SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended May 31, 1999 Commission File No. 0-5940
TEMTEX INDUSTRIES, INC.
--------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 75-1321869
- ------------------------------- ----------------------
(State or other jurisdiction 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)
972/726-7175
- --------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days.
Yes X No
----- -----
The Registrant had 3,453,641 shares of common stock, par value $.20 per
share, outstanding as of the close of the period covered by this report.
<PAGE>
PART I. FINANCIAL INFORMATION
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 5,442 $ 5,719 $ 19,427 $ 20,122
Cost of goods sold 5,131 4,757 16,851 15,410
--------- --------- --------- ---------
311 962 2,576 4,712
Cost and expenses:
Selling, general and administrative 2,012 1,844 5,925 5,681
Interest 27 96 215 316
Other expense (income) 3 (5) 11 (7)
--------- --------- --------- ---------
2,042 1,935 6,151 5,990
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT AND
DISCONTINUED OPERATIONS (1,731) (973) (3,575) (1,278)
State and federal income tax benefit--Note B (563) (332) (1,162) (425)
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (1,168) (641) (2,413) (853)
GAIN FROM DISPOSAL AND OPERATING
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME
TAXES -- Note H -- 659 5,434 1,295
--------- --------- --------- ---------
NET INCOME $ (1,168) $ 18 $ 3,021 $ 442
========= ========= ========= =========
Basic and diluted (loss) income
per common share:
Continuing operations $(.34) $(.18) $(.69) $(.24)
========= ========= ========= =========
Net income:
Basic $(.34) $.01 $.87 $.13
========= ========= ========= =========
Diluted $(.34) $.01 $.86 $.13
========= ========= ========= =========
Basic weighted average common
shares outstanding 3,466,761 3,477,141 3,473,747 3,477,141
========= ========= ========= =========
Diluted weighted average common
and common equivalent shares
outstanding 3,509,363 3,534,292 3,520,391 3,530,455
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE>
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
May 31, 1999 August 31, 1998
-------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,040 $ 327
Accounts receivable, less allowance for
doubtful accounts of $357,000 at May 31,
1999 and $264,000 at August 31, 1998 3,147 3,959
Inventories-Note D 8,745 7,749
Prepaid expenses and other assets 376 182
Income taxes recoverable -- 35
Deferred taxes 477 607
Net current assets of discontinued
operations -- 1,929
-------- --------
TOTAL CURRENT ASSETS 18,785 14,788
DEFERRED TAXES 266 138
OTHER ASSETS 1,668 392
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 2,615 2,615
Machinery, equipment, furniture and fixtures 17,697 16,989
Leasehold improvements 1,165 1,059
-------- --------
21,477 20,663
Less allowances for depreciation,
depletion and amortization 16,375 15,471
-------- --------
5,102 5,192
Property, plant and equipment of
discontinued operations, net of
accumulated depreciation of $7,232. -- 1,974
-------- --------
$ 25,821 $ 22,484
========== =========
-3-
<PAGE>
May 31, 1999 August 31, 1998
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable--Note E $ -- $ 700
Accounts payable 1,769 1,864
Accrued expenses 912 1,327
Income taxes payable 1,876 --
Current maturities of indebtedness to
related parties 12 11
Current maturities of long-term obligations-
Note E 28 48
---------- ----------
TOTAL CURRENT LIABILITIES 4,597 3,950
INDEBTEDNESS TO RELATED PARTIES,
less current maturities 1,584 1,593
LONG-TERM OBLIGATIONS,
less current maturities--Note E 411 433
LONG-TERM OBILIGATIONS OF DISCONTINUED OPERATIONS
less current maturities -- 220
COMMITMENTS AND CONTINGENCIES--Note F
STOCKHOLDERS' EQUITY--Note G
Preferred stock - $1 par value; 1,000,000
shares authorized, none issued -- --
Common stock - $.20 par value; 10,000,000
shares authorized, 5,278,625 shares issued
at August 31, 1998 and 5,286,125 at May 31,
1999 720 718
Additional capital 9,253 9,246
Retained earnings 9,672 6,651
---------- ---------
19,645 16,615
Less:
Treasury stock:
At cost -144,696 and 113,696 shares for
1999 and 1998, respectively 416 327
At no cost - 1,687,788 shares -- --
---------- ---------
19,229 16,288
---------- ---------
$ 25,821 $ 22,484
========== =========
See notes to condensed consolidated financial statements.
