SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED FEBRUARY 29, 1996
Commission File Number 000-20537
WALTER INDUSTRIES, INC.
Incorporated in Delaware
IRS Employer Identification No. 13-3429953
1500 North Dale Mabry, Tampa, Florida 33607
Telephone Number 813-871-4811
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
There were 54,868,766 shares of common stock of the registrant outstanding at
February 29, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
February 29, May 31,
1996 1995
---- ----
(in thousands)
ASSETS
Cash (includes short-term investments of
$49,353,000 and $84,872,000) (Note 5) $ 66,749 $ 128,007
Short-term investments, restricted (Note 5) 157,304 128,002
Instalment notes receivable (Note 6) 4,232,492 4,256,866
Less - Provision for possible losses (26,301) (26,556)
Unearned time charges (2,865,532) (2,869,282)
Trade and other receivables, less $8,196,000
and $7,998,000 provision for possible losses 149,818 182,822
Federal income tax receivable 99,875 99,875
Inventories, at lower of cost (first in,
first out or average) or market:
Finished goods 118,298 111,792
Goods in process 31,683 29,593
Raw materials and supplies 50,282 53,453
Houses held for resale 2,261 1,599
Prepaid expenses 13,481 12,694
Property, plant and equipment, at cost (Note 3) 866,908 1,186,407
Less - Accumulated depreciation,
depletion and amortization (337,426) (523,615)
Investments and other assets 50,519 49,889
Deferred income taxes 57,778 16,544
Unamortized debt expense (Note 4) 31,170 34,167
Excess of purchase price over net
assets acquired (Notes 1 and 3) 320,552 372,896
---------- -----------
$3,019,911 $ 3,245,153
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Bank overdrafts (Note 5) 16,074 $ 33,746
Accounts payable and accrued expenses 180,389 259,044
Income taxes payable 53,137 53,261
Long-term senior debt (Note 4) 2,212,608 2,220,370
Accrued interest 27,332 37,854
Accumulated postretirement health
benefits obligation 243,133 228,411
Other long-term liabilities 50,882 51,693
Stockholders' equity (Note 8):
Common stock 549 505
Capital in excess of par value 1,159,338 1,159,384
Retained earnings (deficit) (917,581) (793,165)
Excess of additional pension liability over
unrecognized prior years service cost (5,950) (5,950)
---------- -----------
Total stockholders' equity 236,356 360,774
---------- -----------
$ 3,019,911 $ 3,245,153
========== ===========
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(UNAUDITED)
<TABLE><CAPTION>
For the three months ended
--------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands except
per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 262,969 $ 271,870
Time charges 56,478 53,347
Miscellaneous 9,695 11,576
Interest income from Chapter 11
proceedings (Note 1) -- 1,898
---------
329,142 338,691
--------- ---------
Costs and expenses:
Cost of sales 229,386 221,074
Depreciation, depletion and amortization 19,187 18,407
Selling, general and administrative 34,306 33,843
Postretirement health benefits 6,848 6,442
Provision for possible losses 953 956
Chapter 11 costs (Note 1) -- 7,800
Interest and amortization of debt discount
and expense 51,958 34,994
Amortization of excess of purchase price
over net assets acquired (Note 1) 9,510 9,386
Long-lived asset impairment (Note 3) 143,265 --
--------- ---------
495,413 332,902
--------- ---------
(166,271) 5,789
Income tax benefit (expense):
Current (2,450) (12,783)
Deferred 50,562 6,761
--------- ---------
Loss before extraordinary item $(118,159) (233)
Extraordinary item - Loss on debt repayment (net
of income tax benefit of $2,910,000)(Note 4) (5,404) --
--------- ---------
Net loss $(123,563) $ (233)
========= =========
Loss per share:
Loss before extraordinary item $ (2.32)
Extraordinary item (.10)
---------
Net loss - Primary $ (2.42)
=========
</TABLE>
The results of operations for the three month periods ended February 29, 1996
and February 28, 1995 are not necessarily indicative of results of operations
for a full fiscal year. All of the amounts are unaudited, but, in the opinion of
the Company, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of each period have been made. Per
share information for the three months ended February 28, 1995 is not relevant
given the significant change in capital structure which occurred as a result of
the Company's reorganization pursuant to the Consensual Plan (see Note 1).
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands except
per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 889,603 $ 848,717
Time charges 168,399 165,905
Miscellaneous 29,424 23,047
Interest income from Chapter 11
proceedings (Note 1) -- 4,992
----------- -----------
1,087,426 1,042,661
----------- -----------
Costs and expenses:
Cost of sales 729,013 682,930
Depreciation, depletion and amortization 56,629 53,094
Selling, general and administrative 100,902 97,814
Postretirement health benefits 20,370 19,524
Provision for possible losses 2,613 3,422
Chapter 11 costs (Note 1) -- 19,752
Interest and amortization of debt discount
and expense 161,451 107,747
Amortization of excess of purchase price
over net assets acquired (Note 1) 29,479 30,270
Long-lived asset impairment (Note 3) 143,265 --
----------- -----------
1,243,722 1,014,553
----------- ---------
(156,296) 28,108
Income tax benefit (expense):
Current (3,950) (40,357)
Deferred 41,234 18,369
----------- -----------
Income (loss) before extraordinary item (119,012) 6,120
Extraordinary item - Loss on debt repayment (net
of income tax benefit of $2,910,000)(Note 4) (5,404) --
----------- -----------
Net income (loss) $ (124,416) $ 6,120
=========== ===========
Loss per share:
Loss before extraordinary item $ (2.34)
Extraordinary item (.10)
-----------
Net loss - Primary $ (2.44)
===========
</TABLE>
The results of operations for the nine month periods ended February 29, 1996 and
February 28, 1995 are not necessarily indicative of results of operations for a
full fiscal year. All of the amounts are unaudited, but, in the opinion of the
Company, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of each period have been made. Per
share information for the nine months ended February 28, 1995 is not relevant
given the significant change in capital structure which occurred as a result of
the Company's reorganization pursuant to the Consensual Plan (see Note 1).
