MARTIN INDUSTRIES INC /DE/
10-Q, 1996-08-13
HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES
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<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

                      QUARTERLY REPORT PURSUANT TO SECTION
                         13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934

 FOR 13-WEEK PERIOD ENDED JUNE 29, 1996           COMMISSION FILE NO. 0-26228

                            MARTIN INDUSTRIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                       <C>                             
              DELAWARE                                        63-0133054                  
      ------------------------------                      --------------------            
     (STATE OR OTHER JURISDICTION OF                      (I.R.S. EMPLOYER               
     INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)            
                                                                                  


       301 EAST TENNESSEE STREET                                              
           FLORENCE, ALABAMA                                        35630      
- ------------------------------------------                        ---------    
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                          (ZIP CODE)   

</TABLE>



                                 (205) 767-0330
                                 --------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

                     8,716,075 SHARES OF COMMON STOCK, $.01
                        PAR VALUE, AS OF AUGUST 8, 1996
<PAGE>   2

                            MARTIN INDUSTRIES, INC.

                                     INDEX



<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----
<S>      <C>                                                                                        <C>
PART I                    FINANCIAL INFORMATION

         ITEM 1.  FINANCIAL STATEMENTS:

                          CONSOLIDATED BALANCE SHEETS AS OF JUNE 29, 1996
                             (UNAUDITED)  AND DECEMBER 31, 1995                                      2

                          UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                             FOR THE 13-WEEK AND 26-WEEK PERIODS ENDED
                             JUNE 29, 1996 AND JULY 1, 1995                                          4

                          UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             FOR THE 26-WEEK PERIODS ENDED JUNE 29, 1996
                             AND JULY 1, 1995                                                        5

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 6

         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                     10

PART II                   OTHER INFORMATION

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS                               19

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                  20
</TABLE>





                                       1
<PAGE>   3

                        PART I     FINANCIAL INFORMATION
                         Item 1.  Financial Statements

                            MARTIN INDUSTRIES, INC.
                          CONSOLIDATED BALANCE SHEETS
                                     ASSETS


<TABLE>
<CAPTION>
                                                          June 29,        December 31,
                                                            1996              1995
                                                      --------------    --------------
                                                        (Unaudited)
<S>                                                   <C>               <C>
Current assets:
     Cash and short-term investments                  $   15,386,000    $   20,439,000
     Accounts and notes receivable, less
         allowance for doubtful accounts of
         $801,000 and $594,000, respectively              23,504,000        13,824,000
     Inventories                                          19,608,000        16,534,000
     Refundable income taxes                                       0           512,000
     Deferred tax benefits                                 2,057,000         2,049,000
     Prepaid expenses and other assets                     1,188,000           978,000
                                                      --------------    --------------
               Total current assets                       61,743,000        54,336,000
                                                      --------------    --------------

Property, plant and equipment, net                        10,693,000         6,346,000
Deferred tax benefits                                        659,000           675,000
Other noncurrent assets                                    4,201,000         2,225,000
                                                      --------------    --------------
                                                          15,553,000         9,246,000
                                                      --------------    --------------
               Total assets                           $   77,296,000    $   63,582,000
                                                      ==============    ==============
</TABLE>



        The accompanying notes are an integral part of these statements.





                                       2
<PAGE>   4

                            MARTIN INDUSTRIES, INC.
                          CONSOLIDATED BALANCE SHEETS
                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                         June 29,        December 31,
                                                           1996              1995
                                                     --------------    --------------
                                                       (Unaudited)
<S>                                                  <C>               <C>
LIABILITIES
  Current liabilities:
       Short-term borrowings                         $    6,347,000    $       12,000
       Current portion of long-term debt                  1,850,000         1,315,000
       Accounts payable                                   4,195,000         4,072,000
       Accrued liabilities:
           Payroll and employee benefits                  3,415,000         3,090,000
           Product liability                                640,000           660,000
           Warranty                                         528,000           617,000
           Workers' compensation                            471,000           603,000
           Other                                            922,000           662,000
       Income taxes payable                                 356,000                 0
                                                     --------------    --------------
                 Total current liabilities               18,724,000        11,031,000
                                                     --------------    --------------
  Long-term debt                                         11,121,000         7,228,000
  Deferred compensation                                   2,096,000         2,013,000
  Other noncurrent liabilities                              178,000           232,000
                                                     --------------    --------------
                                                         13,395,000         9,473,000
                                                     --------------    --------------
                 Total liabilities                       32,119,000        20,504,000
                                                     --------------    --------------

STOCKHOLDERS' EQUITY
  Preferred stock $.01 par value, 1,000,000
      shares authorized; no shares issued and
      outstanding                                                 0                 0
  Common stock, $.01 par value, 20,000,000
      shares authorized; 9,748,000 shares issued             97,000            97,000
  Paid-in capital                                        24,463,000        23,457,000
  Retained earnings                                      30,149,000        30,130,000
  Unrealized gain on foreign currency translation            86,000                 0
                                                     --------------    --------------
                                                         54,795,000        53,684,000
  Less:
      Treasury stock at cost (1,031,925 and 1,269,715,
         respectively)                                    1,927,000         2,319,000
      Unearned compensation - ESOP                        7,691,000         8,287,000
                                                     --------------    --------------
                 Total stockholders' equity              45,177,000        43,078,000
                                                     --------------    --------------

                 Total liabilities and stockholder   $   77,296,000    $   63,582,000
                                                     ==============    ==============
</TABLE>


        The accompanying notes are an integral part of these statements.





                                       3
<PAGE>   5

                            MARTIN INDUSTRIES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                     13-Week Period Ended             26-Week Period Ended   
                                                     --------------------             --------------------   
                                                      6/29/96      7/1/95              6/29/96      7/1/95    
                                                      -------      ------              -------      ------    
<S>                                             <C>            <C>              <C>            <C>
NET SALES                                       $   26,647,000 $   28,593,000   $   47,691,000 $    49,996,000

COST OF SALES                                       19,682,000     21,040,000       36,380,000      37,941,000
                                                -------------- --------------   -------------- ---------------
      Gross profit                                   6,965,000      7,553,000       11,311,000      12,055,000
                                                -------------- --------------   -------------- ---------------
OPERATING EXPENSES:
   Selling                                           2,440,000      2,115,000        5,026,000       4,231,000
   General and administrative                        1,747,000      1,470,000        3,422,000       2,782,000
   Non-cash ESOP compensation expense                  809,000        608,000        1,567,000       1,008,000
                                                -------------- --------------   -------------- ---------------
                                                     4,996,000      4,193,000       10,015,000       8,021,000
                                                -------------- --------------   -------------- ---------------

      Operating income                               1,969,000      3,360,000        1,296,000       4,034,000

INTEREST EXPENSE                                       400,000        316,000          646,000         550,000

INTEREST INCOME                                       (242,000)       (16,000)        (472,000)        (75,000)
                                                -------------- --------------   -------------- ---------------
      Income before income taxes                     1,811,000      3,060,000        1,122,000       3,559,000

PROVISION FOR INCOME TAXES                             839,000      1,288,000          660,000       1,506,000
                                                -------------- --------------   -------------- ---------------
      Net income                                $      972,000 $    1,772,000   $      462,000 $     2,053,000
                                                ============== ==============   ============== ===============

NET INCOME PER SHARE                            $         0.14 $         0.43   $         0.07 $          0.51
                                                ============== ==============   ============== ===============

WEIGHTED AVERAGE NUMBER
   OF COMMON AND COMMON
   EQUIVALENT SHARES OUTSTANDING                     6,753,029      4,088,204        6,644,273       4,044,786
                                                ============== ==============   ============== ===============

DIVIDENDS DECLARED
   PER SHARE                                    $        0.036 $        0.036   $        0.072 $         0.321
                                                ============== ==============   ============== ===============
</TABLE>


        The accompanying notes are an integral part of these statements.





                                       4
<PAGE>   6

                            MARTIN INDUSTRIES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                                  26-Week       
                                                                                Period Ended    
                                                                     --------------------------------
                                                                          June 29,         July 1,
                                                                            1996             1995
                                                                     ---------------  ---------------
<S>                                                                  <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                         $       462,000  $     2,053,000
  Adjustments to reconcile net income to net cash
    used in operating activities:
       Depreciation and amortization                                         670,000          446,000
       Provision for doubtful accounts and notes receivable                   15,000          168,000
       Non-cash ESOP compensation expense                                  1,567,000        1,008,000
       Provision for performance compensation                                      0          345,000
       Other changes in operating assets and liabilities                  (9,218,000)     (10,550,000)
                                                                     ---------------  ---------------

                 Net cash used in operating activities                    (6,504,000)      (6,530,000)
                                                                     ---------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                    (1,192,000)        (675,000)
  Proceeds from sales of assets                                                1,000           12,000
  Purchase of subsidiary, net of cash acquired                            (1,374,000)               0
                                                                     ---------------  ---------------

                 Net cash used in investing activities                    (2,565,000)        (663,000)
                                                                     ---------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net short-term borrowings                                                5,644,000        4,989,000
  Net repayment of long-term debt                                         (1,444,000)        (550,000)
  Exercise of stock options                                                  180,000                0
  Cash dividends paid                                                       (364,000)        (862,000)
                                                                     ---------------  ---------------

                 Net cash provided by financing activities                 4,016,000        3,577,000
                                                                     ---------------  ---------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                 (5,053,000)      (3,616,000)

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD                                                     20,439,000        3,630,000
                                                                     ---------------  ---------------

CASH AND CASH EQUIVALENTS AT
  END OF PERIOD                                                      $    15,386,000  $        14,000
                                                                     ===============  ===============
</TABLE>





        The accompanying notes are an integral part of these statements.





                                       5
<PAGE>   7

                            MARTIN INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


1.  BASIS OF PRESENTATION

Unaudited Interim Consolidated Financial Statements

         The accompanying unaudited interim consolidated financial statements
of Martin Industries, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and are presented in accordance with the requirements of Form 10-Q and Article
10 of Regulation S-X.  The financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1995 included on Form 10-K, as filed with the Securities and
Exchange Commission on March 29, 1996.

         In the opinion of management, the unaudited consolidated financial
statements included herein reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the information set forth
therein.  The results of operations for the periods presented are not
necessarily indicative of results for the full year.  The Company's business is
seasonal and cyclical with the potential for significant fluctuations in
quarterly earnings.

