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 THE QUARTER ENDED AUGUST 31, 1995
Commission File Number
----------
WALTER INDUSTRIES, INC.
Incorporated in Delaware IRS Employer Identification No. 13-3429953
1500 North Dale Mabry, Tampa, Florida 33607
Telephone Number 813-871-4811
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes . No X . Walter
--- ---
Industries, Inc. has not been subject to such filing requirements for the
past 90 days.
There were 50,494,313 shares of common stock of the registrant outstanding
at August 31, 1995.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEET
------------------------------------
(UNAUDITED)
August 31, May 31,
1995 1995
---------- ----------
(in thousands)
ASSETS
- ------
Cash (includes short-term investments of
$52,167,000 and $84,872,000) (Note 3) $ 83,048 $ 128,007
Short-term investments, restricted (Note 3) 140,829 128,002
Instalment notes receivable (Note 4) 4,227,775 4,256,866
Less - Provision for possible losses ( 26,389) ( 26,556)
Unearned time charges (2,851,641) (2,869,282)
Trade and other receivables, less $8,133,000
and $7,998,000 provision for possible losses 178,628 182,822
Federal income tax receivable 99,875 99,875
Inventories, at lower of cost (first in
first out or average) or market:
Finished goods 100,657 111,792
Goods in process 30,899 29,593
Raw materials and supplies 51,340 53,453
Houses held for resale 1,709 1,599
Prepaid expenses 9,641 12,694
Property, plant and equipment, at cost 1,198,162 1,186,407
Less - Accumulated depreciation,
depletion and amortization ( 541,312) ( 523,615)
Investments and other assets 49,788 49,889
Deferred income taxes 11,275 16,544
Unamortized debt expense 32,397 34,167
Excess of purchase price over net
assets acquired (Note 1) 362,671 372,896
----------- ----------
$ 3,159,352 $3,245,153
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Bank overdrafts (Note 3) $ 24,700 $ 33,746
Accounts payable and accrued expenses 201,642 259,044
Income taxes payable 53,638 53,261
Long-term senior debt 2,181,627 2,220,370
Accrued interest 51,446 37,854
Accumulated postretirement health
benefits obligation 233,679 228,411
Other long-term liabilities 51,605 51,693
Stockholders' equity (Note 6):
Common stock 505 505
Capital in excess of par value 1,159,384 1,159,384
Retained earnings (deficit) ( 792,924) ( 793,165)
Excess of additional pension liability over
unrecognized prior years service cost ( 5,950) ( 5,950)
---------- ----------
Total stockholders' equity 361,015 360,774
----------- -----------
$ 3,159,352 $ 3,245,153
=========== ===========
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
-------------------------------------
(UNAUDITED)
For the three months ended
August 31,
------------ ---------
1995 1994
------------ ----------
(in thousands except
per share amount)
Sales and revenues:
Net sales $ 316,107 $ 277,152
Time charges 56,355 56,749
Miscellaneous 7,686 5,321
Interest income from Chapter 11
proceedings (Note 1) - 1,418
--------- ---------
380,148 340,640
--------- ---------
Costs and expenses:
Cost of sales 249,833 224,119
Depreciation, depletion and amortization 18,517 16,757
Selling, general and administrative 33,104 32,350
Postretirement health benefits 6,679 6,647
Provision for possible losses 938 1,297
Chapter 11 costs (Note 1) - 4,149
Interest and amortization of debt discount
and expense 54,581 36,463
Amortization of excess of purchase price
over net assets acquired (Note 1) 10,225 10,568
--------- ---------
373,877 332,350
--------- ---------
6,271 8,290
Income tax benefit (expense):
Current ( 761) ( 12,895)
Deferred ( 5,269) 6,038
--------- ---------
Net income $ 241 $ 1,433
========= =========
Net income per share - Primary $ -
=========
The results of operations for the three month periods ended August 31, 1995
and 1994 are not necessarily indicative of results of operations for a full
fiscal year. All of the amounts are unaudited, but, in the opinion of the
Company, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of each period have been
made. Per share information for the three months ended August 31, 1994 is
not relevant given the significant change in capital structure which
occurred as a result of the Company's reorganization pursuant to the
Consensual Plan (see Note 1).