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
February 29, 1996 February 28, 1995
----------------- ------------------
(in thousands)
<S> <C> <C>
OPERATIONS
- ----------
Income (loss) before extraordinary item $(119,012) $ 6,120
Charges to income not affecting cash:
Depreciation, depletion and amortization 56,629 53,094
Provision for deferred income taxes ( 41,234) ( 18,369)
Accumulated postretirement health
benefits obligation 14,722 15,807
Provision for other long-term liabilities ( 811) ( 669)
Amortization of excess purchase price
over net assets acquired (Note 1) 29,479 30,270
Amortization of debt discount and expense 5,551 9,207
Long-lived asset impairment (Note 3) 143,265 -
--------- ------
88,589 95,460
Decrease (increase) in:
Short-term investments, restricted ( 29,302) 18,902
Instalment notes receivable, net (Note 6) 20,369 ( 93)
Trade and other receivables, net 33,004 ( 7,940)
Inventories ( 6,087) ( 11,233)
Prepaid expenses ( 787) ( 5,802)
Increase (decrease) in:
Bank overdrafts (Note 5) ( 17,672) ( 9,963)
Accounts payable and accrued expenses ( 16,168) 611
Income taxes payable ( 124) 10,617
Accrued interest ( 10,520) 40,525
Liabilities subject to Chapter 11 proceedings (Note 1):
Accounts payable and accrued expenses - ( 45)
--------- ---------
Cash flows from operations 61,302 131,039
--------- ---------
FINANCING ACTIVITIES
- --------------------
Issuance of long-term debt (Note 4) 625,000 -
Retirement of long-term senior debt (Note 4) (632,762) ( 87,155)
Additions to unamortized debt expense ( 5,968) ( 260)
Extraordinary item - Loss on debt repayment (Note 4) ( 5,404) -
Charge to income not affecting cash:
Write off of unamortized debt expense (Note 4) 3,414 -
Payment of liabilities subject to
Chapter 11 proceedings (Note 1) ( 62,489) -
Fractional share payments ( 2) -
--------- ------
Cash flows from financing activities ( 78,211) ( 87,415)
--------- ---------
INVESTING ACTIVITIES
- --------------------
Additions to property, plant and
equipment, net of normal retirements ( 43,719) ( 42,488)
Decrease in investments and other assets ( 630) 520
---------- ---------
Cash flows from investing activities ( 44,349) ( 41,968)
--------- ---------
Net increase (decrease) in cash and cash equivalents ( 61,258) 1,656
Cash and cash equivalents at beginning of period 128,007 203,303
--------- ---------
Cash and cash equivalents at end
of period (Note 5) $ 66,749 $ 204,959
========= =========
</TABLE>
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
FEBRUARY 29, 1996
Note 1 - Recent History
Walter Industries, Inc. (formerly Hillsborough Holdings Corporation) (the
"Company") was organized in 1987 for the purpose of acquiring Jim Walter
Corporation ("Original Jim Walter"). The Company's financial statements reflect
the allocation of the purchase price of Original Jim Walter based upon the fair
value of the assets acquired and the liabilities assumed. On December 27, 1989,
the Company and most of its subsidiaries each filed a voluntary petition for
reorganization under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Middle District
of Florida, Tampa Division (the "Bankruptcy Court"). The Company emerged from
bankruptcy on March 17, 1995 (the "Effective Date") pursuant to the Amended
Joint Plan of Reorganization Dated as of December 9, 1994, as modified on March
1, 1995 (as so modified the "Consensual Plan"). Despite the confirmation and
effectiveness of the Consensual Plan, the Bankruptcy Court continues to have
jurisdiction over, among other things, the resolution of disputed prepetition
claims against the Company and other matters that may arise in connection with
or relate to the Consensual Plan.
Note 2 - Principles of Consolidation
The Company through its direct and indirect subsidiaries currently offers a
diversified line of products and services for homebuilding, water and waste
water transmission, 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. All
significant intercompany balances have been eliminated.
Note 3 - 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 a potential impairment of fixed assets within the Natural
Resources segment.
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
FASB121 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. Adoption of this
standard has no impact on cash flow.
Note 4 - Debt Extinguishment
On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility, a $125 million
six-year term loan and a $60 million seven-year term loan. The $365 million
revolving credit facility includes a sub-facility for trade and other standby
letters of credit in an amount up to $40 million at any time outstanding and a
sub-facility for swingline advances in an amount not in excess of $15 million at
any time outstanding. Proceeds from the financing together with $75 million
drawn under the Mid-State Trust V Variable Funding Loan Agreement were used to
redeem in full $490 million aggregate principal amount of 12.19% 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 replace a $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 deferred
financing costs related to the early repayment of the Senior Notes and the $150
million bank credit facility.
Note 5 - Cash and Restricted Short-Term Investments
Cash includes short-term investments with original maturities of less than one
year. The Company's cash management system provides for the reimbursement of all
major bank disbursement accounts
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
on a daily basis. Checks issued but not yet presented to the banks for payment
are classified as bank overdrafts.
Restricted short-term investments include temporary investment of reserve funds
and collections on instalment notes receivable owned by Mid-State Trusts II,
III, IV and V ($136,149,000). These funds are available only to pay expenses of
the Trusts and principal and interest on indebtedness of the Trusts.
Miscellaneous other segregated accounts restricted to specific uses
($21,155,000), are also included in restricted short-term investments.
Note 6 - Instalment Notes Receivable
The net decrease in instalment notes receivable for the nine month periods ended
February 29, 1996 and February 28, 1995 consists of sales and resales, net of
repossessions and provision for possible losses, of $111,035,000 and
$115,571,000 and cash collections on account, payouts in advance of maturity and
reductions in account balances (in the nine months ended February 29, 1996
resulting from settlement agreements entered into with South Carolina and Texas
homeowners) of $131,404,000 and $115,478,000, respectively. The cost of the
settlement agreements was accrued in the fiscal year ended May 31, 1995.
Mid-State Trusts II, III, and IV are business trusts organized by Mid-State
Homes, Inc. ("Mid-State"), which owns all of the beneficial interest in Trust
III and Trust IV. Trust IV owns all of the beneficial interest in Trust II. The
Trusts were organized for the purpose of purchasing instalment notes receivable
from Mid-State from the net proceeds from the issuance of the Trust II
Mortgage-Backed Notes, the Trust III Asset Backed Notes and the Trust IV Asset
Backed Notes with outstanding balances at February 29, 1996 of $518,750,000;
$154,167,000, and $916,341,000, respectively. The assets of Trust II, Trust III
and Trust IV, including the instalment notes receivable, are not available to
satisfy claims of general creditors of the Company and its subsidiaries. The
liabilities of Mid-State Trusts II, III and IV for their publicly issued debt
are to be satisfied solely from the proceeds of the underlying instalment notes
and are non-recourse to the Company and its subsidiaries. Of the gross amount of
instalment notes receivable at February 29, 1996 of $4,232,492,000 with an
economic balance of $2,031,531,000, receivables owned by Trust II had a gross
book value of $1,225,929,000 and an economic balance of $756,385,000,
receivables owned by Trust III had a gross book value of $433,201,000 and an
economic balance of $224,176,000, and receivables owned by Trust IV had a gross
book value of $1,839,510,000 and an economic balance of $776,212,000. Mid-State
Trust V, a business trust in which Mid-State Homes holds all the beneficial
interest, was organized to hold instalment notes receivable as collateral for
borrowings to provide temporary financing to Mid-State for its current purchases
of instalment notes and mortgages from Jim Walter Homes, Inc. ("Jim Walter
Homes"). At February 29, 1996, receivables owned by Mid-State Trust V had a
gross book value of $730,701,000 and an economic balance of $273,565,000, with
outstanding borrowings of $190,000,000.