Principles of Consolidation and Fiscal Periods

         The unaudited interim consolidated financial statements include the
accounts and transactions of the Company and its wholly owned Canadian
subsidiary, 1166081 Ontario Inc.  All significant intercompany accounts and
transactions have been eliminated in consolidation.  See Note 3 for discussion
of the business combination.

         The Company's fiscal quarters end on the Saturday nearest each
calendar quarter-end.  The Company utilizes a December 31 fiscal year-end.

Recapitalization and Stock Split

         On April 7, 1995, the Company's stockholders approved a change in the
authorized number of shares of common stock from 300,000 shares to 20,000,000
shares.  In addition, 1,000,000 shares of $.01 par value preferred stock were
authorized.  The accompanying consolidated financial statements are presented
as if these changes had occurred at the beginning of the first period
presented.  On April 7, 1995, the Board of Directors approved a 35-for-1 stock
split of the Company's common stock that was effected in the form of a stock
dividend effected on July 6, 1995, prior to the consummation of the Company's
initial public offering (the "Offering") discussed in Note 2.  All share and
per share amounts have been retroactively restated for all periods presented to
reflect the stock split.





                                       6
<PAGE>   8

2.  INITIAL PUBLIC OFFERING

         On July 13, 1995, the Company commenced its underwritten initial
public offering of 2,000,000 shares of common stock at an initial price to the
public of $9.50 per share.  The closing of the transaction was completed on
July 18, 1995, at which time the underwriters of the Offering exercised their
over-allotment option to purchase an additional 300,000 shares of common stock
to be sold to the public at $9.50 per share.  The proceeds of the Offering, net
of an underwriting discount of $1,530,000 and expenses of $923,000, were
$19,397,000.  The net proceeds will be used to fund capital expenditures and
possible future acquisitions (see Note 3) and, to the extent not so used, to
reduce outstanding indebtedness, for working capital or other general corporate
purposes.  Pending such uses, the Company has invested the net proceeds in
commercial paper, U.S. agency discount notes and other low-risk, highly liquid
securities.

3.  BUSINESS COMBINATION

         On February 1, 1996, the Company's newly formed, wholly owned Canadian
subsidiary, 1166081 Ontario Inc. ("Martin Canada"), acquired, directly and
indirectly, all of the capital stock of Hunter Energy and Technologies Inc.
("HEAT") and 1061099 Ontario Inc. ("1061099"), a sister company which owned the
land and building leased by HEAT for its manufacturing operation.  The
transaction was accounted for under the purchase method of accounting.  The
aggregate purchase price of approximately $2,102,000 included $850,000 in cash,
$728,000 in promissory notes, $364,000 paid into escrow and transaction
expenses of $160,000.  The promissory notes bear interest at a rate of 9% per
annum and mature on February 1, 1997.  The purpose of the escrow is to make
funds available to meet the sellers' indemnification obligations to the
Company.  The aggregate purchase price exceeded the fair value of the net
assets acquired by $2,197,000, which amount is reflected as goodwill in the
unaudited interim consolidated balance sheet to be amortized over 40 years.
Pursuant to the purchase agreement, Martin Canada caused to be repaid all of
the outstanding bank indebtedness of HEAT and 1061099 in the aggregate amount
of approximately $5,662,000.  The results of operations of the acquired
companies are included in the unaudited interim consolidated statements of
operations for the period from the purchase date, February 1, 1996, through
June 29, 1996.  The pro forma effect of the HEAT acquisition on the Company's
results of operations for the year-to-date periods ended June 29, 1996 and July
1, 1995 is not significant and not disclosed herein.

4.  ESOP ACCOUNTING

         In 1992 the Company established the Employee Stock Ownership Plan
("ESOP") and in January 1993 the Company borrowed $11.9 million from its
primary lender (the "bank loan"), which funds were then loaned by the Company
to the ESOP (the "ESOP loan") on terms substantially similar to those of the
bank loan.  The ESOP utilized the ESOP loan proceeds, together with a $54,000
cash contribution from the Company, to purchase 3,489,115 shares of the
Company's common stock from existing stockholders.  The bank loan and ESOP loan
are payable in equal semi-annual principal installments over a 10-year period.

         At the time of the origination of the bank loan and the ESOP loan and
subsequent purchase by the ESOP of Company shares, the Company recorded the
principal amount of the bank loan as long-term debt and recorded unearned
compensation for the principal amount of the ESOP loan, which is reflected as a
reduction to stockholders' equity on the balance sheet.  Pending repayment of
the ESOP loan, shares owned by the ESOP are held in a suspense account and are
unallocated to participants.  Shares of





                                       7
<PAGE>   9

common stock are committed to be released from the suspense account and
subsequently allocated to participants' accounts based on the ratio that the
annual principal debt repayment of the ESOP loan bears to the original
principal balance (approximately 347,340 shares of common stock per year).  The
Company recognizes non-cash compensation expense and credits equity each month
in an amount equal to one-twelfth of the number of shares of common stock
committed to be released each year, net of shares committed to be released in
lieu of cash dividends declared on allocated shares, multiplied by the average
fair value of such shares during the period.  Prior to the Offering, the
average fair value of the common stock was based on independent appraisals.
For all periods subsequent to the Offering, non-cash compensation expense will
be based on the average market price at which the shares of common stock are
traded in the open market during the applicable period.

         Accordingly, if the average market price of the common stock
increases, the Company's non-cash ESOP compensation expense will also increase,
thereby having a negative impact on the Company's net income and net income per
share.  Because the Company cannot predict the price at which its shares will
trade in the future, it cannot predict the amount of non-cash ESOP compensation
expense or the resulting effect on net income or net income per share for
future periods.

5.  NET INCOME PER SHARE

         Net income per share has been computed based on the weighted average
number of common shares outstanding, including the dilutive effect of
outstanding stock options in each respective period.  Shares of stock owned by
the ESOP that have been committed to be released to participants have been
considered outstanding on a weighted average basis for the purpose of computing
net income per share.  Shares of stock owned by the ESOP that have not been
committed to be released have not been considered outstanding for such purpose.
The computation of the weighted average number of common and common equivalent
shares outstanding for the interim periods reported herein is summarized as
follows:


<TABLE>
<CAPTION>
                                                                 13-Week                           26-Week
                                                              Period Ended                      Period Ended
                                                       --------------------------       --------------------------
                                                         June 29,        July 1,          June 29,        July 1,
                                                           1996            1995             1996            1995
                                                       ----------       ---------       -----------      ---------
<S>                                                     <C>             <C>             <C>              <C>
Weighted average shares,                                          
   excluding ESOP and                                             
   stock option effects                                 5,169,269       2,683,170       5,103,931        2,683,170
                                                                  
Weighted average effect                                           
   of ESOP shares committed                                       
   to be released                                       1,195,916         840,543       1,152,498          797,125
                                                                  
Dilutive effect of stock options                          387,844         564,491         387,844          564,491
                                                        ---------       ---------       ---------        ---------
Weighted average number                                           
   of common and common                                           
   equivalent shares outstanding                        6,753,029       4,088,204       6,644,273        4,044,786
                                                        =========       =========       =========        =========
</TABLE>





                                       8
<PAGE>   10

6.  INVENTORIES

         Substantially all of the Company's inventories are valued at last-in,
first-out ("LIFO") cost, which is not in excess of market.  An analysis of
inventories at June 29, 1996 and December 31, 1995 follows:

<TABLE>
<CAPTION>
                                                                             June 29,           December 31,
                                                                               1996                 1995
                                                                         ------------           -----------
                                                                           (Unaudited)
         <S>                                                             <C>                    <C>
         Inventories valued at first-in, first-out ("FIFO") cost:
            Raw materials and purchased parts                            $  9,594,000           $ 8,391,000
            Work-in-process                                                 4,729,000             4,043,000
            Finished goods                                                 11,325,000            10,020,000
                                                                         ------------           -----------
                                                                           25,648,000            22,454,000
         Less excess of FIFO over LIFO cost                                 6,040,000             5,920,000
                                                                         ------------           -----------
                                                                         $ 19,608,000           $16,534,000
                                                                         ============           ===========
</TABLE>




                                       9
<PAGE>   11

                      ITEM 2.  MANAGEMENT'S DISCUSSION AND
                        ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


         The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
interim consolidated financial statements of the Company and notes thereto
appearing elsewhere in this Form 10-Q.  All references to the second quarter of
1996 and the second quarter of 1995 are referring to the 13-week periods ended
June 29, 1996 and July 1, 1995, respectively.  All references to the 1996
year-to-date period and the 1995 year-to-date period are referring to the
26-week periods ended June 29, 1996 and July 1, 1995, respectively.

         On February 1, 1996, as discussed in Note 3 to Notes to Consolidated
Financial Statements, the Company's wholly owned Canadian subsidiary acquired
all of the capital stock of HEAT and 1061099 through the direct and indirect
purchase of all of the outstanding shares of these companies.  HEAT
manufactures gas space heaters and pre-engineered fireplaces at a 100,000
square foot manufacturing plant located on approximately 12 acres in Orillia,
Ontario, Canada which it leases from 1061099.  The results of operations of the
acquired companies are included in the unaudited interim consolidated statement
of operations for the period from the purchase date through June 29, 1996.  All
references to HEAT in the following discussion refers to the acquired
companies.  The pro forma effect of the HEAT acquisition on the Company's
results of operations for the year-to-date periods ended June 29, 1996 and
July 1, 1995 is not significant and not disclosed herein.

RESULTS OF OPERATIONS

         The following tables set forth, for the periods indicated, information
derived from the Company's financial statements expressed as a percentage of
net sales together with industry segment information.

