<PAGE> 1
U.S. 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 39-WEEK PERIOD ENDED SEPTEMBER 26, 1998 COMMISSION FILE NO. 0-26228
MARTIN INDUSTRIES, INC.
-----------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
(256) 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.
8,396,052 SHARES OF COMMON STOCK, $.01
PAR VALUE, AS OF OCTOBER 30, 1998
<PAGE> 2
MARTIN INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 26, 1998 AND DECEMBER 31, 1997 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE 13-WEEK AND 39-WEEK PERIODS ENDED
SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE 39-WEEK PERIODS ENDED
SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
</TABLE>
1
<PAGE> 3
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 26, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Current assets:
Cash and short-term investments $ 549,000 $ 15,157,000
Accounts and notes receivable, less
allowance for doubtful accounts of
$461,000 and $432,000, respectively 21,714,000 10,106,000
Inventories 24,291,000 24,884,000
Refundable income taxes 746,000 269,000
Deferred tax benefits 3,393,000 3,488,000
Prepaid expenses and other assets 1,556,000 1,811,000
-------------------- --------------------
Total current assets 52,249,000 55,715,000
-------------------- --------------------
Property, plant and equipment, net 9,967,000 10,317,000
Deferred tax benefits 610,000 581,000
Other noncurrent assets 4,166,000 4,367,000
-------------------- --------------------
14,743,000 15,265,000
-------------------- --------------------
Total assets $ 66,992,000 $ 70,980,000
==================== ====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
2
<PAGE> 4
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 26, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $ 455,000 $ 481,000
Current portion of long-term debt 1,745,000 1,750,000
Accounts payable 4,724,000 3,496,000
Accrued liabilities:
Payroll and employee benefits 2,657,000 2,699,000
Product liability 752,000 651,000
Warranty 1,159,000 1,535,000
Workers' compensation 573,000 572,000
Other 1,536,000 1,359,000
------------------- -------------------
Total current liabilities 13,601,000 12,543,000
------------------- -------------------
Long-term debt 6,873,000 8,599,000
Deferred compensation 2,198,000 2,197,000
Other noncurrent liabilities 0 18,000
------------------- -------------------
9,071,000 10,814,000
------------------- -------------------
Total liabilities 22,672,000 23,357,000
------------------- -------------------
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; 9,751,222 shares issued at September 26,
1998 and 9,748,746 at December 31, 1997 98,000 97,000
Paid-in capital 27,231,000 26,863,000
Retained earnings 26,915,000 29,501,000
Foreign currency translation adjustment (886,000) (372,000)
------------------- -------------------
53,358,000 56,089,000
Less:
Treasury stock at cost (1,355,170 shares at September 26,
1998 and 1,104,105 at December 31, 1997) 4,057,000 2,590,000
Unearned compensation - ESOP 4,981,000 5,876,000
------------------- -------------------
Total stockholders' equity 44,320,000 47,623,000
------------------- -------------------
Total liabilities and stockholders' equity $ 66,992,000 $ 70,980,000
=================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE> 5
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13-Week 39-Week
Period Ended Period Ended
----------------------------------- ----------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 20,102,000 $ 23,850,000 $ 63,243,000 $ 63,258,000
COST OF SALES 17,975,000 17,810,000 52,108,000 48,102,000
---------------- --------------- ------------- ------------
Gross profit 2,127,000 6,040,000 11,135,000 15,156,000
---------------- --------------- ------------- ------------
OPERATING EXPENSES:
Selling 2,022,000 2,555,000 7,030,000 7,633,000
General and administrative 1,529,000 1,573,000 4,640,000 4,734,000
Non-cash ESOP compensation expense 312,000 483,000 1,090,000 1,445,000
Restructure charge 0 0 615,000 0
---------------- --------------- ------------- ------------
3,863,000 4,611,000 13,375,000 13,812,000
---------------- --------------- ------------- ------------
Operating income (loss) (1,736,000) 1,429,000 (2,240,000) 1,344,000
INTEREST EXPENSE 224,000 501,000 771,000 1,144,000
INTEREST AND OTHER INCOME (120,000) (219,000) (817,000) (673,000)
---------------- --------------- ------------- ------------
Income (loss) from continuing operations
before income taxes (1,840,000) 1,147,000 (2,194,000) 873,000
PROVISION (CREDIT) FOR INCOME TAXES (426,000) 492,000 (462,000) 409,000
---------------- --------------- ------------- ------------
Income (loss) from continuing operations (1,414,000) 655,000 (1,732,000) 464,000
Loss on disposal of discontinued operations, net of tax 0 (253,000) 0 (253,000)
---------------- --------------- ------------- ------------
NET INCOME (LOSS) $ (1,414,000) $ 402,000 $ (1,732,000) $ 211,000
================ =============== ============= ============
BASIC PER SHARE DATA:
Income (loss) from continuing operations $ (0.20) $ 0.10 $ (0.24) $ 0.07
Loss from discontinued operations 0.00 (0.04) 0.00 (0.04)
---------------- --------------- ------------- ------------
Net income (loss) $ (0.20) $ 0.06 $ (0.24) $ 0.03
================ =============== ============= ============
Weighted average number of common and common
equivalent shares outstanding 7,133,756 6,800,167 7,099,251 6,755,026
================ =============== ============= ============
DILUTED PER SHARE DATA:
Income (loss) from continuing operations $ (0.20) $ 0.09 $ (0.24) $ 0.07
Loss from discontinued operations 0.00 (0.03) 0.00 (0.04)
---------------- --------------- ------------- ------------
Net income (loss) $ (0.20) $ 0.06 $ (0.24) $ 0.03
================ =============== ============= ============
Weighted average number of common and common
equivalent shares outstanding 7,133,756 7,082,734 7,099,251 7,037,593
================ =============== ============= ============
DIVIDENDS DECLARED PER SHARE $ 0.042 $ 0.040 $ 0.122 $ 0.116
================ =============== ============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE> 6
MARTIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39-Week
Period Ended
----------------------------------------------
Sept. 26, Sept. 27,
1998 1997
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,732,000) $ 211,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Accrued restructure charge 288,000 0
