SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
|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.
<PAGE>
Walter Industries, Inc.
The registant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the fiscal year
ended May 31, 1996, as set forth in the pages attached hereto:
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1.
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.
2
<PAGE>
(b) Reports on Form 8-K - None
(c) Exhibits - See Index to Exhibits on page E-1
3
<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 amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
WALTER INDUSTRIES, INC.
August 30, 1996 /s/ W. H. Weldon
-----------------------
W. H. Weldon, Executive
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
August 30, 1996 /s/ Kenneth E. Hyatt
---------------------------
Kenneth E. Hyatt, Chairman,
Director and Principal
Executive Officer
August 30, 1996 /s/ Howard L. Clark, Jr.
---------------------------
Howard L. Clark, Jr.,
Director
August 30, 1996 /s/ James B. Farley
---------------------------
James B. Farley, Director
August 30, 1996 /s/ Eliot M. Fried
---------------------------
Eliot M. Fried, Director
August 30, 1996 /s/ Perry Golkin
---------------------------
Perry Golkin, Director
August 30, 1996 /s/ James L. Johnson
---------------------------
James L. Johnson, Director
August 30, 1996 /s/ Michael T. Tokarz
---------------------------
Michael T. Tokarz, Director
4
<PAGE>
August 30, 1996 /s/ James W. Walter
---------------------------
James W. Walter, Director
August 30, 1996 /s/ William H. Weldon
---------------------------
William H. Weldon,
Executive Vice President,
Director and Principal
Financial Officer
August 30, 1996 /s/ Frank A. Hult
---------------------------
Frank A. Hult, Controller
and Principal Accounting
Officer
5
<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, except as to Note 16, which is as of August 28, 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
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
23 -- Consent of Price Waterhouse LLP
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 (File No. 333-02095) filed by the Company with the Commission on
April 1, 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.
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-02095) of Walter Industries, Inc. and its
subsidiaries of our report dated July 12, 1996, except as to Note 16, which
is as of August 28, 1996, appearing on page F-2 of Walter Industries, Inc.'s
Form 10-K/A - Amendment No. 1 for the year ended May 31, 1996. We also consent
to the incorporation by reference of our report on the Financial Statement
Schedules, which appears on page F25 of this form 10-K/A - Amendment No. 1.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Tampa, Florida
August 29, 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>