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 7 - Litigation and Other Matters
South Carolina Class Actions
- ----------------------------
As previously reported in Note 11 of Notes to Financial Statements for the year
ended May 31, 1995, Jim Walter Homes and Mid-State have filed an adversary
action for declaratory judgment against all South Carolina homeowners who
purchased their homes between July 1, 1982 and December 27, 1989.
On September 15, 1995, Jim Walter Homes and Mid-State entered into a Stipulation
and Settlement Agreement with the homeowners substantially along the lines
previously reported. On September 25, 1995, the Bankruptcy Court entered an
order that provisionally certified the settlement class, provisionally approved
the settlement reached, provisionally designated the class representatives and
provisionally designated class counsel. The order also provided that any
homeowner that did not want to be a member of the proposed class must have filed
with the Bankruptcy Court on or before November 6, 1995 a notice of their
intention to "opt out" or not participate in the agreement. On November 22,
1995, the Bankruptcy Court entered an order that gave final approval to the
settlement. Three individuals who "opted out" of the class had 45 days after the
opt out date to file proofs of claim, which they failed to file.
Texas Litigation
- ----------------
As previously reported in Note 11 of Notes to Financial Statements for the year
ended May 31, 1995, Jim Walter Homes and Mid-State reached a settlement on
litigation brought by certain homeowners in Texas. Certain of the Texas
homeowners (seven as of April 1, 1996) have not signed the settlement documents
and counsel for Jim Walter Homes and Mid-State Homes plan to proceed with
further discovery against these remaining non-settling homeowners in preparation
for eventual trial. The hearing previously set for April 12, 1996 to discuss the
status of the non-settling homeowners has been rescheduled by the Bankruptcy
Court to June 28, 1996. The settling homeowners who have a remaining account
balance began making monthly payments on September 15, 1995.
Bankruptcy Related Matters
- --------------------------
On March 8, 1996, the Company, together with various other parties, filed an
adversary proceeding (the "Adversary Proceeding") with the Bankruptcy Court,
naming The Celotex Corporation ("Celotex") and Jim Walter Corporation ("JWC") as
defendants. The Adversary Proceeding arises out of the consummation of the
Consensual Plan in March 1995. In the Adversary Proceeding the Company and the
other named plaintiffs allege that Celotex and JWC have breached their agreement
with the Company and others to obtain confirmation of a Chapter 11 plan for
Celotex (which is presently in bankruptcy) that includes 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 agreement. Although future veil
piercing claims by asbestos claimants were resolved as part of the Consensual
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Plan, Section 524(g) would afford certain additional statutory protection to the
Company against the possibility of such claims. The Company believes that the
current plan of reorganization proposed by Celotex in its Chapter 11 proceeding
fails to conform with the terms of the Veil Piercing Settlement Agreement, dated
as of November 22, 1994, between the Company, Celotex, JWC and other parties
(the "Veil Piercing Settlement"); that the plan proposed by Celotex does not
meet the requirements of 524(g); and that Celotex and JWC have failed to propose
and use their best efforts to obtain confirmation of a Chapter 11 plan in the
Celotex Chapter 11 proceeding that includes a provision for an injunction as
required by the Veil Piercing Settlement. The defendants contend that the
proposed Celotex plan meets the requirements of the Veil Piercing Settlement.
The Adversary Proceeding requests 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 has filed a
motion in the Bankruptcy Court seeking an order granting summary judgments in
favor of the Company, which motion is presently scheduled for hearing on May 7,
1996.
Note 8 - Stockholders' Equity
As of February 29, 1996, there were 54,868,766 shares of common stock
outstanding. Pursuant to the Consensual Plan, 494,313 shares were issued on
September 13, 1995 to all former stockholders of the Company as of the Effective
Date of the Consensual Plan. Also on September 13, 1995, pursuant to the
Consensual Plan, 3,880,140 shares of common stock were issued to an escrow
account. To the extent that certain federal income tax matters of the Company
are resolved satisfactorily, up to a maximum 3,880,140 of the escrowed shares
will be distributed to all former stockholders of the Company as of the
Effective Date. To the extent such matters are not resolved satisfactorily, the
escrowed shares will be returned to the Company and cancelled.
Note 9 - Segment Information
Information relating to the Company's business segments is set forth on the
following two pages. Due to divestitures of several building materials
subsidiaries in recent years, the Company has restructured certain of its
segment information. Prior year information has been restated.
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Three months ended
------------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands)
<S> <C> <C>
Sales and Revenues:
Homebuilding and related financing $ 100,062 $ 98,968
Water and waste water transmission products 76,816 80,220
Natural resources 84,047 88,167
Industrial and other products 67,711 69,226
Corporate 506 2,110
--------- -----------
Consolidated sales and revenues $ 329,142 $ 338,691
========== ==============
Contributions to Operating Income (c):
Homebuilding and related financing $ 13,759 $ 9,190
Water and waste water transmission products ( 4,674) ( 1,351)
Natural resources ( 130,911)(a) 10,934
Industrial and other products ( 21,156)(a) ( 266)
----------- --------------
( 142,982) 18,507
Less-Unallocated corporate interest and
other expense (b) ( 23,289) ( 12,718)
Income tax benefit (expense) 48,112 ( 6,022)
-------------- -----------
Loss before extraordinary item $(118,159) $( 233)
============== ==============
</TABLE>
(a) - Includes long-lived asset impairment charges of $120,400,000 and
$22,865,000 in the Natural Resources and Industrial
and Other Products Groups, respectively.
(b) - Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $32,498,000 in 1996 and $32,247,000 in 1995. The
balance of unallocated expenses consisting of unallocated interest,
corporate expenses and Chapter 11 costs in 1995 are attributable to all
groups and cannot be reasonably allocated to specific groups.