Depreciation and amortization 1,259,000 1,301,000
Gain on sale of assets 0 (12,000)
Gain on sale of marketable securities (288,000) 0
Provision for doubtful accounts and notes receivable 29,000 21,000
Non-cash ESOP compensation expense 1,090,000 1,445,000
Other changes in operating assets and liabilities (10,522,000) (25,758,000)
------------------ ------------------
Net cash used in operating activities (9,876,000) (22,792,000)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,053,000) (1,803,000)
Proceeds from sale of assets 2,000 1,023,000
Proceeds from sale of marketable securities 368,000 0
------------------ ------------------
Net cash used in investing activities (683,000) (780,000)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (7,000) 18,346,000
Net repayments of long-term debt (1,723,000) (1,689,000)
Purchase of treasury stock (1,729,000) (775,000)
Exercise of stock options 121,000 44,000
Cash dividends paid (676,000) (613,000)
------------------ ------------------
Net cash provided by (used in) financing activities (4,014,000) 15,313,000
------------------ ------------------
NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS (14,573,000) (8,259,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (35,000) 25,000
CASH AND SHORT-TERM INVESTMENTS AT THE
BEGINNING OF THE PERIOD 15,157,000 19,326,000
------------------ -------------------
CASH AND SHORT-TERM INVESTMENTS AT THE
END OF THE PERIOD $ 549,000 $ 11,092,000
================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE> 7
MARTIN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed 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, 1997 included on Form 10-K, as filed with the
Securities and Exchange Commission on March 31, 1998.
In the opinion of management, the unaudited interim condensed
consolidated financial statements included herein reflect all adjustments
necessary to present fairly the information set forth therein. All adjustments
are of a normal recurring nature. The consolidated 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 condensed 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.
The Company's fiscal quarters end on the Saturday nearest each
calendar quarter-end. The Company utilizes a December 31 fiscal year-end.
New Accounting Standards and Statements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131, which
supersedes SFAS Nos. 14, 18, 24, and 30, establishes new standards for segment
reporting using the "management approach" in which reportable segments are
based on the same criteria on which management disaggregates a business for
making operation decisions and assessing performance. The Company will adopt
the new rules in 1998. The new rules are not expected to differ significantly
from the Company's present segment reporting.
6
<PAGE> 8
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132, which
supersedes SFAS Nos. 87, 88, and 106, standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures that are no longer useful as they were when SFAS Nos. 87,
88, and 106, were issued. The Company will adopt the new rules in 1998. The new
rules are not expected to have a significant impact on the Company's financial
reporting.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. The Company is in the
process of evaluating the impact of this statement on its financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position ("SOP"), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP, which must
be adopted by 1999, requires capitalization of costs of internal-use software.
The Company is in the process of evaluating the impact of this statement on its
financial statements.
2. 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 September 26, 1998 and December 31, 1997 follows:
<TABLE>
<CAPTION>
September 26, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Inventories valued at first-in, first-out ("FIFO") cost:
Raw materials and purchased parts $12,318,000 $12,467,000
Work-in-process 5,470,000 5,194,000
Finished goods 12,261,000 12,803,000
---------- -----------
30,049,000 30,464,000
Less excess of FIFO over LIFO cost 5,758,000 5,580,000
----------- -----------
$24,291,000 $24,884,000
=========== ===========
</TABLE>
3. EARNINGS PER SHARE
In December 1997, the Company adopted SFAS No. 128, Earnings per
Share, and restated all prior-period earnings per share ("EPS") data presented.
7
<PAGE> 9
A reconciliation of shares as the denominator of the basic EPS
computation to the diluted EPS computation is as follows:
<TABLE>
<CAPTION>
13-Week Period Ended 39-Week Period Ended
---------------------------------- ---------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average shares-basic,
excluding ESOP and stock
option effects 5,296,817 5,214,178 5,349,146 5,255,871
Weighted average effect of ESOP
shares committed to be
released 1,836,939 1,585,989 1,750,105 1,499,155
------------- ----------- -------------- -------------
Weighted average shares-basic 7,133,756 6,800,167 7,099,251 6,755,026
Dilutive effect of stock options 0 282,567 0 282,567
------------- ----------- -------------- -------------
Weighted average number of
common and common
equivalent shares
outstanding-diluted 7,133,756 7,082,734 7,099,251 7,037,593
=============== ============ ============== =============
</TABLE>
Options outstanding of 691,973 and 396,050 for the 13-week periods ended
September 26, 1998 and September 27, 1997, respectively, were not included in
the table above as they were anti-dilutive. Options outstanding of 691,973 and
396,050 for the 39-week periods ended September 26, 1998 and September 27,
1997, respectively, were not included in the table above as they were
anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
Product Contingency
The Company has experienced production and design problems with
certain products manufactured by Hunter Technology Inc., a wholly-owned
subsidiary of 1166081 Ontario Inc. These product problems, in some cases,
caused the production to be suspended and, therefore, shipments were also
suspended. Corrections have been implemented and all but one of the affected
products are back in production. The Company has completed its evaluation of
the potential exposure to deal with problems related to products shipped prior
to these corrections, and it currently believes that the ultimate liability
will not have a material adverse effect on the Company.
