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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended May 31, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 000-20537
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WALTER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 13-3429953
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1500 NORTH DALE MABRY HIGHWAY 33607
TAMPA, FLORIDA (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (813) 871-4811
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.01 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant, based on the closing price of the Common Stock on August 10, 1998 as
reported by the New York Stock Exchange, was approximately $650.7 million.
Indicate by check mark 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 10, 1998:
53,597,060
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders of the Company to be held October 8, 1998 are incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(a) Narrative Description of Business and Properties
General
The Company is a diversified holding company with five operating segments:
Homebuilding and Financing, Water Transmission Products, Natural Resources,
Industrial Products and Energy Services. The operations of the Company are
carried out by its operating subsidiaries, the business and properties of which
are described below.
(b) Industry Segments
The Company's industry segment information for the last three fiscal years
is included in Note 15 to Consolidated Financial Statements, on pages F-29
through F-31 included herein.
(c) Certain Chapter 11 Matters
Beginning in early 1989, Walter Industries, Inc. (the "Company" or "Walter
Industries") and certain of its officers, directors and stockholders 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
asbestos-related 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 of Celotex and that the distribution by HAC of substantially all of
its assets to the Company pursuant to the LBO was a fraudulent conveyance (the
"Veil-Piercing Suits").
On December 27, 1989, the Company and certain of its subsidiaries filed for
protection under the United States Bankruptcy Code in the 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 in October 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"). The
Consensual Plan binds all known and unknown claimants and enjoins such persons
or entities from bringing any suit against the Company in the future for
asbestos or LBO related claims.
In March 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
alleged 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 that included
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and an injunction issued pursuant to Section 524(g) of the Bankruptcy Code.
Although all veil-piercing claims by Asbestos Claimants were resolved as part of
the Consensual Plan, the Company believes that Section 524(g) affords additional
statutory protection to the Company against the possibility of such claims in
the future. On May 28, 1996, the Bankruptcy Court issued an order granting in
part the Company's motion for summary judgment finding, among other things, that
the plan of reorganization filed by Celotex in its Chapter 11 proceeding did not
comply with the terms of the Veil-Piercing Settlement.
In October 1996, Celotex and various other parties in the Celotex bankruptcy
announced to the court in the Celotex bankruptcy (the "Celotex Bankruptcy
Court") that an agreement had been reached between Celotex and each of its
creditor groups pursuant to a Modified Joint Plan of Reorganization (the
"Celotex Modified Plan") which, among other things, superseded and replaced all
prior plans. The Celotex Modified Plan contains a provision for a Section 524(g)
injunction as to all asbestos claimants. The Celotex Modified Plan was approved
by a vote of the Celotex creditors and in December 1996 the Celotex Bankruptcy
Court entered an Order confirming the Celotex Modified Plan. The Celotex
Modified Plan became effective as of May 30, 1997. The May 1996 Order of the
Bankruptcy Court and the Order confirming the Celotex Modified Plan are now
final and not appealable.
HOMEBUILDING AND FINANCING
Jim Walter Homes
Jim Walter Homes, Inc. and its affiliates ("Jim Walter Homes"),
headquartered in Tampa, Florida, markets and supervises the construction of
detached, single-family residential homes, primarily in the Southern United
States where the weather permits year-round construction and provides mortgage
financing on such homes. Jim Walter Homes has concentrated on the low to
moderately priced segment of the housing market. In June 1997, the Company
increased its operations in Texas through the acquisition of Neatherlin Homes,
Inc. This acquisition also expanded the Company's product line to include larger
homes with more amenities. Over 329,000 homes have been completed by Jim Walter
Homes and its predecessor since 1946.
Jim Walter Homes' products consist of more than 30 models of conventionally
built homes, built of wood on concrete foundations or wood pilings, and ranging
in size from approximately 640 to 2,400 square feet. Each home is completely
finished on the outside and is unfinished on the inside except for rough floors,
ceiling joists, partition studding and closet framing. The buyer may elect to
purchase optional interior components, including installation thereof, such as
plumbing and electrical materials, heating and air conditioning, wallboard,
interior doors, interior trim and floor finishing. A buyer selecting all options
receives a home considered to be "90% complete", excluding landscaping and
utility connections. Shell homes are those which are completely finished on the
outside with the inside containing only rough floors, ceiling joists, partition
studding and closet framing, but not interior wallboard, floor finishing,
plumbing, electrical wiring and fixtures, doors and cabinetry. The remaining
units are sold at varying "in-between" stages of interior finishing. Jim Walter
Homes builds all of its homes "on site" and only after a building contract has
been entered into and Jim Walter Homes is satisfied that the customer has clear
title to the land and the site is suitable for building. The following chart
shows the unit sales volume of Jim Walter Homes and the percent of homes sold in
the three stages of completion for fiscal years ended May 31, 1998, 1997 and
1996.
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PERCENT OF UNIT SALES
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FISCAL YEAR ENDED MAY 31, UNITS BUILT SHELL VARIOUS STAGES 90% COMPLETE
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1998........................................................... 3,702 13% 7% 80%
1997........................................................... 3,900 10 1 89
1996........................................................... 3,760 18 4 78
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During the fiscal years 1998, 1997 and 1996 the average net sales price of a
home was $48,700, $47,500 and $42,300, respectively.
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Jim Walter Homes backlog as of May 31, 1998 was 1,883 units compared to
1,972 units at May 31, 1997. The average time to construct a home ranges from
four to twelve weeks.
At fiscal 1998 year end, Jim Walter Homes operated 116 branch offices
located in 19 states (Alabama, Arizona, Arkansas, Florida, Georgia, Indiana,
Kentucky, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia). In
addition, Jim Walter Homes serves five adjoining states (Delaware, Illinois,
Kansas, Maryland and Pennsylvania). Accordingly, these operations are not
subject to significant concentrations of credit risks. Of such branch offices,
approximately 79% are owned, with the balance on leased land. Substantially all
of these branch offices serve as "display parks" which are designed to allow
customers to view actual models completed to the various stages of interior
finishing available. Jim Walter Homes currently plans to open several new model
home parks in new markets in 1999. Jim Walter Homes intends to achieve growth
through internally driven geographic expansion and strategic acquisitions of
other homebuilders that enable the Company to (i) penetrate new geographic
markets, (ii) further develop existing markets and (iii) broaden its product
line.
Jim Walter Homes does not own or acquire land for purposes of its operations
and is not a land developer. The actual construction of all homes sold by Jim
Walter Homes is done by local building contractors with their own crews,
pursuant to subcontracts executed in connection with each home and inspected by
Jim Walter Homes' supervisory personnel. Jim Walter Homes maintains 32 regional
warehouses near each of its district offices from which a portion of the
necessary building materials may be obtained; the balance of building materials
is purchased locally.
Approximately 96% of the homes Jim Walter Homes sells are purchased with
financing it arranges. Jim Walter Homes offers qualified customers a fixed
interest rate mortgage without requiring a down payment and does not charge
add-ons such as closing costs, points, credit service fees or private mortgage
insurance.
Jim Walter Homes offers credit terms for up to a maximum of 30 years,
usually for 100% of the purchase price of the home and, currently, carry an 8.5%
"annual percentage rate". In December 1995, Jim Walter Homes reduced its
financing rate from 10% to 8.5% for its "90% complete" homes on a trial basis
and in March 1996 began formally advertising the lower rate. Jim Walter Homes
extended the 8.5% financing rate to the remainder of its product line ("shell"
and homes sold at various "in-between" stages of interior finishing) in the
fourth quarter of fiscal 1997. The 10% "annual percentage rate" had been in
effect since 1979.
To qualify for financing, a potential customer must provide information
concerning his or her monthly income and employment history as well as a legal
description of and evidence that the customer owns the land on which the home is
to be built. A customer's income and employment usually are verified through
telephone conversations with the customer's employer and by examining his or her
pay stubs, W2 forms or, if the customer is self-employed, income tax returns. An
applicant must have a minimum of one year's continuous employment or, if there
has been a change in employment, the new job must be in the same field of work.
Only a small percentage of secondary income (second jobs or part-time
employment) is utilized in qualifying applicants. Ownership of the land is
verified by examining the title record. In addition, Jim Walter Homes' credit
department obtains a credit report. Particular attention is paid to the credit
information for the most recent three to five years. Attention is also given to
the customer's total indebtedness and total other monthly payments on a
judgmental basis by the credit department. The customer's credit standing is
considered favorable if the employment history, income and credit report meet
the aforementioned criteria. If a favorable report is obtained and the required
monthly payment does not exceed 25% of the customer's monthly gross income, the
application usually is approved and a building or instalment sale contract is
executed, a title report is ordered and frequently a survey of the property is
made. Surveys are performed by independent registered surveyors when, in the
opinion of Jim Walter
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Homes, additional information beyond examination of the title record is needed.
Such additional information is primarily concerned with verification of legal
description, ownership of land and existence of any encroachments. Jim Walter
Homes does not obtain appraisals or title insurance. Although consideration is
given to the ratio of the amount financed to the estimated value of the home and
the land securing such amount, there is no explicit appraisal-based
loan-to-value test. However, there is a requirement that the value of the lot on
which the home is to be built, as estimated solely on the basis of Jim Walter
Homes' mortgage servicing division employees' experience and knowledge, be at
least equal to 10% of the cash selling price of the home.
The building and instalment sale contract is subject to (i) executing a
promissory note which is secured by a first lien on the land and the home to be
built, except in the State of Texas (ii) executing a mortgage, deed of trust,
mechanic's lien contract or other security instrument, (iii) receiving a
satisfactory title report, (iv) inspecting the land to determine that it is
suitable for building and (v) obtaining required permits. Although the
mortgages, deeds of trust and similar security instruments constitute a first
lien on the land and the home to be built, such security instruments are not
insured by the Federal Housing Administration, guaranteed by the Department of
Veterans Affairs or otherwise insured or guaranteed.
Prior to occupancy of the new home, the buyer must complete utility hook-ups
and any of the other components not purchased from Jim Walter Homes, arrange for
the final building inspection and, if required, obtain a certificate of
occupancy. The costs to complete a new home depends on the stage of completion
of the home purchased and whether public water and sewer systems are available
or wells and septic tanks must be installed. Such costs could range from
$2,000--$3,000 to $30,000--$40,000.
Upon completion of construction of a new home to the agreed-upon percentage
of completion, in the ordinary course of business pursuant to an Agreement of
Purchase and Sale of Instalment Obligations and Servicing of Delinquent
Accounts, Jim Walter Homes sells the building and instalment sale contract, the
note and the related mortgage, deed of trust or other security instrument to
Mid-State Homes, Inc. ("Mid-State Homes"), an indirect, wholly owned subsidiary
of the Company. Pursuant to this agreement, Jim Walter Homes provides servicing
on all delinquent payments, including collection of delinquent payments,
recommendations of foreclosure, foreclosure and resale of foreclosed properties.
Jim Walter Homes' business has tended to be countercyclical to national home
construction activity when interest rates are high. In times of high interest
rates and limited availability of mortgage funds that result in limited new home
construction, Jim Walter Homes' volume of home sales tends to increase due to
the favorable financing it has historically offered.
The single-family residential housing industry is highly competitive. Jim
Walter Homes competes in each of its market areas on the basis of price, design,
finishing options and accessibility to financing with numerous homebuilders
ranging from regional and national firms to small local companies. Jim Walter
Homes also competes with manufactured housing. Jim Walter Homes' strategy is to
compete in a specific segment of the housing market by offering customers
quality traditionally-built homes, at affordable prices with favorable financing
and no closing costs. For the calendar year 1997, Jim Walter Homes was the
twelfth largest builder of detached single-family homes in the United States
after having been the eleventh largest builder in 1996, the eighth largest
builder in 1995 and the sixth largest builder in 1994.
In the three years ended May 31, 1998, 1997 and 1996, Jim Walter Homes' net
sales and revenues amounted to $180.9 million, $185.7 million and $159.2
million, respectively.
Mid-State Homes
Mid-State Homes, headquartered in Tampa, Florida, was established in 1958 to
purchase and service mortgage instalment notes from Jim Walter Homes on homes
constructed and sold by Jim Walter Homes. Mid-State Trust II ("Trust II"),
Mid-State Trust III ("Trust III"), Mid-State Trust IV ("Trust IV"), Mid-State
Trust V ("Trust V") and Mid-State Trust VI ("Trust VI") are Delaware business
trusts organized by
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Mid-State Homes, which owns all of the beneficial interest in Trust III, Trust
IV, Trust V and Trust VI. Trust IV owns all of the beneficial interest in Trust
II.
In April 1988, Mid-State Homes sold to Trust II instalment notes and
mortgages which it had acquired from Jim Walter Homes through February 29, 1988
having a gross amount of approximately $3.376 billion and an aggregate
outstanding economic balance of approximately $1.750 billion pursuant to a
purchase and sales agreement, in exchange for a purchase price of $1.327
billion, representing the net cash proceeds from the public offering of $1.450
billion aggregate face amount of mortgage-backed notes ("Trust II
Mortgage-Backed Notes") of Trust II after paying the expenses associated with
the sale of such Trust II Mortgage-Backed Notes. The outstanding balance of such
Trust II Mortgage-Backed Notes at May 31, 1998 was $323.0 million. At May 31,
1998, such Trust II instalment notes and mortgages had a gross book value of
$784.6 million and an economic balance of $502.0 million.
Under the Trust II indenture for the Trust II Mortgage-Backed Notes, if
certain criteria as to performance of the pledged instalment notes are met,
Trust II is allowed to make quarterly distributions of cash to Trust IV, its
sole beneficial owner, to the extent that cash collections on such instalment
notes exceed Trust II's cash expenditures for its operating expenses, interest
expense and mandatory debt payments on its mortgage-backed notes. In addition to
the performance-based distributions, the indenture permits distribution of
additional excess funds, if any, provided such distributions are consented to by
Financial Security Assurance Inc., a monoline property and casualty insurance
company and the guarantor of the Trust II Mortgage-Backed Notes. As of May 31,
1998, the guarantor had not approved any distributions since the January 1, 1995
distribution and such excess funds of $106.9 million remained on deposit with
Trust II. In June 1998, an agreement was reached with Financial Security
Assurance Inc. to release approximately $121.6 million of funds held by Trust
II, which were subject to retention at July 1, 1998. Such funds were utilized to
pay down Trust IV indebtedness.
On July 1, 1992, mortgage instalment notes having a gross amount of $638.1
million and an economic balance of $296.2 million were sold by Mid-State Homes
to Trust III in exchange for the net proceeds from the public issuance by Trust
III of $249.9 million of asset-backed notes ("Trust III Asset Backed Notes").
Net proceeds were used to repay in full all outstanding indebtedness due under a
revolving credit facility, with the excess cash used to fund the ongoing
operations of the Company and its subsidiaries. The
outstanding balance at May 31, 1998 of such Trust III Asset Backed Notes was
$85.1 million. At May 31,1998, such Trust III instalment notes and mortgages had
a gross book value of $310.5 million and an economic balance of $171.1 million.
On March 16, 1995, mortgage instalment notes having a gross amount of $2.02
billion and an economic balance of $826.7 million were sold by Mid-State Homes
to Trust IV. In addition, on such date, Mid-State Homes sold its beneficial
interest in Trust II to Trust IV. Trust II had a total collateral value of
$910.5 million with $605.7 million of Trust II Mortgage-Backed Notes
outstanding. These sales were in exchange for the net proceeds from the public
issuance by Trust IV of $959.4 million of asset-backed notes ("Trust IV Asset
Backed Notes"). The outstanding balance at May 31, 1998 of such Trust IV Asset
Backed Notes was $774.0 million. At May 31, 1998, such Trust IV instalment notes
and mortgages had a gross book value of $1,416.8 million and an economic balance
of $635.7 million.
On February 27, 1995, Mid-State Homes established Trust V, a business trust
in which Mid-State Homes owns all of the beneficial interest, to provide
temporary financing to Mid-State Homes for its current purchases of instalment
notes and mortgages from Jim Walter Homes. On March 3, 1995, Trust V entered
into the three-year $500.0 million Variable Funding Loan Agreement (the "Trust
Variable Funding Loan Agreement") with Enterprise Funding Corporation, an
affiliate of NationsBank, as lender, and as Administrative Agent. The agreement
was amended to reduce the facility (the "Trust V Variable Funding Loan") to
$400.0 million effective July 31, 1997. The facility is an evergreen three-year
facility with periodic paydowns from the proceeds of permanent financings
similar to those done by Trusts II, III, IV and VI. The facility currently
matures on March 3, 2001. The outstanding Trust V Variable Funding Loan
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balance at May 31, 1998 was $218.0 million. At May 31, 1998, the Trust V
instalment notes and mortgages had a gross book value of $673.0 million and an
economic balance of $262.0 million.
On June 11, 1997, Mid-State Homes purchased mortgage instalment notes from
Trust V having a gross amount of $1.196 billion and an economic balance of
$462.3 million. Mid-State Homes subsequently sold such mortgage instalment notes
to Trust VI, a business trust organized by Mid-State Homes which owns all of the
beneficial interest in Trust VI. These sales were in exchange for the net
proceeds from the public issuance of $439.1 million of asset-backed notes
("Trust VI Asset Backed Notes"). The Trust VI Asset Backed Notes were issued in
four classes, bear interest at rates ranging from 7.34% to 7.79%, and have a
final maturity of July 1, 2035. Payments will be 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 VI expenses. Net proceeds
from the public offering were used primarily to pay down Trust V indebtedness of
$384.0 million. The outstanding balance on May 31, 1998 of such Trust IV Asset
Backed Notes, was $405.7 million. At May 31, 1998, such Trust IV instalment
notes and mortgages had a gross book value of $1,050.7 million and an economic
balance of $419.4 million.
The instalment notes sold by Mid-State Homes to Trusts II, III, IV, V and VI
are serviced by Mid-State Homes pursuant to servicing agreements entered into
with each trust. Mid-State Homes, in connection with such servicing agreements,
has entered into sub-servicing agreements with Jim Walter Homes to provide field
servicing such as collections, repossessions and resales.
On May 28, 1998, Mid-State Homes entered into a 364-day, $90.0 million Loan
and Security Agreement with Kitty Hawk Funding Corporation, an affiliate of
NationsBank, as a lender, and NationsBank, as agent and bank investor. Advances
under the Loan and Security Agreement are secured by Mid-State Homes' beneficial
interest in Trust III and evidenced by a variable funding note. The proceeds
from the borrowings outstanding at May 31, 1998 were used to pay down the
Revolving Credit Facility. Future proceeds will be used for general corporate
purposes. The facility currently matures on May 27, 1999, but provides for
extensions of the maturity through May 31, 2002. Accordingly, the $80.3 million
of borrowings outstanding at May 31, 1998 have been classified as long-term
debt. Principal payments are required on any day in which the outstanding
principal amount of all advances under the Loan and Security Agreement exceed
the borrowing base. Additionally, commencing on May 31, 2001, Mid-State Homes is
required to prepay $1.5 million on May 31, August 31, November 30 and February
28. The outstanding principal of all advances must be paid when the facility is
terminated. Interest must be paid on the last day of each tranche period at
either the commercial paper rate, the prime rate or the LIBOR rate plus .47% as
determined by Mid-State Homes and approved by the lender. The advances under the
Loan and Security Agreement are to be satisfied solely from the assets of
Mid-State Homes and are non-recourse to Walter Industries and any of its other
subsidiaries.
The assets of Mid-State Trusts II, III, IV and VI are not available to
satisfy claims of general creditors of Mid-State Homes or the Company and its
other subsidiaries. The liabilities of Mid-State Trusts II, III, IV and VI for
their publicly issued debt are to be satisfied solely from proceeds of the
underlying instalment notes and are non-recourse to Mid-State Homes and the
Company and its other subsidiaries.
The revenues of Mid-State Trusts II, III, IV, V and VI are required by
generally accepted accounting principles to be consolidated as part of Mid-State
Homes' revenues for financial statement purposes. In the three years ended May
31, 1998, 1997 and 1996 Mid-State Homes' revenues amounted to $262.6 million,
$249.4 million and $248.8 million, respectively.
Cardem Insurance
Cardem Insurance Co., Ltd. ("Cardem Insurance") is a Hamilton, Bermuda based
offshore reinsurance company. The predominant portion of its business is
reinsuring 75% of the risk on fire and extended coverage insurance policies
issued by Westchester Insurance Company, an unrelated insurance company. Such
insurance policies are with individual owners of homes constructed by Jim Walter
Homes. In the
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three years ended May 31, 1998, 1997 and 1996, Cardem Insurance's net sales and
revenues amounted to $12.1 million, $12.3 million and $13.1 million,
respectively.
WATER TRANSMISSION PRODUCTS
U.S. Pipe
United States Pipe and Foundry Company, Inc. ("U.S. Pipe"), headquartered in
Birmingham, Alabama, conducts its business through its Pressure Pipe and
Castings Divisions. The Pressure Pipe Division manufactures and sells a broad
line of ductile iron pressure pipe, pipe fittings, valves and hydrants. It is
one of the nation's largest producers of ductile iron pressure pipe. The
Castings Division produces and sells a wide variety of gray and ductile iron
castings.
In the three years ended May 31, 1998, 1997 and 1996, U. S. Pipe's net sales
and revenues amounted to $427.5 million, $420.7 million and $421.4 million,
respectively.
PRESSURE PIPE DIVISION
The Pressure Pipe Division manufactures and markets a complete line of
ductile iron pipe ranging from 4" to 64" in diameter as well as equivalent
metric sizes, at lengths up to 20 feet. In addition, this division produces and
sells a full line of fittings, valves and hydrants of various configurations to
meet municipal specifications. Approximately 70%--75% of the ductile iron
pressure pipe produced by this division is used in the transmission and
distribution of potable water and the remaining 25%--30% is used in the
transmission of waste water and industrial applications. The majority of ductile
iron pressure pipe and related fittings, valves and hydrants are for new
distribution systems. The market for rehabilitation, upgrading and replacement
of pipe systems accounts for approximately 30% of ductile iron pressure pipe
sales. Fittings, valves and hydrants produced by this division account for
approximately 20% of sales.
