SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended May 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 000-20537
-----------------------
WALTER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3429953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 North Dale Mabry Highway
Tampa, Florida 33607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 871-4811
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 Nasdaq National Market
(Title of class)
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 5, 1996 was approximately $291 million.
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 and 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court Yes X No .
Number of shares of common stock outstanding as of August 5, 1996: 54,868,335
Documents Incorporated by Reference
Applicable portions of the Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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PART I
Items 1 and 2 Business and Properties
(a) Introduction
Walter Industries, Inc. (the "Company" or "Walter Industries") was
organized in August 1987 by a group of investors led by Kohlberg Kravis Roberts
& Co., L.P. ("KKR") for the purpose of acquiring Jim Walter Corporation, a
Florida corporation ("Original Jim Walter"), pursuant to a leveraged buyout (the
"LBO"). Following its organization, the Company organized and acquired all of
the outstanding shares of capital stock of a group of direct and indirect wholly
owned subsidiaries, including Hillsborough Acquisition Corporation ("HAC"). On
September 18, 1987, HAC acquired approximately 95% of the outstanding shares of
common stock of Original Jim Walter pursuant to a cash tender offer (the "Tender
Offer"). On January 7, 1988, (i) Original Jim Walter merged (the "Merger") into
HAC (which changed its name to Jim Walter Corporation), (ii) HAC distributed
substantially all of its assets (principally excluding the stock of The Celotex
Corporation ("Celotex") and several other subsidiaries of Original Jim Walter)
to a parent corporation of HAC (which was merged into the Company on April 1,
1991) in redemption of all of the shares of capital stock of HAC owned by such
parent corporation, (iii) HAC merged into its other stockholder, another
indirect wholly owned subsidiary of the Company, and (iv) the surviving
corporation of such merger changed its name to Jim Walter Corporation
(hereinafter referred to as "J-II" or "Jim Walter Corporation").
Following the Merger and prior to the commencement of the Chapter 11 Cases
(as defined below), the Company undertook a program of corporate reorganizations
and asset dispositions, which were contemplated by all of the debt agreements
entered into in connection with the Tender Offer and the Merger. Pursuant to
this program the Company restructured and/or disposed of certain of the
businesses of Original Jim Walter, including the disposition in April 1988 of
all of the stock of the parent corporation of J-II.
Also during this time, the Company and certain of its subsidiaries and
certain of their former and current directors and officers, stockholders and
other persons and entities which were parties to or beneficiaries of
indemnification agreements and other indemnification obligations of the Company
and its subsidiaries (the "Indemnitees") were named as co-defendants in lawsuits
(the "Veil Piercing Litigation") brought by or on behalf of thousands of persons
("Asbestos Claimants") claiming asbestos-related damages against Celotex
alleging, among other things, that (i) Original Jim Walter, its successors and
other entities, including the Company and certain of its subsidiaries, were
liable for all damages, including asbestos-related damages, caused by products
manufactured, sold and distributed by a predecessor of Celotex, by reason of
claims sounding in piercing the corporate veil, alter ego and related theories
("Veil Piercing Claims"), and (ii) the aforementioned distribution by HAC of
substantially all of its assets pursuant to the LBO constituted a fraudulent
conveyance.
On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 ("Chapter 11") of the
United States Bankruptcy Code (the "Bankruptcy Code") with the Bankruptcy Court
for the Middle District of Florida, Tampa Division (the "Bankruptcy Court"); one
additional subsidiary also filed a voluntary petition for reorganization under
Chapter 11 with the Bankruptcy Court on December 3, 1990 (all such voluntary
petitions for reorganization are hereinafter referred to as the "Chapter 11
Cases"). Two other subsidiaries, Cardem Insurance Co., Ltd. (Bermuda) ("Cardem
Insurance") and Jefferson Warrior Railroad Company, Inc. 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
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was primarily attributable to two factors: (i) uncertainties arising from the
then-pending Veil Piercing 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 indebtedness.
In January 1990, the Company and each of its subsidiaries which were party
to the Chapter 11 Cases filed a declaratory judgment action (the "Adversary
Proceeding") in the Bankruptcy Court against all known Asbestos Claimants who
had filed Veil Piercing Claims, Celotex and Jim Walter Corporation seeking a
declaration, among other things, that (i) the corporate veil between Celotex and
Original Jim Walter could not be pierced, (ii) the Company could not be held
liable for the asbestos-related liabilities of either Celotex or Jim Walter
Corporation on any grounds and (iii) the LBO could not be deemed a fraudulent
conveyance. In October 1990, Celotex and one of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 with the Bankruptcy Court for the
Middle District of Florida, Tampa Division (the "Celotex Bankruptcy Court").
In January 1994, the indenture trustees for certain pre-LBO debentures of
Original Jim Walter assumed by the Company brought an action (the "Fraudulent
Conveyance Lawsuit") for the benefit of the Company's estate and its creditors,
which alleged that the issuance of debt in connection with the LBO constituted a
fraudulent conveyance under New York and Florida law. The plaintiffs sought to
avoid the obligations incurred by the Company and its subsidiaries in the LBO.
On March 17, 1995 (the "Effective Date"), the Company and its subsidiaries
emerged from bankruptcy 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"). At that time, pursuant to the Consensual Plan 50,494,313
shares of common stock were issued to certain former creditors and stockholders
of the Company and its subsidiaries and $490,000,000 aggregate principal amount
of the Company's 12.19% Series B Senior Notes Due 2000 (the "Senior Notes") were
issued to certain former creditors of the Company and its subsidiaries. (The
Senior Notes were redeemed in full in January 1996; see "Management's Discussion
and Analysis of Results of Operations and Financial Condition - Results of
Operations - Years Ended May 31, 1996 and Pro Forma 1995.")
Also pursuant to the Consensual Plan (i) the Veil Piercing Claims, the Veil
Piercing Litigation and the Adversary Proceeding, among other things, were
settled after a ruling by the Bankruptcy Court (which was affirmed on appeal by
the United States District Court for the Middle District of Florida) finding in
favor of the Company on every claim asserted in the Adversary Proceeding and
(ii) the Fraudulent Conveyance Lawsuit was settled. This settlement of the Veil
Piercing Litigation (the "Veil Piercing Settlement") was entered into among the
Company, certain of its creditors, Celotex, Jim Walter Corporation and
representatives of the Asbestos Claimants and provided for the dismissal of all
the Veil Piercing Claims and the release of the Company, KKR, any and all of
their present and former parents, subsidiaries, stockholders, partners,
officers, directors and employees and certain other parties (collectively, the
"Released Parties") from all liabilities relating to the LBO or associated with
asbestos-related liabilities of Celotex or Jim Walter Corporation. The Veil
Piercing Settlement is embodied in the Consensual Plan. The Veil Piercing
Settlement, among other things, requires Celotex, and certain other parties to
the Celotex bankruptcy proceedings, to propose and use their respective best
efforts to obtain confirmation of a plan of reorganization for Celotex that
includes an injunction pursuant to Section 524(g) of the Bankruptcy Code
("Section 524(g)") or other similar injunctive relief providing the same
protection as a Section 524(g) injunction acceptable to each of the Released
Parties. Such injunctive relief would provide the Company with additional
assurance that Veil Piercing Claims cannot be asserted in the future against the
Company.
In conjunction with its Chapter 11 bankruptcy proceedings, through July
1996 Celotex filed various plans of reorganization and/or amendments and
supplements thereto which failed to conform to the Veil Piercing Settlement with
respect to providing for a Section 524(g) injunction and which thus violated the
Veil Piercing Settlement. On March 8, 1996, the Company, along with certain
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other Released Parties, commenced an adversary proceeding (the "Second Adversary
Proceeding") in the Bankruptcy Court against Celotex and Jim Walter Corporation
seeking (1) a declaration that the then-most recently proposed Celotex
reorganization plan (the "Former Celotex Plan") did not contain the Section
524(g) injunction agreed upon by Celotex and Jim Walter Corporation and thus
violated the Veil Piercing Settlement and (2) a mandatory injunction compelling
Celotex to amend the Former Celotex Plan to incorporate a provision for a
Section 524(g) injunction or an injunction acceptable to the Released Parties
that provided the Released Parties the same protection which would be afforded
to them by Section 524(g). On May 28, 1996, the Bankruptcy Court entered an
Order granting Plaintiffs' Motion for Summary Judgment in part and denying the
Motions for Summary Judgment filed by Celotex and Jim Walter Corporation. The
Bankruptcy Court's Order declared that: (i) the Veil Piercing Settlement was a
valid agreement binding all signatories, including Celotex and Jim Walter
Corporation; (ii) the Former Celotex Plan did not contain a Section 524(g)
injunction; and (iii) Celotex had not proposed an injunction acceptable to the
Released Parties that provided the Released Parties the same protection which
would be afforded to them by Section 524(g), thus violating the Veil Piercing
Settlement. On June 7, 1996, the Bankruptcy Court (1) made its Order granting
Plaintiffs' Motion for Summary Judgment in part a final order and (2) denied
without prejudice Plaintiffs' Emergency Motion for Injunctive Relief, which
sought an injunction mandating that Celotex and Jim Walter Corporation comply
with the Veil Piercing Settlement. Celotex and Jim Walter Corporation each filed
notices of appeal from, inter alia, the Bankruptcy Court's Order granting in
part Plaintiffs' Motion for Summary Judgment. By order dated June 19, 1996, the
Celotex bankruptcy court denied confirmation of the Former Celotex Plan and
ordered that any new plans must be submitted by July 12, 1996. On July 12, 1996,
competing plans were filed by Celotex, Jim Walter Corporation, the Asbestos
Bodily Injury Claimants Committee and others (the "Bodily Injury Plan") and by
the Asbestos Property Damage Claimants Committee (the "Property Damage Plan").
The Company filed objections to both plans, on the grounds that they did not
comply fully with the Veil Piercing Settlement. On August 23, 1996,
both the Bodily Injury Plan proponents and the Property Damage Plan proponents
filed amended plans. The Property Damage Plan, as amended, provides for a
Section 524(g) injunction as to all claimants. The Bodily Injury Plan, as
amended, provides for a Section 524(g) injunction as to all claimants, but
reserves the right to seek confirmation of the Bodily Injury Plan even if the
asbestos property damage claimants class votes against that plan. If the Bodily
Injury Plan were to be confirmed over an adverse vote of the property damage
claimants class, that would appear to preclude a Section 524(g) injunction as to
asbestos property damage claims. However, in such event the Bodily Injury Plan
would still provide for an injunction against asbestos property damage claims to
the extent such an injunction is allowed by Section 105 of the Bankruptcy Code.
Both plans require the approval of creditors and confirmation by the Celotex
Bankruptcy Court. A confirmation hearing concerning the Bodily Injury Plan, as
amended, and the Property Damage Plan, as amended, is currently scheduled to
commence on October 7, 1996. See Notes 12 and 16 to Financial Statements -
Litigation and Other Matters - Veil Piercing Suits and - Subsequent Event.
(b) Industry Segments
The Company's industry segment information for the last three fiscal years
is included in Note 15 of Notes to Financial Statements, on pages F-22 and F-23
included herein.
(c) Narrative Description of Business and Properties
General
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 operations of the Company are carried out by its
operating subsidiaries, the business and properties of which are described
below.
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Jim Walter Homes
Jim Walter Homes, Inc. ("Jim Walter Homes") headquartered in the Walter
Industries building in Tampa, Florida, is in the business of marketing and
supervising the construction of standardized, partially finished and shell,
detached, single family residential homes, primarily in the southern region of
the United States where the weather permits year-round construction. Jim Walter
Homes has concentrated on the low to moderately priced segment of the housing
market. Over 320,000 homes have been completed by Jim Walter Homes and its
predecessor since 1946.
Jim Walter Homes' products consist of more than 30 models of
conventionally built homes, built of wood on concrete foundations or wood
pilings, and ranging in size from approximately 640 to 2,214 square feet. Each
home is completely finished on the outside and is unfinished on the inside
except for rough floors, ceiling joists, partition studding and closet framing.
The buyer may elect to purchase optional interior components, including
installation thereof, such as plumbing and electrical materials, heating and air
conditioning, wallboard, interior doors, interior trim and floor finishing. A
buyer selecting all options receives a home considered to be "90% complete",
excluding only floor covering, inside paint and utility hookups. Shell homes are
those which are completely finished on the outside with the inside containing
only rough floors, partition studding and closet framing, but not interior
wallboard, floor finishing, plumbing, electrical wiring and fixtures, doors and
cabinetry. The remaining units are sold at varying "in-between" stages of
interior finishing. Jim Walter Homes builds all of its homes "on site" and only
against firm orders.
The following chart shows the unit sales volume of Jim Walter Homes and
the percent of homes sold in the three stages of completion for fiscal years
ended May 31, 1996, 1995 and 1994.
Percent of Unit Sales
-----------------------------------
Fiscal Year Ended May 31, Units Sold Shell Various Stages 90% Complete
------------------------- ---------- ----- ------------------ --------
1996...................... 3,760 18% 4% 78%
1995...................... 4,126 25 9 66
1994...................... 4,331 23 10 67
During the fiscal years 1996, 1995 and 1994 the average net sales price of
a home was $42,300, $40,200 and $38,300, respectively.
Jim Walter Homes' backlog as of May 31, 1996 was 1,957 units compared to
1,529 units at May 31, 1995. The average time to construct a home ranges from
four to twelve weeks.
Jim Walter Homes currently operates 109 branch offices located in 19
states (Alabama, Arizona, Arkansas, Florida, Georgia, Indiana, Kentucky,
Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oklahoma,
South Carolina, Tennessee, Texas, Virginia and West Virginia). In addition, Jim
Walter Homes serves five adjoining states (Delaware, Illinois, Kansas, Maryland
and Pennsylvania). Of such branch offices, approximately 82% are owned, with the
balance on leased land. Substantially all of these branch offices serve as
"display parks" which are designed to allow customers to view actual models
completed to the various stages of interior finishing available. Jim Walter
Homes does not own or acquire land for purposes of its operations and is not a
real estate developer. Accordingly, these operations are not subject to
significant concentrations of credit risks. The actual construction of all homes
sold by Jim Walter Homes is done by local building contractors with their own
crews, pursuant to subcontracts executed in connection with each home, and
inspected by Jim Walter Homes' supervisory personnel. Jim Walter Homes maintains
warehouses near each of its district offices from which a portion of the
necessary building materials may be obtained; the balance of building materials
is purchased locally.
Approximately 96% of the homes Jim Walter Homes sells are purchased with
financing it provides. In order to qualify for a credit sale, the purchaser of a
home must own his property free and clear of all encumbrances. In addition to
owning the land, the purchaser must perform certain steps to complete the home
and obtain a certificate of occupancy. Depending on the degree of completion of
the home purchased, these steps can cost a significant amount of money. The
credit terms offered by Jim Walter Homes have a maximum 30-year term, are
usually
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for 100% of the purchase price of the home and currently carry either an 8.5% or
10% "annual percentage rate", without points or closing costs. In an effort to
generate additional sales, Jim Walter Homes in December 1995 reduced its
financing rate from 10% to 8.5% for its "90% complete" homes on a trial basis
and in March 1996 began formally advertising the lower rate. The 10% "annual
percentage rate" had been in effect since 1979. To qualify for financing, a
potential purchaser must also provide information concerning his or her monthly
income and employment history as well as a legal description of and evidence
that the customer owns the land on which the home is to be built. A customer's
income and employment usually are verified through telephone conversations with
such customer's employer and by examining his or her pay stubs, W2 forms or, if
the customer is self-employed, income tax returns. An applicant must have a
minimum of one year's continuous employment or, if he or she has changed jobs,
the new job must be in the same field of work. Only a small percentage of
secondary income (second job or part-time work) is utilized in qualifying
applicants. Ownership of the land is verified by examining the title record. In
addition, Jim Walter Homes' credit department obtains a credit report. If a
favorable report is obtained and the required monthly payment does not exceed
25% of the customer's monthly gross income, the application usually is approved
and a building or instalment sales contract is executed, a title report is
ordered and frequently a survey of the property is made. Surveys are performed
by independent registered surveyors when, in the opinion of Jim Walter Homes,
additional information beyond examination of the title record is needed. Such
additional information is primarily concerned with verification of legal
description, ownership of land and existence of any encroachments. Jim Walter
Homes does not use a point or grade credit scoring system. Particular attention
is paid to the credit information for the most recent three to five years.
Attention is also given to the customer's total indebtedness and total other
monthly payments on a judgmental basis by the credit department. The customer's
credit standing is considered favorable if the employment history, income and
credit report meet the aforementioned criteria. The contract for sale is subject
to (i) executing a promissory note which is secured by a first lien on the land
and the home to be built, (ii) executing a mortgage, deed of trust or other
security instrument, (iii) receiving a satisfactory title report, (iv)
inspecting the land to determine that it is suitable for building and (v)
obtaining required permits. Although the mortgages, deeds of trust and similar
security instruments constitute a first lien on the land and the home to be
built, such security instruments are not insured by the Federal Housing
Administration or guaranteed by the Veterans Administration or otherwise insured
or guaranteed.
Jim Walter Homes does not obtain appraisals or title insurance. Although
consideration is given to the ratio of the amount financed to the estimated
value of the home and the land securing such amount, there is no explicit
appraisal-based loan-to-value test. However, there is a requirement that the
value of the lot on which the home is to be built, as estimated solely on the
basis of Jim Walter Homes' mortgage servicing division employees' experience and
knowledge, be at least equal to 10% of the amount of the sales price to be
financed. Before occupying a new home, the customer must complete the utility
hook-ups and any of the other components not purchased from Jim Walter Homes,
arrange for the building inspection and, if required, obtain a certificate of
occupancy. The costs to complete a new home depend on the stage of completion of
the home purchased and whether public water and sewer systems are available or
wells and septic tanks must be installed. Such costs could range from
$2,000-$3,000 to $30,000-$40,000. Upon construction of a new home to the
agreed-upon percentage of completion, Jim Walter Homes sells the building and
instalment sales contract, the note and the related mortgage, deed of trust or
other security instrument to Mid-State Homes, Inc. ("Mid-State Homes"), an
indirect, wholly owned subsidiary of the Company, in the ordinary course of
business pursuant to an Agreement of Purchase and Sale of Instalment Obligations
and Servicing of Delinquent Accounts. Pursuant to this agreement, Jim Walter
Homes provides field servicing on all delinquent accounts, including collection
of delinquent accounts, recommendations of foreclosure, foreclosure and resale
of foreclosed properties.
The favorable financing offered by Jim Walter Homes normally has tended to
increase unit volume in times of high interest rates and limited availability of
mortgage financing funds. As a result, Jim Walter Homes' volume of home sales
has tended to be counter-cyclical to national home construction activity. Also,
in times of low interest rates and high availability of mortgage funds,
additional competition is able to enter the market.
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The single-family residential housing industry is highly competitive. Jim
Walter Homes competes in each of its market areas on the basis of price, design,
finishing options and accessibility to financing with numerous home builders
ranging from regional and national firms to small local companies. Jim Walter
Homes also competes with manufactured housing. For the calendar year 1995, Jim
Walter Homes was the eighth largest builder of detached single-family homes in
the United States after having been the sixth largest builder in 1994, the fifth
largest builder in 1993, and the fourth largest builder in 1992 and 1991.
However, because there are so many firms engaged in the single-family
homebuilding industry, Jim Walter Homes accounted for less than 1% of all new
detached for sale homes built in 1995.
In the three years ended May 31, 1996, 1995 and 1994, Jim Walter Homes'
net sales and revenues amounted to $159.2 million, $165.8 million and $166.0
million, respectively.
Mid-State Homes
Mid-State Homes, headquartered in the Walter Industries building in Tampa,
Florida, was established in 1958 to purchase mortgage instalment notes from Jim
Walter Homes on homes constructed and sold by Jim Walter Homes and to service
such mortgage instalment notes. Mid-State Trust II, Mid-State Trust III,
Mid-State Trust IV and Mid-State Trust V are business trusts organized by
Mid-State Homes, which owns all of the beneficial interest in Mid-State Trust
III, Mid-State Trust IV and Mid-State Trust V. Mid-State Trust IV owns all of
the beneficial interest in Mid-State Trust II.
In April 1988, Mid-State Homes sold to Mid-State Trust II instalment notes
and mortgages which it had acquired from Jim Walter Homes through February 29,
1988 with a gross amount of approximately $3,376,000,000 and an aggregate
outstanding economic balance of approximately $1,750,000,000 pursuant to a
purchase and sales agreement, in exchange for a purchase price of
$1,326,665,600, representing the net cash proceeds from the public offering of
$1,450,000,000 aggregate face amount of mortgage-backed notes ("Mid-State Trust
II Mortgage-Backed Notes") of Mid-State Trust II after paying the expenses
associated with the sale of such Mid-State Trust II Mortgage-Backed Notes. The
outstanding balance at May 31, 1996 of such Mid-State Trust II Mortgage-Backed
Notes was $497,000,000. At May 31, 1996, such Mid-State Trust II instalment
notes and mortgages had a gross book value of $1,166,386,000 and an economic
balance of approximately $723,481,000.