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(UNAUDITED)
For the three months ended
August 31,
--------------------------
1995 1994
------------ ---------
(in thousands)
OPERATIONS
- ----------
Net income $ 241 $ 1,433
Charges to income not affecting cash:
Depreciation, depletion and amortization 18,517 16,757
Provision for deferred income taxes 5,269 ( 6,038)
Accumulated postretirement health
benefits obligation 5,268 6,199
Provision for other long-term liabilities ( 88) ( 324)
Amortization of excess purchase price
over net assets acquired (Note 1) 10,225 10,568
Amortization of debt discount and expense 1,942 3,318
--------- ---------
41,374 31,913
Decrease (increase) in:
Short-term investments, restricted ( 12,827) 8,887
Instalment notes receivable, net (Note 4) 11,283 2,532
Trade and other receivables, net 4,194 ( 6,110)
Inventories 11,832 12,800
Prepaid expenses 3,053 2,226
Increase(decrease) in:
Bank overdrafts (Note 3) ( 9,046) ( 11,933)
Accounts payable and accrued expenses ( 25,420) ( 11,508)
Income taxes payable 377 6,824
Accrued interest 13,594 12,625
Liabilities subject to Chapter 11
proceedings (Note 1):
Accounts payable - 10
--------- ---------
Cash flows from operations 38,414 48,266
--------- ---------
FINANCING ACTIVITIES
- --------------------
Retirement of long-term senior debt ( 38,743) ( 30,716)
Additions to unamortized debt expense ( 172) -
Payment of liabilities subject to
Chapter 11 proceedings (Note 1) ( 31,984) -
--------- ---------
Cash flows from financing activities ( 70,899) ( 30,716)
--------- ---------
INVESTING ACTIVITIES
- --------------------
Additions to property, plant and
equipment, net of normal retirements ( 12,575) ( 11,280)
Increase (decrease) in investments and
other assets 101 ( 16)
--------- ---------
Cash flows from investing activities ( 12,474) ( 11,296)
--------- ---------
Net increase (decrease) in cash and
cash equivalents ( 44,959) 6,254
Cash and cash equivalents at beginning
of period 128,007 203,303
--------- ---------
Cash and cash equivalents at end
of period (Note 3) $ 83,048 $ 209,557
========= =========
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
AUGUST 31, 1995
---------------
(UNAUDITED)
Note 1 - Recent History
Walter Industries, Inc. (formerly Hillsborough Holdings Corporation) (the
"Company") was organized in 1987 for the purpose of acquiring Jim Walter
Corporation ("Original Jim Walter"). The Company's financial statements
reflect the allocation of the purchase price of Original Jim Walter based
upon the fair value of the assets acquired and the liabilities assumed.
On December 27, 1989, the Company and most of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 of Title 11 of the
United States Code in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division (the "Bankruptcy Court"). The Company
emerged from bankruptcy on March 17, 1995 (the "Effective Date") pursuant
to the Amended Joint Plan of Reorganization Dated as of December 9, 1994,
as modified on March 1, 1995 (as so modified the "Consensual Plan").
Despite the confirmation and effectiveness of the Consensual Plan, the
Bankruptcy Court continues to have jurisdiction over, among other things,
the resolution of disputed prepetition claims against the Company and other
matters that may arise in connection with or relate to the Consensual Plan.
Note 2 - Principles of Consolidation
The Company through its direct and indirect subsidiaries currently offers a
diversified line of products and services for homebuilding, water and waste
water transmission, residential and non-residential construction, and
industrial markets. The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany balances have been eliminated.
Note 3 - Cash and Restricted Short-Term Investments
Cash includes short-term investments with original maturities of less than
one year. The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not yet presented to the banks for payment are classified
as bank overdrafts.
Restricted short-term investments include temporary investment of reserve
funds and collections on instalment notes receivable owned by Mid-State
Trusts II, III, IV and V ($116,501,000). These funds are available only to
pay expenses of the Trusts and principal and interest on indebtedness of
the Trusts. Miscellaneous other segregated accounts restricted to specific
uses ($24,328,000), are also included in restricted short-term investments.
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 4 - Instalment Notes Receivable
The net decrease in instalment notes receivable for the three month periods
ended August 31, 1995 and 1994 consists of sales and resales, net of
repossessions and provision for possible losses, of $36,250,000 and
$38,792,000 and cash collections on account, payouts in advance of maturity
and reductions in account balances (only in the three months ended August
31, 1995 resulting from settlement agreements entered into with South
Carolina and Texas homeowners. See Note 5) of $47,533,000 and $41,324,000,
respectively. The cost of the settlement agreements was accrued in the
fiscal year ended May 31, 1995.
