respect of, any Lease, and no event has occurred which, with
due notice or lapse of time or both, would constitute such a
default. To the best of Seller's knowledge, no other party
to any Lease is in default in respect thereof, and no event
has occurred which, with due
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notice or lapse of time or both, would constitute such a
default. True and complete copies of all Leases have been
made available to Buyer or its representatives.
3.12 TITLE TO PROPERTY; ENCUMBRANCES; SUFFICIENCY OF
PURCHASED ASSETS. Seller has good, valid and, in the case
of the Owned Real Property, indefeasible fee simple, title
to all the Purchased Assets, in each case free and clear of
all Encumbrances except for (i) Encumbrances on the Owned
Real Property reflected in any Title Commitment (as such
term is hereinafter defined) or (ii) other Encumbrances
reflected in Schedule 3.12 hereof; provided, however, that
Seller makes no representation or warranty with respect to
the adequacy or validity of any easements associated with
the Owned Gas Pipeline. No part of the Business is operated
by Seller through any person or entity other than Seller.
The Purchased Assets, together with the Excluded Assets,
comprise all of the assets and properties of Seller which
are held in connection with, or used or held for use in the
business or operations of, the Business as now being
conducted and which are required for the continued conduct
of the Business as now being conducted.
3.13 LICENSES AND PERMITS. Schedule 3.13 hereof sets
forth a true and complete list of all of Seller's material
licenses, permits, franchises, authorizations,
registrations, approvals and certificates of occupancy (or
their equivalent), including without limitation any
environmental permits, issued or granted to it with respect
to the Business by the government of the United States or of
any state, city, municipality, county or town thereof, or of
any foreign jurisdiction, or any department, agency, board
division, subdivision, audit group or procuring office,
commission, bureau or instrumentality of any of the
foregoing (the "Licenses and Permits"), and all pending
applications therefor. Except as set forth on Schedule
3.13, each of Seller's Licenses and Permits has been duly
obtained, is valid and in full force and effect, and is not
subject to any pending or, to the best of Seller's
knowledge, threatened administrative or judicial proceeding
to revoke, cancel, suspend or declare such License and
Permit invalid in any respect.
3.14 Compliance with Law. Except as set forth on
Schedule 3.14 hereof or except to the extent constituting an
Assumed Liability, the operations of the Business have been
conducted in all material respects in accordance with all
applicable laws, regulations, orders and other requirements
of all courts and other governmental or regulatory
authorities, domestic or foreign, having jurisdiction over
it and its assets, properties and operations, except where
the failure to so conduct its business would not have a
Material Adverse Effect. Seller has not received notice of
any violation of any such law, regulation, order or other
legal requirement, or is not in default with respect to any
order, writ, judgment, award, injunction or decree of any
national, state or local court or governmental or regulatory
authority or arbitrator, domestic or foreign, applicable to
the Business or the Purchased Assets, except where the
violation or default would not have a Material Adverse
Effect.
3.15 LITIGATION. Except as set forth in Schedule 3.15
hereof, there are no claims, actions, suits, proceedings or
investigations pending or, to the best of Seller's
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knowledge, threatened before any federal, state or local
court or governmental or regulatory authority, domestic or
foreign, or before any arbitrator of any nature, brought by
or against Seller or any of its officers, directors,
employees, or agents involving, affecting or relating to the
Business, the Purchased Assets or the transactions
contemplated by this Agreement, nor does there exist any
fact which might reasonably be expected to give rise to any
such suit, proceeding, dispute or investigation. Neither
the Business nor the Purchased Assets is subject to any
order, writ, judgment, award, injunction or decree of any
federal, state or local court or governmental or regulatory
authority, domestic or foreign, or any arbitrator of any
nature, that affects or might affect the Business or the
Purchased Assets, or that would or might interfere with the
transactions contemplated by this Agreement.
3.16 CONTRACTS. Schedule 3.16 hereof sets forth a true
and complete list of all material Contracts by which any of
the Purchased Assets are bound or affected, or to which
Seller is a party or by which it is bound in connection with
the Purchased Assets or the Business. All of the Contracts
to be assumed by Buyer hereunder are in full force and
effect and are valid, binding and enforceable against the
parties thereto in accordance with their terms. Seller and,
to its best knowledge, each other party to such assumed
Contracts has performed all obligations required to be
performed by it to date under, and is not in default or
delinquent in performance, status or any other respect
(claimed or actual) in connection with, such assumed
Contracts, and no event has occurred which, with due notice
or lapse of time or both, would constitute such a default.
The enforceability of such assumed Contracts will not be
affected in any manner by the execution, delivery and
performance of this Agreement, subject to any required
consents. Seller has delivered to Buyer or its
representatives true and complete originals or copies of all
such written assumed Contracts and summaries of all such
oral assumed Contracts.
3.17 LABOR MATTERS. Except for Seller's Collective
Bargaining Agreement with the United Steel Workers of
America District Number 12, (i) Seller is not a party to any
employment agreements with employees that are not terminable
at will, or that provide for the payment of any bonus or
commission, (ii) Seller is not a party to any agreement,
policy or practice that requires it to pay termination or
severance pay to salaried, non-exempt or hourly employees of
the Business (other than as required by law), (iii) Seller
is not a party to any collective bargaining agreement or
other labor union contract applicable to employees of the
Business nor does Seller know of any activities or
proceedings of any labor union to organize any such
employees, and (iv) Seller is not a party to or subject to
any conciliation agreements, consent decrees or settlements
with respect to the Business or its employees. Seller has
furnished to Buyer complete and correct copies of all such
agreements (the "Employment and Labor Agreements"). Seller
has not breached or otherwise failed to comply with any
provisions of the Employment and Labor Agreements, there are
no grievances outstanding thereunder.
Except as set forth in Schedule 3.17 hereof: (i) Seller
is in compliance with all applicable laws relating to
employment and employment practices, wages, hours, and
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terms and conditions of employment in each case relating to
the Business, (ii) there is no unfair labor practice charge
or complaint pending before the NLRB relating to the
Business, or, to Seller's best knowledge, threatened against
the Business, (iii) there is no labor strike, material
slowdown or material work stoppage or lockout pending or, to
Seller's best knowledge, threatened against or affecting the
Business, and Seller has not experienced any strike,
material slowdown or material work stoppage, lockout or
other collective labor action by or with respect to
employees of the Business within the last 24 months, (iv)
there is no representation, claim or petition pending before
the NLRB or any similar foreign agency and no question
concerning representation exists relating to the employees
of the Business, (v) there are no charges with respect to or
relating to the Business pending before the Equal Employment
Opportunity Commission or any state, local or foreign agency
responsible for the prevention of unlawful employment
practices, and (vi) Seller has not received notice from any
national, state, local or foreign agency responsible for the
enforcement of labor or employment laws of an intention to
conduct an investigation of it relating to the Business and
no such investigation is in progress.
Seller has furnished Buyer with a complete and accurate
list of all its employee manuals, policies, procedures and
work-related rules that apply to employees of the Business
("Employee Policies and Procedures").
3.18 EMPLOYEE PLANS. Except as set forth in Schedule
3.18 hereof, Seller does not maintain and does not have any
obligation to contribute to any pension, savings,
retirement, health, life, disability, other insurance,
severance, bonus, incentive compensation, stock option or
other equity-based or other employee benefit or fringe
benefit plans (whether or not "employee benefit plans" as
defined in Section 3(3) of ERISA) with respect to the
Business (collectively referred to herein as the "Plans").
Seller or any trade or business (whether or not
incorporated) which is or has ever been treated as a single
employer with Seller under Section 414(b), (c), (m) or (o)
of the Code ("ERISA Affiliate") has incurred no liability
under Title IV of ERISA or Section 412 of the Code, except
for any such liability which has been satisfied in full, and
no events have occurred and no circumstances exist that
could reasonably be expected to result in any such liability
to Seller or any ERISA Affiliate.
3.19 INSURANCE. Schedule 3.19 hereof lists the
fidelity bonds and the aggregate coverage amount and type
and generally applicable deductibles of all insurance
policies insuring the Business and the Purchased Assets or
relating to employees of the Business. Seller shall
maintain the coverage under all policies and bonds listed in
Schedule 3.19 hereof in full force and effect through the
Closing Date.
3.20 ENVIRONMENTAL MATTERS. Schedule 3.20 hereof sets
forth a list of all documents, records and information in
Seller's possession or control concerning Environmental
Conditions and/or Serious Environmental Conditions relevant
to any Site or any facilities or operations thereon, whether
generated by Seller or others, including without limitation
environmental audits, environmental risk assessments, or
site assessments of any Site and/or adjacent property or
other property in the vicinity
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of any Site owned or operated by Seller relating to the
Business, documentation regarding any on-site or off-site
Release of Hazardous Materials, spill control plans, permits
or registrations and related compliance, and environmental
agency reports and correspondence. Seller has delivered to
Buyer or its representatives true and complete originals or
copies of all such documents, records and information.
3.21 CUSTOMERS AND SUPPLIERS. Seller does not have any
outstanding purchase contracts or commitments or unaccepted
purchase orders relating to the Business which are in excess
of the normal, ordinary and usual requirements. No supplier
or subcontractor to the Business has reduced its shipments
of orders issued by Seller, or threatened to discontinue,
supplying such items or services to Seller on reasonable
terms. Seller has not received notice that, nor does Seller
have any knowledge that, any such supplier or subcontractor
to the Business has, will or plans to discontinue doing
business with Seller on substantially the same terms as are
consistent with its past practices.
3.22 NO BROKERS. Neither Seller nor any related party
has entered into any contract, arrangement or understanding
with any person or firm which may result in the obligation
of Buyer to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
3.23 NO OTHER AGREEMENTS TO SELL THE PURCHASED ASSETS.
Neither Seller nor any related party has any commitment or
legal obligation to any other person other than Buyer to
sell, assign, transfer or effect a sale of any of the
Purchased Assets (other than in the ordinary course of
business), to effect any merger, consolidation, liquidation,
dissolution or other reorganization of Seller, or to enter
into any agreement or cause the entering into of an
agreement with respect to any of the foregoing.
3.24 ACCURACY OF INFORMATION. None of Seller's
representations, warranties or statements contained in this
Agreement, in the Schedules and Exhibits hereto or in any
other document delivered to the Buyer in connection with the
transactions contemplated by this Agreement, contains or
will contain any untrue statement of a material fact or
omits to state any material fact necessary in order to make
any of such representations, warranties or statements, in
light of the circumstances under which they were made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer
represents and warrants to Seller as follows:
4.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY;
COMPLIANCE WITH LAW. Buyer (i) is a corporation duly
incorporated, validly existing and in good standing under
the laws of the State of Delaware; (ii) is duly licensed or
qualified to do business as a foreign corporation and is in
good standing under the laws of any other jurisdiction in
which the character of the properties owned or leased by it
therein or in which the transaction of its business makes
such qualification necessary, except where
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the failure to be so qualified would not have a material
adverse effect on the results of operations or financial
condition of Buyer; (iii) has all requisite corporate power
and authority to own its properties and carry on its
business as now conducted; (iv) is not in default with
respect to any order of any court, governmental authority or
arbitration board or tribunal to which Buyer is a party or
is subject; (v) is not in violation of any laws, ordinances,
governmental rules or regulations to which it is subject,
except for violations that would not have a material adverse
effect on the results of operations or financial condition
of Buyer; and (vi) has obtained all licenses, permits and
other authorizations and has taken all actions required by
applicable laws or governmental regulations in connection
with its business as now conducted, except where the failure
to obtain such licenses, permits or authorizations, or the
failure to take such actions, would not have a material
adverse effect on the results of operations or financial
condition of Buyer.
4.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS.
4.2.1 The execution and delivery of this
Agreement and all agreements and documents contemplated
hereby by Buyer, and the consummation by it of the
transactions contemplated hereby, have been duly
authorized by all requisite corporate action.
4.2.2 This Agreement constitutes, and all
agreements and documents contemplated hereby when
executed and delivered pursuant hereto for value
received will constitute, the valid and legally binding
obligations of Buyer enforceable in accordance with
their terms, except that enforceability may be limited
by applicable bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium, bulk sales,
preference, equitable subordination, marshalling or
other similar laws of general application now or
hereafter in effect relating to the enforcement of
creditors' rights generally and except that the
remedies of specific performance, injunction and other
forms of equitable relief are subject to certain tests
of equity jurisdiction, equitable defenses and the
discretion of the court before which any proceeding
therefor may be brought.
4.2.3 The execution and delivery of this
Agreement by Buyer does not, and the consummation of
the transactions contemplated hereby by Buyer will not,
except as set forth on Schedule 4.2 hereof, (i) require
the consent, approval or authorization of, or
declaration, filing or registration with, any
governmental or regulatory authority or any third
party; (ii) result in the breach of any term or
provision of, or constitute a default under, or result
in the acceleration of or entitle any party to
accelerate (whether after the giving of notice or the
lapse of time or both) any obligation under, or result
in the creation or imposition of any Encumbrance upon
any part of the property of Buyer pursuant to any
provision of, any order, judgment, arbitration award,
injunction, decree, indenture, mortgage, lease,
license, lien, or other agreement or instrument to
which Buyer is a party or by which it is bound; or
(iii) violate or conflict with any provision
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of the by-laws or certificate of incorporation of Buyer
as amended to the date hereof.
5. SURVIVAL OF PROVISIONS/INDEMNIFICATION.
5.1 SURVIVAL OF PROVISIONS. All the respective
representations, warranties, covenants and agreements of
each of the parties hereto made herein or in any certificate
or other document furnished or to be furnished by the
parties pursuant hereto (except covenants and agreements
which are expressly required to be performed and are
performed in full on or before the Closing Date) shall be
considered to have been relied upon by the other party
hereto, as the case may be, shall survive, in accordance
with their terms, delivery by the parties hereto of the
consideration to be given by them hereunder, and shall
survive the execution hereof, the Closing hereunder and the
Closing Date, except as otherwise provided herein.
5.2 INDEMNIFICATION BY SELLER. Upon the terms and
subject to the conditions set forth in Sections 5.4 and 5.5
hereof and this Section 5.2, Seller agrees to indemnify,
defend, protect, save and hold harmless each Buyer
Indemnitee (as such term is hereinafter defined) against,
and will reimburse each Buyer Indemnitee on demand for, any
and all Losses (as such term is hereinafter defined) made or
incurred by or asserted against such Buyer Indemnitee, at
any time after the Closing Date, directly or indirectly,
arising out of, related to, caused by, or resulting from any
of the following ("Seller Indemnifiable Claims"):
(a) any and all Excluded Liabilities; or
(b) any inaccuracy, omission, misrepresentation,
breach of warranty, or nonfulfillment of any term,
provision, covenant or agreement on the part of Seller
contained herein or in any certificate or other
instrument furnished or to be furnished by Seller to
Buyer pursuant hereto.
As used herein, the term "Losses" shall mean, with
respect to any person or party, any payment, loss,
liability, obligation, damage (including, without
limitation, consequential, punitive, special or otherwise),
deficiency, lien, claim, suit, cause of action, judgment,
cost or expense (including, without limitation, reasonable
attorneys' fees and court costs) of any kind, nature or
description.
As used herein, the term "Buyer Indemnitee" shall mean
Buyer and any entity controlling, controlled by or under
common control with Buyer.
As used herein, the term "control", "controlling" and
"controlled" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of
the management and policies of a person or party, whether
through the ownership of voting securities or voting
interests, by contract or otherwise.
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5.3 INDEMNIFICATION BY BUYER. Upon the terms and
subject to the conditions set forth in Sections 5.4 and 5.5
hereof and this Section 5.3, Buyer agrees to indemnify,
defend, protect, save and hold harmless Seller against, and
will reimburse Seller on demand for, any and all Losses made
or incurred by or asserted against Seller, at any time after
the Closing Date, directly or indirectly, arising out of,
related to, caused by, or resulting from any of the
following ("Buyer Indemnifiable Claims"):
(a) any and all Assumed Liabilities; or
(b) all warranties, liabilities or obligations to
customers or distributors with respect to the repair or
replacement of any finished products related to the
Business which are manufactured by Buyer after the
Closing Date, and all other liabilities or obligations
of Buyer arising out of or related to the Purchased
Assets and/or the Business that arise or occur after
the Closing Date to the extent such liabilities or
obligations do not constitute Excluded Liabilities; or
(c) any inaccuracy, omission, misrepresentation,
breach of warranty, or nonfulfillment of any term,
provision, covenant or agreement on the part of Buyer
contained herein or in any certificate or other
instrument furnished or to be furnished by Buyer to
Seller pursuant hereto.
5.4 LIMITATIONS ON INDEMNIFICATION. Rights to
indemnification under Section 5.2 or 5.3 hereof are subject
to the following limitations:
(a) No amount shall be payable by Seller in
indemnification under Section 5.2 hereof until and
unless the aggregate of all Losses incurred by all
Buyer Indemnitees with respect to one or more Seller
Indemnifiable Claims (other than Losses incurred by the
Buyer Indemnitees with respect to Seller Indemnifiable
Claims relating to any representation or warranty of
Seller set forth in Section 3.1(i), 3.2.1, 3.2.2, 3.5,
3.9.1, 3.10, 3.11, 3.12 or 3.20 hereof or to any
Excluded Liability (including, without limitation, any
Serious Environmental Condition)) shall exceed
$25,000.00 (the "Threshold"), in which event the Buyer
Indemnitees shall be entitled to indemnification under
Section 5.2 hereof for all such Losses (including
amounts up to the Threshold) incurred by all Buyer
Indemnitees with respect to all such Seller
Indemnifiable Claims up to an amount equal to the
Purchase Price.
(b) No amount shall be payable by Seller in
indemnification under Section 5.2 hereof with respect
to any Losses incurred by any Buyer Indemnitee with
respect to any Seller Indemnifiable Claim relating to
any representation or warranty of Seller set forth in
Section 3.1(iii), 3.3, 3.6, 3.8, 3.17, 3.18, 3.19, 3.23
or 3.24 hereof, which representations and warranties
shall be deemed to be conditions to the Closing and
shall not survive the Closing or the Closing Date. No
amount shall be payable by Seller in indemnification
under Section 5.2 hereof with respect to any Losses
incurred by any Buyer Indemnitee with respect to any
Seller Indemnifiable Claim relating to the adequacy or
validity of any easements associated with the Owned Gas
Pipeline.
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(c) With respect to any Losses incurred by any
Buyer Indemnitee with respect to any Seller
Indemnifiable Claim relating to any representation or
warranty of Seller set forth in Section 3.1(i), 3.2.1,
3.2.2, 3.5, 3.9.1, 3.10, 3.11, 3.12 or 3.20 hereof or
to any Excluded Liability (including, without
limitation, any Serious Environmental Condition), such
Buyer Indemnitee shall be entitled to indemnification
under Section 5.2 hereof for all such Losses incurred
by such Buyer Indemnitee with respect to such Seller
Indemnifiable Claim without limitation as to the amount
of such Losses.
(d) The obligations of Seller under Section 5.2
hereof with respect to any Losses incurred by any Buyer
Indemnitee with respect to any Seller Indemnifiable
Claim arising out of or relating to any breach of any
representation or warranty of Seller set forth in
Section 3.1(i), 3.2.1, 3.2.2, 3.5, 3.9.1, 3.10, 3.11 or
3.12 hereof, or to any Excluded Liability (other than
any Serious Environmental Condition), shall not expire.
(e) Subject to Section 5.4(h) hereof, the
obligations of Seller under Section 5.2 hereof with
respect to any Losses incurred by any Buyer Indemnitee
with respect to any Seller Indemnifiable Claim arising
out of or relating to any breach of any covenant or
agreement of Seller set forth in this Agreement shall
terminate upon expiration, if any, of such covenant or
agreement as provided herein.