<TABLE>
<CAPTION>
                                                          13-Week Period Ended              26-Week Period Ended
                                                          --------------------              --------------------
                                                           June 29,      July 1,             June 29,      July 1,
                                                             1996          1995                1996          1995
                                                           -------       -------             -------       -------
   <S>                                                     <C>           <C>                 <C>           <C>
   Net sales                                               100.0%        100.0%              100.0%        100.0%
   Cost of sales                                            73.9          73.6                76.3          75.9
                                                           -----         -----               -----         -----
   Gross profit                                             26.1          26.4                23.7          24.1
                                                           -----         -----               -----         -----
   Operating expenses:                                                                              
     Selling                                                 9.2           7.4                10.5           8.4
     General and administrative                              6.5           5.1                 7.2           5.6
     Non-cash ESOP compensation expense                      3.0           2.1                 3.3           2.0
                                                           -----         -----               -----         -----
   Operating income                                          7.4          11.8                 2.7           8.1
   Interest expense, net                                      .6           1.1                  .4           1.0
                                                           -----         -----               -----         -----
   Income before income taxes                                6.8          10.7                 2.3           7.1
   Provision for income taxes                                3.2           4.5                 1.3           3.0
                                                           -----         -----               -----         -----
     Net income                                              3.6%          6.2%                1.0%          4.1%
                                                           =====         =====               =====         =====
</TABLE>





                                       10
<PAGE>   12

<TABLE>
<CAPTION>
                                                                           Segment Information
                                                        ----------------------------------------------------------
                                                          13-Week Period Ended              26-Week Period Ended
                                                          --------------------              --------------------
                                                           June 29,    July 1,               June 29,    July 1,   
                                                             1996       1995                  1996        1995     
                                                            ------     ------                ------      ------    
                                                                              (In Thousands)
   <S>                                                     <C>         <C>                   <C>         <C>
   Net sales:                                                                                           
     Home heating products                                 $19,352     $19,057               $29,926     $28,818
     Metal office furniture                                  2,548       5,141                 8,197      10,697
     Leisure and other products                              4,747       4,395                 9,568      10,481
                                                           -------     -------               -------     -------
                                                           $26,647     $28,593               $47,691     $49,996
                                                           =======     =======               =======     =======
   Gross profit:                                                                                        
     Home heating products                                 $ 6,051     $ 5,931               $ 8,562     $ 8,563
     Metal office furniture                                    129         888                 1,092       1,755
     Leisure and other products                                785         734                 1,657       1,737
                                                           -------     -------               -------     -------
                                                           $ 6,965     $ 7,553               $11,311     $12,055
                                                           =======     =======               =======     =======
   Segment contribution (loss)(1):                                                                      
     Home heating products                                 $ 4,327     $ 4,518               $ 5,168     $ 5,926
     Metal office furniture                                   (211)        463                   262         873
     Leisure and other products                                409         457                   855       1,025
                                                           -------     -------               -------     -------
                                                           $ 4,525     $ 5,438               $ 6,285     $ 7,824
                                                           =======     =======               =======     =======
</TABLE>

    (1)  Segment contribution (loss) consists of gross profit less selling
                                   expenses.


13-WEEK PERIOD ENDED JUNE 29, 1996 COMPARED TO 13-WEEK PERIOD ENDED JULY 1,
1995

Net Sales

         Net sales in the 13-week period ended June 29, 1996 decreased to $26.6
million from $28.6 million in the 13-week period ended July 1, 1995, a decrease
of $2.0 million, or 6.8%.

Home Heating Products.  Net sales of home heating products increased from $19.1
million in the second quarter of 1995 to $19.4 million in the second quarter of
1996, an increase of $295,000, or 1.5%.  The increase in net sales of home
heating products was primarily the result of the acquisition of HEAT.  HEAT's
net sales for the second quarter of 1996 were $1.6 million.  See Note 3 to
Notes to Consolidated Financial Statements.

Metal Office Furniture.  Net sales of metal office furniture were $2.5 million
in the second quarter of 1996 as compared to $5.1 million in the second quarter
of 1995, a decrease of $2.6 million, or 50.4%.  The decrease in net sales was
primarily due to competition providing the Company's primary metal office
furniture customer with lower and higher grade file cabinets which the Company
does not manufacture.  Customer purchases of the Company's medium grade file
cabinets have decreased as a result.





                                       11
<PAGE>   13

Leisure and Other Products.  Net sales of leisure and other products increased
$352,000, or 8.0%, in the second quarter of 1996 to $4.7 million as compared to
$4.4 million in the second quarter of 1995.  Gross sales of barbecue gas grills
increased $891,000, or 68.1%, in the second quarter of 1996 as compared to the
second quarter of 1995.  A Company grill was awarded a "Best Buy" designation
by Consumer Digest magazine in its May 1996 issue, which contributed to the
increase.  The increase in the sale of barbecue gas grills was partially offset
by a $451,000, or 15.2%, decrease in the sale of utility trailer kits.
Shipments to a primary mass merchandiser of the utility trailer kits decreased
$569,000 in the second quarter of 1996 as compared to the second quarter of
1995.

Gross Profit

         Gross profit in the second quarter of 1996 was $7.0 million as
compared to $7.6 million in the second quarter of 1995, a decrease of $588,000,
or 7.8%.  Gross margin, defined as gross profit as a percentage of net sales,
decreased from 26.4% in the second quarter of 1995 to 26.1% in the second
quarter of 1996.

Home Heating Products.  Gross profit on net sales of home heating products in
the second quarter of 1996 was $6.1 million as compared to $5.9 million in the
second quarter of 1995, an increase of $120,000, or 2.0%. The increase in net
sales for the quarter of 1.5% was the primary contributor to the increase.

Metal Office Furniture.  Gross profit on net sales of metal office furniture
decreased $759,000, or 85.5%, from $888,000 in the second quarter of 1995 to
$129,000 in the second quarter of 1996.  The decrease was the result of the
50.4% decrease in net sales discussed above and a 12.2 point decrease in gross
margin from 17.3% in the second quarter of 1995 to 5.1% in the second quarter
of 1996.  The decrease in gross margin was primarily the result of an increase
in the rate of fixed manufacturing cost as a percentage of net sales from 12.5%
in the second quarter of 1995 to 20.3% in the second quarter of 1996.

Leisure and Other Products.  Gross profit on net sales of leisure and other
products in the second quarter of 1996 was $785,000 as compared to $734,000 in
the second quarter of 1995, an increase of $51,000, or 6.9%.  The increase was
the result of the 8.0% increase in net sales discussed above partially offset
by a decrease in gross margin from 16.7% in the second quarter of 1995 to 16.5%
in the second quarter of 1996.

Selling Expenses

         Selling expenses in the second quarter of 1996 increased to $2.4
million from $2.1 million in the second quarter of 1995, an increase of
$325,000, or 15.4%, primarily in the home heating product segment.  The
acquisition of HEAT resulted in $279,000 of the increase.  Promotion expenses
have increased $111,000 primarily as a result of the increased effort to
promote the Company's new gas heating and fireplace products for the 1996
season.  Selling expenses as a percentage of net sales increased to 9.2% in the
second quarter of 1996 from 7.4% in the second quarter of 1995 primarily as a
result of the 6.8% decrease in net sales together with the increases discussed
herein.





                                       12
<PAGE>   14

Segment Contribution

         Total segment contribution, defined as gross profit less selling
expenses, decreased from $5.4 million in the second quarter of 1995 to $4.5
million in the second quarter of 1996, a decrease of $913,000, or 16.8%.  The
decrease was primarily the result of the 7.8% decrease in gross profit, the
15.4% increase in selling expenses and other factors discussed above.

General and Administrative Expenses

         General and administrative expenses increased $277,000, or 18.8%, in
the second quarter of 1996 as compared to the second quarter of 1995.  The
increase is primarily the result of the $276,000 in general and administrative
expenses incurred by HEAT during the 1996 quarter.

Non-cash ESOP Compensation Expense

         Non-cash ESOP compensation expense was $809,000 in the second quarter
of 1996 as compared to $608,000 in the second quarter of 1995, an increase of
$201,000, or 33.1%.  In the second quarter of 1996, 82,833 shares of
unallocated ESOP stock were committed to be released as compensation at an
average fair value of $9.77 per share, as compared to 83,195 shares committed
to be released as compensation at an average fair value of $7.31 per share in
the second quarter of 1995.  The increase in non-cash ESOP compensation expense
in the second quarter of 1996 was the result of a 33.7% increase in the average
fair value of the Company's common stock associated with the Offering discussed
in Note 2 to Notes to Consolidated Financial Statements.  See discussion of
ESOP accounting in Note 4 to Notes to Consolidated Financial Statements.

Interest Expense

         Interest expense in the second quarter of 1996 was $400,000 as
compared to $316,000 in the second quarter of 1995, an increase of $84,000, or
26.7%.  The increase was primarily attributable to the increase in interest
expense applicable to the $5,000,000 term loan obtained by the Company in March
1996 to refinance the bank debt of HEAT.

Interest Income

         Interest income in the second quarter of 1996 was $242,000 as compared
to $16,000 in the second quarter of 1995, an increase of $226,000.  The
increase represents interest earned on the available net proceeds received in
the Offering.  See Note 2 to Notes to Consolidated Financial Statements for
discussion of the Offering.

Provision for Income Taxes

         The provision for income taxes decreased from $1.3 million in the
second quarter of 1995 to $839,000 in the second quarter of 1996, a decrease of
$449,000, or 34.9%.  The decrease was the result of a $1.3 million decrease in
income before taxes from $3.1 million in the second quarter of 1995 to $1.8
million in the second quarter of 1996, a decrease of 40.8%.  The effective tax
rate increased from 42.1% in the second quarter of 1995 to 46.3% in the second
quarter of 1996 primarily as a result of the





                                       13
<PAGE>   15

non-recognition of a tax benefit on the $173,000 net loss of HEAT during the
quarter.  The realization of the tax benefit for the HEAT loss is not certain
at this time.

Net Income and Net Income Per Share

         Net income in the second quarter of 1996 was $972,000 as compared to
net income of $1.8 million in the second quarter of 1995.  The decrease in net
income was primarily the result of the factors discussed above.

         Net income per share was $0.14 in the second quarter of 1996 as
compared to $0.43 per share in the second quarter of 1995.  The rate of
decrease in net income per share was more than the rate of decrease in net
income as a result of a 2.7 million increase in the weighted average number of
common and common equivalent shares outstanding.  The increase in weighted
average shares outstanding was primarily the result of the completion of the
Offering in July 1995 and the release of shares to participants in the
Company's ESOP.  See Notes 2 and 5 to Notes to Consolidated Financial
Statements.


26-WEEK PERIOD ENDED JUNE 29, 1996 COMPARED TO 26-WEEK PERIOD ENDED JULY 1,
1995

Net Sales

         Net sales in the 26-week period ended June 29, 1996 decreased to $47.7
million as compared to $50.0 million in the 26-week period ended July 1, 1995,
a decrease of $2.3 million, or 4.6%.