Ductile iron pressure pipe is manufactured by the deLavaud centrifugal
casting process and is typically classified into three size categories: 1) Small
pipe, ranging from 4" to 12" in diameter (approximately 59% of the division's
pipe production), used primarily for potable water distribution systems and
small water system grids; 2) Medium pipe, ranging from 14" to 24" in diameter
(approximately 25% of the division's pipe production), used primarily in
reinforcing distribution systems, including looping grids and supply lines; and
3) Large pipe, 30" to 64" in diameter (which accounts for the remaining 16% of
pipe production), used for major water and waste water transmission and
collection systems.
The ductile iron pressure pipe industry is highly competitive, with a small
number of manufacturers of ductile iron pressure pipe, fittings, valves and
hydrants. U.S. Pipe is one of the nation's largest producers of ductile iron
pressure pipe. Major ductile iron pipe competitors include McWane, Inc., Griffin
Ductile Iron Pipe Company and American Cast Iron Pipe Company. The division
competes with such other manufacturers of ductile iron pressure pipe on the
basis of price, customer service and product quality.
Additional competition for ductile iron pressure pipe comes from pipe
composed of other materials, such as PVC, concrete, fiberglass, reinforced
plastic and steel. Although ductile iron pressure pipe is typically more
expensive than competing forms of pipe, customers choose ductile iron for its
quality, longevity, strength, ease of installation and lack of maintenance
problems.
U.S. Pipe also manufacturers ductile iron fittings. The company believes
that McWane, Inc. has the largest market share in this market segment. U.S. Pipe
is not a major manufacturer of valves and hydrants.
Products of the Pressure Pipe Division are sold primarily to contractors,
water works distributors, municipalities, private utilities and other
governmental agencies. Most ductile iron pressure pipe orders result from
contracts which are bid by contractors or directly issued by municipalities or
private utilities. An increasing portion of ductile iron pressure pipe sales are
made through independent water works distributors. The division maintains
numerous supply depots in leased space throughout the country, which are used as
a source of pipe for start-up projects to support ongoing projects and to aid in
completing
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projects. The Pressure Pipe Division's sales are primarily domestic, with
foreign sales accounting for approximately 9% of dollar sales in 1998. In June
1997, the Ministry of Electricity and Water of Qatar awarded U.S. Pipe a
contract for the supply of approximately 36,600 tons of ductile iron pipe and
500 tons of fittings. Deliveries under the contract totaled 28,300 tons at May
31, 1998. U.S. Pipe has 36 regional sales offices in leased office space in the
United States.
The order backlog of pressure pipe at May 31, 1998 was 121,709 tons, which
represents approximately three months shipments, compared to 108,341 tons at May
31, 1997.
The Pressure Pipe Division manufactures ductile iron pressure pipe at four
owned plants located in (i) Bessemer, Alabama (603,000 square feet on 169 acres
of land); (ii) North Birmingham, Alabama (358,000 square feet on 77 acres of
land); (iii) Union City, California (121,000 square feet on 70 acres of land);
and (iv) Burlington, New Jersey (329,000 square feet on 109 acres of land).
These plants have annual rated capacities to produce 180,000 tons, 160,000 tons,
85,000 tons and 132,000 tons, respectively, of ductile iron pressure pipe based
on one shift per day. In addition, the division manufactures fittings, valves
and hydrants at its owned plant in Chattanooga, Tennessee (648,000 square feet
on 91 acres of land). The general offices located in Birmingham, Alabama contain
122,000 square feet of office space on 6 acres of owned land.
While the pipe business is generally sensitive to recessions because of its
partial dependence on the level of new construction activity, certain aspects of
Pressure Pipe's operations have in the past helped to reduce the impact of a
downturn in new construction. First, Pressure Pipe's products have experienced a
strong level of demand in the replacement market. The company believes that
growth of the replacement market will accelerate as a result of anticipated
major expenditures by government entities, such as the New York, Boston,
Washington, D.C., Atlanta and Philadelphia municipalities, to rehabilitate water
transmission systems. The company believes that this represents a significant
growth opportunity and that it is well positioned to take advantage of this
opportunity. Second, Pressure Pipe's facilities are located in regions of the
country that have exhibited consistent economic strength. The Burlington, New
Jersey plant is adjacent to the northeastern market with its significant
replacement potential and the division's operations in the South are located in
areas of steady economic growth. The West Coast, served by the Union City,
California plant, has a critical shortage of water for many of the large
metropolitan areas which will require major transmission pipelines in the
future. Because freight costs for pipe are high, locations close to important
markets lower transportation costs, thereby making the Pressure Pipe Division's
products more competitive.
CASTINGS DIVISION
The Castings Division produces a wide variety of gray and ductile iron
castings for a diversified customer base, including special hardness castings
for the pollution control industry. In the year ended May 31, 1998,
approximately 44% of the division's castings sales were directed to the Pressure
Pipe Division, with the balance of sales to various capital goods industries.
Manufacturing operations are located in Anniston, Alabama (240,000 square feet
on 21 acres of owned land).
NATURAL RESOURCES
Jim Walter Resources
The operations of Jim Walter Resources, Inc. ("Jim Walter Resources") are
conducted through its Mining Division, which mines and sells coal from four deep
shaft mines in Alabama, and its De-Gas Division, which extracts and sells
methane gas from the coal seams owned or leased by Jim Walter Resources.
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MINING DIVISION
The Mining Division, headquartered in Brookwood, Alabama, has approximately
10.3 million tons of rated annual coal production capacity from four deep shaft
mines. These mines extract coal from Alabama's Blue Creek seam, which contains
high-quality metallurgical coal. This coal can be used as coking coal as well as
steam coal because it meets current environmental compliance specifications.
Blue Creek coal offers high coking strength with low coking pressure, low sulfur
and low-to-medium ash content with high BTU values and can be sold either as
metallurgical coal, used to produce coke, or as compliance steam coal, used by
electric utilities. The current market price of metallurgical coal generally
exceeds the market price of compliance steam coal. The mines are located in west
central Alabama between the cities of Birmingham and Tuscaloosa.
The majority of coal is mined using longwall extraction technology,
complemented by the more standard continuous mining method. By replacing more
traditional methods of underground mining with longwall technology, the Mining
Division has achieved greater production efficiency, improved safety, generated
superior coal recovery results and lowered production costs. There are
approximately 70 longwall mining systems in use in the United States, of which
the Mining Division currently operates seven. The Mining Division's normal
operating plan is a longwall/continuous miner ratio of about 75%:25%, which is a
sustainable long-term ratio.
Recoverable reserves were estimated to be approximately 228 million tons as
of May 31, 1998, of which 203 million tons relate to the four Blue Creek Mines.
A summary of reserves is as follows:
ESTIMATED RECOVERABLE (1) COAL RESERVES AS OF MAY 31, 1998
(IN THOUSANDS OF TONS)
<TABLE>
<CAPTION>
TYPE (4)
------------- JIM WALTER
STEAM (S) RESOURCES' INTEREST
RESERVES (2) CLASSIFICATIONS (3) OR QUALITY (6)
MINING ------------------------------------- ------------------------ METALLUR- ------------------------ -----------
PROPERTY TOTAL ASSIGNED UNASSIGNED MEASURED INDICATED GICAL (M) OWNED LEASED (5) ASH
- ------------ --------- ----------- ------------- ----------- ----------- ------------- ----------- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No. 3 Mine.. 59,078 59,078 -- 44,509 14,569 S/M 1,257 57,821 8.2
No. 4 Mine.. 67,094 67,094 -- 52,622 14,472 S/M 5,678 61,416 9.4
No. 5 Mine.. 22,561 22,561 -- 20,713 1,848 S/M 20,606 1,955 8.8
No. 7 Mine.. 54,445 54,445 -- 43,335 11,110 S/M 12,941 41,504 8.0
--------- ----------- ------ ----------- ----------- ----------- -----------
203,178 203,178 -- 161,179 41,999 40,482 162,696
Bessie
(8)......... 24,919 -- 24,919 14,880 10,039 -- 658 24,261
--------- ----------- ------ ----------- ----------- ----------- -----------
TOTAL....... 228,097 203,178 24,919 176,059 52,038 41,140 186,957
--------- ----------- ------ ----------- ----------- ----------- -----------
--------- ----------- ------ ----------- ----------- ----------- -----------
<CAPTION>
PRODUCTION (7)
MINING -------------------------------
PROPERTY SULF. BTU/LB 1998 1997 1996
- ------------ ----- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
No. 3 Mine.. 0.56 14,469 1,974 2,198 2,084
No. 4 Mine.. 0.69 14,240 2,194 2,129 2,542
No. 5 Mine.. 0.66 14,334 1,495 801 893
No. 7 Mine.. 0.65 14,499 2,449 2,513 2,347
--------- --------- ---------
8,112 7,641 7,866
Bessie
(8)......... -- -- --
--------- --------- ---------
TOTAL....... 8,112 7,641 7,866
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) "Recoverable" reserves are defined as tons of mineable coal in the Blue
Creek and Mary Lee seams which can be extracted and marketed after deduction
for coal to be left in pillars, etc. and adjusted for reasonable preparation
and handling losses.
(2) "Assigned" reserves represent coal which has been committed by Jim Walter
Resources to its operating mines and plant facilities. "Unassigned" reserves
represent coal which is not committed to an operating mine and would require
additional expenditures to recover. The division of reserves into these two
categories is based upon current mining plans, projections and techniques.
(3) The recoverable reserves (demonstrated resources) are the sum of "Measured"
and "Indicated" resources. Measured coal extends 1/4 mile from any point of
observation or measurement. Indicated coal is projected to extend from 1/4
mile to 3/4 mile from any point of observation or measurement. Inferred coal
extends from 3/4 mile to 3 miles from any point of observation or
measurement. Inferred reserves are not included in recoverable reserves.
(4) All of the coal in the Blue Creek and Mary Lee seams is suitable for
metallurgical purposes although, for marketing reasons, some is sold as
compliance steam coal.
(5) The leases are either renewable until the reserves are mined to exhaustion
or are of sufficient duration to permit mining of all of the reserves before
the expiration of the term.
(6) Values shown are weighted averages of all reserves and are calculated on a
dry basis. Bessie Mine reserves are equivalent to preparation at a 1.60
specific gravity, whereas the others are at a 1.40 specific gravity.
(7) Production for 1998, 1997 and 1996 is for the fiscal years ended May 31.
(8) The Bessie Mine suspended operations in August 1988.
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Environmental expenditures imposed by laws relating to deep shaft mining have
been insignificant to date and no substantial expenditures are expected in the
future. The Mining Division does not engage in any surface (strip) mining.
The facilities of the Mining Division are summarized as follows:
<TABLE>
<CAPTION>
FACILITY LOCATION SQ. FOOTAGE
- ---------------------------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Administrative headquarters................................................. Brookwood, AL 41,500
Central shop, supply center and training center............................. Brookwood, AL 128,400
<CAPTION>
CURRENT
OPERATING MINES LOCATION RATED CAPACITY
- ---------------------------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Blue Creek No. 3............................................................ Adger, AL 2,600,000 tons
Blue Creek No. 4............................................................ Brookwood, AL 2,800,000 tons
Blue Creek No. 5............................................................ Brookwood, AL 2,100,000 tons
Blue Creek No. 7............................................................ Brookwood, AL 2,800,000 tons
</TABLE>
Of the Mining Division's approximately 10.3 million tons of current rated
annual production capacity, approximately 4.5 million tons are sold under
long-term contracts, leaving approximately 5.8 million tons to be sold under
short-term contracts or on the spot market.
Jim Walter Resources' supply contract with Alabama Power Company ("Alabama
Power"), which had been in effect since January 1, 1979, as amended, was
superseded by an agreement executed on May 10, 1994 (the "Current Alabama Power
Contract"). Under the Current Alabama Power Contract, Alabama Power purchases
4.0 million tons of compliance steam coal per year from Jim Walter Resources
through December 31, 1999 at prices which are significantly above market prices
for metallurgical coal as well as compliance steam coal. In January 1998, Jim
Walter Resources entered into a contract amendment with Alabama Power to extend
the contract period from August 31, 1999 to December 31, 1999. Total tonnage to
be shipped under the contract was not amended. The Current Alabama Power
Contract has a fixed price subject to an escalation based on the Consumer Price
Index and adjustments for governmental impositions and quality. The Current
Alabama Power Contract includes favorable modifications of specification,
shipping deviations and changes in transportation arrangements. Also, in January
1998, Jim Walter Resources entered into a new agreement to supply coal from
January 1, 2000 to December 31, 2005. The new contract stipulates lower volumes
(1.5 million tons per year) and significantly lower selling prices. The
expiration of the Current Alabama Power Contract could, in management's
estimation, result in a decrease in Jim Walter Resource's annual revenue of up
to $50.0 million. In 1996, Jim Walter Resources embarked on a cost cutting
program intended to reduce operating costs at it's Mining Division by 20% from
fiscal 1997 levels over a three year period. If these cost cutting reductions
are fully achieved, the company currently believes that a decrease in revenues
of the magnitude referred to above in fiscal 2000 will not have a material
adverse effect on the results of operations of the company as compared to fiscal
1997. However, there can be no assurances as to the extent to which such cost
reductions will be achieved or what the market prices for metallurgical and
compliance steam coal will be in the future.
Jim Walter Resources and Cockerill Sambre are parties to a long-term
contract that expires on December 31, 2000. The contract provides for the sale
of approximately 880,000 tons annually, with an option on approximately 220,000
additional tons annually. The pricing mechanism is market driven and reflects
changes in prices of three specific coals or coal indices.
Blue Creek Mine No. 5 ("Mine No. 5") was shut down from November 17, 1993
through December 16, 1993 and from early April 1994 until May 16, 1994 as a
result of fires due to spontaneous combustion heatings caused by pyritic sulfur
concentrations occurring in the mine's coal steam being exposed to air by the
mining process. Representatives of Jim Walter Resources, the Mine Safety and
Health Administration, Alabama State Mine Inspectors and the United Mine Workers
of America
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<PAGE>
("UMWA") agreed that the longwall coal panel being mined in Mine No. 5 at the
time the fire recurred in April 1994 would be abandoned and sealed off.
Development mining for the two remaining longwall coal panels in this section of
the mine resumed on May 16, 1994 and mining on the first longwall panel resumed
on January 17, 1995. Production was adversely impacted until such date. As a
result of the fires, the Company and Jim Walter Resources claimed compensable
losses in the amount of $25.0 million under their business interruption
insurance coverage. When the insurers refused to pay their pro rata part of the
claim, the Company commenced litigation seeking to enforce such insurance. The
insurers issued policies insuring various percentages of the risk. During
calendar 1997, the Company entered into settlements with all of the insurers who
in the aggregate have paid $24.0 million in full and final settlement of the
Company's and Jim Walter Resources' claim.
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 were then permanently sealed off in an
effort to prevent further combustion fires in this mine. Mining operations were
redeployed approximately five miles to the eastern side of the mine where more
favorable geological conditions exist. Firefighting and idle plant costs of
approximately $16 million associated with the November 1995 fire were not
insured since spontaneous combustion heatings caused by pyritic sulfur
concentrations in Jim Walter Resources' Mine No. 4 and No. 5 are now excluded
from the Company's and Jim Walter Resources' insurance policies. The affected
coal panels on the western side were sealed off and from December 1995 through
March 1997 development work was accelerated on the eastern side of Mine No. 5.
The mine returned to production status in the fourth quarter of fiscal 1997.
Longwall production resumed in the eastern part of the mine in June 1997. While
in development, the mine's costs ($40.7 million) were capitalized. Jim Walter
Resources' three other mines remained in full production.
In the three years ended May 31, 1998, 1997 and 1996, the Mining Division's
net sales and revenues were $329.0 million, $310.7 million and $325.8 million,
respectively, including $5.8 million, $4.2 million and $4.8 million,
respectively, to Sloss Industries Corporation ("Sloss Industries"), a wholly
owned subsidiary of the Company.
DE-GAS DIVISION
The De-Gas Division, through a joint venture headquartered in Brookwood,
Alabama, extracts and sells methane gas from the coal seams owned or leased by
Jim Walter Resources.
The original motivation for the joint venture was to increase safety in Jim
Walter Resources' Blue Creek mines by reducing methane gas concentrations with
wells drilled in conjunction with the mining operations. There were 442 wells
producing approximately 51 million cubic feet of gas per day, as of May 1998. As
many as 49 additional wells are planned for development in fiscal 1999. The
degasification operation, as had originally been expected, has improved mining
operations and safety by reducing methane gas levels in the mines, as well as
being a profitable operation.
The gas is transported directly to SNG's pipeline through a 12-mile pipeline
(owned and operated by Black Warrior Transmission Corp., a corporation the stock
of which is owned 50% by Jim Walter Resources and 50% by Sonat Exploration
Company, an affiliate of Southern Natural Gas Company (SNG)).
The De-Gas Division began operations in 1981 with the formation of an equal
joint venture with Kaneb Services, Inc. ("Kaneb") to capture and market methane
gas from the Blue Creek seam. SNG is the joint venture's exclusive customer for
all output of methane gas, all of which was originally at a price tied to the
price of fuel oil in New York. Kaneb subsequently sold its 50% interest in the
degasification operation to an indirect wholly owned subsidiary of Sonat, Inc.
In connection with this sale, additional areas were added to the gas sales
contract. This gas was priced at a market price nominated by SNG which was not
to
12
<PAGE>
be lower than the published price for spot purchases for SNG-South Louisiana for
the applicable month. Effective January 1, 1994, the gas sales contract was
amended. The price to be paid for gas delivered to SNG is now equal to the
average of two published spot prices provided, however, that the price will not
be less than $2.00 per MMBTU (approximately $1.96 per MCF) on a weighted annual
basis, calculated cumulatively each month. The contract also calls for SNG to
pay Jim Walter Resources a reservation fee of $675,000 per month through
December 31, 2001, provided certain minimum quantities of gas are delivered.
Black Warrior Methane Corp., a corporation the stock of which is owned 50% by
Jim Walter Resources and 50% by Sonat Exploration Company, manages the
operational activities of the joint venture.
In the three years ended May 31, 1998, 1997 and 1996, the De-Gas Division's
net sales and revenues amounted to $31.4 million, $28.8 million and $23.0
million, respectively.
UNITED LAND
United Land Corporation ("United Land") owns approximately 39,000 acres of
land, 171,000 acres of mineral rights and 1,500 acres of surface rights,
principally in Alabama.
United Land receives royalties resulting from leases to strip coal miners,
gas producers and timber companies. When market conditions are favorable,
management from time to time sells excess real estate from the holdings of
United Land not utilized by any of the other subsidiaries of the Company.
In the three years ended May 31, 1998, 1997 and 1996, United Land's net
sales and revenues amounted to $7.3 million, $8.6 million and $14.6 million,
respectively.
INDUSTRIAL PRODUCTS
JW Aluminum
JW Aluminum Company ("JW Aluminum"), headquartered in Mt. Holly, South
Carolina, is a leading producer of fin stock, used in heating and air
conditioning applications and telecommunications cable wrap. JW Aluminum's other
foil and sheet products are used in a variety of applications such as lithoplate
for newspapers and as a facer on foam insulation products. Aluminum sheet
products are primarily used for general building applications such as siding,
gutters, downspouts, roofing, mobile home siding and skirting, residential
siding and window components.
JW Aluminum sold approximately 150.0 million pounds of aluminum products in
fiscal 1998; 69% of which were foil products and 31% were sheet products. JW
Aluminum has focused on directing its product mix towards higher value-added
products such as custom-coated fin stock, where quality and service are relied
upon more than price-driven commodity products.
JW Aluminum operates a single manufacturing 350,000 square foot facility in
Mt. Holly, South Carolina on 37 acres of owned land and with a current rated
capacity of 180 million pounds per year based on its present product mix. These
amounts include fiscal 1998 additions of 50,000 square feet of production space,
seven acres of owned land and 30 million pounds of capacity as a result of
completing the first year of a two-year, $31.0 million expansion project. At
completion, this project will have added a total of 65,000 square feet of
production space and increased capacity 60% to approximately 240 million pounds
per year.
In the three years ended May 31, 1998, 1997 and 1996, JW Aluminum's net
sales and revenues totaled $165.2 million, $150.4 million and $141.1 million,
respectively, including $5.2 million, $2.8 million and $3.4 million,
respectively, to JW Window Components, Inc. ("JW Window Components"), a wholly
owned subsidiary of the Company.
13
<PAGE>
Sloss Industries
Sloss Industries is a diversified manufacturing operation, headquartered in
Birmingham, Alabama, which has four major product lines: (1) foundry coke; (2)
furnace coke; (3) slag fiber; and (4) specialty chemicals.
Foundry coke is marketed to cast iron pipe plants and foundries producing
castings, such as for the automotive and agricultural equipment industries. It
is shipped primarily into four geographic markets: the East Coast; the
Southeast; Mexico and the West Coast. Competition comes primarily from two
merchant suppliers: ABC Coke and Empire Coke Company. In the year ended May 31,
1998, approximately 64% of the foundry coke produced by Sloss Industries was
sold to U. S. Pipe.
Furnace coke is sold primarily to the domestic steel industry for producing
steel in blast furnaces. Furnace coke sales have been at capacity over the past
years to satisfy a long-term contract with National Steel Corporation. Sloss
Industries has only an estimated 1% share of the furnace coke market.
Competition comes primarily from Koppers Company, Inc., Citizens Gas & Coke
Utility and steel producers with excess coking capacity.