Under the Mid-State Trust II indenture for the Mid-State Trust II
Mortgage-Backed Notes, if certain criteria as to performance of the pledged
instalment notes are met, Mid-State Trust II is allowed to make quarterly
distributions of cash to Mid-State Trust IV, its sole beneficial owner, to the
extent that cash collections on such instalment notes exceed Mid-State Trust
II's cash expenditures for its operating expenses, interest expense and
mandatory debt payments on its mortgage-backed notes. In addition to the
performance-based distributions, the indenture permits distribution of
additional excess funds, if any, provided such distributions are consented to by
Financial Security Assurance Inc., a monoline property and casualty insurance
company and the guarantor of the Mid-State Trust II Mortgage-Backed Notes. The
guarantor has not approved any additional distributions since the January 1,
1995 distribution and such excess funds remain on deposit with Mid-State Trust
II.
On July 1, 1992, pursuant to approval by the Bankruptcy Court, mortgage
instalment notes having a gross amount of $638,078,000 and an economic balance
of $296,160,000 were sold by Mid-State Homes to Mid-State Trust III in exchange
for the net proceeds from the public issuance by Mid-State Trust III of
$249,864,000 of asset backed notes ("Mid-State Trust III Asset Backed Notes").
Net proceeds were used to repay in full all outstanding indebtedness due under a
revolving credit facility, with the excess cash used to fund the ongoing
operations of the Company and its subsidiaries. The outstanding balance at May
31, 1996 of such Mid-State Trust III Asset Backed Notes was $147,669,000. At May
31,1996, such Mid-State Trust III instalment notes and mortgages had a gross
book value of $416,780,000 and an economic balance of $217,247,000.
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On March 16, 1995, pursuant to approval by the Bankruptcy Court, mortgage
instalment notes having a gross amount of $2,020,258,000 and an economic balance
of $826,671,000 were sold by Mid-State Homes to Mid-State Trust IV. In addition,
on such date, Mid-State Homes sold its beneficial interest in Mid-State Trust II
to Mid-State Trust IV. Mid-State Trust II had a total collateral value of
$910,468,000 with $605,750,000 of Mid-State Trust II Mortgage-Backed Notes
outstanding. These sales were in exchange for the net proceeds from the public
issuance by Mid-State Trust IV of $959,450,000 of asset backed notes ("Mid-State
Trust IV Asset Backed Notes"). The outstanding balance at May 31, 1996 of such
Mid-State Trust IV Asset Backed Notes was $902,277,000. At May 31, 1996, such
Mid-State Trust IV instalment notes and mortgages had a gross book value of
$1,786,406,000 and an economic balance of $759,234,000.
The instalment notes sold by Mid-State Homes to Mid-State Trusts II, III
and IV are serviced by Mid-State Homes pursuant to servicing agreements entered
into with each trust. Mid-State Homes, in connection with such servicing
agreements, has entered into sub-servicing agreements with Jim Walter Homes to
provide field servicing such as collections, repossessions and resale.
The assets of Mid-State Trusts II, III and IV are not available to satisfy
claims of general creditors of Mid-State Homes or the Company and its other
subsidiaries. The liabilities of Mid-State Trusts II, III and IV for their
publicly issued debt are to be satisfied solely from proceeds of the underlying
instalment notes and are nonrecourse to Mid-State Homes and the Company and its
other subsidiaries.
On February 27, 1995, Mid-State Homes established Mid-State Trust V, a
business trust in which Mid-State Homes owns all the beneficial interest, to
provide temporary financing to Mid-State Homes for its current purchases of
instalment notes and mortgages from Jim Walter Homes. On March 3, 1995,
Mid-State Trust V entered into a Variable Funding Loan Agreement (the "Mid-State
Trust V Variable Funding Loan Agreement") with Enterprise Funding Corporation,
an affiliate of NationsBank N.A., as lender, and NationsBank N.A. (Carolinas),
as Administrative Agent. The agreement provides for a three-year $500,000,000
credit facility (the "Mid-State Trust V Variable Funding Loan") secured by the
instalment notes and mortgages Mid-State Trust V purchases from Mid-State Homes.
It is contemplated that the facility will be an evergreen three-year facility
with periodic paydowns from the proceeds of permanent financings similar to
those done by Mid-State Trusts II, III and IV. The facility currently matures on
March 3, 1999. The outstanding Mid-State Trust V Variable Funding Loan balance
at May 31, 1996 was $245,000,000. At May 31, 1996, such Mid-State Trust V
instalment notes and mortgages had a gross book value of $835,454,000 and an
economic balance of $315,422,000.
The revenues of Mid-State Trusts II, III, IV and V are required by
generally accepted accounting principles to be consolidated as part of Mid-State
Homes' revenues for financial statement purposes. In the three years ended May
31, 1996, 1995 and 1994, Mid-State Homes' revenues amounted to $248.8 million,
$237.1 million and $255.3 million, respectively.
Jim Walter Resources
The operations of Jim Walter Resources, Inc. ("Jim Walter Resources") are
conducted through its Mining Division, which mines and sells coal from four deep
shaft mines in Alabama, and its De-Gas Division, which extracts and sells
methane gas from the coal seams owned or leased by Jim Walter Resources.
Mining Division
The Mining Division, headquartered in Brookwood, Alabama, has
approximately 9.7 million tons of rated annual coal production capacity from
four deep shaft mines. These mines extract coal from Alabama's Blue Creek seam,
which contains high quality metallurgical coal. This coal can be used as coking
coal as well as steam coal because it meets current environmental compliance
specifications. The Blue Creek coal has a low/medium volatility, high BTU and
low sulfur content. The mines are located in west central Alabama between the
cities of Birmingham and Tuscaloosa.
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The majority of coal is mined using longwall technology, complemented by
the more standard continuous mining method. Since the late 1970's, by replacing
the traditional methods of underground mining with the longwall technique, the
Mining Division has achieved greater production efficiency, improved safety,
generated superior coal recovery results and lowered production costs. There are
approximately 70 longwall mining systems in use in the United States, of which
the Mining Division currently operates six. The Mining Division's normal
operating plan is a longwall/continuous miner ratio of about 75%/25%, which is
the long-term sustainable ratio.
Recoverable reserves, as of May 31, 1996, were estimated to be
approximately 242 million tons, of which 217 million tons relate to the four
Blue Creek Mines.
A summary of reserves is as follows:
ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF MAY 31, 1996
(In Thousands of Tons)
<TABLE><CAPTION>
Reserves(2) Classifications(3) Type(4) JWR's Interest Quality(6) Production(7)
--------------------------- ------------------- -------- ------------------ ---------------- -------------------
Steam(S)
or
Metallur-
Mining Property Total Assigned Unassigned Measured Indicated gical(M) Owned Leased(5) Ash Sulf. BTU/lb 1994 1995 1996
- --------------- ----- -------- ---------- -------- --------- -------- ------- --------- --- ----- ------ ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No. 3 Mine..... 60,075 60,075 --- 43,554 16,521 S/M 1,445 58,630 8.2 0.56 14,469 1,347 1,730 2,084
No. 4 Mine..... 71,262 71,262 --- 45,536 25,726 S/M 5,892 65,370 9.4 0.69 14,240 2,257 2,448 2,542
No. 5 Mine..... 26,758 26,758 --- 21,888 4,870 S/M 24,548 2,210 8.8 0.66 14,334 1,074 948 893
No. 7 Mine..... 59,174 59,174 --- 45,209 13,965 S/M 15,228 43,946 8.0 0.65 14,499 1,849 2,501 2,347
------- ------- ------ ------- ------- ------ ------- ----- ----- -----
217,269 217,269 --- 156,187 61,082 47,113 170,156 6,527 7,627 7,866
Bessie (8).... 24,919 --- 24,919 14,880 10,039 S/M 658 24,261 11.0 1.30 13,655 ----- ----- -----
------- ------- ------ ------- ------- ------ ------- ----- ----- -----
TOTAL ........ 242,188 217,269 24,919 171,067 71,121 47,771 194,417 6,527 7,627 7,866
======= ======= ====== ======= ======= ====== ======= ===== ===== =====
</TABLE>
- --------
(1) "Recoverable" reserves are defined as tons of mineable coal in the Blue
Creek and Mary Lee seams which can be extracted and marketed after
deduction for coal to be left in pillars, etc. and adjusted for reasonable
preparation and handling losses.
(2) "Assigned" reserves represent coal which has been committed by Jim Walter
Resources to its operating mines and plant facilities. "Unassigned"
reserves represent coal which is not committed to an operating mine and
would require additional expenditures to recover. The division of reserves
into these two categories is based upon current mining plans, projections
and techniques.
(3) The recoverable reserves (demonstrated resources) are the sum of "Measured"
and "Indicated" resources. Measured coal extends 1/4 mile from any point of
observation or measurement. Indicated coal is projected to extend from 1/4
mile to 3/4 mile from any point of observation or measurement. Inferred
coal extends from 3/4 mile to 3 miles from any point of observation or
measurement. Inferred reserves are not included in recoverable reserves.
(4) All of the coal in the Blue Creek and Mary Lee seams is suitable for
metallurgical purposes although, for marketing reasons, some is sold as
compliance steam coal.
(5) The leases are either renewable until the reserves are mined to exhaustion
or are of sufficient duration to permit mining of all of the reserves
before the expiration of the term.
(6) Values shown are weighted averages of all reserves and are calculated on a
dry basis. Bessie Mine reserves are equivalent to preparation at a 1.60
specific gravity, whereas the others are at a 1.40 specific gravity.
(7) Production for 1996, 1995 and 1994 is for the fiscal years ended May 31.
(8) The Bessie Mine was closed in August 1988.
Environmental expenditures imposed by laws relating to deep shaft mining
have been insignificant to date and no substantial expenditures are expected in
the future. The Mining Division does not engage in any surface (strip) mining.
The facilities of the Mining Division are summarized as follows:
Facility Location Sq. Footage
-------- ------------ -----------
Administrative headquarters...... Brookwood, AL 41,500
Central shop, supply center and
training center................ Brookwood, AL 128,400
Current
Operating Mines Location Rated Capacity
--------------- ------------ --------------
Blue Creek No. 3 ................ Adger, AL 2,600,000 tons
Blue Creek No. 4 ................ Brookwood, AL 2,700,000 tons
Blue Creek No. 5 ................ Brookwood, AL 1,800,000 tons
Blue Creek No. 7 ................ Brookwood, AL 2,600,000 tons
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Of the Mining Division's approximately 9.7 million tons of current rated
annual production capacity, 4.88 to 5.10 million tons are sold under long-term
contracts, leaving 4.82 to 4.60 million tons to be sold under short-term
contracts or on the spot market.
Jim Walter Resources' supply contract with Alabama Power Company ("Alabama
Power") that had been in effect since January 1, 1979, as amended, was
superseded by a new agreement executed on May 10, 1994 (the "New Alabama Power
Contract"). 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
from July 1, 1994 through August 31, 1999. The New Alabama Power Contract has a
fixed price subject to an escalation based on the Consumer Price Index and
adjustments for governmental impositions and quality. The New Alabama Power
Contract includes favorable modifications of specification, shipping deviations
and changes in transportation arrangements.
Jim Walter Resources and Carcoke, S.A. are parties to a long-term contract
which expires on December 31, 1997. The contract provides for the sale of
approximately 880,000 tons annually, with an option on approximately 220,000
additional tons annually. The pricing mechanism is market driven and reflects
changes in prices of three specific coals or coal indices.
Blue Creek Mine No. 5 ("Mine No. 5") was shut down for a substantial
portion of the period from July 9, 1990 through September 16, 1990 as a result
of safety concerns arising from spontaneous combustion heatings which were a
result of pyritic sulfur concentrations occurring in the coal seam in the
southern part of the mine being exposed to the air by the mining process. The
exposure of the sulfur deposits and its reaction with oxygen contained in the
ventilation air currents caused the heatings to occur. Throughout this period,
Jim Walter Resources was engaged in discussions with the Mine Safety and Health
Administration ("MSHA") regarding a new ventilating arrangement designed to
reduce the contact between oxygen and sulfur for the longwall faces at Mine No.
5. Idle plant expenses associated with the shutdown were $6.5 million. Although
MSHA approved the resumption of operations at the mine on September 14, 1990,
providing for a modified conventional ventilation system, productivity was poor
and costs were therefore high. In February 1991, the mine's one longwall unit
was moved from the southern part of the mine to a longwall coal panel in the
northern area and productivity improved. The southwestern area of the mine was
subsequently abandoned and sealed off as efforts to design a ventilation
arrangement acceptable to MSHA which properly controlled the spontaneous
combustion heating and provided acceptable productivity and costs of operation
were not successful.
Mine No. 5 also was shut down 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 heatings caused by pyritic sulfur concentrations
occurring in the mine's coal seam being exposed to the air by the mining
process. Representatives of Jim Walter Resources, MSHA, Alabama State Mine
Inspectors and the United Mine Workers of America ("UMWA") 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. As a result of the fire, the
Company and Jim Walter Resources claimed compensable losses in the amount of
$25 million under their business interruption insurance coverage. When the
insurers refused to pay their pro rata part of the claim, the Company commenced
litigation seeking to enforce such insurance. The insurers issued policies
insuring various percentages of the risk. The Company has entered into
settlements with several insurers who, in the aggregate, have paid
approximately $11.7 million, reducing the contract claims in the lawsuit
to $12.7 million. The Company and Jim Walter Resources continue to pursue the
litigation against the remaining carriers and a trial is tentatively scheduled
for October 21, 1996.
In late November 1995, Mine No. 5 experienced another fire due to the
unexpected recurrence of spontaneous combustion heatings caused by pyritic
sulfur concentrations occurring in the mine's coal seam being exposed
to the air by the mining process, and the mine was shut down. Efforts to
contain and extinguish the fire were successful; however, conditions dictated
the mine be shut down for several weeks. Firefighting and idle plant costs of
approximately $16 million associated with the November 1995 fire were not
insured since spontaneous
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combustion heatings caused by pyritic sulfur concentrations in Jim Walter
Resources' Mines No. 4 and No. 5 are now excluded from the Company's and
Jim Walter Resources' insurance policies. The affected coal panels on the
western side of the mine have been sealed off and development work is
underway on the eastern side of Mine No. 5. Longwall production on the east
side is expected to commence in the fourth quarter of fiscal 1997. While in
development, the mine's costs are being capitalized. Total development costs in
the year ended May 31, 1996 were $15,169,000. Jim Walter Resources' three other
operating mines remain in full production.
In the three years ended May 31, 1996, 1995 and 1994, the Mining Division's
net sales and revenues were $325.8 million, $299.4 million and $290.3 million,
respectively, including $4.8 million, $5.4 million and $5.7 million,
respectively, to Sloss Industries Corporation ("Sloss Industries"), a wholly
owned subsidiary of the Company.
De-Gas Division
The De-Gas Division, through a joint venture headquartered in Brookwood,
Alabama, extracts and sells methane gas from the coal seams owned or leased by
Jim Walter Resources.
The original motivation for the joint venture was to increase safety in Jim
Walter Resources' Blue Creek mines by reducing the level of methane gas through
wells drilled in conjunction with the mining operations. As of May 1996, there
were 340 wells producing approximately 40 million cubic feet of gas per day. As
many as 100 additional wells are planned for development over the next 12 - 18
months. The degasification operation, as had originally been expected, has
improved mining operations and safety by reducing methane gas levels in the
mines, as well as being a profitable operation.
The gas is transported through a 12-mile pipeline (owned and operated by
Black Warrior Transmission Corp., a corporation the stock of which is owned on a
50-50 basis by Jim Walter Resources and Sonat Exploration Company, an affiliate
of Southern Natural Gas Company ("SNG")), directly to SNG's pipeline.
The De-Gas Division began operations in 1981 with the formation of an equal
joint venture with Kaneb Services, Inc. ("Kaneb") to capture and market methane
gas from the Blue Creek seam. SNG is the joint venture's exclusive customer for
all output of methane gas, all of which was originally at a price tied to the
price of fuel oil in New York. Kaneb subsequently sold its 50% interest in the
degasification operation to an indirect wholly-owned subsidiary of Sonat, Inc.
In connection with such sale, additional areas were added to the gas sales
contract. This gas was priced at a market price nominated by SNG which was not
to be lower than the published price for spot purchases for SNG-South Louisiana
for the applicable month. Effective January 1, 1994, the gas sales contract was
amended. The price to be paid for gas delivered to SNG is now equal to the
average of two published spot prices; provided, however, that the price will not
be less than $2.00 per MMBTU (approximately $1.96 per MCF) on a weighted annual
basis, calculated cumulatively each month. Beginning in January 1994 and ending
in December 2001, SNG will pay Jim Walter Resources a reservation fee of
$675,000 per month if certain minimum quantities of gas are delivered. Black
Warrior Methane Corp., a corporation the stock of which is owned on a 50-50
basis by Jim Walter Resources and Sonat Exploration Company, manages the
operational activities of the joint venture.
In the three years ended May 31, 1996, 1995 and 1994, the De-Gas Division's
net sales and revenues amounted to $23.0 million, $20.8 million and $23.0
million, respectively.
U.S. Pipe
United States Pipe and Foundry Company, Inc. ("U.S. Pipe"), headquartered
in Birmingham, Alabama, conducts its business through its Pressure Pipe Division
and Castings Division. The Pressure Pipe Division manufactures and sells a broad
line of ductile iron pressure pipe, pipe fittings and valves and hydrants. It is
one of the nations's largest producers of ductile iron pressure pipe. The
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<PAGE>
Castings Division produces and sells a wide variety of gray and ductile iron
castings.
In the three years ended May 31, 1996, 1995 and 1994, U.S. Pipe's net sales
and revenues amounted to $421.4 million, $412.2 million and $357.2 million,
respectively.
Pressure Pipe Division
The Pressure Pipe Division manufactures and sells a complete line of
ductile iron pipe ranging from 4" to 64" in diameter as well as most equivalent
metric sizes. In addition, this division produces and sells a full line of
fittings, valves and hydrants of various configurations to meet various
municipal specifications. Approximately 70%-75% of the ductile iron pressure
pipe produced by this division is used in the transmission and distribution of
potable water and the remaining 25%-30% is used in the transmission of waste
water and industrial applications. The majority of ductile iron pressure pipe
and related fittings, valves and hydrants are for new distribution systems.
However, the market for rehabilitation, upgrading and replacement of pipe
systems has grown significantly in recent years (currently accounting for
approximately 30% of ductile iron pressure pipe sales) as municipalities have
initiated programs to rehabilitate aging water and waste water transmission
systems. Fittings, valves and hydrants produced by this division account for
approximately 20% of sales.
Ductile iron pressure pipe is manufactured by the deLavaud centrifugal
casting process and is typically classified into three size categories: 1) Small
pipe, ranging from 4" to 12" in diameter (approximately 55% of the division's
pipe production), is used primarily for potable water distribution systems and
small water system grids; 2) Medium pipe, ranging from 14" to 24" in diameter
(approximately 26% of the division's pipe production), is used primarily in
reinforcing distribution systems, including looping grids and supply lines; and
3) Large pipe, 30" to 64" in diameter, which accounts for the remaining 19% of
pipe production, is used for major water and waste water transmission and
collection systems.
The ductile iron pressure pipe industry is highly competitive, with a small
number of manufacturers of ductile iron pressure pipe, fittings, valves and
hydrants as well as a larger number of manufacturers which produce pipe from
substitute materials, such as PVC, concrete, fiberglass, reinforced plastic and
steel. U.S. Pipe is one of the nation's largest producers of ductile iron
pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin
Ductile Iron Pipe Company and American Cast Iron Pipe Company. The division
competes with such manufacturers of ductile iron pressure pipe on the basis of
price, customer service and product quality.
U.S. Pipe is also a manufacturer of ductile iron fittings. The Company
believes that McWane, Inc. has the largest market share in this market segment.
U.S. Pipe is not a major manufacturer of valves and hydrants.
Additional competition for ductile iron pressure pipe comes from pipe
composed of other materials. Although ductile iron pressure pipe is typically
more expensive than competing forms of pipe, customers choose ductile iron for
its quality, longevity, strength, ease of installation and lack of maintenance
problems.
Products of the Pressure Pipe Division are sold primarily to contractors,
water works distributors, municipalities and private utilities. Most ductile
iron pressure pipe orders result from contracts which are bid by contractors or
directly issued by municipalities or private utilities. An increasing portion of
ductile iron pressure pipe sales are made through independent water works
distributors. The division maintains numerous supply depots in leased space
throughout the country which are used as a source of pipe for start-up projects
to support ongoing projects and to aid in completing projects. The Pressure Pipe
Division's sales are primarily domestic, with foreign sales accounting for
approximately 5% of dollar sales in 1996. U.S. Pipe has 36 sales offices in
leased space in the United States. It employs a salaried sales force of
approximately 70 persons.
12
<PAGE>
The order backlog of pressure pipe at May 31, 1996 was 121,734 tons, which
represents approximately three months' shipments, compared to 121,548 tons at
May 31, 1995.
The Pressure Pipe Division manufactures ductile iron pressure pipe at four
owned plants located in (i) Bessemer, Alabama (581,000 square feet on 169 acres
of land); (ii) North Birmingham, Alabama (358,000 square feet on 61 acres of
land); (iii) Union City, California (121,000 square feet on 70 acres of land);
and (iv) Burlington, New Jersey (329,000 square feet on 109 acres of land). Such
plants have annual rated capacities, on a one shift per day basis, of 180,000
tons, 160,000 tons, 85,000 tons and 132,000 tons, respectively, of ductile iron
pressure pipe. In addition, the division manufactures fittings, valves and
hydrants at its owned plant in Chattanooga, Tennessee (648,000 square feet on 80
acres of land). The general offices, located in Birmingham, Alabama, contain
122,000 square feet of office space on 6 acres of owned land.