Home Heating Products.  Net sales of home heating products increased to $29.9
million in the 1996 year-to-date period as compared to $28.8 million in the
1995 year-to-date period, an increase of $1.1 million, or 3.8%.  The increase
in net sales of home heating products was the result of the acquisition of
HEAT.  HEAT's net sales for the period from February 1, 1996 through June 29,
1996 were $2.4 million.  See Note 3 to Notes to Consolidated Financial
Statements.  The increase in net sales of home heating products due to the HEAT
acquisition was partially offset by a decrease in net sales of the Company's
non-HEAT gas heaters and logs.  Orders received by the Company's gas heating
divisions from March through June, the Company's primary early booking period,
were $24.0 million in 1996 as compared to $31.8 million in the same period in
1995.  As a result, gas heater and log shipments in the first half of 1996 have
decreased  as compared to the same period in 1995.  Due to unseasonably warm
weather in  1995, which resulted in significantly less fill-in orders, the
early booking order rate for 1995 was 80% of annual gas heater sales.  In
recent years prior to 1995, the early booking rate during such period
approximated 60% to 65% of such sales.  Therefore, if current 1996 early
booking order rates follow the historical trends in effect prior to 1995, 1996
annual net sales of gas heaters and logs would not be materially different from
1995 annual net sales of such products, with a higher percentage of shipments
coming in the second half of the year.  However, due to the risks and
uncertainties inherent in the seasonal, cyclical and competitive nature of the
Company's gas heater business, the Company is unable at the time of filing this
report to predict or give any assurances regarding whether this trend or
another trend will affect its gas heater and log sales for the balance of 1996.


Metal Office Furniture.  Net sales of metal office furniture decreased to $8.2
million in the 1996 year-to-date period from $10.7 million in the 1995
year-to-date period, a decrease of $2.5 million, or 23.4%.  As discussed above,
the decrease was the result of competition providing the Company's primary
customer for metal office furniture with lower and higher grade file cabinets
not manufactured by the Company.





                                       14
<PAGE>   16

Leisure and Other Products.  Net sales of leisure and other products decreased
$913,000, or 8.7%, in the 1996 year-to-date period to $9.6 million as compared
to $10.5 million in the 1995 year-to-date period.  The decrease was primarily
the result of a $1.4 million, or 27.2%, decrease in net sales of utility
trailer kits partially offset by a $598,000, or 11.9%, increase in net sales of
barbecue gas grills.  Shipments to five utility trailer kit customers have
decreased $1.7 million primarily as a result of the short selling season caused
by the unseasonably cool weather during the first four months of 1996.

Gross Profit

         Gross profit in the 1996 year-to-date period was $11.3 million as
compared to $12.1 million in the 1995 year-to-date period, a decrease of
$744,000, or 6.2%.  Gross margin decreased from 24.1% in the 1995 year-to-date
period to 23.7% in the 1996 year-to-date period.

Home Heating Products.  Gross profit on net sales of home heating products
remained at $8.6 million in the 1996 year-to-date period as compared to the
1995 year-to-date period.  The increase in gross profit realized as a result of
the 3.8% increase in net sales discussed above was offset by a decrease in the
gross margin from 29.7% in the 1995 year-to-date period to 28.6% in the 1996
year-to-date period.  The decrease in gross margin was caused by the shift in
sales mix from higher margin gas heating products to HEAT and Martin fireplace
products.  Gas heating product sales, excluding HEAT, were 48.3% of home
heating product sales in the 1996 year-to-date period as compared to 62.0% in
the 1995 year-to-date period.

Metal Office Furniture.  Gross profit on net sales of metal office furniture
decreased $663,000, or 37.8%, in the 1996 year-to-date period to $1.1 million,
as compared to $1.8 million in the 1995 year-to-date period.  The decrease in
the 1996 year-to-date period was primarily the result of the 23.4% decrease in
net sales discussed above and the decrease in the gross margin from 16.4% in
the 1995 year-to-date period to 13.3% in the 1996 year-to-date period.  The
decrease in gross margin was primarily the result of an increase in the rate of
fixed manufacturing costs from 12.1% of net sales in the 1995 year-to-date
period to 14.0% in the 1996 year-to-date period.

Leisure and Other Products.  Gross profit on net sales of leisure and other
products decreased $80,000, or 4.6%, in the 1996 year-to-date period to $1.7
million as compared to the 1995 year-to-date period.  The decrease was
primarily the result of the 8.7% decrease in net sales as discussed above,
partially offset by an increase in the gross margin from 16.6% in the 1995
year-to-date period to 17.3% in the 1996 year-to-date period.  The increase was
primarily the result of a shift in sales mix from utility trailer kits to
higher margin, barbecue gas grills.  Barbecue gas grill sales were 57.9% of
leisure and other product sales in the 1996 year-to-date period as compared to
47.1% in the 1995 year-to-date period.

Selling Expenses

         Selling expenses in the 1996 year-to-date period were $5.0 million as
compared to $4.2 million in the 1995 year-to-date period, an increase of
$795,000, or 18.8%.  The acquisition of HEAT resulted in $477,000 of the
increase.  Cooperative advertising expenses increased $129,000 primarily as a
result of an increase in customer credit claims in the home heating product
segment.  In addition, promotion and travel expenses have increased $232,000
primarily as a result of the increased effort to expand the distribution of
home heating products and to promote the Company's new gas heating and
fireplace





                                       15
<PAGE>   17

products for the 1996 season.  Selling expenses as a percentage of net sales
increased to 10.5% in the 1996 year-to-date period from 8.5% in the 1995
year-to-date period primarily as a result of a 4.8% decrease in net sales
together with the increases discussed herein.

Segment Contribution

         Total segment contribution decreased from $7.8 million in the 1995
year-to-date period to $6.3 million in the 1996 year-to-date period, a decrease
of $1.5 million, or 19.7%.  The decrease was primarily the result of the
decrease in gross profit together with the increased selling expense discussed
above.

General and Administrative Expense

         General and administrative expenses increased $640,000, or 23.0%, in
the 1996 year-to-date period as compared to the 1995 year-to-date period.  The
increase was primarily the result of $445,000 in general and administrative
expenses incurred by HEAT, a $186,000 increase in insurance expense and a
$163,000 increase in professional fees.  These increases were partially offset
by a $168,000 decrease in bad debt expense.

Non-cash ESOP Compensation Expense

         Non-cash ESOP compensation expense increased $559,000, or 55.5%, in
the 1996 year-to-date period to $1.6 million, as compared to $1.0 million in
the 1995 year-to-date period.  In the 1996 year-to-date period, 165,405 shares
of unallocated ESOP stock were committed to be released as compensation at an
average fair value of $9.47 per share, as compared to 140,805 shares committed
to be released as compensation at an average fair value of $7.16 per share in
the 1995 year-to-date period.  The 24,600 share increase in the 1996
year-to-date period represents the decrease during the period in shares 
committed to be released in lieu of dividends payable on shares allocated to 
ESOP participants that were used to pay the ESOP loan.

Interest Expense

         Interest expense increased $96,000, or 17.5%, in the 1996 year-to-date
period to $646,000, as compared to $550,000 in the 1995 year-to-date period.
As discussed above, the increase was primarily attributable to the interest
expense incurred on the $5.0 million term loan utilized to refinance the bank
debt of HEAT in March 1996.

Interest Income

         Interest income increased $397,000 in the 1996 year-to-date period to
$472,000, as compared to $75,000 in the 1995 year-to-date period.  As discussed
above, the increase was attributable to the interest earned on the Offering
proceeds received in July 1995, partially offset by a decease in available
operating cash during the first quarter of 1996.  Operating cash decreased
primarily as a result of an increase in average non-HEAT inventory levels of
approximately $2.9 million.





                                       16
<PAGE>   18

Provision for Income Taxes

         The provision for income taxes decreased $846,000, or 56.2%, in the
1996 year-to-date period as compared to the 1995 year-to-date period.  Although
income before income taxes decreased 68.5% in the 1996 year-to-date period, the
provision for income taxes decreased at a lower rate as a result of the
increase in the Company's effective tax rate.  The effective tax rate increased
from 42.3% in the 1995 year-to-date period to 58.8% in the 1996 year-to-date
period.  The increase in the effective tax rate was primarily the result of the
non-recognition of a tax benefit on the $438,000 net loss of HEAT during the
1996 period.  The realization of the tax benefit for the HEAT loss is not
certain at this time.

Net Income and Net Income Per Share

         Net income in the 1996 year-to-date period was $462,000 as compared to
$2.1 million in the 1995 year-to-date period, a decrease of $1.6 million, or
77.5%.  The decrease was primarily the result of the factors discussed above.

         Net income per share was $0.07 per share in the 1996 year-to-date
period as compared to $0.51 per share in the 1995 year-to-date period.
Although net income decreased 77.5%, net income per share decreased $0.44 per
share, or 86.3%, as a result of a 2,599,487, or 64.3%, increase in the weighted
average number of common and common equivalent shares outstanding.  See Notes 2
and 4 to Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has historically financed its operations in the first half
of the year from internally generated funds and seasonal borrowings under its
bank line of credit.  The Company's primary capital requirements are for
working capital, debt service, capital expenditures and dividends.

         The Company's operations in the 26-week period ended June 29, 1996
used $6.5 million in cash to finance increases in extended term ("dating")
receivables and inventories required to supply the Company's peak shipping
season which occurs primarily in the third and fourth quarters of each year.
The Company's operating cash and bank line of credit were utilized to provide
the funds needed for these working capital requirements, capital expenditures,
long-term debt repayments and dividends for the period.  Historically, the
Company's operations for the remainder of the year have provided the funds
required to repay the bank line of credit.

         As discussed above, the Company finances temporary working capital
requirements under an unsecured bank line of credit with its principal lender.
The credit agreement provides a line of $20.0 million for a term expiring July
31, 1997.  Interest on the line of credit is payable monthly at a variable rate
equivalent to 30-day LIBOR plus 1.25%, which at July 31, 1996 was 6.75%.

         In addition to the operating requirements for the period, the Company
utilized $1.4 million in cash to purchase the capital stock of HEAT and 1061099
as discussed in Note 3 to Notes to Consolidated Financial Statements.  The
funds utilized to purchase the stock were provided from the Offering discussed
in Note 2 to Notes to Consolidated Financial Statements.  In connection with
the acquisition of the stock, the Company also caused to be repaid
approximately $5.7 million in bank debt of HEAT,





                                       17
<PAGE>   19

1061099 and affiliates.  In March 1996, the Company obtained a $5.0 million
unsecured term loan from its principal lender to refinance such bank debt.  The
term loan is due in semi-annual principal payments of $250,000 over a
seven-year period with a balloon payment of $1.5 million due at maturity.
Interest on the term loan is payable monthly at a fixed rate of 6.9%.