8
<PAGE> 10
Legal
On February 1, 1996, the Company's wholly owned subsidiary, 1166081
Ontario Inc. ("Martin Canada"), acquired all of the capital stock of Hunter
Technology Inc. ("Hunter"). This transaction was accounted for under the
purchase method of accounting. The aggregate purchase price of approximately
$1,943,000 included $850,000 in cash, $729,000 in promissory notes payable and
$364,000 paid into escrow. Transaction expenses of $160,000 were incurred. The
promissory notes bear interest at a rate of 9% per annum and matured during the
first quarter of 1997. The purpose of the escrow is to make funds available to
meet the sellers' indemnification obligations to the Company. The Company has
withheld payment on certain of the promissory notes pending resolution of
certain issues with the holders of the notes arising out of the purchase
transaction. The Company has claimed the entire amount in escrow and instituted
litigation to recover these amounts and additional amounts from certain sellers
in the purchase transaction, and certain of the sellers have sued to enforce
collection of their notes. The outcome of these matters is uncertain at this
time.
The Company is a party to various legal proceedings that are
incidental to its business. Certain of these cases filed against the Company
and other companies engaged in businesses similar to the Company often allege,
among other things, product liability, personal injury and breach of contract
and warranty. Such suits sometimes seek the imposition of large amounts of
compensatory and punitive damages and trials by jury. In the opinion of
management, after consultation with legal counsel responsible for these
matters, the ultimate liability, if any, with respect to the proceedings in
which the Company is currently involved is not presently expected to have a
material adverse affect on the Company. However, the potential exists for
unanticipated material adverse judgments against the Company.
5. REPORTING COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for the
reporting and display of "comprehensive income," which is the total of net
income (loss) and all other nonowner changes in stockholders' equity, and its
components. Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
13-Week Period Ended 39-Week Period Ended
---------------------------------- --------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
---------------------------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,414,000) $ 402,000 $ (1,732,000) $ 211,000
Other comprehensive income
(loss), net of tax
Foreign currency translation
adjustment (267,000) (7,000) (514,000) (79,000)
------------------- ------------- ------------ --------------
Comprehensive income (loss) $ (1,681,000) $ 395,000 $ (2,246,000) $ 132,000
================== ============= ============ ==============
</TABLE>
9
<PAGE> 11
6. RESTRUCTURE CHARGE
As part of the continuing effort to reduce operating costs and improve
manufacturing efficiencies, the Company made the decision to close its
Washington Park, Illinois facility. The Company initiated the closing and the
transfer of the gas grill, gas log and freestanding vent-free stove production
into the Athens, Alabama and Huntsville, Alabama locations during the second
quarter of 1998. The Company recorded a non-recurring charge of $615,000,
before tax, in connection with the closing. The non-recurring charge includes
plant closing costs of $590,000 (primarily payroll, severance and payroll taxes
of $234,000 and group insurance of $255,000) and a property, plant and
equipment valuation charge of $25,000. The estimated reserve remaining as of
September 26, 1998 totaled $288,000.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
interim condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this Form 10-Q. All references to the third
quarter of 1998 and the third quarter of 1997 are referring to the 13-week
periods ended September 26, 1998 and September 27, 1997, respectively. All
references to the 1998 year-to-date period and the 1997 year-to-date period are
referring to the 39-week periods ended September 26, 1998 and September 27,
1997, respectively.
The Company manufactures products in two industry segments: home
heating products and leisure and other products such as do-it-yourself utility
trailer kits and gas barbecue grills. Each of the industry segments in which
the Company operates is cyclical in nature, with sales being affected by
general economic cycles, consumer confidence levels, inflation, employment and
income levels and the availability of credit generally. The Company's fireplace
business is also influenced by factors affecting the housing industry, such as
housing demand, the availability of financing and the level and stability of
interest rates.
Sales of home heating products and, in particular, gas and solid fuel
heaters (other than fireplaces), historically have been seasonal in nature,
with sales being directly affected by weather conditions. In an effort to
better control its production schedule and inventory of finished products in
light of this seasonality, the Company utilizes early booking programs, which
allow the Company to project sales early in the year and plan production
accordingly. In general, the Company takes early booking orders for its heating
products in the first and second quarters and fills the majority of these
orders in the second and third quarters, with fill-in orders being shipped in
the fourth quarter and to a lesser degree in the ensuing first quarter.
Prior to 1997, the Company manufactured products in the metal office
furniture segment through its Filex line acquired in 1989. In February of 1997,
the Company elected to discontinue its metal office furniture operations. The
consolidation in the office furniture industry increased competition and margin
pressures in the segment to the point of an unacceptable return to the Company.
The metal office furniture segment's operations are treated as discontinued in
the accompanying condensed consolidated financial statements. See "--Results of
Discontinued Metal Office Furniture Operations."
11
<PAGE> 13
As part of the continuing effort to reduce operating costs and improve
manufacturing efficiencies, the Company made the decision to close its
Washington Park, Illinois facility. The Company initiated the closing and the
transfer of the gas grill, gas log and freestanding vent-free stove production
into the Athens, Alabama and Huntsville, Alabama locations during the second
quarter of 1998. The Company recorded a non-recurring charge of $615,000,
before tax, in connection with the closing. The non-recurring charge includes
plant closing costs of $590,000 (primarily payroll, severance and payroll taxes
of $234,000 and group insurance of $255,000) and a property, plant and
equipment valuation charge of $25,000. The estimated reserve remaining as of
September 26, 1998 totaled $288,000. See "39-Week Period Ended September 26,
1998 Compared to 39-Week Period Ended September 27, 1997 - Restructure Charge."
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent in part
on its computer software programs and operating systems (collectively, the
"Programs and Systems"). These Programs and Systems are used in several key
areas of the Company's business, including inventory management, pricing,
sales, and financial reporting, as well as in various administrative functions.