While the pipe business is generally sensitive to recessions because of its
partial dependence on the level of new construction activity, certain aspects of
Pressure Pipe's operations have in the past helped to reduce the impact on such
division of the effects of a downturn in new construction.
First, Pressure Pipe's products have experienced a strong level of demand
in the replacement market. The Company believes that the growth of the
replacement market will continue as a result of major expenditures by
governmental entities in an effort to rebuild the nation's infrastructure, such
as the replacement and upgrading of water and waste water transmission systems.
In addition, legislation such as the Clean Water Act and the Safe Drinking Water
Act may force utilities and cities to upgrade and/or replace their pipe systems.
Second, Pressure Pipe's facilities are located in regions of the country
which have exhibited consistent economic strength. The Burlington, New Jersey
plant is adjacent to the northeastern market with its significant replacement
potential and the division's operations in the South are located in areas of
steady economic growth. The West Coast, served by the Union City, California
plant, has a critical shortage of water for many of the large metropolitan areas
which will require major transmission pipelines in the future. Because freight
costs for pipe are high, locations close to important markets lower
transportation costs, thereby making the Pressure Pipe Division's products more
competitive.
Castings Division
The Castings Division produces a wide variety of gray and ductile iron
castings for a diversified customer base, including special hardness castings
for the pollution control industry. In the year ended May 31, 1996,
approximately 45% of the Castings Division's sales were sales of castings to the
Pressure Pipe Division, with the balance of sales to various capital goods
industries. Manufacturing operations are located in Anniston, Alabama (240,000
square feet on 21 acres of owned land).
Sloss Industries
Sloss Industries is a diversified manufacturing operation, headquartered in
Birmingham, Alabama, which has four major product lines: (1) foundry coke; (2)
furnace coke; (3) slag wool; and (4) specialty chemicals.
Foundry coke is marketed to cast iron pipe plants and foundries producing
castings, such as for the automotive and agricultural equipment industries. It
is shipped primarily into four geographic markets: the East Coast; the
Southeast; Mexico and the West Coast. Competition comes primarily from three
merchant suppliers: ABC Coke, Koppers Company, Inc. and Empire Coke Company. In
the year ended May 31, 1996, approximately 60% of the foundry coke produced by
Sloss Industries was sold to U.S. Pipe.
Furnace coke is sold primarily to basic steel producers. Furnace coke sales
have been consistent over the past years, as a result of a contract with
National Steel Corporation taking nearly all of Sloss' production capacity.
Sloss Industries has only an estimated 1% of the market for furnace coke.
Competition
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comes primarily from Koppers Company, Inc. in the southern United States and
from Citizens Gas & Coke Utility and steel producers with excess coking capacity
in the Midwest.
Slag wool is utilized principally by acoustical ceiling manufacturers and
is also used in fireproofing cements. A related product, processed mineral
fiber, is used in friction materials and phenolic molding compounds. The
continued success of the slag wool business depends upon Sloss Industries'
ability to produce ceiling tile fiber of consistent high quality and react to
customer demands for specific "customized" fiber composition. Of the total slag
wool sales in the year ended May 31, 1996, approximately 66% was sold to
Armstrong World Industries and 26% to Celotex.
Chemical products are manufactured in plants located in Birmingham and
Ariton, Alabama. The Birmingham product line is composed primarily of aromatic
sulfonic acids and sulfonyl chlorides used in the pharmaceutical, plasticizer,
foundry and coatings industries, but also includes a custom manufactured
specialty monomer for the plastics industry. The Ariton facility produces custom
manufactured specialty products for the rubber and plastics industries.
Sloss Industries' manufacturing facilities located in Birmingham, Alabama
include 120 coke ovens with an annual rated capacity of 450,000 tons and related
buildings of 148,400 square feet, a slag wool plant with an annual rated
capacity of 121,000 tons in a building of 63,000 square feet and a synthetic
chemicals plant in a building of 63,300 square feet, all on 521 acres of owned
land. Sloss Industries also operates a specialty chemical facility in Ariton,
Alabama in a building of 6,880 square feet, on 53 acres of owned land.
In the three years ended May 31, 1996, 1995 and 1994, Sloss Industries' net
sales and revenues amounted to $91.1 million, $88.0 million and $81.7 million,
respectively, including $12.0 million, $11.1 million and $9.4 million,
respectively to U.S. Pipe.
JW Aluminum
JW Aluminum Company ("JW Aluminum"), headquartered in Mt. Holly, South
Carolina, is a leading producer of fin stock used in heating and air
conditioning applications. Its second leading product is cable wrap used in the
manufacture of communications cable. JW Aluminum's other foil and sheet products
are used in a variety of applications, such as lithoplate for newspapers and as
a facer on foam insulation products. Aluminum sheet products are used primarily
for general building applications such as siding, gutters, downspouts, trailer
siding, mobile home siding and skirting, residential siding and window
components.
In fiscal 1996, JW Aluminum sold 122.7 million pounds of aluminum products,
29% of which were sheet products and 71% were foil products. JW Aluminum has
focused on directing its product mix away from building products which are price
sensitive, low value added products, towards higher value added products such as
fin stock, where product quality and service are relied upon more than price.
JW Aluminum operates a single manufacturing facility in Mt. Holly, South
Carolina. Such facility, which incorporates the plant warehouse and
administrative functions, is in a building of 319,000 square feet on 25 acres of
owned land. JW Aluminum's current rated capacity is 125 million pounds per year,
based on the present product mix. A $7.5 million expansion program currently
underway will increase capacity to 150 million pounds per year in late fiscal
1997.
In the three years ended May 31, 1996, 1995 and 1994, JW Aluminum's net
sales and revenues amounted to $141.1 million, $134.2 million and $87.3 million,
respectively, including $3.4 million, $6.1 million and $2.1 million,
respectively, to JW Window Components, Inc. ("JW Window Components"), a wholly
owned subsidiary of the Company.
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JW Window Components
JW Window Components produces a variety of screens and screen components
and a full line of window components, such as extruded aluminum components,
weatherstripping, sash balances and spiral balances. JW Window Components is
recognized as an industry leader in the production of block and tackle sash
balances. It also has the broadest product line of any supplier to the window
and patio door industry. The Company estimates that approximately 60% of total
sales are directed to the new construction market, approximately 30% to the
renovation market and approximately 10% to the commercial sector.
JW Window Components' products are sold through a network of independent
sales agents, who cover the continental United States, the Caribbean and Central
American countries.
JW Window Components operates three plants located in Elizabethton,
Tennessee (190,000 square feet on 25 acres of owned land); Sioux Falls, South
Dakota (50,000 square feet on 3 acres of owned land); and Merrill, Wisconsin
(54,000 square feet of leased space). The administrative offices are located in
Elizabethton, Tennessee.
In the three years ended May 31, 1996, 1995 and 1994, net sales and
revenues for JW Window Components amounted to $37.0 million, $45.8 million and
$38.7 million, respectively.
Southern Precision
Southern Precision Corporation ("Southern Precision") is the largest
producer of pattern tooling and resin coated sand in the Southeast.
Southern Precision's Irondale, Alabama manufacturing facility incorporates
the plant, warehouse and administrative functions (85,000 square feet of
buildings located on 6 acres of owned land). The facility and equipment enable
the company to service the larger and more sophisticated tooling and machining
programs. Products and services provided at this location include: 1) wood and
metal pattern tooling; 2) numerical controlled machining for industries such as
satellite and aircraft communications, aerospace and glass machines; 3) plastic
injection, compression and rubber molds; 4) aluminum castings; and 5) general
machining of fabrications, castings and plates.
Southern Precision's Birmingham, Alabama manufacturing facility (27,500
square feet on 5 acres of owned land) produces a coated sand for production of
shell cores for the foundry industry. To increase operating efficiency, the
company closed its Irondale, Alabama coating facility in August 1995 and
combined it with the Birmingham facility. The Birmingham facility is newer,
provides adequate land for expansion and is located on a major rail line, which
eliminates trucking expense while providing for bulk shipment by rail.
In the three years ended May 31, 1996, 1995 and 1994, Southern Precision's
net sales and revenues amounted to $15.0 million, $14.4 million and $11.0
million, respectively, including $1.2 million, $2.4 million and $2.2 million,
respectively, to U.S. Pipe.
Vestal Manufacturing
Vestal Manufacturing Company ("Vestal Manufacturing") produces a
diversified line of metal and foundry products for residential, commercial and
industrial use. Vestal Manufacturing manufactures a line of energy saving
fireplaces, fireplace inserts, accessories and woodburning stoves, as well as
lightweight castings for municipal markets and metal building products.
Vestal Manufacturing's products are sold through a network of independent
sales agents to hardware and building materials distributors, home centers and
mass merchandisers throughout the United States and Canada.
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Vestal Manufacturing's performance to a large extent is tied to residential
construction. Foreign competition has also been a factor in recent years.
Vestal Manufacturing, located in Sweetwater, Tennessee, operates a foundry
with 103,000 square feet, a steel fabrication plant with 109,000 square feet and
an administrative office containing 7,000 square feet, all on 46 acres of owned
land.
In the three years ending May 31, 1996, 1995 and 1994, Vestal
Manufacturing's net sales and revenues amounted to $17.3 million, $19.4 million
and $17.4 million, respectively.
United Land
United Land Corporation ("United Land") owns approximately 43,000 acres of
land, 137,000 acres of mineral rights and 1,300 acres of surface rights,
principally in Alabama.
United Land receives royalties resulting from leases to strip coal miners,
gas producers and timber companies. When market conditions are favorable,
management expects from time to time to sell excess real estate from the
holdings of United Land not utilized by any of the other subsidiaries of the
Company.
In the three years ended May 31, 1996, 1995 and 1994, United Land's net
sales and revenues amounted to $14.6 million, including a gain of $6.1 million
on sales of certain excess real estate, $15.8 million, including a gain of $6.1
million on the sale of certain excess real estate, and $9.2 million,
respectively.
Walter Land
Walter Land Company ("Walter Land") is a land sales operation with an
inventory at May 31, 1996 of approximately 7,400 acres, primarily on the south
side of Houma, Louisiana. The bulk of the commercial development in Houma is
tied directly to service and support for offshore oil and gas drilling, which
has been in a long term recession. Land sales have been few and small in recent
years. Presently, the majority of Walter Land's income is derived from rental
income. The management and sale of the Louisiana properties are handled by local
personnel on a contract basis. In the three years ended May 31, 1996, 1995 and
1994, Walter Land's net sales and revenues amounted to $277,000, $196,000 and
$247,000, respectively.
Cardem Insurance
Cardem Insurance is a Hamilton, Bermuda based offshore reinsurance company.
The predominant part of its business is reinsuring 75% of the risk on fire and
extended coverage insurance policies issued by Westchester Insurance Company, an
unrelated insurance company. Such insurance policies are with individual owners
of homes constructed by Jim Walter Homes. In the years ended May 31, 1996, 1995
and 1994, Cardem Insurance's net sales and revenues amounted to $13.1 million,
$11.8 million and $12.0 million, respectively.
Seasonality
Certain of the businesses of the Company (primarily U.S. Pipe, Jim Walter
Homes, JW Window Components and Vestal Manufacturing) are subject to seasonal
variations to varying degrees. However, the businesses of the Company are
significantly influenced by the general economy.
Trade Names, Trademarks and Patents
The names of each of the Company's subsidiaries are well established in the
respective markets served by them. Management believes that the reputation of
such trade names is of some importance. The Company's subsidiaries have numerous
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patents and trademarks. Management does not believe, however, that any one such
patent or trademark is of material importance.
Research and Development
Research activities conducted by each business are directed toward new
products, process and building systems development, improvement of existing
products, development of new uses for existing products and cost reduction
efforts. Total research and development expenditures in each of the last three
fiscal years were less than 1% of consolidated net sales and revenues.
Raw Materials
Substantially all of the raw materials needed for the operations of the
Company and its subsidiaries are either produced by the Company and its
subsidiaries or are purchased from domestic sources. All materials used by the
various businesses of the Company are available in the quantities necessary to
support their respective operations.
Environmental
The Company and its subsidiaries are subject to a wide variety of laws and
regulations concerning the protection of the environment, both with respect to
the construction and operation of many of its plants, mines and other
facilities, and with respect to remediating environmental conditions that may
exist at its own and other properties. The Company believes that it and its
subsidiaries are in substantial compliance with federal, state and local
environmental laws and regulations. Expenditures for compliance of ongoing
operations and for remediation of environmental conditions arising from past
operations in the fiscal year ended May 31, 1996 were approximately $5.1
million. Because environmental laws and regulations on the federal, state and
local levels continue to evolve, and because conditions giving rise to
obligations and liabilities under environmental laws are in some circumstances
not readily identified, it is difficult to forecast the amount of such future
environmental expenditures or the effects of changing standards on future
business operations, and the Company can give no assurance that such
expenditures will not, in the future, be material. Capital expenditures for
environmental requirements are anticipated in the next five years to average
approximately $6.0 million per year.
U.S. Pipe is implementing an Administrative Consent Order ("ACO") for its
Burlington, New Jersey plant that was required under the New Jersey
Environmental Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act) in connection with the completion of the LBO. The ACO required
soil and ground water cleanup. U.S. Pipe has completed, pending final approval,
the soil cleanup required by the ACO. U.S. Pipe also has completed, pending
final approval, ground water treatment as ordered in the ACO. Ground water
monitoring as required by the ACO continues. It is not known how long ground
water monitoring will be required. Management does not believe the cleanup costs
will have a material adverse effect on the financial condition or results of
operations of the Company and its subsidiaries.
The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), generally imposes liability, which may be joint and
several and is without regard to fault or the legality of waste generation or
disposal, on certain classes of persons, including owners and operators of sites
at which hazardous substances are released into the environment (or pose a
threat of such release), persons that disposed or arranged for the disposal of
hazardous substances at such sites, and persons who owned or operated such sites
at the time of such disposal. CERCLA authorizes the EPA, the states and, in some
circumstances, private entities to take actions in response to public health or
environmental threats and to seek to recover the costs they incur from the same
classes of persons. Certain governmental authorities can also seek recovery for
damages to natural resources. Various subsidiaries of the Company have been
identified as potentially responsible parties by the EPA under CERCLA with
respect to cleanup of hazardous substances at several sites to which their
wastes
17
<PAGE>
allegedly have been transported. The subsidiaries are in the process of
preliminary investigation of their relationship to these sites, if any, to
determine the nature of their potential liability and amount of remedial costs
to clean up such sites. Although no assurances can be given that the Company
will not be required in the future to make material expenditures relating to
these sites, management does not believe at this time that the cleanup costs its
subsidiaries will be called on to bear, if any, associated with these sites will
have a material adverse effect on the financial condition or results of
operations of the Company and its subsidiaries; management believes the extent
of the subsidiaries' involvement, if any, to be minor in relation to that of
other named potentially responsible parties, a significant number of which are
substantial companies.
Employees
As of May 31, 1996, the Company and its subsidiaries employed 7,755 people,
of whom 4,817 were hourly workers and 2,938 were salaried employees.
Approximately 4,300 employees were represented by unions under collective
bargaining agreements, of which approximately 1,750 were covered by one contract
with the UMWA, which currently expires on August 1, 1998. The Company considers
its relations with its employees to be satisfactory.
The Company and its subsidiaries have various pension and profit sharing
plans covering substantially all employees. In addition to the Company's own
pension plans, contributions are made to certain multi-employer plans. The
funding of retirement and employee benefit plans is in accordance with the
requirements of the plans and, where applicable, in sufficient amounts to
satisfy the "Minimum Funding Standards" of the Employee Retirement Income
Security Act of 1974 ("ERISA"). The plans provide benefits based on years of
service and compensation or at stated amounts for each year of service.
Properties
The headquarters building of the Company is a modern twin tower building of
masonry and steel construction containing approximately 200,000 square feet of
office space, located on a plot of land in excess of 13 acres in Tampa, Florida.
Item 3. Legal Proceedings
See Items 1 and 2 - Business and Properties - Introduction on pages 2
through 4 and Notes 12 and 16 of the Notes to Financial Statements on pages
F-14 through F-18 and page F-24 included herein.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
<PAGE>
Item 4A. Executive Officers of the Registrant
Set forth below is a list showing the names, ages (as of August 1, 1996)
and positions of the executive officers of the Company.
Name Age Office
---- --- ------
Kenneth E. Hyatt 55 Chairman, President and Chief Executive
Officer
Richard E. Almy 54 Executive Vice President and Chief
Operating Officer
William H. Weldon 64 Executive Vice President and Chief
Financial Officer
Dean M. Fjelstul 54 Senior Vice President - Finance
Robert W. Michael 54 Senior Vice President and Group
Executive
William N. Temple 63 Senior Vice President and Group
Executive
Frank A. Hult 45 Vice President, Controller and Chief
Accounting Officer
Donald M. Kurucz 57 Vice President and Treasurer
Edward A. Porter 49 Vice President, General Counsel and
Secretary
David L. Townsend 42 Vice President - Administration
William Carr 65 President and Chief Operating Officer
of Jim Walter Resources, Inc.
Sam J. Salario(1) 67 President of Mid-State Homes; Vice
President of Jim Walter Homes
- ----------
(1) Mr. Salario has announced his intention to retire on August 31, 1996.
Kenneth E. Hyatt has been Chairman of the Board and Chief Executive Officer
of the Company since June 1, 1996 and has been President of the Company since
September 1, 1995. Between September 1, 1995 and June 1, 1996, he also served as
Chief Operating Officer of the Company. He was elected a director of the Company
on September 12, 1995. Mr Hyatt served as President and Chief Executive Officer
and a director of Celotex from 1990 until shortly prior to his election,
effective September 1, 1995, as President and Chief Operating Officer of the
Company. Mr Hyatt held various management and executive positions with various
subsidiaries of Original Jim Walter from 1966 until 1984, at which time he was
named Vice President and Group Executive of Original Jim Walter. Following
Original Jim Walter's leveraged buyout in 1988 by KKR, Mr. Hyatt joined with an
investor group in the acquisition of Celotex and certain related entities. In
October 1990 Celotex and one of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 in the Celotex Bankruptcy Court as a result of
massive litigation involving asbestos-related liabilities.
Richard E. Almy has been Executive Vice President and Chief Operating
Officer of the Company since June 1996. Previously he was President of JW
Aluminum (1991-1996) and JW Window Components (1995-1996).
William H. Weldon was elected a director of the Company on June 1, 1996.
Since December 1, 1995 he has been Executive Vice President and Chief Financial
Officer of the Company. Mr. Weldon had been Senior Vice President-Finance and
Chief Accounting Officer of the Company since November 1991. He previously
served as Vice President, Controller and Chief Accounting Officer of the Company
from 1988 to 1991. Previously he served as Vice President and Controller (1977-
1988), Controller (1972-1977) and Assistant Controller (1970-1972) of Original
Jim Walter.
Dean M. Fjelstul has been Senior Vice President - Finance of the Company
since June 1996. Previously, he was employed by Alliant Techsystems as Vice
President and Chief Financial Officer (1990-1996). Prior thereto he served in
various financial management capacities with Honeywell, Inc. during a 22-year
tenure with that company.
19
<PAGE>
Robert W. Michael has been a Senior Vice President and Group Executive of
the Company since 1991 and President and Chief Operating Officer of Jim Walter
Homes since 1984. He also served as a Vice President of Original Jim Walter from
1984 to 1988. Prior thereto, he was Vice President-Sales (1975-1984), a Regional
Manager (1973-1975), an Assistant Regional Manager (1970-1973), a Main Branch
Manager (1967-1970) and a Sub-Branch Manager (1966-1967) with Jim Walter Homes
and held various managerial positions with Mid-State Homes (1964-1966).
William N. Temple has been a Senior Vice President and Group Executive of
the Company since 1991 and President and Chief Operating Officer of U.S. Pipe
since 1993; he was a Vice President of the Company from 1988 to 1991 and, from
1974, was a Vice President of Original Jim Walter. Previously he served as
President of the former Fasteners and Special Products Division of U.S. Pipe and
Vice President of U.S. Pipe (1972-1974), President of the former Southeastern
Bolt and Screw division of U.S. Pipe (1971-1974) and Controller of U.S. Pipe
(1965-1971).
Frank A. Hult has been a Vice President and the Chief Accounting Officer of
the Company since 1995. Previously, he was a Vice President (since 1994), the
Controller (since 1991), Assistant Controller and Chief Accountant (1989-1991)
and Manager of Budgets (1988-1989) of the Company. Prior thereto he was Manager
of Budgets (1984-1988) and Financial Analyst (1978-1981) of Original Jim Walter
and Manager-Operations Administration (1981-1984), Plant Controller (1975-1978)
and Cost Accountant (1974-1975) for Celotex.
Donald M. Kurucz has been a Vice President and the Treasurer of the Company
since 1991; he was Treasurer of the Company from 1988-1991. Previously he served
as Treasurer (1977-1988) and Assistant Treasurer (1975-1977) of Original Jim
Walter.
Edward A. Porter has been Vice President, General Counsel and Secretary of
the Company since January 1996. Previously he was employed by National Gypsum
Company as Senior Vice President-Administration, General Counsel and Secretary
(1993-1995), Vice President - Administration, General Counsel and Secretary
(1988-1993) and in various legal positions (1980-1988).
David L. Townsend has been a Vice President of the Company since 1988.
Previously he served as a Vice President (since 1983), Director of Public
Relations (1982-1983) and Manager of Public Relations (1980-1982) of Original
Jim Walter and in various staff positions (1978-1980) with Original Jim Walter.