Slag fiber is an insulating fiber utilized principally as a raw material by
acoustical ceiling manufacturers. It is also used in manufactured-home
insulation, plastics molding and asphalt paving systems where it is used as a
bonding agent. A related product, processed mineral fiber, is used in friction
materials and thermoplastic molding compounds, adhesives, paints and sealants.
In April 1998, Sloss Industries acquired the Alexandria, Indiana, slag fiber
manufacturing operations of Fibrex, Inc., which will establish Sloss Industries
as a leading producer of slag fiber products in the United States. The continued
success of the slag fiber business depends upon Sloss Industries' ability to
produce ceiling tile fiber of consistent high quality and react to customer
demands for specific "customized" fiber composition. Of the total slag fiber
sales in the year ended May 31, 1998, approximately 73% was sold to Armstrong
World Industries and 15% to Celotex.
Specialty chemical products are manufactured in plants located in Birmingham
and Ariton, Alabama. The Birmingham product line is composed primarily of
aromatic sulfonic acids and sulfonyl chlorides used in the pharmaceutical,
plasticizer, foundry and coatings industries, as well as a custom manufactured
specialty monomer for the plastics industry. The Ariton facility produces custom
manufactured specialty products for the rubber and plastics industries.
Sloss Industries' manufacturing facilities located in Birmingham, Alabama
include: 120 coke ovens with an annual rated capacity of 410,000 tons and
related buildings of 148,400 square feet, a slag fiber plant with an annual
rated capacity of 102,000 tons in a building of 63,000 square feet and a
synthetic chemicals plant in a building of 63,300 square feet, all on 521 acres
of owned land. The Alexandria, Indiana plant is comprised of a 109,000 square
foot production and warehouse facility with an annual rated capacity of 55,000
tons and a 2,900 square foot office building, all on 33 acres of owned land.
Sloss Industries also operates a specialty chemical facility in Ariton, Alabama
in a building of 6,880 square feet, on 53 acres of owned land.
In the three years ended May 31, 1998, 1997 and 1996, Sloss Industries' net
sales and revenues amounted to $94.0 million, $91.1 million and $91.1 million,
respectively, including $12.8 million, $11.2 million and $12.0 million,
respectively to U.S. Pipe.
Southern Precision
Southern Precision Corporation ("Southern Precision") is one of the largest
producers of specialized industrial tooling products and resin coated sand in
the Southeast.
Southern Precision has three manufacturing facilities which are located in
Birmingham, Irondale and Trussville, Alabama. The Irondale, Alabama
manufacturing facility incorporates the plant, warehouse and administrative
functions in 78,000 square feet of building space located on 6 acres of owned
land. Products
14
<PAGE>
and services provided at this location include: wood and metal pattern tooling;
computerized numerically controlled machining for industries such as satellite
and aircraft communications, aerospace and glass machines; plastic injection,
compression and rubber molds; aluminum castings; and general machining of
fabrications, castings and plates.
Southern Precision's manufacturing facility located in Birmingham, Alabama
(27,500 square feet on 5 acres of owned land) produces coated sand for
production of shell cores for the foundry industry. The Trussville, Alabama
manufacturing facility is closely connected to the pattern and tooling operation
in that it supplies precision aluminum and steel fabrications to the same
industries.
In the three years ended May 31, 1998, 1997 and 1996, Southern Precision's
net sales and revenues amounted to $16.1 million, $15.6 million and $15.0
million, respectively, including $1.3 million, $1.2 million and $1.2 million,
respectively to U.S. Pipe.
JW Window Components
JW Window Components produces a variety of screens and screen components and
a full line of window components, such as extruded aluminum components,
weatherstripping, block and tackle balances and spiral balances. The Company
estimates that 60% of total sales are directed to the new construction market,
30% to the renovation market and 10% to the commercial sector.
JW Window Components products are sold through a network of independent
sales agents, covering the continental United States, the Caribbean and Central
America.
JW Window Components operates three plants located in Elizabethton,
Tennessee (200,000 square feet on 25 acres of owned land); Sioux Falls, South
Dakota (52,000 square feet on 3 acres of owned land); and Merrill, Wisconsin
(50,000 square feet of leased space). The administrative offices located in
Elizabethton, Tennessee contain 8,500 square feet of leased office space.
In the three years ended May 31, 1998, 1997 and 1996, JW Window Components'
net sales and revenues were $37.7 million, $38.9 million and $37.0 million,
respectively.
Vestal Manufacturing
Vestal Manufacturing Company ("Vestal") produces a diversified line of metal
and foundry products for residential, commercial and industrial use. Vestal
manufactures a line of energy saving fireplaces, fireplace inserts, accessories
and wood-burning stoves, as well as lightweight castings for municipal markets
and metal building products, including meter boxes and covers, valve boxes and
covers and manhole covers. Its products are sold through a network of
independent sales agents to hardware and building material distributors, home
centers and mass merchandisers throughout the United States and Canada.
Vestal's performance to a large extent is tied to residential construction.
Foreign competition has also been a factor in recent years.
Vestal, located in Sweetwater, Tennessee, operates a foundry with 103,000
square feet of building, a steel fabrication plant with 109,000 square feet and
an administrative office containing 7,000 square feet, all on 46 acres of owned
land.
In the three years ended May 31, 1998, 1997 and 1996, Vestal's net sales and
revenues totaled $17.4 million, $18.0 million and $17.3 million, respectively.
15
<PAGE>
ENERGY SERVICES
Applied Industrial Materials Corporation
On October 15, 1997, the Company completed the acquisition of Applied
Industrial Materials Corporation ("AIMCOR") which, through its Carbon Group, is
a leading international provider of products and outsourcing services to the
petroleum, steel, foundry and aluminum industries. Through its Metals Group,
AIMCOR is also a leading supplier of ferrosilicon in the southeastern United
States. The purchase price was approximately $400.0 million, including direct
acquisition costs of $4.8 million, and is subject to certain indemnity
obligations of the parties as required by the Stock Purchase Agreement. The
acquisition was accounted for using the purchase method of accounting and had an
effective date of September 30, 1997.
CARBON PRODUCTS
AIMCOR markets and distributes a variety of grades of petroleum coke and
also applies value-added services to large volumes of petroleum coke and other
relatively low-cost bulk raw materials, such as ores, slags and other materials.
These bulk raw materials are delivered to industrial markets throughout the
world from a variety of global sources as discrete products and services
targeted to meet individual customer needs.
The Carbon Group purchases petcoke primarily from oil refiners. Petcoke is a
coal-like, high carbon fuel source, which is a by-product produced when heavy
fuel oil is refined into gasoline. The average refinery produces 3,000 to 4,000
tons of petcoke per day. By combining and processing the petcoke produced by
several refineries, AIMCOR is able to market larger quantities of consistent
quality petcoke, thereby creating a more marketable product than an individual
refiner could produce on its own. Petcoke is used in industrial furnaces, cement
kilns, steel plants, foundries, paper mills, cogeneration plants and home
heating. Calcined coke is low sulfur petcoke which has been further processed to
remove gases and moisture, and is used as the primary ingredient (for which
there is no economic substitute) in anodes for the smelting of aluminum. The
Company believes that AIMCOR is one of the largest suppliers to the worldwide
petcoke market, shipping approximately 6 million metric tons of petcoke
annually. When AIMCOR establishes a marketing relationship with a refinery, it
is then in position to provide these value-added services. Conversely, when
AIMCOR is hired to provide such services, it is in position to obtain
commitments for long-term supply of petcoke.
AIMCOR has marketed petcoke products for over thirty years. It maintains
strong relationships with all major United States oil refiners and has an
in-depth knowledge of the end-user markets. AIMCOR's petcoke supply comes
primarily from oil refiners on the Gulf Coast (59%) and the West Coast (41%) of
the United States. AIMCOR's terminal and services operating group has entered
into long-term contracts with leading refiners including Mobil, Shell and Citgo.
The typical refinery has no means for the handling or storage of this
continuously produced by-product and its primary objective is that the company
take possession of the petcoke. Refiners typically sign one or two year
take-or-pay contracts with their petcoke handlers and marketers. Under
take-or-pay contracts with oil refineries, the company is contractually
obligated to take delivery of all or a certain portion of a refiners petcoke
output. Price reset provisions in the company's supply contracts typically allow
for monthly, bi-monthly, quarterly, or annual price adjustments based on
petcoke's world commodity price. Contractual hardship provisions protect the
company in most cases from precipitous price fluctuations by allowing repricing
even more rapidly than contractual reset provisions. In some cases, the
"net-back" provisions require the refiner to pay the company for the removal of
petcoke under certain circumstances.
AIMCOR limits the duration of forward sales agreements to manage its
exposure to adverse price movements. Forward sales at a fixed price generally
range from two to four months. The company may agree to sell petcoke to a
customer at a fixed price for as long as a twelve month period, but it typically
does so only after a refiner has agreed to supply the company a matching
quantity of petcoke for the same
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<PAGE>
period. In light of its ability to periodically reset the price per ton paid to
petcoke suppliers, the company's exposure to price fluctuations is largely
limited to petcoke held in inventory, and its margin on petcoke sales has
remained relatively stable over time.
AIMCOR markets its products through three operating groups: carbon
specialties, carbon fuels and calcined services. The carbon specialties
operating group is responsible for the marketing and sale of petcoke primarily
for steel/foundry, chemical, special cement, other metallurgical or special fuel
applications. The products marketed by this group usually require processing,
storage, screening, blending and customized delivery. The petcoke sold for these
applications typically has a general specification for sulfur of less than 3%.
The carbon fuels operating group is responsible for the marketing and sale of
petcoke for use as a fuel in the cement industry and for utilities in the
worldwide market. The petcoke sold for these markets typically has a sulfur
content above 3%.
The calcined specialties operating group markets and distributes raw petcoke
for calcination and manages the products which either go into or are supplied
from calciners. The company is the largest non-producer distributor of
calcinated petcoke. In addition, the company is an equity partner in Rain
Calcining, Ltd., a combination petcoke calciner and independent power supplier
in Visakhapatnam, India which commenced operations in April 1998. The company
will derive revenues from its 5% interest in the joint venture as well as from a
marketing arrangement with the joint venture. Calcined petcoke is used as the
main carbon source for anodes in aluminum smelting, and is also used in the
titanium, steel and foundry industries. Calcined petcoke is reprocessed and
therefore, commands a higher price on the open market, roughly three to four
times higher than the regular raw material.
AIMCOR markets petcoke through a combination of its internal sales force and
its strategically located shipping terminals throughout the world. AIMCOR's
principal shipping locations are located in Long Beach, California; Texas City,
Texas; Rotterdam, the Netherlands; Ghent, Belgium; and Red Car, United Kingdom.
The company's sales offices comprise an internal network of 14 offices located
in ten countries, including Luxembourg, the Netherlands, Germany, England,
Japan, Mexico, Brazil, Belgium, Australia, and the United States. Rather than
marketing through intermediaries or brokers, AIMCOR maintains direct
relationships with most end users through its 56-person sales force (17
domestic, 39 international). This approach allows the company to develop the
optimum petcoke quality that meets the customer's specifications. However, in
some markets international trading companies serve as the financial
intermediaries.
The Carbon Group also performs (on a service contract basis) value-added
services such as the cutting, blending, inventory management, stock piling and
removal of petcoke in the refinery, as well as the handling, warehousing and
distribution and shipping of petcoke from the refinery to the terminal and
ultimately to the end user. The company's value-added approach has distinguished
it as a leader in business that many competitors treat in a commodity-like
manner.
Like coal and oil, the international petcoke market is dollar-denominated,
which serves to limit AIMCOR's exposure to exchange rate fluctuations. Since the
United States petcoke supply dominates the international petcoke market, the
company's exchange rate exposure is limited to those few markets where AIMCOR
must compete against local sources or in foreign retail markets, such as
household fuels.
The Carbon Group's net sales and revenues were $228.8 million for the period
from October 1, 1997 through May 31, 1998.
METALS
The Metals Group is a leading manufacturer and marketer of a variety of
ferroalloys, metals, minerals and specialty materials that are used primarily as
alloying agents, fluxing agents and/or performance improvement additives in the
steelmaking and metal casting production processes in North American foundry and
steel industries. A ferroalloy is a refined combination of iron and one key
element.
17
<PAGE>
The Metals Group is comprised of five distinct but related businesses,
including two joint ventures. It manufactures and markets ferrosilicon,
ferrovanadium, ferromolybdenum, metallurgical process materials, fluorspar and
various other ferroalloys on both an agency and trading basis.
FERROSILICON. The company's ferrosilicon business is conducted through
Tennessee Alloys Company (the "Joint Venture"), a joint venture between the
company (75%) and Allegheny/Ludlum Steel, a major specialty steel producer
(25%), that was established in 1975 to build and operate a 40 megawatt, self-
baking electrode furnace located in Bridgeport, Alabama. This facility is a
leading supplier of ferrosilicon in the Southeastern United States and operates
at a current capacity of 33,000 tons of 50% ferrosilicon or 29,000 tons of 75%
ferrosilicon. Under the terms of the Joint Venture agreement, the company and
its joint venture partner are obligated to purchase their pro rata share of the
output of the facility through the year 2005. The company resells its share of
the output through its sales organization to third party steel producers and
foundry operators. As the managing partner, the company controls the day-to day
operations of the Joint Venture. Historically, over 90% of domestic consumption
of ferrosilicon has gone directly to the production of steel and cast iron and,
as a result, the industry is largely affected by the relative strength of the
domestic steel industry and its end-markets.
FERROVANADIUM. The company's ferrovanadium business is conducted through
Masterloy Products Limited ("Masterloy") located in Ottawa, Canada.
Ferrovanadium is an alloying agent used to impart strengthening properties in
steel and iron. Masterloy is the only producer of ferrovanadium in Canada and
one of only two North American producers engaged in the conversion of vanadium
pentoxide (V(2) O(5)) into 80% ferrovanadium. Masterloy also converts molybdenum
oxide into ferromolybdenum and also markets AIMCOR's United States based
products to the Canadian steel industry. Masterloy currently serves over 30
customers in Canada and the United States.
METALLURGICAL PROCESS MATERIALS. The company's metallurgical process
materials operating facility produces blends of materials used for the
desulfurization of steel and slag conditioning by North American steel
producers. The company focuses its efforts on the production of more complex and
customized materials which typically require at least three raw material
components (E.G., lime, aluminum and fluorspar) blended in specific ratios to
meet customer requirements and sold either as bulk product or bagged in a
variety of sizes. The company also processes and sells acid-grade fluorspar as a
finished product.
AIMCOR has dedicated considerable resources to developing its metallurgical
process materials production facility, located in Aurora, Indiana, which AIMCOR
believes possesses the most sophisticated production and testing capabilities in
the industry. AIMCOR seeks to take advantage of its production and testing
capabilities to create technically sophisticated, low-cost alternatives to
higher cost raw materials and to improve profitability and grow its market share
as domestic steel producers search for cost-effective solutions to purify steel
and enhance their production processes.
The Metals Group's net sales and revenues were $57.2 million for the period
of October 1, 1997 through May 31, 1998.
18
<PAGE>
PROPERTIES
The facilities of AIMCOR are summarized as follows:
<TABLE>
<CAPTION>
SQUARE FOOTAGE
--------------------
FACILITY LOCATION LEASED OWNED
- ---------------------------------------------------------------- --------------------------- --------- ---------
<S> <C> <C> <C>
Administrative headquarters Stamford, Connecticut 13,250
Operations (office buildings, terminals & warehouses) Gulf Coast (Texas ) 67,400
Operations (office buildings, terminals & warehouses) West Coast (California ) 2,937 321,453
Operations (office buildings, terminals, warehouses and
manufacturing plant) International 92,754 29,702
Operations (manufacturing plant) Aurora, Indiana 38,665
Operations (manufacturing plant) Bridgeport, Alabama 176,900
Sales Office Pittsburgh, Pennsylvania 7,870
Sales Office Birmingham, Alabama 640
</TABLE>
Seasonality
Certain of the businesses of the Company (primarily U.S. Pipe, Jim Walter
Homes, AIMCOR, JW Window Components and Vestal Manufacturing) are subject to
seasonal variations to varying degrees. However, the businesses of the Company
are significantly influenced by the general economy and in particular, the level
of construction.
Trade Names, Trademarks and Patents
The names of each of the Company's subsidiaries are well established in the
respective markets served by them. Management believes that the reputation of
such trade names is of some importance. The Company's subsidiaries have numerous
patents and trademarks. Management does not believe, however, that any one such
patent or trademark is of material importance to the Company's business as a
whole.
Research and Development
Research activities conducted by each business are directed toward new
products, process and building systems development, improvement of existing
products, development of new uses for existing products and cost reduction
efforts. Total research and development expenditures in each of the last three
fiscal years were less than 1% of consolidated net sales and revenues.
Raw Materials
Substantially all of the raw materials needed for the operations of the
Company and its subsidiaries are either produced by the Company and its
subsidiaries or purchased from domestic sources. All materials used by the
various businesses of the Company are available in quantities required to
support their respective operations.
Environmental
The Company and its subsidiaries are subject to a wide variety of laws and
regulations concerning the protection of the environment, both with respect to
the construction and operation of many of its plants, mines and other
facilities, and with respect to remediating environmental conditions that may
exist at its own and other properties. The Company believes that it and its
subsidiaries are in substantial compliance with federal, state and local
environmental laws and regulations. Expenditures for compliance of ongoing
operations and for remediation of environmental conditions arising from past
operations in the fiscal years ended May 31, 1998 and 1997 were approximately
$6.1 million and $6.8 million, respectively. Because environmental laws and
regulations on the federal, state and local levels continue to evolve, and
because conditions giving rise to obligations and liabilities under
environmental laws are in some circumstances not
19
<PAGE>
readily identifiable, it is difficult to forecast the amount of such future
environmental expenditures or the effects of changing standards on future
business operations. Consequently, the Company can give no assurance that such
expenditures will not be material in the future. Capital expenditures for
environmental requirements are anticipated to average approximately $6.0 million
per year in the next five years.
U.S. Pipe has implemented an Administrative Consent Order ("ACO") for its
Burlington, New Jersey plant that was required under the New Jersey
Environmental Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act) in connection with the completion of the LBO. The ACO required
soil and ground water cleanup. U.S. Pipe has completed, pending final approval,
the soil cleanup required by the ACO. U.S. Pipe also has completed, pending
final approval, ground water treatment as ordered in the ACO. Ground water
monitoring as required by the ACO continues. It is not known how long ground
water monitoring will be required. Management does not believe any further
cleanup costs will have a material adverse effect on the financial condition or
results of operations of the Company and its subsidiaries.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), generally imposes liability, which may be joint and several and
is without regard to fault or the legality of waste generation or disposal, on
certain classes of persons, including owners and operators of sites at which
hazardous substances are released into the environment (or pose a threat of such
release), persons that disposed or arranged for the disposal of hazardous
substances at such sites, and persons who owned or operated such sites at the
time of such disposal. CERCLA authorizes the EPA, the states and, in some
circumstances, private entities to take actions in response to public health or
environmental threats and to seek to recover the costs they incur from the same
classes of persons. Certain governmental authorities can also seek recovery for
damages to natural resources. Currently, U.S. Pipe has been identified as a
potentially responsible party ("PRP") by the EPA under CERCLA with respect to
cleanup of hazardous substances at two sites to which its wastes allegedly were
transported. U.S. Pipe is one of many PRP's at such sites and is in the process
of preliminary investigation of its relationship to these sites, if any, to
determine the nature of its potential liability and amount of remedial costs to
clean up such sites. Although no assurances can be given that U.S. Pipe will not
be required in the future to make material expenditures relating to these sites,
management does not believe at this time that the cleanup costs it will be
called on to bear, if any, associated with these sites will have a material
adverse effect on the financial condition or results of operations of the
Company and its subsidiaries. Management believes the extent of U.S. Pipe's
involvement, if any, to be minor in relation to that of other named PRP's, a
significant number of which are substantial companies.
Employees
As of May 31, 1998, the Company and its subsidiaries employed 8,067 people,
of whom 5,018 were hourly workers and 3,049 were salaried employees.
Approximately 4,236 employees were represented by unions under collective
bargaining agreements, of which approximately 1,596 were covered by one contract
with the UMWA, which expires on December 31, 2002. The Company considers its
relations with its employees to be satisfactory.
The Company and its subsidiaries have various pension and profit sharing
plans covering substantially
all employees. In addition to the Company's own pension plans, contributions are
made to certain multi-employer plans. The funding of retirement and employee
benefit plans is in accordance with the requirements of such 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. The Company and its subsidiaries also provide certain
postretirement benefits other than pensions and profit sharing, primarily
healthcare, to eligible retirees.
20
<PAGE>
Properties
The Company's headquarters building contains approximately 200,000 square
feet of office space located on approximately 13 acres in Tampa, Florida.
ITEM 3. LEGAL PROCEEDINGS
See Items 1 and 2--Business and Properties--Introduction on page 2 and Jim
Walter Resources-- Mining Division on pages 11 through 12 and Note 13 of the
Notes to Consolidated Financial Statements on pages F-26 through F-27 included
herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Set fourth below is a list showing the names, ages (as of August 1, 1998)
and positions of the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ------------------------------------------ --- ------------------------------------------------------------------
<S> <C> <C>
Kenneth E. Hyatt.......................... 57 Chairman, President and Chief Executive Officer
Richard E. Almy........................... 56 Director, Executive Vice President and Chief Operating Officer
Dean M. Fjelstul.......................... 56 Senior Vice President and Chief Financial Officer
Robert W. Michael......................... 56 Senior Vice President and Group Executive
Frank A. Hult............................. 47 Vice President, Controller and Chief Accounting Officer
Edward A. Porter.......................... 51 Vice President-General Counsel and Secretary
David L. Townsend......................... 44 Vice President-Administration
Joseph J. Troy............................ 34 Vice President and Treasurer
Ralph E. Fifield.......................... 52 President and Chief Operating Officer of U.S. Pipe
George R. Richmond........................ 48 President and Chief Operating Officer of Jim Walter Resources
Peter Scott-Hansen........................ 56 President and Chief Operating Officer of AIMCOR
</TABLE>
Kenneth E. Hyatt has been Chairman of the Board and Chief Executive Officer
of the Company since June 1, 1996 and has been President of the Company since
September 1, 1995. Between September 1, 1995 and June 1, 1996, Mr. Hyatt also
served as Chief Operating Officer of the Company. Mr. Hyatt was elected a
director on September 12, 1995. Mr. Hyatt served as President and Chief
Operating Officer and a director of Celotex from 1990 until shortly prior to his
election, effective September 1, 1995, as President and Chief Operating Officer
of the Company.