(f) Subject to Section 5.4(h) hereof, the
obligations of Seller under Section 5.2 hereof with
respect to any Losses incurred by any Buyer Indemnitee
with respect to any Seller Indemnifiable Claim arising
out of or relating to any Serious Environmental
Condition, or to any breach of any representation or
warranty of Seller set forth in this Agreement (other
than any breach of any representation or warranty of
Seller set forth in Section 3.1(i), 3.1(iii), 3.2.1,
3.2.2, 3.3, 3.5, 3.6, 3.8, 3.9.1, 3.10, 3.11, 3.12,
3.17, 3.18, 3.19, 3.23 or 3.24 hereof), shall terminate
on the second anniversary of the Closing Date.
(g) Subject to Section 5.4(h) hereof, the
obligations of Buyer under Section 5.3 hereof with
respect to any Losses incurred by Seller with respect
to any Buyer Indemnifiable Claim arising out of or
relating to any breach of any representation or
warranty of Buyer contained in this Agreement shall
terminate on the second anniversary of the Closing
Date. The obligations of Buyer under Section 5.3
hereof with respect to any Losses incurred by Seller
with respect to any Buyer Indemnifiable Claim arising
out of or relating to any Assumed Liability, or to any
matter referred to in Section 5.3(b) hereof, shall not
expire. Subject to Section 5.4(h) hereof, the
obligations of Buyer under Section 5.3 hereof with
respect to any Losses incurred by Seller with respect
to any Buyer Indemnifiable Claim arising out of or
relating to any breach of any covenant or agreement of
Buyer set forth in this Agreement shall terminate upon
expiration, if any, of such covenant or agreement as
provided herein.
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(h) The foregoing provisions of this Section 5.4
notwithstanding, if, prior to the termination of any
obligation to indemnify, written notice of a Seller
Indemnifiable Claim or a Buyer Indemnifiable Claim, as
the case may be, is given by the party seeking
indemnification (the "Indemnified Party") to the party
from whom indemnification is sought (the "Indemnifying
Party"), or a suit or action based upon a Seller
Indemnifiable Claim or a Buyer Indemnifiable Claim, as
the case may be, is commenced against the Indemnifying
Party, the Indemnified Party shall not be precluded
from pursuing such claimed breach, occurrence, other
matter, or suit or action, or recovering from the
Indemnifying Party (whether through the courts or
otherwise) on the Seller Indemnifiable Claim or the
Buyer Indemnifiable Claim, as the case may be, by
reason of the termination otherwise provided for above
in this Section 5.4, if any.
5.5 CONDITIONS OF INDEMNIFICATION. With respect to
any actual or potential claim, any written demand, the
commencement of any action, or the occurrence of any other
event which involves any Seller Indemnifiable Claim or Buyer
Indemnifiable Claim (a "Claim"):
(a) Promptly after the President of the
Indemnified Party first receives written documents
pertaining to the Claim, or if such Claim does not
involve a third party Claim (a "Third Party Claim"),
promptly after the Indemnified Party first has actual
knowledge of such Claim, the Indemnified Party shall
give notice to the Indemnifying Party of such Claim in
reasonable detail and stating the amount involved, if
known, together with copies of any such written
documents.
(b) The obligation of the Indemnifying Party to
indemnify the Indemnified Party with respect to any
Claim shall not be affected by the failure of the
Indemnified Party to give the notice with respect
thereto in accordance with Section 5.5(a) hereof unless
the Indemnifying Party shall establish by clear and
convincing evidence that it has been irretrievably
prejudiced thereby.
(c) If the Claim involves a Third Party Claim,
then the Indemnifying Party shall have the right, at
its sole cost, expense and ultimate liability
regardless of the outcome, and through counsel of its
choice (which counsel shall be reasonably satisfactory
to the Indemnified Party), to litigate, defend, settle
or otherwise attempt to resolve such Third Party Claim;
provided, however, that if in the Indemnified Party's
reasonable judgment a conflict of interest may exist
between the Indemnified Party and the Indemnifying
Party with respect to such Third Party Claim, then the
Indemnified Party shall be entitled to select counsel
of its own choosing, reasonably satisfactory to the
Indemnifying Party, in which event the Indemnifying
Party shall be obligated to pay the fees and expenses
of such counsel. Notwithstanding the preceding
sentence, the Indemnified Party may elect, at any time
and at the Indemnified Party's sole cost, expense and
ultimate liability, regardless of the outcome, and
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through counsel of its choice, to litigate, defend,
settle or otherwise attempt to resolve such Third Party
Claim. If the Indemnified Party so elects (for reasons
other than the Indemnifying Party's failure or refusal
to provide a defense to such Third Party Claim), then
the Indemnifying Party shall have no obligation to
indemnify the Indemnified Party with respect to such
Third Party Claim, but such disposition will be without
prejudice to any other right the Indemnified Party may
have to indemnification under Section 5.2 or 5.3
hereof, regardless of the outcome of such Third Party
Claim. If the Indemnifying Party fails or refuses to
provide a defense to any Third Party Claim, then the
Indemnified Party shall have the right to undertake the
defense, compromise or settlement of such Third Party
Claim, through counsel of its choice, on behalf of and
for the account and at the risk of the Indemnifying
Party, and the Indemnifying Party shall be obligated to
pay the costs, expenses and attorney's fees incurred by
the Indemnified Party in connection with such Third
Party Claim. In any event, Seller and the Buyer
Indemnitees shall fully cooperate with each other and
their respective counsel in connection with any such
litigation, defense, settlement or other attempted
resolution.
5.6 BUYER'S RIGHT OF WITHHOLDING AND OFFSET.
5.6.1 In addition to any other rights of the
Buyer Indemnitees, if any Seller Indemnifiable Claim
remains unresolved as between Buyer and Seller on any
date on which any payment of any amount is otherwise
due and payable by Buyer hereunder, then Buyer shall be
entitled to withhold payment of any such amount that is
otherwise due and payable hereunder up to an aggregate
amount equal to the estimated Losses with respect to
all such unresolved Seller Indemnifiable Claims until
the earlier of (i) such time as such Seller has paid
all such unresolved Seller Indemnifiable Claims in full
or otherwise corrected or remedied all such unresolved
Seller Indemnifiable Claims to the reasonable
satisfaction of Buyer or (ii) final adjudication
(including appeals) by a court of competent
jurisdiction; provided, however, that Seller does not
waive any of its rights against wrongful withholding.
5.6.2 Upon a final determination (by a court of
competent jurisdiction or otherwise by agreement of
Buyer and Seller) of the value of any Seller
Indemnifiable Claim, Buyer shall be entitled to an
offset and credit against the unpaid payments hereunder
in an aggregate amount equal to the value of such
Seller Indemnifiable Claim.
6. OTHER COVENANTS AND AGREEMENTS.
6.1 RESTRICTIVE COVENANTS.
6.1.1 CUSTOMER RESTRICTION. Subject to Section
6.1.4 hereof, Seller covenants and agrees that it shall
not, for a period of five years from and after the
Closing Date, working alone or in conjunction with one
or more other
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persons or entities, for compensation or not, (i)
provide or offer to provide to any Customer (as such
term is hereinafter defined) any clay brick product, or
(ii) induce or attempt to induce any Customer to
withdraw, curtail or cancel such business with Buyer or
any of its subsidiaries or affiliates or in any manner
modify or fail to enter into any such actual or
potential business relationship with Buyer or any of
its subsidiaries or affiliates. As used in this
Section 6.1, the term "Customer" means any person or
entity for whom Seller provided clay brick product on
or prior to the Closing Date. As used in this Section
6.1, the term "Vendor" means any third party selling or
licensing a product or service to a Customer or to the
Business on or prior to the Closing Date.
6.1.2 NON-RAID. Subject to Section 6.1.4 hereof,
Seller covenants and agrees that it shall not, for a
period of five years from and after the Closing Date,
working alone or in conjunction with one or more other
persons or entities, for compensation or not, (i)
recruit or otherwise solicit or induce any person or
entity who is, on the Closing Date or thereafter, an
employee or Vendor of the Business to terminate their
employment with, or otherwise cease or reduce their
relationship with, the Business, Buyer or any of its
subsidiaries or affiliates, or (ii) recruit or
otherwise solicit any person or entity who, within the
six months immediately preceding the Closing Date, had
been an employee or Vendor of the Business.
6.1.3 NONCOMPETITION. Subject to Section 6.1.4
hereof, Seller covenants and agrees that it shall not,
for a period of five years from and after the Closing
Date, working alone or in conjunction with one or more
other persons or entities, for compensation or not,
permit Seller's name to be used by or engage in or
carry on, directly or indirectly, either for itself or
as a member of a partnership or other entity or as a
stockholder, investor, agent, associate or consultant
of any person, partnership, corporation or other entity
(other than Buyer or a subsidiary or affiliate of
Buyer), the business of manufacturing, storing,
delivering, selling, supplying or distributing clay
brick products (but only for as long as such business
is carried on by (i) Buyer and/or any of its
subsidiaries or affiliates or (ii) any person,
corporation, partnership, trust or other organization
or entity deriving title from Buyer and/or any of its
subsidiaries or affiliates to the assets and goodwill
of such business) in any county in any state of the
United States in which Buyer or any of its subsidiaries
or affiliates conducts such business, or in any other
county in each state of the United States. The parties
intend that the covenants contained in this Section
6.1.3 shall be deemed to be a series of separate
covenants, one for each county in each state of the
United States and, except for geographic coverage, each
such separate covenant shall be identical in terms to
the covenant contained in this Section 6.1.3.
6.1.4 Notwithstanding anything to the contrary
contained herein, the covenants set forth in Sections
6.1.1, 6.1.2 and 6.1.3 hereof shall terminate in the
event of a Change of Control (as such term is
hereinafter defined). For
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purposes of this Section 6.1, a "Change in Control"
shall be deemed to have occurred if any one of the
following shall have occurred: (i) there is
consummated a merger, consolidation or reorganization
of Seller, other than a merger, consolidation or
reorganization which would result in the voting
securities of Seller outstanding immediately prior to
such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted
into voting securities of the surviving entity or any
parent thereof) at least 50% of the combined voting
power of the securities of Seller or such surviving
entity or any parent thereof outstanding immediately
after such merger, consolidation or reorganization; or
(ii) the stockholders of Seller approve a plan of
complete liquidation or dissolution of Seller or there
is consummated an agreement for the sale or disposition
by Seller of all or substantially all of Seller's
assets, other than a sale or disposition by Seller of
all or substantially all of Seller's assets to an
entity at least 50% of the combined voting power of the
voting securities of which are owned by stockholders of
Seller immediately prior to such sale.
6.1.5 REFORMATION. If, in any judicial
proceeding, the court shall refuse to enforce any of
the separate covenants contained in Section 6.1.1,
6.1.2 or 6.1.3 hereof because the time limit is too
long, then it is expressly understood and agreed
between the parties hereto that for purposes of such
proceeding such time limitation shall be deemed reduced
to the extent necessary to permit enforcement of such
covenants. If, in any judicial proceeding, the court
shall refuse to enforce any of the separate covenants
contained in Section 6.1.1, 6.1.2 or 6.1.3 hereof
because it is more extensive (whether as to geographic
area, scope of business or otherwise) than necessary to
protect the business and goodwill of Buyer, then it is
expressly understood and agreed between the parties
hereto that for purposes of such proceeding the
geographic area, scope of business or other aspect
shall be deemed reduced to the extent necessary to
permit enforcement of such covenants.
6.1.6 INJUNCTIVE RELIEF. Seller acknowledges
that a breach of Section 6.1.1, 6.1.2 or 6.1.3 hereof
would cause irreparable damage to Buyer, and in the
event of its actual or threatened breach of the
provisions of Section 6.1.1, 6.1.2 or 6.1.3 hereof,
Buyer shall be entitled to a temporary restraining
order and an injunction restraining Seller from
breaching such covenants without the necessity of
posting bond or proving irreparable harm, such being
conclusively admitted by Seller. Nothing shall be
construed as prohibiting Buyer from pursuing any other
available remedies for such breach or threatened
breach, including the recovery of damages from Seller.
Seller acknowledges that the restrictions set forth in
Sections 6.1.1, 6.1.2 and 6.1.3 hereof are reasonable
in scope and duration, given the nature of the business
of Buyer.
6.2 CONDUCT OF THE BUSINESS.
6.2.1 AFFIRMATIVE COVENANTS. On and after the
date hereof and until the Closing Date or the date, if
any, on which this Agreement is earlier
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terminated and abandoned pursuant to Section 8 hereof
(the "Termination Date"), Seller shall:
(i) conduct the operations of the Business
according to its ordinary and usual course of
business consistent with past practice; and
(ii) use its best efforts to preserve intact
the Business' organization and goodwill, to keep
available the services of its employees, and to
maintain satisfactory relationships with
suppliers, distributors, licensors, licensees,
customers, employees and others having business
relationships with the Business.
6.2.2 NEGATIVE COVENANTS. Without limiting the
generality of the foregoing, and except for actions to
be taken in connection with any of the transactions
contemplated hereby, without Buyer's prior written
consent, Seller shall not, on or after the date hereof
and until the earlier of the Closing Date or the
Termination Date:
(i) make any material change in the conduct
of the Business or enter into any transaction
other than in the ordinary course of business
consistent with past practice;
(ii) make any sale, transfer, or other
conveyance of the Purchased Assets or any part
thereof, except transactions pursuant to Contracts
and dispositions of inventory or worn-out or
obsolete equipment and machinery for fair or
reasonable value in the ordinary course of
business consistent with past practice;
(iii) subject any of the Purchased Assets to
any Encumbrance (other than under existing banking
arrangements);
(iv) take any action that would cause any of
the representations and warranties made by it in
this Agreement not to remain true and correct; or
(vi) commit to do any of the foregoing.
6.3 CONSENTS AND APPROVALS. Seller shall, at its cost
and expense, use its reasonable efforts to obtain all
necessary authorizations, consents, waivers, estoppel
certificates and approvals of all governmental and
regulatory authorities, and of all other persons or entities
required in connection with the execution, delivery and
performance by Seller of this Agreement (including, without
limitation, obtaining all authorizations, consents, waivers,
estoppel certificates and approvals as may be required in
connection with the assignment of the Leases and of those
Contracts to be assigned to Buyer pursuant hereto). Each
party shall reasonably assist and cooperate with the other
party in preparing and filing all documents, including
permit, transfers,
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modifications and applications required to be submitted by
the other to any governmental or regulatory authority, in
connection with such transactions and in obtaining any
governmental consents, waivers, authorizations, estoppel
certificates or approvals which may be required to be
obtained in connection with such transactions (which
assistance and cooperation shall include without limitation
timely furnishing to the other party all information
concerning such party that counsel to the other party
reasonably determines is required to be included in such
documents or would be helpful in obtaining any such consent,
waiver, estoppel certificate, novation, authorization or
approval).
6.4 ACCESS TO PROPERTIES AND RECORDS. Seller shall
afford to Buyer, and to the accountants, counsel,
prospective lenders, agents and representatives of Buyer,
upon reasonable notice, full access during normal business
hours, throughout the period from the date hereof through
the earlier of the Closing Date or the Termination Date, to
the Business and all properties, books, Leases, Contracts
and files and records (including but not limited to tax
returns and correspondence with accountants) of Seller
relating to the Business and, during such period, shall
furnish promptly to Buyer all other information concerning
the Business and its properties and personnel as Buyer may
reasonably request; provided, however, that no investigation
or receipt of information pursuant to this Section 6.4 shall
qualify any representation or warranty of Seller or the
conditions to the obligations of Buyer. In addition to the
foregoing, Seller shall provide to Buyer all environmental
studies and reports pertaining to the Business or the
Purchased Assets and Seller acknowledges that Buyer's
investigation pursuant to this Section 6.4 may include,
without limitation, (i) testing of the soil, groundwater,
building components, tanks and other equipment, and (ii)
contacting present and potential customers and conducting
such due diligence investigation relating to such customer
relations as Buyer deems reasonably necessary or
appropriate.
6.5 ACQUISITION PROPOSALS. Until the earlier of the
Closing Date or the Termination Date, Seller shall not,
directly or indirectly, through any officer, director,
agent, representative (including, without limitation,
investment bankers, attorneys and accountants) or otherwise,
(i) solicit, initiate or encourage submission of inquiries,
proposals or offers from any person, corporation,
partnership or other entity or group other than Buyer (a
"Third Party"), relating to any acquisition or purchase of
all or a portion of the Purchased Assets; or (ii)
participate in any discussions or negotiations regarding, or
furnish to any Third Party any information with respect to,
or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or
attempt by any Third Party to do or seek any of the
foregoing. Seller shall promptly notify Buyer if any such
proposal or offer, or any inquiry or contact with any Third
Party with respect thereto, is made, and shall in any such
notice set forth in reasonable detail the identity of the
Third Party and the terms and conditions of such inquiry,
proposal or offer.
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6.6 PUBLIC ANNOUNCEMENTS. On or after the date
hereof, and until the earlier of the Closing Date or the
Termination Date, neither party shall furnish any written
communication to the Business' suppliers, partners,
customers, creditors or to the public generally if the
subject matter thereof relates to the transactions
contemplated hereby without the prior approval of the other
party as to the content thereof; provided, however, that the
foregoing shall not be deemed to prohibit disclosures
pursuant to the proxy statement referred to in Section 1.5
hereof or any disclosure required by any applicable law or
by any governmental authority having jurisdiction over such
matters.
6.7 NOTIFICATION OF CERTAIN MATTERS. Seller shall
give prompt notice to Buyer, and Buyer shall give prompt
notice to Seller, of (i) the occurrence, or failure to
occur, of any event which occurrence or failure would be
likely to cause any representation or warranty of such party
contained herein to be untrue or inaccurate in any material
respect at any time from the date hereof to the Closing
Date; and (ii) any material failure of Seller or of Buyer,
as the case may be, or of any officer, director, employee or
agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by
it hereunder.
6.8 EXECUTION OF ADDITIONAL DOCUMENTS. Each party
hereto will at any time, and from time to time after the
Closing Date, upon request of the other party hereto,
execute, acknowledge and deliver, without payment, all such
further deeds, assignments, transfers, conveyances, powers
of attorney and assurances, and take all such further
action, as may be required to carry out or effectuate the
intentions and purposes of this Agreement, and to transfer
and vest title to any Purchased Asset being transferred
hereunder, and to protect the right, title and interest in
and enjoyment of all of the Purchased Assets sold, granted,
assigned, transferred, delivered and conveyed pursuant
hereto; provided, however, that this Agreement shall be
effective regardless of whether any such additional
documents are executed.
6.9 COSTS AND EXPENSES. Except as otherwise provided
herein, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such costs and
expenses.
6.10 TRANSFER TAXES. Except as otherwise provided
herein, any and all sales, use, transfer or similar Taxes
("Transfer Taxes") which result from the transfer of the
Purchased Assets, Assumed Liabilities or the Business
pursuant to this Agreement shall be borne 50% by Seller and
50% by Buyer. The parties shall prepare and file any related
tax returns required to be filed in connection with the
payment of such Transfer Taxes on a timely basis. After the
Closing Date, each party shall, upon the request of the
other party, promptly reimburse such other party for any
Transfer Taxes or related expenses for which it is
responsible under this Agreement but which have been paid by
such other party.
6.11 COOPERATION ON TAX MATTERS; BUSINESS RECORDS.
Buyer and Seller agree to furnish or cause to be furnished
to each other, as promptly as practicable, such information
and assistance relating to the Business as is reasonably
necessary for the preparation and filing of any return,
claim for refund or other required or optional filings
relating to Tax matters, for the preparation for and proof
of facts during any tax audit, for the preparation for any
Tax protest, for the prosecution or defense of any suit or
other proceeding relating to Tax matters and for the answer
to any governmental or regulatory inquiry relating to Tax
matters.