-4-
<PAGE>
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
-----------------------
1999 1998
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,021 $ 442
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 1,015 1,259
Discontinued operations:
Gain on sale, net of tax (4,675) --
Income from operations, net of tax (759) (1,295)
Deferred taxes -- (232)
Gain on disposition of property, plant and equipment -- (11)
Provision for doubtful accounts 122 (5)
Changes in operating assets and liabilities:
Accounts receivable 690 600
Inventories (996) (739)
Prepaid expenses and other assets (1,096) (33)
Accounts payable and accrued expenses (2,362) 156
Income taxes payable/recoverable 1,913 706
Cash (used in) provided by discontinued operations (1,986) 514
--------- --------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (5,113) 1,362
INVESTING ACTIVITIES
Purchases of property, plant and equipment (814) (751)
Purchases of property, plant and equipment, discontinued operations (24) (86)
Proceeds from sale of discontinued operations 12,525 --
Proceeds from disposition of property, plant and equipment -- 1
Proceeds from disposition of property, plant and equipment,
discontinued operations -- 15
NET CASH PROVIDED BY (USED IN) --------- --------
INVESTING ACTIVITIES 11,687 (821)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term borrowings -- --
Principal payments on revolving line of credit, long-term obligations
and indebtedness to related parties (750) (173)
Principal payments on long-term obligations, discontinued operations (31) (82)
Proceeds from issuance of common stock 9 --
Purchase of treasury stock (89) --
--------- --------
NET CASH USED IN FINANCING ACTIVITIES (861) (255)
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 5,713 286
Cash and cash equivalents at beginning of year 327 502
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,040 $ 788
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements include the accounts of Temtex Industries, Inc. (the
Company) and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended May 31, 1999 are not
necessarily indicative of the results that may be expected for the
year ending August 31, 1999. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended August 31,
1998.
NOTE B--INCOME TAXES
Income taxes have been provided using the liability method for
providing deferred taxes. Income from continuing operations for the
first nine months of fiscal 1999 reflects an estimated annualized tax
rate of approximately 32.5%.
NOTE C--INCOME PER COMMON SHARE
Basic income per common share is based upon the weighted average
number of shares of common stock outstanding during each period.
Diluted income per share is based upon the weighted average number of
shares of common stock and common stock equivalents outstanding
during each period. Common stock equivalents include options granted
to key employees and outside directors. The number of common stock
equivalents was based on the number of shares issuable on the
exercise of options reduced by the number of shares that are assumed
to have been purchased at the average price of common stock during
each quarter with the proceeds from the exercise of the options.
NOTE D--INVENTORIES
Inventories are summarized below:
May 31, 1999 August 31, 1998
------------ ---------------
(in thousands)
Finished goods $ 2,855 $ 2,682
Work in process 1,017 899
Raw materials and supplies 4,873 4,168
------- -------
$ 8,745 $ 7,749
======= =======
-6-
<PAGE>
NOTE E--NOTES PAYABLE AND LONG-TERM DEBT
In May 1996, the Company entered into a two-year credit agreement
with a bank whereby the Company may borrow a maximum of $4,000,000
under a revolving credit facility. At the option of the Company,
borrowings under the demand note may bear interest at the lending
bank's prime commercial interest rate or at the London Interbank
Offered Rate ("LIBOR") plus 1.25 percentage points. Interest is
payable on a monthly basis. The Company's obligation to the bank is
secured by accounts receivable and inventory. In April 1998, the
credit agreement was amended whereby the maximum amount available
under the revolving credit facility was reduced to $3,000,000 and the
expiration date was extended for an additional two year period. The
loan agreement contains covenants that require the maintenance of a
specified ratio of quick assets to current liabilities, as defined,
and a specified ratio of total liabilities to tangible net worth, as
defined, both ratios to be measured on a quarterly basis. At May 31,
1999, the Company is in compliance with these covenants. The
agreement was amended a second time in January 1999, whereby the
availability of the line of credit is restricted unless the Company
reports fiscal year to date income, greater than zero, from
continuing operations. At May 31, 1999, there was no balance
outstanding under the revolving credit note.