(c) - Includes amortization of excess of purchase price over net
assets acquired (goodwill) of $9,510,000 in 1996 and
$9,386,000 in 1995. A breakdown by segment is as follows:
<TABLE>
<CAPTION>
Three months ended
------------------
February 29, 1996 February 28,1995
----------------- ----------------
(in thousands)
<S> <C> <C>
Homebuilding and related financing $ 7,434 $ 7,329
Water and waste water transmission products 3,043 3,012
Natural resources ( 331) ( 326)
Industrial and other products 656 650
Corporate ( 1,292) ( 1,279)
--------- ---------
$ 9,510 $ 9,386
========= =========
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
-----------------
February 29,1996 February 28, 1995
---------------- -----------------
(in thousands)
Sales and Revenues:
<S> <C> <C>
Homebuilding and related financing $ 303,528 $ 305,256
Water and waste water transmission products 306,372 295,243
Natural resources 271,560 236,392
Industrial and other products 204,097 200,130
Corporate 1,869 5,640
------------ ------------
Consolidated sales and revenues $1,087,426 $1,042,661
============ ============
Contributions to Operating Income (c):
Homebuilding and related financing $ 41,287 $ 34,188
Water and waste water transmission products 11,510 13,154
Natural resources ( 117,834)(a) 14,857
Industrial and other products 16,227)(a) 3,391
-------------- --------------
( 81,264) 65,590
Less-Unallocated corporate interest and
other expense (b) ( 75,032) ( 37,482)
Income tax benefit (expense) 37,284 ( 21,988)
--------------- ---------------
Income (loss) before extraordinary item $( 119,012) $ 6,120
=============== ===============
</TABLE>
(a) - Includes long-lived asset impairment charges of $120,400,000 and
$22,865,000 in the Natural Resources and Industrial and Other Products
Groups, respectively.
(b) - Excludes interest expense incurred by the Homebuilding and Related
Financing Group of $96,747,000 in 1996 and $94,564,000 in 1995. The
balance of unallocated expenses consisting of unallocated interest,
corporate expenses and Chapter 11 costs in 1995 are attributable to all
groups and cannot be reasonably allocated to specific groups.
(c) - Includes amortization of excess of purchase price over net assets
acquired (goodwill) of $29,479,000 in 1996 and $30,270,000 in 1995. A
breakdown by segment is as follows:
<TABLE>
<CAPTION>
Nine months ended
-----------------
February 29, 1996 February 28, 1995
----------------- -----------------
(in thousands)
<S> <C> <C>
Homebuilding and related financing $ 23,229 $ 24,042
Water and waste water transmission products 9,168 9,134
Natural resources ( 997) ( 993)
Industrial and other products 1,974 1,967
Corporate ( 3,895) ( 3,880)
---------- ----------
$ 29,479 $ 30,270
========= ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company emerged from bankruptcy on March 17, 1995. Accordingly, the
Company's Consolidated Statement of Operations for the three months and nine
months ended February 29, 1996 are not comparable to the Consolidated Statement
of Operations for the periods ended February 28, 1995.
The following unaudited pro forma consolidated statement of operations for the
three months and nine months ended February 28, 1995 have been prepared to
illustrate the estimated effects of the Consensual Plan and related financings
as if they had occurred as of June 1, 1994. This discussion should be read in
conjunction with such pro forma consolidated statement of operations and the
consolidated financial statements and notes thereto of Walter Industries, Inc.
and subsidiaries for the three months and nine months ended February 29, 1996,
particularly Note 9 - "Segment Information" which presents sales and operating
income by operating group.
Pro Forma Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended February 28, 1995
--------------------------------------------
As Reported Adjustments Pro Forma
----------- ----------- ---------
(in thousands except
per share amount)
<S> <C> <C>
Sales and revenues
Net sales $ 271,870 $ 271,870
Time charges 53,347 53,347
Miscellaneous 11,576 11,576
Interest income from Chapter 11 proceedings 1,898 $( 1,898)1 --
------------ ------------ ------------
338,691 ( 1,898) 336,793
------------ ------------ ------------
Cost and expenses:
Cost of sales 221,074 221,074
Depreciation, depletion and amortization 18,407 18,407
Selling, general and administrative 33,843 33,843
Postretirement health benefits 6,442 6,442
Provision for possible losses 956 956
Chapter 11 costs 7,800 ( 7,800)2 --
Interest and amortization of debt discount
and expense 34,994 19,938 3 54,932
Amortization of excess of purchase price
over net assets acquired 9,386 9,386
------------ ------------ ------------
332,902 12,138 345,040
------------ ------------ ------------
5,789 (14,036) ( 8,247)
Income tax benefit (expense) ( 6,022) 5,324 4 ( 698)
------------ ------------ ------------
Net loss $ (233) $ (8,712) $ (8,945)
============ ============ ============
Net loss per share $( .18)5
50,988,626
Weighted average shares outstanding
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended February 28, 1995
-------------------------------------------
As Reported Adjustments Pro Forma
----------- ----------- ---------
(in thousands except
per share amount)
<S> <C> <C> <C>
Sales and revenues
Net sales $ 848,717 $ 848,717
Time charges 165,905 165,905
Miscellaneous 23,047 23,047
Interest income from Chapter 11 proceedings 4,992 $( 4,992)1
------------ ------------ ------------
1,042,661 ( 4,992) 1,037,669
------------ ------------ ------------
Cost and expenses:
Cost of sales 682,930 682,930
Depreciation, depletion and amortization 53,094 53,094
Selling, general and administrative 97,814 97,814
Postretirement health benefits 19,524 19,524
Provision for possible losses 3,422 3,422
Chapter 11 costs 19,752 ( 19,752)2 --
Interest and amortization of debt discount
and expense 107,747 58,970 3 166,717
Amortization of excess of purchase price
over net assets acquired 30,270 -- 30,270
------------ ------------ ------------
1,014,553 39,218 1,053,771
------------ ------------ ------------
28,108 ( 44,210) ( 16,102)
Income tax benefit (expense) ( 21,988) 16,767 4 ( 5,221)
------------ ------------ ------------
Net income (loss) $ 6,120 $ (27,443) $ (21,323)
============ ============ ============
Net loss per share $( .42)5
50,988,626
Weighted average shares outstanding
</TABLE>
- ----------
Changes from the historical financial statements in the pro forma consolidated
statement of operations consist of the following adjustments (all amounts in
thousands):
(1) Interest income from Chapter 11 proceedings of $1,898 in the three month
period and $4,992 in the nine month period, which would not have been
realized assuming the Consensual Plan became effective June 1, 1994, have
been eliminated.
(2) Chapter 11 costs of $7,800 in the three month period and $19,752 in the
nine month period, 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 increased
$19,938 in the three month period and $58,970 in the nine month period to
give retroactive effect as if all indebtedness to be repaid pursuant to
the Consensual Plan was so done as of June 1, 1994 and the $490 million of
Series B Senior Notes had been outstanding for the full three months and
nine months ended February 28, 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 Mid-State
Trust V Variable Funding Loan Agreement were based on 78% of Jim Walter
Homes' credit sales during the three month period December 1, 1994 through
February 28, 1995. This time period is subsequent to the Mid-State Trust
IV cut off date for purchases of instalment notes from Mid-State Homes. No
working capital borrowings were assumed under the Bank Revolving Credit
Facility. Pro forma interest expense, however, includes letter of credit
fees and unused working capital commitment fees.