Mid-State Trusts II, III, and IV are business trusts organized by Mid-State
Homes, Inc. ("Mid-State"), which owns all of the beneficial interest in
Trust III and Trust IV. Trust IV owns all of the beneficial interest in
Trust II. The Trusts were organized for the purpose of purchasing
instalment notes receivable from Mid-State from the net proceeds from the
issuance of the Trust II Mortgage-Backed Notes, the Trust III Asset Backed
Notes and the Trust IV Asset Backed Notes with outstanding balances at
August 31, 1995 of $562,250,000; $167,495,000, and $943,032,000,
respectively. The assets of Trust II, Trust III and Trust IV, including
the instalment notes receivable, are not available to satisfy claims of
general creditors of the Company and its subsidiaries. The liabilities of
Mid-State Trusts II, III and IV for their publicly issued debt are to be
satisfied solely from the proceeds of the underlying instalment notes and
are non-recourse to the Company and its subsidiaries. Of the gross amount
of instalment notes receivable at August 31, 1995 of $4,227,775,000 with an
economic balance of $2,041,204,000, receivables owned by Trust II had a
gross book value of $1,335,400,000 and an economic balance of $814,879,000,
receivables owned by Trust III had a gross book value of $458,963,000 and
an economic balance of $233,948,000, and receivables owned by Trust IV had
a gross book value of $1,928,198,000 and an economic balance of
$802,161,000. Mid-State Trust V, a business trust in which Mid-State Homes
holds all the beneficial interest, was organized to hold instalment notes
receivable as collateral for borrowings to provide temporary financing to
Mid-State for its current purchases of instalment notes and mortgages from
Jim Walter Homes, Inc. ("Jim Walter Homes"). At August 31, 1995,
receivables owned by Mid-State Trust V had a gross book value of
$376,051,000 and an economic balance of $136,742,000, with outstanding
borrowings of $15,000,000.
Note 5 - Litigation and Other Matters
South Carolina Class Actions
- ----------------------------
As previously reported in Note 11 of Notes to Financial Statements for the
year ended May 31, 1995, Jim Walter Homes and Mid-State have filed an
adversary action for declaratory judgment against all South Carolina
homeowners who purchased their homes between July 1, 1982 and December 27,
1989.
On September 15, 1995, Jim Walter Homes and Mid-State entered into a
Stipulation and Settlement Agreement with the South Carolina homeowners
substantially along the lines previously reported. On September 25, 1995,
the Bankruptcy Court
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
entered an order that provisionally certified the settlement class,
provisionally approved the settlement reached, provisionally designated the
class representatives and provisionally designated class counsel. The
order also provides that any homeowner that does not want to be a member of
the proposed class must file with the Bankruptcy Court on or before
November 6, 1995 a notice of their intention to "opt out" or not
participate in the agreement. The Bankruptcy Court has set a hearing for
November 14, 1995 to determine the fairness of the settlement.
Texas Litigation
- ----------------
As previously reported in Note 11 of Notes to Financial Statements for the
year ended May 31, 1995, Jim Walter Homes and Mid-State reached a
settlement on litigation brought by certain homeowners in Texas. Certain
of the Texas homeowners (52 in number) have not signed the settlement
documents and Jim Walter Homes and Mid-State continue to work with their
counsel. The Bankruptcy Court has set a hearing for April 12, 1996 to
discuss the status of the non-settling homeowners. The settling homeowners
who have a remaining account balance began making monthly payments on
September 15, 1995.
Note 6 - Stockholders' Equity
As of August 31, 1995, there were 50,494,313 shares of common stock
outstanding. Pursuant to the Consensual Plan, 494,313 additional shares
were issued on September 13, 1995 to all former stockholders of the Company
as of the Effective Date of the Consensual Plan. Also on September 13,
1995, pursuant to the Consensual Plan, 3,880,140 additional shares of
common stock were issued to an escrow account. To the extent that certain
federal income tax matters of the Company are resolved satisfactorily, up
to a maximum 3,880,140 of the escrowed shares will be distributed to all
former stockholders of the Company as of the Effective Date. To the extent
such matters are not resolved satisfactorily, the escrowed shares will be
returned to the Company and cancelled.
Note 7 - Segment Information
Information relating to the Company's business segments is set forth below.
Due to divestitures of several building materials subsidiaries in recent
years, the Company has restructured certain of its segment information.
Prior year information has been restated.
