TEMTEX INDUSTRIES INC
10-Q, 2000-07-17
HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES
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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

-- 

     
 

            

             

             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

-- 

  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


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