William Carr has been President and Chief Operating Officer of Jim Walter
Resources since 1991; prior thereto he was a Senior Executive Vice President and
Chief Operating Officer of Jim Walter Resources and President of its Mining
Division since 1976. He was a Vice President of Original Jim Walter from 1976 to
1988.
Sam J. Salario has been President of Mid-State Homes since 1984, and a Vice
President of Jim Walter Homes since 1972. Previously he served as an Assistant
Vice President (1963-1984), a Regional Supervisor (1961-1963) and a
Representative (1960-1961) with Mid-State Homes.
Executive officers serve at the pleasure of the Board of Directors. The
Company is not aware of any family relationships among any of the foregoing
executive officers.
20
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The Company's common stock has been listed on the Nasdaq National Market
under the symbol "WLTR" since October 11, 1995. The table below sets forth, for
the quarterly periods indicated, the range of high and low sales prices of the
Company's common stock since such date.
High Low
---- ---
Fiscal Year 1996
Second Quarter................................. $ 14-3/4 $ 12-3/8
(beginning October 11, 1995)
Third Quarter................................. 13-3/4 12
Fourth Quarter................................ 14-1/2 12-5/8
The Registrant has never paid cash dividends on its common stock and has no
present intention of paying any cash dividends on its common stock. Covenants
contained in certain of the debt instruments referred to in Note 8 of Notes to
Financial Statements on pages F-10 through F-12 restrict the ability of the
Company to pay cash dividends.
As of August 21, 1996, there were 135 holders of record of the Company's
common stock.
21
<PAGE>
Item 6. Selected Financial Data
The following data, insofar as it relates to each of the fiscal years 1992
through 1996, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1996 and 1995 and the related
consolidated statements of operations and retained earnings (deficit) and cash
flows for the three years ended May 31, 1996 and the notes thereto appearing
elsewhere herein. All of the information presented below should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto, and the other information contained elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------------------------------------------------------------
1992 1993(2) 1994 1995 1996(3)(4)
---------- ---------- ---------- ---------- -------------
(Dollars in thousands
except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues ............. $1,366,581 $1,318,986 $1,328,524 $1,442,322 $1,485,635
Cost of sales (exclusive of
depreciation) ................ 891,882 804,411 845,061 951,381 987,354
Depreciation, depletion and
amortization ................. 82,801 70,483 71,035 72,037 74,341
Interest and amortization of
debt discount and expense (1). 177,060 171,581 155,470 304,548 208,690
Income tax expense(benefit)..... 12,463 24,328 28,917 (170,450) (55,155)
Income(loss) before extraordinary
item and cumulative effect of
accounting change (2)(3)(4)... 22,342 46,594 7,175 (358,645) (79,292)
Net income (loss) .............. 22,342 (58,014) 7,175 (358,645) (84,696)
Net loss per share (4)(5)
Loss before extraordinary item (7.10) (1.56)
Extraordinary item -- (.10)
---------- ----------
Net loss (7.10) (1.66)
========== ==========
Number of shares used in
calculation of loss per share 50,494,313 50,988,195
Additional Financial Data:
Gross capital expenditures ..... $ 68,349 $ 71,708 $ 69,831 $ 91,317 $ 83,523
Net property, plant and equipment 664,622 663,040 657,863 662,792 541,536
Total assets ................... 3,171,266 3,223,234 3,140,892 3,245,153 3,091,377
Long-term senior debt .......... 948,782 1,046,971 871,970 2,220,370 2,211,296
Liabilities subject to Chapter
11 proceedings ............... 1,845,328 1,725,631 1,727,684 -- --
Stockholders' equity (deficit).. (230,119) (287,737) (282,353) 360,774 276,694
Employees at end of year .......... 7,645 7,545 7,676 7,888 7,755
</TABLE>
- ---------
(1) Interest on unsecured obligations not accrued since December 27, 1989
amounted to $163.7 million in each of the years ended May 31, 1992 through
1994. The Company recorded additional interest and amortization of debt
discount and expense of $141.4 million related to the consummation of the
Consensual Plan in fiscal 1995.
(2) The Company adopted Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
("FASB 106") and Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("FASB 109") during fiscal year 1993.
(3) The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of" ("FASB 121") during fiscal year 1996.
(4) Extraordinary item consists of redemption premium and write off of
unamortized debt expense of $8.3 million ($5.4 million after tax) related
to early repayment of the Senior Notes and a $150 million bank credit
facility during fiscal year 1996. See Note 8 of Notes to Financial
Statements.
(5) Per share information for fiscal years 1992 through 1994 is not relevant
given the significant change in the Company's capital structure following
consummation of the Consensual Plan.
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
The Company emerged from bankruptcy on March 17, 1995 pursuant to the
Consensual Plan. Accordingly, the Company's Consolidated Statement of Operations
22
<PAGE>
and Retained Earnings (Deficit) for the year ended May 31, 1996 are not
comparable to the Consolidated Statement of Operations and Retained Earnings
(Deficit) for prior periods.
This discussion should be read in conjunction with the consolidated
financial statements and notes thereto of Walter Industries, Inc. and
subsidiaries, particularly Note 1 of Notes to Financial Statements on pages F-6
and F-7 which presents an unaudited pro forma consolidated statement of
operations for the year ended May 31, 1995 to illustrate the estimated effects
of the Consensual Plan and related financings as if they had occurred as of June
1, 1994, and Note 15 of Notes to Financial Statements on pages F-22 and F-23
which presents sales and operating income by operating group.
Results of Operations
Years Ended May 31, 1996 and Pro Forma 1995
Net sales and revenues for the year ended May 31, 1996 were $50.9 million,
or 3.6%, ahead of the prior year with a 3.0% increase in pricing and/or product
mix and a .6% increase in volume. The increase in net sales and revenues was the
result of improved sales and revenues in all operating groups.
Homebuilding and Related Financing Group sales and revenues were $6.0
million, or 1.5%, ahead of the prior year. This performance reflects a 5.2%
increase in the average net selling price per home sold, from $40,200 in 1995 to
$42,300 in 1996, partially offset by an 8.9% decrease in the number of homes
sold, from 4,126 units in 1995 to 3,760 units in 1996. The higher average net
selling price reflects a greater percentage of "90% complete" homes sold in the
current year and a price increase instituted February 1, 1995 to compensate for
higher building material costs. The decrease in unit sales resulted from
extremely competitive conditions in virtually every Jim Walter Homes sales
region. The relatively low mortgage interest rate environment and higher
availability of mortgage financing for home buyers in recent years adversely
affected Jim Walter Homes' sales volumes. In an effort to generate additional
unit sales, Jim Walter Homes in December 1995 reduced its financing rate to 8.5%
from 10% for its "90% complete" homes on a trial basis and, in March 1996, began
formally advertising the lower rate. Jim Walter Homes' backlog at May 31, 1996
was 1,957 units (all of which are expected to be completed prior to the end of
fiscal 1997) compared to 1,529 units at May 31, 1995, a 28% increase. Time
charge income (revenues received from Mid-State Homes' instalment note
portfolio) increased from $222.2 million in 1995 to $231.1 million in 1996. The
increase is attributable to increased payoffs received in advance of maturity
and to an increase in the average balance per account in the portfolio,
partially offset by a reduction in the total number of accounts. Operating
income of $63.3 million (net of interest expense) was $18.5 million greater than
the prior year. This performance was due to the higher time charge income,
improved homebuilding gross profit margins resulting from the higher average net
selling price per home sold and lower lumber costs and lower interest expense in
1996 ($128.2 million) as compared to that incurred in 1995 ($131.6 million),
partially offset by the lower number of homes sold.
Water and Waste Water Transmission Products Group sales and revenues were
$9.2 million, or 2.2%, ahead of the prior year. The increase was the result of
higher sales prices, partially offset by reduced volumes for ductile iron
pressure pipe, fittings and castings. Sales volumes were negatively impacted by
severe winter weather conditions and delays in federal funding for planned water
and sewer pipeline projects. The order backlog at May 31, 1996 was 121,734 tons,
which represents approximately three months' shipments, compared with 121,548
tons at May 31, 1995. Operating income of $14.0 million was $2.3 million below
the prior year. The lower performance resulted from the lower sales volumes,
higher raw material costs, especially for scrap iron and alloys which are major
raw material components, partially offset by the higher sales prices.
Natural Resources Group sales and revenues exceeded the prior year by
$31.9 million, or 9.6%. The increase resulted from greater sales volumes for
coal and methane gas, a higher average selling price for coal, higher outside
gas and timber royalty income and a $3.7 million gain (in 1996) from the sale of
gas royalty interests in certain mineral properties. Gains from sales of certain
excess real estate were $6.1 million in each year. A total of 7.61 million tons
of coal was sold in 1996 versus 7.20 million tons in 1995, a 5.7% increase. The
23
<PAGE>
increase in tonnage sold was the result of greater shipments to certain export
customers, partially offset by lower shipments to Alabama Power and Japanese
steel mills. The average price per ton of coal sold increased $1.51 from $41.34
in 1995 to $42.85 in 1996 due to higher prices realized in the worldwide
metallurgical market and to Alabama Power. Mine No. 5 was shut down 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 heatings.
Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and
the UMWA 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. As a
result of the fire, the Company and Jim Walter Resources claimed compensable
losses in the amount of $25 million under their business interruption insurance
coverage. When the insurers refused to pay their pro rata part of the claim, the
Company commenced litigation seeking to enforce such insurance. The insurers
issued policies insuring various percentages of the risk. The Company has
entered into settlements with several insurers who, in the aggregate, have paid
approximately $11.7 million, reducing the contract claims in the lawsuit to
$12.7 million. The Company and Jim Walter Resources continue to pursue the
litigation against the remaining carriers, and a trial is tentatively scheduled
for October 21, 1996. See Note 12 of Notes to Financial Statements. In late
November 1995, Mine No. 5 experienced another fire due to the unexpected
recurrence of spontaneous combustion heatings and the mine was shut down.
Efforts to contain and extinguish the fire were successful; however, conditions
dictated the mine be shut down for several weeks. The affected coal panels on
the western side of the mine have been sealed off and development work is under
way on the eastern side of Mine No. 5. Longwall production on the east side is
expected to commence in the fourth quarter of fiscal 1997. See "Business and
Properties -- Jim Walter Resources -- Mining Division." Jim Walter Resources'
three other operating mines remain in full production. The Group incurred an
operating loss of $106.5 million in 1996 as compared to operating income of
$21.4 million in 1995. The lower performance reflects a $120.4 million
write-down of fixed assets to estimated fair market values at two coal mines
reflecting the Company's adoption of FASB 121 (see Note 5 of Notes to Financial
Statements) and firefighting and idle plant costs of $16 million, principally
associated with the fire at Mine No. 5, partially offset by the increased sales
volumes of coal and methane gas, the higher average sales price for coal, higher
gas and timber royalty income, the $3.7 million gain (in 1996) from the sale of
certain gas royalty interests and slightly lower costs per ton of coal produced
($36.12 in 1996 versus $37.13 in 1995).
Industrial and Other Products Group sales and revenues were $2.6 million,
or .9%, greater than the prior year. Increased selling prices for furnace and
foundry coke, aluminum foil products, window components and metal building and
foundry products combined with greater sales volumes of furnace and foundry
coke, resin-coated sand and patterns and tooling were partially offset by lower
aluminum sheet products selling prices and volumes and reduced sales volumes of
window components and metal building and foundry products. The Group's operating
loss in 1996 was $9.5 million as compared to operating income of $9.3 million in
1995. This performance reflects a $22.9 million FASB 121 write-off of excess of
purchase price over net assets acquired (goodwill) (see Note 5 of Notes to
Financial Statements) and the window components business experiencing lower
sales volume, higher raw material costs and reduced efficiencies due to
prolonged start-up problems associated with the consolidation and relocation of
JW Window Components' Hialeah, Florida and Columbus, Ohio operations to
Elizabethton, Tennessee. These decreases were partially offset by increased
margins realized on aluminum sheet and foil products, furnace coke and
resin-coated sand.
Cost of sales, exclusive of depreciation, of $987.4 million was 80.9% of
net sales in 1996 versus $951.4 million and 80.5% in 1995. The cost of sales
increase was primarily the result of lower gross profit margins for pipe
products, window components, patterns and tooling and metal building and foundry
products combined with the firefighting and idle plant costs principally
associated with the fire at Mine No. 5. These increases were partially offset by
improved profit margins on home sales, aluminum foil and sheet products, furnace
coke and resin-coated sand.
24
<PAGE>
Selling, general and administrative expenses of $135.8 million were 9.1%
of net sales and revenues in 1996 versus $130.6 million and 9.1% in 1995.
Interest and amortization of debt expense was $208.7 million in 1996
versus $223.2 million, on a pro forma basis in 1995, reflecting lower
outstanding debt balances and reduced interest rates resulting from the
financing completed on January 22, 1996. The average rate of interest in 1996
was 9.10% as compared to 9.79% on a pro forma basis, in 1995. The prime interest
rate ranged from 8.25% to 9.0% in 1996 compared to a range of 7.25% to 9.0% in
1995.
The Company's effective tax rate in 1996 and on a pro forma basis in 1995
differed from the statutory tax rate due to amortization of goodwill and the
FASB 121 write-off of goodwill of $22.9 million (in 1996) which are not
deductible for tax purposes. In addition, in the fiscal 1996 fourth quarter, the
Company recorded approximately $27 million of non-recurring tax benefits
resulting from utilization of a capital loss carry forward, the Company's
election to carry forward its net operating loss (thereby avoiding the effect of
a rate difference and loss of certain tax credits), and other miscellaneous tax
adjustments. See Note 9 of Notes to Financial Statements for further discussion
of income taxes.
On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility, a six-year $125
million term loan and a $60 million seven-year term loan (collectively the
"Credit Facilities"). Proceeds from the financing together with $75 million
drawn under the Mid-State Trust V Variable Funding Loan Agreement were used to
redeem in full the Senior Notes at a redemption price of 101% of the principal
amount thereof plus accrued and unpaid interest thereon to the date of
redemption and to replace an existing $150 million bank credit facility, both
incurred as a result of the Company's emergence from bankruptcy in March 1995.
The Company recorded an extraordinary loss of $8.3 million ($5.4 million net of
income tax benefit) consisting of a redemption premium and write-off of
unamortized debt expense related to the early repayment of the Senior Notes and
the $150 million bank credit facility. See Note 8 of Notes to Financial
Statements.
The net loss for the year ended May 31, 1996 was $84.7 million compared to
a net loss of $38.3 million, on a pro forma basis, in 1995 reflecting all of the
previously mentioned factors as well as the impact of higher postretirement
health benefits in 1996.
Years ended May 31, 1995 and 1994
Net sales and revenues for the year ended May 31, 1995 were $113.8
million, or 8.6%, greater than the prior year, with a 7.0% increase in volume
and a 1.6% increase in pricing and/or product mix. The increase in net sales and
revenues was the result of improved sales and revenues in all operating groups
except Homebuilding and Related Financing.
Industrial and Other Products Group sales and revenues were $59.6 million,
or 26.5%, greater than the prior year. Increased sales volumes of aluminum foil
and sheet products, foundry coke, chemicals, patterns and tooling, resin-coated
sand, window components and metal building and foundry products, combined with
higher selling prices for aluminum foil and sheet products, furnace coke, window
components and metal building and foundry products and a $3.6 million gain from
the sale of JW Window Components' Hialeah, Florida facility were partially
offset by reduced sales volumes of furnace coke and slag wool. The Group's
operating income of $9.3 million was $2.0 million lower than the prior year. The
decrease was the result of higher manufacturing costs in the window components
business due to increased raw material costs, especially aluminum, a major raw
material component, startup costs associated with the consolidation and
relocation during 1995 of JW Window Components' Hialeah, Florida and Columbus,
Ohio, operations to Elizabethton, Tennessee and reduced operating efficiencies,
including start-up problems associated with the relocation of Vestal
Manufacturing's steel fabrication operation in May 1994. These decreases
were partially offset by increased income for aluminum foil and sheet, foundry
coke, chemicals, patterns and tooling and resin-coated sand due to the sales
increases, improved gross profit margins for furnace coke and the gain from the
Hialeah facility sale.
25
<PAGE>
Water and Waste Water Transmission Products Group sales and revenues were
$55.0 million, or 15.4%, ahead of the prior year. The increase was the result of
higher sales volumes and prices for ductile iron pressure pipe, valves, hydrants
and castings. The order backlog for pressure pipe, at May 31, 1995, was 121,548
tons, compared to 111,907 tons at May 31, 1994. Operating income of $16.2
million exceeded the prior year by $2.8 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 were $12.8 million, or 4.0%,
greater than the prior year. The increase resulted from greater sales volumes
for coal and a $6.1 million gain from the sale of excess real estate, partially
offset by lower sales prices for coal and methane gas and lower outside coal and
gas royalty income. A total of 7.20 million tons of coal was sold in 1995 versus
6.56 million tons in 1994, a 9.8% increase. The increase in tonnage sold was the
result of increased shipments to Alabama Power and certain export customers,
partially offset by lower shipments to Japanese steel mills. Increased shipments
to Alabama Power were the result of 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. The New Alabama Power Contract has a fixed
price subject to an escalation based on 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
specification, shipping deviations and changes in transportation arrangements.
The average price per ton of coal sold decreased $2.79 from $44.13 in 1994 to
$41.34 in 1995 due to lower prices realized on shipments to Alabama Power, the
Japanese steel mills and certain export customers. Mine No. 5 was shut down 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 heatings.
Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and
the UMWA 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. As a
result of the fire, the Company and Jim Walter Resources claimed compensable
losses in the amount of $25 million under their business interruption insurance
coverage. When the insurers refused to pay their pro rata part of the claim, the
Company commenced litigation seeking to enforce such insurance. (See Note 12 of
Notes to Financial Statements.) Operating income of $21.4 million exceeded the
prior year by $21.2 million. The improved performance principally resulted from
the increased sales volumes of coal, lower costs per ton of coal produced
($37.13 in 1995 versus $38.29 in 1994) and the gain on the sale of certain
excess real estate, partially offset by decreases in selling prices for coal and
methane gas and lower outside coal and gas royalty income.
Homebuilding and Related Financing Group sales and revenues were $17.4
million, or 4.1%, below the prior year. This performance reflects a 4.7%
decrease in the number of homes sold, from 4,331 units in 1994 to 4,126 units in
1995, partially offset by an increase in the average selling price per home
sold, from $38,300 in 1994 to $40,200 in 1995. The decrease in unit sales was
due to strong competition in virtually every Jim Walter Homes sales region. The
higher average selling price in 1995 principally reflects a smaller percentage
of the lower priced Affordable line homes sold. Jim Walter Homes' backlog at May
31, 1995 was 1,529 units compared to 2,065 units at May 31, 1994. Time charge
income (revenues received from Mid-State Homes' instalment note portfolio)
decreased from $238.1 million in 1994 to $222.2 million in 1995. The decrease in
time charge income is attributable to a reduction in the total number of
accounts and lower payoffs received in advance of maturity, partially offset by
an increase in the average balance per account in the portfolio. The Group's
operating income of $44.8 million (net of interest expense) was $16.9 million
below the prior year. This decrease resulted from the lower number of homes
sold, reduced homebuilding gross profit margins resulting from discounts related
to sales promotions on certain models, the decrease in time charge income and
higher interest expense in 1995 ($131.6 million) as compared to that incurred in
1994 ($128.8 million), partially offset by the increase in the average selling
price per home sold.
26
<PAGE>
Cost of sales, exclusive of depreciation, of $951.4 million was 80.5% of
net sales versus $845.1 million and 79.1% in 1994. The cost of sales percentage
increase was primarily the result of lower gross profit margins on homes sales,
pipe products, window components and metal building and foundry products.
Selling, general and administrative expenses of $130.6 million were 9.1%
of net sales and revenues in 1995 versus $127.9 million and 9.6% in 1994.
Chapter 11 costs of $442.4 million in 1995 include $390 million in
settlement of all asbestos-related veil piercing claims and related legal fees
and $52.4 million for professional fees, settlement of various disputed claims
and other bankruptcy expenses.
Interest and amortization of debt discount and expense increased $149.1
million principally due to $141.4 million of additional interest and
amortization of debt expense related to consummation of the Consensual Plan. The
average rate of interest in 1995 was 10.19% (such rate calculated excluding
$141.4 million additional interest and amortization of debt discount and expense
related to the consummation of the Consensual Plan) versus 9.58% in 1994. The
prime interest rate ranged from 7.25% to 9.0% in 1995 compared to a range of
6.0% to 7.25% in 1994. During the pendency of the Chapter 11 Cases, the Company
did not accrue interest on its pre-filing date unsecured debt obligations.
Amortization of excess of purchase price over net assets acquired
(goodwill) decreased $8.5 million primarily due to lower payoffs received in
advance of maturity on the instalment note portfolio.
The income tax benefit for 1995 was $170.5 million, which included
recognition of tax benefits resulting from $583.8 million of additional expenses
related to consummation of the Consensual Plan previously mentioned, compared to
income tax expense of $28.9 million in 1994. On August 10, 1993, the Omnibus
Budget Reconciliation Act of 1993 was signed into law, raising the federal
corporate income tax rate to 35% from 34% retroactive to January 1, 1993. The
effect of the rate change resulted in a $2.8 million charge to deferred tax
expense in 1994.
The net loss for 1995 and the net income for 1994 reflect all of the
previously mentioned factors as well as the impact of slightly higher
postretirement health benefits, partially offset by the greater interest income
from Chapter 11 proceedings.