Richard E. Almy has been Executive Vice President and Chief Operating
Officer of the Company since June 1996. Previously, Mr. Almy was President and
Chief Operating Officer at JW Aluminum (1991-1996) and JW Window Components
(1995-1996).
Dean M. Fjelstul has been Senior Vice President and Chief Financial Officer
of the Company since October 1996. Between June 1, 1996 and October 1, 1996, Mr.
Fjelstul served as Senior Vice President-- Finance of the Company. Previously,
he was employed by Alliant Techsystems as Vice President and Chief Financial
Officer (1990-1996). Prior thereto he served in various financial management
capacities with Honeywell, Inc. during a 22 year tenure with that company.
Robert W. Michael has been Senior Vice President and Group Executive of the
Company since 1991 and President and Chief Operating Officer of Jim Walter Homes
since 1984. He also served as Vice President of Original Jim Walter from 1984 to
1988. Prior thereto, he was Vice President--Sales
21
<PAGE>
(1975-1984), a Regional Manager (1973-1975), an Assistant Regional Manager
(1970-1973), a Main Branch Manager (1967-1970) and a Sub-Branch Manager
(1966-1967) with Jim Walter Homes and held various managerial positions with
Mid-State Homes (1964-1966).
Frank A. Hult has been Vice President, Controller and the Chief Accounting
Officer of the Company since 1995. Previously, he was a Vice President (since
1994), the Controller (since 1991), Assistant Controller and Chief Accountant
(1989-1991) and Manager of Budgets (1988-1989) of the Company. Prior thereto, he
was Manager of Budgets (1984-1988) and Financial Analyst (1978-1981) of Original
Jim Walter and Manager-Operations Administration (1981-1984), Plant Controller
and Cost Accountant (1974-1975) for Celotex.
Edward A. Porter has been Vice President, General Counsel and Secretary of
the Company since January 1996. Previously, he was employed by National Gypsum
Company as Senior Vice President-- Administration, General Counsel and Secretary
(1993-1995); Vice President--Administration, General Counsel and Secretary
(1988-1993); and held various legal positions (1980-1988).
David L. Townsend has been a Vice President of the Company since 1988.
Previously, he served as a Vice President--Human Resources and Public Relations
(1994-1996) and Vice President--Public Relations (1988-1994) of the Company.
Prior thereto, he served as a Vice President--Public Relations (since 1983),
Director of Public Relations (1982-1983) and Manager of Public Relations
(1980-1982) of Original Jim Walter and in various staff positions (1978-1980)
with Original Jim Walter.
Joseph J. Troy has been Vice President and Treasurer of the Company since
March 1998. Previously, he was employed by NationsBank as Senior Vice
President--Corporate Finance (1993-1998) and prior thereto he served in various
banking positions from 1985-1993.
Ralph E. Fifield has been President and Chief Operating Officer of U.S. Pipe
since August 1, 1997. Previously, Mr. Fifield served since 1994 as President of
United States Steel/Kobe Steel Company, a joint venture with annual revenues of
approximately $770 million. Prior thereto, he was Corporate Vice
President--Operations of United States Steel Corporation (1991-1994), General
Manager of its Fairfield, Alabama (1990-1991) and Fairless, Pennsylvania Plants
(1988-1990), and Plant Manager of its South Works plant in Chicago (1984-1988),
and he served in a series of plant engineering positions at its Gary, Indiana
plant (1969-1984).
George R. Richmond has been President and Chief Operating Officer of Jim
Walter Resources since June 1, 1997. Previously he served as Senior Vice
President of Operations (since 1993) and Vice President of Operations (1992).
Prior thereto he was Deputy Mine Manager and No. 3 Mine Manager, Longwall
Manager, Master Mechanic and Longwall Mechanical Engineer.
Peter Scott--Hansen has been President and Chief Executive Officer of AIMCOR
since it was acquired by Walter Industries in October 1997. Previously, he was
President of the Carbon Products division of AIMCOR since 1986. Prior thereto,
he was President of the Carbon Products Group of International Minerals and
Chemical Corporation (IMC"), a predecessor of AIMCOR, (1980-1986) and held
various positions in international marketing, transportation and operations with
IMC (1968-1980).
Executive Officers serve at the pleasure of the Board of Directors. The
Company is not aware of any family relationships among any of the foregoing
executive officers.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock (the "Common Stock") has been listed on the New
York Stock Exchange under the trading symbol "WLT" since December 18, 1997.
Previously, the Common Stock had been listed on the Nasdaq National Market
("WLTR") since October 11, 1995. The table below sets forth, for the quarterly
periods indicated, the range of high and low sales prices of the Common Stock
since such date.
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
------- ------- ------- -------
1st Quarter......... $18 13/16 $14 $14 1/4 $11 7/8
2nd Quarter......... 21 9/16 18 1/2 14 1/4 12 5/8
3rd Quarter......... 22 5/8 17 1/2 15 1/4 12 5/8
4th Quarter......... 22 3/8 18 1/16 15 3/8 13 1/4
</TABLE>
The Registrant has never paid cash dividends on Common Stock and has no
present intention of paying any cash dividends on the Common Stock. Covenants
contained in certain of the debt instruments referred to in Note 8 of Notes to
Consolidated Financial Statements on pages F-16 through F-19 restrict the amount
the Company could pay in cash dividends.
In July 1998, the Company's Board of Directors authorized the Company to
repurchase shares (not to exceed 2.0 million) of its common stock. As of August
28, 1998, the Company had repurchased approximately 1,127,500 shares at a cost
of approximately $18.2 million.
As of August 10, 1998, there were 7,316 shareholders of record of the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to each of the fiscal years 1994
through 1998, has been derived from annual financial statements, including the
consolidated balance sheets at May 31, 1998 and 1997 and the related
consolidated statements of operations and cash flows for the three years ended
May 31, 1998 and the notes thereto appearing elsewhere herein. All of the
information presented below should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, and the other
information contained elsewhere in this report.
23
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996(2) 1995 1994
------------- ------------- ------------- ------------- -------------
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales and revenues................... $ 1,837,200 $ 1,507,061 $ 1,485,635 $ 1,442,322 $ 1,328,524
Cost of sales (exclusive of
depreciation)...................... 1,244,164 980,235 987,354 951,381 845,061
Depreciation and depletion........... 75,429 71,814 74,341 72,037 71,035
Interest and amortization of debt
expense (1)........................ 193,736 179,291 208,690 304,548 155,470
Income tax benefit (expense)......... (38,802) (32,981) 55,155 170,450 (28,917)
Income (loss) before extraordinary
item (2)........................... 58,904 37,117 (79,292) (358,645) 7,175
Net income (loss) (2) (3)............ 56,241 37,117 (84,696) (358,645) 7,175
Basic income (loss) per share (4)
Income (loss) before extraordinary
item............................. 1.09 .68 (1.56) (7.10)
Extraordinary item................. (.05) -- (.10) --
------------- ------------- ------------- -------------
Net income (loss).................. 1.04 .68 (1.66) (7.10)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Number of shares used in calculation
of basic income (loss) per share... 53,846,000 54,922,000 50,989,000 50,494,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted income (loss) per share (4)
Income (loss) before extraordinary
item............................... 1.08 .67 (1.56) (7.10)
Extraordinary item................... (.05) -- (.10) --
------------- ------------- ------------- -------------
Net income........................... 1.03 .67 (1.66) (7.10)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Number of shares used in calculation
of diluted income (loss) per
share.............................. 54,383,000 55,064,000 50,989,000 50,494,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Additional Financial Data:
Gross capital expenditures........... $ 107,553 $ 101,755 $ 83,523 $ 91,317 $ 69,831
Net property, plant and equipment.... 672,348 568,176 541,536 662,792 657,863
Total assets......................... 3,562,670 3,027,385 3,091,377 3,245,153 3,140,892
Long-term senior debt................ 2,475,617 2,065,575 2,211,296 2,220,370 871,970
Liabilities subject to Chapter 11
proceedings........................ -- -- -- -- 1,727,684
Stockholders' equity (deficit)....... 359,087 319,412 276,694 360,774 (282,353)
Employees at end of year............. 8,067 7,584 7,755 7,888 7,676
</TABLE>
- ------------------------
(1) Interest on unsecured obligations not accrued since December 27, 1989
amounted to $163.7 million in the year ended May 31, 1994. The Company
recorded additional interest and amortization of debt discount and expense
of $141.4 million related to the consummation of the Consensual Plan in
fiscal 1995.
(2) The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of" ("FAS 121") during fiscal year 1996.
(3) Extraordinary item consists of (i) write-off of unamortized debt expense of
$4.1 million ($2.7 million net of income tax benefit) related to early
repayment of the bank credit facility during fiscal 1998 and (ii) redemption
premium and write-off of unamortized debt expense of $8.3 million ($5.4
million after tax) related to early repayment of the Senior Notes and a
$150.0 million bank credit facility during fiscal year 1996.
24
<PAGE>
(4) Per share information for fiscal year 1994 is not relevant given the
significant change in the Company's capital structure following consummation
of the Consensual Plan.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This discussion should be read in conjunction with the consolidated
financial statements and notes thereto of Walter Industries, Inc. and
subsidiaries, particularly Note 15 of "Notes to Consolidated Financial
Statements" which presents sales and operating income by operating segment.
On October 15, 1997, the Company completed the acquisition of AIMCOR, which
is a leading international provider of products and outsourcing services to the
petroleum, steel, foundry and aluminum industries. AIMCOR is also a leading
supplier of ferrosilicon in the southeastern United States (see Note 2 of "Notes
to Consolidated Financial Statements"). Sales and revenues and operating income
for AIMCOR are reflected in the Company's new business segment, the Energy
Services Group.
RESULTS OF OPERATION
YEARS ENDED MAY 31, 1998 AND 1997
Net sales and revenues for the year ended May 31, 1998 were $330.1 million
above the prior year, representing a 21.9% increase of which 19.0% was
attributable to AIMCOR. In addition to the contribution from AIMCOR, the
increase was the result of improved performances from all other operating
groups.
Homebuilding and Financing Group sales and revenues were $8.7 million, or
2.0%, greater than the prior year. This performance reflects a 2.5% increase in
the average net selling price, from $47,500 in 1997 to $48,700 in 1998, which
was more than offset by a 5.1% decrease in the number of units sold, from 3,900
units in 1997 to 3,702 units in 1998. The higher average selling price is
primarily attributable to price increases instituted during the year to
compensate for higher building materials and labor costs. The decrease in unit
sales resulted from continuing intense competition from local and regional
homebuilders as well as labor shortages due to high demand for subcontractors
and construction crews. Jim Walter Homes' backlog at May 31, 1998 was 1,883
units (all of which are expected to be completed by the end of fiscal 1999)
compared to 1,972 units at May 31, 1997. Time charge income (revenues received
from Mid-State Homes' instalment note portfolio) increased from $231.4 million
in 1997 to $242.9 million in 1998. This increase is attributable to increased
payoffs received in advance of maturity and to an increase in the average
balance per account in the portfolio, partially offset by a reduction in the
total number of accounts. The aggregate amount of instalment notes receivable
having at least one payment 90 or more days delinquent was 3.06% and 2.78% of
total instalment notes receivable at May 31, 1998 and 1997, respectively. The
allowance for possible losses as a percentage of net instalment notes receivable
for the years ended May 31, 1998 and 1997 was approximately 2.0%, which reflects
management's assessment of the amount necessary to provide against future losses
in the portfolio. Operating income of $96.4 million (net of interest expense)
was $14.7 million greater than the prior year, reflecting the higher time charge
income, the increase in the average net selling price per home sold, an improved
homebuilding gross profit margin, lower interest expense in 1998 ($116.0
million) as compared to the prior year ($119.0 million), and lower goodwill
amortization in 1998 ($26.9 million) versus 1997 ($28.5 million), partially
offset by the decrease in the number of homes sold.
Water Transmission Products Group sales and revenues were $6.6 million above
the prior year, representing a 1.6% increase. The increase reflected greater
shipments of ductile iron pressure pipe, valves and hydrants, partially offset
by lower selling prices across most product lines, combined with lower sales
volumes of fittings. Ductile iron pressure pipe shipments of 548,700 tons were
5.2% higher than the prior year, while average selling prices were 2.2% lower,
reflecting intense competitive conditions related to the continuing slow pace of
funding for domestic infrastructure repair and replacement projects. The order
backlog at May 31, 1998 was 121,709 tons, which represents approximately three
months shipments, compared with 108,341 tons at May 31, 1997. Operating income
of $13.8 million was $.2 million below the
25
<PAGE>
prior year. This performance was the result of the lower selling prices and
gross profit margins for ductile iron pressure pipe and fittings, partially
offset by the previously mentioned increase in sales volumes.
Natural Resources Group sales and revenues were $17.2 million, or 5.0%,
greater than the prior year. The increase resulted from increased coal shipments
due to higher production levels, coupled with greater methane gas sales volumes,
partially offset by reduced selling prices for both coal and methane gas. A
total of 7.6 million tons of coal was sold at an average selling price per ton
of $42.95 in the current year compared with 7.0 million tons at $44.49 in 1997.
The tonnage increase was the result of greater shipments to Alabama Power and
certain export customers. The decrease in the average selling price was
primarily the result of lower price realizations on coal sold to the worldwide
metallurgical market. Methane gas sales volumes were 8.6 billion cubic feet in
1998 versus 7.6 billion cubic feet in 1997. The average selling price per
thousand cubic feet was $3.57 in 1998 versus $3.75 in 1997. Both years included
a monthly reservation fee of $.7 million. The Group's operating income of $38.4
million exceeded the prior year by $10.8 million. This performance was the
result of higher coal shipments and methane gas sales volumes combined with
increased coal productivity which contributed to lower production costs ($36.28
per ton in 1998 versus $36.73 in 1997), partially offset by the reduced coal and
methane gas selling prices. Cost per ton of coal produced in the fourth quarter
of fiscal 1998 was adversely affected by a geological fault encountered in one
of the two longwall sections of Blue Creek Mine No. 3 ("Mine No. 3"). The mine's
production schedule has been realigned to single longwall production which
lowered its coal output during the fourth quarter and is expected to reduce
production during fiscal 1999. Current year results also included a $8.0 million
credit from settlement of insurance claims. Prior year results included a $10.0
million settlement of a legal claim related to a theft of coal inventory at the
Port of Mobile, Alabama, partially offset by a $6.2 million charge relating to a
reduction in Jim Walter Resources' salaried workforce under a voluntary early
retirement program. In addition, from December 1995 through March 1997, Mine No.
5 was in development. While in development, the mine's costs of $40.7 million
were capitalized.
Industrial Products Group sales and revenues were $12.5 million, or 4.2%,
greater than the prior year. The improved performance was principally the result
of increased shipments of aluminum foil and sheet products, foundry coke and
slag fiber, combined with higher selling prices for aluminum foil and sheet
products and furnace and foundry coke. These increases were partially offset by
decreased shipments of chemicals and window components. Operating income of
$21.5 million approximated the prior year. The increase in sales and revenues
was offset by lower gross profit margins realized on aluminum foil and sheet
products, furnace and foundry coke, slag fiber, chemicals and window components.
Cost of sales, exclusive of depreciation, of $1,244.2 million was 79.3% of
net sales in 1998 versus $980.2 million and 78.4% in 1997. The percentage
increase reflected lower gross profit margins realized on pipe products, coal,
methane gas, aluminum products, furnace and foundry coke, slag fiber, chemicals
and window components, partially offset by improved margins on home sales.
Selling, general and administrative expenses of $165.2 million were 9.0% of
net sales and revenues in 1998 versus $144.7 million and 9.6% in 1997.
Interest and amortization of debt expense was $193.7 million in 1998 versus
$179.3 million in 1997, reflecting higher outstanding debt balances primarily
resulting from the AIMCOR acquisition. The average rate of interest in 1998 was
8.0%, compared to 8.1% in 1997. The prime rate of interest was 8.5% in 1998
compared to a range of 8.25% to 8.5% in 1997.
The Company's effective tax rate in 1998 and 1997 differed from the
statutory tax rate primarily due to amortization of goodwill (excluding such
amount related to the AIMCOR acquisition), which is not deductible for tax
purposes, and percentage depletion (see Note 7 of "Notes to Consolidated
Financial Statements" for further discussion of income taxes).
In conjunction with the closing of the AIMCOR acquisition, on October 15,
1997, the Company completed a financing with NationsBank National Association
("NationsBank") whereby NationsBank provided credit facilities totaling $800
million (the "Credit Facilities"). The Credit Facilities were used to (a)
finance the acquisition of AIMCOR, (b) repay the Revolving Credit Agreement,
Term Loan A and
26
<PAGE>
Term Loan B, (c) pay transaction costs and (d) provide ongoing working capital.
The Company recorded an extraordinary loss of $4.1 million ($2.7 million net of
income tax benefit) consisting of a write-off of unamortized debt expense
related to the early repayment of the Revolving Credit Agreement, Term Loan A
and Term Loan B. See "Financial Condition."
Net income for the year ended May 31, 1998 was $56.2 million compared to net
income of $37.1 million in 1997, reflecting all of the previously mentioned
factors as well as the income contribution from the Energy Services Group and
lower provision for possible losses and postretirement benefits in the current
year.
YEARS ENDED MAY 31, 1997 AND 1996
Net sales and revenues for the year ended May 31, 1997 were $21.4 million,
or 1.4%, above the prior year, with a 2.8% increase in pricing and/or product
mix partially offset by a 1.4% decrease in volume. The decrease in volume was
principally the result of lower coal shipments, reflecting reduced production
levels. In addition, continued delays in federal spending for planned water and
sewer pipeline projects resulted in lower ductile iron pressure pipe shipments.
The increase in pricing primarily resulted from higher average net selling
prices for homes, ductile iron pressure pipe and coal.
Homebuilding and Financing Group sales and revenues were $27.7 million, or
6.7%, greater than the prior year. This performance reflects a 12.3% increase in
the average net selling price per home sold, from $42,300 in 1996 to $47,500 in
1997, combined with a 3.7% increase in the number of homes sold, from 3,760
units in 1996 to 3,900 units in 1997. The higher average net selling price
reflects a greater percentage of "90% complete" homes sold in the current year
and price increases instituted to compensate for higher building material and
labor costs. The increase in unit sales reflects the decision by Jim Walter
Homes in December 1995 to reduce its financing rate from 10% to 8.5% for its
"90% complete" homes on a trial basis to generate additional unit sales. In
March 1996, the lower rate was formally advertised. Jim Walter Homes extended
the 8.5% financing rate to the remainder of its product line ("shell" and homes
sold at various "in-between" stages of interior finish) in the fourth quarter of
1997. Jim Walter Homes' backlog at May 31, 1997 was 1,972 units compared to
1,957 units at May 31, 1996. Time charge income (revenues received from
Mid-State Homes' instalment note portfolio) increased slightly, from $231.1
million in 1996 to $231.4 million in 1997. This increase is attributable to
increased payoffs received in advance of maturity and to an increase in the
average balance per account in the portfolio, partially offset by a reduction in
the total number of accounts. Operating income of $81.7 million (net of interest
expense) was $18.3 million greater than the prior year. This performance
resulted from increases in the average net selling price and number of homes
sold, lower interest expense in 1997 ($119.0 million) as compared to 1996
($128.2 million), lower goodwill amortization in 1997 ($28.5 million) versus
1996 ($31.2 million), and slightly higher time charge income and homebuilding
gross profit margins, partially offset by higher selling, general and
administrative expenses principally resulting from changes to the base salary
and commission structure at Jim Walter Homes.
Industrial Products Group sales and revenues were $12.6 million, or 4.4%,
greater than the prior year. Increased sales volumes of aluminum foil and sheet
products, slag fiber, furnace coke, window components and metal building
products, combined with improved sales prices for furnace and foundry coke,
window components and metal building and foundry products, were partially offset
by lower sales volumes of foundry coke and lower sales prices for aluminum foil
and sheet products. The Group's operating income in 1997 was $21.4 million,
compared to an operating loss of $10.4 million in 1996. The improved performance
was the result of the overall sales increases and higher gross profit margins
realized on furnace and foundry coke, slag fiber, aluminum foil and sheet
products, window components and metal building and foundry products. Results for
1996 were adversely impacted by a $22.9 million write-off of goodwill,
reflecting the Company's adoption of FAS 121 (see Note 6 of "Notes to
Consolidated Financial Statements").
Water Transmission Products Group sales and revenues declined slightly in
1997. The Group's performance reflected lower sales volumes, but higher selling
prices for ductile iron pressure pipe and
27
<PAGE>
fittings, and higher selling prices and sales volumes for valves and hydrants.
The order backlog at May 31, 1997 was 108,341 tons compared with 121,734 tons at
May 31, 1996. Operating income of $14.0 million was $3.5 million above the prior
year. This increase was principally due to improved operating efficiencies and
lower raw material costs, especially for scrap iron, the principal raw material
used in the manufacture of ductile iron pressure pipe.