Many of the Company's Programs and Systems, as well as the programs and systems
of third parties doing business with the Company, are subject to the "Year
2000" issue, which is the inability of a computer to correctly process dates
after December 31, 1999. This inability could potentially cause affected
computers to shut down or perform incorrect calculations, ultimately resulting
in a system failure, disruption of operations, and the inability to engage in
normal business activities. This issue also affects products or systems which
contain embedded computer chips with date sensitive programming, such as
manufacturing equipment, security systems, telephone equipment and office
equipment ("non-IT systems"). As a result, many companies' software and
computer systems need to be upgraded or replaced in order to address the Year
2000 issue.
The Company is in the process of evaluating its Programs and Systems,
including its non-IT systems, to identify and address potential Year 2000
compliance problems. With respect to the Company's non-IT systems, the Company
has not completed its evaluation, but currently believes that its material
non-IT systems are not date dependent. The Company has substantially completed
its preliminary assessment of its IT Programs and Systems. The Company has also
initiated communication with suppliers, and intends to initiate communication
with financial institutions and other third parties with which it does business
in the near future, to evaluate their Year 2000 compliance. The Company is
currently reviewing responses from its suppliers to identify and assess
compliance issues, but has not yet completed that review.
It is anticipated that further modification or replacement of certain
of the Company's Programs and Systems will be necessary to make its IT Programs
and Systems Year 2000 compliant. The Company plans to complete its final
assessment of its IT Programs and Systems and implement corrections and/or
selective replacements to those Programs and Systems by the end of the second
quarter of 1999. While some non-critical systems may not be addressed until
after December 1999, the Company believes such systems will not disrupt its
operations in a material manner. The Company does not expect that the cost to
modify and/or make selective improvements to its Programs and Systems will be
material to its financial condition or results of operations; however, the
Company does expect to incur approximately $50,000 from working capital funds
as an expense during 1998 and 1999 to complete the assessment and corrections.
Because of the subjective nature of and inherent uncertainty in the Year 2000
compliance issue, the actual costs to address and resolve any non-compliance
issues may differ materially from those anticipated. In particular, this
estimate assumes that the Company will not encounter material Year 2000
compliance issues with its non-IT systems, that it has correctly identified and
assessed the material Year 2000 compliance issues associated with its IT
Programs and Systems, and that its suppliers, customers and others with which
it does business correctly communicate with the Company and do not experience
significant Year 2000 compliance issues. In addition, the Company in the normal
course of its business has been evaluating the need for a system-wide upgrade
or replacement of its Programs and Systems without regard to the Year 2000
compliance issue. If the Company undertakes such an upgrade or replacement,
it will be designed to eliminate any Year 2000 issues. The Company, however,
has not
12
<PAGE> 14
made any decision to implement such a project and does not expect to accelerate
this decision in order to address the Year 2000 issue.
The Company could be affected if the Year 2000 issue impacts
suppliers' abilities to provide raw materials and other supplies needed in the
manufacturing process or if its customers' ability to take shipments are
affected. The Company is also dependent on third parties or government agencies
to (1) supply sufficient electrical power and other utilities, transportation
and other services to sustain the manufacturing process and other Company
operations, (2) process, pay and maintain records of certain employee benefits,
and (3) supply funds and information in a timely fashion for its distributors
and customers to purchase products. Any failure on the part of these third
parties could have a material adverse effect on the business, results of
operations and financial condition of the Company.
If the Company's efforts to resolve the Year 2000 issue are not
adequate or implemented in a timely manner, the Company could experience a
disruption in its normal business activities. Management of the Company
currently believes that the most reasonably likely worst case scenario would be
the delay in collections from third parties which could result in liquidity
issues for the Company, the delay of financial reporting due to any accounting
processes which may need to be performed manually, a delay in purchasing
supplies and shipping products, and increased costs associated with obtaining
alternative sources of supply and other business, in each case until all Year
2000 issues are resolved. However, the potential consequences of the Year 2000
issue are inherently uncertain, and, consequently, no assurance can be given
that this will be the reasonably likely worst case scenario.
The Company has not established a contingency plan for Year 2000
issues. The Company, however, intends to reevaluate the need for a contingency
plan in approximately mid-1999.
Many of the statements in this section constitute forward-looking
statements and are subject to a number of assumptions, risks and uncertainties
that could cause actual results to differ materially from those expressed or
contemplated by these statements. See "'Safe Harbor' Statement under the
Private Securities Litigation Reform Act of 1995" appearing on page 22 of this
report.
<PAGE> 15
RESULTS OF CONTINUING 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 39-Week Period Ended
-------------------------- -----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.4 74.7 82.4 76.0
------- ------- ------ --------
Gross profit 10.6 25.3 17.6 24.0
Operating expenes:
Selling 10.1 10.7 11.1 12.1
General and administrative 7.6 6.6 7.3 7.5
Non-cash ESOP compensation expense 1.5 2.0 1.7 2.3
Restructure charge 0.0 0.0 1.0 0.0
------- ------- ------ --------
Operating income (loss) (8.6) 6.0 (3.5) 2.1
Interest expense (income), net 0.5 1.2 (0.1) 0.7
------- ------- ------ --------
Income (loss) before income taxes (9.1) 4.8 (3.4) 1.4
Provision (credit) for income taxes (2.1) 2.1 (0.7) 0.7
------- ------- ------ --------
Net income (loss) (7.0)% 2.7% (2.7)% 0.7%
======= ======= ====== ========
<CAPTION>
Segment Information
----------------------------------------------------------
13-Week Period Ended 39-Week Period Ended
------------------------- --------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Net sales:
Home heating products $ 18,484 $ 21,461 $ 45,726 $ 48,554
Leisure and other products 1,618 2,389 17,517 14,704
--------- -------- -------- --------
$ 20,102 $ 23,850 $ 63,243 $ 63,258
========= ======== ======== ========
Gross profit:
Home heating products $ 2,041 $ 5,655 $ 7,429 $ 11,860
Leisure and other products 86 385 3,706 3,296
--------- -------- -------- --------
$ 2,127 $ 6,040 $ 11,135 $ 15,156
========= ======== ======== ========
Segment contribution (loss): (1)
Home heating products $ 445 $ 3,624 $ 2,676 $ 6,279
Leisure and other products (340) (139) 1,429 1,244
--------- -------- -------- --------
$ 105 $ 3,485 $ 4,105 $ 7,523
========= ======== ======== ========
</TABLE>
(1)Segment contribution (loss) consists of gross profit less selling expenses.
