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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, 2000 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 Identification No.) |
incorporation or organization) |
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 3,444,641 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 and Per Share Amounts)
Three Months Ended |
Nine Months Ended |
|||
May 31, |
May 31, |
|||
2000 |
1999 |
2000 |
1999 |
|
Net sales | $ 4,770 |
$ 5,442 |
$ 16,104 |
$ 19,427 |
Cost of goods sold | 4,620 |
5,131 |
4,597 |
16,851 |
150 |
311 |
1,507 |
2,576 |
|
Cost and expenses: | ||||
Selling, general and administrative | 1,914 |
2,012 |
5,711 |
5,925 |
Interest | 108 |
27 |
211 |
215 |
Other expense (income) | 8 |
3 |
(137) |
11 |
2,030 |
2,042 |
5,785 |
6,151 |
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS | ||||
BEFORE INCOME TAX PROVISION (BENEFIT) AND DISCONTINUED | ||||
OPERATIONS | (1,880) |
(1,731) |
(4,278) |
(3,575) |
State and federal income tax provision (benefit) | ||||
--Note B | 959 |
(563) |
-- |
(1,162) |
LOSS FROM CONTINUING OPERATIONS | (2,839) |
(1,168) |
(4,278) |
(2,413) |
GAIN FROM DISPOSAL AND OPERATING | ||||
INCOME FROM DISCONTINUED | ||||
OPERATIONS, NET OF INCOME | ||||
TAXES -- Note H | -- |
-- |
-- |
5,434 |
NET (LOSS) INCOME | $ (2,839) |
$ (1,168) |
$ (4,278) |
$ 3,021 |
Basic and diluted (loss) income per common share: | ||||
Continuing operations | $ (.82) |
$ (.34) |
$ (1.24) |
$ (.69) |
Net income: | ||||
Basic | $ (.82) |
$ (.34) |
$ (1.24) |
$ .87 |
Diluted | $ (.82) |
$ (.34) |
$ (1.24) |
$ .86 |
Basic weighted average common shares outstanding | 3,444,641 |
3,466,761 |
3,444,641 |
3,473,747 |
Diluted weighted average common and common | ||||
equivalent shares outstanding | 3,450,708 |
3,509,363 |
3,464,404 |
3,520,391 |
See notes to condensed consolidated financial statements.
2
<PAGE>
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands Except Share Amounts)
May 31, |
August 31, |
|
2000 |
1999 |
|
(Unaudited) |
||
ASSETS | ||
CURRENT ASSETS | ||
Cash and cash equivalents | $ 2,217 |
$ 4,077 |
Accounts receivable, less allowance for doubtful accounts of | ||
$278 at May 31, 2000 and $267 at August 31, 1999 | 2,990 |
3,648 |
Inventories--Note D | 7,705 |
8,680 |
Prepaid expenses and other assets | 322 |
254 |
Deferred taxes--Note B | 339 |
169 |
|
|
|
TOTAL CURRENT ASSETS |
13,573 |
16,828 |
DEFERRED TAXES--Note B | 144 |
144 |
OTHER ASSETS | 154 |
1,793 |
PROPERTY, PLANT AND EQUIPMENT | ||
Buildings and improvements | 2,615 |
2,615 |
Machinery, equipment, furniture and fixtures | 18,297 |
17,859 |
Leasehold improvements | 1,290 |
1,213 |
22,202 |
21,687 |
|
Less allowances for depreciation and amortization | 17,654 |
16,752 |
4,548 |
4,935 |
|
|
|
|
$ 18,419 |
$ 23,700 |
3
<PAGE>
May 31, |
August 31, |
|
2000 |
1999 |
|
(Unaudited) |
||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
CURRENT LIABILITIES | ||
Accounts payable | $ 1,681 |
$ 1,725 |
Accrued expenses | 1,235 |
1,749 |
Income taxes payable | 332 |
746 |
Current maturities of indebtedness to related parties | 16 |
13 |
Current maturities of long-term obligations | 30 |
29 |
TOTAL CURRENT LIABILITIES | 3,294 |
4,262 |
INDEBTEDNESS TO RELATED PARTIES, | ||
less current maturities | 1,568 |
1,580 |
LONG-TERM OBLIGATIONS, | ||
less current maturities | 381 |
404 |
COMMITMENTS AND CONTINGENCIES--Note F | ||
STOCKHOLDERS' EQUITY | ||
Preferred stock - $1 par value; 1,000,000 | ||
shares authorized, none issued and outstanding | -- |
-- |
Common stock - $.20 par value; 10,000,000 shares authorized, | ||
5,286,125 shares issued and 3,444,641 outstanding | 720 |
720 |
Additional capital | 9,253 |
9,253 |
Retained earnings | 3,642 |
7,920 |
13,615 |
17,893 |
|
Less: | ||
Treasury stock--Note G | ||
At cost 153,696 shares | 439 |
439 |
At no cost - 1,687,788 shares | -- |
-- |
13,176 |
17,454 |
|
|
|
|
$18,419 |
$23,700 |
See notes to condensed consolidated financial statements.