Natural Resources Group sales and revenues were $17.9 million, or 4.9%,
below the prior year. The decrease resulted from lower coal shipments due to
reduced production levels, a $3.7 million gain (in 1996) from the sale of gas
royalty interests in certain mineral properties, lower gains realized from the
sale of excess real estate in 1997 ($2.5 million) versus 1996 ($6.1 million),
and lower coal and timber royalty income, partially offset by higher average
selling prices for coal and methane gas and greater methane gas volume. A total
of 7.0 million tons of coal was sold in 1997 versus 7.6 million tons in 1996, a
7.9% decrease reflecting lower shipments to certain export customers, partially
offset by increased tonnage sold to Alabama Power. The average price per ton of
coal sold increased $1.64, from $42.85 in 1996 to $44.49 in 1997, as a result of
higher prices realized in the worldwide metallurgical market and a greater
percentage of tonnage sold to Alabama Power at above-market contract prices.
Methane gas sales volumes were 7.6 billion cubic feet in 1997 versus 6.8 billion
cubic feet in 1996. The average selling price per thousand cubic feet, which
included a monthly reservation fee of $.7 million, was $3.75 in 1997 versus
$3.32 in 1996. The Group's operating income in 1997 was $27.6 million compared
to an operating loss of $105.9 million in 1996. Coal production costs of $36.73
per ton in 1997 were slightly higher than 1996 costs of $36.12 per ton.
Operating income of $27.6 million in 1997 includes settlement of a legal claim
related to a theft of coal inventory from the Port of Mobile, Alabama, partially
offset by a charge relating to a reduction in Jim Walter Resources' salaried
workforce under a voluntary early retirement program. The operating loss of
$105.9 million in 1996 included a $120.4 million FAS 121 write-down of fixed
assets to estimated fair market values at two coal mines (see Note 6 of "Notes
to Consolidated Financial Statements"), and firefighting and idle plant costs of
$16.0 million principally associated with a fire at Mine No. 5 in November 1995.
From December 1995 through March 1997, Mine No. 5 accelerated development of its
eastern reserves. While in development, the mine's costs ($40.7 million) were
capitalized.
As a result of a previous fire that began in Mine No. 5 on November 17,
1993, the Company and Jim Walter Resources claimed compensable losses in the
amount of $25.0 million under their business interruption coverage. When the
insurers refused to pay their pro rata portion of the claim, the Company and Jim
Walter Resources commenced litigation seeking to enforce such insurance. The
Company entered into settlement with several insurers who, in the aggregate,
paid approximately $12.4 million through May 31, 1997, reducing the contract
claims to approximately $12.6 million. During fiscal 1998, the Company and Jim
Walter Resources entered into settlements with each of the insurers who, in the
aggregate, paid approximately $24.0 million in full and final settlement of the
Company's and Jim Walter Resources' claims (see Note 13 of "Notes to
Consolidated Financial Statements").
Cost of sales, exclusive of depreciation, of $980.2 million was 78.4% of net
sales in 1997 versus $987.4 million and 80.9% in 1996. Cost of sales in 1996 was
adversely impacted by firefighting and idle plant costs associated with the Mine
No. 5 fire. In addition, 1997 costs were favorably affected by decreases in the
cost of scrap iron, the major raw material used in the manufacture of ductile
iron pressure pipe.
Selling, general and administrative expenses of $144.7 million were 9.6% of
net sales and revenues in 1997 versus $135.8 million and 9.1% in 1996. The
increases principally reflect higher expenses at Jim Walter Homes and Jim Walter
Resources as previously discussed.
Interest and amortization of debt expense was $179.3 million in 1997 versus
$208.7 million in 1996, reflecting lower outstanding debt balances and reduced
interest rates resulting from a debt refinancing completed on January 22, 1996.
The average rate of interest in 1997 was 8.1% compared to 9.1% in 1996. The
prime interest rate ranged from 8.25% to 8.5% in 1997 compared to a range of
8.25% to 9.0% in 1996.
The Company's effective tax rate in 1997 and 1996 differed from the
statutory tax rate due to amortization of goodwill and the FAS 121 write-off of
goodwill of $22.9 million (in 1996), which are not
28
<PAGE>
deductible for tax purposes, and percentage depletion. Also, in the fiscal 1996
fourth quarter, the Company recorded approximately $27.0 million of
non-recurring tax benefits resulting from utilization of a capital loss carry
forward, the Company's election to carry its 1995 net operating loss forward
rather than back to prior years (thereby avoiding the effect of a rate
difference and loss of certain tax credits), and other miscellaneous tax
adjustments (see Note 7 of "Notes to Consolidated Financial Statements" for
further discussion of income taxes).
Net income for the year ended May 31, 1997 was $37.1 million compared to a
net loss of $84.7 million in 1996, reflecting all of the previously mentioned
factors as well as the impact of lower postretirement benefits in 1997. The loss
in fiscal 1996 includes 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 resulting from the debt refinancing completed in
January 1996.
FINANCIAL CONDITION
Since May 31, 1997, total debt increased $415.8 million. On June 11, 1997,
Mid-State purchased from Mid-State Trust V instalment notes having a gross
amount of $1,196.5 million and an economic balance of $462.3 million and
subsequently sold such instalment notes to Mid-State Trust VI ("Trust VI"), a
business trust organized by Mid-State which owns all of the beneficial interest
in Trust VI. These sales were in exchange for the net proceeds from the public
issuance of $439.1 million of Asset Backed Notes by Trust VI. The notes were
issued in four classes, bear interest at rates ranging from 7.34% to 7.79% and
have a final maturity of July 1, 2035. Payments will be made quarterly on
January 1, April 1, July 1 and October 1 based on the underlying collateral,
less amounts paid for interest on the notes and Trust VI expenses. Net proceeds
from the public offering were used primarily to pay down the Mid-State Trust V
Variable Funding Loan Agreement indebtedness of $384.0 million.
The Credit Facilities consist of a $350.0 million revolving credit facility
(the "Revolving Credit Facility") and a $450.0 million six-year term loan (the
"Term Loan"). The Credit Facilities are secured by guarantees and pledges of the
capital stock of all domestic subsidiaries of the Company other than Mid-State
Holdings and its subsidiary. Net cash proceeds from (a) asset sales where the
aggregate consideration received (on a cumulative basis since October 15, 1997)
exceeds $20.0 million and the cumulative amount of such proceeds from such sales
since the most recent preceding prepayment equals or exceeds $5.0 million, (b)
each Permitted Receivables Securitization (as defined in the Credit Facilities)
or (c) the issuance of Consolidated Indebtedness (as defined in the Credit
Facilities) permitted thereunder must be applied to permanently reduce the
Credit Facilities. There have been no such reductions to date. The Revolving
Credit Facility includes a sub-facility for trade and other standby letters of
credit in an amount up to $75.0 million at any time outstanding and a
sub-facility for swingline advances in an amount not in excess of $25.0 million
at any time outstanding. The Revolving Credit Facility is due on October 15,
2003 and the Term Loan amortizes over a six-year period. Scheduled principal
payments to be made on the Term Loan in each of the six years commencing October
15, 1998 are $25.0 million, $50.0 million, $75.0 million, $75.0 million, $100.0
million, and $125.0 million, respectively. Borrowings under the Credit
Facilities bear interest at rates that fluctuate. As of May 31, 1998, borrowings
under the Credit Facilities totaled $590.8 million (including swingline advances
of $5.8 million). In addition, there were $23.3 million face amount of letters
of credit outstanding thereunder.
On May 28, 1998, Mid-State entered into a 364-day, $90.0 million Loan and
Security Agreement with Kitty Hawk Funding Corporation, an affiliate of
NationsBank, as lender, and NationsBank, as agent and bank investor. Advances
under the Loan and Security Agreement are secured by Mid-State's beneficial
interest in Trust III and evidenced by a variable funding note. Proceeds of
$80.3 million were used to pay down the Revolving Credit Facility. Future
proceeds will be used for general corporate purposes. The facility currently
matures on May 27, 1999, but provides for extensions of the maturity through May
31, 2002. Principal payments are required on any day in which the outstanding
principal amount of all advances under the Loan and Security Agreement exceed
the borrowing base. Additionally, commencing on May 31, 2001, Mid-State is
required to prepay $1.5 million on May 31, August 31, November 30 and
29
<PAGE>
February 28. The outstanding principal of all advances must be paid when the
facility is terminated. Interest is due on the last day of each tranche period
at either the commercial paper rate, the prime rate or the LIBOR rate plus .47%
as determined by Mid-State and approved by the lender.
The Company has traditionally used interest rate lock agreements as hedge
instruments to manage interest rate risks. 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 rate fluctuations from indebtedness
secured by fixed rate instalment notes receivable generated by its homebuilding
business. The Company has entered into forward-interest rate lock agreements in
order to fix the interest rate on a portion of asset-backed long-term debt
anticipated to be issued in the second quarter of fiscal 1999. The lock
agreements have a total notional amount of $150.0 million, mature in October
1998, and have a weighted-average interest rate of 5.70%. Approximately $100.0
million notional amount of interest rate lock agreements are held by Lehman
Brothers Holdings Inc., which owned 2,849,321 shares of the Company's stock at
May 31, 1998. Upon the issuance of the debt, any gain or loss realized on the
lock agreements will be amortized to interest expense over the term of the
related debt. Additionally, the interest rate lock agreements in effect during
fiscal 1997 were terminated on June 11, 1997 and the losses incurred ($8.6
million) have been deferred and are being amortized to interest expense over the
life of Trust VI.
During the year ended May 31, 1998, borrowings under Mid-State Trust V
Variable Funding Loan Agreement totaled $218.0 million. Payments on the
Mid-State Trust II Mortgage-Backed Notes, the Mid-State Trust III Asset Backed
Notes, the Mid-State Trust IV Asset Backed Notes and the Mid-State Trust VI
Asset Backed Notes amounted to $87.0 million, $31.8 million, $67.2 million and
$33.5 million, respectively. In addition, retirements of other long-term debt
amounted to $.7 million, repayment of the Revolving Credit Agreement, Term Loan
A and Term Loan B amounted to $311.0 million and debt assumed from acquisitions
totaled $2.7 million.
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 capital 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 fixed charge coverage ratios and maximum
leverage ratios. The borrowers are required to maintain a leverage ratio (the
ratio of indebtedness to consolidated EBITDA (as defined in the Credit
Facilities)) of not more than 3.75-to-1 for the measurement period commencing
May 31, 1998 and ending May 30, 1999 and 3.25-to-1 thereafter. The borrowers'
fixed charge coverage ratio (the ratio of (a) EBITDA minus capital expenditures
to (b) the sum of all required principal payments on outstanding indebtedness,
interest expense and dividends paid) is required to be at least 1.25-to-1 at the
end of each Four Quarter Period (as defined in the Credit Facilities) for the
duration of the Credit Facilities. The Company was in compliance with these
covenants at May 31, 1998 and believes it will meet these financial tests over
the remaining term of this agreement.
The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants at
May 31, 1998.
The Loan and Security Agreement contains a number of covenants that, among
other things, restrict the ability of Mid-State to dispose of assets, create
liens on assets, engage in mergers, incur any unsecured or recourse debt, or
make changes to their credit and collection policy. In addition, Mid-State is
required to maintain specified net income and net worth levels. The Company was
in compliance with these covenants at May 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1998, cash and cash equivalents, net of book overdrafts, were
approximately $29.8 million. Operating cash flows for the year ended May 31,
1998, together with issuance of the Mid-State Trust VI
30
<PAGE>
Asset Backed Notes, borrowings under the Mid-State Trust V Variable Funding Loan
Agreement, the proceeds from the Credit Facilities, borrowings under the Loan
and Security Agreement, and the use of available cash balances were primarily
used for retirement of long-term senior debt, the purchase of AIMCOR, interest
payments, capital expenditures and the purchase of approximately 1.4 million
shares of common stock in June 1997. In July 1998, the Company's Board of
Directors authorized the Company to repurchase additional shares (not to exceed
2.0 million) of its common stock.
Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at May 31, 1998 were
not significant; however, it is estimated that gross capital expenditures of the
Company and its subsidiaries for the year ending May 31, 1999 will approximate
$112.0 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 generated by Jim Walter Homes and its affiliates. It is
anticipated that one or more permanent financings, similar to the previous
Mid-State asset backed 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 cash
flow will be generated to make all required interest and principal payments on
its indebtedness, to make all of its planned capital expenditures, and to meet
substantially all operating needs. It is further expected that amounts under the
Revolving Credit Facility will be sufficient to meet peak operating needs of the
Company and to repurchase up to 2.0 million shares of the Company's stock.
YEAR 2000
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. The Company has
established a project team to coordinate solutions to Year 2000 issues for its
information systems. The team has identified systems and applications that must
be modified and has also evaluated alternative solutions, including modification
versus replacement. As a result, plans have been established which include
timely milestones and appropriate testing to ensure that the systems and
applications are ready for the Year 2000. The team will develop alternative
solutions when and where necessary. Based on information currently available,
costs of addressing potential problems are not expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant Year 2000 issues in a timely
manner.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130--"Reporting
Comprehensive Income" ("FAS 130") and No. 131--"Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), were issued in June 1997. Both
statements became effective for fiscal years beginning after December 15, 1997
(fiscal 1999 for the Company). FAS 130 establishes standards for display and
reporting of comprehensive income and its components in a full set of
general-purpose financial statements. FAS 130 defines comprehensive income as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement
requires that all items that meet the definition of components of comprehensive
income be reported in a financial statement for the period in which they are
recognized. FAS 131 establishes standards for reporting
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<PAGE>
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. In addition, it establishes
standards for related disclosures about products and services, geographic areas
and major customers.
In June 1998, Statement of Financial Accounting Standards No.
133--"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
was issued. FAS 133 becomes effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 (fiscal 2000 for the Company). This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. FAS 133
requires that all derivatives and hedging activities be recognized as either
assets or liabilities in the statement of financial position and be measured at
fair value. Currently, the Company's only derivative instruments relate to
interest rate lock agreements (see Note 8 of "Notes to Consolidated Financial
Statements").
The Company believes that the adoption of the above standards will not
materially affect its financial performance or reporting.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-K contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that is based on the beliefs of the management of the
Company, as well as assumptions made by and information currently available to
the management of the Company. When used in this Form 10-K, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to publicly release any revisions to these forward looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
UNAUDITED INTERIM FINANCIAL INFORMATION:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1998 AUGUST 31 NOVEMBER 30* FEBRUARY 28* MAY 31*
- ------------------------------------------------------------ ---------- ------------- ------------ ----------
Net sales and revenues...................................... $ 399,333 $ 448,069 $ 453,822 $ 535,976
Gross Profit................................................ 74,395 76,905 80,618 91,914
Income before extraordinary item............................ 14,065 12,641 7,708 24,490
Net income.................................................. 14,065 9,978 7,708 24,490
Income per common share:
Basic..................................................... .26 .19 .14 .45
Diluted................................................... .26 .18 .14 .45
<CAPTION>
QUARTER ENDED
---------------------------------------------------
FISCAL YEAR 1997 AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
- ------------------------------------------------------------ ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales and revenues...................................... $ 369,663 $ 397,896 $ 340,415 $ 399,087
Gross Profit................................................ 71,269 67,963 51,662 79,893
Net income (loss)........................................... 10,220 7,525 (2,248) 21,620
Income (loss) per common share:
Basic..................................................... .19 .14 (.04) .39
Diluted................................................... .19 .13 (.04) .39
</TABLE>
- ------------------------
* Includes results from AIMCOR acquired with an effective date of September
30, 1997
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data consist of the financial
statements as indexed on page F-1 and unaudited interim financial information
presented in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Proxy Statement (the "Proxy Statement")
included in the Schedule 14A filed by the Company with the Securities and
Exchange Commission (the "Commission") on August 25, 1998 under the Securities
Exchange Act of 1934, as amended. Certain information with respect to executive
officers is included in Part I, Item 4A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules--See Index to Financial
Statements on page F-1.
(b) Reports of Form 8-K-- None
(c) Exhibits--See Index to Exhibits on page E-1 and E-2.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
WALTER INDUSTRIES, INC.
, 1998
-----------------------------------------------
Dean M. Fjelstul,
SENIOR VICE PRESIDENT AND PRINCIPAL FINANCIAL
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ KENNETH E. HYATT*
------------------------------------------
Kenneth E. Hyatt, Chairman, Director and
Principal Executive Officer
, 1998
/s/ RICHARD E. ALMY*
------------------------------------------
Richard E. Almy, Executive Vice President,
Director and Principal Operating Officer
, 1998
/s/ HOWARD L. CLARK, JR.*
------------------------------------------
, 1998 Howard L. Clark, Jr., Director
/s/ PERRY GOLKIN*
------------------------------------------
, 1998 Perry Golkin, Director
/s/ JAMES L. JOHNSON*
------------------------------------------
1998 James L. Johnson, Director
/s/ MICHAEL T. TOKARZ*
------------------------------------------
, 1998 Michael T. Tokarz, Director
/s/ JAMES W. WALTER*
------------------------------------------
, 1998 James W. Walter, Director
------------------------------------------
Dean M. Fjelstul, Senior Vice President
and Principal Financial Officer
, 1998
------------------------------------------
Frank A. Hult, Vice President, Controller
and Principal Accounting Officer
, 1998
<TABLE>
<S> <C> <C> <C>
*By: -------------------------
Frank A. Hult
ATTORNEY-IN-FACT
</TABLE>
34
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Walter Industries, Inc. and Subsidiaries
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets -- May 31, 1998 and 1997....................... F-3
Consolidated Statements of Operations for the Three Years Ended May 31,
1998..................................................................... F-4
Consolidated Statements of Cash Flows for the Three Years Ended May 31,
1998..................................................................... F-5 to F-6
F-7 to
Notes to Consolidated Financial Statements................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Walter Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Walter Industries, Inc. and its
subsidiaries at May 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1998,
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.