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Buyer agrees to retain possession of all accounting,
business, financial and Tax records and information (i)
relating to the Business in existence on the Closing Date
transferred to Buyer hereunder and (ii) coming into
existence after the Closing Date which relate to the
Business prior to or on the Closing Date, for the period not
to exceed six years from the Closing Date. In addition,
from and after the Closing Date, Buyer agrees that it will
not unreasonably withhold access by Seller and its
attorneys, accountants and other representatives (after
reasonable notice and during normal business hours and with
reasonable charge), to such personnel, books, records,
documents and any or all other information relating to the
Business as Seller may reasonably deem necessary to properly
prepare for, file, prove, answer, prosecute and/or defend
any such Tax return, filing, audit, protest, claim, suit,
inquiry or other proceeding. Such access shall include
without limitation access to any computerized information
retrieval systems relating to the Business.
6.12 ALLOCATION OF TOTAL PURCHASE PRICE. On or prior
to the Closing Date, Buyer and Seller shall prepare a
mutually agreeable preliminary allocation of the estimated
final Purchase Price to be determined pursuant to Section
2.2 hereof and the Assumed Liabilities among the Purchased
Assets (any agreed allocation hereinafter referred to as the
"Agreed Allocation"). A copy of the Agreed Allocation with
respect to the Owned Real Property will also be delivered to
the Title Company (as such term is hereinafter defined) and
will constitute the agreement of Buyer and Seller with
respect to the insurable value of each tract of Owned Real
Property for purposes of the applicable Owners Title Policy
(as such term is hereinafter defined). Buyer and Seller
agree that the final allocation shall be made pursuant to
the following procedure: after determination of the final
Purchase Price pursuant to Section 2.2 hereof, Buyer shall
deliver to Seller an allocation of such final Purchase Price
and the Assumed Liabilities among the Purchased Assets.
Seller shall accept and agree to such allocation by Buyer
unless such allocation is manifestly unreasonable in light
of the preliminary Allocation referred to above, in which
case Seller shall deliver written notice to Buyer within 30
days after Seller's receipt thereof. If Seller so objects
to such allocation, then Seller and Buyer shall prepare
separate allocations of the final Purchase Price and Assumed
Liabilities among the Purchased Assets. Buyer and Seller
agree to act in accordance with the Agreed Allocation, if
any, in any tax returns or similar filings. All fees and
expenses relating to the Agreed Allocation shall be borne
equally by the parties. In the event that any Tax authority
disputes the Agreed Allocation, Seller or Buyer, as the case
may be, shall promptly notify the other party of the nature
of such dispute.
6.13 PRORATION OF PROPERTY TAXES. Ad valorem real
property and personal property Taxes and assessments on the
Purchased Assets shall be prorated between Buyer and Seller
as of the Closing Date. All such prorations shall be
allocated so that items relating to time periods ending on
or prior to the Closing Date shall be allocated to Seller
and items relating to time periods beginning after the
Closing Date shall be allocated to Buyer. The amount of all
such prorations shall be settled and paid on the Closing
Date based on assessed values, provided that final payments
with respect to prorations that are not able to be
calculated as of the Closing Date shall be calculated and
paid as soon as practicable thereafter.
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6.14 OFFERS OF EMPLOYMENT. Buyer may, but shall not be
required to, offer employment to individuals who are
employees of the Business on or prior to the Closing Date,
on wages, terms and conditions and in accordance with hiring
practices determined in Buyer's sole discretion. Seller
shall cooperate with all requests made by Buyer for the
purpose of facilitating Buyer's hiring of such employees.
For purposes of this Agreement, "Transferred Employees"
shall mean all such employees to whom employment is offered
as provided above and who accept employment with Buyer,
including without limitation those on medical, disability or
other leave of absence, provided that employees on leave
shall not be considered Transferred Employees until the date
on which each such employee is released by the employee's
physician to return to work and the employee actually
returns to work. Buyer shall provide health insurance to
all Transferred Employees in accordance with Buyer's current
health insurance policies, and, in connection therewith, (i)
with respect to any length of service requirements
applicable to such policies, Buyer shall credit each
Transferred Employee with the number of days such
Transferred Employee was employed by Seller and (ii) Buyer
shall waive any pre-existing condition exclusions applicable
to any Transferred Employee who was covered under Seller's
health insurance policy. Should any liability occur as a
result of the failure to give any required notice under the
Worker Adjustment and Retraining Notification Act, Buyer
assumes all responsibility and liability for any wages and
benefits for employees of the Business who did not receive
any such required notice or for civil penalties by local
governments which may be imposed for failure to give advance
notice under the Worker Adjustment and Retraining
Notification Act, including without limitation fines and
attorneys' fees. Nothing herein expressed or implied shall
confer upon any Transferred Employee or other employee or
former employee of Seller or legal representatives thereof,
any rights or remedies, including without limitation any
right to employment or continued employment for any
specified period, of any nature or kind whatsoever, or any
right to specific terms or conditions of employment
(including rate of pay, fringe benefits or position) under
or by reason of this Agreement.
6.15 TITLE COMMITMENTS, TITLE POLICIES AND SURVEYS COVERING
OWNED REAL PROPERTY.
6.15.1 With respect to each of the Owned Real
Properties, Seller, at its sole cost and expense, has
delivered or caused to be delivered to Buyer (i) a
commitment for title insurance (a "Title Commitment")
in a preliminary amount set forth therein and from East
Texas Title Company (the "Title Company") setting forth
the status of the title of such Owned Real Property and
showing all Encumbrances and other matters of record
affecting such Owned Real Property and all improvements
thereon; and (ii) a true, complete and legible copy of
all documents referred to in such Title Commitment.
6.15.2 Seller, at its sole cost and expense, has
delivered or caused to be delivered to Buyer a current
on the ground survey for each Owned Real Property (a
"Survey") consisting of plats and filed notes prepared
by licensed surveyors (together with a computer file of
each Survey using Autocad Version 13).
6.15.3 Prior to the Closing, Seller, at its sole
cost and expense, shall be obligated to cure, release
or remove all Encumbrances reflected on Schedule 6.15
hereof against the Owned Real Property.
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6.15.4 At the Closing, Seller shall deliver or
cause to be delivered to Buyer a Texas Standard Form
Owner's Policy of Title Insurance (the "Owners Title
Policy") in the amount for each tract of Owned Real
Property which is specified in the Agreed Allocation
and issued through the Title Company pursuant to the
applicable Title Commitment, subject only to such
Encumbrances (but excluding the Encumbrances referred
to in Schedule 6.15 hereof) set forth in the Title
Commitment. Seller shall pay the premium for such
insurance and Buyer shall pay for any survey
endorsement. At the Closing, Seller shall deliver or
cause to be delivered to Buyer executed special
warranty deeds with respect to each of the Owned Real
Properties, in form and substance reasonably
satisfactory to Buyer and its counsel. Seller shall
reimburse Buyer for 50% of all costs and expenses
incurred by Buyer in connection with the recording of
such special warranty deeds.
6.16 ENVIRONMENTAL INFORMATION. Until the earlier of
the Closing Date or the Termination Date and for a period of
two years after the Closing Date, Seller shall, within 30
days after its receipt, provide to Buyer copies of any and
all documents, records and information that come into
Seller's possession or control subsequent to the date hereof
concerning Environmental Conditions and/or Serious
Environmental Conditions relevant to any Site or any
facilities or operations thereon, whether generated by
Seller or others, including without limitation environmental
audits, environmental risk assessments, or site assessments
of any Site and/or adjacent property or other property in
the vicinity of any Site owned or operated by Seller
relating to the Business prior to the Closing Date,
documentation regarding any on-site or off-site Release of
Hazardous Materials, spill control plans, permits or
registrations and related compliance, and environmental
agency reports and correspondence. For a period of two
years after the Closing Date, Buyer shall provide to Seller
copies of any and all documents, records and information
that come into Buyer's possession or control subsequent to
the Closing Date concerning Serious Environmental Conditions
relevant to any Site or any facilities or operations
thereon, whether generated by Buyer or others.
7. CONDITIONS OF CLOSING.
7.1 BUYER'S CONDITIONS OF CLOSING. The obligation of
Buyer to purchase and pay for the Purchased Assets and to
assume the specified liabilities and obligations set forth
herein shall be subject to and conditioned upon, at Buyer's
option, the satisfaction at the Closing of each of the
following conditions:
7.1.1 The holders of shares of the issued and
outstanding capital stock of Seller shall have duly
adopted and approved this Agreement and all
transactions contemplated hereby in accordance with the
requirements of Delaware law and the certificate of
incorporation and by-laws, as amended to the date
hereof, of Seller.
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7.1.2 All representations and warranties of
Seller contained herein shall be true and correct at
and as of the Closing Date with the same effect as
though made as of the Closing Date (except for the
failure of any such representation or warranty to be
true and correct at and as of the Closing Date
resulting from a reduction in Seller's sales to current
distributors or other material changes in the
relationship or business conduct between Seller and its
current distributors) and Seller shall have performed
all agreements and covenants and satisfied all
conditions on its part to be performed or satisfied by
the Closing Date pursuant to the terms hereof, and
Buyer shall have received a certificate of Seller,
signed by an authorized officer of Seller and dated the
Closing Date, to both such effects.
7.1.3 As of the Closing, there shall have been no
material adverse change since July 31, 1998 in the
financial condition, business or affairs of the
Business and/or the Purchased Assets (except for any
such change resulting from a reduction in Seller's
sales to current distributors or other material changes
in the relationship or business conduct between Seller
and its current distributors), and the Business and/or
the Purchased Assets shall not have suffered any
material loss (whether or not insured) by reason of
physical damage caused by fire, earthquake, accident or
other calamity which substantially affects the value of
the Business and/or the Purchased Assets, and Buyer
shall have received a certificate of Seller, signed by
the President of Seller and dated the Closing Date, to
both such effects.
7.1.4 Seller shall have obtained all
authorizations, consents, waivers, estoppel
certificates and approvals as may be required in
connection with the assignment of the Leases and of
those Contracts to be assigned to Buyer pursuant hereto
upon terms acceptable to Buyer in its sole discretion.
7.1.5 The Encumbrances reflected in Schedule 3.12
and Schedule 6.15 hereof shall have been cured,
removed, discharged, released or terminated pursuant to
documents in form and substance reasonably acceptable
to Buyer and its counsel.
7.1.6 Seller shall have executed and delivered to
Buyer (i) the Bill of Sale, Assignment and Assumption
Agreement, (ii) a special warranty deed in form and
content reasonably satisfactory to Buyer relating to
each tract of the Owned Real Property, and (iii) and
such other bills of sale, deeds, instruments of
assignment and other appropriate documents as may be
reasonably requested by Buyer in order to carry out the
intentions and purposes hereof.
7.1.7 Seller shall have delivered or caused to be
delivered to Buyer an Owners Title Policy for each
tract of the Owned Real Property in accordance with
Section 6.15.4 hereof.
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<PAGE>
7.1.8 Seller shall have delivered to Buyer a
certificate, dated the Closing Date, of Seller's
corporate Secretary certifying:
(i) Resolutions of its Board of Directors
approving and adopting this Agreement and all
transactions contemplated hereby and authorizing
Seller's execution, performance and delivery of
this Agreement and all agreements, documents and
transactions contemplated hereby; and
(ii) The incumbency of its officers
executing this Agreement and all agreements and
documents contemplated hereby.
7.1.9 The approvals and all consents from third
parties and governmental agencies required to
consummate the transactions contemplated hereby shall
have been obtained (including, without limitation, all
approvals for transfer of any air permits relating to
facilities utilized by the Business).
7.1.10 No suit, action, investigation, inquiry or
other proceeding by any governmental or regulatory
authority shall have been instituted or threatened
which questions the validity or legality of the
transactions contemplated hereby.
7.1.11 There shall be no effective injunction,
writ, preliminary restraining order or any order of any
nature issued by a court of competent jurisdiction
directing that the transactions provided for herein or
any of them not be consummated as so provided or
imposing any conditions on the consummation of the
transactions contemplated hereby, which is unduly
burdensome on Buyer.
7.1.12 Buyer shall have received from Arter &
Hadden LLP, counsel for Seller, an opinion, dated as of
the Closing Date, in the form attached hereto as
Exhibit "B".
7.2 SELLER'S CONDITIONS OF CLOSING. The obligation of
Seller to sell, grant, convey, assign, transfer and deliver
the Purchased Assets shall be subject to and conditioned
upon, at Seller's option, the satisfaction at the Closing of
each of the following conditions:
7.2.1 The holders of shares of the issued and
outstanding capital stock of Seller shall have duly
adopted and approved this Agreement and all
transactions contemplated hereby in accordance with the
requirements of Delaware law and the certificate of
incorporation and by-laws, as amended to the date
hereof, of Seller.
7.2.2 All representations and warranties of Buyer
contained herein shall be true and correct at and as of
the Closing Date with the same effect as though made as
of the Closing Date and Buyer shall have performed all
agreements and covenants and satisfied all conditions
on its part to be performed or satisfied by the Closing
Date pursuant to the terms hereof, and Seller shall
have received a certificate of Buyer, signed by an
authorized officer of Buyer and dated the Closing Date,
to both such effects.
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<PAGE>
7.2.3 Seller shall have received the Initial
Payment in accordance with Section 2.1.2 hereof.
7.2.4 Buyer shall have executed and delivered the
Bill of Sale, Assignment and Assumption Agreement.
7.2.5 Buyer shall have delivered to Seller a
certificate, dated the Closing Date, of Buyer's
corporate Secretary certifying:
(i) Resolutions of its Board of Directors
adopting and approving this Agreement and all
transactions contemplated hereby and authorizing
Buyer's execution, performance and delivery of
this Agreement and all agreements, documents and
transactions contemplated hereby; and
(ii) The incumbency of its officers
executing this Agreement and all agreements and
documents contemplated hereby.
7.2.7 The approvals and all consents from third
parties and governmental agencies required to
consummate the transactions contemplated hereby shall
have been obtained (including, without limitation, all
approvals for transfer of any air permits relating to
facilities utilized by the Business).
7.2.8 No suit, action, investigation, inquiry or
other proceeding by any governmental or regulatory
authority shall have been instituted or threatened
which questions the validity or legality of the
transactions contemplated hereby.
7.2.9 There shall be no effective injunction,
writ, preliminary restraining order or any order of any
nature issued by a court of competent jurisdiction
directing that the transactions provided for herein or
any of them not be consummated as so provided or
imposing any conditions on the consummation of the
transactions contemplated hereby, which is unduly
burdensome on Seller.
7.2.10 Seller shall have received from Kelly,
Hart & Hallman, a professional corporation, counsel for
Buyer, an opinion, dated as of the Closing Date, in the
form attached hereto as Exhibit "C".
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<PAGE>
8. TERMINATION AND ABANDONMENT.
8.1 REASONS FOR TERMINATION. Anything herein or
elsewhere to the contrary notwithstanding, this Agreement
may be terminated and abandoned at any time after the date
hereof but not later than the Closing:
8.1.1 by the mutual consent of Seller and Buyer;
or
8.1.2 by Buyer at any time after December 31,
1998 if, by that date, the conditions set forth in
Section 7.1 hereof shall not have been fulfilled or
waived; or
8.1.3 by Seller at any time after December 31,
1998 if, by that date, the conditions set forth in
Section 7.2 hereof shall not have been fulfilled or
waived; or
8.1.4 by Buyer at any time if there has been a
material adverse change since July 31, 1998 in the
business, financial condition, or results of operations
of the Business and/or the Purchased Assets (except for
any such change resulting from a reduction in Seller's
sales to current distributors or other material changes
in the relationship or business conduct between Seller
and its current distributors); or
8.1.5 by Buyer or by Seller at any time if there
has been a material breach of any representation or
warranty made by the other party herein or in any
certificate or other document delivered pursuant hereto
or if there has been any failure by the other party to
perform in all material respects all obligations or to
comply with all covenants on its part to be performed
hereunder.
8.2 PROCEDURE UPON AND EFFECT OF TERMINATION. In the
event of any termination and abandonment pursuant to Section
8.1 hereof, written notice thereof shall forthwith be given
to the other party and the transactions contemplated hereby
shall thereupon be terminated and abandoned, without further
action by Buyer or by Seller, and there shall be no
liability on the part of either Seller or Buyer or their
respective officers, directors or shareholders, except for
the material breach of any representation, warranty or
covenant contained herein that is within the control of the
party in breach.
9. MISCELLANEOUS.
9.1 NOTICES. Any notice, consent, approval, request,
demand, declaration or other communication required
hereunder shall be in writing to be effective and shall be
given and shall be deemed to have been given if (i)
delivered in person with receipt acknowledged, (ii) telexed
or telecopied and electronically confirmed, (iii) deposited
in the custody of a nationally recognized overnight courier
for next day delivery, or (iv) placed in the federal mail,
postage prepaid, certified or registered mail, return
receipt requested, in each case addressed as follows:
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<PAGE>
If to Buyer:
Acme Brick Company
2821 West Seventh Street
Fort Worth, Texas 76107
Attention: Edward L. Stout, President
Facsimile #: 817/390-2404
Confirming #: 817/390-2406
Copy to:
Wayne B. Whitham, Esq.
Kelly, Hart & Hallman, a professional corporation
201 Main Street
Suite 2500
Fort Worth, Texas 76102
Facsimile #: 817/878-9280
Confirming #: 817/878-3554
If to Seller:
Temtex Industries, Inc.
5400 LBJ Freeway
Suite 1375
Dallas, Texas 75240
Attention: E. R. Buford, President and Chief
Executive Officer
Facsimile #: 972/726-0315
Confirming #: 972/726-7175
and, prior to the Closing,
Texas Clay Industries
P.O. Box 469
700 West Bartlett Street
Malakoff, Texas 75148
Attention: Maury Ward, President
Facsimile #: 903/489-2480
Confirming#: 903/489-1331
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<PAGE>
Copy to:
Stanley R. Huller, Esq.
Arter & Hadden LLP
1717 Main Street, Suite 4100
Dallas, Texas 75201-4605
Facsimile #: 214/741-7139
Confirming #: 214/761-2100
or at such other address as may be substituted by giving the
other parties not fewer than five business days' advance
written notice of such change of address in accordance with
the provisions hereof. The giving of any notice required
hereunder may be waived in writing by the party entitled to
receive such notice. Every notice, demand, request, consent,
approval, declaration or other communication hereunder shall
be deemed to have been duly served, delivered and received
on the date on which personally delivered with receipt
acknowledged or telecopied or telexed and electronically
confirmed, or 48 hours after being deposited into the
custody of a nationally recognized overnight courier for
next day delivery, or five business days after the same
shall have been placed in the federal mail as aforesaid.
Failure or delay in delivering copies of any consent,
notice, demand, request, approval, declaration or other
communication to the persons designated above to receive
copies shall in no way adversely affect the effectiveness of
such notice, demand, request, consent, approval, declaration
or other communication.
9.2 BINDING EFFECT; BENEFITS. This Agreement shall be
binding upon and shall inure to the benefit of the parties
and their respective successors and permitted assigns.
Notwithstanding anything contained herein to the contrary,
nothing in this Agreement, expressed or implied, is intended
to confer on any person (other than the parties hereto, the
Buyer Indemnitees (but only with respect to Section 5
hereof), or their respective successors and permitted
assigns) any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
9.3 ENTIRE AGREEMENT. This Agreement, together with
the Exhibits, Schedules and other agreements and documents
contemplated hereby, constitutes the final written
expression of all of the agreements between the parties, and
is a complete and exclusive statement of those terms.