13
<PAGE> 16
13-WEEK PERIOD ENDED SEPTEMBER 26, 1998 COMPARED TO 13-WEEK PERIOD ENDED
SEPTEMBER 27, 1997
Net Sales
Net sales in the 13-week period ended September 26, 1998 decreased to
$20.1 million from $23.9 million in the 13-week period ended September 27,
1997, a decrease of $3.7 million, or 15.7%.
Home Heating Products. Net sales of home heating products decreased to $18.5
million in the third quarter of 1998 from $21.5 million in the third quarter of
1997, a decrease of $3.0 million, or 13.9%. The decrease in net sales of home
heating products, particularly gas space heaters, was primarily due to the
continued effect of high levels of customer inventories carried over as a
result of last year's mild winter. Price competition is also fierce as the gas
heater industry has been negatively impacted by these conditions and by
increased competition generally from foreign and domestic producers. Gas heater
prices were reduced approximately 13% to 14% on approximately $3.0 million of
sales shifted from distributors to direct retail.
Leisure and Other Products. Net sales of leisure and other products decreased
$771,000, or 32.3%, in the third quarter of 1998 to $1.6 million as compared to
$2.4 million in the third quarter of 1997. The decrease in sales was primarily
due to lower utility trailer sales as a result of competition from a foreign
producer and a decrease in barbeque gas grill sales as a result of the transfer
of grill production from the Washington Park, Illinois facility to the Athens,
Alabama facility. See "--Restructure Charge."
Gross Profit
Gross profit in the third quarter of 1998 was $2.1 million as compared
to $6.0 million in the third quarter of 1997, a decrease of $3.9 million, or
64.8%. Gross margin, defined as gross profit as a percentage of net sales, was
10.6% in the third quarter of 1998 as compared to 25.3% in the third quarter of
1997.
Home Heating Products. Gross profit on net sales of home heating products in
the third quarter of 1998 was $2.0 million as compared to $5.7 million in the
third quarter of 1997, a decrease of $3.6 million or 63.9%. The sales decline,
the shift in mix from higher margin gas heaters to lower margin fireplace
products, lower net selling prices and a higher rate of production variances
contributed to the decrease. During the third quarter, the average prices of
fireplaces and accessories were reduced approximately 3% to 4%. Gross margin
was 11.0% in the third quarter of 1998 as compared to 26.4% in the third
quarter of 1997 primarily as the result of the factors noted above.
Leisure and Other Products. Gross profit on net sales of leisure and other
products in the third quarter of 1998 decreased $299,000, or 77.7%, to $86,000
as compared to the third quarter of 1997. The decrease was caused by the
decrease in sales and the adverse effect of a higher rate of production
variances related to the move of the Washington Park, Illinois facility to the
Athens, Alabama facility. See "--Restructure Charge." Gross margin was 5.3% in
the third quarter of 1998 as compared to 16.1% in the third quarter of 1997.
14
<PAGE> 17
Selling Expenses
Selling expenses in the third quarter of 1998 decreased to $2.0
million from $2.6 million in the third quarter of 1997, a decrease of $533,000,
or 20.9%. The decrease in selling expenses was mainly attributable to a
decrease in sales, a $60,000 decrease in the Canadian operation's selling
expenses, a $203,000 decrease in advertising and promotion expenses, a $162,000
decrease in salary and commission expenses, and a $40,000 decrease in co-op
advertising. Selling expenses as a percentage of net sales decreased to 10.1%
in the third quarter of 1998 from 10.7% in the third quarter of 1997.
Segment Contribution
Total segment contribution, defined as gross profit less selling
expenses, decreased to $105,000 in the third quarter of 1998 from $3.5 million
in the third quarter of 1997, a decrease of $3.4 million, or 97.0%. The
decrease was primarily the result of the $3.9 million decrease in gross profit,
partially offset by the $533,000 decrease in selling expenses as discussed
above.
General and Administrative Expenses
General and administrative expenses decreased $44,000, or 2.8%, in the
third quarter of 1998 as compared to the third quarter of 1997. General and
administrative expenses as a percentage of net sales were 7.6% in the third
quarter of 1998 as compared to 6.6% in the third quarter of 1997.
Non-cash ESOP Compensation Expense
Non-cash ESOP compensation expense was $312,000 in the third quarter
of 1998 as compared to $483,000 in the third quarter of 1997, a decrease of
$171,000, or 35.4%. In the third quarter of 1998, 74,040 shares of unallocated
ESOP stock were committed to be released as compensation at an average fair
value of $4.21 per share, as compared to 78,175 shares committed to be released
as compensation at an average fair value of $6.18 per share in the third
quarter of 1997.
Restructure Charge
As reported in the Company's Form 10-Q for the 13-week period ended
March 28, 1998, the Company made the decision to close its Washington Park,
Illinois facility. The Company initiated the closing and the transfer of the
gas grill, gas log and freestanding vent-free stove production into the Athens,
Alabama and Huntsville, Alabama locations during the second quarter of 1998.