Years ended May 31, 1994 and 1993
Net sales and revenues for the year ended May 31, 1994 were $9.5 million,
or .7%, greater than the prior year. The improved performance was the result of
increased pricing and/or product mix as sales volumes were level with the prior
year. The increase in net sales and revenues was the result of improved sales
and revenues in all operating groups except the Natural Resources Group.
Homebuilding and Related Financing Group sales and revenues were $5.2
million, or 1.2%, greater than the prior year. This performance reflects a 3.5%
increase in the average selling price per home sold, from $37,000 in 1993 to
$38,300 in 1994, which was more than offset by a 9.5% decrease in the number of
homes sold, from 4,784 units in 1993 to 4,331 units in 1994. The higher average
selling price in 1994 reflects a price increase instituted on April 1, 1993 to
compensate for higher lumber costs and a greater percentage of "90% complete"
homes sold in 1994 versus the prior year. The decrease in unit sales resulted
from strong competition in virtually every Jim Walter Homes sales region. Jim
Walter Homes' backlog at May 31, 1994 was 2,065 units compared to 1,831 units at
May 31, 1993. Time charge income (revenues received from Mid-State Homes'
instalment note portfolio) increased from $218.7 million in 1993 to $238.1
million in 1994. The increase in time charge income is attributable to increased
payoffs received in advance of maturity and to an increase in the average
balance per account in the portfolio. The Group's operating income of $61.8
million (net of interest expense) exceeded the prior year by $4.0 million. This
improvement resulted from the increase in the average selling price per home
sold, the higher time charge income and lower interest expense in 1994 ($128.8
million) compared to that incurred in 1993 ($137.9 million), partially offset by
the lower number
27
<PAGE>
of homes sold, reduced homebuilding gross profit margins and higher selling,
general and administrative expenses. The lower gross profit margins were the
result of higher average lumber prices, the effect of discounts relating to
sales promotions on certain models instituted during the period February 1994
through May 1994 and the decision in October 1992 to reduce gross profit margins
on five smaller basic shelter homes to generate additional sales.
Industrial and Other Products Group sales and revenues were $12.1 million,
or 5.7%, ahead of the prior year. Increased sales volumes of aluminum foil,
foundry coke, window components, metal building and foundry products,
resin-coated sand and chemicals, combined with higher selling prices for furnace
coke and window components, were partially offset by lower sales volumes of slag
wool and patterns and tooling and lower selling prices for aluminum foil and
sheet products. The Group's operating income of $11.2 million was $2.6 million
greater than the prior year. The improved performance resulted from the sales
increases and higher gross profit margins for furnace coke and slag wool,
partially offset by reduced margins for chemicals, foundry coke, window
components, metal building and foundry products, resin-coated sand and patterns
and tooling.
Water and Waste Water Transmission Products Group sales and revenues were
$26.0 million, or 7.8%, ahead of the prior year. The increase was the result of
higher selling prices and volumes for ductile iron pressure pipe and valves and
hydrants, greater castings sales volume and increased selling prices for
fittings, partially offset by lower fittings volume. The order backlog of
pressure pipe at May 31, 1994 was 111,907 tons compared to 121,173 tons at May
31, 1993. Operating income of $13.4 million exceeded the prior year period by
$9.7 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) and lower gross profit margins for castings.
Natural Resources Group sales and revenues were $31.6 million, or 9.0%,
below the prior year. The decrease resulted from lower sales volumes and prices
for coal and reduced methane gas selling prices, partially offset by increased
methane gas sales volume and an increase in outside gas and timber royalty
income. A total of 6.56 million tons of coal was sold in 1994 versus 7.18
million tons in 1993, an 8.6% decrease. The decrease in tonnage sold was the
result of lower shipments to Alabama Power and Japanese steel mills. Reduced
shipments to Alabama Power were the result of an agreement reached with Alabama
Power to ship reduced tonnage for the contract year ending June 30, 1994. The
average price per ton of coal decreased 1.6%, from $44.84 in 1993 to $44.13 in
1994, due to lower prices realized on shipments to Japanese steel mills and
other export customers. As previously mentioned, Mine No. 5 was shut down 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 heatings.
Representatives of Jim Walter Resources, MSHA, Alabama State Mine Inspectors and
the UMWA agreed that the longwall coal panel being mined at the time the fire
recurred 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 January 17, 1995. As a result of the
fire, the Company and Jim Walter Resources claimed compensable losses in the
amount of $25 million under their business interruption insurance coverage. When
the insurers refused to pay their pro rata part of the claim, the Company
commenced litigation seeking to enforce such insurance. See Note 12 of the Notes
to Financial Statements. The Group's operating income of $152,000 was $52.0
million below the prior year. The lower performance reflects the decrease in
sales volumes and prices for coal, lower methane gas selling prices, reduced
coal mining productivity as a result of various geological problems in all mines
during portions of the year which resulted in higher costs per ton of coal
produced ($38.29 in 1994 versus $33.45 in 1993) and idle plant costs of $5.7
million associated with the Mine No. 5 shut downs, all of which more than offset
the effect of increased methane gas sales volume and greater outside gas and
timber royalty income.
Cost of sales in fiscal 1994, exclusive of depreciation, of $845.1 million
was 79.1% of net sales versus $804.4 million and 75.0% in fiscal 1993. The cost
of sales percentage increase was primarily the result of lower gross profit
margins on home sales, coal, chemicals, foundry coke, castings, resin-coated
sand, patterns and tooling, window components and metal building and foundry
28
<PAGE>
products, partially offset by improved margins on furnace coke, slag wool and
pipe products.
Selling, general and administrative expenses of $127.9 million were 9.6%
of net sales and revenues in 1994 versus $124.6 million and 9.4% in 1993.
The Company adopted FASB 106 in 1993. Upon adoption the Company elected to
record the transition obligation of $166.4 million pre-tax ($104.6 million after
tax) as a one time charge against earnings rather than amortize it over a longer
period. The annual accrual for postretirement health benefit costs in 1994 was
$25.6 million versus $23.5 million in 1993.
Interest and amortization of debt discount and expense decreased $16.1
million. The decrease was principally the result of reductions in the
outstanding debt balances on the Mid-State Trust II Mortgage-Backed Notes and
Mid-State Trust III Asset Backed Notes (see Note 8 of Notes to Financial
Statements) and lower amortization of debt discount and expense, partially
offset by higher interest rates. The average interest rate in 1994 was 9.58%
versus 9.44% in 1993. The prime interest rate ranged from 6.0% to 7.25% in 1994
compared to a range of 6.0% to 6.5% in 1993. Interest in the amount of $724.3
million ($163.7 million in each of the years 1994 and 1993) on unsecured
obligations was not accrued in the Consolidated Financial Statements since the
date of the filing of petitions for reorganization. This amount was based on the
balances of the unsecured debt obligations and their interest rates as of
December 27, 1989 and did not consider fluctuations in the level of short-term
debt and interest rates and the issuance of commercial paper that would have
occurred to meet the working capital requirements of the Homebuilding and
Related Financing Group.
Amortization of excess of purchase price over net assets acquired
(goodwill) increased $9.1 million. The increase primarily resulted from
adjustments to amortization of the goodwill due to greater payoffs received in
advance of maturity on the instalment note portfolio.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law raising the federal corporate income tax rate to 35% from 34%
retroactive to January 1, 1993. The effect of the rate change resulted in a $2.8
million charge to deferred tax expense. The rate change effect, combined with
reduced percentage depletion and increased amortization of goodwill (both
permanent book/tax differences), resulted in an effective tax rate of 80.1% in
1994 versus an effective tax rate of 34.3% in 1993.
The net income for fiscal 1994 and the net loss for fiscal 1993 reflects
all of the previously mentioned factors, as well as the $4.5 million increase in
Chapter 11 costs, partially offset by slightly higher interest income from
Chapter 11 proceedings. The increase in Chapter 11 costs was due to the Veil
Piercing Litigation (see Note 12 of Notes to Financial Statements) and the
filing of two amended plans of reorganization.
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 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
29
<PAGE>
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
vigorously defend such claims against the Company, but there can be no assurance
as to the ultimate outcome.
Since May 31, 1995, total debt has decreased $9.1 million resulting from
redemption of the Senior Notes ($490.0 million), early repayments on the Credit
Facilities debt ($30.0 million), quarterly principal payments on the Credit
Facilities ($4.0 million), Mid-State Trust II Mortgage-Backed Notes ($87.0
million), Mid-State Trust III Asset Backed Notes ($25.9 million) and Mid-State
Trust IV Asset Backed Notes ($51.6 million) and scheduled retirements of other
long-term debt ($.6 million), partially offset by the issuance of long-term debt
from the Credit Facilities financing ($450.0 million) and the Mid-State Trust V
Variable Funding Loan Agreement ($230.0 million).
The Credit Facilities contain a $365 million revolving credit facility
which includes a sub-facility for trade and other standby letters of credit in
an amount up to $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 May 31, 1996, $23.0 million of letters of credit were
outstanding under this facility.
The Credit Facilities and the Mid-State 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, 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 Credit Facilities, the Company is required
to maintain specified financial ratios and comply with certain financial tests,
including interest coverage, fixed charge coverage ratios and maximum leverage
ratios, some of which become more restrictive over time. The Company was in full
compliance with these covenants at May 31, 1996 and believes it will meet these
financial tests over the remaining terms of these debt agreements.
Liquidity and Capital Resources
At May 31, 1996, cash and short term investments, net of bank overdrafts,
were approximately $53.7 million. Operating cash flows for the year ended May
31, 1996, together with proceeds from the Credit Facilities financing, issuance
of long-term debt under the Mid-State Trust V Variable Funding Loan Agreement
and the use of available cash balances, were primarily used for working capital
requirements, payment of liabilities resulting from the Chapter 11
reorganization and previously accrued in fiscal year ended May 31, 1995,
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 May 31, 1996 are
not material; however, it is estimated that gross capital expenditures for the
Company and its subsidiaries for the year ending May 31, 1997 will approximate
$100 million.
30
<PAGE>
Because the Company's operating cash flow is significantly influenced by
the general economy and, in particular, the level of construction, prior years'
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
Trust II, III and IV financings will be required over the next several years to
repay borrowings under the Mid-State Trust V Variable Funding Loan Agreement.
The Company believes that under present operating conditions sufficient
operating cash flow will be generated to make all required interest and
principal payments and planned capital expenditures and meet substantially all
operating needs and that amounts available under the Credit Facilities will be
sufficient to meet peak operating needs.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference to pages 5 through 7 of the Proxy Statement (the
"Proxy Statement") included in the Schedule 14A filed by the Company with the
Securities and Exchange Commission (the "Commission") on August 15, 1996 under
the Securities Exchange Act of 1934, as amended. Certain information with
respect to executive officers is included in Part I, Item 4A.
Item 11. Executive Compensation
Incorporated by reference to pages 15 through 22 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to pages 12 through 14 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to page 11 of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules - See Index to Financial
Statements on page F-1.
31
<PAGE>
(b) Reports on Form 8-K - None
(c) Exhibits - See Index to Exhibits on page E-1
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
August 28, 1996 /s/ W. H. Weldon
-----------------------
W. H. Weldon, Executive
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
August 28, 1996 /s/ Kenneth E. Hyatt
---------------------------
Kenneth E. Hyatt, Chairman,
Director and Principal
Executive Officer
August 28, 1996 /s/ Howard L. Clark, Jr.
---------------------------
Howard L. Clark, Jr.,
Director
August 28, 1996 /s/ James B. Farley
---------------------------
James B. Farley, Director
August 28, 1996 /s/ Eliot M. Fried
---------------------------
Eliot M. Fried, Director
August 28, 1996 /s/ Perry Golkin
---------------------------
Perry Golkin, Director
August 28, 1996 /s/ James L. Johnson
---------------------------
James L. Johnson, Director
August 28, 1996 /s/ Michael T. Tokarz
---------------------------
Michael T. Tokarz, Director
33
<PAGE>
August 28, 1996 /s/ James W. Walter
---------------------------
James W. Walter, Director
August 28, 1996 /s/ William H. Weldon
---------------------------
William H. Weldon,
Executive Vice President,
Director and Principal
Financial Officer
August 28, 1996 /s/ Frank A. Hult
---------------------------
Frank A. Hult, Controller
and Principal Accounting
Officer
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Pages
Walter Industries, Inc. and Subsidiaries
Report of Independent Certified Public Accountants..................... F-2
Consolidated Balance Sheet - May 31, 1996 and 1995..................... F-3
Consolidated Statement of Operations and Retained
Earnings (Deficit) for the Three Years Ended
May 31, 1996......................................................... F-4
Consolidated Statement of Cash Flows for the Three
Years Ended May 31, 1996............................................. F-5
Notes To Financial Statements....................................... F-6 to F-24
Financial Statement Schedules for the three years ended May 31, 1996:
Report of Independent Certified Public Accountants
On Financial Statement Statements ................................ F-25
Schedule III - Valuation and Qualifying Accounts.............. F-26 to F-28
All other schedules have been omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Walter Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and retained earnings (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Walter Industries, Inc. and its subsidiaries at May 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1996 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Tampa, Florida
July 12, 1996
F-2
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
May 31,
--------------------------
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
ASSETS
Cash (includes short-term investments of $64,338,000
and $84,872,000) (Notes 3 and 14) $ 81,881 $ 128,007
Short-term investments, restricted (Notes 3 and 14) 175,432 128,002
Installment notes receivable (Notes 4, 8 and 14) 4,208,252 4,256,866
Less - Provision for possible losses (26,138) (26,556)
Unearned time charges (2,851,961) (2,869,282)
----------- ----------
Net 1,330,153 1,361,028
Trade receivables 178,847 160,584
Less - Provision for possible losses (8,180) (7,998)
----------- ----------
Net 170,667 152,586
Federal income tax receivable (Note 9) -- 99,875
Other notes and accounts receivable 21,055 30,236
Inventories, at lower of cost (first in,
first out or average) or market
Finished goods 124,456 111,792
Goods in process 32,798 29,593
Raw materials and supplies 51,674 53,453
Houses held for resale 2,517 1,599
----------- ----------
Total inventories 211,445 196,437
Prepaid expenses 11,937 12,694
Property, plant and equipment, at cost (Notes 5 and 6) 888,991 1,186,407
Less - Accumulated depreciation, depletion
and amortization (347,455) (523,615)
----------- ----------
Net 541,536 662,792
Investments 6,646 6,191
Deferred income taxes (Note 9) 155,171 16,544
Unamortized debt expense (Note 8) 29,548 34,167
Other assets 44,971 43,698
Excess of purchase price over net assets acquired
(Notes 1, 5 and 7) 310,935 372,896
----------- ----------
$ 3,091,377 $ 3,245,153
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts (Note 3) $ 28,194 $ 33,746
Accounts payable 74,330 108,137
Accrued expenses 120,477 150,907
Income taxes payable (Note 9) 56,238 53,261
Long-term senior debt (Notes 4, 8 and 14) 2,211,296 2,220,370
Accrued interest (Note 8) 28,819 37,854
Accumulated postretirement health benefits obligation (Note 13) 247,827 228,411
Other long-term liabilities 47,502 51,693
Stockholders' equity (Notes 1, 10 and 11):
Common stock, $.01 par value per share:
Authorized - 200,000,000 shares
Issued - 54,868,335 shares and 50,494,313 shares 549 505
Capital in excess of par value 1,159,332 1,159,384
Retained earnings (deficit), per accompanying statement (877,861) (793,165)
Excess of additional pension liability over
unrecognized prior years service cost (5,326) (5,950)
----------- ----------
Total stockholders' equity 276,694 360,774
----------- ----------
$ 3,091,377 $ 3,245,153
=========== ===========
</TABLE>
F-3
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
For the years ended May 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands except
per share amounts)
<S> <C> <C> <C>
Sales and revenues:
Net sales $ 1,220,397 $ 1,181,635 $ 1,068,387
Time charges (Note 4) 231,104 222,221 238,097
Miscellaneous 34,134 30,838 17,383
Interest income from Chapter 11
proceedings (Note 1) -- 7,628 4,657
----------- ----------- -----------
1,485,635 1,442,322 1,328,524
----------- ----------- -----------
Cost and expenses:
Cost of sales 987,354 951,381 845,061
Depreciation, depletion
and amortization (Note 6) 74,341 72,037 71,035
Selling, general and administrative 135,840 130,616 127,901
Postretirement health benefits (Note 13) 27,129 25,961 25,585
Provision for possible losses 4,367 4,485 4,611
Chapter 11 costs (Note 1) -- 442,362 14,254
Interest and amortization of debt
discount and expense(Notes 6 and 8) 208,690 304,548 155,470
Amortization of excess of purchase
price over net assets acquired (Note 7) 39,096 40,027 48,515
Long-lived asset impairment (Note 5) 143,265 -- --
----------- ----------- -----------
1,620,082 1,971,417 1,292,432
----------- ----------- -----------
(134,447) (529,095) 36,092
Income tax benefit (expense) (Note 9):
Current (621) 80,754 (41,598)
Deferred 55,776 89,696 12,681
----------- ----------- -----------
Income (loss) before extraordinary item (79,292) (358,645) 7,175
Extraordinary item - loss on debt
repayment(net of income tax benefit
of $2,910,000) (Note 8) (5,404) -- --
----------- ----------- -----------
Net income (loss) (84,696) (358,645) 7,175
Retained earnings (deficit) at
beginning of year (793,165) (434,520) (441 ,695
----------- ----------- -----------
Retained earnings (deficit) at end of year $ (877,861) $ (793,165) $ (434,520)
=========== =========== ===========
Net loss per share (Note 10):
Loss before extraordinary item $ (1.56) $ (7.10)
Extraordinary item .10) --
----------- -----------
Net loss $ (1.66) $ (7.10)
=========== ===========
</TABLE>
F-4
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE><CAPTION>
For the years ended May 31,
--------------------------------------
1996 1995 1994
---------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
OPERATIONS
Income (loss) before extraordinary item $ (79,292) $(358,645) $ 7,175
Charges to income not affecting cash:
Settlement of Chapter 11 claims with
debt and new Common Stock -- 444,752 --
Depreciation, depletion and amortization 74,341 72,037 71,035
Provision for deferred income taxes (55,776) (89,696) (12,681)
Accumulated postretirement health benefits
obligation (Note 13) 19,416 18,449 20,057
Provision for other long-term liabilities (4,034) 294 280
Amortization of excess of purchase price
over net assets acquired (Note 7) 39,096 40,027 48,515
Amortization of debt discount and expense 7,250 11,783 17,597
Long-lived asset impairment (Note 5) 143,265 -- --
--------- --------- ---------
144,266 139,001 151,978
Decrease (increase) in:
Short-term investments, restricted (Note 3) (47,430) (20,450) (1,932)
Instalment notes receivable, net (a) 30,875 (1,849) 27,680
Trade and other receivables, net (8,900) (44,009) 12,747
Federal income tax receivable (Note 9) 99,875 (99,875) --
Inventories (15,008) (23,858) (5,940)
Prepaid expenses 757 (1,359) (3,433)
Deferred income taxes (Note 9) (79,941) -- --
Increase (decrease) in:
Bank overdrafts (Note 3) (5,552) 3,867 11,958
Accounts payable (7,361) 28,925 6,772
Accrued expenses 7,054 28,242 6,427
Income taxes payable (Note 9) 2,977 (15,348) 2,408
Accrued interest (9,033) 24,156 47,833
Liabilities subject to Chapter 11
proceedings (Note 1) -- -- 1,286
--------- --------- ---------
Cash flows from operations 112,579 17,443 257,784
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of long-term senior debt (Note 8) 680,000 974,450 2,000
Additions to unamortized debt expense (6,045) (17,153) --
Extraordinary item - loss on debt repayment (5,404) -- --
Charge to income not affecting cash:
Write off of unamortized debt expense 3,414 -- --
Provision for deferred income tax (2,910) -- --
Retirement of long-term senior debt (Note 8) (689,074) (120,250) (178,865)
Payment of liabilities subject to
Chapter 11 proceedings (63,932) (604,044)(b) --
Payment of accrued postpetition interest on
Chapter 11 secured debt obligations -- (244,334) --
Fractional share payments (8) -- --
--------- --------- ---------
Cash flows used in financing activities (83,959) (11,331) (176,865)
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment,
net of normal retirements (73,485) (76,966) (65,858)
(Increase) in investments and other assets (1,261) (4,442) (2,128)
--------- --------- ---------
Cash flows used in investing activities (74,746) (81,408) (67,986)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (46,126) (75,296) 12,933
Cash and cash equivalents at beginning of year 128,007 203,303 190,370
--------- --------- ---------
Cash and cash equivalents at end of year (Note 3)$ 81,881 $ 128,007 $ 203,303
========= ========= =========
</TABLE>
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $148,749,000, $155,236,000 and $153,776,000 and cash
collections on account and payouts in advance of maturity of $179,624,000,
$153,387,000 and $181,456,000, for the years ended May 31, 1996, 1995 and
1994, respectively.
(b) In addition, $490 million of Series B Senior Notes and 44,050,974 shares
of new Common Stock were issued to satisfy a portion of the allowed claims
of holders of secured and subordinated debt, settle a portion of the
asbestos-related veil-piercing claims and 6,443,339 shares of new Common
Stock were issued to the former shareholders in cancellation of their
original holdings.
F-5
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Recent History
Walter Industries, Inc. (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. The
following unaudited pro forma consolidated statement of operations for fiscal
1995 was prepared to illustrate the estimated effects of the Consensual Plan and
related financings as if they had occurred as of June 1, 1994.
