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 February 28, 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 (I.R.S. Employer
of 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 3,479,641 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 Six Months Ended
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 6,310 $ 6,132 $ 13,985 $ 14,403
Cost of goods sold 5,638 4,755 11,720 10,653
------------ ------------ ------------ ------------
672 1,377 2,265 3,750
Cost and expenses:
Selling, general and administrative 1,878 1,784 3,913 3,837
Interest 76 109 188 220
Other expense (income) 6 (3) 8 (2)
------------ ------------ ------------ ------------
1,960 1,890 4,109 4,055
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT AND
DISCONTINUED OPERATIONS (1,288) (513) (1,844) (305)
State and federal income tax benefit-Note B (448) (174) (599) (93)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (840) (339) (1,245) (212)
GAIN FROM DISPOSAL AND OPERATING
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME
TAXES -- Note H 4,828 378 5,434 636
------------ ------------ ------------ ------------
NET INCOME $ 3,988 $ 39 $ 4,189 $ 424
============ ============ ============ ============
Basic and diluted (loss) income
per common share:
Continuing operations $ (.24) $ (.10) $ (.36) $ (.06)
====== ====== ====== ======
Net Income:
Basic $ 1.15 $ .01 $ 1.20 $ .12
====== ====== ====== ======
Diluted $ 1.13 $ .01 $ 1.19 $ .12
====== ====== ====== ======
Basic Weighted average common shares
outstanding 3,477,458 3,477,141 3,477,298 3,477,141
============ ============ ============ ============
Diluted weighted average common and common
equivalent shares outstanding 3,523,628 3,527,877 3,525,963 3,528,536
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE>
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
February 28, 1999 August 31, 1998
----------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,720 $ 327
Accounts receivable, less allowance for
doubtful accounts of $329,000 at
February 28, 1999 and $264,000 at
August 31, 1998 3,966 3,959
Inventories-Note D 9,064 7,749
Prepaid expenses and other assets 327 182
Income taxes recoverable -- 35
Deferred taxes 477 607
Net current assets of discontinued operations -- 1,929
--------- ---------
TOTAL CURRENT ASSETS 21,554 14,788
DEFERRED TAXES 266 138
OTHER ASSETS 1,660 392
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 2,615 2,615
Machinery, equipment, furniture and fixtures 17,481 16,989
Leasehold improvements 1,090 1,059
--------- ---------
21,186 20,663
Less allowances for depreciation,
depletion and amortization 16,060 15,471
--------- ---------
5,126 5,192
Property, plant and equipment of discontinued operations,
net of accumulated depreciation of $7,232. -- 1,974
--------- ---------
$ 28,606 $ 22,484
========= =========
</TABLE>
-3-
<PAGE>
<TABLE>
February 28, 1999 August 31, 1998
----------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable--Note E $ -- $ 700
Accounts payable 2,664 1,864
Accrued expenses 950 1,327
Income taxes payable 2,476 --
Current maturities of indebtedness to related parties 12 11
Current maturities of long-term obligations--Note E 27 48
--------- ---------
TOTAL CURRENT LIABILITIES 6,129 3,950
INDEBTEDNESS TO RELATED PARTIES,
less current maturities 1,588 1,593
LONG-TERM OBLIGATIONS,
less current maturities--Note E 419 433
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 February 28, 1999 720 718
Additional capital 9,253 9,246
Retained earnings 10,840 6,651
--------- ---------
20,813 16,615
Less:
Treasury stock:
At cost - 118,696 and 113,696 shares
for 1999 and 1998, respectively 343 327
At no cost - 1,687,788 shares -- --
--------- ---------
20,470 16,288
--------- ---------
$ 28,606 $ 22,484
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
-4-
<PAGE>
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
February 28,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,189 $ 424
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 700 824
Discontinued operations:
Gain on sale, net of tax (4,675) --
Income from operations, net of tax (759) (636)
Gain on disposition of property, plant and equipment -- (14)
Provision for doubtful accounts 73 79
Changes in operating assets and liabilities:
Accounts receivable (80) 425
Inventories (1,315) (57)
Prepaid expenses and other assets (1,039) 16
Accounts payable and accrued expenses (1,429) (284)
Income taxes payable/recoverable 2,513 246
Cash (used in) provided by discontinued operations (1,986) 351
---------- ----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (3,808) 1,374
INVESTING ACTIVITIES
Purchases of property, plant and equipment (523) (296)
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 11,978 (366)
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 (739) (537)
Principal payments on long-term obligations, discontinued operations (31) (54)
Proceeds from issuance of common stock 9 --
Purchase of treasury stock (16) --
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (777) (591)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 7,393 417
Cash and cash equivalents at beginning of year 327 502
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,720 $ 919
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
-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 six-
month period ended February 28, 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 six 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:
February 28, 1999 August 31, 1998
----------------- ---------------
(in thousands)
Finished goods $ 2,929 $ 2,682
Work in process 899 899
Raw materials and supplies 5,236 4,168
--------- ---------
$ 9,064 $ 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
February 28, 1999, the Company is in compliance with these
covenants. At February 28, 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 February 28, 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 February
28, 1999, 5,000 shares have been purchased on the open market and
are included as treasury stock.