4
<PAGE>
TEMTEX INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Nine Months Ended |
||
May 31, |
||
2000 |
1999 |
|
OPERATING ACTIVITIES | ||
Net (loss) income | $(4,278) |
$ 3,021 |
Adjustments to reconcile net (loss) income to net cash | ||
used in operating activities: | ||
Depreciation, depletion and amortization | 924 |
1,015 |
Discontinued operations: | ||
Gain on sale, net of tax | -- |
(4,675) |
Income from operations, net of tax | -- |
(759) |
Loss on disposition of property, plant and equipment | 15 |
-- |
Provision for doubtful accounts | 105 |
122 |
Changes in operating assets and liabilities: | ||
Accounts receivable | 553 |
690 |
Inventories | 975 |
(996) |
Prepaid expenses and other assets | 1,571 |
(1,096) |
Accounts payable and accrued expenses | (728) |
(2,362) |
Income taxes payable | (414) |
1,913 |
Cash used in discontinued operations | -- |
(1,986) |
NET CASH USED IN OPERATING ACTIVITIES | (1,277) |
(5,113) |
INVESTING ACTIVITIES | ||
Purchases of property, plant and equipment | (555) |
(814) |
Purchases of property, plant and equipment, discontinued operations | -- |
(24) |
Proceeds from sale of discontinued operations | -- |
12,525 |
Proceeds from disposition of property, plant and equipment | 3 |
-- |
|
|
|
NET CASH (USED IN) PROVIDED BY | ||
INVESTING ACTIVITIES | (552) |
11,687 |
FINANCING ACTIVITIES | ||
Principal payments on revolving line of credit, long-term obligations | ||
and indebtedness to related parties | (31) |
(750) |
Principal payments on long-term obligations, discontinued operations | -- |
(31) |
Proceeds from issuance of common stock | -- |
9 |
Purchase of treasury stock | -- |
(89) |
NET CASH USED IN FINANCING ACTIVITIES | (31) |
(861) |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,860) |
5,713 |
Cash and cash equivalents at beginning of period | 4,077 |
327 |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ 2,217 |
$ 6,040 |
See notes to condensed consolidated financial statements.
5
<PAGE>
Temtex Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
May 31, 2000
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, 2000 are not necessarily indicative of the results that may be expected for the year ending August 31, 2000. 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, 1999.
NOTE B--INCOME TAXES
During the three months ended May 31, 2000, the Company changed its estimate of the effective annual tax rate. Through the six months ended February 29, 2000, the Company had recorded a state and federal income tax benefit of $959,000, using a tax rate of approximately 39% to reflect the estimated effective annual tax rate for the year resulting in a net deferred tax asset of $669,000 at February 29, 2000. The Company now believes that it will be in a net loss position for the year. Because the Company does not believe it is more likely than not that the net deferred tax asset will be recovered, a valuation allowance will be recorded for the entire amount of the net deferred tax asset resulting in an effective tax rate of 0% for the year ending August 31, 2000.
Accordingly, the Company has recorded a $959,000 (($0.28) per share) provision for income taxes for the quarter ended May 31, 2000, to reverse the income tax benefits recorded on operating losses during the quarters ended November 30, 1999 and February 29, 2000 and the net deferred tax asset of $483,000 at May 31, 2000 reflects the estimated amount to be recovered from prior tax payments.
NOTE C--INCOME PER COMMON SHARE
Basic income (loss) per common share is based upon the weighted average number of shares of common stock outstanding during each period. Diluted income (loss) 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 only 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. The effect of common stock equivalents has been excluded from the computation of diluted loss per share because the effect of their inclusion would be antidilutive.
6
<PAGE>
NOTE D--INVENTORIES
Inventories are summarized below:
May 31, 2000 |
August 31, 1999 |
|
(in thousands) |
||
Finished goods | $ 3,174 |
$ 3,121 |
Work in process | 810 |
856 |
Raw materials and supplies | 3,721 |
4,703 |
$ 7,705 |
$ 8,680 |
NOTE E--NOTES PAYABLE AND LONG-TERM DEBT
A two-year credit agreement entered into by the Company with a bank in May 1996 and amended in April 1998 was repaid in January 1999 with proceeds received from the sale of the Company's face brick manufacturing facility. In August 1999, the Company and the bank mutually agreed to terminate the agreement prior to its scheduled termination.
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--TREASURY STOCK
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, 2000, 40,000 shares have been purchased on the open market and are included as treasury stock.
NOTE H--DISCONTINUED OPERATIONS
On January 5, 1999, the Company sold its Texas Clay face brick manufacturing division for approximately $12.5 million. The condensed consolidated statements of operations and cash flow for the nine months ended May 31, 1999 classify 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 per share amounts)
Nine Months Ended |
|
May 31, 1999 |
|
Income from operations of Texas Clay before | |
income taxes | $ 1,171 |
Income taxes | 412 |
759 |
|
Gain on disposal of Texas Clay before | |
income taxes | 7,420 |
Income taxes | 2,745 |
4,675 |
|
|
|
Gain from disposal and operating income from | |
discontinued operations, net of income taxes | $ 5,434 |
Income per share: | |
Basic income per common share: | |
Operations | $ .22 |
Gain on sale | 1.34 |
$ 1.56 |
|
Diluted income per common and common | |
equivalent share: | |
Operations | $ .22 |
Gain on sale | 1.33 |
$ 1.55 |
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 12% or $672,000 in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. The decrease in sales resulted from a decrease in the quantity of fireplaces delivered in the third quarter of 2000 as well as small decreases in the average unit selling prices for those products. Between the comparative nine-month periods, net sales decreased approximately l7% or $3,323,000 in fiscal 2000. Reduced quantity and reduced unit selling prices in the nine months of fiscal 2000 were responsible for the reduction in sales. Competition within the industry continues to be the controlling force in determining selling prices.