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Three months ended August 31,
-----------------------------
1995 1994
----------- ---------
(in thousands)
Sales and Revenues:
Homebuilding and related financing $ 100,764 $ 103,082
Water and waste water transmission products 119,448 105,334
Natural resources 89,515 68,612
Industrial and other products 69,559 61,951
Corporate 862 1,661
--------- ---------
Consolidated sales and revenues $ 380,148 $ 340,640
========= =========
Contributions to Operating Income (a):
Homebuilding and related financing $ 13,884 $ 11,419
Water and waste water transmission products 8,817 7,361
Natural resources 7,124 ( 2,124)
Industrial and other products 1,867 1,737
--------- ---------
31,692 18,393
Less-Unallocated corporate interest and
other expense (b) ( 25,421) ( 10,103)
Income taxes ( 6,030) ( 6,857)
--------- ---------
Net income $ 241 $ 1,433
========== =========
(a) - Operating income amounts are after deducting amortization of excess
of purchase price over net assets acquired (goodwill) of
$10,225,000 in 1995 and $10,568,000 in 1994. A breakdown by segment
is as follows:
Three months ended August 31,
-----------------------------
1995 1994
----------- -----------
(in thousands)
Homebuilding and related financing $ 8,125 $ 8,470
Water and waste water transmission
products 3,079 3,078
Natural resources ( 335) ( 335)
Industrial and other products 664 663
Corporate ( 1,308) ( 1,308)
--------- --------
$ 10,225 $ 10,568
======== ========
(b) - Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $31,653,000 in 1995 and $31,120,000 in 1994.
The balance of unallocated expenses consisting of unallocated
interest, corporate expenses and Chapter 11 costs (net of Chapter 11
interest income) in 1994 are attributable to all groups and cannot
be reasonably allocated to specific groups.
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 8 - Prior Period Adjustments
The Company has restated its previously issued Segment Information -
Contributions to Operating Income, for the three years in the period ended
May 31, 1995 to reflect amortization of excess of purchase price over net
assets acquired (goodwill) by operating segment, which amortization was
previously included in unallocated corporate interest and other expense.
Contributions to Operating Income (as previously reported):
<TABLE><CAPTION>
For the years ended May 31,
---------------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Homebuilding and related financing $ 76,525 $ 101,954 $ 88,902
Industrial and other products 11,902 13,851 11,301
Water and waste water transmission products 28,454 25,641 16,040
Natural resources 20,072 ( 1,175) 50,807
--------- --------- ---------
136,953 140,271 167,050
Less - Unallocated corporate interest
and other expense (a) (666,048) (104,179) ( 96,128)
Income taxes 170,450 ( 28,917) ( 24,328)
--------- --------- ---------
Income (loss) from operations $ (358,645) $ 7,175 $ 46,594
========== ========= =========
Contributions to Operating Income (as restated):
For the years ended May 31,
--------------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
Homebuilding and related financing $ 44,822 $ 61,763 $ 57,828
Industrial and other products 9,275 11,227 8,676
Water and waste water transmission products 16,240 13,426 3,763
Natural resources 21,400 152 52,135
--------- --------- ---------
91,737 86,568 122,402
Less - Unallocated corporate interest
and other expense (a) (620,832) ( 50,476) ( 51,480)
Income taxes 170,450 ( 28,917) ( 24,328)
--------- --------- ---------
Income (loss) from operations $ (358,645) $ 7,175 $ 46,594
========== ========== ==========
</TABLE>
(a) - Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $131,560,000, $128,828,000 and $137,945,000 in
1995, 1994 and 1993, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company emerged from bankruptcy on March 17, 1995. Accordingly, the
Company's Consolidated Statement of Operations for the three months ended
August 31, 1995 is not comparable to the Consolidated Statement of
Operations for the period ended August 31, 1994.
The following unaudited pro forma consolidated statement of operations for
the three months ended August 31, 1994 has been prepared to illustrate the
estimated effects of the Consensual Plan and related financings as if they
had occurred as of June 1, 1994. This discussion should be read in
conjunction with such pro forma consolidated statement of operations and
the consolidated financial statements and notes thereto of Walter
Industries, Inc. and subsidiaries for the three months ended August 31,
1995, particularly Note 7 - "Segment Information" which presents sales and
operating income by operating group.