The Company recorded a non-recurring charge of $615,000, before tax, in
connection with the closing in the second quarter of 1998. While the
consolidation resulted in lower manufacturing efficiencies and a lower gross
margin on sales in the third quarter of 1998, the Company anticipates annual
cost savings of up to $1 million beginning in late 1998 as a result of this
consolidation. The foregoing statement and statements elsewhere in this
Quarterly Report regarding the Company's expectations regarding the amount of
restructuring charges and annual cost savings associated with closing the
Washington Park facility constitute forward-looking statements and involve
known and unknown assumptions, risks and uncertainties that could cause the
actual charges and savings to differ materially from those expressed in the
statements. There can be no assurance that the Company will not incur more
restructuring charges than expected or that it will be able to achieve the
anticipated level of cost savings. (See "'Safe Harbor' statement under the
Private Securities Litigation Reform Act of 1995" on page 22.)
15
<PAGE> 18
Interest Expense
Interest expense in the third quarter of 1998 was $224,000 as compared
to $501,000 in the third quarter of 1997, a decrease of $277,000, or 55.3%. The
decrease was attributable to the decrease in average outstanding debt during
the third quarter.
Interest and Other Income
Interest and other income in the third quarter of 1998 was $120,000 as
compared to $219,000 in the third quarter of 1997, a decrease of $99,000, or
45.2%. The decrease was primarily attributable to the decrease of $8.7 million
in average funds invested during the third quarter.
Credit for Income Taxes
The credit for income taxes was $426,000 for the third quarter of 1998
as compared to a provision for income taxes of $492,000 for the third quarter
of 1997. The effective tax rate was (23.2)% in the third quarter of 1998 as
compared to 42.9% in the third quarter of 1997. The change was primarily a
result of the $1.8 million loss from continuing operations before income taxes
in the third quarter of 1998 as compared to the $1.1 million income from
continuing operations before income taxes in the third quarter of 1997 and the
non-recognition of a tax benefit on the $396,000 net loss of Hunter Technology
Inc. ("Hunter") during the third quarter of 1998.
Loss from Continuing Operations and Loss from Continuing Operations Per Share
The loss from continuing operations in the third quarter of 1998 was
$1.4 million as compared to income from continuing operations of $655,000 in
the third quarter of 1997. The decrease was primarily the result of the factors
discussed above.
Loss from continuing operations per share-basic was $0.20 in the third
quarter of 1998 as compared to income from continuing operations per share of
$0.10 in the third quarter of 1997. This decrease was due to the decrease in
income from continuing operations offset primarily by the 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
ESOP shares committed to be released to participants.
Loss from continuing operations per share-diluted was $0.20 in the
third quarter of 1998 as compared to $0.09 in the third quarter of 1997. The
loss per share on a diluted basis was the same as the loss per share on a basic
basis for the third quarter of 1998 as the effect of outstanding stock options
was not dilutive.
Based on current orders in house, current market trends and the
continued mild weather, the depressed results realized in the third quarter may
continue through the fourth quarter and early 1999.
39-WEEK PERIOD ENDED SEPTEMBER 26, 1998 COMPARED TO 39-WEEK PERIOD ENDED
SEPTEMBER 27, 1997
Net Sales
Net sales in the 39-week period ended September 26, 1998 were $63.2
million as compared to $63.3 million in the 39-week period ended September 27,
1997, a decrease of $15,000.
16
<PAGE> 19
Home Heating Products. Net sales of home heating products decreased to $45.7
million in the 1998 year-to-date period as compared to $48.6 million in the
1997 year-to-date period, a decrease of $2.8 million, or 5.8%. The decrease in
net sales of home heating products, particularly gas space heaters, was
primarily due to the continued affect of high levels of customer inventories
carried over as a result of last year's mild winter, which appears to be
affecting the industry as a whole, as evidenced by statistics published by the
Gas Appliance Manufacturers Association which indicate that industry sales of
vented and vent-free gas heating products for the first eight months of 1998
decreased 6.4% as compared to the same period in 1997. Price competition is
also fierce as the gas heater industry has been negatively impacted by these
conditions and by increased competition generally from foreign and domestic
producers. While Martin fireplace sales have increased $2.9 million during the
1998 year-to-date period as compared to the 1997 year-to-date period, sales of
gas space heaters and other heating products, excluding Hunter products,
decreased $6.7 million during the 1998 year-to-date period as compared to the
1997 year-to-date period.
Leisure and Other Products. Net sales of leisure and other products increased
$2.8 million, or 19.1%, in the 1998 year-to-date period to $17.5 million as
compared to $14.7 million in the 1997 year-to-date period. The increase was
primarily the result of a $3.9 million, or 42.3%, increase in net sales of
barbecue gas grills. Net sales of utility trailer kits decreased $810,000, or
14.9%, in the 1998 year-to-date period to $4.6 million as compared to $5.4
million in the 1997 year-to-date period.
Gross Profit
Gross profit in the 1998 year-to-date period was $11.1 million as
compared to $15.2 million in the 1997 year-to-date period, a decrease of $4.0
million, or 26.5%. Gross margin decreased to 17.6% in the 1998 year-to-date
period from 24.0% in the 1997 year-to-date period.
Home Heating Products. Gross profit on net sales of home heating products was
$7.4 million in the 1998 year-to-date period as compared to $11.9 million in the
1997 year-to-date period, a decrease of $4.4 million, or 37.4%. Gross margin
decreased to 16.2% in the 1998 year-to-date period from 24.4% in the 1997
year-to-date period. The decrease in gross margin was caused by the continued
shift in sales mix from higher margin gas heating products to Martin Fireplace
products, lower net selling prices and a higher rate of production variances.
Martin Fireplace product sales were 51.1% of home heating product sales in the
1998 year-to-date period as compared to 42.2% in the 1997 year-to-date period.
Leisure and Other Products. Gross profit on net sales of leisure and other
products increased $410,000, or 12.4%, in the 1998 year-to-date period to $3.7
million as compared to $3.3 million in the 1997 year-to-date period, primarily
as a result of higher grill sales. Gross margin decreased to 21.2% in the 1998
year-to-date period from 22.4% in the 1997 year-to-date period. The decrease in
the margin rate was primarily the result of a higher rate of production
variances related to the move of the production of grills from the Washington
Park, Illinois facility to the Athens, Alabama facility. See "--Restructure
Charge."