Gross Profit
Gross profit decreased approximately 52% or $161,000 in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. Gross profit decreased approximately 42% or $1,069,000 between the comparative nine-month periods. Reduced sales and the lack of capacity utilization were mainly responsible for the reduced gross profits in both comparison periods. Additional expenses were incurred in the most recent quarter due to the relocation of fireplace production from our California facility to our plants in Tennessee and Mexico. With the successful relocation completed, the Company expects an improvement in gross margins as early as the fourth quarter of fiscal 2000. Greater improvements should be recorded in fiscal 2001.
9
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $98,000 or approximately 5% in the third quarter of fiscal 2000. Between the comparative nine-month periods, expenses decreased $214,000 or approximately 4%. Expenses in the second and third quarters of the current year include approximately $400,000 for the termination costs connected with job eliminations and for the termination of the Select Management Employee Security Plan.
Interest Expense
Net interest expense increased $81,000 in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. The increase was related to an estimate of the amount of interest that is due to the Internal Revenue Service. As discussed below, the Company has a negotiated settlement with the Internal Revenue Service based on audits of its tax returns for fiscal years 1995 through 1998. Interest expense for the nine-month comparison periods was essentially the same at $211,000 and $215,000, respectively.
Income Taxes
During the three months ended May 31, 2000, the Company changed its estimate of the effective annual tax rate. Through the six months ended February 29, 2000, the Company had recorded a state and federal income tax benefit of $959,000, using a tax rate of approximately 39% to reflect the estimated effective annual tax rate for the year resulting in a net deferred tax asset of $669,000 at February 29, 2000. The Company now believes that it will be in a net loss position for the year. Because the Company does not believe it is more likely than not that the net deferred tax asset will be recovered, a valuation allowance will be recorded for the entire amount of the net deferred tax asset resulting in an effective tax rate of 0% for the year ending August 31, 2000.
Accordingly, the Company has recorded a $959,000 (($0.28) per share) provision for income taxes for the quarter ended May 31, 2000, to reverse the income tax benefits recorded on operating losses during the quarters ended November 30, 1999 and February 29, 2000 and the net deferred tax asset of $483,000 at May 31, 2000 reflects the estimated amount to be recovered from prior tax payments.
During the third quarter of fiscal 2000, the Company negotiated a settlement with the Internal Revenue Service, resulting from a routine audit of its tax returns for fiscal years 1995 through 1998. The Company agreed to pay approximately $170,000 in additional taxes related to amounts capitalized under the Uniform Capitalization Rule as specified in the Tax Act of 1986.
Liquidity and Capital Resources
Net cash used by operating activities was $1,277,000 for the first nine months of 2000. The decreased cash flow from operations in the first nine months of fiscal 2000 was primarily due to the loss incurred by operations. Net cash used by operating activities for the first nine months of 1999 was $5,113,000.
10
<PAGE>
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 for other appropriate uses.
The Company used $555,000 in investing activities for capital expenditures and capitalized lease obligations during the first nine months of 2000. Expenditures include amounts for tooling, dies, replacement items, major repairs to manufacturing equipment, setup of refractory production area in Mexico and the relocation of equipment to Mexico from California.
Working capital decreased from $12,566,000 at August 31, 1999 to $10,279,000 at May 31, 2000.
In May 1996, the Company entered into a two-year credit agreement with a bank whereby the Company could borrow up to $4,000,000 under a revolving credit facility. 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 outstanding balance on the credit facility was repaid by the Company with proceeds from the sale of its brick manufacturing facility in the second quarter of fiscal 1999. In August 1999, the Company and the bank mutually agreed to terminate the credit agreement prior to its scheduled termination.
The Company is in negotiations with a lending institution to establish a new line of credit agreement. All indications are that a new credit facility will be approved shortly and funds will be available prior to fiscal year end.
The Company anticipates that cash flow from operations, together with cash on hand and cash that should be available through a new 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. Although the Company cannot be completely assured at this time that the current negotiations will result in a new credit facility, all indications are that a new facility will be available in the very near future. If the Company is unable to obtain a credit facility on suitable terms or to the extent the Company continues to experience operating losses in future periods, it may be required to seek additional sources of capital. Sources of additional capital may include public and private equity and debt financing, sales of nonstrategic assets and other financing arrangements. No assurances can be made that the Company will be able to obtain sufficient capital in the future.
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: 07/17/00 | BY: /s/ E. R. BUFORD |
E. R. Buford | |
President |
|