FINANCIAL POSITION

         Cash and short-term investments in the first half of 1996 decreased
$5.1 million as a result of the factors discussed above.  Accounts receivable
and inventories in the 1996 year-to-date period increased $9.7 million and $3.1
million, respectively.  The increase in accounts receivable of $9.7 million, or
70.0%, was the result of the $1.0 million of HEAT receivables acquired and a
$12.0 million increase in dating receivables.  In an effort to better control
its production schedule in light of the seasonal nature of its home heating
product and barbecue gas grill business, the Company utilizes early booking
programs under which customers receive favorable dating terms for placing their
orders early and permitting the Company to ship the products at "factory
convenience."

         The increase in inventories of $3.1 million, or 18.6%, was the result
of the $2.5 million of HEAT inventory acquired and the Company's general
practice of producing gas and solid fuel heaters in the late spring and summer
to supply the typical peak shipping season in the last two quarters of the
year.

         During the 1996 year-to-date period, net property, plant and equipment
increased $4.3 million, or 68.5%.  The increase was the result of $3.9 million
of HEAT fixed assets acquired and $1.1 million in capital expenditures during
the period.

         As previously discussed, the Company utilizes its bank line of credit
during the peak production period in the second and third quarters to finance
working capital requirements.  During the 1996 year-to-date period, the Company
utilized $6.3 million of its bank line of credit for this purpose as reflected
by the increase in short-term borrowings for the period.





                                       18
<PAGE>   20

                          PART II - OTHER INFORMATION


ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         The Annual Meeting of Stockholders of Martin Industries, Inc. was held
on May 3, 1996.  At the Annual Meeting, the stockholders elected four members
to the board of directors of the Company to serve as a class until the Annual
Meeting of Stockholders to be held in 1999.  The nominees to the board of
directors to serve until the Annual Meeting of Stockholders to be held in 1999
received the following number of votes:

<TABLE>
<CAPTION>
                                  Shares Voted        Shares Voted            Abstentions
                                     FOR                 AGAINST             and Non-Votes
                                  ------------        ------------           -------------
<S>                                 <C>                   <C>                  <C>         
William H. Martin, III              7,492,759             35,874               1,058,412   
                                                                                           
Louis J. Martin II                  7,494,176             34,457               1,058,412   
                                                                                           
James W. Truitt                     7,494,176             34,457               1,058,412   
                                                                                           
James D. Wilson                     7,494,176             34,457               1,058,412   
</TABLE>                                                            


         At the Annual Meeting, the stockholders also considered the selection
of the Company's independent auditors for the fiscal year ending December 31,
1996.  The stockholders approved the selection by the board of directors of the
accounting firm of Arthur Andersen LLP as independent auditors for the Company
for said fiscal year by the following number of votes:

<TABLE>
<CAPTION>
                                  Shares Voted     Shares Voted       Abstentions
                                     FOR             AGAINST         and Non-Votes
                                  ------------     ------------      -------------
                                     <S>              <C>               <C>           
                                     7,491,669        10,394            1,084,982     
</TABLE>


     No other matters were considered or voted upon at the Annual Meeting.





                                       19
<PAGE>   21

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K

         (a)     Exhibits

                 *3(a)    Form of Restated Certificate of Incorporation of
                          Martin Industries, Inc. which was filed as Exhibit
                          3(a) to the Registrant's Registration Statement on
                          Form S-1 filed with the Commission on July 10, 1995
                          (Registration No. 33-90432).

                 *3(b)    Bylaws of Martin Industries, Inc. which were filed as
                          Exhibit 3(b) to the Registrant's Quarterly Report on
                          Form 10-Q filed with the Commission on May 14, 1996
                          (Commission File No.  0-26228).

                 *4       Article 4 of the Restated Certificate of
                          Incorporation of Martin Industries, Inc. which was
                          included in Exhibit 3(a) to the Registrant's
                          Registration Statement on Form S-1 filed with the
                          Commission on July 10, 1995 (Registration No.
                          33-90432).

                 10       Martin Industries, Inc. 1996 Non-Employee Directors'
                          Stock Option and Deferred Compensation Plan.

                 **27     Financial Data Schedule (for SEC use only)


         (b)     Reports on Form 8-K

                 On April 15, 1996, the Registrant filed a report on Form 8-K/A
                 with the Commission amending the report on Form 8-K filed by
                 the Registrant with the Commission on February 16, 1996
                 concerning the acquisition by the Registrant, directly and
                 indirectly, of all of the issued and outstanding shares of
                 capital stock of Hunter Energy and Technologies Inc., an
                 Ontario corporation ("HEAT"), and 1061099 Ontario Inc., an
                 Ontario corporation ("1061099"), on February 1, 1996.  The
                 Registrant's report on Form 8-K/A amended the Form 8-K filed
                 by the Registrant with the Commission on February 16, 1996,
                 pursuant to Item 7 of Form 8-K, by including the following
                 unaudited interim financial statements and audited financial
                 statements of HEAT and 1061099 and the following pro forma
                 financial information:

                 Unaudited Interim Financial Statements:

                   Hunter Energy and Technologies Inc.                         
                       Balance Sheets as of January 31, 1996 and               
                       February 24, 1995                                       
                       Statements of Income for the Eleven-Month               
                          Periods Ended January 31, 1996 and 1995             
                       Statements of Cash Flows for the Eleven-Month           
                          Periods Ended January 31, 1996 and 1995              
                       Notes to Unaudited Interim Financial                    
                          Statements                                           





                                       20
<PAGE>   22
                  1061099 Ontario Inc.                                 
                      Balance Sheets as of January 31, 1996 and                
                         February 28, 1995 
                      Statements of Income for               
                         the Eleven-Month Period Ended     
                         January 31, 1996 and for the period from              
                         the Date of Inception (March 4, 1994) to              
                         January 31, 1995                                      
                      Statements of Cash Flows for the Eleven-Month            
                         Period Ended January 31, 1996 and for the             
                         Period from the Date of Inception (March              
                         4, 1994) to January 31, 1995                          
                      Notes to Unaudited Interim Financial Statements       
                                                                               

                 Audited Financial Statements:

                  Hunter Energy and Technologies Inc.                        
                      Auditors' Report                                 
                      Balance Sheets as of February 24, 1995 and       
                         February 28, 1994 
                      Statements of Income for       
                         the Fiscal Years Ended                           
                         February 24, 1995 and February 28, 1994       
                      Statements of Retained Earnings for the          
                         Fiscal Years Ended February 24, 1995 and      
                         February 28, 1994                             
                      Statements of Cash Flows for the Fiscal Years    
                         Ended February 24, 1995 and February 28,      
                         1994                                          
                      Notes to Financial Statements                          

                  1061099 Ontario Inc.                                         
                      Auditors' Report                                         
                      Balance Sheet as of February 28, 1995                    
                      Statement of Income for Fiscal Year Ended                
                         February 28, 1995 
                      Statement of Deficit for               
                         Fiscal Year Ended February 28, 1995 
                      Statement of Cash Flows for Fiscal Year Ended 
                         February 28, 1995 
                      Notes to Financial Statements                   
                                                                               
                                                                               
                 Pro Forma Financial Information:                              
                                                                               
                   Pro Forma Financial Information Statement                   
                   Pro Forma Combining Balance Sheet as of December 31,        
                   1995 
                   Pro Forma Combining Statement of Operations for        
                    the Year Ended December 31, 1995                            
                                                                               
                                                                               
___________________________________
  *Incorporated by reference.
**Filed with electronic filing only





                                       21
<PAGE>   23
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:

        With the exception of historical information, the matters and statements
discussed, made or incorporated by reference in this Quarterly Report on Form
10-Q constitute forward-looking statements and are discussed, made or
incorporated by reference, as the case may be, pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995.  Such
forward-looking statements involve certain assumptions, risks and uncertainties
that could cause actual results to differ materially from those inlcuded in or
contemplated by the statements.  These assumptions, risks and uncertainties
inlcude, but are not limited to, those associated with general economic cycles;
the cyclicality of the industries in which the Company operates and the factors
related thereto, including consumer confidence levels, inflation, employment
and income  levels, the availability of credit, and factors affecting the
housing industry; the potential in the Company's business  to experience
significant fluctuations in quarterly earnings; the Company's business
strategy, including its strategy of pursuing acquisitions and new product
development; potential losses from product liability and personal injury
lawsuits; the effects of seasonality and weather conditions on the the
Company's home heating products sales and other sales; fluctuations in
quarterly earnings due to ESOP accounting; the reliance on a signifiant
customer for the company's metal office furniture sales; the effect of existing
and  new governmental and environmentl regulations applicable to the Company;
the dependence of the Company on key personnel;  the highly competitive nature
of each of the industries in which the Company operates; the volatility of the
stock price at which outstanding shares of the Company may trade form time to
time; and the other risks and uncertainties discussed or indicated in all
documents filed by the Company with the Commission.  The Company expressly
disclaims any obligation to update any forward-looking statements as a result
of developments occurring after the filing of this report.


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.





                                               MARTIN INDUSTRIES, INC.
                                               
                                               
                                               
Date:         8/13/96                             By /s/ James W. Truitt
     -----------------------------                -----------------------------
                                                  James W. Truitt,
                                                  Vice-President, Chief 
                                                   Financial Officer,           
                                                   Secretary and Treasurer      
                                                   (Executed on behalf of       
                                                   Registrant and as Principal  
                                                   Financial Officer)           
                                                  





                                       22
<PAGE>   24

                               INDEX TO EXHIBITS


         Exhibit
         Number           Description of Exhibits
         -------          -----------------------

         *3(a)            Form of Restated Certificate of Incorporation of
                          Martin Industries, Inc. which was filed as Exhibit
                          3(a) to the Registrant's Registration Statement on
                          Form S-1 filed with the Commission on July 10, 1995
                          (Registration No. 33-90432).

         *3(b)            Bylaws of Martin Industries, Inc. which were filed as
                          Exhibit 3(b) to the Registrant's Quarterly Report on
                          Form 10-Q filed with the Commission on May 14, 1996
                          (Commission File No. 0-26228).

         *4               Article 4 of the Restated Certificate of
                          Incorporation of Martin Industries, Inc. which was
                          included in Exhibit 3(a) to the Registrant's
                          Registration Statement on Form S-1 filed with the
                          Commission on July 10, 1995 (Registration No.
                          33-90432).

         10               Martin Industries, Inc. 1996 Non-Employee Directors'
                          Stock Option and Deferred Compensation Plan.