<TABLE><CAPTION>
Pro Forma Consolidated Statement of Operations
(Unaudited)
For the three months ended August 31, 1994
-------------------------------------------
As Reported Adjustments Pro Forma
-------------- ------------ -----------
(in thousands except
per share amount)
<S> <C> <C> <C>
Sales and Revenues
Net sales $ 277,152 $ 277,152
Time charges 56,749 56,749
Miscellaneous 5,321 5,321
Interest income from Chapter 11 proceedings 1,418 $ ( 1,418)(1) -
---------- ---------- -----------
340,640 ( 1,418) 339,222
---------- ---------- -----------
Cost and expenses:
Cost of sales 224,119 224,119
Depreciation, depletion and amortization 16,757 16,757
Selling, general and administrative 32,350 32,350
Postretirement health benefits 6,647 6,647
Provision for possible losses 1,297 1,297
Chapter 11 costs 4,149 ( 4,149)(2) -
Interest and amortization of debt discount
and expense 36,463 19,543 (3) 56,006
Amortization of excess of purchase price
over net assets acquired 10,568 10,568
---------- ---------- -----------
332,350 15,394 347,744
---------- ---------- -----------
8,290 ( 16,812) ( 8,522)
Income tax benefit (expense) ( 6,857) 6,376 (4) ( 481)
---------- ---------- -----------
Net income (loss) $ 1,433 $ ( 10,436) $ ( 9,003)
========== =========== ============
Net loss per share $( .18)(5)
===========
Weighted average shares outstanding 50,494,313
</TABLE>
- --------------
Changes from the historical financial statement in the pro forma
consolidated statement of operations consist of the following adjustments
(all amounts in thousands):
(1) Interest income from Chapter 11 proceedings of $1,418, which would not
have been realized assuming the Consensual Plan became effective June
1, 1994, has been eliminated.
(2) Chapter 11 costs of $4,149, which would not have been incurred
assuming the Consensual Plan became effective June 1, 1994, have been
eliminated.
<PAGE>
(3) Interest and amortization of debt discount and expense has been
increased $19,543 to give retroactive effect as if all indebtedness to
be repaid pursuant to the Consensual Plan was so done as of June 1,
1994 and the $490 million of Series B Senior Notes had been
outstanding for the full three months ended August 31, 1994.
Borrowings under the Trust IV Asset Backed Notes were assumed to
increase during the period June 1, 1994 through August 31, 1994
proportionately with the comparable period increase in the outstanding
economic balance of the instalment notes sold by Mid-State to Trust IV
on March 16, 1995. No borrowings were assumed under the Mid-State
Trust V Variable Funding Loan Agreement as this time period was prior
to the Mid-State Trust IV cut off date for purchases of instalment
notes from Mid-State. No working capital borrowings were assumed
under the Bank Revolving Credit Facility. Pro forma interest expense,
however, includes letter of credit fees and unused working capital
commitment fees.
(4) The provision for income taxes has been adjusted at the applicable
statutory rates to give effect to the pro forma adjustments described
above.
(5) Net loss per share has been computed based on the weighted average
number of common shares outstanding.
Results of Operations
Three months ended August 31, 1995 and 1994
- -------------------------------------------
Net sales and revenues for the three months ended August 31, 1995 increased
$40.9 million, or 12.1%, over the prior year period (on a pro forma basis),
with an 9.4% increase in volume and a 2.7% increase in pricing and/or mix.
The increase in net sales and revenues was the result of improved sales and
revenues in the Water and Waste Water Transmission Products, Natural
Resources and Industrial and Other Products Groups, partially offset by
lower sales and revenues in the Homebuilding and Related Financing Group.
Water and Waste Water Transmission Products Group sales and revenues were
$14.1 million, or 13.4%, ahead of the prior year period. The increase was
the result of higher sales prices and volumes for ductile iron pressure
pipe, fittings and valves and hydrants and improved castings sales prices.
The order backlog at August 31, 1995 was 124,456 tons, which represents
approximately three months shipments, compared to 127,885 tons at August
31, 1994 and 121,548 tons at May 31, 1995. Operating income of $8.8
million exceeded the prior year period by $1.5 million. The improved
performance resulted from the increased sales prices and volumes, partially
offset by higher raw material costs, especially scrap, a major raw material
component.