(4) The provision for income taxes has been adjusted at the applicable
statutory rates to give effect to the pro forma adjustments described
above.
(5) Net loss per share has been computed based on the weighted average number
of common shares outstanding.
<PAGE>
Results of Operations
Three months ended February 29, 1996 and February 28, 1995
- ----------------------------------------------------------
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 three months ended February 29, 1996 as a result of significant adverse
changes in the results of operations during fiscal 1996, principally in the
Natural Resources Group as a result of a fire due to the unexpected recurrence
of spontaneous combustion heatings at Jim Walter Resources' Blue Creek Mine No.
5 ("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 a potential impairment of fixed assets within the
Natural Resources Group. 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 $143.3
million before tax ($101.1 million after tax) of which a $120.4 million write
down of fixed assets ($78.2 million after tax) to estimated fair market values
was recorded in the Natural Resources Group and a $22.9 million write off of
excess purchase price over net assets acquired ("goodwill") was recorded in the
Industrial and Other Products Group. Adoption of this standard has no impact on
cash flow. (See Note 3 of Notes to Consolidated Condensed Financial Statements.)
Net sales and revenues for the three months ended February 29, 1996 decreased
$7.7 million, or 2.3%, from the prior year period (on a pro forma basis). The
lower performance resulted from a 6.0% decrease in volume, partially offset by a
3.7% increase in pricing and/or product mix. All operating groups except
Homebuilding and Related Financing experienced a decline in sales and revenues.
Homebuilding and Related Financing sales and revenues were $1.1 million, or
1.1%, greater than the prior year period. This performance reflects a 3.9%
increase in the average net selling price per home sold from $41,200 in the 1995
period to $42,800 in the 1996 period, partially offset by a 10.3% decrease in
the number of homes sold from 991 units in 1995 to 889 units in 1996. The higher
average net selling price reflects a greater percentage of "90% complete" home
sold in the current year period and a price increase instituted February 1, 1995
to compensate for higher building material costs. The decrease in unit sales
reflects continuing strong competitive conditions in virtually every Jim Walter
Homes sales region. The relatively low mortgage interest rate environment and
the higher availability of mortgage financing for home buyers in recent years
have adversely affected Jim Walter Homes' sales volumes. In December 1995 Jim
Walter Homes reduced its financing rate to 8.5% from 10.0% for its "90%
complete" homes on a trial basis in an effort to generate additional unit sales.
Jim Walter Homes' backlog at February 29, 1996 was 1,700 units compared to 1,529
units at May 31, 1995 and 1,678 units at February 28, 1995. Time charge income
(revenues received from Mid-State Homes' instalment note portfolio) increased
from $53.3 million in the 1995 period to $56.5 million in the 1996 period. The
increase in time charge income is attributable to increased payoffs received in
advance of maturity and to an increase in the average balance per account in the
portfolio, partially offset by a reduction in the total number of accounts.
Operating income of $13.8 million (net of interest expense) was $4.6 million
greater than the prior year period. This performance was due principally to the
higher time charge income and improved homebuilding gross profit margins
<PAGE>
reflecting the higher average net selling prices per home sold and lower lumber
costs, partially offset by the lower number of homes sold.
Water and Waste Water Transmission Products Group sales and revenues were $3.4
million, or 4.2%, below the prior year period . The decrease was the result of
lower sales volumes for ductile iron pressure pipe, fittings and castings,
partially offset by higher selling prices. Sales volumes were negatively
impacted by severe winter weather conditions and delays in infrastructure
spending for planned water and sewer pipeline projects due to the federal
government's ongoing budget debate and lack of action on key legislation. The
order backlog at February 29, 1996 was 126,893 tons which represents
approximately three months shipments compared with 121,548 tons at May 31, 1995
and 158,251 tons at February 28, 1995. The Group incurred a $4.7 million loss in
the 1996 period compared to a $1.4 million loss in the 1995 period. This
performance was the result of the lower sales volumes and higher manufacturing
costs, partially offset by the increased selling prices.
Natural Resources Group sales and revenues were $4.1 million, or 4.7%, below the
prior year period. The decrease reflects lower sales volumes for coal and lower
outside coal and gas royalty income, partially offset by higher average selling
prices for coal and methane gas and greater methane gas sales volume. In
addition, the Group realized a $3.5 million gain from the sale of excess real
estate in the current year period as compared to a $6.1 million gain in the 1995
period. A total of 1.70 million tons of coal was sold in the 1996 period versus
1.89 million tons in the 1995 period, a 10% decrease. The decrease in tonnage
sold was the result of lower shipments to Japanese steel mills and certain
export customers, partially offset by slightly higher shipments to Alabama Power
Company ("Alabama Power"). The average price per ton of coal sold increased
$3.29 from $39.86 in the 1995 period to $43.15 in the 1996 period due to higher
prices realized on shipments to Alabama Power and certain export customers. Mine
No. 5 was shut down from November 17, 1993 through December 16, 1993 and from
early April 1994 until May 16, 1994 as a result of a fire due to spontaneous
combustion heating. Representatives of Jim Walter Resources, the Mine Safety and
Health Administration, Alabama State Mine Inspectors and the United Mine Workers
of America agreed that the longwall coal panel being mined in Mine No. 5 at the
time the fire recurred in April 1994 would be abandoned and sealed off.
Development mining for the two remaining longwall coal panels in this section of
the mine resumed on May 16, 1994 and mining on the first longwall panel resumed
on January 17, 1995. Production was adversely impacted until such date; however,
a portion of the increased costs is expected to be recovered from business
interruption insurance and the Company has commenced litigation seeking to
enforce such insurance with the non-settling insurance companies. In late
November 1995 Mine No. 5 experienced another fire due to an unexpected
recurrence of spontaneous combustion heatings and the mine was shut down.
Efforts to contain and extinguish the fire were successful; however, conditions
dictated the mine be shut down for several weeks. The affected coal panels on
the western side of the mine have been sealed off and development work is
underway on the eastern side of Mine No. 5. Longwall production on the east side
is expected to commence in the Spring of 1997. Jim Walter Resources' three other
mines remain in full production. The Group incurred a $130.9 million operating
loss in the 1996 period as compared to operating income of $10.9 million in the
1995 period. The lower performance reflects the $120.4 million FASB 121 write
down of fixed assets at two coal mines to estimated fair market values (see Note
3 of Notes to Consolidated Condensed Financial Statements), firefighting and
idle plant expenses of $14 million, the decrease in coal sales volumes, reduced
outside coal and gas royalty income, a lower gain realized from the sale of
excess real estate in the 1996 period versus the
<PAGE>
1995 period and lower productivity due to geological problems which resulted in
higher costs per ton of coal produced ($38.91 in the 1996 period versus $37.30
in the 1995 period), partially offset by the higher average selling prices for
coal and methane gas and the greater methane gas sales volume.