Except as specifically included or referred to herein, this
Agreement and the Exhibits, Schedules and other agreements
and documents contemplated hereby supersede all prior
understandings, negotiations and agreements concerning the
matters specified herein. Any representations, promises,
warranties or statements made by any party that differ in
any way from the terms of this written Agreement, and the
Exhibits, Schedules and other agreements and documents
contemplated hereby, shall be given no force or effect
(except as specifically included or referred to herein).
The parties specifically represent, each to the others, that
there are no additional or supplemental agreements between
them related in any way to the matters herein contained
unless specifically included or referred to herein.
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<PAGE>
At any time before or after approval and adoption of
this Agreement by the stockholders of Seller and prior to
the Closing, this Agreement may be amended or supplemented
in writing by an affirmative action of the President of
Seller and the President of Buyer with respect to any of the
terms contained herein except to the extent approval of
Seller's stockholders would otherwise be required under any
applicable law.
9.4 GOVERNING LAW. THIS AGREEMENT, AND ALL QUESTIONS
RELATING TO ITS VALIDITY, INTERPRETATION, PERFORMANCE AND
ENFORCEMENT (INCLUDING, WITHOUT LIMITATION, PROVISIONS
CONCERNING LIMITATIONS OF ACTION), SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
(EXCLUSIVE OF THE CONFLICT OF LAW PROVISIONS THEREOF)
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE.
THIS AGREEMENT HAS BEEN EXECUTED, ACCEPTED AND
DELIVERED AND IS PERFORMABLE IN TARRANT COUNTY, TEXAS, AND
VENUE IN ANY SUIT, PROCEEDING OR ACTION ARISING OUT OF OR
INVOLVING THIS AGREEMENT SHALL BE IN TARRANT COUNTY, TEXAS.
9.5 COUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same
instrument; but in making proof of this Agreement, it shall
not be necessary to produce or account for more than one
such counterpart. It is not necessary that each party
execute the same counterpart, so long as identical
counterparts are executed by all parties. Executed
signature pages to any counterpart instrument may be
detached and affixed to a single counterpart, which single
counterpart with multiple signature pages affixed thereto
constitutes an original counterpart instrument. All such
counterpart signature pages shall be read as though one and
they shall have the same force and effect as if all of the
parties had executed a single signature page.
9.6 HEADINGS. Headings of the Sections of this
Agreement are for the convenience of reference only, and
shall be given no substantive or interpretive effect
whatsoever.
9.7 WAIVERS. Any party may, by written notice to the
other parties, (i) extend the time for the performance of
any of the obligations or other actions of the other parties
hereunder; (ii) waive any inaccuracies in the
representations or warranties of the other parties contained
herein or in any other agreement or document delivered
pursuant hereto; (iii) waive compliance with any of the
conditions or covenants of the other parties contained
herein; or (iv) waive performance of any of the obligations
of the other parties hereunder. Except as provided in the
preceding sentence, no action taken pursuant hereto,
including without limitation any investigation by or on
behalf of any party, shall be deemed to constitute a waiver
by the party taking such action of
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<PAGE>
compliance with any representations, warranties, covenants
or agreements contained herein. No failure or delay on the
part of any party in exercising any right, privilege, power
or remedy under this Agreement, and no course of dealing
among the parties, shall operate as a waiver of such right,
privilege, power or remedy; nor shall any single or partial
waiver or exercise of any right, privilege, power or remedy
under this Agreement preclude any other or further exercise
of such right, privilege, power or remedy, or the exercise
of any other right, privilege, power or remedy. No notice
or demand on any party in any case shall entitle such party
to any other or future notice or demand in any similar or
other circumstances or constitute a waiver of the right of
the party giving such notice or making such demand to take
any other or future action in any circumstances without
notice or demand.
9.8 MERGER OF DOCUMENTS. This Agreement and all
agreements and documents contemplated hereby constitute one
agreement and are interdependent upon each other in all
respects.
9.9 INCORPORATION OF EXHIBITS AND SCHEDULES. All
Exhibits and Schedules attached hereto are by this reference
incorporated herein and made a part hereof for all purposes
as if fully set forth herein.
9.10 SEVERABILITY. If for any reason whatsoever, any
one or more of the provisions hereof shall be held or deemed
to be illegal, inoperative, unenforceable or invalid as
applied to any particular case or in all cases, such
circumstances shall not have the effect of rendering such
provision illegal, inoperative, unenforceable or invalid in
any other case or of rendering any of the other provisions
hereof illegal, inoperative, unenforceable or invalid.
Furthermore, in lieu of each illegal, invalid, unenforceable
or inoperative provision, there shall be added
automatically, as part of this Agreement, a provision
similar in terms of such illegal, invalid, unenforceable or
inoperative provision as may be possible and as shall be
legal, valid, enforceable and operative.
9.11 ASSIGNABILITY. Neither this Agreement nor any of
the parties' rights hereunder may be assigned or otherwise
transferred by any party without the prior written consent
of the other parties; provided, however, that Buyer's or its
successors' or permitted assigns' rights hereunder may be
assigned or otherwise transferred, in whole or in part,
without any other party's consent (i) to any successor by
merger or consolidation, (ii) to any bank or other financial
institution, or to any individual, partnership, corporation
or other entity, providing any financing to Buyer, its
successors or permitted assigns, or (iii) to any individual,
partnership, corporation or other entity deriving title from
Buyer, or its successors or permitted assigns, to all or
substantially all of the Purchased Assets as constituted on
the date of any such transfer; provided further, however,
that Seller's or its successors' or permitted assigns'
rights hereunder may be assigned or otherwise transferred,
in whole but not in part, without any other party's consent,
(i) to any successor by merger or consolidation, or (ii)
after the Closing Date, to any individual, partnership,
corporation or other entity deriving title from Seller, or
its successors or permitted assigns, to all or substantially
all of its assets as constituted on the date of such
transfer. No assignment or other transfer permitted by this
Section 9.11 shall operate as a release of the assignor's
obligations or liabilities hereunder, and the assignor shall
remain liable hereunder notwithstanding such assignment or
other transfer. In the event of any assignment or other
transfer permitted by this Section 9.11, an instrument of
assignment shall be executed by the assignee and shall
expressly state that the assignee assumes all of the
applicable obligations and liabilities of the assignor
contained herein.
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<PAGE>
9.12 Drafting. The parties acknowledge and confirm that
each of their respective attorneys have participated jointly
in the review and revision of this Agreement and that it has
not been written solely by counsel for one party. The
parties therefore stipulate and agree that the rule of
construction to the effect that any ambiguities are to be or
may be resolved against the drafting party shall not be
employed in the interpretation of this Agreement to favor
any party against another.
9.13 References. The use of the words "hereof,"
"herein," "hereunder," "herewith," "hereto," "hereby," and
words of similar import shall refer to this entire
Agreement, and not to any particular article, section,
subsection, clause, or paragraph of this Agreement, unless
the context clearly indicates otherwise.
9.14 Calendar Days, Weeks and Months. Unless
otherwise, specified herein, any reference to "day", "week",
or "month" herein shall mean a calendar day, week or month.
9.15 Gender; Plural and Singular. Where the context
clearly indicates otherwise, the singular shall include the
plural and vice versa. Whenever the masculine, feminine or
neuter gender is used inappropriately in this Agreement,
this Agreement shall be read as if the appropriate gender
had been used.
9.16 Cumulative Rights. All rights and remedies
specified herein are cumulative and are in addition to, not
in limitation of, any rights or remedies the parties may
have at law, in equity, or otherwise, and all such rights
and remedies may be exercised singularly or concurrently.
9.17 No Implied Covenants. Each party, against the
other, waives and relinquishes any right to assert, either
as a claim or as a defense, that the other party is bound to
perform or liable for the nonperformance of any implied
covenant or implied duty or implied obligation.
9.18 Attorneys' Fees. The prevailing party in any
dispute between the parties arising out of the
interpretation, application or enforcement of any provision
hereof shall be entitled to recover all of its reasonable
attorney's fees and costs whether suit be filed or not,
including without limitation costs and attorneys' fees
related to or arising out of any trial or appellate
proceedings.
9.19 Indirect Action. Where any provision hereof
refers to action to be taken by any person or party, or
which such person or party is prohibited from taking, such
provision shall be applicable whether the action in question
is taken directly or indirectly by such person or party.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement to be effective as of the day and year hereinabove
first set forth.
BUYER:
ACME BRICK COMPANY
By: /s/ EDWARD L. STOUT
------------------------------
Edward L. Stout, President
SELLER:
TEMTEX INDUSTRIES, INC.
By: /s/ E. R. Buford
------------------------------
E. R. Buford, President and
Chief Executive Officer
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<PAGE>
APPENDIX
FAIRNESS OPINION OF
BUSINESS VALUATION SERVICES
<PAGE>
APPENDIX B
Fairness Opinion of
Business Valuation Services
<PAGE>
[Letterhead of Business Valuation Services]
October 22, 1998
The Board of Directors
Temtex Industries, Inc.
5400 LBJ Freeway
Suite 1375
Dallas, Texas 75240
Members of the Board of Directors:
We understand that Temtex Industries, Inc. (the "Company")
proposes to enter into that Asset Purchase Agreement, the most
recent draft having been reviewed, (the "Agreement") pursuant to
which the Company will sell substantially all of the assets (the
"Assets") of Texas Clay Industries, a division of the Company
("Texas Clay") to Acme Brick Company (the "Buyer").
You have requested that Business Valuation Services, Inc. ("BVS")
render an opinion (the "Opinion") as to the fairness to the
Company and its shareholders, from a financial point of view, of
the consideration (the "Transaction Consideration") to be paid by
the Buyer under the Agreement. Pursuant to this request, we also
considered the effect of the purchase price adjustment mechanism
set forth in Section 2.2 of the Agreement (the "Mechanism") on
the Transaction Consideration.
BVS, in the course of its corporate finance advisory operations,
is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, public
and private financing, and valuations for estate, corporate and
other purposes. The fee paid to BVS for its work in connection
with rendering the Opinion is in no way affected by our findings
and conclusion.
In connection with the Opinion set forth herein, we have among
other things:
i. reviewed the most recent draft copy of the Agreement;
ii. reviewed certain of the Company's filings with the
Securities and Exchange Commission;
iii. reviewed historical financial results of the Company
and Texas Clay;
<PAGE>
iv. held discussions with both the Company and Texas Clay's
management regarding the business, operations and
prospects of Texas Clay;
v. solicited and considered opinions of certain industry
sources and experts regarding the quality and market
potential of Texas Clay's products;
vi. discussed the details of the Agreement with the
Company's management and legal counsel;
vii. performed various financial analyses, as we deemed
appropriate, of Texas Clay using generally accepted
analytical methodologies, including (i) an income
approach valuation in which Texas Clay's operating
characteristics were forecast and the resulting cash
flows were discounted to their present value; and (ii)
a comparison of the Transaction Consideration and
implied valuation of Texas Clay to the market
capitalizations of public companies with comparable
operating and financial characteristics;
viii. reviewed the historical trading prices and volumes
of the Company's common stock; and
ix. performed such other financial studies, analyses,
inquiries and investigations, as we deemed appropriate.
In rendering the Opinion, we assumed and relied upon the accuracy
and completeness of all information supplied or otherwise made
available to us by the Company and Texas Clay, or obtained by us
from other sources, and upon the assurance of the Company's
management that they are not aware of any information or facts
that would make the information provided to us incomplete or
misleading. We have not independently verified such information,
undertaken an independent appraisal of the assets or liabilities
(contingent or otherwise) of Texas Clay, or been furnished with
any such appraisals. Texas Clay's future prospects were
determined by considering management comments, industry outlook
and the overall economic outlook.
In connection with the preparation of this Opinion, we have not
been authorized by the Company to solicit, nor have we solicited,
third-party indications of interest for the acquisition of all or
any part of Texas Clay.
The Opinion is necessarily based upon financial, economic, market
and other conditions as they exist, and the information made
available to us, as of the date hereof. We disclaim any
undertakings or obligations to advise any person of any change in
any fact
<PAGE>
or matter affecting the Opinion, which may come or be brought to
our attention after the date of the Opinion.
The Opinion does not constitute a recommendation as to any action
the Board of Directors of the Company or any stockholder of the
Company should take in connection with the Agreement or any
aspect thereof. The Opinion relates solely to the fairness, from
a financial point of view, of the Transaction Consideration and
the Mechanism to the Company and its shareholders. We express no
opinion herein as to the structure, terms of effect or any other
aspect of the Agreement or as to the merits of the underlying
decision of the Company to enter into the Agreement.
This letter is for the information of the Board of Directors of
the Company for its use in evaluating the fairness, from a
financial point of view, of the Transaction Consideration and the
Mechanism to the Company and its shareholders. This letter may be
used as part of any proxy statement prepared by the Company
relating to the Agreement and the transactions contemplated
thereby. It is not to be used for any other purpose or referred
to without our express knowledge and prior written consent, which
will not be unreasonably withheld.
Based upon and subject to all of the foregoing, we are of the
opinion, as valuation consultants and financial advisors, that
the Transaction Consideration and the Mechanism are fair, from a
financial point of view, to the Company and its shareholders.
Very truly yours,
BUSINESS VALUATION SERVICES, INC.
/s/ MARK L. MITCHELL
- ---------------------------------
Mark L. Mitchell, CFA, ASA
Principal
/s/ MATTHEW R. MORRIS
- ---------------------------------
Matthew R. Morris
Analyst
<PAGE>
APPENDIX C
ANNUAL REPORT ON FORM 10-K
OF
TEMTEX INDUSTRIES, INC.
FOR
FISCAL YEAR ENDED
AUGUST 31, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED: AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-5940
TEMTEX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1321869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 LBJ FREEWAY, SUITE 1375, DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: 972/726-7175
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.20 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (a) has filed all reports required
to be filed by Section13 or 14 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of November 13, 1998, the aggregate market value of the voting stock held by
nonaffiliates of Temtex Industries, Inc. was $7,169,441.
As of August 31, 1998 there were 3,477,141 shares of common stock, par value
$0.20 per share, of Temtex Industries, Inc. outstanding.
1
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is a major producer of metal fireplace products (woodburning and
gas) and face brick products used in the residential and commercial building
markets. The Company manufactures woodburning metal fireplaces as well as those
utilizing natural gas and liquified petroleum products. In 1992, the Company
introduced its Temco American Dream -TM- ventfree gas log product line. The
ventfree fireplace units provide heat from glowing artificial logs without the
use of a vent, flue or similar device. The Company also manufactures and markets
a line of face brick products in varying styles, textures, sizes and colors. The
Company was organized in 1969 under the name Monnfield Industries, Inc. and in
1971 changed its name to Temtex Industries, Inc. In August 1971, the Company
merged with Texas Clay Industries, Inc., thereby acquiring several businesses,
including its face brick business.
NARRATIVE DESCRIPTION OF BUSINESS
FIREPLACE PRODUCTS
Through its wholly owned subsidiary, Temco Fireplace Products, Inc. ("TFPI"),
formerly Temtex Products, Inc., the Company manufactures and distributes zero
clearance metal fireplace units and gas fireplace equipment. For the fiscal year
ended August 31, 1998, the Company had aggregate sales of fireplace products of
approximately $26.2 million.
ZERO CLEARANCE METAL FIREPLACE PRODUCTS. A zero clearance metal fireplace is
similar in function to a masonry fireplace, except that the firebox and flue
pipe chimney are fabricated from stainless and coated steels and shipped as a
unit to the purchaser or construction site. The inside of the firebox of a zero
clearance metal fireplace is completely lined with an embossed brick pattern
refractory, giving the appearance of a masonry surface. The inner pipe of the
flue is made from stainless steel. Because zero clearance metal fireplaces are
prefabricated, contractors can install them more easily and at lower cost than
is the case with traditional masonry fireplaces. In addition, because zero
clearance metal fireplaces utilize a metal flue instead of a masonry chimney,
they offer enhanced placement flexibility. The Company manufactures and
distributes zero clearance fireplaces in a full range of prices for each of the
common fuel categories (i.e., wood logs, natural gas and liquified petroleum
products). In addition, the Company either manufactures or purchases from others
for use in conjunction with its fireplace products certain essential components
or optional enhancements such as glass doors, blower kits, outside aire kits,
screens and grates. These items are incorporated into the zero clearance metal
fireplace units during the assembly process or shipped in conjunction with a
fireplace unit for subsequent assembly, depending upon customer specifications.
The Company does not currently manufacture accessories for fireplace units
manufactured by third parties or for existing masonry fireplaces.
VENTFREE GAS LOGS AND VENTFREE FIREPLACES. During fiscal 1992, the Company
introduced its American Dream -TM- ventfree gas log and a related ventfree
fireplace unit. The American Dream -TM- ventfree gas log is a simulated wood
log and burner set assembly utilizing a patented design licensed to the
Company. This design permits the burning of natural gas or liquefied
petroleum products, such as propane, to provide heat without the necessity of
venting carbon monoxide from the combustion area. The simulated wood logs
utilized in the American Dream -TM- ventfree gas log set are made of a soft
ceramic material to resemble wood logs and the embers produced by the burning
of wood logs. As the soft ceramic material is heated by the burner set, it
radiates heat and produces a red glow resembling that produced by wood logs
in a masonry fireplace. The Company also markets its ventfree gas logs as the
Firetech 2000-Registered Trademark- ventfree gas log, depending upon the
customer. Unlike vented fireplaces, which must be located where outside
venting can be effected, the Company's ventfree gas logs may be placed in any
location where a heat source is desired, including existing fireplaces.
Existing fireplaces can be modified to accommodate the use of the Company's
ventfree gas logs at a nominal cost.
2
The Company markets ventfree gas log products, which consist of several
different size ventfree gas log sets, ventfree gas heaters, and fireplace
units. The current fireplace products are marketed under either the American
Dream -TM- ventfree name or the Firetech 2000 -Registered Trademark- ventfree
name, depending upon the customer. Sales of the combined ventfree gas log and
fireplace unit have been primarily to new home contractors, while significant
quantities of the ventfree gas log sets not associated with a zero clearance
fireplace unit have been sold to independent distributors and contractors
serving the remodeling and retrofit markets.
DIRECT-VENT GAS FIREPLACES. The Company purchased assets and technology of
Toronto based GSW, Inc. during the third quarter of fiscal 1998 for
approximately $700,000. The Company has converted the GSW products to the Temco
brand name and these products were introduced to the Company's distributors in
August 1998. The acquisition of the GSW product line made it possible for the
Company to expand its market presence in Canada and broaden the line of products
in the fast growing direct-vent gas fireplace market. The Company has added new
distributors in the United States and Canada as the result of the new
direct-vent line of products.
MARKETING AND DISTRIBUTION. The Company sells its fireplaces, ventfree gas logs
and related accessories nationwide through its own sales force and through third
party sales representatives primarily to contractors, wholesale distributors and
retailers. A majority of the Company's fireplaces are ultimately purchased by
homebuilders and others engaged in the construction of new housing or remodeling
of existing homes. The Company has distributors in all regions of the country
serving builders and remodelers. The Company's fireplace products are used by
many of the country's best know builders.
Although the Company ships its fireplace products nationwide, its sales tend to
be somewhat concentrated in the states where housing construction is active.
Because the Company typically produces its products to meet specific orders by
contractors, large distributors or retailers, it does not maintain material
amounts of inventories in excess of anticipated short-term demand. The raw
materials for the company's fireplace products are readily available from a
variety of sources. During fiscal ended August 31, 1998, no single customer for
fireplace products accounted for more than 10% of the Company's consolidated
sales during such period.
MANUFACTURING. The Company currently fabricates its zero clearance fireplace
units from stainless and coated steels acquired from vendors and brick pattern
refractory of its own manufacture. During the fabrication process, the Company
adds components and other hardware purchased from vendors. Glass doors, fan kits
and blowers designed for the Company's zero clearance fireplace units are
usually shipped separately. The company produces a variety of sizes and styles
of zero clearance fireplace units for both the single family and multi-family
markets. In the case of the ventfree gas log units, the Company incorporates an
oxygen depletion sensor and a pilot light and valve acquired from vendors. The
ventfree gas log units are then further assembled and placed under an
arrangement of soft ceramic simulated wood logs. The Company, during fiscal year
1995, began manufacturing the simulated wood logs at the Manchester facility.