Natural Resources Group sales and revenues exceeded the prior year period
by $20.9 million, or 30.5%. The increase resulted from greater sales
volumes for coal and methane gas and higher outside coal, gas and timber
royalty income, partially offset by lower average selling prices for coal
and methane gas. A total of 1.92 million tons of coal was sold in the 1995
period versus 1.40 million tons in the 1994 period, a 37% increase. The
increase in tonnage sold was the result of greater shipments to Alabama
Power Company ("Alabama Power"), Japanese steel mills and certain export
customers. Increased shipments to Alabama Power were the result of a new
agreement signed May 10, 1994 (the "New Alabama Power Contract") for the
sale and purchase of coal, replacing the 1979 contract and the 1988
amendment thereto. Under the New Alabama Power Contract, Alabama Power
will purchase 4.0 million tons of coal per year from Jim Walter Resources
during the period July 1, 1994 through August 31, 1999. In addition, Jim
Walter Resources will have the option to extend the New Alabama Power
Contract through August 31, 2004, subject to mutual agreement on the market
pricing mechanism and certain other terms and conditions of such extension.
The New Alabama Power Contract has a fixed price subject to an escalation
based on
<PAGE>
the Consumer Price Index or another appropriate published index and
adjustments for government impositions and quality. The New Alabama Power
Contract includes favorable modifications of specifications, shipping
deviations and changes in transportation arrangements. The average price
per ton of coal sold decreased $1.62 from $44.11 in the 1994 period to
$42.49 in the 1995 period due to lower prices realized on shipments to
Alabama Power, partially offset by improved prices to the Japanese steel
mills and certain export customers. Blue Creek Mine No. 5 ("Mine No. 5")
was shutdown from November 17, 1993 through December 16, 1993 and from
early April 1994 until May 16, 1994 as a result of a fire due to
spontaneous combustion heating. Representatives of Jim Walter Resources,
the Mine Safety and Health Administration, Alabama State Mine Inspectors
and the United Mine Workers of America agreed that the longwall coal panel
being mined in Mine No. 5 at the time the fire recurred in April 1994 would
be abandoned and sealed off. Development mining for the two remaining
longwall coal panels in this section of the mine resumed on May 16, 1994
and mining on the first longwall panel resumed on January 17, 1995.
Production was adversely impacted until such date; however, a portion of
the increased costs is expected to be recovered from business interruption
insurance and the Company has commenced litigation seeking to enforce such
insurance. Operating income of $7.1 million exceeded the prior year's loss
of $2.1 million by $9.2 million. The improved performance principally
resulted from the increased sales volumes of coal and methane gas, improved
mining productivity which resulted in lower costs per ton of coal produced
($34.50 in the 1995 period versus $43.17 in the 1994 period) and greater
outside coal, gas and timber royalty income, partially offset by the
decreases in selling prices for coal and methane gas.
Industrial and Other Products Group sales and revenues were $7.6 million,
or 12.3%, greater than the prior year period. Increased selling prices of
furnace and foundry coke, slag wool, aluminum foil and sheet products,
window components and metal building and foundry products, combined with
greater sales volumes of furnace and foundry coke, slag wool, chemicals,
resin coated sand and patterns and tooling were partially offset by reduced
sales volumes of window components, aluminum sheet products and metal
building and foundry products. The Group's operating income of $1.9
million exceeded the prior year period by $130,000. The improved
performance resulted from increased income for aluminum foil and sheet,
furnace and foundry coke, slag wool, resin coated sand and patterns and
tooling due to the sales volume and price increases. These increases were
partially offset by lower income in the window components business
resulting from the decrease in sales volume, increased raw material costs,
especially aluminum, a major raw material component, and reduced
efficiencies due to prolonged start up problems associated with the
consolidation and relocation of JW Window Components, Inc.'s Hialeah,
Florida and Columbus, Ohio operations to Elizabethton, Tennessee.
Homebuilding and Related Financing Group sales and revenues were $2.3
million, or 2.2%, below the prior year period. This performance reflects a
12.9% decrease in the number of homes sold, from 1,062 units in the 1994
period to 925 units in the 1995 period, partially offset by an increase in
the average selling price per home sold from $39,400 in 1994 to $41,900 in
1995. The decrease in unit sales reflects continuing strong competition in
virtually every Jim Walter Homes sales region. The higher average selling
price in the 1995 period reflects a price increase instituted February 1,
1995 to compensate for higher building materials costs, especially lumber.
Jim Walter Homes' backlog at August 31, 1995 was 1,770 units compared to
2,019 units at August 31, 1994. Time charge income (revenues
<PAGE>
received from Mid-State Homes' instalment note portfolio) decreased
slightly from $56.7 million in the 1994 period to $56.4 million in the 1995
period. The decrease in time charge income is attributable to a reduction
in the total number of accounts, partially offset by an increase in the
average balance per account in the portfolio. Operating income of $13.9
million (net of interest expense) was $2.5 million greater than the prior
year period. This increase resulted from improved homebuilding gross
profit margins reflecting the higher average selling price per home sold
and lower lumber costs combined with lower selling, general and
administrative expenses, partially offset by the decrease in time charge
income and slightly higher interest expense in the 1995 period ($31.7
million) as compared to that incurred in the 1994 period ($31.1 million).