At February 28, 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 February 28, 1999
and August 31, 1998, respectively. Of the shares issued,
3,479,641 were outstanding at February 28, 1999 and 3,477,141
were outstanding at August 31, 1998. The remainder of the issued
stock is comprised of 1,806,484 and 1,801,484 shares of treasury
stock at February 28, 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 $12.9 million subject to
final adjustments. Management believes that any final adjustments
will not be significant. 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income from operations of Texas Clay before
income taxes $ 280 $ 578 $ 1,171 $ 1,012
Income taxes 127 200 412 376
-------- -------- -------- --------
153 378 759 636
Gain on disposal of Texas Clay before
income taxes 7,420 7,420
Income taxes 2,745 2,745
-------- -------- -------- --------
4,675 -- 4,675 --
-------- -------- -------- --------
Gain from disposal and income from
discontinued operations, net of income taxes $ 4,828 $ 378 $ 5,434 $ 636
======== ======== ======== ========
Income per share:
Basic income per common share:
Operations $ .04 $ .11 $ .22 $ .18
Gain on sale 1.35 -- 1.34 --
----- ----- ----- -----
$1.39 $ .11 $1.56 $ .18
===== ===== ===== =====
Diluted income per common and common
equivalent share:
Operations $ .04 $ .11 $ .22 $ .18
Gain on sale 1.33 -- 1.33 --
----- ----- ----- -----
$1.37 $ .11 $1.55 $ .18
===== ===== ===== =====
</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.
On January 5, 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 increased approximately 3% or
$178,000 in the second quarter of fiscal 1999 compared to the
second quarter of fiscal 1998. The major portion of the sales
increase results from an increase in the quantity of gas log sets
delivered in the second quarter of 1999. Sales of zero-clearance
fireplaces remained at approximately the same level as in
1998. Between the comparative six-month periods, net sales
decreased approximately 3% in fiscal 1999. Net sales decreased
for both fireplaces and gas log sets. Although the combined
quantity for all models of fireplaces sold in the most recent six
months period was greater than last year, the unit average
selling price was less than last year's price. Competition
within the industry continues to be a major factor in determining
selling prices.
Gross Profit
- ------------
Gross profit decreased approximately 51% in the second quarter of
fiscal 1999 compared to the second 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 40% between the comparative six-
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 by $94,000
or approximately 5% in the second quarter of fiscal 1999 compared
to the second quarter of fiscal 1998. A portion of the increase
was caused by the creation of a department within the sales
organization for the exclusive purpose of managing the Canadian
sales effort. Expenses related to home center sales also showed
a slight increase. Between the comparative six-month periods,
expenses increased $76,000 or approximately 2% for essentially
the same reasons as the increase between the quarters.
Interest Expense
- ----------------
Interest expense decreased $33,000 or approximately 30% and
$32,000 or 14% between the comparative quarters and six-month
periods, respectively. The decrease in expense in both the
second quarter and the first six months of fiscal 1999 was caused
by the decrease in the average debt outstanding during both
periods compared to those in fiscal 1998.
Income Taxes
- ------------
Income tax benefit of $599,000 for continuing operations for the
first six 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 $3,808,000 for the
first six months of 1999 compared to net cash provided of
$1,374,000 for the first six months of 1998. The decreased cash
flow from operations in the first six 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.
The brick manufacturing division was sold for approximately
$12,900,000, subject to final adjustments, of which $12,068,000
was received at closing on January 5, 1999. Price adjustments
may include amounts for accounts receivable, inventories and
prepaid items that differed in amounts on the closing date from
amounts recorded at the time of the original agreement in 1998.
Any price adjustments are not expected to be significant. The
cash proceeds, estimated to be approximately $12,500,000 after
final adjustments, have been 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
$15,425,000 at February 28, 1999.
Capital expenditures and capitalized lease obligations for the
first six months of 1999 were $523,000. 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
-10-
<PAGE>
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 no
outstanding balance at February 28, 1999.
The Company anticipates that cash flow from operations together
with proceeds from the sale of the brick division and 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.
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 filed one report 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: 4/13/99 BY: /s/ E. R. BUFORD
------- -------------------------
E. R. Buford
President
DATE: 4/13/99 BY: /s/ R. N. STIVERS
------- -------------------------
R. N. Stivers
Vice President-Finance
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE TEMTEX INDUSTRIES,
INC. AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED FEBRUARY 28,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 7,720
<SECURITIES> 0
<RECEIVABLES> 4,295
<ALLOWANCES> 329
<INVENTORY> 9,064
<CURRENT-ASSETS> 21,554
<PP&E> 21,186
<DEPRECIATION> 16,060
<TOTAL-ASSETS> 28,606
<CURRENT-LIABILITIES> 6,129
<BONDS> 0
0
0
<COMMON> 720
<OTHER-SE> 19,750
<TOTAL-LIABILITY-AND-EQUITY> 28,606
<SALES> 13,985
<TOTAL-REVENUES> 13,985
<CGS> 11,720
<TOTAL-COSTS> 11,720
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> (1,844)
<INCOME-TAX> (599)
<INCOME-CONTINUING> (1,245)
<DISCONTINUED> 5,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,189
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
</TABLE>