COMPETITION; PATENTS. There are a number of manufacturers producing zero
clearance metal fireplaces and related accessories similar to the products of
the Company and the market for these products is very competitive. The Company
believes that it is among the larger producers of such products and that it
markets a full range of zero clearance fireplace units at competitive prices.
The Company's ventfree gas log products utilize a patented design, which is
currently being licensed by the company from the holder of the applicable
patent. Under the revised terms of this license, the Company has a non-exclusive
right to manufacture and distribute ventfree gas logs in the United States and
Mexico in conjunction with a prefabricated fireplace unit or other burn chamber,
and also the right to produce and sell ventfree gas logs independently of
fireplace units. The Company knows of one other entity which is licensed by the
patent holder to produce separate ventfree gas logs. Other companies have
introduced products which compete with the Company's ventfree log sets, but the
Company does not believe that they are using the patented concept which provides
glowing logs and embers. There can be no assurance that the holder of the patent
will not license such non-exclusive rights to additional parties, thereby
increasing the competition for the Company's ventfree gas logs.
3
FACE BRICK PRODUCTS
The Company manufactures a broad line of face brick in a variety of styles,
textures, sizes and colors. The Company's face brick products are manufactured
in Malakoff, Texas (approximately 75 miles southeast of Dallas, Texas), through
its Texas Clay Division. For the fiscal year ended August 31, 1998, the Company
had sales of face brick products of approximately $11.0 million.
Subsequent to August 31, 1998, the Company entered into an agreement to sell its
Texas Clay Division. Such sale is subject to shareholder approval amongst other
conditions, and is expected to close in December 1998.
MANUFACTURING. Approximately 90% of the clay deposits presently utilized in the
manufacturing of face brick products by the company are located within twelve
miles of its Malakoff operating facilities. The Company owns approximately 728
acres of land, most of which the company believes have clay deposits, and leases
an aggregate of approximately 460 additional acres which it also believes to
contain clay deposits. Generally, the leases will continue so long as clay is
mined in paying quantities or minimum royalties are paid. Royalties under the
leases range from $0.25 to $0.35 per cubic yard of merchantable clay removed.
The Company normally maintains at least a 120 day supply of raw clay at its
operating facilities. Historically, Texas Clay has obtained approximately 25% of
its raw clay requirements from its own land and the remaining 75% from leased
land. The Company believes that its clay reserves necessary for making face
bricks are adequate for the foreseeable future, although the Company does not
have sufficient engineering data to permit it to predict the extent of such
reserves with accuracy. Additionally, the company believes that there is an
abundance of clay deposits located near its Malakoff operating facility, which
would be available to the Company on acceptable terms if additional clay
deposits are needed.
The Malakoff operating facility includes two plants that are capable of
producing approximately 55 million bricks annually operating one shift per day,
five days a week. For energy efficiency reasons, three of the Company's kilns
are operated 24 hours a day, notwithstanding staffing of other production
facilities. In the manufacture of face brick, the raw clay is mined on the
surface of the ground by open pit. The principal type of clay mined by the
Company is a highly refractory type of material. A variety of clay pits are
worked by the Company at any given time since the type and grade of clay
determine the characteristics and color of finished brick. After the raw clay is
mined, it is crushed, screened and blended, warmed and tempered into an
amorphous mass, which is extruded through a die and cut to size automatically.
The brick is then dried to reduce the moisture content, burned at heat ranging
up to 2200 degrees Fahrenheit, and gathered and packaged for shipment in bundles
of the same shade or color or of mixed shades or colors. The Company utilizes a
grinding system, which permits it to automatically mix ingredients, thereby
producing more consistency in color.
MARKETING AND DISTRIBUTION. The face brick products manufactured by the Company
are distributed primarily in Texas and adjacent states to commercial and
residential contractors, architects and interior and commercial decorators. The
Company markets its face brick products primarily through independent
distributors. In addition, the Company currently employs one full-time
salesperson. Sales made to the residential market generally produce higher
profit margins than sales made to the commercial markets. During the fiscal year
ended August 31, 1998, two face brick customers accounted for more than 10% of
the Company's consolidated net sales during such period.
FUEL REQUIREMENTS. In order to manufacture the Company's face brick products,
significant quantities of natural gas must be obtained from the local public
utility or from private parties. The Company historically has obtained most of
its natural gas requirements from the local public utility, but has obtained,
and currently continues to obtain, a significant portion of its gas supply from
one or more private parties.
4
The Company's manufacturing operations have, from time to time, experienced
minor disruptions resulting primarily from the imposition by the local public
utility of allocations during peak usage periods, but such disruptions have not
had and are not expected in the foreseeable future to have, a material adverse
effect on the Company's operations. However, since the cost of natural gas
historically has constituted the largest single component of the Company's face
brick manufacturing operating costs (other than labor and maintenance parts) and
is expected in the foreseeable future to continue to be material, any
significant increase in the cost of natural gas without an accompanying price
increase in the products sold by the Company could adversely affect its
operating results. The Company purchases all of its natural gas at prevailing
rates and does not have any long-term supply agreements.
INVENTORIES AND PAYMENT TERMS
As a general rule, the Company's customers are not permitted to return fireplace
units or face brick products, nor are they granted extended payment terms on any
of these products. As a result, the Company's working capital needs are less
than would be the case if it carried significant amounts of inventory, accepted
returns of merchandise or granted extended payment terms.
PATENTS AND TRADEMARKS
The Company does not own any material patents, but does own a variety of
trademarks and trade names. The consumer products manufactured by the Company
are sold primarily under the trademark or trade names of Temco -Registered
Trademark-, Amberlight -Registered Trademark-, Temco American Dream -TM-,
Firetech 2000 -Registered Trademark- and Masterworks 280 -Registered
Trademark- direct vent fireplace. The Company believes that its trademarks
and trade names as a whole have significant value. However, the Company does
not consider any one or group of its trademarks or trade names or any
licenses granted to or by it to be material to its business as a whole,
except for the patent license (the "Patent License") relating to its ventfree
fireplace products and direct vent fireplaces. The Patent License is
scheduled to expire on March 31, 2002.
5
BACKLOG
The table set forth below gives certain information with respect to the
approximate backlog of the Company by business segment.
<TABLE>
<CAPTION>
FACE FIREPLACE
BRICK PRODUCTS PRODUCTS TOTAL
-------------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at
8/31/97 $ 1,672 $ 1,267 $ 2,939
Balance at
8/31/98 $ 2,956 $ 1,061 $ 4,017
</TABLE>
As of August 31, 1998, the amount of backlog of orders shown above is believed
to be firm and the orders are expected to be filled during 1999. The Company
does not consider backlog amounts to be significant due to the nature of the
customer's order patterns.
GOVERNMENT REGULATIONS
The Company does not anticipate that compliance with Federal, State and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have any material effect upon capital expenditures or earnings
and will not affect the competitive position of the Company and its subsidiaries
in any of the Company's segments of business.
EMPLOYEES
As of August 31, 1998, the Company employed approximately 563 persons (including
employees of wholly-owned subsidiaries) of whom approximately 111 were salaried
and 452 were hourly employees.
6
ITEM 2. PROPERTIES
CORPORATE OFFICE
The executive offices of the Company are located at 5400 LBJ Freeway, Suite
1375, Dallas, Texas 75240. Such offices consist of a small office suite, which
is leased under a five-year lease expiring on September 30, 2001. The current
monthly base rental is $5,185.
FIREPLACE PRODUCTS
The Company manufactures and assembles its fireplace products in its facilities
at Manchester, Tennessee, Perris, California and Mexicali, Baja California,
Mexico. Management of the Company believes the availability of two plants
located in different geographic areas of the United States allows it to ship
products nationwide at a lower average freight cost than many of its competitors
operating out of a single plant.
The Company's Manchester facility contains approximately 127,000 square feet and
includes a main building of metal construction and three adjacent smaller
buildings, generally of metal construction. The Manchester facility is leased by
the Company from HUTCO, a California partnership of which Mr. James E. Upfield
(Chairman of the Board of the Company) is a general partner. The original lease
provided for a twenty-five year term, expiring in 2014 with a monthly rental of
$13,020, subject to certain scheduled rental escalations based upon increases in
the consumer price index. During fiscal 1994, the Company entered into a new
lease agreement with HUTCO whereby HUTCO expanded the Manchester facility by
30,000 square feet to a total of approximately 157,000 square feet. The monthly
rental beginning January, 1995 increased to $21,500 and is subject to certain
scheduled rent escalations based upon increases in the consumer price index. The
new lease provides for a twenty-five year term, expiring in 2020. In the opinion
of the management of the Company, the leases from HUTCO were consummated on
terms and conditions as favorable to the Company as terms and conditions
obtainable from non-affiliated parties.
The Company's manufacturing facility in Perris is located on ten acres of land
and contains approximately 78,000 square feet. The facility is leased by the
Company under a long-term lease originally expiring in 1999. During fiscal 1995,
the Company exercised a ten year option extending the lease through September
30, 2008. The monthly rental rate remains the same at $6,368.
The Company during April 1998 moved its Mexicali, Mexico operation to a larger
facility containing approximately 35,000 square feet. The lease for the facility
commenced April 20, 1998, provides for basic monthly rental of $11,732 (U.S.)
and expires in April 2005. This facility manufactures fireplace component parts
for use by the Company's Manchester and Perris plants.
FACE BRICK PRODUCTS
The Company's face brick products are manufactured in Malakoff, Texas through
its Texas Clay division. The Company owns and operates office and manufacturing
facilities on a seventy-six acre tract of land at this location, consisting of
multiple buildings constructed on steel frames with sheet metal siding and roofs
which contain approximately 268,000 square feet of floor space. The Company's
facilities house manufacturing equipment, three active kilns, storage areas for
raw materials and finished products and loading areas for trucks.
7
ITEM 3. LEGAL PROCEEDINGS
There are legal actions in which the Company is a party, however, in the opinion
of management, the Company's ultimate loss, if any, will not be significant
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table summarizes the high and low sales prices of the Common Stock
provided to the Company by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The Company's common Stock trades on the
NASDAQ market under the symbol TMTX.
<TABLE>
<CAPTION>
Price (1)
-------------------
High Low
---- ---
<S> <C> <C>
FISCAL 1997
-----------
First Quarter $ 4.13 $ 2.75
Second Quarter 4.50 2.38
Third Quarter 3.63 2.38
Fourth Quarter 3.88 2.32
FISCAL 1998
-----------
First Quarter $ 4.75 $ 2.88
Second Quarter 3.38 2.50
Third Quarter 4.63 3.13
Fourth Quarter 4.13 2.50
</TABLE>
(1) The prices shown represent quotations between dealers and do not include
mark-ups, mark-downs or commissions, and may not represent actual
transactions.
The number of shareholders of record and beneficial shareholders of the Company
as of November 13, 1998 was approximately 977. The only stock of the Company
outstanding is Common Stock par value $0.20 per share.
No cash dividends were declared or paid during fiscal 1997 or 1998. The Company
currently intends to reinvest its earnings for use in its business and to
finance future growth. Accordingly, the Company does not anticipate paying
dividends in the foreseeable future.
8
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except share amounts)
Selected Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net Sales
Fireplace products ................................. $26,162 $30,198 $33,110 $34,504 $35,324
Face brick products ................................ 11,021 9,010 8,862 8,400 8,611
------- ------- ------- ------- -------
Total net sales .................................. 37,183 39,208 41,972 42,904 43,935
Cost of goods sold ................................... 27,045 29,317 30,977 30,962 29,391
------- ------- ------- ------- -------
Gross profit ......................................... 10,138 9,891 10,995 11,942 14,544
Selling, general and administrative expenses ......... 8,912 9,831 9,548 10,782 10,291
Interest expense ..................................... 464 519 583 424 526
Other income ......................................... (68) (114) (2) (122) (71)
------- ------- ------- ------- -------
Income (loss) before income taxes .................... 830 (345) 866 858 3,798
Income tax expense (benefit) ......................... 323 (144) 324 369 (280)
------- ------- ------- ------- -------
Net income (loss) .................................... 507 (201) 542 489 4,078
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic income (loss) per common share ................. $0.15 $(0.06) $0.16 $0.14 $1.28
Diluted income (loss) per common share ............... $0.14 $(0.06) $0.15 $0.14 $1.25
Basic weighted average common shares outstanding ..... 3,477,141 3,474,155 3,465,739 3,458,381 3,182,668
Diluted weighted average common and common
equivalent shares outstanding ...................... 3,531,414 3,474,155 3,531,631 3,543,915 3,272,880
<CAPTION>
August 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Balance Sheet Data:
Working capital ...................................... $10,838 $ 9,990 $ 8,329 $ 9,014 $10,189
Total assets ......................................... 23,647 23,233 27,808(4) 27,116(4) 23,643(4)
Short-term debt (1) ............................... 848 1,011 3,343 2,770 595
Long-term debt, excluding current maturities (2) .. 2,246 2,244 2,218 3,099 1,346
Stockholders' equity (3) .......................... 16,288 15,781 15,970 15,416 14,916
</TABLE>
- ---------------------------------
(1) Includes amounts borrowed under a revolving credit agreement and debt
payable within one year, including capitalized lease obligations to related
parties.
(2) Includes capitalized lease obligations to related parties.
(3) The Company has neither declared nor paid cash dividends during the
relevant periods.
(4) Excludes assets related to previously discontinued operations.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a producer of metal fireplace products and face brick products
used in the residential and commercial building and remodeling markets. The
Company manufactures and distributes its fireplace products through Temco
Fireplace Products, Inc., a wholly owned subsidiary of the Company, and its face
brick products through its Texas Clay Industries division. The Company's
fireplace products are sold nationwide to a network of contractors, distributors
and retailers, and its face brick products are sold to contractors and
distributors principally in Texas and surrounding states.
The Company provides products to contractors and others engaged in the
construction and remodeling markets, which usually are more active in the summer
and fall months. The Company's sales are affected by this seasonality since
contractors and other users do not maintain inventories of products for
construction purposes. In addition, the Company provides goods to the building
products industry which is cyclical in nature and can be affected by changes in
consumer credit, interest rates and general economic conditions.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
NET SALES
FIREPLACE PRODUCTS. Net sales decreased $4.0 million or 13% in fiscal 1998
compared with fiscal 1997. The reduction in sales was the direct result of a
decrease in the quantity of gas burning fireplaces and log sets delivered in
fiscal 1998 due to the loss of a home center customer in fiscal 1997 and
unseasonably warm winter conditions in fiscal 1998. In addition, the Company has
been unable to increase selling prices for its products due to the competition
within the industry.
FACE BRICK PRODUCTS. Net sales increased approximately $2.0 million or 22% in
fiscal 1998 compared with fiscal 1997. The introduction of a new size of face
brick in the first quarter of fiscal 1998 in addition to a strong demand from
the construction industry in the region serviced by the brick manufacturing
facility was mainly responsible for the increase in sales. The increase in sales
was the result of an 18% increase in the quantity of brick sold as well as an
increase of approximately 3% in the price the Company received for the product.
GROSS PROFIT
FIREPLACE PRODUCTS. Gross profit decreased approximately 20% in fiscal 1998
compared with fiscal 1997. The decrease in sales volume was the major factor
contributing to the decrease in gross profit.
FACE BRICK PRODUCTS. Gross profit increased approximately 52% in fiscal 1998
compared with fiscal 1997. The increase resulted from the increases in sales
volume and selling prices, as well as favorable production efficiencies realized
in the manufacturing process.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses decreased 24% in fiscal 1998 compared with fiscal 1997. The
decrease was mainly due to decreases in payroll, selling commissions,
advertising and promotional display expenses.
General and administrative expenses increased approximately 7% in fiscal 1998
compared with fiscal 1997. The increase was mainly due to increases in
professional fees and the Company's contribution to the 401(k) employee benefit
plan.
10
INTEREST EXPENSE
Interest expense decreased $55,000 or 11% in fiscal 1998 compared with fiscal
1997. The decrease in interest expense was the direct result of the decrease in
the average indebtedness of the Company throughout fiscal 1998.
OTHER INCOME
Other income for both fiscal 1998 and 1997 includes small amounts of
miscellaneous income and expenses from various sources.
INCOME TAXES
The provision for income taxes, both current and deferred, increased from a
benefit of $144,000 in fiscal 1997 to an expense of $323,000 in fiscal 1998 due
to the significant improvement in operating results. In fiscal 1998, the income
tax provision consists of $176,000, $111,000 and $36,000 in federal, state and
foreign tax expenses, respectively.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NET SALES
FIREPLACE PRODUCTS. Net sales decreased $2.9 million or 9% in fiscal 1997
compared with fiscal 1996. The reduction in sales was the direct result of a
decrease in the quantity of woodburning fireplaces delivered in 1997. Intense
competition within the industry has prohibited the Company from increasing
selling prices on its fireplace products.
FACE BRICK PRODUCTS. Net sales increased approximately $0.1 million or 2% in
fiscal 1997 compared with fiscal 1996. A small increase in selling price was
responsible for the increase in net sales.
GROSS PROFIT
FIREPLACE PRODUCTS. Gross profit decreased approximately 15% in fiscal 1997
compared with fiscal 1996. The decrease in sales volume was the major factor
contributing to the decrease in gross profit.
FACE BRICK PRODUCTS. Gross profit increased approximately 5% in fiscal 1997
compared with fiscal 1996. The increase was a direct result of the increase in
the selling price for brick products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses decreased 9% in fiscal 1997 compared with fiscal 1996. The
decrease was mainly due to decreases in selling commissions, payroll and
advertising expenses.
General and administrative expenses increased approximately 21% in fiscal 1997
compared with fiscal 1996. Payroll related fringe benefits, specifically group
health insurance and worker's compensation insurance expenses were less than
usual in fiscal 1996 due to refunds received in 1996 that related to prior years
and adjustment of accrued balances to more accurately reflect estimated
liabilities in fiscal 1996. Expenses for fiscal 1997 do not include any
significant adjustments for prior year activity.
INTEREST EXPENSE
Interest expense decreased $64,000 or 11% in fiscal 1997 compared with fiscal
1996. The decrease in interest expense was the direct result of the decrease in
the average indebtedness of the Company throughout fiscal 1997.
11
OTHER INCOME
Other income for both fiscal 1997 and 1996 includes small amounts of
miscellaneous income and expenses from various sources.
INCOME TAXES
The provision for income taxes, both current and deferred, decreased from an
expense of $324,000 in fiscal 1996 to a benefit of $144,000 in fiscal 1997 due
to diminished operating results. In fiscal 1997, the income tax provision
consists of a benefit of $202,000 in federal and an expense of $58,000 in state
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,214,000, $3,088,000 and
$2,161,000 in fiscal 1998, 1997 and 1996, respectively. Working capital
increased $848,000 in fiscal 1998 due mainly to increases in accounts receivable
and inventories. In fiscal 1997, working capital increased $1,661,000 due to
decreases in notes payable and accounts payable.
Capital expenditures and capitalized lease obligations for fireplace and brick
products totaled $1,235,000 ($922,000 for fireplace products and $313,000 for
face brick products), $1,158,000 ($682,000 for fireplace products and $476,000
for face brick products) and $2,057,000 ($1,722,000 for fireplace products and
$335,000 for face brick products) in fiscal 1998, 1997 and 1996, respectively.