Cost of sales, exclusive of depreciation, of $249.8 million was 79.0% of
net sales in the 1995 period versus $224.1 million and 80.9% in the 1994
period. The cost of sales percentage decrease was primarily the result of
improved gross profit margins on home sales, coal, furnace coke and
aluminum foil and sheet products, partially offset by reduced margins for
pipe products and window components.
Selling, general and administrative expenses of $33.1 million were 8.7% of
net sales and revenues in the 1995 period versus $32.3 million and 9.5% in
the 1994 period.
Interest and amortization of debt discount and expense were $54.6 million
in the 1995 period versus $56.0 million on a pro forma basis in the 1994
period reflecting lower average outstanding debt balances. The prime
interest rate ranged from 8.75% to 9.0% in the 1995 period compared to a
range of 7.25% to 7.75% in the 1994 period.
The Company's effective tax rate in the 1995 period and on a pro forma
basis in the 1994 period differed substantially from the statutory tax rate
due primarily to amortization of excess of purchase price over net assets
acquired (goodwill) which is not deductible for tax purposes.
The net income for the three months ended August 31, 1995 was $241,000 as
compared to a loss of $9.0 million on a pro forma basis in the 1994 period
reflecting all of the previously mentioned factors.
Financial Condition
On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court. On December 3, 1990, one additional small subsidiary also filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court. Two other small subsidiaries did not file petitions for
reorganization under Chapter 11. The filing of the voluntary petitions
resulted from a sequence of events stemming primarily from an inability of
the Company's interest reset advisors to reset interest rates on
approximately $624 million of outstanding indebtedness, which indebtedness
by its terms required that the interest rates thereon be reset to the rate
per annum such indebtedness should bear in order to have a bid value of
101% of the principal amount thereof as of December 2, 1989. The reset
advisors' inability to reset the interest rates was primarily attributable
to two factors: (i) uncertainties arising from the then pending asbestos-
related veil piercing
<PAGE>
litigation, including the possibility either that such litigation would
lead to the prohibition of further asset sales and debt repayment or that
substantial new asbestos-related claims might become assertible against the
Company, which uncertainties materially hindered the ability of the Company
and its subsidiaries to pursue a refinancing or sell assets to reduce debt,
and (ii) general turmoil in the high yield bond markets at such time, both
of which depressed the bid value of such notes.
On March 17, 1995, the Company and its subsidiaries emerged from
bankruptcy. Pursuant to the Consensual Plan, the Company has repaid
substantially all of its unsecured claims and senior and subordinated
indebtedness subject to the Chapter 11 reorganization proceedings.
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. Proofs of claim have been filed by the
Internal Revenue Service in the amounts of $110,560,883 with respect to
fiscal years ended August 31, 1980 and August 31, 1983 through August 31,
1987, $31,468,189 with respect to fiscal years ended May 31, 1988 (nine
months) and May 31, 1989 and $44,837,693 with respect to fiscal years ended
May 31, 1990 and May 31, 1991. Objections to the proofs of claim have been
filed by the Company and the various issues are being litigated in the
Bankruptcy Court. The Company believes that such proofs of claim are
substantially without merit and intends to defend such claims against the
Company vigorously.
Since May 31, 1995, total debt has decreased $38.7 million resulting almost
entirely from quarterly principal payments on the Mid-State Trust II
Mortgage-Backed Notes ($21.8 million), Mid-State Trust III Asset Backed
Notes ($6.0 million) and Mid-State Trust IV Asset Backed Notes ($10.8
million).
The Company and certain of its subsidiaries have entered into a Bank
Revolving Credit Facility, providing up to $150 million at any time
outstanding for working capital needs with a sub-limit for trade and
standby letters of credit in an amount not in excess of $40 million at any
time outstanding and a sub-facility for swingline advances in an amount not
in excess of $15 million at any time outstanding. At August 31, 1995,
$22.0 million of letters of credit were outstanding under this agreement.