         **27             Financial Data Schedule (for SEC use only).



         __________________________
           *Incorporated by reference.
         **Filed with electronic filing only.





                                       23

<PAGE>   1
                                                                      EXHIBIT 10



                            MARTIN INDUSTRIES, INC.

                   1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION
                         AND DEFERRED COMPENSATION PLAN




                                   ARTICLE I
                                  DEFINITIONS

SECTION 1.1      DEFINITIONS

         As used herein, the following terms shall have the meanings
hereinafter set forth unless the context clearly indicates to the contrary:

                 (a)      "Board" shall mean the Board of Directors of Martin
Industries, Inc., a Delaware corporation.

                 (b)      "Committee" shall mean the committee of the Board
appointed pursuant to Article III to administer the Plan.

                 (c)      "Company" shall mean Martin Industries, Inc., a
Delaware corporation, and any successor in interest thereto.

                 (d)      "Eligible Director" shall mean any person who is
serving as a director of the Company who is not an officer of the Company or a
subsidiary of the Company or otherwise employed by the Company or a subsidiary
of the Company.

                 (e)      "Fair Market Value" shall mean, if applicable, the
closing price per share of the Stock on the principal United States securities
exchange registered under the 1934 Act on which such Stock is sold in the
regular way; or the last sales price of the day during regular trading per
share of the Stock quoted on an automated quotation system of a registered
securities association on which such Stock is sold in the regular way; or if
the Stock is not registered or traded in such a manner that such quotations are
available, the Fair Market Value shall be deemed to be the fair value per share
of Stock determined in good faith by the Board or the Committee as of a date
which is within 30 days of the date as of which the determination is to be
made.

                 (f)      "Fees" shall mean the cash retainer and meeting fees
payable to an Eligible Director for service on the Board of Directors of the
Company and any committees thereof.

                 (g)      "Internal Revenue Code" shall mean the Internal
Revenue Code of 1986, as amended.

                 (h)      "Option" shall mean an option to purchase Stock
granted pursuant to the provisions of Article VI hereof.





                                      1
<PAGE>   2

                 (i)      "Optionee" shall mean a person to whom an Option has
been granted hereunder.

                 (j)      "Plan" shall mean the Martin Industries, Inc. 1996
Non-Employee Directors' Stock Option and Deferred Compensation Plan, the terms
of which are set forth herein.

                 (k)      "Retainer" shall mean the cash retainer payable to an
Eligible Director for service on the Board of Directors of the Company and any
committees thereof.

                 (l)      "Stock," with respect to each share to which that
term refers, shall mean one (1) share of Common Stock, par value $0.01 per
share, of the Company now authorized; any other shares of the Stock of the
Company hereafter authorized; and securities of the Company which, under any
conditions, will be converted into or exchanged for any such Stock.

                 (m)      "Stock Option Agreement" shall mean the agreement
between the Company and the Optionee under which the Optionee may purchase
Stock hereunder.

                 (n)      "1934 Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.


                                   ARTICLE II
                                    THE PLAN

SECTION 2.1      NAME

         This Plan shall be known as the "Martin Industries, Inc. 1996
Non-Employee Directors' Stock Option and Deferred Compensation Plan."


SECTION 2.2      PURPOSE

         The purpose of the Plan is to advance the interests of the Company and
its stockholders by affording to Eligible Directors an opportunity to acquire
or increase their proprietary interest in the Company by the grant to such
directors of Options and by allowing such directors to receive Options in lieu
of Fees that otherwise would have been paid in cash under the terms set forth
herein and, thereby, to align the interests of the Eligible Directors with the
interests of the stockholders of the Company.  The purpose of the Plan is also
to enhance the Company's long-term growth and financial performance by
increasing the Company's ability to continue to attract and retain the services
of experienced and knowledgeable directors.





                                      2
<PAGE>   3

SECTION 2.3      EFFECTIVE DATE

         The Plan was adopted by the Board of Directors on May 3, 1996, and
became effective as of that date, subject to ratification and approval prior to
June 1, 1997 by the affirmative vote of a majority of the shares of Stock of
the Company present, or represented, and entitled to vote at a meeting of
stockholders of the Company duly held in accordance with the Restated
Certificate of Incorporation of the Company and the General Corporation Law of
the State of Delaware.  The Plan and all Options granted hereunder are further
subject to the receipt by the Company of any consents or approvals required to
adopt the Plan and/or grant Options under applicable law and under any permit,
agreement or instrument to which the Company is a party or by which any of its
properties or assets are bound.  Any Option granted prior to such stockholder
and other consent and approval of the Plan as herein provided shall be subject
to such approval and shall have no legal effect and shall convey no rights to
the holder thereof in the event said stockholder and other consent and approval
of the Plan is not obtained.  The Plan shall expire ten (10) years from the
effective date of the Plan; provided, however, that upon termination of the
Plan, the applicable provisions of the Plan shall continue to apply to all
Options which are outstanding on the date the Plan is terminated.  If
stockholder approval is not obtained within the period contemplated herein, the
Plan shall be nullified and all Options granted pursuant to Article VI below
shall be rescinded and all elections to receive options pursuant to Article VI
below shall be rescinded and all Eligible Directors shall receive cash equal to
all Fees that had been the subject of an election under said article or Article
V hereof.


                                  ARTICLE III
                          ADMINISTRATION AND OPERATION

SECTION 3.1      APPOINTMENT OF AND DUTIES AND POWERS OF COMMITTEE

         The Plan shall be administered by a Committee appointed by the Board
of Directors of the Company and consisting of at least three (3) members who
shall not be Eligible Directors.  Subject to the express provisions of the
Plan, the Committee shall have complete authority to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to it, and to make
all other determinations necessary or advisable in the administration of the
Plan.  The final determination of the Committee as to any disputed questions
shall be conclusive.

        Any action of the Committee may be taken without a meeting if a 
majority of the members of the Committee sign written consents setting forth
the action taken or to be taken at any time before or after the intended
effective date of such action.  Any member of the Committee may participate in
a meeting of the Committee by means of a conference telephone or similar
communications equipment enabling all persons participating in the meeting to
hear each other. The Committee may authorize any member thereof to execute all
instruments required in the administration of the Plan, and such instruments
may be executed by facsimile signature.

         The Committee may delegate to any member or members of the Committee
or to any employee or employees of the Company the authority to perform any
ministerial act in connection with the administration of the Plan.





                                      3
<PAGE>   4



SECTION 3.2      MAJORITY RULE

         A majority of the members of the Committee shall constitute a quorum,
and any action taken by a majority present at a meeting at which a quorum is
present or any action taken without a meeting evidenced by a writing executed
by a majority of the whole Committee shall constitute the action of the
Committee.


SECTION 3.3      COMPANY ASSISTANCE

         The Company shall supply full and timely information to the Committee
on all matters relating to Eligible Directors and such pertinent facts related
thereto as the Committee may require.  The Company shall furnish the Committee
with such clerical and other assistance as is necessary in the performance of
its duties.


SECTION 3.4      PLAN OPERATION IN COMPLIANCE WITH RULE 16B-3 OF THE 1934 ACT.

         The Plan shall be interpreted and administered to comply with Rule
16b-3 promulgated under the 1934 Act, as then applicable to the Company's
employee benefit plans.  At such time as the terms of the Plan are required to
comply with (or, if earlier, are elected by the Company to comply with) the
provisions of Rule 16b-3 adopted in Release No. 34- 37260 dated May 31, 1996,
all Options granted under this Plan shall provide that at least six months must
elapse from the date of the grant of the Option to the date of disposition of
any underlying shares of Stock to which such Option relates, unless any earlier
disposition may be effected without causing a violation of Section 16(b) of the
1934 Act or any rules and regulations promulgated thereunder.


                                   ARTICLE IV
                        SHARES OF STOCK SUBJECT TO PLAN

SECTION 4.1      LIMITATIONS

         The number of shares of Stock which may be issued and sold hereunder
shall not exceed 100,000 shares of Stock, subject to adjustment pursuant to the
provisions of Section 4.3 hereof.  Such shares may be either authorized and
unissued shares or shares issued and thereafter acquired by the Company, and
such amount of shares shall be and is hereby reserved for issuance pursuant to
this Plan.  Any of such shares which may remain unsold and which are not
subject to outstanding Options at the termination of the Plan shall cease to be
reserved for the purpose of the Plan, but until the termination of the Plan,
the Company shall at all times reserve a sufficient number of shares to meet
the requirements of the Plan.





                                      4
<PAGE>   5

SECTION 4.2      OPTIONS GRANTED UNDER PLAN

         Shares of Stock with respect to which an Option granted hereunder
shall have been exercised shall not again be available for grant hereunder.  If
Options granted hereunder shall expire, terminate, or be canceled for any
reason without being wholly exercised, new Options may be granted hereunder
covering the number of shares to which such Option expiration, termination or
cancellation relates.


SECTION 4.3      ANTIDILUTION

         In the event that the outstanding shares of Stock hereafter are
increased, decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of merger,
consolidation, reorganization, recapitalization, reclassification, combination
of shares, stock split, or stock dividend after the effective date of the Plan,

                 (a)      the aggregate number and kind of shares subject to
Options which may be granted hereunder shall be adjusted appropriately; and

                 (b)      rights under outstanding Options granted hereunder,
both as to the number of subject shares and the Option price, shall be adjusted
appropriately.

         In the event of a dissolution or liquidation of the Company, the
Options granted hereunder shall terminate; provided, however, that the
Optionees shall have the right for a period of thirty (30) days prior to such
dissolution or liquidation to exercise outstanding Options in full without
regard to any installment exercise provisions and whether the Option by its
terms is at such time immediately exercisable in full, to the extent it shall
not have been exercised.  In the event of (i) any merger, consolidation or
combination involving the Company, other than (A) any merger, consolidation or
combination that is solely for the purpose of changing the domicile of the
Company, and (B) any merger, consolidation or combination that would result in
the holders of the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by the securities remaining
outstanding or by being converted into voting securities of the surviving
entity) more than fifty percent (50%) of the combined voting power of the
voting securities of the Company (or such surviving entity) outstanding
immediately after such merger, consolidation or combination, or (ii) any sale
of substantially all the assets of the Company or a sufficient amount of Stock
in the Company (whether by tender offer, original issuance, or a single or
series of related stock purchase and sale agreements and/or transactions)
sufficient to confer on the purchaser or purchasers thereof (whether
individually or in a group) the ability to elect a majority of the Board of
Directors of the Company (without regard to any provisions concerning the
classification of Board members or the staggering of their terms), the Optionee
shall have the right, immediately prior to such merger, consolidation,
combination, or asset or stock sale to exercise outstanding Options in full,
without regard to any installment exercise provisions and whether the Option by
its terms is at such time immediately exercisable in full, to the extent that
it shall not have been exercised. In the event of a transaction of the nature
described in (i) above (including, without limitation, in (i)(A) and (i)(B)
above), nothing contained herein shall prevent the Board and the Board of
Directors of the surviving corporation and/or the acquiring corporation from
converting an Option into an option to purchase stock in the





                                      5
<PAGE>   6

surviving or acquiring corporation on a fair and equitable basis.  In the event
of a transaction described in (i) (including, without limitation, in (i)(A) and
(i)(B)) and (ii) above, the Board shall be entitled in its discretion to
require Optionees either to exercise their Options prior to such transactions
becoming effective or to forfeit them in the absence of such an exercise.