Pro Forma Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the year ended May 31, 1995
------------------------------------------
As Reported Adjustments Pro Forma
------------ ------------ ----------
(in thousands except
per share amount)
<S> <C> <C> <C>
Sales and revenues:
Net sales $ 1,181,635 $1,181,635
Time charges 222,221 222,221
Miscellaneous 30,838 30,838
Interest income from
Chapter 11 proceedings 7,628 $ (7,628)(1) --
------------ ------------ ----------
1,442,322 (7,628) 1,434,694
------------ ------------ ----------
Cost and expenses:
Cost of sales 951,381 951,381
Depreciation, depletion and amortization 72,037 72,037
Selling, general and administrative 130,616 130,616
Postretirement health benefits 25,961 25,961
Provision for possible losses 4,485 4,485
Chapter 11 costs 442,362 (442,362)(2) --
Interest and amortization of debt discount
and expense 304,548 (81,364)(3) 223,184
Amortization of excess of purchase price
over net assets acquired 40,027 40,027
------------ ------------ ----------
1,971,417 (523,726) 1,447,691
------------ ------------ ----------
(529,095) 516,098 (12,997)
Income tax benefit (expense) 170,450 (195,730)(4) (25,280)
------------ ------------ ----------
Net income (loss) $ (358,645) $ 320,368 $ (38,277)
============ ============ ==========
Net loss per share $ (.75)(5)
==========
Weighted average shares outstanding 50,988,626
</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 $7,628, which would not have
been realized assuming the Consensual Plan became effective June 1, 1994,
has been eliminated.
F-6
<PAGE>
(2) Chapter 11 costs of $442,362, which would not have been incurred assuming
the Consensual Plan became effective June 1, 1994, have been eliminated.
(3) Interest and amortization of debt discount and expense has been reduced
$81,364 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 year
ended May 31, 1995. Borrowings under the Trust IV Asset Backed Notes were
assumed to increase during the period June 1, 1994 through November 30,
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. Borrowings under the Trust V Variable Funding Loan
Agreement were based on 78% of Jim Walter Homes' credit sales during the
six-month period December 1, 1994 through May 31, 1995. This time period is
subsequent to the Trust IV cut-off date for purchases of instalment notes
from Mid-State. No working capital borrowings were assumed under the Bank
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 (including 494,313 additional shares of Common
Stock issued six months after the Effective Date of the Consensual Plan,
but not including 3,880,140 additional shares which have been issued to an
escrow account because such issuance is contingent upon future events and
would be anti-dilutive).
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, coal mining and related degasification, residential and
non-residential construction, and industrial markets. The consolidated financial
statements include the accounts of the Company and all of its subsidiaries.
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. Actual
results could differ from those estimates. 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. These investments are readily convertible to cash and are stated at
cost which approximates market. 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 (i) temporary investment of
reserve funds and collections on instalment notes receivable owned by Mid-State
Trusts II, III, IV and V ($110,436,000) which are available only to pay expenses
of the Trusts and principal and interest on indebtedness of the Trusts, (ii)
certain funds held by Trust II that are in excess of the amount required to be
paid for expenses, principal and interest on the Trust II Mortgage-Backed Notes
but which are subject to retention ($43,161,000) and (iii) miscellaneous other
segregated accounts restricted to specific uses ($21,835,000).
NOTE 4 - Instalment Notes Receivable
The instalment notes receivable arise from sales of partially finished
homes to customers for time payments primarily over periods of twelve to thirty
years and are secured by first mortgages or similar security instruments.
Revenue and income from the sale of homes is included in income upon completion
of construction and legal transfer to the customer. The buyer's ownership of the
land and the improvements necessary to complete the home constitute a
significant equity investment which the Company has access to should the buyer
default on payment of the instalment note obligation. Of the gross amount of
$4,208,252,000 an amount of $3,914,150,000 is due after one year. Instalment
payments estimated to be receivable within each of the five years from May 31,
1996 are $294,102,000, $288,698,000, $283,371,000, $275,512,000 and
$266,809,000, respectively, and $2,799,760,000 after five years. Of the gross
amount of instalment notes receivable of $4,208,252,000, 19%, 11% and 11% are
secured by homes located in the states of Texas, Florida and Mississippi,
respectively. Time charges are included in equal parts in each monthly payment
and are taken into income as collected. This method approximates the interest
method since a much larger provision for loan losses and other expenses would be
required if time charge income were accelerated. The aggregate
F-7
<PAGE>
amount of instalment notes receivable having at least one payment ninety or more
days delinquent was 3.14% and 3.17% of total instalment notes receivable at May
31, 1996 and 1995, respectively.
Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from Jim
Walter Homes, Inc. ("Jim Walter Homes") on homes constructed and sold by Jim
Walter Homes and services such instalment mortgage notes. Mid-State Trust II
("Trust II"), Mid-State Trust III ("Trust III") and Mid-State Trust IV ("Trust
IV") are business trusts organized by 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 with 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. 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 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 May 31, 1996 of $4,208,252,000 with an economic
balance of $2,016,665,000, receivables owned by Trust II had a gross book value
of $1,166,386,000 and an economic balance of $723,481,000, receivables owned by
Trust III had a gross book value of $416,780,000 and an economic balance of
$217,247,000 and receivables owned by Trust IV had a gross book value of
$1,786,406,000 and an economic balance of $759,234,000. Mid-State Trust V
("Trust V"), a business trust in which Mid-State 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. At May 31, 1996,
receivables owned by Trust V had a gross book value of $835,454,000 and an
economic balance of $315,422,000.
NOTE 5 - Long-Lived Asset Impairment
The Financial Accounting Standards Board issued in March 1995 Statement of
Financial Accounting Standards No. 121 - "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FASB 121")
which becomes effective for fiscal years beginning after December 15, 1995
(fiscal year 1997 for the Company). The Company elected to adopt FASB 121 during
the third quarter of fiscal 1996 as a result of significant adverse changes in
the results of operations during fiscal 1996 principally in the Natural
Resources business segment as a result of a fire due to the unexpected
recurrence of spontaneous combustion heatings at Jim Walter Resources' Mine No.
5 at the end of the fiscal second quarter and various geological problems at the
three other coal mines during portions of the year that led to the conclusion
that there was an impairment of fixed assets within the Natural Resources
segment.
FASB 121 established standards for determining when impairment losses on
long-lived assets have occurred and how impairment losses should be measured.
The Company is required to review long-lived assets and certain intangibles, to
be held and used, for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. In
performing such a review for recoverability, the Company is required to compare
the expected future cash flows to the carrying value of long-lived assets and
identifiable intangibles. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of such assets and intangibles, the
assets are impaired and the assets must be written down to their estimated fair
market value.
After performing a review for asset impairment at each of the Company's
business segments and applying the principles of measurement contained in FASB
121, the Company recorded a charge against earnings of $143,265,000 before tax
($101,125,000 after tax). The charge includes a $120,400,000 pre-tax
($78,260,000 after tax) write down of fixed assets at two coal mines in the
Natural Resources segment to their estimated fair market values. Fair market
values were based principally on expected future discounted cash flows. In
addition, a $22,865,000 write off of excess of purchase price over net assets
acquired was recorded in the Industrial and Other Products segment,
substantially all of which was at JW Window Components, Inc. Adoption of this
standard had no impact on cash flow.
F-8
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6 - Property, Plant and Equipment
Property, plant and equipment are summarized as follows (see Notes 1 and
5):
May 31,
---------------------------
1996 1995
---------- ----------
(in thousands)
Land and minerals $ 150,708 $ 196,798
Land improvements 18,143 20,140
Buildings and leasehold improvements 98,452 110,758
Mine development costs 47,930 125,903
Machinery and equipment 548,562 703,138
Construction in progress 25,196 29,670
---------- ----------
Total $ 888,991 $1,186,407
========== ==========
The Company provides depreciation for financial reporting purposes
principally on the straight line method over the useful lives of the assets.
Assets (primarily mine development costs) extending for the full life of a coal
mine are depreciated on the unit of production basis. For federal income tax
purposes accelerated methods are used for substantially all eligible properties.
Depletion of minerals is provided based on estimated recoverable quantities.
The Company has capitalized interest on qualifying properties in accordance
with Statement of Financial Accounting Standards No. 34. Interest capitalized
for the years ended May 31, 1996, 1995 and 1994 was immaterial. Interest paid in
cash for the years ended May 31, 1996, 1995 and 1994 was $220,959,000,
$437,357,000 and $91,293,000, respectively.
NOTE 7 - Excess of Purchase Price Over Net Assets Acquired
The excess of purchase price over net assets acquired in connection with
the acquisition of Original Jim Walter is being amortized over periods ranging
up to twenty years. The Company evaluates on a regular basis, whether events or
circumstances have occurred that indicate the carrying amount of goodwill may
warrant revision or may not be recoverable. The Company measures impairment of
goodwill based upon estimated future undiscounted cash flows from operations of
the related business unit(see Note 5). At May 31, 1996, the accumulated
amortization of goodwill was approximately $443.3 million. At May 31, 1996, the
net unamortized balance of goodwill is not considered to be impaired.
F-9
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8 - Debt
Long-term debt, in accordance with its contractual terms, consisted of the
following at each year end:
May 31,
---------------------------
1996 1995
---------- ----------
(in thousands)
Senior debt:
Walter Industries, Inc.
Revolving Credit Facility $ 235,000 $ --
Bank Credit Facility -- --
Term Loan A 121,250 --
Term Loan B 59,750 --
Series B Senior Notes Due 2000 -- 490,000
Other 3,350 4,000
---------- ----------
419,350 494,000
---------- ----------
Mid-State Trusts
Trust II Mortgage-Backed Notes 497,000 584,000
Trust III Asset Backed Notes 147,669 173,527
Trust IV Asset Backed Notes 902,277 953,843
Trust V Variable Funding Loan 245,000 15,000
---------- ----------
1,791,946 1,726,370
---------- ----------
Total $2,211,296 $2,220,370
========== ==========
On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility ("Revolving
Credit Facility"), a $125 million six-year term loan ("Term Loan A") and a $60
million seven-year term loan ("Term Loan B") (collectively the "Credit
Facilities"). Proceeds from the financing, together with $75 million drawn under
the Trust V Variable Funding Loan Agreement were used to redeem in full $490
million aggregate amount of Series B Senior Notes Due 2000 (the "Senior Notes")
at a redemption price of 101% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of redemption and to replace the existing
$150 million bank credit facility, both issued in connection with the Company's
emergence from bankruptcy in March 1995. The Company recorded an extraordinary
loss of $8,314,000 ($5,404,000 net of income tax benefit) consisting of a
redemption premium and the write off of unamortized debt expense related to the
early repayment of the Senior Notes and the $150 million bank credit facility.
The Credit Facilities are secured by a pledge of intercompany notes and stock of
certain subsidiaries of the Company. Net cash proceeds from certain asset sales
must be applied to permanently reduce the Credit Facilities and beginning with
fiscal year ending May 31, 1997, 50% of the excess cash flow (as defined in the
Credit Facilities) must be used to permanently reduce Term Loan A and Term Loan
B.
The Revolving Credit Facility is a six year non-amortizing facility which
includes a subfacility for trade and other standby letters of credit in an
amount up to $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. Interest, at the option of the Company, is at (i) the greater of
(a) the Prime Rate or (b) the Federal Funds Effective Rate plus 1/2%, or (ii) a
LIBOR rate plus an Applicable Margin of 3/4% to 1-3/4% (based upon a leverage
ratio pricing grid). At May 31, 1996, the weighted average interest rate was
6.74%. A commitment fee ranging from 1/4% to 1/2% per annum (based upon a
leverage ratio pricing grid) is payable on the daily average unutilized
commitment. The fee for outstanding letters of credit is priced at the
Applicable Margin less 3/8%. At May 31, 1996, there were no swingline borrowings
outstanding under this facility; however, letters of credit in the aggregate
face amount of $23,042,000 have been issued thereunder.
Term Loan A interest, at the option of the Company is at (i) the greater of
(a) the Prime Rate or (b) the Federal Funds Effective Rate plus 1/2%, or (ii) a
LIBOR rate plus 3/4% to 1- 3/4% (based upon a leverage ratio pricing grid).
Scheduled principal payments to be made in each of the five years from May 31,
1996 are $15,000,000, $16,250,000, $21,250,000, $25,000,000 and $25,000,000,
respectively. At May 31, 1996, the weighted average interest rate was 6.64%
F-10
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Term Loan B interest is at LIBOR plus 2% to 2-1/4% (based upon a leverage
ratio pricing grid). At May 31, 1996, the interest rate was 7.39%. Scheduled
principal payments in each of the five years from May 31, 1996 are $1,000,000.
The Trust II Mortgage-Backed Notes (see Note 4) were issued in five classes
in varying principal amounts. Three of the classes have been fully repaid. The
two remaining classes A3 and A4 bear interest at the rates of 9.35% and 9.625%,
respectively. Interest on each class of notes is payable quarterly on each
January 1, April 1, July 1 and October 1 (each a "Payment Date"). On each
Payment Date, regular scheduled principal payments will be made on the Class A3
and Class A4 Notes in order of maturity. Maturities of the balance of these
Mortgage-Backed Notes range from April 1, 1998 for the Class A3 Notes to April
1, 2003 for the Class A4 Notes. The Class A3 and Class A4 Notes are subject to
special principal payments and the Class A4 Notes may be subject to optional
redemption under specified circumstances. The scheduled principal amount of
notes maturing in each of the five years from May 31, 1996 is $87,000,000,
$87,000,000, $64,600,000, $64,600,000 and $64,600,000, respectively.
The Trust III Asset Backed Notes (see Note 4) bear interest at 7.625%,
constitute a single class and have a final maturity date of April 1, 2022.
Payments are made quarterly on January 1, April 1, July 1 and October 1, based
on collections on the underlying collateral less amounts paid for interest on
the notes and Trust III expenses.
The Trust IV Asset Backed Notes (see Note 4) bear interest at 8.33%,
constitute a single class and have a final maturity of April 1, 2030. Payments
are made quarterly on January 1, April 1, July 1 and October 1 based on
collections on the underlying collateral and distributions from Trust II, less
amounts paid for interest on the notes and Trust IV expenses.
On March 3, 1995, Trust V entered into the three-year $500 million Variable
Funding Loan Agreement with Enterprise Funding Corporation, an affiliate of
NationsBank National Association, as lender, and NationsBank National
Association (Carolinas), as Administrative Agent. It is contemplated that this
facility will be an evergreen three-year facility with periodic paydowns from
the proceeds of permanent financings similar to those done by Trusts II, III and
IV. The facility currently matures on March 3, 1999. Accordingly, the $245
million of borrowings outstanding at May 31, 1996 has been classified as
long-term debt. Interest is based on the cost of A-1 and P-1 rated commercial
paper plus 3/4%. Commitment fees on the unused facility are .55%.
The Company uses interest rate swaps that are relatively straightforward
and involve little complexity as hedge instruments to manage interest rate
risks. At the present time the Company has two types of interest rate risks: (i)
current risk on interest rates related to debt which has floating rates and (ii)
risk of interest rates and proceeds in refinancing from short-term to long-term
certain indebtedness secured by the fixed rate instalment notes receivable
generated by its homebuilding business. At May 31, 1996, Trust V had in place a
swap agreement with a notional amount of $216 million under which it pays a
fixed interest rate of 5.25% and receives interest based on commercial paper
rates. This swap is in effect until June 30, 1997, accretes monthly and is
designed to offset the interest rate risk of the Trust V Variable Funding Loan
Agreement. Also at May 31, 1996, Trust V had in place forward swaps totaling
$100 million notional amount which will start June 30, 1997 and run for 10 years
at a blended monthly fixed rate of 7.25%. At that time Trust V would begin to
receive interest based on prevailing commercial paper rate levels. It is the
Company's intent to terminate those forward swaps when a long-term fixed rate
financing is put in place for a portion of the instalment notes receivable
portfolio. The gain or loss at termination will be deferred and amortized over
the life of the new financing.
The Credit Facilities 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, 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 Credit Facilities,
the Company is required to maintain specified financial ratios and comply with
certain financial tests, including interest coverage, fixed charge coverage
ratios and
F-11
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
maximum leverage ratios, some of which become more restrictive over time. The
Company was in full compliance with these covenants at May 31, 1996.
The Trust V Variable Funding Loan Agreement's covenants, among other
things, restricts the ability of Trust V to dispose of assets, create liens and
engage in mergers or consolidations. The Company was in full compliance with
these covenants at May 31, 1996.
NOTE 9 - Income Taxes
Income tax expense (benefit) is made up of the following components:
<TABLE>
<CAPTION>
May 31, 1996 May 31, 1995 May 31, 1994
------------------------- ------------------------ ----------------------
Current Deferred Current Deferred Current Deferred
-------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
United States $ (799) $ (54,846) $(80,445) $(88,815) $ 38,712 $(11,716)
State and local 1,420 (930) (309) (881) 2,886 (965)
--------- --------- --------- -------- -------- --------
Total $ 621 $ (55,776) $(80,754) $(89,696) $ 41,598 $(12,681)
========= ========= ======== ======== ======== ========
</TABLE>
In fiscal 1996 the Company received a refund of federal income tax of $22.2
million paid in 1995 as estimated payments while in fiscal 1995 and 199 the
Company paid federal income tax of approximately $30.6 million and $37.1
million. State income taxes refunded in fiscal 1996 were approximately $0.1
million while state income taxes paid in 1995 and 1994 were approximately $4.0
million and $2.1 million, respectively.
The Company complies with Statement of Financial Accounting Standards No.
109 ("FASB 109"), "Accounting for Income Taxes". FASB 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events which have been
recognized in the Company's financial statements or tax returns. FASB 109
generally considers all expected future events other than changes in tax law or
rates.
The income tax expense (benefit) before extraordinary item at the Company's
effective tax rate differed from the statutory rate as follows:
For the years ended May 31,
---------------------------
1996 1995 1994
--------- ------ ------
Statutory tax rate (35.0)% (35.0)% 35.0%
Effect of:
Adjustment to deferred taxes -- -- 5.3
State and local income tax .2 (.2) 3.3
Percentage depletion (2.6) (.5) (1.7)
Enacted tax rate change -- -- 9.4
Nonconventional source fuel credit -- -- (10.8)
Amortization of excess of purchase price over net
assets acquired and FASB 121 charge 16.2 2.7 47.1
Benefit of capital loss carryforward (5.9) (1.5) (8.5)
Adjustment of prior years net operating
loss carryforward (5.0) -- --
Effect of rate difference and avoidance
of loss of credits on net operating loss
due to carryforward election (9.1) 2.3 --
Other, net .2 -- 1.0
---- ---- ----
Effective tax rate (41.0)% (32.2)% 80.1%
==== ==== ====
The tax benefit related to the extraordinary item approximates the
statutory rate and is deferred federal income tax.
F-12
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law raising the federal corporate income tax rate to 35% from 34%,
retroactive to January 1, 1993. FASB 109 requires that deferred tax liabilities
and assets be adjusted in the period of enactment for the effect of an enacted
change in the tax laws or rates. The effect of the change was $2,833,000 and
such amount is included in the provision for deferred income taxes for the year
ended May 31, 1994. Deferred tax liabilities (assets) are comprised of the
following:
May 31,
-------------------------
1996 1995
--------- ----------
(in thousands)
Instalment sales method for
instalment notes receivable in prior years $ 34,691 $ 43,312
Depreciation 78,462 116,625
Difference in basis of assets
under purchase accounting 20,424 23,894
Capital loss carryforward -- (7,977)
Net operating loss carryforward (155,283) (31,488)
Accrued expenses (39,034) (81,855)
Postretirement benefits other than pensions (94,431) (87,032)
Valuation allowance -- 7,977
--------- ---------
Total deferred tax (asset) liability $(155,171) $ (16,544)
========= =========
The Revenue Act of 1987 eliminated the instalment sales method of tax
reporting for instalment sales after December 31, 1987.
As a result of the loss incurred in the 1995 fiscal year, the Company
recorded a federal income tax receivable of approximately $99.9 million. During
fiscal 1996 the Company elected to carry the 1995 loss forward rather than back
to prior years. Accordingly, $77.7 million has been reclassified from federal
income tax receivable to a deferred tax asset. The election to carryforward the
net operating loss generated a tax benefit of approximately $19 million in the
fourth quarter due to the effect of the rate difference, avoidance of loss of
credits and other miscellaneous tax adjustments. The Company's net operating
loss carryforward at May 31, 1996 approximates $443.6 million of which $372.3
million will expire in fiscal 2010 and $71.3 million will expire in fiscal 2011.
Also during the fourth quarter of fiscal 1996 the Company utilized its capital
loss carryforward of approximately $22.8 million.
Under the Internal Revenue Code, if certain substantial changes in the
Company's ownership occur, there are annual limitations on the amount of loss
and credit carry-forwards. The reorganization under the Consensual Plan created
an ownership change in fiscal 1995; therefore, $296 million of the net operating
loss carryforward is subject to the annual limitation which will be eliminated
by fiscal 1998. However, the Company believes that the annual limitation will
not affect the realization of the net operating loss carryforward.
The Company allocates federal income tax expense (benefit) to its
subsidiaries based on their separate taxable income (loss).
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. Although the range
for such claims is zero to $186 million, the Company believes that such proofs
of claim are substantially without merit and intends to defend such claims
against the Company vigorously.