PricewaterhouseCoopers LLP
Tampa, Florida
July 14, 1998
F-2
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................. $ 54,709 $ 35,782
Short-term investments, restricted.................................................... 247,463 195,371
Marketable securities................................................................. 39,064 41,222
Instalment notes receivable........................................................... 4,238,745 4,256,845
Less--Allowance for possible losses................................................. (26,221) (26,394)
Unearned time charges.......................................................... (2,894,459) (2,896,517)
---------- ----------
Net........................................................................... 1,318,065 1,333,934
Trade receivables..................................................................... 218,906 170,236
Less--Allowance for possible losses................................................. (7,133) (8,225)
---------- ----------
Net........................................................................... 211,773 162,011
Other notes and accounts receivable................................................... 12,918 20,880
Inventories
Finished goods...................................................................... 205,516 117,949
Goods in process.................................................................... 36,876 32,291
Raw materials and supplies.......................................................... 53,509 52,066
Houses held for resale.............................................................. 3,153 3,068
---------- ----------
Total inventories............................................................. 299,054 205,374
Prepaid expenses...................................................................... 12,156 11,862
Property, plant and equipment, at cost................................................ 1,149,707 978,006
Less--Accumulated depreciation and depletion........................................ (477,359) (409,830)
---------- ----------
Net........................................................................... 672,348 568,176
Investments........................................................................... 10,665 5,112
Deferred income taxes................................................................. 84,409 109,023
Unamortized debt expense.............................................................. 31,215 22,793
Other long-term assets................................................................ 41,135 41,671
Goodwill, net......................................................................... 527,696 274,174
---------- ----------
$3,562,670 $3,027,385
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdrafts....................................................................... $ 24,867 $ 25,523
Accounts payable...................................................................... 145,476 86,418
Accrued expenses...................................................................... 126,022 131,768
Income taxes payable.................................................................. 60,098 58,884
Short-term notes payable.............................................................. 5,800 --
Long-term senior debt
Mortgage-backed/asset-backed notes.................................................. 1,886,167 1,752,125
Other senior debt................................................................... 589,450 313,450
Accrued interest...................................................................... 27,147 23,220
Accumulated postretirement benefits obligation........................................ 283,708 268,959
Other long-term liabilities........................................................... 54,848 47,626
Stockholders' equity
Common stock, $.01 par value per share:
Authorized--200,000,000 shares
Issued--55,283,686 shares and 55,063,412 shares................................... 553 551
Capital in excess of par value...................................................... 1,169,052 1,164,261
Retained earnings (accumulated deficit)............................................. (784,503) (840,744)
Treasury stock--1,398,092 shares, at cost........................................... (21,841) --
Cumulative foreign currency translation adjustment.................................. (52) --
Excess of additional pension liability over unrecognized prior years service cost... (4,122) (4,656)
---------- ----------
Total stockholders' equity.................................................... 359,087 319,412
---------- ----------
$3,562,670 $3,027,385
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales and revenues:
Net sales............................................................. $ 1,567,996 $ 1,251,022 $ 1,220,397
Time charges.......................................................... 242,858 231,388 231,104
Miscellaneous......................................................... 26,346 24,651 34,134
------------ ------------ ------------
1,837,200 1,507,061 1,485,635
------------ ------------ ------------
Cost and expenses:
Cost of sales......................................................... 1,244,164 980,235 987,354
Depreciation and depletion............................................ 75,429 71,814 74,341
Selling, general and administrative................................... 165,176 144,703 135,840
Postretirement benefits............................................... 21,708 22,710 27,129
Provision for possible losses......................................... 676 3,340 4,367
Interest and amortization of debt expense............................. 193,736 179,291 208,690
Amortization of goodwill.............................................. 38,605 34,870 39,096
Long-lived asset impairment........................................... -- -- 143,265
------------ ------------ ------------
1,739,494 1,436,963 1,620,082
------------ ------------ ------------
Income (loss) before tax benefit (expense) and extraordinary item....... 97,706 70,098 (134,447)
Income tax benefit (expense):
Current............................................................... (8,545) (8,244) (621)
Deferred.............................................................. (30,257) (24,737) 55,776
------------ ------------ ------------
Income (loss) before extraordinary item................................. 58,904 37,117 (79,292)
Extraordinary item--loss on early extinguishment of debt (net of income
tax benefit of $1,434 in 1998 and $2,910 in 1996)..................... (2,663) -- (5,404)
------------ ------------ ------------
Net income (loss)....................................................... $ 56,241 $ 37,117 $ (84,696)
------------ ------------ ------------
------------ ------------ ------------
Basic income (loss) per share:
Income (loss) before extraordinary item............................... $ 1.09 $ .68 $ (1.56)
Extraordinary item.................................................... (.05) -- (.10)
------------ ------------ ------------
Net income (loss)................................................... $ 1.04 $ .68 $ (1.66)
------------ ------------ ------------
------------ ------------ ------------
Diluted income (loss) per share:
Income (loss) before extraordinary item............................... $ 1.08 $ .67 $ (1.56)
Extraordinary item.................................................... (.05) -- (.10)
------------ ------------ ------------
Net income (loss)................................................... $ 1.03 $ .67 $ (1.66)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)....................................................... $ 56,241 $ 37,117 $ (84,696)
Charges to income not affecting cash:
Depreciation and depletion............................................ 75,429 71,814 74,341
Provision for (benefit from) deferred income taxes.................... 30,257 24,737 (55,776)
Accumulated postretirement benefits obligation........................ 14,749 21,132 19,416
Provision for (benefit from) other long-term liabilities.............. 1,493 1,336 (4,034)
Amortization of goodwill.............................................. 38,605 34,870 39,096
Amortization of debt expense.......................................... 6,624 6,914 7,250
Extraordinary item -- loss on early extinguishment of debt (net of
income tax benefit)................................................. 2,663 -- 5,404
Long-lived asset impairment........................................... -- -- 143,265
----------- ----------- -----------
226,061 197,920 144,266
Decrease (increase) in assets, net of effects from acquisitions:
Short-term investments, restricted.................................... (52,092) (19,939) (47,430)
Marketable securities................................................. 2,158 8,116 20,534
Instalment notes receivable, net (a).................................. 15,869 (3,781) 30,875
Trade and other notes and accounts receivable, net.................... 5,371 8,831 (8,900)
Federal income tax receivable......................................... -- -- 99,875
Inventories........................................................... (16,448) 6,071 (15,008)
Prepaid expenses...................................................... 1,311 75 757
Deferred income taxes................................................. -- 21,411 (79,941)
Increase (decrease) in liabilities, net of effects from acquisitions:
Book overdrafts....................................................... (656) (2,671) (5,552)
Accounts payable...................................................... 14,057 14,850 (7,361)
Accrued expenses...................................................... (21,412) 11,937 7,054
Income taxes payable.................................................. 1,258 2,646 2,977
Accrued interest...................................................... 3,927 (5,599) (9,033)
----------- ----------- -----------
Cash flows from operating activities................................ 179,404 239,867 133,113
----------- ----------- -----------
FINANCING ACTIVITIES
Issuance of short-term notes payable and long-term senior debt........ 1,550,500 159,000 680,000
Retirement of long-term senior debt................................... (1,185,198) (304,721) (693,974)
Additions to unamortized debt expense................................. (19,143) (159) (6,045)
Purchases of treasury stock........................................... (21,841) -- --
Exercise of employee stock options.................................... 4,793 -- --
Disposition of liabilities subject to Chapter 11 proceedings.......... -- 3,427 (63,932)
Fractional share payments............................................. -- (13) (8)
----------- ----------- -----------
Cash flows from (used in) financing activities...................... 329,111 (142,466) (83,959)
----------- ----------- -----------
</TABLE>
F-5
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Acquisitions, net of cash acquired.................................... (386,319) -- --
Additions to property, plant and equipment,net of retirements and
effects from acquisitions........................................... (105,250) (98,454) (73,485)
Decrease (increase) in investments and other assets, net of effects
from acquisitions................................................... 1,592 4,292 (1,261)
----------- ----------- -----------
Cash flows used in investing activities............................. (489,977) (94,162) (74,746)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE ON CASH........................................... 389 -- --
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...................... 18,927 3,239 (25,592)
Cash and cash equivalents at beginning of year............................ 35,782 32,543 58,135
----------- ----------- -----------
Cash and cash equivalents at end of year.................................. $ 54,709 $ 35,782 $ 32,543
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $171,081, $173,418 and $148,749 and cash collections on
account and payouts in advance of maturity of $186,950, $169,637 and
$179,624 for the years ended May 31, 1998, 1997 and 1996, respectively.
<TABLE>
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................... $ 183,866 $ 179,749 $ 220,959
Income taxes paid........................................... 7,331 5,598 --
Income tax refunds.......................................... -- 21,411 22,300
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: The
Company purchased all of the capital stock of AIMCOR and other immaterial
entities for approximately $406,400. In conjunction with the acquisitions,
liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired..................................... $ 524,700
Cash paid......................................................... 406,400
---------
Liabilities assumed............................................... $ 118,300
---------
---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (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 related to the Consensual
Plan.
PRINCIPLES OF CONSOLIDATION
The Company is a diversified holding company with five operating segments:
Homebuilding and Financing, Water Transmission Products, Natural Resources,
Industrial Products and Energy Services. Through its operating segments, the
Company offers a diversified line of products and services primarily including
home construction and financing, ductile iron pressure pipe, coal, methane gas,
furnace and foundry coke, chemicals, slag fiber, aluminum foil and sheet
products and petroleum coke distribution and refinery outsourcing services. 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. In addition, certain
reclassifications of prior year amounts have been made in the accompanying
consolidated financial statements in order to conform with the fiscal 1998
presentation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries included in Energy Services
are translated at current exchange rates, while revenues and expenses are
translated at average rates prevailing during the year. Translation adjustments
are reported as a component of stockholders' equity. Gains and losses on foreign
currency transactions are included in general and administrative expenses.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash and cash equivalents,
marketable securities, instalment notes receivable and trade receivables.
The Company maintains cash and cash equivalents and marketable securities in
high quality securities with various financial institutions. Concentrations of
credit risk with respect to instalment notes receivable and trade receivables
are limited due to the large number of customers and their dispersion across
many geographic areas. However, of the gross amount of instalment notes
receivable at May 31, 1998 and 1997, 20%, 12% and 10% and 19%, 12% and 11%,
respectively, are secured by homes located in the states of Texas, Mississippi
and Florida, respectively. Additionally, sales to Alabama Power Company by the
Natural
F-7
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Resources segment were 11%, 13% and 13% of consolidated net sales and revenues
in the years ended May 31, 1998, 1997 and 1996, respectively. At May 31, 1998
and 1997, trade receivables from Alabama Power Company accounted for
approximately 5% and 6%, respectively, of consolidated trade receivables. Jim
Walter Resources, Inc.'s ("JWR") current coal supply contract with Alabama Power
Company expires in December 1999. A new contract with Alabama Power Company
begins on January 1, 2000 and expires on December 31, 2005. The new contract
stipulates lower volumes and lower sales prices. The Company believes the
potential for incurring material losses related to these credit risks is remote.
REVENUE RECOGNITION
Revenue is recognized when products are shipped or services are provided to
customers for all segments except Homebuilding and Financing. Revenue from the
sale of a home is included in income upon completion of construction and legal
transfer to the customer. Time charges are included in equal parts in each
monthly payment and taken into income as collected. This method of time charge
income recognition approximates the effective interest method since a much
larger provision for losses would be required if time charge income were
accelerated.
INVENTORIES
Inventories are valued at the lower of cost or market using either the
first-in, first-out ("FIFO") or average cost method of accounting.
GOODWILL
Goodwill acquired in connection with the acquisition of Original Jim Walter
is being amortized over periods ranging up to 20 years. Goodwill acquired in
connection with the acquisition of Applied Industrial Materials Corporation
("AIMCOR") is being amortized over 35 years. Goodwill acquired in connection
with all other acquisitions is being amortized over 15 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 and other long-term
assets based upon estimated future undiscounted cash flows from operations of
the related business unit. At May 31, 1998 and 1997, the accumulated
amortization of goodwill was approximately $516.7 million and $478.1 million,
respectively. At May 31, 1998, the net unamortized balance of goodwill and other
long-term assets are not considered to be impaired.
DEPRECIATION AND DEPLETION
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,
F-8
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
accelerated methods are used for substantially all eligible properties. The
depreciable property categories and the principal rates for depreciation used
are as follows:
<TABLE>
<S> <C>
Land improvements........................................ 3.50% to 10.00%
Buildings................................................ 2.00% to 20.00%
Over term of
Leasehold improvements................................... lease
Mine development costs................................... Over life of mine
Machinery and equipment.................................. 3.50% to 33.33%
</TABLE>
Depletion of minerals is provided based on estimated recoverable quantities.
CAPITALIZED INTEREST
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, 1998, 1997 and 1996 was immaterial.
OPERATING LEASES
Rent expense was $13.7 million, $12.0 million and $11.0 million for the
years ended May 31, 1998, 1997 and 1996, respectively. Future minimum payments
under noncancelable operating leases at May 31, 1998 are: 1999, $13.3 million;
2000, $10.5 million; 2001, $9.4 million; 2002, $7.6 million; and 2003, $4.7
million.
ENVIRONMENTAL EXPENDITURES
The Company capitalizes environmental expenditures that increase the life or
efficiency of property or that reduce or prevent environmental contamination.
The Company accrues for environmental expenses resulting from existing
conditions that relate to past operations when the costs are probable and
reasonably estimable.
TAXES
The Company complies with Statement of Financial Accounting Standards No.
109--"Accounting for Income Taxes" ("FAS 109"). FAS 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 that have been
recognized in the Company's financial statements or tax returns. FAS 109
generally considers all expected future events other than changes in tax law or
rates.
EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No.
128--"Earnings per Share" ("FAS 128"), was issued. FAS 128 became effective for
both interim and annual periods ending after December 15, 1997 and required a
restatement of previously reported earnings per share. Under FAS 128, "basic"
earnings per share replaced the reporting of "primary" earnings per share. Basic
earnings per share is calculated by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for the
period, without consideration of common stock equivalents. "Fully diluted"
earnings per share was replaced by "diluted" earnings per share under FAS 128.
The
F-9
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--RECENT HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
calculation of diluted earnings per share is similar to that of fully diluted
earnings per share under previous accounting pronouncements. Diluted earnings
per share includes the number of shares issuable on the exercise of dilutive
employee stock options less the number of shares of common stock that could have
been purchased with the proceeds from the exercise of such options.
NOTE 2--ACQUISITION OF AIMCOR
On October 15, 1997, the Company completed the acquisition of AIMCOR which,
through its Carbon Group, is a leading international provider of products and
outsourcing services to the petroleum, steel, foundry and aluminum industries.
Through its Metals Group, AIMCOR is also a leading supplier of ferrosilicon in
the southeastern United States. The purchase price was approximately $400.0
million, including direct acquisition costs of $4.8 million, and is subject to
certain indemnity obligations of the parties as required by the Stock Purchase
Agreement. Direct acquisition costs included investment advisory and finders
fees of approximately $4.0 million paid to Kohlberg Kravis Roberts & Co., LLC,
which owned 13,958,589 shares of the Company's common stock at May 31, 1998. The
acquisition was accounted for using the purchase method of accounting and had an
effective date of September 30, 1997.
The following unaudited results of operations reflects the effect on the
Company's operations as if the acquisition of AIMCOR had occurred as of June 1,
1997.
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1998
-------------------
<S> <C>
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
Net sales and revenues................................................... $ 1,994,711
Income before extraordinary item......................................... $ 63,890
Net income............................................................... $ 61,227
Basic net income per share............................................... $ 1.14
Diluted net income per share............................................. $ 1.13
</TABLE>
The unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of June 1, 1997, nor are they
necessarily indicative of future operating results.
NOTE 3--CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS AND
MARKETABLE SECURITIES
Cash and cash equivalents include short-term deposits and highly liquid
investments which have original maturities of three months or less 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 book overdrafts.
Restricted short-term investments at May 31, 1998 and 1997 include (i)
temporary investment of reserve funds and collections on instalment notes
receivable owned by Mid-State Trusts II, III, IV, V and VI (the "Trusts")
($125.3 million and $101.5 million respectively) 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 ($106.9 million and $79.7 million,
respectively)
F-10
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS AND
MARKETABLE SECURITIES (CONTINUED)
and (iii) miscellaneous other segregated accounts restricted to specific uses
($15.3 million and $14.2 million, respectively). In June 1998, an agreement was
reached with Financial Security Assurance Inc. to release approximately $121.6
million of funds held by Trust II which were subject to retention at July 1,
1998. Such funds were utilized to pay down Trust IV indebtedness.
Investments with original maturities greater than three months are
classified as marketable securities. In accordance with Statement of Financial
Accounting Standards No. 115--"Accounting for Certain Investments in Debt and
Equity Securities," the Company's marketable securities are classified as
available for sale and are carried at estimated fair values which approximate
cost at May 31, 1998 and 1997.
NOTE 4--INSTALMENT NOTES RECEIVABLE
Instalment notes receivable arise from sales of detached, single-family
homes to customers. These receivables require periodic payments primarily over
periods of 12 to 30 years and are secured by first mortgages or similar security
instruments. The credit terms offered by Jim Walter Homes, Inc. ("Jim Walter
Homes") and its affiliates are usually for 100% of the purchase price of the
home. The buyer's ownership of the land and improvements necessary to complete
the home constitute a significant equity investment to which the Company has
access should the buyer default on payment of the instalment note obligation.
Instalment notes receivable currently carry either an 8.5% or 10% annual
percentage rate, without points or closing costs. The aggregate amount of
instalment notes receivable having at least one payment 90 or more days
delinquent was 3.06% and 2.78% of total instalment notes receivable at May 31,
1998 and 1997, respectively.
Mid-State Homes, Inc. ("Mid-State") purchases instalment notes from Jim
Walter Homes and its affiliates on homes constructed and sold by Jim Walter
Homes and its affiliates and services such instalment notes. Mid-State Trust II
("Trust II"), Mid-State Trust III ("Trust III"), Mid-State Trust IV ("Trust IV")
and Mid-State Trust VI ("Trust VI") are business trusts organized by Mid-State,
which owns all of the beneficial interest in Trust III, Trust IV and Trust VI.
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 mortgage-backed or asset-backed
notes. The assets of Trust II, Trust III, Trust IV and Trust VI, 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, IV and VI 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. Mid-State Trust V ("Trust V"), a business trust in
which Mid-State holds all the beneficial interest, was organized as a warehouse
facility 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 and its affiliates.
F-11
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INSTALMENT NOTES RECEIVABLE (CONTINUED)
The gross amount of instalment notes receivable and the economic balance by
trust are as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 31, 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
GROSS BALANCE ECONOMIC BALANCE GROSS BALANCE ECONOMIC BALANCE
------------- ----------------- ------------- -----------------
Trust II..................................... $ 784,641 $ 502,034 $ 966,072 $ 609,227
Trust III.................................... 310,526 171,071 364,872 195,535
Trust IV..................................... 1,416,842 635,678 1,612,880 704,532
Trust V...................................... 673,043 261,986 1,310,206 509,059
Trust VI..................................... 1,050,695 419,430 -- --
Unpledged.................................... 2,998 1,329 2,815 1,228
------------- ----------------- ------------- -----------------
Total........................................ $ 4,238,745 $ 1,991,528 $ 4,256,845 $ 2,019,581
------------- ----------------- ------------- -----------------
------------- ----------------- ------------- -----------------
</TABLE>
The economic balance of an account is the present value of the future
scheduled monthly payments due on the account. Such present value is calculated
by discounting the remaining future scheduled monthly payments on an account
using the effective financing rate. The effective financing rate is determined
by calculating the discount rate which, when applied in a present value
calculation, results in the present value of all originally scheduled monthly
payments on such account being equal to the original amount financed. In effect,
the economic balance of an account is the amount of principal that can be
amortized by the instalment payments due over the remaining term of the account
at the effective financing rate.
At May 31, 1998, instalment payments estimated to be receivable within each
of the next five fiscal years and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................ $ 281,126
2000............................................................ 275,193
2001............................................................ 268,583
2002............................................................ 262,067
2003............................................................ 253,136
Thereafter...................................................... 2,898,640
---------
$4,238,745
---------
---------
</TABLE>
F-12
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
<S> <C> <C>
1998 1997
------------ ----------
Land and minerals................................................... $ 151,691 $ 150,667
Land improvements................................................... 22,664 20,476
Buildings and leasehold improvements................................ 151,683 106,004
Mine development costs.............................................. 80,672 80,363
Machinery and equipment............................................. 694,883 597,357
Construction in progress............................................ 48,114 23,139
------------ ----------
Total............................................................... $ 1,149,707 $ 978,006
------------ ----------
------------ ----------
</TABLE>
NOTE 6--LONG-LIVED ASSET IMPAIRMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 -- "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " ("FAS 121")
which became effective for fiscal years beginning after December 15, 1995
(fiscal year 1997 for the Company). The Company elected to adopt FAS 121 during
fiscal 1996 as a result of significant adverse changes in the results of
operations, principally in the Natural Resources business segment. A fire which
resulted from the unexpected recurrence of spontaneous combustion heatings at
JWR's Mine No. 5 at the end of the fiscal second quarter, as well as various
geological problems at the three other coal mines during portions of the year,
led to the conclusion that there was an impairment of fixed assets within the
Natural Resources segment.
After performing a review for asset impairment at each of the Company's
business segments and applying the principles of measurement contained in FAS
121, the Company recorded a charge against earnings in 1996 of $143.3 million
before tax ($101.1 million after tax). The charge included a $120.4 million
pre-tax ($78.3 million 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 $22.9 million write-off of goodwill was recorded in the
Industrial Products segment, substantially all of which was at JW Window
Components, Inc. Adoption of this standard had no impact on cash flow.
NOTE 7--INCOME TAXES
Income tax expense (benefit) is made up of the following components (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
---------------------- ---------------------- ---------------------
<CAPTION>
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal................................................... $ 4,444 $ 30,747 $ 4,745 $ 25,697 $ (799) $ (54,846)
State and local........................................... 2,178 (490) 3,499 (960) 1,420 (930)
Foreign................................................... 1,923 -- -- -- -- --
----------- --------- ----------- --------- --------- ----------
Total..................................................... $ 8,545 $ 30,257 $ 8,244 $ 24,737 $ 621 $ (55,776)
----------- --------- ----------- --------- --------- ----------
----------- --------- ----------- --------- --------- ----------
</TABLE>
F-13
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
The income tax expense (benefit) before extraordinary item at the Company's
effective tax rate differed from the statutory rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Statutory tax rate......................................................................... 35.0% 35.0% (35.0)%
Effect of:
State and local income tax............................................................... 1.1 2.3 .2
Percentage depletion..................................................................... (7.5) (8.8) (2.6)
Amortization of goodwill and FAS 121 charge.............................................. 12.0 17.5 16.2
Benefit of capital loss carryforward..................................................... -- -- (5.9)
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.................................................................. -- .5 (9.1)
Foreign sales corporation benefit........................................................ (.4) -- --
Other, net............................................................................... (.5) .5 .2
--- --- ---------
Effective tax rate......................................................................... 39.7% 47.0% (41.0)%
--- --- ---------
--- --- ---------
</TABLE>
In fiscal 1998 and 1996, the income tax benefit related to the extraordinary
item approximated the statutory rate and is deferred federal income tax.
Deferred tax liabilities (assets) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
<S> <C> <C>
1998 1997
----------- -----------
Bad debts............................................................................... $ (11,832) $ (12,309)
Instalment sales method for instalment notes receivable in prior years.................. 21,268 27,504
Depreciation............................................................................ 85,640 84,721
Difference in basis of assets under purchase accounting................................. 16,761 18,536
Net operating loss/credit carryforwards................................................. (51,214) (91,230)
Accrued expenses........................................................................ (37,019) (33,792)
Postretirement benefits other than pensions............................................. (108,013) (102,453)
----------- -----------
Total deferred tax asset.............................................................. $ (84,409) $ (109,023)
----------- -----------
----------- -----------
</TABLE>
The Revenue Act of 1987 eliminated the instalment sales method of tax
reporting for instalment sales after December 31, 1987.
The change in the deferred tax accounts during fiscal 1998 includes a
purchase accounting adjustment for the AIMCOR acquisition. As a result of the
loss incurred in fiscal 1996, the Company recorded a deferred tax asset of $25.0
million. During fiscal 1997, the Company elected to carry the 1996 loss back to
prior years rather than forward, resulting in a refund of federal income taxes
of $21.4 million, which was accordingly charged against the deferred tax asset.
The election to carry back the net operating loss generated a tax charge of
approximately $.4 million in the fourth quarter of fiscal 1997 due to the effect
of the rate difference and other miscellaneous tax adjustments. The Company
believes that it is more likely
F-14
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
than not that the total deferred tax asset will be realized through taxable
earnings or alternative tax strategies; therefore, a valuation allowance is not
warranted.
The Company's net operating loss carryforward at May 31, 1998 approximates
$118.2 million, which will expire in fiscal 2010. The Company's minimum tax
credit carryforward at May 31, 1998 approximates $9.3 million. The Company's
foreign tax credit carryforward at May 31, 1998 approximates $.6 million which
will expire in fiscal 2003.
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 carryforwards. The reorganization under the Consensual Plan created
an ownership change in fiscal 1995; therefore, $70.8 million of the remaining
net operating loss carryforward is subject to the annual limitation. However,
the Company believes that the annual limitation will not affect the realization
of the net operating loss carryforward, which is expected to be fully utilized
in fiscal 1999.