The majority of expenditures in each of the years was for tooling, replacement
items and major repairs to manufacturing equipment. Approximately 58 acres of
land were purchased in fiscal 1998 and approximately 117 acres were purchased in
fiscal 1997. The land is believed to contain clay/shale deposits that can be
mined for utilization in the production of face brick.
In May 1996, the Company entered into a two year credit agreement with a bank
whereby the Company may borrow a maximum of $4,000,000 under a revolving credit
facility. The outstanding principal balance may bear interest at a variable or
fixed rate, at the Company's option, at the time funds are requested. Interest
is payable on a monthly basis and also at the end of the borrowing period if
borrowing at a fixed rate. In April 1998, the credit agreement was amended
whereby the maximum amount available under the revolving credit facility was
reduced to $3,000,000 and the expiration date was extended for an additional
two-year period. The revolving credit facility had an outstanding balance of
$700,000 at August 31, 1998. The credit facility requires the Company to
maintain certain minimum financial ratios, measured on a quarterly basis, in
addition to positive net income for each annual accounting period. At August 31,
1998, the Company is in compliance with these covenants.
In fiscal 1998, purchases of tooling and manufacturing equipment were made using
cash generated from operations. Proceeds from long-term notes were used to
purchase land.
Subsequent to August 31, 1998, the Company entered into an agreement for the
sale of its face brick products division. The agreement is subject to approval
by the Company's stockholders. The cash proceeds, estimated to be $12 million,
will be available to pay down certain indebtedness and enhance the Company's
remaining business operations through strategic acquisitions or other
appropriate uses.
The Company anticipates that cash flow from operations together with funds
available from the revolving credit facility should provide the Company with
adequate funds to meet its working capital requirements as well as requirements
for capital expenditures for at least the next twelve months.
12
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations have not
been material during the past three fiscal years. However, inflation could
adversely affect the Company if inflation results in higher interest rates or a
substantial weakening in economic conditions that could adversely affect the new
housing market.
YEAR 2000 ISSUE
Many existing computer systems and applications and other control devices use
only two digits to identify a year in the date field, without considering the
impact of the upcoming change in the century. As a result, as year 2000
approaches, computer systems and applications used by many companies may need to
be upgraded to comply with "Year 2000" requirements. The Company relies on its
systems in operating and monitoring may significant aspects of its business,
including financial systems (such as general ledger, accounts payable, accounts
receivable, inventory and order management), customer services, infrastructure
and network and telecommunications equipment. The Company also relies directly
and indirectly on the systems of external business enterprises such as
customers, suppliers, creditors and financial organizations.
Based on various assessments during the past year, the Company determined that
only minor modifications of its information and production software systems
would be necessary in order to properly utilize dates beyond the year 1999. Most
of the changes have already been made. Although the Company anticipates all
remaining modifications to be completed in early 1999, if such modifications
were not made, management believes the year 2000 issue will not have a material
impact on the operations of the Company.
The cost for system modifications was approximately $11,000 and any further
modification expenses are expected to be insignificant.
At this time, the Company is not aware of any customer, vendor or supplier with
a year 2000 issue that would materially affect the operations of the Company.
However, the Company will continue to monitor the situation and will devote
necessary resources to resolve any significant year 2000 issues in a timely
manner.
Management is of the opinion that all significant year 2000 issues have been
identified and addressed. Accordingly, the Company has no developed year 2000
contingency plans for continuing operations.
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) DIRECTORS OF THE COMPANY
The names of the directors and nominees for the office of director and
information about them, as furnished by the directors and nominees themselves,
are set forth below:
<TABLE>
<CAPTION>
First Became Positions and Offices with Company, Business Experience During Past Five
Name Age Director in Years and Other Directorships
- ----------------- --- ------------ ------------------------------------------------------------------------------
<S> <C> <C> <C>
James E. Upfield 78 1969 Chairman of the Board of the Company for more than the past five years;
also Chairman of the Board of Temco Fireplace Products, Inc., a
wholly-owned subsidiary of the Company, serves as a director of Magnum
Petroleum, Inc. which is engaged in the sale of oil, gas and oilfield
services.
E. R. Buford 63 1973 President of the Company for more than five years and was elected Chief
Executive Officer of the Company in February, 1986; President and a
director of Temco Fireplace Products, Inc., a wholly-owned subsidiary of
the Company, for more than the past five years.
Joseph V. Mariner, Jr. 78 1979 Retired as Chairman and Chief Executive Officer of Hydro-Metals, Inc., when
it was acquired by Wallace Murray Corporation, a manufacturer of plumbing
ware and cutting tools; serves as a director for Peerless Mfg. Co., a
manufacturer of separators and filters used for removing liquids and solids
from gases and air; the Dyson-Kissner-Moran Corporation, a New York based
privately owned investment company; Kearney National, Inc., a manufacturer
of electrical power distribution products; and Renters Choice, Inc., the
largest operator in the U.S. rent-to-own industry, currently operating over
2,000 company owned stores.
Larry J. Parsons 69 1989 Retired in 1988 as partner of Ernst & Whinney (now known as Ernst & Young
LLP), an international public accounting firm. Mr. Parsons was a partner
for more than five years before his retirement and holds no other
directorships.
Scott K. Upfield 39 1992 President, Treasurer and a director of Insurance Technologies Corporation,
a company principally engaged in developing and marketing software to the
insurance industry for more than the past five years.
Richard W. Griner 60 1995 Director, President and Chief Operating Officer of The Hart Group, a
privately owned company which supplies managerial services to privately
owned Rmax, Inc., a manufacturer of rigid foam roofing and sheathing
insulation for more than the past five years; director and President of HC
Industries, Inc. and of HC Industries NV., Inc., subsidiaries of Rmax; and
director of Axon, Inc., a multifaceted contracting and service company.
Mr. Griner is also a director and President of Rmax.
</TABLE>
Each of the above named nominees is a member of the present Board of Directors
and was elected to such office at the Annual Meeting of Stockholders held
March 5, 1998. There are no family relationships among any of the directors or
among any of the directors and any officer of the Company except Messrs.
James E. Upfield and Scott K. Upfield who are father and son.
14
(b) EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Name Age Offices with Company
- -------------------- --- ----------------------------------------------
<S> <C> <C>
James E. Upfield 78 Chairman of the Board and a director
E. R. Buford 63 President, Chief Executive Officer and a director
R. N. Stivers 62 Vice President-Finance, Secretary, Treasurer,
Chief Financial Officer and Chief Accounting
Officer
</TABLE>
Each of the officers has served in their respective capacity for more than the
past five years. There are no family relationships between any of the executive
officers, nor any arrangement of understanding between any officer and any other
person pursuant to which the officer was selected. Officers are appointed
annually by the Board of Directors immediately following the annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain disclosure of all compensation awarded to,
earned by or paid to the chief executive officer of the Company and to each of
the Company's four most highly compensated executive officers (other than the
chief executive officer) whose total salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Fiscal Salary Bonus sation Awards SARs Payouts sation
Position Year ($) ($) $) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. R. Buford 1996 213,500 -0- N/A -0- -0- -0- N/A
Chief 1997 222,100 -0- N/A -0- -0- -0- N/A
Executive 1998 225,000 -0- N/A -0- -0- -0- N/A
Officer and
President
- -------------------------------------------------------------------------------------------------------------------------
J. E. Upfield 1996 150,000 -0- N/A -0- -0- -0- N/A
Chairman of 1997 150,000 -0- N/A -0- -0- -0- N/.A
the Board 1998 150,000 -0- N/A -0- -0- -0- N.A
- -------------------------------------------------------------------------------------------------------------------------
R. N. Stivers 1996 112,000 -0- N/A -0- -0- -0- N/A
Chief Financial 1997 116,600 -0- N/A -0- -0- -0- N/A
Officer/Vice 1998 118,100 -0- N/A -0- -0- -0- N/A
President-
Finance
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other annual compensation did not exceed the lesser of either $50,000 or 10% of
total salary as disclosed in the summary compensation table.
EMPLOYMENT CONTRACT AGREEMENTS
The Company entered into three-year employment contracts with Mr. E. R. Buford
and Mr. R. N. Stivers (the "Executives") as of June 7, 1994. Under the terms of
the agreements, Mr. Buford receives an annual base salary of at least $201,300
and Mr. Stivers receives a base salary of at least $105,000. During the term of
the agreements, the Company may increase the base salary of the Executives. The
Executives will also be eligible to participate in the regular employee benefits
program now or hereafter established by the Company.
15
On each anniversary of these agreements, the term shall be extended for an
additional period of one year unless the Board of Directors elects, at the
directors' meeting following the annual stockholders' meeting, not to extend the
agreements.
The agreements may be terminated by the Company without cause upon thirty days
prior written notice. In the event of termination without cause, the Company
shall for a period of two and one-half years continue to pay Mr. Buford and for
a period of one year continue to pay Mr. Stivers their base salaries effective
at the time of termination.
If the Executives are involuntarily terminated, other than for cause, in
contemplation of, or within three years following, a change of control, the
Company shall pay the Executives (i) a lump sum severance payment equal to two
and one-half times the Executives base salary in effect at the time of
involuntary termination, payable as a lump sum, and (ii) continuation of all
employee benefits, executive benefits and perquisites or benefits reasonably
equivalent thereto, for a period of two and one-half years.
SELECT MANAGEMENT EMPLOYEE SECURITY PLAN
Except for the Company's Select Management Employee Security Plan, the Company
does not have any plans that could be deemed long-term incentive plans or
defined benefit or actuarial plans under which benefits are determined primarily
by reference to final compensation. The Select Management Employee Security Plan
(the "Security Plan") provides certain death and retirement benefits to key
employees of the Company. During the fiscal year ended August 31, 1998, ten (10)
employees were participating in the Security Plan (including the three named
executive officers in the Summary Compensation Table above). The Company's
Compensation Committee has discretion to select additional employees (not more
frequently than annually) to participate in the Security Plan.
The Security Plan provides for benefits to be paid to each participant for a
period of ten (10) years after retirement (or to the beneficiary or estate of a
participant for a period of ten (10) years following the date of death of a
participant) in an amount during each such year equal to approximately 50% of
the participant's salary at the date of retirement or death. All required
benefit payments are provided by individual life insurance, retirement insurance
or annuity type policies which the Company's Compensation Committee has deemed
appropriate. Pursuant to the Security Plan, the Company makes all contributions
to fund the aggregate amount of insurance premiums required to purchase and
maintain all applicable insurance or annuity type policies.
Any participant in the Security Plan who ceases to be an employee of the Company
prior to attaining the age of fifty (50) and ten (10) years of employment and
before normal retirement date may elect to purchase his insurance policy for
one-third of its cash value on the date of termination. Any participant who
ceases to be employed after attaining age fifty (50) and ten (10) years of
service but before normal retirement will be assigned his insurance policy
without any payment being required.
STOCK OPTION PLAN FOR KEY EMPLOYEES
In 1990, the Company adopted the 1990 Stock Plan for Key Employees of Temtex
Industries, Inc. and its Subsidiaries (the "1990 Plan"). The 1990 Plan provides
for the grant of stock options, including "incentive stock options" within the
meaning of Section 422A of the Internal Revenue Code of 1986 and "non-qualified
stock options" which do not constitute incentive stock options, the grant of
stock appreciation rights in connection therewith, and the allotment of shares
of restricted stock, to key employees of the Company.
The 1990 Plan is intended to attract, retain and provide incentives for eligible
key employees. The 1990 Plan is administered by a committee of the Board of
Directors not eligible to receive awards under the 1990 Plan. Presently the
Compensation Committee administers the Plan. Such committee has authority, in
its discretion, to determine the individuals to whom, and the time or times at
which restricted stock will be allotted or options or stock appreciation rights
will be granted, the number of shares to be subject to each allotment of
restricted stock, stock options and appreciation rights, the option price for
the duration of each option and other matters in connection with the
administration of the 1990 Plan and the grant of awards thereunder. The exercise
price of any option granted under the 1990 Plan may not be less than the fair
market value of the Common Stock at the date of grant. Options and stock
appreciation rights may be granted and restricted stock allotted under the 1990
Plan from time
16
to time until December 31, 1999, on which date such 1990 Plan will terminate,
unless it is sooner terminated as provided therein.
The stockholders at the annual meeting held March 7, 1995, approved a proposal
increasing the shares eligible for issuance pursuant to the 1990 Plan from
95,000 shares to 195,000 shares of Common Stock and the aggregate number of
options (including stock appreciation rights) or shares of restricted stock
which may be issued to any one employee in any fiscal year shall not exceed
25,000.
OPTION GRANTS DURING 1998 FISCAL YEAR
There were no stock options granted to the Company's executive officers named in
the summary compensation table during fiscal year 1998.
- --------------------------------------------------------------------------------
The following table includes the number of shares received upon exercise, or if
no shares were received, the number of securities with respect to which the
options were exercised, the aggregate dollar value realized upon exercise and
the total value of unexercised options held at the end of the last completed
fiscal year for each of the Company's executive officers named in the Summary
Compensation Table
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at FY-
Options/SARs at FY- End ($)
End (#)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. R. Buford -0- -0- Exercisable 50,000 $97,000
Exercisable 15,000 -0- (1)
Unexercisable 5,000 -0- (1)
J. E. Upfield -0- -0- -0- -0-
R. N. Stivers -0- -0- Exercisable 7,500 -0- (1)
Unexercisable 2,500 -0- (1)
</TABLE>
(1) The Company's stock price at August 31, 1998 was below the option price.
- --------------------------------------------------------------------------------
17
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
In 1990, the Company also adopted the Outside Director Stock Option Plan (the
"Outside Director Plan"). The Outside Director Plan is intended to encourage
more extensive ownership of the Common Stock, to provide incentives and to
attract and retain eligible outside directors of the Company. Under the Outside
Director Plan, 30,000 shares of Common Stock were reserved. The Outside Director
Plan is presently administered by the Board of Directors. The Board of Directors
has authority, in its discretion, to determine the outside directors to whom,
and the time or times in which, options will be granted, the number of shares to
be subject to each option, and the purchase price of the shares covered by each
option. The exercise price of any option granted under the Outside Director Plan
may not be less than the fair market value of the Common Stock at the date of
the grant. Options granted under the Outside Director Plan are non-qualified
options for federal income tax purposes.
The following table shows stock options granted and presently exercisable to
outside directors from May 23, 1990 to August 31, 1998:
<TABLE>
<CAPTION>
Options
Granted and Value of Unexercised
Presently Option In-The-Money Options
Name of Director Exercisable Price At Fiscal Year End
- ---------------------- ----------- ------ --------------------
<S> <C> <C> <C>
Joseph V. Mariner, Jr. 2,500 $2.00 $2,825
2,500 $1.44 4,225
1,500 $3.31 -0- (1)
------ ------
6,500 $7,050
------ ------
------ ------
Larry J. Parsons 2,500 $2.00 $2,825
2,500 $1.44 4,225
1,500 $3.31 -0- (1)
------ ------
6,500 $7,050
------ ------
------ ------
Scott K. Upfield 2,500 $1.44 4,225
1,500 $3.31 $ -0- (1)
------ ------
4,000 $4,225
------ ------
------ ------
Richard W. Griner 2,500 $4.81 $ -0- (1)
1,500 $3.31 -0- (1)
------ ------
4,000 $ -0-
------ ------
------ ------
</TABLE>
(1) The Company's stock price at August 31, 1998 was below the option price.
DIRECTORS' REMUNERATION
Those directors who are salaried employees of the Company receive no additional
compensation for their services as directors or as members of committees of the
Board. Cash compensation currently payable to the other directors for services
in that capacity consists of a retainer of $2,500 per year and a fee of $750 (in
addition to travel expenses) for each day of each meeting of the Board of
Directors attended. No additional retainers are paid for serving on a committee;
however, if one or more committee meetings are held on a day other than one on
which a Board meeting is held, committee members are paid a fee of $750 (in
addition to travel expenses) for each day of such meeting or meetings.
Directors who are not regular salaried officers or employees who render services
to the Company in a capacity or capacities other than that of a director (for
example, as consultants or attorneys) may be compensated for such other
services, and such compensation for other services shall not, except insofar as
may be specified by the
18
Company in particular cases, affect the cash compensation payable to such
directors in their capacities as directors and members of committees of the
Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James E. Upfield was, during the fiscal year, an officer of the Company and a
member of the Compensation Committee of the Board of Directors. Mr. Upfield has
engaged in certain transactions with the company described under the heading
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors consists of Mr. Richard W.
Griner (Chairman), Mr. Larry J Parsons, Mr. James E. Upfield, Mr. Scott K.
Upfield and Mr. Joseph V. Mariner, Jr. The Compensation Committee's primary
function is to review the compensation awarded to the Company's Chief Executive
and Chief Financial Officers and to approve the determinations of compensation
to be paid to certain other senior executives of the Company. Salaries are
reviewed at regular intervals, approximately annually, depending on job
classification and competitive market levels. Mr. E. R. Buford (the Chief
Executive Officer of the Company) and Mr. Roger N. Stivers (the Chief financial
Officer of the Company), have employment agreements with the Company which fix
their annual salaries at certain minimum levels ($201,300 per annum for Mr.
Buford and $105,000 per annum for Mr. Stivers). See "--Executive Officers
Employment Agreements."
In determining executive compensation, the Compensation Committee reviews the
performance of the specific executive, the operating performance of the Company,
the compensation for executives of companies, which are comparable to the
Company and the performance of the Company's Common Stock. Although the
Compensation Committee does not utilize any formal mathematical formulae or
objective thresholds, particular emphasis is given to the operating results of
the Company. The Compensation Committee believes that specific formulae restrict
flexibility and are too rigid at this state of the Company's development.
The Compensation Committee also believes that in order for the Company to
succeed, it must attract and retain qualified executives who can not only
perform satisfactorily on an individual basis but who can also retain and manage
a quality staff of other executive officers and key employees. Thus, in addition
to applying the criteria generally applicable to all executive officers, in
determining the compensation of the Chief Executive Officer, the Compensation
Committee may also be influenced to a significant extent by the overall
performance of the company's other executives and key employees.
In addition to the Compensation Committee's subjective determination of the
factors noted above, the committee has access to, and reviews reports of,
independent financial consultants who assimilate and evaluate the compensation
of executive officers employed by companies which are generally comparable to
the Company. During this year's review, the Compensation Committee considered
the report, dated February 16, 1998, of a recognized independent consulting firm
used by the committee each of the previous two years. The Compensation Committee
seeks to establish base salaries that generally approximate the median range for
comparable companies as set forth in the consultant's report. The independent
consulting firm considers a wide spectrum of durable goods manufacturing
companies to be "comparable" for this purpose; however, adjustments are made to
reflect the relative size of such companies. The "DOW JONES FURNISHINGS &
APPLIANCES" peer group used in the performance chart on page 20 of the Annual
Report reflects a smaller group of the Company's competitors. The Compensation
Committee believes that the use of a broader group of manufacturing companies
for purposes of determining competitive levels of executive pay is justified
because the Company competes with this larger group for the services of talented
executives.
After a review of the factors discussed above, the Compensation Committee
determines whether a particular executive should receive an increase in
compensation, an incentive bonus under the Company's Executive Bonus Plan, a
stock option or stock grant under the Company's Stock Option Plan for Key
Employees, or any other compenation benefits. For fiscal 1998, the Compensation
Committee noted that, although comparable companies were generally providing for
modest increases to the base salaries of their executive officers, the Company's
performance during this period did not meet expectations. As a result, the
Compensation Committee determined to
19
maintain Mr. Buford's base salary at $225,000 per annum. Neither the report of
the independent financial consultants nor the Compensation Committee recommended
that a bonus or other incentive payment be paid.
The Compensation Committee has reviewed the applicability of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), which disallows a
tax deduction for compensation to an executive officer in excess of $1.0 million
per year. The Compensation Committee does not anticipate that compensation
subject to this threshold will be paid to any executive officer of the Company
in the foreseeable future. The committee intends to periodically review the
potential consequences of Section 162(m) and may in the future structure the
performance-based portion of its executive officer compensation to comply with
certain exemptions provided in Section 162(m).