F-13
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 10 - Stockholders' Equity
The Company is authorized to issue 200,000,000 shares of common stock, $.01
par value. As of May 31, 1996, 54,868,335 shares of common stock are
outstanding.
Pursuant to the Consensual Plan, 494,313 shares were issued on September
13, 1995 to all former stockholders as of the Effective Date of the Consensual
Plan. Also on September 13, 1995, pursuant to the Consensual Plan, 3,880,140
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 canceled.
Net loss per share has been computed by dividing net loss by the weighted
average number of common shares issued of 50,988,195, which includes 494,313
additional shares issued on September 13, 1995 pursuant to the Consensual Plan,
but does not include 3,880,140 additional shares issued to an escrow account on
September 13, 1995 because such issuance is contingent on future events and
would be anti-dilutive in the current year. In management's opinion, per share
information for fiscal year 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).
NOTE 11 - Stock Options
Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved
by stockholders in October 1995, an aggregate of 3,000,000 shares of the
Company's common stock have been reserved for the grant and issuance of
incentive and non-qualified stock options, stock appreciation rights ("SAR's")
and stock awards. The maximum number of such shares with respect to which stock
options or SAR's may be granted to any employee during which the plan is in
effect is 500,000 shares and the aggregate number of such shares that may be
used in settlement of stock awards is 1,000,000 shares. An option becomes
exercisable at such times and in such installments as set by the Compensation
Committee of the Board but no option will be exercisable after the tenth
anniversary of the date on which it is granted. The option price per share may
not be less than the fair market value of a share on the date the option is
granted. Information on stock options is summarized as follows:
1996
---------------------------
Average Price
Shares per Share
--------- --------------
Outstanding at beginning of year -- $ --
Granted 1,500,000 14.120
Exercised -- --
Canceled (13,000) 14.125
---------
Outstanding at end of year 1,487,000 14.120
=========
Exercisable at end of year -- --
=========
NOTE 12 - Litigation and Other Matters
Veil-Piercing Suits
Beginning in early 1989, the Company and certain of its officers, directors
and shareholders were named as co-defendants in a number of lawsuits brought by
persons ("Asbestos Claimants") claiming that the Company should be held liable
for all asbestosrelated liabilities of The Celotex Corporation ("Celotex") and
its parent, Jim Walter Corporation ("JWC"). The stock of a predecessor of JWC
("Original Jim Walter") was acquired by a company known as Hillsborough
Acquisition Corporation ("HAC"), a former subsidiary of the Company, pursuant to
a 1988 leveraged buyout (the "LBO"). Asserting a variety of theories of
derivative liability, including piercing the corporate veil, the suits alleged,
among other things, that Original Jim Walter was liable for all asbestos-related
liabilities
F-14
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
of Celotex and that the distribution by HAC of substantially all of its assets
to the Company pursuant to the LBO was therefore a fraudulent conveyance (the
"Veil-Piercing Suits").
On December 27, 1989, the Company and certain of its subsidiaries filed for
protection under Chapter 11 of Title 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Middle District of Florida, Tampa
Division (the "Bankruptcy Court"), which stayed all Veil-Piercing Suits pursuant
to the automatic stay. In January 1990, the Company filed a declaratory judgment
action ("Adversary Proceeding") against all Asbestos Claimants who had filed
Veil-Piercing Suits seeking a ruling that the Company could not be held liable
for any asbestos-related liabilities of Celotex or JWC on any grounds, asserting
that the corporate veil separating Original Jim Walter and Celotex was intact,
and asserting that the LBO could not be deemed a fraudulent conveyance.
In April 1994, the Bankruptcy Court ruled in favor of the Company on all of
the claims asserted in the Adversary Proceeding. The ruling was affirmed by the
United States District Court for the Middle District of Florida ( the "District
Court") on October 13, 1994. Thereafter, a settlement (the "Veil-Piercing
Settlement") was entered into among the Company, certain of its creditors,
Celotex, JWC and representatives of the Asbestos Claimants pursuant to which all
the Veil-Piercing Suits would be dismissed and the Company and its officers,
directors and relevant stockholders would be released from all liabilities
relating to the LBO or associated with asbestos-related liabilities of Celotex
or JWC. The Veil-Piercing Settlement is embodied in the Amended Joint Plan of
Reorganization Dated as of December 9, 1994 as modified on March 1, 1995 (as so
modified the "Consensual Plan") that was confirmed by the Bankruptcy Court
pursuant to an order signed on March 2, 1995. The Consensual Plan binds all
known and unknown claimants and enjoins such persons or entities from bringing
any suits against the Company in the future for asbestos or LBO related claims.
Dismissal of the Veil-Piercing Suits is in process and all of these suits will
be dismissed in the near future pursuant to the terms of the Veil-Piercing
Settlement and the Consensual Plan.
On March 8, 1996, the Company, together with various other parties, filed
an adversary proceeding with the Bankruptcy Court, naming Celotex and JWC as
defendants. In this proceeding the Company and the other named plaintiffs allege
that Celotex and JWC breached the Veil-Piercing Settlement by failing to propose
and use their best efforts to obtain confirmation of a Chapter 11 plan for
Celotex (which is presently in bankruptcy) that included an injunction issued
pursuant to Section 524(g) of the Bankruptcy Code or other similar injunctive
relief acceptable to each of the parties to the Veil-Piercing Settlement.
Although all Veil-Piercing claims by Asbestos Claimants were resolved as part of
the Consensual Plan, the Company believes that Section 524(g) would afford
additional statutory protection to the Company against the possibility of such
claims in the future. The Company believed that the plan of reorganization
proposed by Celotex in its Chapter 11 proceeding failed to conform with the
terms of the Veil-Piercing Settlement; that the plan proposed by Celotex did not
meet the requirements of Section 524(g); and that Celotex and JWC failed to
propose and use their best efforts to obtain confirmation of a plan of
reorganization in the Celotex bankruptcy that included a provision for an
injunction as required by the VeilPiercing Settlement. The defendants contend
that the proposed Celotex plan met the requirements of the Veil-Piercing
Settlement. This proceeding requested the Bankruptcy Court to (i) declare the
rights and obligations of the various parties to the Veil-Piercing Settlement
and (ii) issue an order requiring specific performance by each of the named
defendants of their obligations under the Veil-Piercing Settlement. The Company,
Celotex and JWC each filed motions in the Bankruptcy Court seeking an order
granting summary judgment in favor of the respective party.
On May 28, 1996, the Bankruptcy Court issued an order granting in part the
Company's motion for summary judgment and denying the motions for summary
judgment filed by Celotex and JWC. The Bankruptcy Court found that the plan of
reorganization filed by Celotex in its Chapter 11 proceeding did not comply with
the terms of the Veil-Piercing Settlement. The Bankruptcy Court, however,
declined to issue a mandatory injunction compelling compliance, but rather left
to the parties the opportunity to fashion an alternative remedy. The parties
were unable to agree on an alternative remedy and on June 7, 1996, the Company
requested that the Bankruptcy Court grant injunctive relief compelling Celotex
and JWC to perform their respective obligations under the Veil-Piercing
Settlement. In light of confirmation hearings scheduled to begin June 10, 1996
in the Celotex bankruptcy, the Bankruptcy Court denied the
F-15
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
relief requested without prejudice to request such relief in the future. The
Bankruptcy Court's May 28, 1996 order has been appealed by Celotex and JWC.
On June 12, 1996, the court in the Celotex bankruptcy (the "Celotex
Bankruptcy Court"), in response to an announcement by certain parties, including
Celotex, of an agreement to an alternative plan of reorganization, denied
confirmation of the Celotex plan of reorganization. On July 12, 1996, certain
parties to the Celotex reorganization, together with Celotex filed with the
Celotex Bankruptcy Court a proposed plan of reorganization. That plan contains a
provision for an injunction pursuant to Section 524(g). The proposed plan is
subject to approval of Celotex' creditors and confirmation by the Celotex
Bankruptcy Court.
South Carolina Litigation
In February 1995, Jim Walter Homes and Mid-State filed an adversary action
for declaratory judgment in the Bankruptcy Court against all South Carolina
homeowners who purchased their homes between July 1, 1982 and December 27, 1989.
The complaint in the adversary action sought a declaration that Jim Walter Homes
and Mid-State did not violate a South Carolina statute that provided homeowners
a preferential choice of attorneys to represent them in the closing of the
purchase of their homes. The adversary action was settled for $3 million which,
after application of settlement proceeds to pay arrearages on the homeowners'
mortgages, resulted in a net cash outlay of approximately $1,050,000, and legal
fees of $360,000. On November 22, 1995, the Bankruptcy Court approved the
settlement and distribution pursuant to the settlement has been completed.
Texas Litigation
In May 1991, Jim Walter Homes and Mid-State, together with Trust II and
certain other parties, were involved in various lawsuits, primarily in the
Bankruptcy Court, with approximately 750 owners of 446 houses constructed by Jim
Walter Homes in south Texas. The homeowners sought damages based upon alleged
construction defects, common law fraud, and violations of various Texas and
federal statutes. The litigation was settled pursuant to a settlement agreement
approved by the Bankruptcy Court on July 13, 1995. The settlement figure was
approximately $3,600,000 in account balance reductions (of which approximately
$1,250,000 represents a principal reduction), plus an approximate aggregate of
$27,500 cash to certain homeowner claimants and $2,900,000 as attorney's fees
(of which $900,000 was deferred and is payable over five years).
Cases involving approximately 22 non-settling homeowner accounts will be
resolved on an individual basis before the Bankruptcy Court and the Company has
filed motions believed by the Company to be dispositive of these remaining
issues.
Suit by the Company and Jim Walter Resources, Inc. for Business Interruption
Losses
On May 31, 1995, the Company and Jim Walter Resources, Inc. ("JWR") filed
a lawsuit in the Circuit Court for Tuscaloosa County, Alabama (Civil Action No.
CV-95-625) against certain insurers. The lawsuit arises out of a spontaneous
combustion fire that began in JWR's underground coal mine No. 5 on November 17,
1993. Efforts to control the fire caused a blockage in the tunnels, corridors,
and passageways necessary to conduct mining, so mining operations temporarily
ceased. After JWR believed that the fire had been extinguished or brought under
control, JWR resumed its mining operations. JWR subsequently detected that the
intensity of the fire increased substantially, making it necessary to seal off
portions of the mine and to lose permanently certain corridors and passageways
necessary to the continued mining of the longwall panel then being mined. JWR's
longwall mining was interrupted until another longwall panel could be prepared.
In addition to the mining of coal, JWR produces natural gas from wells drilled
into the mine, and production of the gas from the area of the lost longwall
panel was also lost. As a result of the fire, the Company and JWR claimed
compensable losses in the amount of $25 million under their business
interruption insurance coverage. When the insurers refused to pay their pro rata
part of the claim, the lawsuit described above was commenced.
F-16
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The complaint filed by the Company and JWR seeks payment of the amounts
claimed to be due under the insurance policies in question and a declaratory
judgment that the policies in question are not void or voidable due to any
alleged failure to disclose or a lack of fortuity. Certain of the insurers have
counterclaimed for rescission on the basis of nondisclosure and lack of
fortuity. The Company and JWR also seek a declaratory judgment stating that each
of the insurers is liable for its pro rata share of the business interruption
loss. In addition, the Company and JWR have asserted a claim for bad faith
refusal to pay against certain insurers.
The insurers issued policies insuring various percentages of the risk. The
Company has entered into settlements with several insurers, who, in the
aggregate have paid approximately $11.7 million to date, reducing the contract
claims in the lawsuit to approximately $12.7 million. The Company and JWR
continue to pursue the litigation against the remaining carriers and a trial is
tentatively scheduled for October 21, 1996.
Litigation Related to Chapter 11 Distributions to Certain Holders of
Subordinated Notes and/or Debentures
The plan of reorganization originally proposed by certain creditors and
committees (the "Creditors' Plan") provided that subordinated bondholders could
elect to receive "Qualified Securities" (cash and/or new senior notes) in lieu
of shares of Common Stock of the Company. Such elections (the "Subordinated Note
Claim Election") were to be made on the ballots used for voting on the
Creditors' Plan. A balloting agent was retained to receive and separately
tabulate ballots cast on the Creditors' Plan and the Debtors' Fifth Amended
Joint Plan of Reorganization (the "Company's Plan"). Voting on the Company's
Plan and the Creditors' Plan took place during the period August 12, 1994
through September 23, 1994.
Subsequent to September 23, 1994, the balloting agent filed with the
Bankruptcy Court two (2) separate voting certifications. The voting
certification with respect to the Creditors' Plan not only set forth the voting
results but also listed the names of subordinated bondholders who made the
Subordinated Note Claim Election.
The Consensual Plan confirmed by the Bankruptcy Court, which technically
constituted a modification of the Creditors' Plan, (a) kept in place the
Subordinated Note Claim Election provision and prior elections, (b) contained as
Exhibit 8 a schedule prepared by the balloting agent which set forth the names
of the subordinated bondholders who made the Subordinated Note Claim Election
(the "Exhibit 8 Schedule"), and (c) contained a new election (the "Class U-4
Exchange Election") which provided that those subordinated bondholders who made
the Subordinated Note Claim Election were eligible to make the Class U-4
Exchange Election whereby they could essentially "exchange" shares of Common
Stock for new senior notes which Lehman Brothers, Inc. was otherwise entitled to
receive.
In February 1995, the balloting agent filed a voting certification with the
Bankruptcy Court which listed those subordinated bondholders who made the Class
U-4 Exchange Election (the "Exchange Election Schedule").
In preparing to make distributions to subordinated bondholders, it came to
the attention of the Company that the Exhibit 8 Schedule and the Exchange
Election Schedule were inaccurate. As a result, the Company reviewed all ballots
that the balloting agent claimed to be in its possession and determined that
discrepancies existed between the Exhibit 8 Schedule and Exchange Election
Schedule and certain of the ballots cast by subordinated bondholders.
On or about April 5, 1995, the Company filed a motion with the Bankruptcy
Court seeking to amend the Exhibit 8 Schedule and the Exchange Election
Schedule. On April 28, 1995, an order was entered reflecting the Bankruptcy
Court's decision to permit the amendment of the Exhibit 8 Schedule and the
Exchange Election Schedule to correct errors on the information contained
therein and not to permit such Schedules to be amended to include any additional
bondholders(the "April 28 Order").
F-17
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Four bondholders each filed a motion with the Bankruptcy Court seeking a
stay of the April 28 Order pending appeal to the United States District Court.
On May 10, 1995, the Bankruptcy Court denied each of the stay motions. Two of
such bondholders then each filed emergency motions for a stay pending appeal
with the District Court. On May 11, 1995, the District Court issued an order
denying the emergency motions.
On May 14, 1995, one of such bondholders filed a petition for a writ of
mandamus with the Eleventh Circuit Court of Appeals which was denied on May 15,
1995.
Appeals from the April 28 Order were filed with the District Court by six
bondholders. (Two of the appeals have been dismissed). The appeals raise similar
issues and ultimately seek the same relief - reversal of the April 28 Order as
it applies to appellants and the modification of the consideration that
appellants are to be provided under the Consensual Plan, so that a portion of
their distribution would be comprised of Qualified Securities, instead of Common
Stock of the Company.
The Company filed a brief in support of the April 28 Order and also filed a
motion to dismiss the remaining four appeals of the appellants as moot and to
dismiss two of those appeals for failure to file timely briefs. Subsequently,
one of the remaining four appeals has been voluntarily dismissed. At this time
the Company is unable to predict whether or not the three pending appeals will
be dismissed, or the ultimate outcome of such appeals.
Chapter 11 Adversary Proceeding Filed by Certain Holders of Series B & C Senior
Notes
On June 15, 1995, certain holders of Series B & C Notes (the "Noteholders")
commenced an adversary proceeding in the Bankruptcy Court against the Company,
as Disbursing Agent, and its subsidiaries seeking payment of interest for the
period from the Effective Date (March 17, 1995) until the date distribution was
received by such Noteholders. The Bankruptcy Court entered an order on January
17, 1996 denying the Noteholders' claim for interest, which order was not
appealed.
Income Tax Litigation
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See Note 9 - Income Taxes for a more complete
explanation.
Miscellaneous Litigation
The Company and its subsidiaries are parties to a number of other lawsuits
arising in the ordinary course of their businesses. Most of these cases are in a
preliminary stage and the Company is unable to predict a range of possible loss,
if any. The Company provides for costs relating to these matters when a loss is
probable and the amount is reasonably estimable. The effect of the outcome of
these matters on the Company's future results of operations cannot be predicted
because any such effect depends on future results of operations and the amount
and timing of the resolution of such matters. While the results of litigation
cannot be predicted with certainty, the Company believes that the final outcome
of such other litigation will not have a materially adverse effect on the
Company's consolidated financial condition.
NOTE 13 - Pension and Other Employee Benefits
The Company has various pension and profit sharing plans covering
substantially all employees. In addition to its own pension plans, the Company
contributes to certain multi-employer plans. Total pension expense for the years
ended May 31, 1996, 1995 and 1994, was $11.8 million, $8.2 million and $9.7
million, respectively. The funding of retirement and employee benefit plans is
in accordance with the requirements of the plans and, where applicable, in
sufficient amounts to satisfy the "Minimum Funding Standards" of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The plans provide benefits
based on years of service and compensation or at stated amounts for each year of
service.
F-18
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The net pension costs for Company administered plans are as follows:
For the years ended May 31,
-------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
Service cost-benefits earned during the period $ 6,072 $ 5,817 $ 5,334
Interest cost on projected benefit obligation 16,972 16,174 16,333
Actual loss (return) on assets (35,347) 4,304 (19,352)
Net amortization and deferral 20,236 (21,377) 3,145
--------- -------- --------
Net pension costs $ 7,933 $ 4,918 $ 5,460
========= ======== ========
The following table sets forth the funded status of Company administered
plans:
<TABLE>
<CAPTION>
May 31, 1996 May 31, 1995
---------------------------- ---------------------------
Plans in which Plans in which
---------------------------- ---------------------------
Assets exceed Accumulated Assets exceed Accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested benefits $ 149,542 $ 50,941 $ 134,589 $ 47,474
Non-vested benefits 6,815 1,585 5,849 1,207
--------- --------- --------- ---------
$ 156,357 $ 52,526 $ 140,438 $ 48,681
========= ========= ========= =========
Plan assets at fair value, primarily
stocks and bonds $ 189,728 $ 34,609 $ 169,635 $ 31,023
Projected benefit obligations 188,422 54,008 169,984 49,681
--------- --------- --------- ---------
Plan assets in excess of (less than)
projected benefit obligations 1,306 (19,399) (349) (18,658)
Unamortized portion of transition
(asset)obligation at June 1, 1986 (9,185) 4,021 (10,507) 4,785
Unrecognized net loss from actual
experience different from
that assumed 13,191 6,124 20,545 6,610
Prior service cost not recognized 618 3,595 696 2,269
Contribution to pl ns after
measurement date -- 1,042 -- 667
--------- --------- ---------- ---------
Prepaid (accrued) pension cost 5,930 (4,617) 10,385 (4,327)
Additional liability -- (12,507) -- (12,664)
--------- --------- ---------- ---------
Prepaid pension cost (pension
liability)recognized in the
balance sheet $ 5,930 $ (17,124) $ 10,385 $ (16,991)
========= ========= ========= =========
</TABLE>
The projected benefit obligations were determined using an assumed discount
rate of 7-1/2% in fiscal 1996 and 8% in 1995 and, where applicable, an assumed
increase in future compensation levels of 4-1/2% in fiscal 1996 and 5% in 1995.
The assumed long-term rate of return on plan assets was 8% in fiscal 1996 and
1995.
Under the labor contract with the United Mine Workers of America, Jim Walter
Resources makes payments into multi-employer pension plan trusts established for
union employees. Under ERISA, as amended by the Multiemployer Pension Plan
Amendments Act of 1980, an employer is liable for a proportionate part of the
plans' unfunded vested benefits liabilities. The Company estimates that its
allocated portion of the unfunded vested benefits liabilities of these plans
amounted to approximately $41.5 million at May 31, 1996. However, although the
net liability can be estimated, its components, the relative position of each
employer with respect to actuarial present value of accumulated benefits and net
assets available for benefits, are not available to the Company.
F-19
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company provides certain postretirement benefits other than pensions,
primarily healthcare, to eligible retirees. The Company's postretirement benefit
plans are not funded. Postretirement benefit costs were $27.1 million in 1996,
$26.0 million in 1995 and $25.6 million in 1994. Amounts paid for postretirement
benefits were $7.7 million in 1996, $7.5 million in 1995 and $5.5 million in
1994.
The net periodic postretirement benefit cost includes the following
components:
For the years ended May 31,
------------------------------
1996 1995 1994
-------- -------- -------
(in thousands)
Service cost $ 8,668 $ 8,491 $ 9,302
Interest cost 18,701 17,470 16,283
Net amortization and deferral (240) -- --
-------- -------- -------
Net periodic postretirement
benefit cost $ 27,129 $ 25,961 $25,585
======== ======== =======
The accumulated postretirement benefits obligation at May 31, 1996 and 1995
are as follows:
May 31,
-------------------------
1996 1995
-------- --------
(in thousands)
Retirees $ 93,380 $ 92,550
Fully eligible, active
participants 32,896 30,129
Other active participants 132,026 111,084
-------- --------
Accumulated postretirement benefit
obligation 258,302 233,763
Unrecognized net loss (10,475) (5,352)
--------- --------
Postretirement benefit liability
recognized in the balance sheet $247,827 $228,411
======== ========
The principal assumptions used to measure the accumulated postretirement
benefit obligation include a discount rate of 7-1/2% in fiscal 1996 and 8% in
1995 and a health care cost trend rate of 9-1/2% declining to 5-1/4% over a nine
year period and remaining level thereafter in fiscal 1996 and a health care cost
trend rate of 10% declining to 5-1/2% over a ten year period in fiscal 1995. A
one percent increase in trend rates would increase the accumulated
postretirement benefit obligation by 18% and increase net periodic
postretirement benefit cost for 1996 by 20%.