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 ("IRS") for taxes, interest and penalties in the amounts of
$110.6 million with respect to fiscal years ended August 31, 1980 and August 31,
1983 through August 31, 1987, $31.5 million with respect to fiscal years ended
May 31, 1988 (nine months) and May 31, 1989 and $44.8 million with respect to
fiscal years ended May 31, 1990 and May 31, 1991. These proofs of claim
represent total adjustments to taxable income of approximately $360.0 million
for all tax periods at issue. The Company has filed objections to the proofs of
claim, and the various issues are being litigated in the Bankruptcy Court. By
joint stipulation between the IRS and the Company, confirmed by Order of the
Bankruptcy Court dated January 3, 1997, the IRS conceded an issue involving an
adjustment to taxable income of approximately $51.0 million for hedging losses
incurred during fiscal year 1988. Also by joint stipulation, confirmed by Order
of the Bankruptcy Court dated March 10, 1998, the IRS has conceded an issue
involving adjustments to taxable income of approximately $127.0 million for
amortization deductions related to certain debt issuance costs for tax years
1988 through 1991. The Company believes that the balance of such proofs of claim
are substantially without merit and intends to defend vigorously such claims,
but there can be no assurance as to the ultimate outcome. The Company's U. S.
federal income tax returns for the fiscal years ended May 31, 1992, 1993 and
1994 have been audited by the IRS and the Company has received a notice of
assessment. The Company's U. S. federal income tax return for the fiscal years
ended May 31, 1995 and 1996 are currently being audited by the IRS.
F-15
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT
Long-term debt, in accordance with its contractual terms, consisted of the
following at each year end (in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Senior debt:
Walter Industries, Inc.
Revolving Credit Facility......................................................... $ 135,000 $ --
Term Loan......................................................................... 450,000 --
Revolving Credit Agreement........................................................ -- 146,000
Term Loan A....................................................................... -- 106,250
Term Loan B....................................................................... -- 58,750
Other............................................................................. 4,450 2,450
------------ ------------
589,450 313,450
------------ ------------
Mid-State Trusts
Loan & Security Agreement......................................................... 80,300 --
Trust II Mortgage-Backed Notes.................................................... 323,000 410,000
Trust III Asset Backed Notes...................................................... 85,145 116,934
Trust IV Asset Backed Notes....................................................... 774,024 841,191
Trust V Variable Funding Loan..................................................... 218,000 384,000
Trust VI Asset Backed Notes....................................................... 405,698 --
------------ ------------
1,886,167 1,752,125
------------ ------------
Total........................................................................... $ 2,475,617 $ 2,065,575
------------ ------------
------------ ------------
</TABLE>
In conjunction with the closing of the AIMCOR acquisition on October 15,
1997, the Company completed an $800.0 million financing with NationsBank,
National Association ("NationsBank"). The financing consisted of a $350.0
million revolving credit facility ("Revolving Credit Facility") and a $450.0
million six-year term loan (the "Term Loan"), (collectively, the "Credit
Facilities"). Proceeds from the financing were used to (a) finance the
acquisition of AIMCOR, (b) pay transaction costs, (c) provide ongoing working
capital, and (d) repay the Revolving Credit Agreement, Term Loan A and Term Loan
B. The Company recorded an extraordinary loss of $4.1 million ($2.7 million net
of income tax benefit) consisting of a write-off of unamortized debt expense
related to the early repayment of the Revolving Credit Agreement, Term Loan A
and Term Loan B.
The Credit Facilities are secured by guarantees and pledges of the capital
stock of all domestic subsidiaries of the Company other than Mid-State Holdings
Corporation and its sole subsidiary Mid-State. Net cash proceeds from (a) asset
sales where the aggregate consideration received (on a cumulative basis from
October 15, 1997) exceeds $20.0 million and the cumulative amount of such
proceeds from such sales since the most recent preceding prepayment equals or
exceeds $5.0 million, (b) each Permitted Receivables Securitization (as defined
in the Credit Facilities) or (c) the issuance of Consolidated Indebtedness (as
defined in the Credit Facilities) permitted thereunder must be applied to
permanently reduce the Credit Facilities. There have been no such reductions to
date. 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 .50% or (ii) a LIBOR
rate plus an
F-16
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED)
Applicable Margin (as defined in the Credit Facilities) of .50% to 1.25 % (based
upon a leverage ratio pricing grid). At May 31, 1998, the weighted average
interest rate was 6.44%.
The Revolving Credit Facility includes a sub-facility for trade and other
standby letters of credit in an amount up to $75.0 million at any time
outstanding and a sub-facility for swingline advances in an amount not in excess
of $25.0 million at any time outstanding. A commitment fee ranging from .175% to
.30% 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 .125%. At May 31, 1998, letters of
credit in the aggregate face amount of $23.3 million have been issued and
swingline advances outstanding were $5.8 million. The Revolving Credit Facility
is due October 15, 2003.
Scheduled principal payments on the Term Loan in each of the six years from
May 31, 1998 are $25.0 million, $50.0 million, $75.0 million, $75.0 million,
$100.0 million and $125.0 million, respectively.
On May 28, 1998, Mid-State entered into a 364-day, $90.0 million Loan and
Security Agreement with Kitty Hawk Funding Corporation, an affiliate of
NationsBank, as lender, and NationsBank, as agent and bank investor. Advances
under the Loan and Security Agreement are secured by Mid-State's beneficial
interest in Trust III and evidenced by a variable funding note. The proceeds
from the borrowings outstanding at May 31, 1998 were used to pay down the
Revolving Credit Facility. Future proceeds will be used for general corporate
purposes. The facility currently matures on May 27, 1999, but provides for
extensions of the maturity through May 31, 2002. Accordingly, the $80.3 million
of borrowings outstanding at May 31, 1998 have been classified as long-term
debt. Principal payments are required on any day in which the outstanding
principal amount of all advances under the Loan and Security Agreement exceed
the borrowing base. Additionally, commencing on May 31, 2001, Mid-State is
required to prepay $1.5 million on May 31, August 31, November 30, and February
28. The outstanding principal of all advances must be paid when the facility is
terminated. Interest must be paid on the last day of each tranche period at
either the commercial paper rate, the prime rate or the LIBOR rate plus .47% as
determined by Mid-State and approved by the lender. The advances under the Loan
and Security Agreement are to be satisfied solely from the assets of Mid-State
and are non-recourse to Walter Industries and any of its other subsidiaries.
The Trust II Mortgage-Backed Notes were issued in five classes in varying
principal amounts. Four of the classes have been fully repaid. The remaining
class, A4 ("Class A4 Notes"), bears interest at the rate of 9.625%. Interest on
the notes is payable quarterly on 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 A4 Notes until maturity on April 1, 2003. Class A4
Notes are subject to special principal payments and 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, 1998 is $64.6 million.
The Trust III Asset Backed Notes 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 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.
F-17
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED)
On March 3, 1995, Trust V entered into the three-year $500.0 million
Variable Funding Loan Agreement with Enterprise Funding Corporation, an
affiliate of NationsBank, as lender and as Administrative Agent. The agreement
was amended to reduce the facility to $400.0 million effective July 31, 1997.
This facility is an evergreen three-year facility with periodic paydowns from
the proceeds of permanent financings. The facility currently matures on March 3,
2001. Accordingly, the $218.0 million of borrowings outstanding at May 31, 1998
have been classified as long-term debt. Interest is based on the cost of A-1 and
P-1 rated commercial paper which was 5.57% at May 31, 1998 plus .35%. The
facility fee on the maximum net investment is .15%.
On June 11, 1997, Mid-State purchased from Mid-State Trust V instalment
notes having a gross amount of $1,196.5 million and an economic balance of
$462.3 million and subsequently sold these instalment notes to Mid-State Trust
VI. These sales were in exchange for the net proceeds from the public issuance
of $439.1 million of Asset Backed Notes by Trust VI. The notes were issued in
four classes, bear interest at rates ranging from 7.34% to 7.79% and have a
final maturity of July 1, 2035. Payments will be 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 VI expenses. Net proceeds
from the public offering were used primarily to pay down the Trust V
indebtedness of $384.0 million. Lehman Brothers Inc. ("Lehman Brothers"), an
affiliate of Lehman Brothers Holdings Inc., which owned 2,849,321 shares of the
Company's common stock at May 31, 1998, acted as an underwriter in connection
with the public issuance of the Trust VI Asset Backed Notes and received
underwriting commissions and fees of $2.2 million.
The Company has traditionally used interest rate lock agreements as hedge
instruments to manage interest rate risks. 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 rate fluctuations from indebtedness
secured by fixed-rate instalment notes receivable generated by its homebuilding
business. The Company has entered into forward-interest rate lock agreements in
order to fix the interest rate on a portion of asset-backed long-term debt
anticipated to be issued in the second quarter of fiscal 1999. The lock
agreements have a total notional amount of $150.0 million, mature in October
1998, and have a weighted-average interest rate of 5.70%. Approximately $100.0
million notional amount of interest rate lock agreements are held by Lehman
Brothers. Upon the issuance of the debt, any gain or loss realized on the lock
agreements will be amortized to interest expense over the term of the related
debt. Additionally, the interest rate lock agreements in effect during fiscal
1997 were terminated on June 11, 1997 and the losses incurred ($8.6 million)
have been deferred and are being amortized to interest expense over the life of
Trust VI.
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 capital 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 fixed charge coverage ratios and maximum
leverage ratios, some of which become more restrictive over time. The Company
was in compliance with these covenants at May 31, 1998.
The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants at
May 31, 1998.
F-18
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--DEBT (CONTINUED)
The Loan and Security Agreement contains a number of covenants that, among
other things, restrict the ability of Mid-State to dispose of assets, create
liens on assets, engage in mergers, incur any unsecured or recourse debt, or
make changes to their credit and collection policy. In addition, Mid-State is
required to maintain specified net income and net worth levels. The Company was
in compliance with these covenants at May 31, 1998.
NOTE 9--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, 1998, 1997 and 1996, was $7.5 million, $7.6 million and $11.8
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.
The net pension costs for Company-administered plans are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Service cost-benefits earned during the period.................................... $ 6,860 $ 6,644 $ 6,072
Interest cost on projected benefit obligation..................................... 18,651 17,589 16,972
Actual loss (return) on assets.................................................... (45,246) (28,532) (35,347)
Net amortization and deferral..................................................... 23,394 8,680 20,236
--------- --------- ---------
Net pension costs............................................................... $ 3,659 $ 4,381 $ 7,933
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the funded status of Company administered
plans (in thousands):
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 31, 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
PLANS IN WHICH PLANS IN WHICH
-------------------------- --------------------------
<CAPTION>
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested benefits..................................... $ 185,237 $ 51,555 $ 166,103 $ 46,853
Non-vested benefits................................. 8,271 1,427 7,444 1,525
------------ ------------ ------------ ------------
$ 193,508 $ 52,982 $ 173,547 $ 48,378
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Plan assets at fair value, primarily stocks and bonds... $ 242,023 $ 41,373 $ 213,726 $ 33,341
Projected benefit obligations........................... 232,991 52,982 207,610 48,430
------------ ------------ ------------ ------------
Plan assets in excess of (less than) projected benefit
obligations........................................... 9,032 (11,609) 6,116 (15,089)
Unamortized portion of transition (asset) obligation at
June 1, 1986.......................................... (6,299) 2,237 (7,524) 2,918
Unrecognized net loss from actual experience different
from that assumed..................................... 2,340 4,011 6,743 4,758
Prior service cost not recognized....................... 574 3,744 633 3,695
Contribution to plans after measurement date............ 1 1,056 103 1,126
------------ ------------ ------------ ------------
Prepaid (accrued) pension cost.......................... 5,648 (561) 6,071 (2,592)
Additional liability.................................... -- (9,993) -- (11,294)
------------ ------------ ------------ ------------
Prepaid pension cost (pension liability) recognized in
the balance sheet..................................... $ 5,648 $ (10,554) $ 6,071 $ (13,886)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The projected benefit obligations were determined using an assumed discount
rate of 7.00% in fiscal 1998 and 7.50% in fiscal 1997 and, where applicable, an
assumed increase in future compensation levels of 4.50% in fiscal 1998 and 1997.
The assumed long-term rate of return on plan assets was 9.00% in fiscal 1998 and
1997.
Under the labor contract with the United Mine Workers of America, JWR 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 $42.5 million and $34.7 million at May 31, 1998 and 1997,
respectively. However, although the net liability can be estimated, its
components, the relative position of each employer with respect to the actuarial
present value of accumulated benefits and net assets available for benefits, are
not available to the Company.
The Company provides certain postretirement benefits other than pensions,
primarily health care, to eligible retirees. The Company's postretirement
benefit plans are not funded. Postretirement benefit costs
F-20
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
were $21.7 million in 1998, $22.7 million in 1997, and $27.1 million in 1996.
Amounts paid for postretirement benefits were $7.0 million in 1998, $7.3 million
in 1997, and $7.7 million in 1996.
The net periodic postretirement benefit cost includes the following
components (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Service cost..................................................................... $ 8,128 $ 7,642 $ 8,668
Interest cost.................................................................... 16,005 14,990 18,701
Net amortization and deferral.................................................... (2,425) 78 (240)
--------- --------- ---------
Net periodic postretirement benefit cost....................................... $ 21,708 $ 22,710 $ 27,129
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accumulated postretirement benefits obligation at May 31, 1998 and 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Retirees.................................................................................. $ 84,252 $ 81,731
Fully eligible, active participants....................................................... 42,813 37,189
Other active participants................................................................. 135,699 106,493
---------- ----------
Accumulated postretirement benefit obligation............................................. 262,764 225,413
Unrecognized net gain..................................................................... 20,944 43,546
---------- ----------
Postretirement benefit liability recognized in the balance sheet.......................... $ 283,708 $ 268,959
---------- ----------
---------- ----------
</TABLE>
The principal assumptions used to measure the accumulated postretirement
benefit obligation include:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Discount rate............................................................. 7.00% 7.50%
Health care cost trend rate............................................... 8.00% declining 8.50% declining
to 5.25% over to 5.25% over
seven years eight years
and remaining and remaining
level thereafter level thereafter
</TABLE>
A one percent increase in trend rates would increase the accumulated
postretirement benefit obligation by 19.50% and increase net periodic
postretirement benefit cost by 20.90% for fiscal 1998.
Certain subsidiaries of the Company maintain profit sharing plans. The total
cost of these plans for the years ended May 31, 1998, 1997 and 1996 was $3.5
million, $3.4 million and $2.9 million, respectively.
In February 1997, a reduction in the salaried workforce at JWR was completed
under a voluntary early retirement program. The total cost of this program was
$6.2 million.
NOTE 10--STOCKHOLDERS' EQUITY
The Company is authorized to issue 200,000,000 shares of common stock, $.01
par value. As of May 31, 1998 and 1997, 53,885,594 and 55,063,412, respectively,
shares of common stock were outstanding.
F-21
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
On June 24, 1997, the Company repurchased 1,387,092 shares of outstanding common
stock which are currently held as treasury stock. Additionally, 11,000 shares of
common stock related to the Walter Industries, Inc. Directors' Deferral Fee Plan
are being held as treasury stock.
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 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.
Pursuant to the Consensual Plan, a total of 54,868,766 shares of common
stock were to be issued to creditors and former stockholders of the Company. 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 common
stock of the Company. The Consensual Plan confirmed by the Bankruptcy Court
(which technically constituted a modification of the Creditors Plan) kept in
place the bondholders election. Certain subordinated bondholders, however, were
unable to provide documentation evidencing their right to receive Qualified
Securities within the two-year time frame required by the Consensual Plan. As a
result, approximately 212,000 additional shares of common stock were issued in
lieu of Qualified Securities in 1997. In addition, certain former stockholders
did not tender their shares, which resulted in approximately 17,000 shares not
being issued.
F-22
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
Changes in stockholders' equity for each of the three years in the period
ended May 31, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CUMULATIVE EXCESS OF
COMMON STOCK CAPITAL RETAINED TREASURY STOCK FOREIGN ADDITIONAL
-------------------------- IN EARNINGS ---------------------- CURRENCY PENSION
SHARES PAR VALUE EXCESS (DEFICIT) SHARES AMOUNT ADJUSTMENT LIABILITY
----------- ------------- --------- --------- ----------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995... 50,494 $ 505 $1,159,384 $(793,165) $ (5,950)
Shares issued pursuant to
Consensual Plan:
Shares issued to
former
stockholders........ 494 5 (5)
Shares issued to
escrow.............. 3,880 39 (39)
Fractional share
payments................ (8)
Net loss.................. (84,696)
Reverse excess of
additional pension
liability............... 624
----------- ----- --------- --------- ----------- --------- --- -----------
Balance at May 31, 1996... 54,868 549 1,159,332 (877,861) (5,326)
Stock issued in lieu of
qualified securities.... 212 2 5,373
Canceled shares........... (17) (431)
Fractional share
payments................ (13)
Net income................ 37,117
Reverse excess of
additional pension
liability............... 670
----------- ----- --------- --------- ----------- --------- --- -----------
Balance at May 31, 1997... 55,063 551 1,164,261 (840,744) (4,656)
Stock issued from option
exercises............... 221 2 4,791
Net income................ 56,241
Purchase of treasury
stock................... (1,398) $ (21,841)
Cumulative foreign
currency adjustment..... $ (52)
Reverse excess of
additional pension
liability............... 534
----------- ----- --------- --------- ----------- --------- --- -----------
Balance at May 31, 1998... 55,284 $ 553 $1,169,052 $(784,503) (1,398) $ (21,841) $ (52) $ (4,122)
----------- ----- --------- --------- ----------- --------- --- -----------
----------- ----- --------- --------- ----------- --------- --- -----------
</TABLE>
F-23
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE
A reconciliation of the basic and diluted per share computations for each of
the three years in the period ended May 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
-------------------- -------------------- ----------------------
<CAPTION>
BASIC DILUTED BASIC DILUTED BASIC DILUTED
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item................ $ 58,904 $ 58,904 $ 37,117 $ 37,117 $ (79,292) $ (79,292)
Extraordinary item..................................... (2,663) (2,663) -- -- (5,404) (5,404)
--------- --------- --------- --------- ---------- ----------
Net income (loss)...................................... $ 56,241 $ 56,241 $ 37,117 $ 37,117 $ (84,696) $ (84,696)
--------- --------- --------- --------- ---------- ----------
--------- --------- --------- --------- ---------- ----------
Shares of common stock outstanding:
Average number of common shares(a)(b)(c)............... 53,846 53,846 54,922 54,922 50,989 50,989
Weighted effect of diluted securities:
Stock options (d)...................................... -- 537 -- 142 -- --
--------- --------- --------- --------- ---------- ----------
53,846 54,383 54,922 55,064 50,989 50,989
--------- --------- --------- --------- ---------- ----------
--------- --------- --------- --------- ---------- ----------
Per share:
Income (loss) before extraordinary item.............. $ 1.09 $ 1.08 $ .68 $ .67 $ (1.56) $ (1.56)
Extraordinary item................................... (.05) (.05) -- -- (.10) (.10)
--------- --------- --------- --------- ---------- ----------
Net income (loss)...................................... $ 1.04 $ 1.03 $ .68 $ .67 $ (1.66) $ (1.66)
--------- --------- --------- --------- ---------- ----------
--------- --------- --------- --------- ---------- ----------
</TABLE>
- ------------------------
(a) Fiscal 1998 shares include 3,880,140 additional shares issued to an escrow
account on September 13, 1995 pursuant to the Consensual Plan, but does not
include 1,398,092 shares held in treasury.
(b) Fiscal 1997 shares include 3,880,140 additional shares issued to the escrow
account.
(c) Fiscal 1996 shares do not include 3,880,140 additional shares issued to the
escrow account because such issuance would be anti-dilutive.
(d) Represents the number of shares of common stock issuable on the exercise of
dilutive employee stock options less the number of shares of common stock
which could have been purchased with the proceeds from the exercise of such
options. These purchases were assumed to have been made at the higher of
either the market price of the common stock at the end of the period or the
average market price for the period.
NOTE 12--STOCK OPTIONS
Under the Walter Industries, Inc. Long-Term Incentive Stock Plan approved by
stockholders in October 1995 and amended in September 1997, an aggregate of
6,000,000 shares (3,000,000 shares at May 31, 1997 and 1996) of the Company's
common stock have been reserved for the grant and issuance of incentive and
non-qualified stock options, stock appreciation rights ("SARs") and stock
awards. The maximum number of such shares with respect to which stock options or
SARs may be granted to any employee during while the Plan is in effect is
1,000,000 shares and the aggregate number of such shares that may be used in
settlement of stock awards is 3,000,000 shares. An option becomes exercisable at
such times and in such installments as set by the Compensation Committee of the
Board (generally, vesting occurs over three years in equal annual increments),
but no option will be exercisable after the tenth
F-24
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 31, 1997 MAY 31, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning of year................... 2,669,999 $ 13.301 1,487,000 $ 14.120 -- $ --
Granted............................................ 906,000 17.955 1,219,000 12.313 1,500,000 14.120
Exercised.......................................... (233,341) 13.686 -- -- -- --
Canceled........................................... (44,329) 13.353 (36,001) 13.571 (13,000) 14.125
----------
Outstanding at end of year......................... 3,298,329 14.551 2,669,999 13.301 1,487,000 14.120
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year......................... 1,143,036 13.570 487,333 14.118 -- --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------------------- ------------------
NUMBER WEIGHTED AVERAGE NUMBER
WEIGHTED AVERAGE OUTSTANDING AT REMAINING CONTRACTUAL EXERCISABLE AT
EXERCISE PRICES MAY 31, 1998 LIFE (YEARS) MAY 31, 1998
- ---------------- -------------- ------------------------- ------------------
<S> <C> <C> <C>
$ 12.313 1,126,861 8.1 346,239
14.117 1,269,468 7.1 796,797
14.875 30,000 9.0 --
17.908 825,000 9.5 --
20.814 47,000 9.8 --
-------------- ----------
3,298,329 8.1 1,143,036
-------------- ----------
-------------- ----------
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations for
accounting for stock options. Accordingly, no compensation costs at the grant
dates are recorded. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates as prescribed by Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("FAS 123"), the Company's net income and net income per share on
a pro forma basis would have been (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Pro forma net income........................................................................ $ 53,836 $ 35,314
--------- ---------
--------- ---------
Pro forma basic net income per share........................................................ $ 1.00 $ .64
--------- ---------
--------- ---------
Pro forma diluted net income per share...................................................... $ .99 $ .64
--------- ---------
--------- ---------
</TABLE>
The preceding pro forma results were calculated with the use of the Black
Scholes option-pricing model. The following assumptions were used for the year
ended May 31, 1998: (1) risk-free interest rate of 6.07%; (2) dividend yield of
0.0%; (3) expected life of 5.0 years; and (4) volatility of 31.10%. The
following assumptions were used for the year ended May 31, 1997: (1) risk-free
interest rate of 7.36%; (2) dividend yield of 0.0%; (3) expected life of 5.0
years; and (4) volatility of 29.30%.