NOTE F-COMMITMENTS AND CONTINGENCIES
Due to the complexity of the Company's operations, disagreements
occasionally occur.
In the opinion of management, the Company's ultimate loss from such
disagreements and potential resulting legal action, if any, will not
be significant.
NOTE G--CAPITAL STOCK
At May 31, 1999 and August 31, 1998, there were 1,000,000 shares of
preferred stock, with a par value of $1 authorized. None have been
issued.
The Company's Board of Directors approved the repurchase of up to $1.0
million of the Company's Common Stock after a Special Shareholder's
meeting held on January 5, 1999. As of May 31, 1999, 31,000 shares
have been purchased on the open market and are included as treasury
stock.
At May 31, 1999 and August 31, 1998, there were 10,000,000 shares of
par value $.20 common stock authorized of which 5,286,125 and
5,278,625 shares were issued at May 31, 1999 and August 31, 1998,
respectively. Of the shares issued, 3,453,641 were outstanding at May
31, 1999 and 3,477,141 were outstanding at August 31, 1998. The
remainder of the issued stock is comprised of 1,832,484 and 1,801,484
shares of treasury stock at May 31, 1999 and August 31, 1998,
respectively.
NOTE H-DISCONTINUED OPERATIONS
On January 5, 1999, the Company sold its Texas Clay brick
manufacturing division for approximately $12.5 million. The financial
statements have been restated to reflect Texas Clay as a discontinued
operation.
-7-
<PAGE>
NOTE H-- DISCONTINUED OPERATIONS - (continued)
The components of the Company's results from the discontinued
operation of Texas Clay, net of income taxes, are as follows: (In
thousands except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1999 1998 1999 1998
---------- -------- ------- --------
<S> <C> <C> <C> <C>
Income from operations of Texas Clay before
income taxes $ $ 1,002 $ 1,171 $ 2,014
Income taxes 343 412 719
--------- -------- ------- -------
-- 659 759 1,295
Gain on disposal of Texas Clay before
income taxes 7,420
Income taxes 2,745
--------- -------- ------- -------
-- 4,675 --
--------- -------- ------- -------
Gain from disposal and income from
discontinued operations, net of income taxes $ -- $ 659 $ 5,434 $ 1,295
========= ======== ======= =======
Income per share:
Basic income per common share:
Operations $ $ .19 $ .22 $ .37
Gain on sale -- 1.34 --
--------- -------- ------- -------
$ -- $ .19 $ 1.56 $ .37
========= ======== ======== =======
Diluted income per common and common
equivalent share:
Operations $ $ .19 $ .22 $ .37
Gain on sale -- 1.33 --
--------- -------- -------- -------
$ -- $ .19 $ 1.55 $ .37
========= ======== ======== =======
</TABLE>
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction
with the unaudited condensed consolidated financial statements and
related notes of the Company included elsewhere in this report. This
Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Quarterly Report on
Form 10-Q contain forward-looking statements that involve risks and
uncertainties. Among the risks and uncertainties to which the
Company is subject are the risks inherent in the cyclical and
unpredictable nature of the housing and home products business
generally, fluctuations in interest rates, geographic concentration
of the Company's primary market, the fact that the Company has
experienced fluctuations in revenues and operating results, and the
highly competitive nature of the industries in which the Company
competes, together with each of those other factors set forth in the
Company's filings made with the Securities & Exchange Commission. As
a result, the actual results realized by the Company could differ
materially from the results discussed in the forward-looking
statements made herein. Words or phrases such as "will,"
"anticipate," "expect," "believe," "intend," "estimate," "project,"
"plan" or similar expressions are intended to identify forward-
looking statements. Readers are cautioned not to place undue
reliance on the forward-looking statements made in this Quarterly
Report on Form 10-Q.