17
<PAGE> 20
Selling Expenses
Selling expenses in the 1998 year-to-date period were $7.0 million as
compared to $7.6 million in the 1997 year-to-date period, a decrease of
$603,000, or 7.9%. The decrease was primarily due to a $204,000 decrease in
salary and commission expenses, a $175,000 decrease in advertising and
promotion expenses in the home heating segment, a $109,000 decrease in co-op
advertising and a $117,000 decrease associated with Hunter. Selling expenses as
a percentage of net sales decreased to 11.1% in the 1998 year-to-date period
from 12.1% in the 1997 year-to-date period.
Segment Contribution
Total segment contribution was $4.1 million in the 1998 year-to-date
period compared to $7.5 million in the 1997 year-to-date period. The $3.4
million decrease was primarily the result of the decrease in gross profit
offset by decreased selling expenses as discussed above.
General and Administrative Expense
General and administrative expenses decreased $94,000, or 2.0%, in the
1998 year-to-date period as compared to the 1997 year-to-date period.
Non-cash ESOP Compensation Expense
Non-cash ESOP compensation expense decreased $355,000, or 24.6%, in
the 1998 year-to-date period to $1.1 million, as compared to $1.4 million in
the 1997 year-to-date period. In the 1998 year-to-date period, 224,568 shares
of unallocated ESOP stock were committed to be released as compensation at an
average fair value of $4.85 per share, as compared to 233,607 shares committed
to be released as compensation at an average fair value of $6.19 per share in
the 1997 year-to-date period.
Restructure Charge
As reported in the Company's Form 10-Q for the 13-week period ended
March 28, 1998, the Company made the decision to close its Washington Park,
Illinois facility. The Company initiated the closing and the transfer of the
gas grill, gas log and freestanding vent-free stove production into the Athens,
Alabama and Huntsville, Alabama locations during the second quarter of 1998.
The Company recorded a non-recurring charge of $615,000, before tax, in
connection with the closing in the second quarter of 1998. The non-recurring
charge includes plant closing costs of $590,000 (primarily payroll, severance
and payroll taxes of $234,000 and group insurance of $255,000) and a property,
plant and equipment valuation charge of $25,000. The estimated reserve
remaining as of September 26, 1998 totaled $288,000. See "13-Week Period Ended
September 26, 1998 Compared to 13-Week Period Ended September 27, 1997 --
Restructure Charge."
Interest Expense
Interest expense decreased $373,000, or 32.6%, in the 1998
year-to-date period to $771,000, as compared to $1.1 million in the 1997
year-to-date period. The decrease was primarily attributable to the decrease in
average outstanding debt during the year-to-date period.
18
<PAGE> 21
Interest and Other Income
Interest and other income increased $144,000, or 21.4%, in the 1998
year-to-date period to $817,000, as compared to $673,000 in the 1997
year-to-date period. The increase was primarily attributable to a gain on sale
of marketable securities of $288,000, offset by a decrease in average funds
invested during the 1998 year-to-date period.
Credit for Income Taxes
The credit for income taxes was $462,000 in the 1998 year-to-date
period as compared to a provision for income taxes of $409,000 in the 1997
year-to-date period, a change of $871,000. The effective tax rate was (21.1)%
in the 1998 year-to-date period as compared to 46.8% in the 1997 year-to-date
period. The change in the effective tax rate was primarily the result of the
$2.2 million loss from continuing operations before income taxes during the
1998 year-to-date period as compared to the $873,000 income from continuing
operations before income taxes in the 1997 year-to-date period and the
non-recognition of a tax benefit on the $640,000 net loss of Hunter during the
1998 year-to-date period.
Loss from Continuing Operations and Loss from Continuing Operations Per Share
Loss from continuing operations in the 1998 year-to-date period was
$1.7 million as compared to income from continuing operations of $464,000 in
the 1997 year-to-date period, a change of $2.2 million. The change was
primarily the result of the factors discussed above.
Loss from continuing operations per share-basic was $0.24 in the 1998
year-to-date period as compared to income from continuing operations per
share-basic of $0.07 in the 1997 year-to-date period.
The loss per share on a diluted basis was the same as the loss per
share on a basic basis for the 1998 year-to-date period as the effect of
outstanding stock options was not dilutive.
Loss from continuing operations, excluding the impact of the
restructure charge ($384,000, net of tax) and the gain on sale of marketable
securities ($180,000, net of tax), was $1.5 million, or a loss of $0.22 per
share on a basic and diluted basis, for the 1998 year-to-date period as
compared to $464,000, or income of $0.07 per share on a basic and diluted
basis, for the 1997 year-to-date period. There were no restructure charges or
gains on sales of marketable securities in the 1997 year-to-date period.
RESULTS OF DISCONTINUED METAL OFFICE FURNITURE OPERATIONS
On February 24, 1997, the Company announced that it had elected to
discontinue its operations in the metal office furniture segment. For 1997, the
segment's operations, net of tax, have been treated as a discontinued operation
for accounting purposes. The Company established a reserve at December 31, 1996
of $1,430,000, net of taxes of $861,000. During the 1997 year-to-date period,
the loss exceeded management's estimated reserve by $253,000, net of tax.
At December 31, 1997, the Company recorded an estimated reserve of
$187,000, net of taxes of $112,000, for charges to be incurred during 1998. The
estimated pre-tax reserve remaining as of September 26, 1998 totaled $247,000.
19
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations 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 39-week period ended September 26,
1998 used $9.9 million in cash primarily to finance increases in extended term
("dating") receivables. The Company's operating cash and initial public
offering investments were also utilized to provide the funds needed for capital
expenditures, long-term debt repayments, treasury stock purchases and dividends
for the period.