F-25
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTIONS (CONTINUED)
The Walter Industries, Inc. Employee Stock Purchase Plan was adopted in
January 1996. All full-time employees of the Company who have attained the age
of majority in the state in which they reside are eligible to participate. The
Company contributes a sum equal to 15% of each participant's actual payroll
deduction as authorized, and remits such funds to a designated brokerage firm
which purchases in the open market, as agent for the Company, as many shares of
common stock as such funds will permit for the accounts of the participants. The
amount of stock purchased depends upon the market prices of the common stock at
the time the purchases are made. The total number of shares that may be
purchased under the plan is 1,000,000. Total shares purchased under the plan in
1998 and 1997 were approximately 155,000 and 200,000, respectively, and the
Company's contribution was approximately $.4 million in both years.
NOTE 13--LITIGATION
VEIL-PIERCING SUITS
Beginning in early 1989, the Company and certain of its officers, directors
and stockholders 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 asbestos-related 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 of Celotex and that the distribution by HAC of substantially all of
its assets to the Company pursuant to the LBO was a fraudulent conveyance (the
"Veil-Piercing Suits").
On December 27, 1989, the Company and certain of its subsidiaries filed for
protection under the Bankruptcy Code in 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 in October 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 Consensual Plan. 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.
In March 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
alleged that Celotex and JWC breached the Veil-Piercing Settlement by failing to
F-26
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--LITIGATION (CONTINUED)
propose and use their best efforts to obtain confirmation of a Chapter 11 plan
for Celotex that included an injunction issued pursuant to Section 524(g) of the
Bankruptcy Code. Although all Veil-Piercing claims by Asbestos Claimants were
resolved as part of the Consensual Plan, the Company believes that Section
524(g) affords additional statutory protection to the Company against the
possibility of such claims in the future. On May 28, 1996, the Bankruptcy Court
issued an order granting in part the Company's motion for summary judgment
finding, among other things, that the plan of reorganization filed by Celotex in
its Chapter 11 proceeding did not comply with the terms of the Veil-Piercing
Settlement.
In October 1996, Celotex and various other parties in the Celotex bankruptcy
announced to the Court in the Celotex Bankruptcy (the "Celotex Bankruptcy
Court") that an agreement had been reached between Celotex and each of its
creditor groups pursuant to a Modified Joint Plan of Reorganization (the
"Celotex Modified Plan") which, among other things, superseded and replaced all
prior plans. The Celotex Modified Plan contains a provision for a Section 524(g)
injunction as to all asbestos claimants. The Celotex Modified Plan was approved
by a vote of the Celotex creditors and in December 1996 the Celotex Bankruptcy
Court entered an Order confirming the Celotex Modified Plan. The Celotex
Modified Plan became effective as of May 30, 1997. The May 1996 Order of the
Bankruptcy Court and the Order confirming the Celotex Modified Plan are now
final and not appealable.
SUIT BY THE COMPANY AND JIM WALTER RESOURCES, INC. FOR BUSINESS INTERRUPTION
LOSSES
In May 1995, the Company and JWR filed a lawsuit in the Circuit Court for
Tuscaloosa County, Alabama (Civil Action No. CV-95-625) against certain
insurers. The lawsuit arose out of a spontaneous combustion fire that began in
JWR's underground coal mine No. 5 on November 17, 1993. As a result of the fire,
the Company and JWR claimed compensable losses in the amount of $25.0 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. The complaint filed by the Company and JWR sought, among other
things, payment of the amounts claimed to be due under the insurance policies in
question and a declaratory judgment that the policies were not void or voidable.
During calendar year 1997 the Company entered into settlements with each of the
insurers who, in the aggregate, paid approximately $24.0 million in full and
final settlement of the Company's and JWR's claims.
INCOME TAX LITIGATION
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See "Note 7 -- 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.
F-27
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 -- "Disclosures about
Fair Value of Financial Instruments" ("FAS 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 permitted
under FAS 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, FAS 107 fair value disclosures do not
purport to be the amount that 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,
management believes that the disclosures required by FAS 107 have limited
relevance to the Company and its operations.
The following methods and assumptions were used to estimate fair value
disclosures:
CASH AND CASH EQUIVALENTS, RESTRICTED SHORT-TERM INVESTMENTS, MARKETABLE
SECURITIES, TRADE RECEIVABLES, OTHER NOTES AND ACCOUNTS RECEIVABLE, ACCOUNTS
PAYABLE AND SHORT-TERM NOTES PAYABLE--The carrying amounts reported in the
balance sheet approximate fair value.
INSTALMENT NOTES RECEIVABLE--The estimated fair value of instalment notes
receivable at May 31, 1998 and 1997 was in the range of $2,100.0 million to
$2,200.0 million and $2,000.0 million to $2,100.0 million, respectively. The
estimated fair value is based upon valuations prepared by an investment banking
firm as of May 31, 1998 and 1997. 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 senior debt at May 31, 1998 and
1997 was $2,560.0 million and $2,142.0 million, respectively, based on current
yields for comparable debt issues or prices for actual transactions.
INTEREST RATE LOCK AGREEMENTS--The estimated fair value of the interest rate
lock agreements at May 31, 1998 would have resulted in a loss of $.9 million.
The fair value is based on quotes from brokers which represented the amounts
that the Company would pay if the agreements were terminated at May 31, 1998.
F-28
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION
Information relating to the Company's business segments is set forth below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Sales and revenues:
Homebuilding and Financing............................................ $ 449,471 $ 440,749 $ 413,078
Water Transmission Products........................................... 426,389 419,813 419,984
Natural Resources..................................................... 362,245 345,011 362,948
Industrial Products................................................... 312,313 299,851 287,230
Energy Services....................................................... 285,950 -- --
Corporate............................................................. 832 1,637 2,395
------------ ------------ ------------
Consolidated sales and revenues (a)(b).............................. $ 1,837,200 $ 1,507,061 $ 1,485,635
------------ ------------ ------------
------------ ------------ ------------
Operating income (c)(d):
Homebuilding and Financing (e)(g)..................................... $ 96,431 $ 81,731 $ 63,390
Water Transmission Products........................................... 13,836 13,986 10,517
Natural Resources (f)................................................. 38,377 27,595 (105,929)
Industrial Products (f)............................................... 21,469 21,433 (10,406)
Energy Services....................................................... 20,947 -- --
------------ ------------ ------------
191,060 144,745 (42,428)
Less-Corporate interest and other expense (g)......................... (93,354) (74,647) (92,019)
------------ ------------ ------------
Income before tax benefit (expense) and extraordinary item............ 97,706 70,098 (134,447)
Income tax (expense) benefit.......................................... (38,802) (32,981) 55,155
------------ ------------ ------------
Income (loss) before extraordinary item............................. $ 58,904 $ 37,117 $ (79,292)
------------ ------------ ------------
------------ ------------ ------------
Depreciation and depletion:
Homebuilding and Financing............................................ $ 3,840 $ 3,311 $ 3,279
Water Transmission Products........................................... 16,880 17,010 18,636
Natural Resources..................................................... 36,330 38,107 38,652
Industrial Products................................................... 13,121 11,696 11,890
Energy Services....................................................... 3,701 -- --
Corporate............................................................. 1,557 1,690 1,884
------------ ------------ ------------
Total............................................................... $ 75,429 $ 71,814 $ 74,341
------------ ------------ ------------
------------ ------------ ------------
Gross capital expenditures:
Homebuilding and Financing............................................ $ 4,908 $ 5,617 $ 3,735
Water Transmission Products........................................... 20,492 14,479 12,888
Natural Resources..................................................... 40,683 54,999 53,576
Industrial Products................................................... 26,181 25,968 12,792
Energy Services....................................................... 14,169 -- --
Corporate............................................................. 1,120 692 532
------------ ------------ ------------
Total............................................................... $ 107,553 $ 101,755 $ 83,523
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-29
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Identifiable assets:
Homebuilding and Financing............................................ $ 1,833,967 $ 1,796,949 $ 1,802,950
Water Transmission Products........................................... 439,514 452,963 480,209
Natural Resources..................................................... 391,831 387,167 381,582
Industrial Products................................................... 214,974 192,688 177,668
Energy Services....................................................... 503,508 -- --
Corporate............................................................. 178,876 197,618 248,968
------------ ------------ ------------
Total............................................................... $ 3,562,670 $ 3,027,385 $ 3,091,377
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
(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 Products Group to the
Water Transmission Products Group of $14.1 million, $12.4 million and $13.3
million and sales of the Natural Resources Group to the Industrial Products
Group of $5.8 million, $4.2 million and $4.8 million in 1998, 1997 and 1996,
respectively.
(b) Export sales were $229.2 million, $134.7 million and $171.5 million in 1998,
1997 and 1996, respectively. Export sales to any single geographic area do
not exceed 10% of consolidated net sales and revenues.
(c) Operating income amounts are after deducting amortization of goodwill. A
breakdown by segment is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Homebuilding and Financing................................................. $ 26,932 $ 28,538 $ 31,246
Water Transmission Products................................................ 12,215 12,212 12,247
Natural Resources.......................................................... (1,328) (1,327) (1,331)
Industrial Products........................................................ 639 638 2,135
Energy Services............................................................ 5,336 -- --
Corporate.................................................................. (5,189) (5,191) (5,201)
--------- --------- ---------
$ 38,605 $ 34,870 $ 39,096
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-30
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SEGMENT INFORMATION (CONTINUED)
(d) Operating income amounts include postretirement benefits. A breakdown by
segment is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Homebuilding and Financing............................................. $ 1,271 $ 1,888 $ 1,636
Water Transmission Products............................................ 2,046 3,857 3,729
Natural Resources...................................................... 15,062 11,873 16,640
Industrial Products.................................................... 3,087 4,519 4,581
Energy Services........................................................ -- -- --
Corporate.............................................................. 242 573 543
--------- --------- ---------
$ 21,708 $ 22,710 $ 27,129
--------- --------- ---------
--------- --------- ---------
</TABLE>
(e) In July 1986, Waltsons, Inc., a corporation in which James W. Walter,
Chairman Emeritus and a Director of the Company, has a twenty percent (20%)
interest, acquired a fifty percent (50%) interest in the operations of
Booker & Company, Inc. ("Booker"), a wholesale distributor of building
supplies and materials. In December 1996, Waltsons, Inc. sold all of its
interest in the operations of Booker. Booker has been a supplier of various
building supplies and materials to Dixie Building Supplies, Inc., a wholly
owned subsidiary of the Company. Booker's sales of building supplies and
materials to such subsidiary totaled $6.1 million and $5.7 million in 1997
and 1996, respectively. The Company believes that the terms of the
transactions between the Company and Booker were at least as favorable to
the Company as those that could have been obtained from unaffiliated third
parties.
(f) Includes FAS 121 write-down of fixed assets of $120.4 million at two coal
mines in the Natural Resources Group and write-off of goodwill of $22.9
million in the Industrial Products Group in 1996.
(g) Interest expense incurred by the Homebuilding and Financing segment and
Corporate are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Homebuilding and Financing:.....................................
Gross interest................................................ $ 154,644 $ 152,094 $ 156,342
Less: Intercompany interest income............................ (38,647) (33,135) (28,127)
----------- ----------- -----------
Net interest.................................................. 115,997 118,959 128,215
Corporate....................................................... 77,739 60,332 80,475
----------- ----------- -----------
$ 193,736 $ 179,291 $ 208,690
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The corporate interest and other expenses are attributable to all groups,
but cannot be reasonably allocated to specific groups.
F-31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
Walter Industries, Inc.
Our audits of the consolidated financial statements of Walter Industries,
Inc. referred to in our report dated July 14, 1998, appearing on page F-2 of
this Form 10-K also included an audit of the Financial Statement Schedules
listed in Item 14(a) of this Form 10-K. 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.
PricewaterhouseCoopers LLP
Tampa, Florida
July 14, 1998
F-32
<PAGE>
SCHEDULE II
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS RECLASSI- AT END
DESCRIPTION OF YEAR EXPENSES FROM RESERVES FICATIONS OF YEAR
- ----------------------------------------------------- ----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Reserve (provision for possible losses) deducted from
instalment notes receivable........................ $ 26,394 $ 2,142 $ 2,315(1) -- $ 26,221
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
Reserve (provision for possible losses) deducted from
trade receivables.................................. $ 8,225 $ (1,466) $ (374) -- $ 7,133
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
Accrued workmen's compensation (2)................... $ 9,763 $ 1,304 $ 671(3) -- $ 10,396
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
Black Lung reserve (2)............................... $ 13,942 $ -- $ 232(3) -- $ 13,710
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
</TABLE>
- ------------------------
(1) Notes and accounts written off as uncollectible.
(2) Included in other long-term liabilities.
(3) Losses sustained.
F-33
<PAGE>
SCHEDULE II
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS RECLASSI- AT END
DESCRIPTION OF YEAR EXPENSES FROM RESERVES FICATIONS OF YEAR
- ----------------------------------------------------- ----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Reserve (provision for possible losses) deducted from
instalment notes receivable........................ $ 26,138 $ 2,861 $ 2,605(1) -- $ 26,394
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
Reserve (provision for possible losses) deducted from
trade receivables.................................. $ 8,180 $ 479 $ 434(1) -- $ 8,225
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
Accrued workmen's compensation (2)................... $ 8,668 $ 1,116 $ 21(3) -- $ 9,763
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
Black Lung reserve (2)............................... $ 14,225 $ -- $ 283(3) -- $ 13,942
----------- ----------- ------ ----------- ---------
----------- ----------- ------ ----------- ---------
</TABLE>
- ------------------------
(1) Notes and accounts written off as uncollectible.
(2) Included in other long-term liabilities.
(3) Losses sustained.
F-34
<PAGE>
SCHEDULE II
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
- ----------------------------------------------------- ----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Reserve (provision for possible losses) deducted from
instalment notes receivable........................ $ 26,556 $ 3,805 $ 4,223(1) -- $ 26,138
----------- ----------- ------ --------- ---------
----------- ----------- ------ --------- ---------
Reserve (provision for possible losses) deducted from
trade receivables.................................. $ 7,998 $ 562 $ 380(1) -- $ 8,180
----------- ----------- ------ --------- ---------
----------- ----------- ------ --------- ---------
Accrued workmen's compensation (2)................... $ 4,500 $ (257) $ 75(3) $ 4,500 $ 8,668
----------- ----------- ------ --------- ---------
----------- ----------- ------ --------- ---------
Black Lung reserve (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-35
<PAGE>
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- --------------------------------------------------------------------------------------------
<C> <C> <S>
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 Plan 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 Indemnities 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)
10(l) -- Stock Purchase Agreement dated as of September 19, 1997 by and among the Stockholders of
Applied Industrial Materials corporation, Certain Stockholders of AIMCOR Enterprises
International, Inc. AIMCOR (Germany) Limited Partnership and AIMCOR (Luxembourg) Limited
Partnership, as first parties, and Walter Industries, Inc. as second party. (9)
10(m) -- $800 Million Credit Agreement by and among Walter Industries, Inc. as Borrower, NationsBank,
National Association, as Administrative Agent, Documentation Agent and Syndication Agent and
the Lenders Party hereto from time to time. (9)
</TABLE>
E-1
<PAGE>
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- --------------------------------------------------------------------------------------------
<C> <C> <S>
10(n) -- Variable Funding Loan Agreement, dated as of March 3, 1995, among Mid-State Trust V.
Enterprise Funding Corporation and NationsBank N.A. and amendments thereto.(10)
21 -- Subsidiaries of the Company
23 -- Consent of PricewaterhouseCoopers LLP
24 -- Powers of Attorney
27 -- Financial Data Schedule
</TABLE>
- ------------------------
(1) This Exhibit is incorporated by reference to the Application for
Qualification of Indenture of Form T-3 filed by the Company with the
Commission on February 6, 1995.
(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 of
Form S-1 (File No. 33-59013) filed by the Company with the Commission on May
2, 1995.
(4) Portions of this document have been omitted pursuant to an approved request
for confidential treatment dated October 11, 1995.
(5) This Exhibit is incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 33-59013) filed by the Company
with the Commission on May 2, 1995.
(6) This Exhibit is incorporated by reference to the Registration Statement on
Form S-8 filed by the Company with the Commission on 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.
(9) This Exhibit is incorporated by reference to Form 8-K filed by the Company
with the Commission on October 30, 1997.
(10) This Exhibit is incorporated by reference to Form 10-K/A filed by the
Company with the Commission on November 7, 1997.
E-2
<PAGE>
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 (DE)
2. Homes Holdings Corporation (DE)
a. Jim Walter Homes, Inc. (FL) (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. (FL) (a subsidiary of Jim Walter
Homes, Inc.)
iii. Neatherlin Homes, Inc. (TX) (a subsidiary of Jim Walter Homes,
Inc.)
iv. Jim Walter Homes of Georgia, Inc. (DE) (a subsidiary of Jim
Walter Homes, Inc.)
3. JW Window Components, Inc. (DE)
a. JW Windows (Wisconsin), Inc. (WI) (a subsidiary of JW Window
Components, Inc.)
4. Vestal Manufacturing Company (DE)
5. Sloss Industries Corporation (DE)
6. Southern Precision Corporation (DE)
7. Mid-State Holdings Corporation (DE)
a. Mid-State Homes, Inc. (FL) (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.)
iv. Mid-State Trust VI (a business trust owned by Mid-State Homes,
Inc.)
8. United States Pipe and Foundry Company, Inc. (AL)
9. Railroad Holdings Corporation (DE)
a. Jefferson Warrior Railroad Company, Inc. (AL) (a subsidiary of
Railroad Holdings Corporation)
10. Computer Holdings Corporation (DE)
a. Jim Walter Computer Services, Inc. (DE) (a subsidiary of Computer
Holdings Corporation)
11. Land Holdings Corporation (DE)
a. Walter Land Company (DE) (a subsidiary of Land Holdings Corporation)
12. J.W.I. Holdings Corporation (DE)
a. J.W. Walter, Inc. (DE) (a subsidiary of J.W.I. Holdings Corporation)
13. Hamer Holdings Corporation (DE)
a. Hamer Properties, Inc. (WV) (a subsidiary of Hamer Holdings
Corporation)
14. Best Insurors, Inc. (FL)
<PAGE>
a. Best Insurors of Mississippi, Inc. (MS) (a subsidiary of Best
Insurors, Inc.)
15. Cardem Insurance Co., Ltd. (Bermuda)
16. Coast to Coast Advertising, Inc. (FL)
17. United Land Corporation (DE)
18. Dixie Building Supplies, Inc. (FL)
19. Jim Walter Resources, Inc. (AL)
a. Black Warrior Transmission Corp. (50% owned by Jim Walter Resources,
Inc.)
b. Black Warrior Methane Corp. (50% owned by Jim Walter Resources, Inc.)
20. Walter International Sales, Inc. (Barbados, W.I.)
21. Applied Industrial Materials Corporation (DE)
a. AIMCOR Enterprises International, Incorporated (NV) (a subsidiary of
Applied Industrial Materials Corporation)
b. Gans Transport Agencies (USA), Inc. (DE) (a subsidiary of Applied
Industrial Materials Corporation)
c. Tennessee Alloys Company (75% owned by Applied Industrial Materials
Corporation)
d. Rain Calcining Limited (India) (5% owned by Applied Industrial
Materials Corporation)
22. AIMCOR Mannheim GMBH (Germany)
23. Applied Industrial Materials Luxembourg, S.A. (Luxembourg)
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 1998.
<PAGE>
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 14, 1998, appearing on page F-2 of this
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedules, which appears on page F-32 of this Form 10-K.
PricewaterhouseCoopers LLP
Tampa, Florida
August 28, 1998
<TABLE> <S> <C>
<PAGE>
<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-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 54,709
<SECURITIES> 286,527
<RECEIVABLES> 4,457,651
<ALLOWANCES> (2,927,813)
<INVENTORY> 299,054
<CURRENT-ASSETS> 2,195,202<F1>
<PP&E> 1,149,707
<DEPRECIATION> (477,359)
<TOTAL-ASSETS> 3,562,670
<CURRENT-LIABILITIES> 362,263<F1>
<BONDS> 2,475,617
1,169,605
0<F1>
<COMMON> 0<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,562,670
<SALES> 1,567,996
<TOTAL-REVENUES> 1,837,200
<CGS> 1,244,164
<TOTAL-COSTS> 240,605
<OTHER-EXPENSES> 60,313
<LOSS-PROVISION> 676
<INTEREST-EXPENSE> 193,736
<INCOME-PRETAX> 97,706
<INCOME-TAX> (38,802)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 2,663<F1>
<CHANGES> 0<F1>
<NET-INCOME> 56,241
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03<F1>
<FN>
<F1>THIS LINE ITEM IS NOT PRESENTED ON THE CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