In the second quarter of fiscal 1999, the Company sold its facility
that produced face brick products. The results of operations and
gain on the sale have been classified as discontinued operations.
The following discussion focuses on the remaining segment of
business, "Fireplace Products".
Net Sales
- ---------
Net sales of fireplace products decreased approximately 5% or
$277,000 in the third quarter of fiscal 1999 compared to the third
quarter of fiscal 1998. The decrease in sales resulted from decreases
in the quantities of both fireplaces and gas log sets delivered in
the third quarter of 1999. Between the comparative nine-month
periods, net sales decreased approximately 3% in fiscal 1999. Net
sales increased for gas fireplaces but decreased for woodburning
fireplaces and gas log sets. The sales increase in gas fireplaces
was caused by an increase in the number of fireplaces delivered. The
decrease in sales in woodburning fireplaces and gas log sets was
caused by decreases in the quantities delivered as well as small
decreases in the average unit sales prices. Competition within the
industry continues to be a dominating force in determining selling
prices.
Gross Profit
- ------------
Gross profit decreased approximately 68% in the third quarter of
fiscal 1999 compared to the third quarter of fiscal 1998. Production
at less than optimum levels results in under absorption of fixed
costs and reduced gross profits. Gross profit decreased
approximately 45% between the comparative nine-month periods due to
the lack of capacity utilization as in the comparative quarters.
-9-
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased $168,000 or
approximately 9% in the third quarter of fiscal 1999 compared to the
third quarter of fiscal 1998. Between the comparative nine-month
periods, expenses increased $244,000 or approximately 4%. Expenses
related to home center sales and trade shows increased over the
previous comparison periods. Additional expenses incurred in fiscal
1999 are the result of the creation of a new department within the
sales organization for the sole purpose of managing the Company's
sales effort in Canada.
Interest Expense
- ----------------
Net interest expense decreased $69,000 or approximately 72% and
$101,000 or approximately 32% between the comparative quarters and
nine-month periods, respectively. The decrease in the net expense in
both the third quarter and the first nine-months of fiscal 1999 was
caused by the decrease in the average indebtedness during both
periods of fiscal 1999 compared to fiscal 1998. In addition, the
Company has invested a portion of the proceeds from the sale of its
brick manufacturing facility in cash funds and is earning interest on
a daily basis.
Income Taxes
- ------------
Income tax benefit from continuing operations for the first nine
months of fiscal 1999 is based on an estimated annualized effective
tax rate of 32.5%. The effective tax rates applied to discontinued
operations and the gain on the disposition of the discontinued
operations were 35.2% and 37%, respectively.
Liquidity and Capital Resources
- -------------------------------
Net cash used by operating activities was $5,113,000 for the first
nine months of 1999 compared to net cash provided of $1,362,000 for
the first nine months of 1998. The decreased cash flow from
operations in the first nine months of fiscal 1999 was primarily due
to the loss incurred by continuing operations as well as changes in
working capital, principally increases in inventories, prepaids and
other assets and decreases in accounts payable and accrued expenses.
The brick manufacturing division was sold for approximately
$12,500,000 in the second quarter of fiscal 1999. The cash proceeds
were used to pay down certain indebtedness with the remainder being
available to enhance the Company's business operations through
strategic acquisitions or other appropriate uses.
Working capital increased from $10,838,000 at August 31, 1998 to
$14,188,000 at May 31, 1999.