The Series B Senior Notes Due 2000, the Bank Revolving Credit Facility and
the Trust V Variable Funding Loan Agreement contain a number of significant
covenants that, among other things, restrict the ability of the Company and
its subsidiaries to dispose of assets, incur additional indebtedness, make
capital expenditures, pay dividends, create liens on assets, enter into
leases, make investments or acquisitions, engage in mergers or
consolidations or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities (including change of
control and asset sale transactions). In addition, under the Bank
Revolving Credit Facility, the Company is required to maintain specified
financial ratios and comply with certain financial tests, including
interest coverage, fixed charge coverage ratios, maximum leverage ratios
and minimum earnings before interest, taxes, depreciation and amortization
expense, some of which become more restrictive over time. The Company
believes it will meet these financial tests over the terms of these debt
agreements.
<PAGE>
Liquidity and Capital Resources
At August 31, 1995, cash and short-term investments were approximately
$83.0 million. Operating cash flows for the three months ended August 31,
1995 together with the use of available cash balances were primarily used
for working capital requirements, retirement of long-term senior debt,
interest payments and capital expenditures.
Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at August 31,
1995 are not material; however, it is estimated that gross capital
expenditures of the Company and its subsidiaries for the balance of the
year ending May 31, 1996 will approximate $66 million.
Because the Company's operating cash flow is significantly influenced by
the general economy and, in particular, the level of construction, current
results should not necessarily be used to predict the Company's liquidity,
capital expenditures, investment in instalment notes receivable or results
of operations. The Company believes that the Mid-State Trust V Variable
Funding Loan Agreement will provide Mid-State Homes with the funds needed
to purchase the instalment notes and mortgages generated by Jim Walter
Homes. It is contemplated that one or more permanent financings similar to
the Mid-State Trusts II, II and IV financings will be required over the
next four years in order to repay borrowings under the Variable Funding
Loan Agreement. The Company also believes that under present operating
conditions sufficient operating cash flow will be generated through fiscal
year 1999 to make all required interest and principal payments and planned
capital expenditures and meet substantially all operating needs and that
amounts available under the Bank Revolving Credit Facility will be
sufficient to meet peak operating needs. However, it is currently
anticipated that sufficient operating cash flow will not be generated to
repay at maturity the principal amount of the Senior Notes without
refinancing a portion of such debt or selling assets. No assurance can be
given that any such sales of assets can be consummated.
The Company currently is pursuing the possibility of financing its optional
redemption of the Series B Senior Notes Due 2000 at a redemption price of
101% of the outstanding principal amount thereof plus accrued and unpaid
interest thereon to the redemption date. The Company currently
contemplates that such financing would be obtained by selling new debt
securities of the Company or incurring bank debt pursuant to a new credit
facility, or both. The Company currently believes that it may be able to
consummate such transactions within the next several months. However,
there can be no assurance as to whether or when any such transactions can
be consummated.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 5 of Notes to Consolidated Condensed Financial Statements
contained in Part I - Financial Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of stockholders was held on October 17, 1995 for
the purpose of considering and acting upon the following proposals:
(a) Approval of the appointment of Price Waterhouse LLP as
independent certified public accountants for the Company for
the year ending May 31, 1996.
Votes cast for 40,924,143
Votes cast against 24,695
Abstentions 6,201
(b) Approval of the 1995 Long-Term Incentive Stock Plan of Walter
Industries, Inc.
Votes cast for 35,070,425
Votes cast against 777,067
Abstentions 5,107,547
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit I - Earnings per share calculation for the three months
ended August 31, 1995
(b) Reports on Form 8-K - None Filed
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.
WALTER INDUSTRIES, INC.
/s/ K. J. Matlock /s/ W. H. Weldon
- --------------------------------- ---------------------------------
K. J. Matlock W. H. Weldon
Executive Vice President and Senior Vice President and
Principal Financial Officer Principal Accounting Officer
Date:November 9, 1995
----------------
<PAGE>
Form 10-Q
Exhibit I
WALTER INDUSTRIES, INC.
NET INCOME PER SHARE CALCULATION
(in thousands, except per share amount)
Three months ended
August 31, 1995
------------------
Net income $ 241
Divided by:
Weighted average shares of
common stock outstanding 50,494
-------
Net income per share - Primary $ -
=======
In management's opinion, per share information for the three months ended
August 31, 1994 is not relevant given the significant change in the
Company's capital structure which occurred as a result of the Company's
reorganization pursuant to the Consensual Plan (see Note 1 of Notes to
Consolidated Condensed Financial Statements included in Part I - Financial
Information).