Mr. Richard W. Griner
Mr. James E. Upfield
Mr. Scott K. Upfield
Mr. Larry J. Parsons
Mr. Joseph V. Mariner, Jr.
20
PERFORMANCE GRAPH
The following table compares the performance of the Company's Common Stock with
certain comparable indices:
[GRAPH]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
TEMTEX INDUSTRIES, INC.............. $100.00 $121.06 $ 52.82 $ 40.88 $ 38.06 $ 35.25
Dow Jones Industrial................ $100.00 $110.10 $133.27 $166.10 $229.66 $231.11
Dow Jones Furnishings &
Appliances........................ $100.00 $ 91.73 $ 93.27 $107.80 $133.46 $115.94
</TABLE>
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The Company knows of no person owning beneficially more than 5% of the
Company's Common Stock, except for the following persons who owned, as of
November 13, 1998, the number of shares of Common Stock of the Company set forth
opposite his name in the table below:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership (1) Percent of Class
------------------ ------------------------ ------------------------ ----------------
<S> <C> <C> <C>
Common Stock James E. Upfield 1,083,590 (2) 31.2%
5400 LBJ Freeway
Suite 1375
Dallas, TX 75240
Common Stock Franklin Resources, Inc. 265,500 7.6%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock Dimensional Fund Advisors, 196,000 5.6%
Inc.
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
</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 of which Mr. Upfield is general partner. Mr. James E.
Upfield has shared voting and investment power with respect to such
shares of Common Stock.
22
(b) The following table sets forth the beneficial ownership (as defined by the
rules of the Securities and Exchange Commission) of Common Stock of the Company
by the incumbent directors, nominees for director and all directors and officers
as a group, together with the percentage of the outstanding shares which such
ownership represents. Information is stated as of November 13, 1998.
<TABLE>
<CAPTION>
Amount and
Title of Name or Identity Nature of Bene- Percent of
Class of Group ficial Ownership (1) Class
---------------- ----------------------- -------------------- ----------
<S> <C> <C> <C>
Common Stock James E. Upfield 1,083,590 (2) 31.2%
Common Stock E. R. Buford 114,062 (3) 3.3%
Common Stock Joseph V. Mariner, Jr. 6,725 (4) *
Common Stock Larry J. Parsons 7,000 (4) *
Common Stock Scott K. Upfield 30,500 (5) 1.0%
Common Stock Richard W. Griner 4,500 (5) *
Common Stock R. N. Stivers 30,043 (6) 1.0%
----------- -------
1,276,420 (7) 36.7 %
</TABLE>
- ----------------
* Denotes less than 1%.
(1) The nature of the beneficial ownership of the shares by the
respective persons or group is sole voting and investment power
unless otherwise indicated.
(2) Includes 24,750 shares of Common Stock over which Mr. James E.
Upfield has shared voting and investment power owned by HUTCO, a
partnership of which Mr. James E. Upfield is a general partner.
(3) Includes 65,000 shares of Common Stock exercisable under the 1990
Plan.
(4) Includes 6,500 shares of Common Stock exercisable under the Outside
Director Plan.
(5) Includes 4,000 shares of Common Stock exercisable under the Outside
Director Plan.
(6) Includes 7,500 shares of Common Stock exercisable under the 1990
Plan.
(7) Includes 93,500 shares of Common Stock issuable upon exercise of
options granted under the 1990 Plan and the Outside Director Plan.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the Annual Meeting of Stockholders of the Company held December 21, 1976, the
Company's stockholders approved a Share Purchase Agreement ("Agreement") among
the Company, Mr. James E. Upfield and RepublicBank Dallas, (succeeded by
NationsBank of Texas, N.A.) as trustee (the "Trustee"), pursuant to which the
Company may purchase, or may be required, following the death of Mr. Upfield, to
purchase from the estate of Mr. Upfield (the "Estate") up to that maximum number
of shares of Common Stock whose aggregate purchase price does not exceed the
lesser of (a) the sum of (i) the estate, inheritance, legacy and succession
taxes (including any interest collected as a part of such taxes) imposed because
of Mr. Upfield's death and (ii) the amount of funeral and administrative
expenses allowable as deductions in computing the taxable estate of Mr. Upfield
under Section 2053 of the Code, or (b) the amount paid to the Trustee pursuant
to the Agreement upon and by reason of the death of Mr. Upfield pursuant to a
life insurance policy in the amount of $500,000 carried by the Company on the
life of Mr. Upfield.
The purpose of the Agreement is to provide an orderly means for the Estate to
raise funds to pay all estate and inheritance taxes and funeral and
administrative expenses without necessitating the sale of a large number of
shares of Common Stock in the over-the-counter market, an event which, in the
opinion of the Company, would have, primarily because of the limited volume of
trading in such shares, a potentially serious adverse effect on the price of the
Common Stock.
The purchase price of a share of Common Stock under the Agreement is an
amount equal to 90% of the mean between the highest and lowest quoted selling
price for a share of Common Stock in any public securities exchange or
market, if available, or otherwise the mean between the bona fide closing bid
and asked prices therefore in said exchange or market, on the date of death
of Mr. Upfield, or if no such sales or bid and asked prices are available on
such date, then the weighted average of the mean between the highest and
lowest selling prices, or bona fide bid and asked prices, as the case may be,
for a share of Common Stock on the nearest trading date before and the
nearest trading date after the date of death of Mr. Upfield (such average to
be weighted inversely by the respective number of trading dates between the
selling dates or the price quotation dates and such date of death in the same
manner used in determining the valuation of stock for federal estate tax
purposes as set forth in Treasury Regulation Section.20.2031-2(d) promulgated
by the Commissioner of Internal Revenue under Section 2031 of the Code). Such
purchase price would have been $3.13, if computed as of November 13, 1998.
The Estate will not be obligated to sell any shares of Common Stock under the
Agreement unless prior to the closing of such sale the Estate has obtained a
ruling from the Internal Revenue Service, or an opinion of counsel satisfactory
in form and content to the Estate, to the effect that the purchase by the
Company will be treated as a distribution in full payment and exchange therefore
under Section 302(b) of the Code. The Company will not be required to purchase
any shares of Common Stock under the Agreement if and to the extent that such a
purchase would result in an impairment of its capital or would otherwise be in
violation of applicable state law relative to the Company's purchase of its
shares of Common Stock.
The Company, pursuant to the Agreement, has transferred to the Trustee, as
beneficiary, an existing life insurance policy on the life of Mr. Upfield in the
amount of $500,000. The Company is the owner of such insurance policy; however,
under certain conditions described below, Mr. Upfield will have the right to
purchase all, or any part, of such policy. The premium payable by the Company
for such insurance policy is $21,049 per year. The premiums paid by the Company
are not deductible by it for federal income tax purposes, and the proceeds of
the policy when paid to the Trustee and used to purchase the shares of Common
Stock under the Agreement or transferred to the Company will not constitute
income to the Company for federal income tax purposes.
The Trustee is to hold in its custody until the death of Mr. Upfield or
termination of the Agreement (in which event it is to return to the Company) the
insurance policy on the life of Mr. Upfield. Upon and after the death of Mr.
Upfield, the Trustee is to make claim for, collect, hold, deposit or invest, and
pay over the proceeds of the
24
insurance policy on the life of Mr. Upfield and any deposits or investments
thereof and interest earned thereon for the account of the Company. In the event
the proceeds from such insurance policy are greater than the amount required to
purchase the shares of Common Stock from the Estate, such excess will be paid to
the Company. The Company will reimburse the Trustee for its expenses in carrying
out the provisions of the Agreement and will pay reasonable and customary
compensation.
The Agreement may be terminated (a) upon the determination of bankruptcy or the
dissolution of the Company, (b) upon the cessation of regular business of the
Company, (c) at the option of the Company, in the event the purchase price
thereunder exceeds 200% of the book value of a share of Common Stock, determined
as of the end of the fiscal quarter immediately preceding the date of Mr.
Upfield's death, (d) at the option of the Estate, in the event the purchase
price thereunder is less than 75% of the book value of a share of Common Stock,
determined as of the end of the fiscal quarter immediately preceding the date of
Mr. Upfield's death or (e) by the mutual written consent of Mr. Upfield or the
Estate and the Company. In addition, if Mr. Upfield disposes, during his
lifetime, of all of the Common Stock he now owns, the Agreement will be
terminated.
The Agreement provides that if it is terminated during Mr. Upfield's life, he
will have the right to purchase from the Company any part or all of the
insurance policy on his life subject to the Agreement. The purchase price of
such insurance policy will be equal to its cash surrender value, net of any
policy indebtedness, plus any unearned premium thereon at the date of
purchase.
The manufacturing plant and related real property in Manchester, Tennessee is
leased by TFPI from HUTCO, a California partnership of which Mr. James E.
Upfield is a general partner. The Manchester facility, which was originally
subject to a five-year lease with an option to purchase between TFPI and the
former owner, was acquired by HUTCO upon the assignment to it of TFPI's option
to purchase following TFPI's inability to secure financing upon acceptable
terms. The lease between TFPI and HUTCO is for a twenty-five year term
commencing November 15, 1989 and provides for monthly rental payments of $13,020
(subject to certain scheduled rent escalations based upon increases in the
consumer price index). During the 1994 fiscal year, the Company entered into a
new twenty-five year lease agreement with HUTCO. The new lease agreement
provides for a 30,000 square foot expansion to the facility with monthly rental
payments of $21,500 commencing January 1, 1995. The new lease is subject to
certain scheduled rent escalations based upon increases in the consumer price
index.
In the opinion of management of the Company, the leases of the TFPI
manufacturing facility from HUTCO have been consummated on terms and conditions
as favorable to the Company as terms and conditions obtainable from
non-affiliated parties.
In 1994, the Company entered into employment agreements with Messrs. E. R.
Buford and R. N. Stivers. The employment agreements are described under the
caption "Executive Compensation-Employment Contract Agreements."
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 14 is
submitted as a separate section of this report.
(3) Listing of Exhibits: The response to this
portion is presented in Item . (c)
(b) During the fourth quarter of the period covered by
this report, there were no reports filed on Form 8-K.
(c) Exhibits:
(3) Articles of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of
Incorporation. *
3.2 Amended and Restated Bylaws. *
(10) Material Contracts
10.10 1990 Stock Option Plan for Key
Employees of Temtex Industries, Inc.
and its subsidiaries. *
10.11 Outside Directors Stock Option Plan of
Temtex Industries, Inc. *
10.12 Share Purchase Agreement between the
Registrant and Mr. James E. Upfield
effective December 21, 1976. *
10.13 Lease Agreement between the Registrant
and Mr. John D. Howard, a former
Director of the Registrant, dated
October 1, 1973 (the "Howard Lease
Agreement"). *
10.14 Second Amendment to the Howard Lease
Agreement dated August 22, 1983. *
10.15 Lease Agreement between HUTCO and the
Registrant dated September 7, 1989. *
10.16 Lease Agreement between HUTCO and the
Registrant dated April 25, 1994. **
10.17 Loan Agreement between NationsBank of
Texas, N.A. and the Registrant dated
May 3, 1994. **
26
10.18 Employment contract between E. R.
Buford and the Registrant dated
June 7, 1994. **
10.19 Employment contract between R. N.
Stivers and the Registrant dated
June 7, 1994. **
10.20 First amendment to the loan agreement
between NationsBank of Texas, N.A. and
the Registrant dated May 3, 1994.***
10.21 Second amendment to the loan agreement
between NationsBank of Texas, N.A. and
the Registrant dated May 3, 1994.***
10.22 Loan agreement between Bank of America
and the Registrant dated May 1,
1996.****
10.23 Waiver agreement to the loan between
Bank of America and the Registrant
dated May 1, 1996.*****
10.24 Second amendment to the loan agreement
between Bank of America and the
Registrant dated May 1, 1996.******
(21) Subsidiaries of the Registrant.
21.1 Subsidiaries of the Registrant. *
(23) Consents of Experts and Counsel
23.1 Consent of Independent Auditors.******
(27) Financial Data Schedule
27.1 Financial data schedule.******
(d) Financial Statement Schedules--The response to this portion
of Item 14 is submitted as a separate section of this report.
* Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993, and
incorporated by reference herein.
** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1994, and
incorporated by reference herein.
*** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 and
incorporated by reference herein.
27
**** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1996 and
incorporated by reference herein.
***** Filed as an exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1997 and
incorporated by reference herein.
****** Filed herewith.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TEMTEX INDUSTRIES, INC.
/S/ James E. Upfield
-------------------------------
James E. Upfield
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Titles Date
---------- ------ ----
<S> <C> <C>
/s/James E. Upfield Director, Chairman of the Board 11/24/98
----------------------------
James E. Upfield
/s/E. R. Buford Director, President and Chief
---------------------------- Executive Officer 11/24/98
E. R. Buford
/s/R. N. Stivers Vice President-Finance, 11/24/98
---------------------------- Chief Financial Officer and
R. N. Stivers Chief Accounting Officer
/s/Scott K. Upfield Director 11/24/98
----------------------------
Scott K. Upfield
</TABLE>
29
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
YEAR ENDED AUGUST 31, 1998
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
DALLAS, TEXAS
FORM 10-K--ITEM 8 AND ITEM 14(a) (1) and (2)
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Ernst & Young Independent Auditors
Consolidated balance sheets--August 31, 1998 and 1997
Consolidated statements of operations--Years ended August 31, 1998,
1997 and 1996
Consolidated statements of stockholders' equity--Years ended
August 31, 1998, 1997 and 1996
Consolidated statements of cash flows--Years ended August 1998, 1997,
1996
Notes to consolidated financial statements--August 31, 1998
Financial statement schedules:
II--Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and, therefore have been omitted.
Individual financial statements of the registrant have been omitted as the
registrant is primarily an operating company, and the subsidiary included in the
consolidated financial statement, filed, in the aggregate, does not have
minority equity interest and/or indebtedness to any person other than the
registrant in amounts which together (excepting indebtedness incurred in the
ordinary course of business which is not overdue and matures within one year
from the date of its creation whether or not evidenced by securities) exceed
five percent of the total assets as shown by the most recent year-end
consolidated balance sheet.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Temtex Industries, Inc.
We have audited the accompanying consolidated balance sheets of Temtex
Industries, Inc. and subsidiaries as of August 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended August 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion of these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Temtex
Industries, Inc. and subsidiaries at August 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of three
years in the period ended August 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Dallas, Texas
October 23, 1998
CONSOLIDATED BALANCE SHEETS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
August 31,
--------------------------
1998 1997
------ ------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 407 $ 575
Accounts receivable, less allowance for
doubtful accounts: 1998--$292,000
and 1997--$364,000--Note C 5,598 5,100
Inventories--Notes B and C 9,077 8,172
Prepaid expenses and other assets 227 258
Income taxes recoverable--Note G 35 653
Deferred taxes--Note G 607 440
------ ------
TOTAL CURRENT ASSETS 15,951 15,198
DEFERRED TAXES--Note G 138 163
OTHER ASSETS 392 183
PROPERTY, PLANT AND EQUIPMENT--Notes C and F
Land and clay deposits 566 405
Buildings and improvements 3,491 3,491
Machinery, equipment, furniture and
fixtures 24,753 24,086
Leasehold improvements 1,059 869
------ ------
29,869 28,851
Less allowances for depreciation,
depletion and amortization 22,703 21,162
------ ------
7,166 7,689
------ ------
$23,647 $23,233
------- -------
------- -------
</TABLE>
1
<TABLE>
<CAPTION>
August 31,
--------------------------
1998 1997
------ ------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable--Note C $ 700 $ 800
Accounts payable 2,674 2,459
Accrued expenses--Note D 1,591 1,738
Current maturities of indebtedness
to related parties--Notes C and F 11 9
Current maturities of long-term obligations--Note C 137 202
------ ------
TOTAL CURRENT LIABILITIES 5,113 5,208
INDEBTEDNESS TO RELATED PARTIES,
less current maturities--Notes C and F 1,593 1,604
LONG-TERM OBLIGATIONS, less current maturities--Note C 653 640
COMMITMENTS AND CONTINGENCIES--Notes F and K
STOCKHOLDERS' EQUITY--Notes E and J
Preferred stock--$1 par value; 1,000,000
shares authorized, none issued -- --
Common stock--$.20 par value; 10,000,000
shares authorized, 5,278,625 shares
issued at August 31, 1998 and at August 31, 1997 718 718
Additional capital 9,246 9,246
Retained earnings 6,651 6,144
------ ------
16,615 16,108
Less:
Treasury stock:
At cost--113,696 shares 327 327
At no cost--1,687,788 shares -- --
------ ------
16,288 15,781
------ ------
$23,647 $23,233
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1998 1997 1996
------ ------ ------
(in thousands except share data)
<S> <C> <C> <C>
Net sales $37,183 $39,208 $41,972
Cost of goods sold 27,045 29,317 30,977
------- ------- -------
10,138 9,891 10,995
Costs and expenses:
Selling, general and administrative 8,912 9,831 9,548
Interest 464 519 583
Other income (68) (114) (2)
------- ------- -------
9,308 10,236 10,129
------- ------- -------
------- ------- -------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 830 (345) 866
State and federal income taxes--Note G:
Provision (benefit) 323 (144) 324
------- ------- -------
NET INCOME (LOSS) $ 507 $ (201) $ 542
------- ------- -------
------- ------- -------
Basic income (loss) per common share $0.15 $(0.06) $0.16
Diluted income (loss) per common share $0.14 $(0.06) $0.15
Basic weighted average common shares outstanding 3,477,141 3,474,155 3,465,739
Diluted weighted average common and common
equivalent shares outstanding 3,531,414 3,474,155 3,531,631
</TABLE>
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Stock
Outstanding Cost of
------------------------ Additional Retained Treasury
Shares Amount Capital Earnings Stock
------ ------ ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1995 3,464,141 $ 715 $ 9,225 $ 5,803 $ 327
Stock award 3,000 1 11
Net income 542
--------- ------ ------- ------- -----
BALANCE AT AUGUST 31, 1996 3,467,141 716 9,236 6,345 327
Exercise of stock options 10,000 2 10
Net loss (201)
--------- ------ ------- ------- -----
BALANCE AT AUGUST 31, 1997 3,477,141 718 9,246 6,144 327
Net income 507
--------- ------ ------- ------- -----
BALANCE AT AUGUST 31, 1998 3,477,141 $ 718 $ 9,246 $ 6,651 $ 327
--------- ------ ------- ------- -----
--------- ------ ------- ------- -----
</TABLE>
See notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------
1998 1997 1996
---- ---- ----
(in thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 507 $ (201) $ 542
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,755 2,062 1,964
Deferred taxes (142) 295 (18)
Gain on disposition of buildings and equipment (11) (96) (9)
Provision for doubtful accounts 107 271 198
Changes in operating assets and liabilities:
Accounts receivable (605) 1,600 (158)
Inventories (905) 2,052 (1,451)
Prepaid expenses and other assets (178) 40 101
Accounts payable and accrued expenses 68 (2,225) 492
Income taxes recoverable/payable 618 (710) 500
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,214 3,088 2,161
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,237) (1,161) (2,065)
Expenditures on assets related to discontinued operations -- (44) (129)
Proceeds from disposition of property, plant and equipment 16 150 12
Proceeds from disposition of assets and other
receipts related to discontinued operations -- 398 26
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (1,221) (657) (2,156)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 141 265 1,099
Principal payments on revolving line of credit, long-term
obligations and indebtedness to related parties (302) (2,578) (1,407)
Proceeds from issuance of common stock -- 12 12
------ ------ ------
NET CASH USED IN FINANCING ACTIVITIES (161) (2,301) (296)
------ ------ ------
(DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS (168) 130 (291)
Cash and cash equivalents at beginning of year 575 445 736
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 407 $ 575 $ 445
------ ------ ------
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Capital lease obligations $ -- $ 7 $ --
Charges to allowance for doubtful accounts $ 179 $ 342 $ 304
</TABLE>
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
August 31, 1998
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The Company is a major producer of metal fireplace products and
face brick products. The Company manufactures its fireplace products in
facilities located in Manchester, Tennessee, Perris, California and Mexicali,
Mexico. Face brick products are manufactured in Malakoff, Texas.