         The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined solely by the Committee, and any such
adjustment shall provide for the elimination of fractional share interests.


                                   ARTICLE V
                                DEFERRAL OF FEES

         Each Eligible Director may elect to defer all or any portion of any of
his Fees in accordance with the terms of this Article V.

                 (a)      An election to defer Fees may be made at any time,
but not more frequently than once each calendar year, and shall be effective
only with respect to Fees payable for services to be performed after the date
of the election.  Such election shall be made by executing and delivering a
deferred compensation agreement to the Committee.  A deferral election may not
be modified.  An Eligible Director may terminate a deferral election at any
time by delivering a written notice of termination to the Committee.  Such
notice shall specify the effective date, and deferrals shall cease as soon as
practicable thereafter.  A termination notice shall not be effective with
regard to amounts previously deferred.

                 (b)      The Company shall establish an account for each
Eligible Director who defers Fees hereunder (the "Deferral Account") and shall
adjust the account as follows:

                          (i)     At the end of each calendar month in which
         Fees deferred would otherwise be payable, credit the account with the
         amount deferred for such month; and

                          (ii)    As of the first day of each month (A) debit
         the account by the amount, if any, paid to the Eligible Director or
         his beneficiary during the preceding calendar month in accordance with
         the terms hereof or the terms of any deferred compensation agreement;
         and (B) credit the account with interest on the balance as of said
         first day of the month following the aforementioned debit to the
         account, at the rate paid on five-year U.S. Treasury notes on the
         first day of the month for which the interest is to be credited, or at
         such other rate as is prescribed by the Committee in the deferred
         compensation agreement.

The Committee shall provide each Eligible Director who has elected to defer
Fees hereunder with an account statement at least annually.

                 (c)      The amount credited to the Deferral Account of an
Eligible Director shall be paid to him in substantially equal consecutively
monthly installments over a period not to exceed three (3) years, or in such
other manner as the Committee may permit.  Each such





                                      6
<PAGE>   7

Eligible Director shall elect the manner and time of payment (including the
time payments shall commence) in the first deferred compensation agreement he
executes and such election shall apply to any subsequent deferred compensation
agreement the Eligible Director executes unless specifically modified in a
subsequent agreement.

                 (d)      Except as provided in paragraph (e) below, the amount
credited to the Deferral Account of an Eligible Director, at the time of his
death, shall be paid to his designated beneficiary in substantially equal
consecutive monthly installments over a period not to exceed three (3) years,
or in such other manner as the Committee may permit.  If payment commenced in
accordance with paragraph (c) above prior to the Eligible Director's death,
payment shall continue in accordance with the form of payment then in effect.
If payment had not commenced in accordance with paragraph (c) above, payment
shall be made or commenced as soon as practicable following the date of death.
Each such Eligible Director shall elect the manner in which payment shall be
made to his designated beneficiary in the first deferred compensation agreement
he executes.  Such election shall apply to all subsequent deferred compensation
agreements executed by the Eligible Director unless specifically modified in a
subsequent agreement.

                 (e)      In the event an Eligible Director suffers a financial
hardship caused by accident, illness or other event beyond his control, the
Committee may, in its discretion, accelerate payment of the amounts credited to
the Eligible Director's Deferral Account, if any, to the extent reasonably
necessary to eliminate such hardship.  In addition, if following the death of
an Eligible Director, his beneficiary or beneficiaries suffers a financial
hardship caused by an accident, illness or other event beyond the control of
such beneficiary or beneficiaries, the Committee may, in its discretion,
accelerate payment of the amounts credited to the Eligible Director's Deferral
Account, if any, to which such beneficiary or beneficiaries are entitled to the
extent reasonably necessary to eliminate such hardship.


                                   ARTICLE VI
                                    OPTIONS

SECTION 6.1      ANNUAL OPTION GRANTS

                 (a)      On the date of the meeting of the Board each year
which follows the Annual Meeting of Stockholders in said year (the "Annual
Meeting of Stockholders"), beginning with the date of the Annual Meeting of
Stockholders held in 1996, each director elected to the Board of Directors by
the stockholders of the Company at the annual meeting of stockholders in said
year and who is an Eligible Director, and, in addition to the newly elected
Eligible Directors, each Eligible Director then in office on such date shall
automatically be granted an Option as of the date of such Board meeting to
purchase shares of Stock as follows:

                          (i)     Each director elected to the Board at the
         Annual Meeting of Stockholders and who is an Eligible Director shall
         receive an Option to purchase the number of shares of stock (rounded
         up to the next whole number) determined by dividing the whole dollar
         amount of the director's Retainer for the





                                      7
<PAGE>   8

         upcoming year of service by the Fair Market Value of the Stock on the
         date of grant.

                          (ii)    Each Eligible Director not standing for
         election at the Annual Meeting of Stockholders and who is to continue
         to serve as a director of the Company shall receive an Option to
         purchase the number of shares of Stock (rounded up to the next whole
         number) determined by dividing the whole dollar amount of the
         director's Retainer for the upcoming year of service by the Fair
         Market Value of the Stock on the date of grant and then multiplying
         the resulting amount by .6666.


                 Example:

                 At the Annual Meeting of Stockholders for 1999, Eligible
                 Director A stands for election and is elected to the Board of
                 Directors and Eligible Director B is continuing into the third
                 year of a three-year term as a director of the Company.  Each
                 Eligible Director will be paid a $12,000 Retainer for the
                 upcoming year.  The Fair Market Value of the Stock on the date
                 of the annual meeting of the Board is $11.00.  Under these
                 facts, Eligible Director A will receive an Option to purchase
                 1,091 shares of Stock ($12,000 / $11.00 = 1,090.9, rounded up
                 to 1,091).  Eligible Director B will receive an Option to
                 purchase 728 shares of Stock (1,090.9 x .6666 = 727.1, rounded
                 up to 728).

                 (b)      Each Option granted under this Section 6.1 shall be
evidenced by a Stock Option Agreement dated as of the date of grant and
executed by the Company and the Optionee, which Agreement shall set forth such
terms and conditions as may be determined by the Committee consistent with the
Plan.

                 (c)      The per share price of the Stock subject to each
Option granted under this Section 6.1 shall be one hundred percent (100%) of
the Fair Market Value of the Stock on the date the Option is granted.


SECTION 6.2      OPTION GRANTS IN LIEU OF PAYMENT OF FEES

                 (a)      Each Eligible Director may elect to receive his Fees
in the form of Options in lieu of cash.  An election shall apply to the full
amount of the Eligible Director's Fees and shall be made in writing, on such
form and in such manner as the Committee may prescribe, before the Annual
Meeting of Stockholders of the Company each year, such election to cover Fees
accrued during the twelve-month period to begin on June 1 following said annual
meeting and end May 31 of the following year (the "Election Option Period");
provided, however, that for the initial year of the Plan, an Eligible Director
may make his election hereunder at any time prior to August 31, 1996, which
election shall apply to the period beginning September 1, 1996 and ending on
May 31, 1997.





                                      8
<PAGE>   9


                 (b)      On the first business day following each of the
three-month periods ending August 31, November 30, February 28 (or 29, as the
case may be) and May 31 in each Election Option Period (the "Election Quarter
Period"), the Company shall grant to each Eligible Director who has made an
election in accordance with paragraph (a) above an Option to purchase the
number of shares of Stock (rounded up to the next whole number) determined by
dividing x by y, where --

                 x is the amount of the Eligible Director's Fees accrued during
                 the Election Quarter Period increased by a factor of thirty
                 percent (30%); and

                 y is the Black-Scholes value of each Option to purchase a
                 share of Stock on the date of grant.

                 (c)      The per share price of the Stock subject to each
Option granted under this Section 6.2 shall be one hundred percent (100%) of
the Fair Market Value of the Stock on the date the Option is granted.

                 (d)      An election by an Eligible Director whose service on
the Board terminates prior to the end of an Election Quarter Period to which
the election relates shall be void.  Such Eligible Director shall receive the
portion of his Fees earned as of the date of termination in cash.


SECTION 6.3      OPTION PERIOD

         Each Option granted hereunder must be granted within ten years from
the effective date of the Plan.  The period for the exercise of each Option
shall be ten years.  Options granted hereunder prior to stockholder approval of
the Plan shall provide that such Options are not exercisable within the first
twelve-months following the grant thereof and, further, that at least six
months must elapse from the date of stockholder approval of the Plan to the
date of disposition of any underlying shares of Stock to which such Option
relates, unless any earlier exercise of disposition may be effected without
causing a violation of Section 16(b) of the 1934 Act or any rules and
regulations promulgated thereunder.  Following stockholder approval of the
Plan, Options granted hereunder shall not be exercisable within the first
twelve months after the date of grant; provided, however, that said Options may
become exercisable earlier in accordance with the provisions of this Plan
concerning the termination of an Optionee's directorship on account of total
and permanent disability or death (Section 6.5) and change of control of the
Company (Section 4.3), provided that, in each case, the earlier exercise
thereof would not cause a violation of Section 16(b) of the 1934 Act or any
rules and regulations promulgated thereunder.  Following stockholder approval
of the Plan, the Committee in its discretion may accelerate the times when
Options are exercisable after the initial grant thereof; provided, however,
that the Committee may not exercise such power in a manner that would shorten
the initial twelve-month period for Eligible Directors referred to in the
foregoing sentence or the other periods referenced in this Section 6.3 if to do
so would permit or result in a violation of Section 16(b) of the 1934 Act.