Industrial and Other Products Group sales and revenues were below the prior year
period by $1.5 million, or 2.2%. The decrease principally resulted from lower
sales volumes of window components, metal building and foundry products, furnace
coke and chemicals, combined with lower selling prices for aluminum sheet
products, partially offset by higher selling prices for furnace and foundry coke
and increased patterns and tooling sales volumes. The Group's operating loss in
the 1996 period was $21.2 million, as compared to a $266,000 loss in the 1995
period. The lower performance was the result of the $22.9 million FASB 121 write
off of goodwill, substantially all of which was at JW Window Components (see
Note 3 of Notes to Consolidated Condensed Financial Statements), and lower gross
profit margins for metal building and foundry products, partially offset by
increased income from aluminum foil and sheet products, furnace and foundry
coke, resin coated sand and patterns and tooling.
Cost of sales, exclusive of depreciation, of $229.4 million was 87.2% of net
sales in the 1996 period versus $221.1 million and 81.3% in the 1995 period. The
cost of sales percentage increase was primarily the result of lower gross profit
margins for pipe products and metal building and foundry products, combined with
firefighting and idle plant costs principally associated with the fire at Mine
No. 5. These increases were partially offset by improved profit margins on home
sales, aluminum foil and sheet products, furnace and foundry coke, resin coated
sand and patterns and tooling.
Selling, general and administrative expenses of $34.3 million were 10.4% of net
sales and revenues in the 1996 period versus $33.8 million and 10.0% in the 1995
period.
Interest and amortization of debt discount and expense was $52.0 million in the
1996 period versus $54.9 million, on a pro forma basis, in the 1995 period,
reflecting lower average outstanding debt balances. The prime interest rate
ranged from 8.25% to 8.75% in the 1996 period compared to a range of 8.5% to
9.0% in the 1995 period.
The Company's effective tax rate in the 1996 period and on a pro forma basis in
the 1995 period differed substantially from the statutory tax rate due primarily
to amortization of goodwill and the FASB 121 write off of goodwill of $22.9
million ( in the 1996 period) which are not deductible for tax purposes.
On January 22, 1996, the Company completed a $550 million financing with a
syndicate of banks led by NationsBank National Association (South). The
financing consisted of a $365 million revolving credit facility, a six-year $125
million term loan and a $60 million seven-year term loan (collectively the
"Credit Facilities"). Proceeds from the financing, together with $75 million
drawn under the Mid-State Trust V Variable Funding Loan Agreement, were used to
redeem in full $490 million aggregate amount of 12.19% 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 incurred in
connection with the Company's emergence from bankruptcy in March 1995. The
Company recorded an extraordinary loss of $8.3 million ($5.4 million net of
income tax benefit) consisting of a redemption
<PAGE>
premium and write off of deferred financing costs related to the early repayment
of the Senior Notes and the $150 million bank credit facility. (See Note 4 of
Notes to Consolidated Condensed Financial Statements.)
The net loss for the three months ended February 29, 1996 was $123.6 million
compared to a net loss of $8.9 million, on a pro forma basis, in the 1995 period
reflecting all of the previously mentioned factors.
Nine months ended February 29, 1996 and February 28, 1995
- ---------------------------------------------------------
Net sales and revenues for the nine months ended February 29, 1996 increased
$49.8 million, or 4.8%, over the prior year period (on a pro forma basis), with
a 3.0% increase in pricing and/or product mix and a 1.8% increase in volume. The
increase in net sales and revenues was the result of improved sales and revenues
in the Water and Waste Water Transmission Products, Natural Resources and
Industrial and Other Products Groups, partially offset by lower sales and
revenues in the Homebuilding and Related Financing Group.
Water and Waste Water Transmission Products Group sales and revenues were $11.1
million, or 3.8%, ahead of the prior year period. The increase was the result of
higher sales prices and volumes for ductile iron pressure pipe and increased
sales prices for fittings and castings, partially offset by lower sales volumes
for fittings and castings. Operating income of $11.5 million was $1.6 million
below the prior year period. The lower performance resulted from the higher raw
material costs, especially scrap iron and alloys which are major raw material
components, partially offset by the higher sales prices and increased volume.
Natural Resources Group sales and revenues exceeded the prior year period by
$35.2 million, or 14.9%. The increase resulted from greater sales volumes for
coal and methane gas, a higher average selling price for coal, higher outside
gas and timber royalty income and a $3.7 million gain (in the 1996 period) from
the sale of gas royalty interests in certain mineral properties. These increases
were partially offset by a lower gains realized on the sale of excess real
estate in the 1996 period ($5.8 million) versus last year ($6.1 million). A
total of 5.64 million tons of coal was sold in the 1996 period versus 4.99
million tons in the 1995 period, a 13% increase. The increase in tonnage sold
was the result of greater shipments to certain export customers, partially
offset by lower shipments to Alabama Power and Japanese steel mills. The average
price per ton of coal sold increased $.67 from $41.99 in the 1995 period to
$42.66 in the 1996 period due principally to higher prices realized on shipments
to certain export customers. As previously mentioned, Mine No. 5 was shut down
from November 17, 1993 through December 16, 1993 and from early April 1994 until
May 16, 1994 as a result of a fire due to spontaneous combustion heating.
Representatives of Jim Walter Resources, the Mine Safety and Health
Administration, Alabama State Mine Inspectors and the United Mine Workers of
America agreed that the longwall coal panel being mined in Mine No. 5 at the
time the fire recurred in April 1994 would be abandoned and sealed off.
Development mining for the two remaining longwall coal panels in this section of
the mine resumed on May 16, 1994 and mining on the first longwall panel resumed
on January 17, 1995. Production was adversely impacted until such date; however,
a portion of the increased costs is expected to be recovered from business
interruption insurance and the Company has commenced litigation seeking to
enforce such insurance with the non-
<PAGE>
settling insurance companies. In late November 1995 Mine No. 5 experienced
another fire due to the unexpected recurrence of spontaneous combustion heatings
and the mine was shut down. Efforts to contain and extinguish the fire were
successful; however, conditions dictated the mine be shut down for several
weeks. The affected coal panels on the western side of the mine have been sealed
off and development work is underway on the eastern side of Mine No. 5. Longwall
production on the east side is expected to commence in the Spring of 1997. Jim
Walter Resources' three other mines remain in full production. The Group
incurred an operating loss of $117.8 million in the 1996 period as compared to
operating income of $14.9 million the 1995 period. The lower performance
reflects the $120.4 million FASB 121 write down of fixed assets to estimated
fair market values at two coal mines (see Note 3 of Notes to Consolidated
Condensed Financial Statements), firefighting and idle plant costs of $16
million principally associated with the fire at Mine No. 5 and lower gains
realized in the current year from sales of excess real estate, partially offset
by the increased sales volumes of coal and methane gas, the higher average sales
price for coal, higher gas and timber royalty income, the $3.7 million gain (in
the 1996 period) from the sale of certain gas royalty interests and slightly
better mining productivity which resulted in lower costs per ton of coal
produced ($37.64 in the 1996 period versus $39.29 in the 1995 period).