All products are sold through the Company's own sales force and third party
sales representatives to contractors, distributors and retailers engaged in
providing building products used in both new residential and commercial
construction as well as remodeling projects.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Temtex Industries, Inc. (the Company) and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets, liabilities, revenues, and expenses and the
disclosure of gain and loss contingencies at the date of the consolidated
financial statements. Actual results could differ from those estimates.
INVENTORIES: Raw materials and supplies are stated at the lower of cost or
replacement value. Work in process and finished goods are stated at the lower of
cost or net realizable value, which is less than replacement value.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at
cost. Capitalized leases are carried at the present value of the net fixed
minimum lease commitments, as explained in Note F. Depreciation on buildings and
equipment is provided using principally accelerated methods. Depletion of clay
deposits and amortization of leasehold improvements and capitalized leases are
computed using the straight-line method. The estimated useful lives used in
computing depreciation, depletion, and amortization are:
<TABLE>
<CAPTION>
Years
-------
<S> <C>
Clay deposits 10-20
Buildings and improvements 5-30
Machinery, equipment, furniture and fixtures 3-15
Leasehold improvements Life of lease
</TABLE>
Expenditures for maintenance and repairs are charged to operations; betterments
are capitalized.
INCOME TAXES: Income taxes have been provided using the liability method for
providing deferred taxes.
6
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INCOME PER COMMON SHARE: Basic income per common share is based upon the
weighted average number of shares of common stock outstanding during the year.
Diluted income per share is based upon the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. Common
stock equivalents include options granted to key employees and outside directors
(see Note E). The number of common stock equivalents was based on the number of
shares issuable on the exercise of options reduced by the number of shares that
are assumed to have been purchased at the average price of the common stock
during the year with the proceeds from the exercise of the options.
All periods presented have been restated to reflect the adoption of Statement of
Financial Accounting Standard No. 128 (SFAS 128), "Earnings Per Share".
CASH EQUIVALENTS: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
RECLASSIFICATION: Certain prior year amounts have been reclassified to conform
to the current year presentation.
CONCENTRATION OF CREDIT RISK: The Company manufactures and sells fireplace and
brick products to companies in the construction industry. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Receivables generally are due within 30 days.
Credit losses consistently have been within management's expectations.
NOTE B--INVENTORIES
Inventories by costing method are summarized below:
<TABLE>
<CAPTION>
First-in Average
First-out Cost Total
--------- ------- -----
(in thousands)
<S> <C> <C> <C>
August 31, 1998:
Finished goods $ 2,682 $ 424 $ 3,106
Work in process 899 94 993
Raw materials and supplies 4,168 810 4,978
------ ------ ------
$ 7,749 $1,328 $ 9,077
------- ------- -------
------- ------- -------
August 31, 1997:
Finished goods $ 2,727 $ 669 $ 3,396
Work in process 1,029 101 1,130
Raw materials and supplies 3,057 589 3,646
------ ------ ------
$ 6,813 $ 1,359 $ 8,172
------- ------- -------
------- ------- -------
</TABLE>
7
NOTE C--NOTES PAYABLE AND LONG-TERM DEBT
In May 1996, the Company entered into a two year credit agreement with a bank
whereby the Company may borrow a maximum of $4,000,000 under a revolving credit
facility. At the option of the Company, borrowings under the demand note may
bear interest at the lending bank's prime commercial interest rate or at the
London Interbank Offered Rate ("LIBOR") plus 1.25 percentage points. Interest is
payable on a monthly basis. The Company's obligation to the bank is secured by
accounts receivable and inventory. In April 1998, the credit agreement was
amended whereby the maximum amount available under the revolving credit facility
was reduced to $3,000,000 and the expiration date was extended for an additional
two year period. The loan agreement contains covenants that require the
maintenance of a specified ratio of quick assets to current liabilities, as
defined, and a specified ratio of total liabilities to tangible net worth, as
defined, both ratios to be measured on a quarterly basis. Another covenant
requires the Company to maintain a positive net income for each annual
accounting period . At August 31, 1998, the Company is in compliance with these
covenants. At August 31, 1998 and 1997, $700,000 and $800,000, respectively, was
outstanding under the revolving credit note.
The weighted average interest rate on borrowings under the revolving credit note
as of August 31, 1998 and August 31, 1997 was 8.0% for each period.
Long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
August 31,
----------------------
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Long-term obligations:
Capitalized lease obligations, with interest
at 9.0% to 15.5%--Note F $2,065 $2,113
Equipment and land notes with interest at 6.4%
to 9.0%, due in monthly and annual installments
ending in 2007 329 342
----- -----
2,394 2,455
Less current maturities 148 211
----- -----
$2,246 $2,244
------ ------
------ ------
</TABLE>
Annual maturities of long-term obligations for each of the five succeeding
fiscal years and thereafter are $148,000, $ 94,000, $73,000, $76,000, $84,000,
and $1,919,000.
The Company made interest payments in 1998, 1997, and 1996 of $451,000, $519,000
and $621,000, respectively.
8
NOTE D--ACCRUED EXPENSES
Accrued expenses include the following:
<TABLE>
<CAPTION>
August 31,
--------------------
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Employee compensation $ 462 $ 429
Taxes, other than taxes on income 204 129
Interest 132 120
Other 793 1,060
------ ------
$1,591 $1,738
------ ------
------ ------
</TABLE>
NOTE E--STOCK OPTIONS
In 1990, the Company adopted a stock option plan for key employees to replace a
prior plan that expired on August 31, 1989. Options may include "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of 1986
or "non-qualified stock options." Options and SARs may be granted to key
employees at prices not less than the market value at the date of grant for
terms not to exceed ten years in the case of incentive stock options and ten
years and one month in the case of non-qualified stock options. Under the
original plan, 95,000 shares of common stock were reserved for future issuance.
The plan was amended in 1995 in which the number of shares eligible for issuance
was increased to 195,000 and the aggregate number of options which may be
awarded to any one employee in any fiscal year will not exceed 25,000.
In 1990, the Company adopted a stock option plan for directors of the Company
who are not employees of the Company. Options may be granted at prices not less
than the market value of the stock at the time of the grant for terms not to
exceed ten years from the date of the grant. The maximum number of shares for
which options may be granted to any outside director during a calendar year is
2,500. Under this plan, 30,000 shares of common stock were reserved for future
issuance.
The following table indicates the number of options granted and exercised for
each plan:
<TABLE>
<CAPTION>
Key Outside
Employee Director
Plan Plan
--------- --------
<S> <C> <C> <C>
Options outstanding at August 31, 1995 152,500 15,000
Granted -- --
Exercised -- --
------- ------
Options outstanding at August 31, 1996 152,500 15,000
Granted -- 6,000
Exercised 10,000 --
------- ------
Options outstanding at August 31, 1997 142,500 21,000
Granted -- --
Exercised -- --
------- ------
Options outstanding at August 31, 1998 142,500 21,000
------- ------
------- ------
Options exercisable at August 31, 1998 125,000 21,000
------- ------
------- ------
</TABLE>
Option prices range from $1.19 to $4.94 per share and expire between 1999 and
2005.
The weighted average exercise price at August 31, 1998 is $2.96.
The weighted average remaining life of the options at August 31, 1998 is four
years.
9
NOTE E--STOCK OPTIONS--CONTINUED
The Company has elected to continue to follow the expense recognition criteria
in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees". Therefore, SFAS 123 "Accounting for Stock-Based
Compensation" has no effect on the Company's financial statements. The pro forma
disclosures mandated by SFAS 123 are not provided as there is no effect of
adopting the expense recognition criteria of SFAS 123 for stock options granted
subsequent to August 31, 1995 on reported income per share of the Company.
NOTE F--LEASE COMMITMENTS
Two leased plant facilities are accounted for as a capitalized lease. The leased
properties were capitalized at the initial value of $635,000. In 1995, the
Company exercised its option to renew the lease which increased the term of the
lease by ten years and added to the value of the lease. The leased properties
have a combined net book value of $326,000 and $358,000 at August 31, 1998 and
1997, respectively.
A third manufacturing facility, accounted for as a capitalized lease, is leased
from a partnership which includes the Company's Chairman. This facility was
capitalized at the initial value of $976,000. During 1995, the facility was
expanded, at the expense of the partnership, and the original lease canceled.
The new twenty-five year lease negotiated by the Company has basically the same
provisions as the original, with an increase in the lease payments in
consideration of the expense incurred in the expansion. The facility has a net
book value of $1,230,000 and $1,296,000 at August 31, 1998 and 1997,
respectively. This lease obligation is classified as "Indebtedness to Related
Parties".
Other plant and office facilities are leased under operating lease agreements
which expire at various dates through fiscal 2005. The capitalized leases expire
in fiscal 2009 and fiscal 2019.
Future minimum payments, by year and in the aggregate, under capital leases and
noncancelable operating leases, consisted of the following at August 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
(in thousands)
<S> <C> <C>
Fiscal Year:
1999 $ 337 $ 368
2000 334 358
2001 334 282
2002 334 157
2003 334 157
Thereafter 4,463 263
----- ------
Total minimum lease payments 6,136 $1,585
Amount representing interest 4,071 ------
----- ------
Present value of net minimum
lease payments $2,065
------
------
</TABLE>
Rental expense for operating leases was $411,000, $394,000 and $351,000 in 1998,
1997 and 1996, respectively.
10
NOTE G--INCOME TAXES
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------------
1998 1997 1996
-------- ---------- --------
Current: (in thousands)
<S> <C> <C> <C>
Federal $ 87 $ (157) $ 207
State 111 119 111
Foreign 35 -- 24
-------- ---------- --------
Total current 233 (38) 342
Deferred:
Federal 89 (45) (53)
State 1 (61) 35
-------- ---------- --------
Total deferred 90 (106) (18)
-------- ---------- --------
Total income tax provision (benefit) $ 323 $ (144) $ 324
-------- ---------- --------
-------- ---------- --------
</TABLE>
In 1997, the Company utilized a federal net operating loss carryover of
approximately $1,200,000 through a carryback to 1993. This carryback resulted in
a refund of approximately $122,000 which was included in income taxes
recoverable. The carryback also generated an alternative minimum tax credit
carryforward of approximately of $106,000 and an investment tax credit
carryforward of approximately $126,000 from 1993.
The Company has state net operating loss carryforwards of approximately
$4,900,000 expiring in the years 2004 through 2009. In addition, the Company has
investment tax credit carryforwards of approximately $192,000 expiring in years
2001 through 2003, and approximately $271,000 of alternative minimum tax credit
carryforwards, which have no expiration date.
A valuation allowance of approximately $62,000 has been recorded to offset a
portion of the state net operating loss carryforwards because the realization of
those amounts is uncertain.
The differences between the provision (benefit) for income taxes and income
taxes computed using statutory income tax rates are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
1998 1997 1996
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate $ 282 $ (117) $ 294
Additional statutory percentage depletion (57) (52) (55)
State income taxes, net of federal tax benefit 63 39 73
Change in valuation allowance 62 -- --
Other (27) (14) 12
-------- --------- --------
Total income tax provision (benefit) $ 323 $ (144) $ 324
-------- --------- --------
-------- --------- --------
</TABLE>
11
NOTE G--INCOME TAXES--CONTINUED
Deferred income taxes are recognized using the liability method and reflect the
tax impact of temporary differences between the amount of assets and liabilities
for financial purposes and such amounts as measured by tax laws and regulations.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
August 31,
---------------------------
1998 1997
-------- ----------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 99 $ 124
Capital lease obligation 261 54
Tax credits and net operating
loss carryforwards 660 479
Other 185 57
-------- ----------
Total deferred tax assets 1,205 1,205 714
Valuation allowance (62) --
-------- ----------
Net deferred tax assets 1,143 714
Deferred tax liabilities:
Property, plant and equipment (259) (111)
Other (139) --
-------- ----------
Total deferred tax liabilities (398) (111)
-------- ----------
Net deferred tax assets $ 745 $ 603
-------- ----------
-------- ----------
</TABLE>
The Company received federal and state income tax refunds of $265,000 in 1998
and made federal and state income tax payments in 1998, 1997 and 1996 of
$76,000, $272,000 and $263,000, respectively.
NOTE H-- EMPLOYEE BENEFIT PLAN
During 1992, the Company adopted a defined contribution benefit plan covering
substantially all of its employees. The Company contribution was $.25 for each
$1.00 contributed by an employee (up to 4% of eligible wages).
The plan was amended during 1997, which increases the Company contribution to
$.50 for each $1.00 contributed by an employee (up to 6% of eligible wages).
The total expense for Company contributions was $158,000, $92,000 and $40,000 in
1998, 1997 and 1996, respectively.
12
NOTE I--BUSINESS SEGMENTS
The following financial information is presented for the Company's business
segments:
<TABLE>
<CAPTION>
Face Brick Fireplace
Products Products Total
---------- --------- -----
(in thousands)
<S> <C> <C> <C>
1998:
Net sales $11,021 $26,162 $37,183
------- ------- -------
------- ------- -------
Operating profit (loss) $ 3,326 $ (605) $ 2,721
------- -------
------- -------
Unallocated corporate
expense, net (1,495)
Interest expense (464)
Other income 68
------
Income from continuing
operations before income taxes $ 830
------
------
Identifiable assets $ 4,986 $17,245 $22,231
------- -------
------- -------
Corporate assets 1,416
-----
Total assets $23,647
-------
-------
Depreciation, depletion
and amortization $ 414 $ 1,336
------- -------
------- -------
Capital expenditures $ 313 $ 922
------- -------
------- -------
</TABLE>
13
NOTE I--BUSINESS SEGMENTS--CONTINUED
<TABLE>
<CAPTION>
Face Brick Fireplace
Products Products Total
---------- --------- -----
(in thousands)
<S> <C> <C> <C>
1997:
Net sales $ 9,010 $30,198 $39,208
------- ------- -------
------- ------- -------
Operating profit (loss) $ 1,608 $ (238) $ 1,370
------- -------
------- -------
Unallocated corporate
expense, net (1,310)
Interest expense (519)
Other income 114
-------
Loss from continuing
operations before income taxes $ (345)
-------
-------
Identifiable assets $ 4,200 $17,042 $21,242
------- -------
------- -------
Corporate assets $ 1,991
-------
Total assets $23,233
-------
-------
Depreciation, depletion
and amortization $ 391 $ 1,667
------- -------
------- -------
Capital expenditures $ 476 $ 682
------- -------
------- -------
</TABLE>
14
NOTE I--BUSINESS SEGMENTS--CONTINUED
<TABLE>
<CAPTION>
Face Brick Fireplace
Products Products Total
---------- --------- -----
(in thousands)
<S> <C> <C> <C>
1996:
Net sales $ 8,862 $33,110 $41,972
------- ------- -------
------- ------- -------
Operating profit $ 1,401 $ 892 $ 2,293
------- -------
------- -------
Unallocated corporate
expense, net (846)
Interest expense (583)
Other income 2
-------
Income from continuing operations
before income taxes $ 886
-------
-------
Identifiable assets $ 4,183 $21,927 $26,110
------- -------
------- -------
Corporate assets 1,698
Assets related to
discontinued operations 202
-------
Total assets $28,010
-------
-------
Depreciation, depletion
and amortization $ 385 $ 1,579
------- -------
------- -------
Capital expenditures $ 335 $ 1,722
------- -------
------- -------
</TABLE>
Operating profit is net sales less operating expenses. In computing segment
operating profit, the following items are excluded: general corporate revenues
and expenses, interest expense, other income and income taxes. There are no
sales between segments.
Identifiable assets are those assets used in either segment. Corporate assets
are principally cash and deferred taxes.
Sales to any one customer were not ten percent or greater of the total sales in
any of the three years reported.
The Company will be required to adopt SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information", in its fiscal year beginning
September 1, 1998. The Company does not believe that the adoption of SFAS 131
will materially change its disclosures regarding industry segment information.
15
NOTE J--SHARE REPURCHASE AGREEMENT
On December 21, 1976, the stockholders approved a Share Repurchase Agreement
(the "Agreement") among the Company, the Chairman of the Board of Directors (the
"Chairman"), and a trustee under which the Company may be required to purchase a
number of shares of common stock from the Chairman's estate upon his death. The
purchase price of a share of common stock under this Agreement is to be 90% of
the quoted market value at the date of the Chairman's death. The aggregate
purchase price may not exceed the lesser of certain taxes and expenses
associated with his death or the benefits under a certain life insurance policy
on the life of the Chairman. This policy, purchased by the Company at an annual
premium of $21,000, has been transferred to the Trustee under this Agreement.
The Company is not required to purchase any shares of common stock under the
Agreement if such purchase would result in an impairment of its capital or would
violate state laws in effect at that date.
As of August 31, 1998, the amount payable under this Agreement by the Company to
repurchase shares of common stock from the Chairman's estate could not exceed
$500,000, all of which is payable from the proceeds of the life insurance policy
maintained by the Company for this purpose.
NOTE K--CONTINGENCIES
Due to the complexity of the Company's operations, disagreements occasionally
occur.
In the opinion of management, the Company's ultimate loss from such
disagreements and potential resulting legal action, if any, will not be
significant.
16
NOTE L--QUARTERLY RESULTS (UNAUDITED)
Summary data relating to the results of operations for each quarter of the years
ended August 31, 1998 and 1997 follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
November 30 February 28 May 31 August 31 Total
----------- ----------- ------ --------- -----
<S> <C> <C> <C> <C> <C>
Fiscal year 1998:
Net sales $10,426 $ 8,449 $ 8,566 $ 9,742 $37,183
Gross profit 3,160 2,279 2,191 2,508 10,138
Income from
continuing operations 385 39 18 65 507
Net income 385 39 18 65 507
Basic income from continuing
operations per common share $.11 $.01 $.01 $.02 $.15
Diluted income from continuing
operations per common share .11 .01 .01 .02 .14
Fiscal year 1997:
Net sales $13,086 $ 8,985 $ 8,479 $8,658 $39,208
Gross profit 4,110 2,384 1,748 1,649 9,891
Income (loss) from
continuing operations 753 (88) (376) (490) (201)
Net income (loss) 753 (88) (376) (490) (201)
Basic income (loss) from continuing
operations per common share $.22 $(.03) $(.11) $(.14) $(.06)
Diluted income (loss) from continuing
operations per common share .21 (.03) (.11) (.14) (.06)
</TABLE>
NOTE M--SUBSEQUENT EVENT
On October 22, 1998, the Company entered into an Agreement for the sale of its
Texas Clay division for approximately $12.9 million subject to final adjustment.
The Agreement is subject to final approval by the Company's stockholders.
Accordingly, the consolidated financial statements have not been reclassified to
reflect Texas Clay as a discontinued segment.
17
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended August 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------
Description Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts- Deductions- at End
of Period Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1996
Reserve, deducted from related asset:
Allowance for doubtful accounts $541 $198 $ -- $304 (1) $435
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Year ended August 31, 1997
Reserve, deducted from related asset:
Allowance for doubtful accounts $435 $271 $ -- $342 (1) $364
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Year ended August 31, 1998
Reserve, deducted from related asset:
Allowance for doubtful accounts $364 $107 $ -- $179 (1) $292
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
(1) Amount charged against reserve.
II