Certain subsidiaries of the Company maintain profit sharing plans. The total
cost of these plans for the years ended May 31, 1996, 1995 and 1994 was $2.9
million, $3.0 million and $3.1 million, respectively.
NOTE 14 - Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FASB 107") requires disclosure of estimated
fair values for all financial instruments for which it is practicable to
estimate fair value. Considerable judgment is necessary in developing estimates
of fair value and a variety of valuation techniques are allowed under FASB 107.
The derived fair value estimates resulting from the judgments and valuation
techniques applied cannot be substantiated by comparison to independent
materials or to disclosures by other companies with similar financial
instruments. Furthermore, FASB 107 fair value disclosures do not purport to be
the amount which could be attained in immediate settlement of the financial
instrument. Fair value estimates are not necessarily more relevant than
historical cost values and have limited usefulness in evaluating long-term
assets and liabilities held in the ordinary course of business. Accordingly,
F-20
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
management believes that the disclosures required by FASB 107 have limited
relevance to the Company and its operations.
The following methods and assumptions were used to estimate fair value
disclosures:
Cash (including short-term investments) and short-term investments,
restricted - The carrying amounts reported in the balance sheet approximates
fair value.
Instalment notes receivable - The estimated fair value of instalment notes
receivable at May 31, 1996 was in the range of $2.0 billion to $2.1 billion.
The estimated fair value is based upon valuations prepared by an investment
banking firm as of May 31, 1996. The value of mortgage-backed instruments
such as instalment notes receivable are very sensitive to changes in
interest rates.
Debt - The estimated fair value of long term debt at May 31, 1996 was $2.268
billion based on current yields for comparable debt issues or prices for
actual transactions.
NOTE 15 - Segment Information
Information relating to the Company's business segments is set forth on
pages F-22 and F-23.
Prior years Contributions to Operating Income has been restated to reflect
amortization of excess purchase price over net assets acquired by operating
segment, which amortization was previously included in unallocated corporate
interest and other expense.
F-21
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
For the years ended May 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Sales and Revenues:
Homebuilding and related financing $ 413,111 $ 407,119 $ 424,530
Water and waste water transmission products 421,436 412,237 357,189
Natural resources(b) 364,113 332,251 319,410
Industrial and other products 286,783 284,230 224,673
Corporate 192 6,485 2,722
----------- ----------- -----------
Consolidated sales and revenues(a)(c) $ 1,485,635 $ 1,442,322 $ 1,328,524
=========== =========== ===========
Contributions to Operating Income(d)(e):
Homebuilding and related financing $ 63,317 $ 44,822 $ 61,763
Water and waste water transmission products 13,966 16,240 13,426
Natural resources (f) (106,509) 21,400 152
Industrial and other products (f) (9,509) 9,275 11,227
----------- ----------- -----------
(38,735) 91,737 86,568
Less-Unallocated corporate interest and
other expense(g) (95,712) (620,832) (50,476)
Income taxes 55,155 170,450 (28,917)
----------- ----------- -----------
Income (loss) before extraordinary item $ (79,292) $ (358,645) $ 7,175
=========== =========== ===========
Depreciation, Depletion and Amortization:
Homebuilding and related financing $ 3,279 $ 3,336 $ 3,093
Water and waste water transmission products 18,636 16,520 16,063
Natural resources 38,652 41,434 40,326
Industrial and other products 11,890 9,073 9,821
Corporate 1,884 1,674 1,732
----------- ----------- -----------
Total $ 74,341 $ 72,037 $ 71,035
=========== =========== ===========
Gross Capital Expenditures:
Homebuilding and related financing $ 3,735 $ 4,192 $ 3,210
Water and waste water transmission products 12,888 15,538 14,426
Natural resources 53,576 46,214 40,224
Industrial and other products 12,792 24,692 10,054
Corporate 532 681 1,917
---------- ----------- -----------
Total $ 83,523 $ 91,317 $ 69,831
=========== =========== ===========
Identifiable Assets:
Homebuilding and related financing $ 1,802,950 $ 1,789,582 $ 1,832,919
Water and waste water transmission products 480,209 480,617 490,004
Natural resources 381,582 465,680 450,468
Industrial and other products 177,668 213,836 173,618
Corporate (h) 248,968 295,438 193,883
----------- ----------- -----------
Total $ 3,091,377 $ 3,245,153 $ 3,140,892
=========== =========== ===========
</TABLE>
F-22
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
- ----------
(a) Inter-segment sales (made primarily at prevailing market prices) are
deducted from sales of the selling segment and are insignificant in amount
with the exception of the sales of the Industrial and Other Products Group
to the Water and Waste Water Transmission Products Group of $13,292,000,
$13,373,000 and $11,480,000 and sales of the Natural Resources Group to the
Industrial and Other Products Group of $4,774,000, $5,397,000 and
$5,650,000 in 1996, 1995 and 1994, respectively.
(b) Includes sales of coal of $325,495,000, $297,650,000 and $289,279,000 in
1996, 1995 and 1994, respectively. Jim Walter Resources' coal supply
contract with Alabama Power Company that had been in effect since January
1, 1979, as amended, was superseded by a new contract executed May 10,
1994. The new contract is effective from July 1, 1994 through August 31,
1999 with Jim Walter Resources' option to extend such contract through
August 31, 2004, subject to mutual agreement on the market pricing
mechanism and other terms and conditions of such extension. Sales to
Alabama Power Company in the years ended May 31, 1996, 1995 and 1994 were
13%, 13% and 11% of consolidated net sales and revenues, respectively.
(c) Export sales, primarily coal, were $171,446,000, $129,071,000 and
$155,966,000 in 1996, 1995 and 1994, respectively. Export sales to any
single geographic area do not exceed 10% of consolidated net sales and
revenues.
(d) Operating income amounts are after deducting amortization of excess of
purchase price over net assets acquired (goodwill) of $39,096,000 in 1996,
$40,027,000 in 1995 and $48,515,000 in 1994. A breakdown by segment is as
follows:
For the years ended May 31,
----------------------------------
1996 1995 1994
-------- ---------- ----------
(in thousands)
Homebuilding and related financing $ 31,246 $ 31,703 $ 40,191
Water and waste water transmission products 12,247 12,214 12,215
Natural resources (1,331) (1,328) (1,327)
Industrial and other products 2,135 2,627 2,624
Corporate (5,201) (5,189) (5,188)
-------- ---------- ----------
$ 39,096 $ 40,027 $ 48,515
======== ========== ==========
(e) Includes postretirement health benefits of $27,129,000, $25,961,000 and
$25,585,000 in 1996, 1995 and 1994. A breakdown by segment is as follows:
For the years ended May 31,
----------------------------------
1996 1995 1994
-------- ---------- ----------
(in thousands)
Homebuilding and related financing $ 1,636 $ 2,295 $ 2,170
Water and waste water transmission products 3,729 4,362 4,391
Natural resources 16,640 15,004 14,681
Industrial and other products 4,581 3,610 3,662
Corporate 543 690 681
-------- ---------- ----------
$ 27,129 $ 25,961 $ 25,585
======== ========== ==========
(f) Includes FASB 121 write down of fixed assets of $120,400,000 at two coal
mines in the Natural Resources Group and write off of goodwill of
$22,865,000 in the Industrial and Other Products Group.
(g) Excludes interest expense incurred by he Homebuilding and Related Financing
Group of $128,215,000, $131,560,000 and $128,828,000 in 1996, 1995 and
1994, respectively. The balance of unallocated expenses consisting
primarily of unallocated interest, corporate expenses and Chapter 11 costs
(in 1995 and 1994) are attributable to all groups and cannot be reasonably
allocated to specific groups.
(h) Primarily cash and corporate headquarters buildings and equipment.
F-23
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 16--Subsequent Event (Unaudited - Subsequent to Date of Accountants
Report)
On July 12, 1996, competing plans were filed by Celotex, Jim Walter
Corporation, the Asbestos Bodily Injury Claimants Committee and others (the
"Bodily Injury Plan") and by the Asbestos Property Damage Claimants Committee
(the "Property Damage Plan"). The Company filed objections to both plans, on
the grounds that they did not comply fully with the Veil-Piercing Settlement.
On August 23, 1996, both the Bodily Injury Plan proponents and the
Property Damage Plan proponents filed amended plans. The Property Damage Plan,
as amended, provides for a Section 524(g) injunction as to all claimants. The
Bodily Injury Plan, as amended, provides for a Section 524(g) injunction as to
all claimants, but reserves the right to seek confirmation of the Bodily Injury
Plan even if the asbestos property damage claimants class votes against that
plan. If the Bodily Injury Plan were to be confirmed over an adverse vote of the
property damage claimants class, that would appear to preclude a Section 524(g)
injunction as to asbestos property damage claims. However, in such event the
Bodily Injury Plan would still provide for an injunction against asbestos
property damage claims to the extent such an injunction is allowed by Section
105 of the Bankruptcy Code. Both plans require the approval of creditors and
confirmation by the Celotex Bankruptcy Court. A confirmation hearing concerning
the Bodily Injury Plan, as amended, and the Property Damage Plan, as amended, is
currently scheduled to commence on October 7, 1996.
F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
Walter Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated July 12, 1996, appearing in the Form 10-K also included an audit of the
Financial Statement Schedules listed in Item 14(a) of this form. In our opinion,
these Financial Statement Schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
Price Waterhouse LLP
Tampa, Florida
July 12, 1996
F-25
<PAGE>
SCHEDULE III
WALTER INDUSTRIES, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended May 31, 1996
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and Deductions Reclassi- at end
Description of Year Expenses from reserves fications of Year
----------- ------- -------- ------------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserves (provision for
possible losses) deducted
from instalment notes receivable $26,556 $ 743 $ 1,161(1) -- $26,138
======= ======= ======= ======= =======
Reserve (provision for possible
losses) deducted from trade
receivables $ 7,998 $ 3,624 $ 3,442(1) -- $ 8,180
======= ======= ======= ======= =======
Accrued workmen's
compensation (2) $ 4,500 $( 257) $ 75(3) $ 4,500 $ 8,668
======= ======= ======= ======= =======
Black Lung reserves (2) $21,867 $(3,000) $ 142(3) $(4,500) $14,225
======= ======= ======= ======= =======
</TABLE>
- -----------
(1) Notes and accounts written off as uncollectible.
(2) Included in other long-term liabilities.
(3) Losses sustained.
F-26
<PAGE>
SCHEDULE III
WALTER INDUSTRIES, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended May 31, 1995
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and Deductions Reclassi- at end
Description of Year Expenses from reserves fications of Year
----------- ------- -------- ------------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserves (provision for
possible losses) deducted
from instalment notes receivable $26,301 $ 1,155 $ 900(1) -- $26,556
======= ======= ======= ======= =======
Reserve (provision for possible
losses) deducted from trade
receivables $ 7,392 $ 3,330 $ 2,724(1) -- $ 7,998
======= ======= ======= ======= =======
Accrued workmen's
compensation (2) $ 3,737 $ 763 $ -- -- $ 4,500
======= ======= ======= ======= =======
Black Lung reserves (2) $21,997 $ -- $ 130(3) -- $21,867
======= ======= ======= ======= =======
</TABLE>
- -----------
(1) Notes and accounts written off as uncollectible.
(2) Included in other long-term liabilities.
(3) Losses sustained.
F-27
<PAGE>
SCHEDULE III
WALTER INDUSTRIES, INC, AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended May 31, 1994
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and Deductions Reclassi- at end
Description of Year Expenses from reserves fications of Year
----------- ------- -------- ------------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserves (provision for
possible losses) deducted
from instalment notes receivable $26,579 $ 905 $ 1,183 (1) -- $26,301
======= ======= ======= ======= =======
Reserve (provision for possible
losses) deducted from trade
receivables $ 7,324 $ 3,706 $ 3,638 (1) -- $ 7,392
======= ======= ======= ======= =======
Accrued workmen's
compensation (3) $ 2,887 $ 824 $ (26)(2) -- $ 3,737
======= ======= ======= ======= =======
Black Lung reserves (3) $22,190 $ -- $ 193 (4) -- $21,997
======= ======= ======= ======= =======
</TABLE>
- -----------
(1) Notes and accounts written off as uncollectible.
(2) Expenditures or losses sustained and liabilities reclassified from accounts
payable.
(3) Included in other long-term liabilities.
(4) Losses sustained.
F-28
<PAGE>
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1996
Exhibit Number Description
- -------------- -----------
2(a)(i) -- Amended Joint Plan of Reorganization of Walter
Industries, Inc. and certain of its subsidiaries,
dated as of December 9, 1994 (1)
2(a)(ii) -- Modification to the Amended Joint Plan of Reorganization of
Walter Industries, Inc. and certain of its subsidiaries,
as filed in the Bankruptcy Court on March 1, 1995 (2)
2(a)(iii) -- Findings of Fact, Conclusions of Law and Order Confirming
Amended Joint Plant of Reorganization of Walter Industries,
Inc. and certain of its subsidiaries, as modified (3)
3(a) -- Restated Certificate of Incorporation of the Company (3)
3(b) -- By-Laws of the Company (3)
10(a) -- Stockholder's Agreement (3)
10(b) -- Form of Common Stock Registration Rights Agreement (3)
10(c) -- Channel One Registration Rights Agreement (7)
10(d) -- Second Amended and Restated Veil Piercing Settlement
Agreement (included as Exhibit 3A to Exhibit 2(a)(i)) (1)
10(e) -- Bank Credit Agreement (8)
10(f) -- Director and Officer Indemnification Agreement, dated as of
March 3, 1995, among the Company and the Indemnitees parties
thereto (5)
10(g) -- New Alabama Power Contract (4)(5)
10(h) -- Escrow Agreement, dated as of September 12, 1995, between
the Company and Harris Trust and Savings Bank, as Escrow Agent
(7)
10(i) -- Walter Industries, Inc. Directors' Deferred Fee Plan (7)
10(j) -- 1995 Long-Term Incentive Stock Plan of Walter
Industries, Inc. (6)
10(k) -- Agreement, dated as of August 30, 1995, between the Company
and James W. Walter (7)
11 -- Statement re computation of per share earnings
21 -- Subsidiaries of the Company
27 -- Financial Data Schedule
- ----------
(1) This Exhibit is incorporated by reference to the Application for
Qualification of Indenture on Form T-3 filed by the Company with the Commission
on February 6, 1995.
E-1
<PAGE>
(2) This Exhibit is incorporated by reference to Amendment No. 2 to the
Application for Qualification of Indenture on Form T-3 filed by the Company with
the Commission on March 7, 1995.
(3) This Exhibit is incorporated by reference to the Registration Statement on
Form S-1 (File No. 33-59013) filed by the Company with the Commission on May 2,
1995.
(4) Portions of this document have been omitted pursuant to an approved request
for confidential treatment dated October 11, 1995.
(5) This Exhibit is incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 33-59013) filed by the Company with
the Commission on May 2, 1995.
(6) This Exhibit is incorporated by reference to the Registration Statement on
Form S-8 filed by the Company with the Commission on March 29, 1996.
(7) This Exhibit is incorporated by reference to Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 33-59013) filed by the Company with
the Commission on May 2, 1995.
(8) This Exhibit is incorporated by reference to Form 8-K filed by the Company
with the Commission on February 16, 1996.
E-2
Exhibit 11
NET LOSS PER SHARE CALCULATION
(in thousands, except per share amounts)
Year Ended Year Ended
May 31, 1996 May 31, 1995
----------------- -------------------
Dollars Shares Dollars Shares
------- ------ ------- ------
Loss before extraordinary item $ (79,292) $(358,645)
Primary weighted average shares of
Common Stock outstanding(a) 50,988 50,494
====== ======
Fully diluted weighted average shares
of Common Stock outstanding (a)(b) 50,988 50,494
====== ======
Per share loss before
extraordinary item $(1.56) $(7.10)
Extraordinary item - loss on
debt repayment (5,404)
Per share loss from
extraordinary item (.10)
--------- ---------
Net loss $( 84,696) $(358,645)
========= ------ =========
Per share (primary) $(1.66) $(7.10)
======= =======
Per share (fully diluted) $(1.66) $(7.10)
======= =======
(a) Does not include 3,880,140 shares issued to an escrow account on September
13, 1995 pursuant to the Consensual Plan because such issuance is
contingent on future events and would be anti-dilutive in the current year.
(b) For the year ended May 31, 1996, does not include 1,487,000 shares subject
to options because such options would have an anti-dilutive effect in such
year.
In management's opinion, per share information for fiscal year 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 Financial Statements on Pages F-6 and F-7).
EXHIBIT 21
LIST OF THE SUBSIDIARIES OF THE COMPANY
(Jurisdiction of incorporation as noted in parenthesis)
The direct and indirect subsidiaries of Walter Industries, Inc. are:
1. JW Aluminum Company (Del.)
2. Homes Holdings Corporation (Del.)
a. Jim Walter Homes, Inc. (Fla.) (a subsidiary of Homes Holdings
Corporation)
i. Jim Walter Homes of Louisiana, Inc. (La.) (a subsidiary of Jim
Walter Homes, Inc.)
ii. Walter Home Improvement, Inc. (Fla.) (a subsidiary of Jim
Walter Homes, Inc.)
3. JW Window Components, Inc. (Del.)
a. Jim Walter Window Components, Inc. (Wisc.) (a subsidiary of JW
Window Components, Inc.)
4. Vestal Manufacturing Company (Del.)
5. Sloss Industries Corporation (Del.)
6. Southern Precision Corporation (Del.)
7. Mid-State Holdings Corporation (Del.)
a. Mid-State Homes, Inc. (Fla.) (a subsidiary of Mid-State Holdings
Corporation)
i. Mid-State Trust III (a business trust owned by Mid-State
Homes, Inc.)
ii. Mid-State Trust IV (a business trust owned by Mid-State Homes,
Inc.)
A. Mid-State Trust II (a business trust owned by Mid-State
Trust IV)
iii. Mid-State Trust V (a business trust owned by Mid-State Homes,
Inc.)
8. United States Pipe and Foundry Company, Inc. (Ala.)
9. Railroad Holdings Corporation (Del.)
a. Jefferson Warrior Railroad Company, Inc. (Ala.) (a subsidiary of
Railroad Holdings Corporation)
10. Computer Holdings Corporation (Del.)
a. Jim Walter Computer Services, Inc. (Del.) (a subsidiary of Computer
Holdings Corporation)
11. Land Holdings Corporation (Del.)
a. Walter Land Company (Del.) (a subsidiary of Land Holdings
Corporation)
<PAGE>
12. J.W.I. Holdings Corporation (Del.)
a. J.W. Walter, Inc. (Del.) (a subsidiary of J.W.I. Holdings
Corporation)
13. Hamer Holdings Corporation (Del.)
a. Hamer Properties, Inc. (W.Va.) (a subsidiary of Hamer Holdings
Corporation)
14. Best Insurors, Inc. (Fla.)
a. Best Insurors of Mississippi, Inc., (Miss.) (a subsidiary of Best
Insurors, Inc.)
b. Jim Walter Insurance Services, Inc. (Fla.) (a subsidiary of Best
Insurors, Inc.)
15. Cardem Insurance Co., Ltd. (Bermuda)
16. Coast to Coast Advertising, Inc. (Fla.)
17. United Land Corporation (Del.)
18. Dixie Building Supplies, Inc. (Fla.)
19 Jim Walter Resources, Inc. (Ala.)
a. Black Warrior Transmission Corp. (50% owned by Jim Walter Resources,
Inc.)
b. Black Warrior Methane Corp. (50% owned by Jim Walter Resources,
Inc.)
The names of particular subsidiaries may have been omitted if the unnamed
subsidiaries, considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary as of May 31, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements and related notes thereto and is qualified in
its entirety by reference to such financial statements and related notes.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 81,881
<SECURITIES> 175,432
<RECEIVABLES> 1,556,193
<ALLOWANCES> (34,318)
<INVENTORY> 211,445
<CURRENT-ASSETS> 0 <F1>
<PP&E> 888,991
<DEPRECIATION> (347,455)
<TOTAL-ASSETS> 3,091,377
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 2,211,296
0 <F1>
0 <F1>
<COMMON> 549
<OTHER-SE> 276,145
<TOTAL-LIABILITY-AND-EQUITY> 3,091,377
<SALES> 1,220,397
<TOTAL-REVENUES> 1,485,635
<CGS> 987,354
<TOTAL-COSTS> 210,181
<OTHER-EXPENSES> 209,490
<LOSS-PROVISION> 4,367
<INTEREST-EXPENSE> 208,690
<INCOME-PRETAX> (134,447)
<INCOME-TAX> (55,155)
<INCOME-CONTINUING> (79,292)
<DISCONTINUED> 0 <F1>
<EXTRAORDINARY> (5,404)
<CHANGES> 0 <F1>
<NET-INCOME> (84,696)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> 0 <F1>
<FN>
<F1>This line item is not presented on the Consolidated Financial Statements.
</FN>
</TABLE>