Industrial and Other Products Group sales and revenues were $4.0 million, or
2.0%, greater than the prior year period. Increased selling prices for furnace
coke, aluminum foil and sheet products, window components and metal building and
foundry products combined with greater sales volumes of furnace and foundry
coke, resin coated sand and patterns and tooling were partially offset by
reduced sales volumes of window components, aluminum sheet and foil products and
metal building and foundry products. The Group's operating loss in the 1996
period was $16.2 million as compared to operating income of $3.4 million in the
1995 period. This performance reflects the $22.9 million FASB 121 write off of
goodwill (see Note 3 of Notes to Consolidated Condensed Financial Statements)
and the window components business experiencing lower sales volume, higher raw
material costs and reduced efficiencies due to prolonged start up problems
associated with the consolidation and relocation of the Hialeah, Florida and
Columbus, Ohio operations to Elizabethton, Tennessee. These decreases were
partially offset by increased margins from aluminum sheet and foil products,
furnace coke, resin coated sand and patterns and tooling due to the sales volume
and price increases.
Homebuilding and Related Financing Group sales and revenues were $1.7 million,
or 0.6%, below the prior year period. This performance reflects a 9.8% decrease
in the number of homes sold, from 3,138 units in the 1995 period to 2,830 units
in the 1996 period, partially offset by a 4.7% increase in the average net
selling price per home sold from $39,900 in 1995 to $41,800 in 1996. The
decrease in unit sales resulted from extremely competitive conditions in
virtually every Jim Walter Homes sales region. The relatively low mortgage
interest rate environment and higher availability of mortgage financing for home
buyers in recent years have adversely affected Jim Walter Homes' sales volumes.
In December 1995 Jim Walter Homes reduced its financing rate to 8.5% from 10%
for its "90% complete" homes on a trial basis in an effort to generate
additional unit sales. The higher average selling price reflects a greater
percentage of "90% complete" homes sold in the current year period and a price
increase instituted February 1, 1995 to compensate for higher building material
costs. Time charge income (revenues received from Mid-State Homes' instalment
note portfolio) increased from $165.9 million in the 1995 period to $168.4
million in the 1996 period. The increase is attributable to increased payoffs
received in advance of maturity and to an increase in the average
<PAGE>
balance per account in the portfolio, partially offset by a reduction in the
total number of accounts. Operating income of $41.3 million (net of interest
expense) was $7.1 million greater than the prior year period. This performance
was due to the higher time charge income and improved homebuilding gross profit
margins resulting from the higher average net selling price per home sold and
lower lumber costs, partially offset by the lower number of homes sold and
higher interest expense in the 1996 period ($96.7 million) as compared to that
incurred in the 1995 period ($94.6 million).
Cost of sales, exclusive of depreciation, of $729.0 million was 81.9% of net
sales in the 1996 period versus $682.9 million and 80.5% in the 1995 period. The
cost of sales increase was primarily the result of lower gross profit margins
for pipe products, window components and metal building and foundry products
combined with the firefighting and idle plant costs principally associated with
the fire at Mine No. 5. These increases were partially offset by improved profit
margins on home sales, aluminum foil and sheet products, furnace coke, resin
coated sand and patterns and tooling.
Selling, general and administrative expenses of $100.9 million were 9.3% of net
sales and revenues in the 1996 period versus $97.8 million and 9.4% in the 1995
period.
Interest and amortization of debt discount and expense was $161.5 million in the
1996 period versus $166.7 million, on a pro forma basis, in the 1995 period
principally reflecting lower outstanding debt balances. The prime interest rate
ranged from 8.25% to 9.0% in the 1996 period compared to a range of 7.25% to
9.0% in the 1995 period.
The Company's effective tax rate in the 1996 period and on a pro-forma basis in
the 1995 period differed substantially from the statutory tax rate due primarily
to amortization of goodwill and the FASB 121 write off of goodwill of $22.9
million ( in the 1996 period) which are not deductible for tax purposes.
As previously discussed, on January 22, 1996, the Company completed a $550
million financing with a syndicate of banks led by NationsBank National
Association (South). Proceeds from the financing were used to redeem the Senior
Notes and replace an existing $150 million bank credit facility, both incurred
as a result of the Company's emergence from bankruptcy in March 1995. The
Company recorded an extraordinary loss of $8.3 million ($5.4 million net of
income tax benefit) consisting of a redemption premium and write off of deferred
financing costs related to the early repayment of the Senior Notes and the $150
million bank credit facility. (See Note 4 of Notes to Consolidated Condensed
Financial Statements.)
The net loss for the nine months ended February 29, 1996 was $124.4 million
compared to a net loss of $21.3 million, on a pro forma basis, in the 1995
period reflecting all of the previously mentioned factors.
Financial Condition
On December 27, 1989, the Company and 31 of its subsidiaries each filed a
voluntary petition for reorganization under Chapter 11 with the Bankruptcy
Court. On December 3, 1990, one additional small subsidiary also filed a
voluntary petition for reorganization under Chapter 11 with the
<PAGE>
Bankruptcy Court. Two other small subsidiaries did not file petitions for
reorganization under Chapter 11. The filing of the voluntary petitions resulted
from a sequence of events stemming primarily from an inability of the Company's
interest reset advisors to reset interest rates on approximately $624 million of
outstanding indebtedness, which indebtedness by its terms required that the
interest rates thereon be reset to the rate per annum such indebtedness should
bear in order to have a bid value of 101% of the principal amount thereof as of
December 2, 1989. The reset advisors' inability to reset the interest rates was
primarily attributable to two factors: (i) uncertainties arising from the then
pending asbestos-related veil piercing litigation, including the possibility
either that such litigation would lead to the prohibition of further asset sales
and debt repayment or that substantial new asbestos-related claims might become
assertible against the Company, which uncertainties materially hindered the
ability of the Company and its subsidiaries to pursue a refinancing or sell
assets to reduce debt, and (ii) general turmoil in the high yield bond markets
at such time, both of which depressed the bid value of such notes.
On March 17, 1995, the Company and its subsidiaries emerged from bankruptcy.
Pursuant to the Consensual Plan, the Company has repaid substantially all of its
unsecured claims and senior and subordinated indebtedness subject to the Chapter
11 reorganization proceedings.