Capital expenditures and capitalized lease obligations for the first
nine months of 1999 were $750,000. Expenditures include amounts for
tooling, dies, replacement items and major repairs to manufacturing
equipment.
In May 1996, the Company entered into a two-year credit agreement
with a bank whereby the Company may borrow up to $4,000,000 under a
revolving credit facility. The outstanding principal balance may
bear interest at a variable or fixed rate, at the Company's option,
at the time funds are requested. Interest is payable on a monthly
basis and also at the end of the borrowing period if borrowing at a
fixed rate. In
-10-
<PAGE>
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 credit agreement was amended a second time in
January 1999, whereby the availability of the line of credit is
restricted unless the Company reports fiscal year to date income
greater than zero from continuing operations. The revolving credit
facility had no outstanding balance at May 31, 1999.
The Company anticipates that cash flow from operations together with
proceeds from the sale of the brick division and funds that should
become available from the revolving credit facility should provide
the Company with adequate funds to meet its working capital
requirements as well as requirements for capital expenditures for at
least the next twelve months.
Year 2000 Issue
- ---------------
Many existing computer systems and applications and other control
devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century.
As a result, as year 2000 approaches, computer systems and
applications used by many companies may need to be upgraded to comply
with "Year 2000" requirements. The Company relies on its systems in
operating and monitoring many significant aspects of its business,
including financial systems (such as general ledger, accounts
payable, accounts receivable, inventory and order management),
customer services, infrastructure and network and telecommunications
equipment. The Company also relies directly and indirectly on the
systems of external business enterprises such as customers,
suppliers, creditors and financial organizations.
Based on various assessments during the past year, the Company
determined that only minor modifications of its information and
production software systems would be necessary in order to properly
utilize dates beyond the year 1999. Most of the changes have already
been made. Although the Company anticipates all remaining
modifications to be completed in 1999, if such modifications were not
made, management believes the year 2000 issue will not have a
material impact on the operations of the Company.
The cost for system modifications was approximately $11,000 and any
further modification expenses are expected to be insignificant.
At this date, the Company is not aware of any customer, vendor, or
supplier (external agents) with a year 2000 issue that would
materially affect the Company's results of operations, liquidity or
capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable.
Management is of the opinion that all significant year 2000 issues
have been identified and addressed. Accordingly, the Company has not
developed any year 2000 contingency plans for operations.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
--------
Exhibit
No. Description
------- -----------
27.1 Financial Data Schedule (filed herewith)
(b). Report on Form 8-K
------------------
The Registrant did not file any reports on Form 8-K during
the quarter for which this report is filed
-12-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TEMTEX INDUSTRIES, INC.
DATE: 7/7/99 BY: /s/E.R.BUFORD
------- ----------------------
E. R. Buford
President
DATE: 7/7/99 BY: /s/R. N. STIVERS
------- ----------------------
R. N. Stivers
Vice President-Finance
-13-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the Temtex Industries,
Inc. and Subsidiaries financial statements for the nine months ended May 31,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 6,040
<SECURITIES> 0
<RECEIVABLES> 3,504
<ALLOWANCES> 357
<INVENTORY> 8,745
<CURRENT-ASSETS> 18,785
<PP&E> 21,477
<DEPRECIATION> 16,375
<TOTAL-ASSETS> 25,821
<CURRENT-LIABILITIES> 4,597
<BONDS> 0
0
0
<COMMON> 720
<OTHER-SE> 18,509
<TOTAL-LIABILITY-AND-EQUITY> 25,821
<SALES> 19,427
<TOTAL-REVENUES> 19,427
<CGS> 16,851
<TOTAL-COSTS> 16,851
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 122
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> (3,575)
<INCOME-TAX> (1,162)
<INCOME-CONTINUING> (2,413)
<DISCONTINUED> 5,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,021
<EPS-BASIC> .87
<EPS-DILUTED> .86
</TABLE>