                                      9
<PAGE>   10

SECTION 6.4      OPTION EXERCISE

                 (a)      Options may be exercised with respect to whole shares
only, for such shares of Stock and within the period permitted by the exercise
thereof as determined by the Committee, and shall be exercised by written
notice of intent to exercise the Option with respect to a specified number of
shares delivered to the Company at its principal office in the State of
Alabama, and payment in full to the Company at said office of the amount of the
Option price for the number of shares of Stock with respect to which the Option
is then being exercised.

                 (b)      The Option price upon exercise of any Option shall be
payable to the Company in full either (i) in cash or its equivalent, (ii) by
tendering shares of previously acquired Stock which has been held by the
Optionee for a minimum of six months prior to such exercise, and having a Fair
Market Value as of the business day immediately preceding the date of exercise
equal to the total Option price, or (iii) by a combination of (i) and (ii).
Any shares of Stock received by the Company pursuant to this Section 6.4(b)
shall be held by the Company as treasury shares.

                 (c)      No Option granted hereunder shall be exercisable
unless at all times during the period beginning on the date of the granting of
such Option and ending on the day which is three years before the date of
exercise (or ending on the day which is 90 days before the date of exercise in
the event of the termination of the directorship of the Optionee for cause, or
ending on the expiration date of the Option in the event of termination of the
directorship on account of the retirement, determination of total and permanent
disability or the death of the Optionee, as the case may be) the Optionee was a
director of the Company.


SECTION 6.5      EFFECT OF DEATH OR OTHER TERMINATION OF EMPLOYMENT

                 (a)      In the event that the directorship of an Optionee to
whom an Option shall have been granted hereunder shall be terminated for any
reason (including voluntary resignation, early retirement or failure to be re-
elected) other than for cause (as defined below), mandatory retirement
according to the policy of the Board, death or disability, such Option may be
exercised (to the extent that the Option shall have been entitled to do so at
the date of his termination) by such Optionee at any time prior to the
expiration date of the Option or within three years  after the date of such
directorship termination, whichever is earlier.

                 (b)      If the directorship of an Optionee to whom an Option
shall have been granted hereunder is terminated for cause, as defined below,
such Option may be exercised (to the extent that the Optionee shall have been
entitled to do so at the date of his termination) by such Optionee at any time
prior to the expiration date of the Option or within ninety (90) days after the
date of such termination, whichever is earlier.  For purposes of this Section
6.5, the term "for cause" shall be defined as a good faith express
determination by the Board that the Optionee has been guilty of willful
misconduct or dishonesty or a good faith express determination by the Board
that the Optionee has been grossly derelict in or has grossly neglected the
Optionee's duty to the Company.





                                     10
<PAGE>   11

                 (c)      In the event that the directorship of an Optionee to
whom an Option shall have been granted hereunder shall be terminated by reason
of mandatory retirement according to the policy of the Board, such Option may
be exercised (to the extent that the Option shall have been entitled to do so
at the date of his termination) by such Optionee at any time prior to the
expiration date of the Option.

                 (d)      In the event that the directorship of an Optionee to
whom an Option shall have been granted hereunder shall be terminated by the
death or total and permanent disability (as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"), or as determined by the
Committee in its discretion) of such Optionee, such Option may be exercised (to
the extent that the Option shall have been entitled to do so at the date of his
termination) by such Optionee, his personal representatives, the executor or
administrator of the estate of the Optionee, or the person or persons to whom
an Option granted hereunder shall have been validly transferred pursuant to a
will or the laws of descent and distribution, or otherwise, at any time prior
to the expiration date of the Option.

SECTION 6.6      NONTRANSFERABILITY OF OPTIONS

         At such time as the terms of the Plan are required to comply with (or,
if earlier, are elected by the Company to comply with) the provisions of Rule
16b-3, adopted in Release No. 34-37260 dated May 30, 1996, Options granted
hereunder may be transferred by an Optionee upon the prior consent of the
Committee; provided, however, that such Committee approval shall not be
required for transfers of an Option by will or the laws of descent and
distribution.  Prior to such time, no Option shall be transferred by an
Optionee otherwise than by will or the laws of descent and distribution.  No
transfer of an Option by the Optionee by will or by the laws of descent and
distribution shall be effective to bind the Company unless the Company shall
have been furnished with written notice thereof and an authenticated copy of
the will and/or such other evidence as the Committee may deem necessary to
establish the validity of the transfer and the acceptance by the transferee or
transfers of the terms and conditions of such Option.  Subject to the
foregoing, during the lifetime of an Optionee, the Option shall be exercisable
only by him.


SECTION 6.7      RIGHTS AS STOCKHOLDER

         An Optionee or a transferee of an Option shall have no rights as a
stockholder with respect to any shares subject to such Option prior to the
purchase of such shares by exercise of such Option as provided herein.


                                  ARTICLE VII
                               STOCK CERTIFICATES

SECTION 7.1      STOCK CERTIFICATES

         The Company shall not be required to issue or deliver any certificate
for shares of Stock purchased upon the exercise of an Option granted hereunder
or any portion thereof, prior to fulfillment of all of the following
conditions:





                                     11
<PAGE>   12


                 (a)      the completion of any registration or other
qualification of such shares under any federal or state law or under the
rulings or regulations of the Securities and Exchange Commission or any other
governmental regulatory body, which the Committee shall in its sole discretion
deem necessary or advisable;

                 (b)      the obtaining of any approval or other clearance from
any federal or state governmental agency which the Committee shall in its sole
discretion determine to be necessary or advisable;

                 (c)      the lapse of such reasonable period of time following
the exercise of the Option as the Committee from time to time may establish for
reasons of administrative convenience;

                 (d)      the compliance with any and all applicable federal,
state or local laws; and

                 (e)      such other terms and conditions as may be set forth 
in the Plan.

The Company shall further be entitled to place whatever legends on such
certificate as it shall deem reasonably necessary or appropriate.


                                  ARTICLE VIII
              TERMINATION, AMENDMENT, AND MODIFICATION OF THE PLAN


         The Board may at any time terminate, and may at any time and from time
to time and in any respect amend or modify, the Plan; provided, however, that
no such action of the Board without approval of the stockholders of the Company
may

                 (a)      increase the total number of shares of Stock subject
to the Plan except as contemplated in Section 4.3 hereof;

                 (b)      materially modify the requirements as to those
persons who are eligible to participate in the Plan; and

provided, further, that no termination, amendment, or modification of the Plan
shall in any manner affect any Stock Option Agreement theretofore entered into
pursuant to the Plan without the consent of the Optionee or valid transferee of
the Option.  The foregoing provisions of this Article VIII notwithstanding,
until such time as the terms of the Plan are required to comply with (or, if
earlier, are elected by the Company to comply with) the provisions of Rule
16b-3, adopted in Release No. 34-37260 dated May 30, 1996, the provisions of
Article VI of the Plan shall not be amended more than once every six months,
other than to comport with changes in the Internal Revenue Code, ERISA, or the
rules thereunder.



                                   ARTICLE IX





                                     12
<PAGE>   13

                                 MISCELLANEOUS

SECTION 9.1      OTHER COMPENSATION PLANS

         The adoption of the Plan shall not affect any other stock option or
incentive or other compensation plans in effect for the Company or any of its
subsidiaries, nor shall the Plan preclude the Company from establishing any
other forms of incentive or other compensation for employees of the Company or
any of its subsidiaries.


SECTION 9.2      PLAN BINDING ON SUCCESSORS

         The Plan shall be binding upon the successors and assigns of the
Company.

SECTION 9.3      SINGULAR, PLURAL; GENDER

         Whenever used herein, nouns in the singular shall include the plural,
and the masculine pronoun shall include the feminine gender.

SECTION 9.4      HEADINGS, ETC., NO PART OF PLAN

         Headings of Articles and Sections hereof are inserted for convenience
and references; they constitute no part of the Plan.

SECTION 9.5      INVESTMENT REPRESENTATION

         Each Stock Option Agreement may contain an agreement that, upon demand
by the Committee for such a representation, the Optionee shall deliver to the
Committee at the time of any exercise of an Option a written representation
that the shares of Stock to be acquired upon such exercise are to be acquired
for investment and not for resale or with a view to the distribution thereof.
Upon such demand, delivery of such representation prior to the delivery of any
shares issued upon exercise of an Option and prior to the expiration of the
Option period shall be a condition precedent to the right of the Optionee or
such other persons to purchase any such shares.


SECTION 9.6      COMPLIANCE WITH OTHER LAWS AND REGULATIONS

         The Plan, the grant and exercise of Options hereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable federal and state laws, rules and regulations and
to such approvals by any governmental or regulatory agency or national
securities exchange as may be required.  The Company shall not be required to
issue or deliver any certificates for shares of Stock prior to the completion
of any registration or qualification of such shares under any federal or state
law, or any ruling or regulation of any governmental body or national
securities exchange which the Company shall, in its sole discretion, determine
to be necessary or advisable.





                                     13
<PAGE>   14


SECTION 9.7      WITHHOLDING BY THE COMPANY

         A Stock Option Agreement executed pursuant to this Plan may contain a
provision to the effect that the Optionee will consent to any withholding
actions that the Company deems reasonably necessary to enable the Company to
obtain the benefit of an income tax deduction under the Code, and any related
state or local income tax laws.





                                     14

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE 26-WEEK PERIOD ENDED JUNE 29, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-END>                               JUN-29-1996
<CASH>                                          15,386
<SECURITIES>                                         0
<RECEIVABLES>                                   24,305
<ALLOWANCES>                                       801
<INVENTORY>                                     19,608
<CURRENT-ASSETS>                                61,743
<PP&E>                                          21,998
<DEPRECIATION>                                  11,305
<TOTAL-ASSETS>                                  77,296
<CURRENT-LIABILITIES>                           18,724
<BONDS>                                         11,121
                                0
                                          0
<COMMON>                                            97
<OTHER-SE>                                      45,080
<TOTAL-LIABILITY-AND-EQUITY>                    77,296
<SALES>                                         47,691
<TOTAL-REVENUES>                                47,691
<CGS>                                           36,380
<TOTAL-COSTS>                                   36,380
<OTHER-EXPENSES>                                10,000
<LOSS-PROVISION>                                    15
<INTEREST-EXPENSE>                                 174
<INCOME-PRETAX>                                  1,122
<INCOME-TAX>                                       660
<INCOME-CONTINUING>                                462
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       462
<EPS-PRIMARY>                                     0.07
<EPS-DILUTED>                                     0.07
        

</TABLE>


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