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 $30.0 million for a term expiring July
31, 1999. Interest on the line of credit is payable monthly at a variable rate
equivalent to 30-day LIBOR plus 1.25%, which at October 30, 1998 was 6.625%. As
of September 26, 1998, the Company had no balance outstanding against this line
of credit.
FINANCIAL POSITION
Cash and short-term investments in the 1998 year-to-date period
decreased $14.6 million as a result of the factors discussed above. Accounts
receivable increased $11.6 million in the 1998 year-to-date period. The
increase in accounts receivable was primarily the result of a $13.5 million
increase in dating receivables. In an effort to better control its production
schedule in light of the seasonal nature of its home heating 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."
20
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 18, 1995, the Company closed the sale of 2,300,000 shares of
common stock at a price of $9.50 per share in connection with the initial public
offering of its stock. The proceeds of the offering, net of an underwriting
discount of $1,530,000 and expenses of $923,000, were $19,397,000. Through the
date of this Quarterly Report, the Company has used approximately all of the
proceeds to fund capital expenditures, acquire Hunter Technology Inc., to repay
outstanding indebtedness, for working capital and for other general corporate
purposes. During the 1998 year-to-date period, the Company used approximately
$14.9 million to repay outstanding indebtedness, for working capital and for
other general corporate purposes. See "Condensed Consolidated Balance Sheets,"
"Condensed Consolidated Statements of Cash Flows," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources and -- Financial Position," appearing elsewhere in this
report.
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. as amended and
restated on May 16, 1997 which were filed as Exhibit
3(b) to the Registrant's Quarterly statement on Form
10-Q for the 26-week period ended June 28, 1997
(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).
**27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
- ---------------------------------
*Incorporated by reference
**Filed with electronic filing only
21
<PAGE> 24
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995:
With the exception of historical factual information, the matters and
statements discussed, made or incorporated by reference in this Quarterly Report
on Form 10-Q, including those regarding the anticipated restructuring charges
and annual cost savings resulting from the closing of the Washington Park
facility, the Company's expectations regarding the possible exposure as a result
of the Hunter Technology Inc.'s design and production problems, the Company's
expectations regarding its results of operations for the fourth quarter and
early 1999, and the Company's plans and expectations regarding its Year 2000
issues, constitute forward-looking statements and are discussed, made or
incorporated by reference, as the case may be, pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Wherever
possible, the Company has identified these "forward-looking" statements (as
defined in Section 21E of the Securities Exchange Act of 1934) by words such as
"anticipates," "may," "believes," "estimates," "projects," "expects," "intends,"
and words of similar import. In addition, the Company and its representatives
may from time to time make other oral or written statements that are also
forward-looking statements. Such forward-looking statements involve certain
assumptions, risks and uncertainties that could cause actual results to differ
materially from those included in or contemplated by the statements. In
particular, there can be no assurance that the Company will not incur costs
related to products of Hunter Technology Inc. or restructuring charges
associated with the closing of the Washington Park facility in excess of those
currently expected or that it will be able to achieve the anticipated level of
cost savings or benefits contemplated by the referenced forward-looking
statements. These assumptions, risks and uncertainties include, but are not
limited to, those associated with general economic cycles; the cyclical nature
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 Company's home heating product sales and other sales;
fluctuations in quarterly earnings due to ESOP accounting; the effect of
existing and new governmental and environmental 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 from
time to time; the ability of the Company and third parties with which it does
business to identify and correct, with respect to the Year 2000 issue, all
relevant computer codes and embedded chips, unanticipated delays or difficulties
in the implementation of the Company's Year 2000 project plans and the ability
of third parties to redress their respective computer systems as they relate to
the Year 2000 issue; 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 publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
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.
<TABLE>
<CAPTION>
MARTIN INDUSTRIES, INC.
<S> <C>
Date: November 10, 1998 By /s/ Roderick V. Schlosser
-------------------- ----------------------------------------
Roderick V. Schlosser
Vice President & Chief Financial Officer
(Executed on behalf of Registrant and
as Principal Financial Officer)
</TABLE>
22
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page No.
- ------- ----------------------- --------
<S> <C> <C>
*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) By-laws of Martin Industries, Inc. as amended and restated
on May 16, 1997 which were filed as Exhibit 3(b) to the
Registrant's Quarterly Statement on Form 10-Q for the
26-week period ended June 28, 1997 (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).
**27 Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
* Incorporated by reference
** Filed with electronic filing only
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-26-1998
<CASH> 549
<SECURITIES> 0
<RECEIVABLES> 22,175
<ALLOWANCES> 461
<INVENTORY> 21,714
<CURRENT-ASSETS> 52,249
<PP&E> 23,493
<DEPRECIATION> 13,626
<TOTAL-ASSETS> 66,992
<CURRENT-LIABILITIES> 13,601
<BONDS> 6,873
0
0
<COMMON> 98
<OTHER-SE> 44,222
<TOTAL-LIABILITY-AND-EQUITY> 66,992
<SALES> 63,243
<TOTAL-REVENUES> 63,243
<CGS> 52,108
<TOTAL-COSTS> 52,108
<OTHER-EXPENSES> 13,346
<LOSS-PROVISION> 29
<INTEREST-EXPENSE> (46)
<INCOME-PRETAX> (2,194)
<INCOME-TAX> (462)
<INCOME-CONTINUING> (1,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,732)
<EPS-PRIMARY> (0.24)<F1>
<EPS-DILUTED> (0.24)<F1>
<FN>
<F1>THE EARNINGS PER SHARE ("EPS") INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 128, EARNINGS PER SHARE. AS
SUCH, BASIC EPS AND DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY
DILUTED, RESPECTIVELY.
</FN>
</TABLE>