A substantial controversy exists with regard to federal income taxes allegedly
owed by the Company. Proofs of claim have been filed by the Internal Revenue
Service in the amounts of $110,560,883 with respect to fiscal years ended August
31, 1980 and August 31, 1983 through August 31, 1987, $31,468,189 with respect
to fiscal years ended May 31, 1988 (nine months) and May 31, 1989 and
$44,837,693 with respect to fiscal years ended May 31, 1990 and May 31, 1991.
Objections to the proofs of claim have been filed by the Company and the various
issues are being litigated in the Bankruptcy Court. The Company believes that
such proofs of claim are substantially without merit and intends to defend such
claims against the Company vigorously.
Since May 31, 1995, total debt has decreased $7.8 million resulting from
redemption of the Senior Notes ($490.0 million), early repayments on the Credit
Facilities debt ($20.0 million), quarterly principal payments on the Mid-State
Trust II Mortgage-Backed Notes ($65.3 million), Mid-State Trust III Asset Backed
Notes ($19.4 million) and Mid-State Trust IV Asset Backed Notes ($37.5 million)
and scheduled retirements of other long-term debt ($.6 million), partially
offset by the issuance of long-term debt from the Credit Facilities financing
($450.0 million) and the Mid-State Trust V Variable Funding Loan Agreement
($175.0 million).
The Credit Facilities contain a $365 million revolving credit facility which
includes a sub-facility for trade and other standby letters of credit in an
amount up to $40 million at any time outstanding and a sub-facility for
swingline advances in an amount not in excess of $15 million at any time
outstanding. At February 29, 1996, $21.3 million of letters of credit were
outstanding under this facility.
The Credit Facilities and the Mid-State Trust V Variable Funding Loan Agreement
contain a number of significant covenants that, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
additional indebtedness, pay dividends, create liens on assets, enter into
leases, make investments or acquisitions, engage in mergers or consolidations or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities
<PAGE>
(including change of control and asset sale transactions). In addition, under
the Credit Facilities, the Company is required to maintain specified financial
ratios and comply with certain financial tests, including interest coverage,
fixed charge coverage ratios and maximum leverage ratios, some of which become
more restrictive over time. The Company believes it will meet these financial
tests over the terms of these debt agreements.
Liquidity and Capital Resources
At February 29, 1996, cash and short-term investments, net of bank overdrafts
were approximately $50.7 million. Operating cash flows for the nine months ended
February 29, 1996 together with proceeds from the Credit Facilities financing,
issuance of long-term debt under the Mid-State Trust V Variable Funding Loan
Agreement and the use of available cash balances were primarily used for working
capital requirements, payment of liabilities resulting from the Chapter 11
reorganization and previously accrued in the fiscal year ended May 31, 1995,
retirement of long-term senior debt, interest payments and capital expenditures.
Working capital is required to fund adequate levels of inventories and accounts
receivable. Commitments for capital expenditures at February 29, 1996 are not
material; however, it is estimated that gross capital expenditures of the
Company and its subsidiaries for the balance of the year ending May 31, 1996
will approximate $28 million.
Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, the level of construction, current results
should not necessarily be used to predict the Company's liquidity, capital
expenditures, investment in instalment notes receivable or results of
operations. The Company believes that the Mid-State Trust V Variable Funding
Loan Agreement will provide Mid-State Homes with the funds needed to purchase
the instalment notes and mortgages generated by Jim Walter Homes. It is
contemplated that one or more permanent financings similar to the Mid-State
Trusts II, II and IV financings will be required over the next several years to
repay borrowings under the Mid-State Trust V Variable Funding Loan Agreement.
The Company believes that under present operating conditions sufficient
operating cash flow will be generated to make all required interest and
principal payments and planned capital expenditures and meet substantially all
operating needs and that amounts available under the Credit Facilities will be
sufficient to meet peak operating needs.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 7 of Notes to Consolidated Condensed Financial Statements
contained in Part I - Financial Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 11 - Earnings per share calculation for the three months and
nine months ended February 29, 1996 Exhibit 27 - Financial Data
Schedule
(b) Reports on Form 8-K - The Company filed a report on Form 8-K dated
January 22, 1996 under Item 5 - "Other Events" and Item 7 -
"Exhibits" that contained information with respect to the Company's
completion of a $550 million bank financing led by NationsBank
National Association (South).
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALTER INDUSTRIES, INC.
/s/ W. H. Weldon /s/ F. A. Hult
----------------------------- -------------------------
W. H. Weldon F. A. Hult
Executive Vice President and Vice President and Controller and
Principal Financial Officer Principal Accounting Officer
Date:
Exhibit 11
WALTER INDUSTRIES, INC.
NET LOSS PER SHARE CALCULATION
(in thousands, except per share amount)
<TABLE>
<CAPTION>
Three months ended Nine months ended
February 29, 1996 February 29, 1996
----------------- -----------------
Dollars Shares Dollars Shares
------- ------ ------- ------
<S> <C> <C> <C> <C>
Loss before extraordinary item $(118,159) $(119,012)
Weighted average shares of
Common Stock outstanding (a) 50,989 50,989
====== ======
Per share loss before extraordinary item $(2.32) $(2.34)
Extraordinary item - loss on debt repayment (5,404) (5,404)
Per share loss from extraordinary item ( .10) ( .10)
-------- ----------
Net loss $(123,563) $(124,416)
========= ------ ========== ------
Per share $(2.42) $(2.44)
====== ======
(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 management's opinion, per share information for the three months ended and
nine months ended February 28, 1995 is not relevant given the significant change
in the Company's capital structure which occurred as a result of the Company's
reorganization pursuant to the Consensual Plan (see Note 1 of Notes to
Consolidated Condensed Financial Statements included in Part I - Financial
Information).
</TABLE>
<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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 66,749
<SECURITIES> 157,304
<RECEIVABLES> 1,624,849
<ALLOWANCES> (34,497)
<INVENTORY> 202,524
<CURRENT-ASSETS> 0<F1>
<PP&E> 866,908
<DEPRECIATION> (337,426)
<TOTAL-ASSETS> 3,019,911
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,212,608
<COMMON> 549
0<F1>
0<F1>
<OTHER-SE> 235,807
<TOTAL-LIABILITY-AND-EQUITY> 3,019,911
<SALES> 889,603
<TOTAL-REVENUES> 1,087,426
<CGS> 729,013
<TOTAL-COSTS> 157,531
<OTHER-EXPENSES> 193,114
<LOSS-PROVISION> 2,613
<INTEREST-EXPENSE> 161,451
<INCOME-PRETAX> (156,296)
<INCOME-TAX> (37,284)
<INCOME-CONTINUING> (119,012)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> (5,404)<F1>
<CHANGES> 0<F1>
<NET-INCOME> (124,416)
<EPS-PRIMARY> (2.44)
<EPS-DILUTED> 0 <F1>
<FN>
<F1>This line item is not presented on the Consolidated Financial Statements.
</FN>
</TABLE>
